10-K 1 a12-5241_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

(Mark One)

 

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

 

For the fiscal year ended March 31, 2012

 

OR

 

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

 

For the transition period from                      to                       

 

Commission file number 001-08762

 

 

ITERIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

95-2588496

(State or Other Jurisdiction
of Incorporation or Organization)

 

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

 

1700 Carnegie Ave., Santa Ana, California 92705

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (949) 270-9400

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.10 par value

 

NYSE Amex

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o  No x

 

Based on the closing sale price of the registrant’s common stock on the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting common stock held by nonaffiliates of the registrant was approximately $33,247,000. For the purposes of this calculation, shares owned by officers, directors and 10% stockholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of June 1, 2012, there were 33,998,351 shares of our common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2012 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended March 31, 2012. Except with respect to information specifically incorporated by reference in this report, the registrant’s proxy statement is not deemed to be filed as a part hereof.

 

 

 



Table of Contents

 

ITERIS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

ITEM 1.

BUSINESS

2

 

 

 

ITEM 1A.

RISK FACTORS

6

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

14

 

 

 

ITEM 2.

PROPERTIES

15

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

15

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

15

 

 

 

PART II

 

 

 

 

 

ITEM 5.

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

16

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

17

 

 

 

ITEM 7.

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

17

 

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

29

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

29

 

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

29

 

 

 

ITEM 9B.

OTHER INFORMATION

30

 

 

 

PART III

 

 

 

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

30

 

 

 

ITEM 11.

EXECUTIVE COMPENSATION

30

 

 

 

ITEM 12.

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

31

 

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

31

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

31

 

 

 

PART IV

 

 

 

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

31

 

Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and our wholly-owned subsidiaries.

 

Iteris®, Vantage®, Abacus®, VantageView™, VersiCam™, Pico™, RZ-4™, Vantage Vector™, iPerform™ and IterisPeMS™ are among the trademarks of Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.

 

1



Table of Contents

 

Cautionary Statement

 

This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words “expect(s),” “feel(s),” “believe(s),” “should,” “would,” “could,” “may,” “anticipate(s),” “estimate(s)” and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include but are not limited to statements regarding our anticipated future sales, revenue and operating results, expansion plans, market share, capital needs, competition, backlog and manufacturing capabilities, acceptance of our products and services, and the impact of recent accounting pronouncements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including those in Risk Factors” in Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

 

PART I

 

ITEM 1.                        BUSINESS

 

Overview

 

We are a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics and improve the safety of surface transportation systems infrastructure. We believe that our products, services and solutions, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining our image processing, traffic engineering, information technology, and other products and services, we offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers worldwide.

 

We were originally incorporated in Delaware in 1987. Our principal executive offices are located at 1700 Carnegie Avenue, Santa Ana, California 92705, and our telephone number at that location is (949) 270-9400. Our Internet website address is www.iteris.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, together with amendments to these reports, are available on the “Investors” section of our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.

 

Sale of Vehicle Sensors

 

On July 29, 2011, we completed the sale of substantially all of the assets used in connection with our Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement signed on July 25, 2011 (the “Asset Sale”). Upon closing, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. We are entitled to additional consideration in the form of certain performance and royalty-related earn-outs. As a result of the Asset Sale, we no longer operate in the Vehicle Sensors segment and we determined that the Vehicle Sensors segment, which previously constituted one of our operating segments, qualifies as a discontinued operation. Refer to Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report for additional discussion on this transaction. The applicable financial results of the Vehicle Sensors segment through the closing of the Asset Sale have been reported as a discontinued operation for all periods presented.

 

Products and Services

 

As a result of the sale of Vehicle Sensors in July 2011, and a reevaluation and reorganization of our operating segments in the first quarter of the fiscal year ended March 31, 2012, we currently operate in two reportable segments: Roadway Sensors and Transportation Systems. The Roadway Sensors segment includes, among other products, our Vantage, Versicam, Pico, Vantage Vector and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications. The Transportation Systems segment includes transportation engineering and consulting services, and the development of transportation management and traveler information systems for the ITS industry. See Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for further details on our reportable segments.

 

2



Table of Contents

 

Roadway Sensors

 

Our Roadway Sensors segment product line uses advanced image processing technology to capture and analyze video images through sophisticated algorithms, enabling vehicle detection and transmission of both video images and data using various communication technologies.

 

·                  Our Vantage video detection systems detect vehicle presence at intersections, as well as vehicle count, speed and other traffic data used in traffic management systems. Our Vantage systems give traffic managers the ability to mitigate roadway congestion by modifying traffic signal timing or detecting incidents quickly. Our VantageView software supplements our Vantage video detection systems by providing an integrated platform to manage and “see” video detection assets remotely over a network connection.

 

·                  Our Vantage Vector product is an all-in-one vehicle detection sensor with a wide range of capabilities: stop bar detection, advanced-zone detection, and sensing that enables advanced safety and adaptive control applications. It includes all the proven benefits of Iteris video detection, including high accuracy, high availability remote viewing of video images, no trenching or pavement cutting for installation, bicycle detection capability and high precision for dilemma zone detection by integrating the video field-of-view with radar sensing.  Enhanced information includes the number of vehicles, speed, and distance in user configurable zones that can be used for special applications.

 

·                  VersiCam, our integrated camera and processor video detection system, is a cost-efficient video detection system for smaller intersections that require only a few detection points.

 

·                  Pico, our compact video detection system, was developed primarily to address international video detection needs, and was designed for easy installation and configuration.

 

·                  Our Abacus products take advantage of the large number of existing installed closed-circuit television video feeds designed to monitor roadways, signalized intersections, tunnels and bridges to allow for data collection and incident detection without the set-up and calibration generally required with other systems.

 

We believe that future growth domestically and internationally, particularly in developing countries, will be dependent in part on the continued adoption of above-ground video detection technologies, instead of traditional in-pavement loop technology, to manage traffic.

 

We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in our third and fourth fiscal quarters due to a reduction in road construction and repairs during the winter months due to inclement weather conditions.

 

Transportation Systems

 

Our Transportation Systems segment includes transportation engineering and consulting services focused on the planning, design, development and implementation of software-based systems that integrate sensors, video surveillance, computers, and advanced communications equipment to enable public agencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews and distribute real-time information about traffic conditions. Our services include planning, design and implementation of surface transportation infrastructure systems. We perform analysis and study goods movement, study commercial vehicle operations, provide travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. This segment also includes the activities of Meridian Environmental Technology, Inc. (“MET”), which we acquired in January 2011, and which specializes in 511 advanced traveler information systems as well as Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. The operations of Berkeley Transportation Systems, Inc. (“BTS”), which we acquired in November 2011, are also included in this segment. BTS specializes in transportation performance measurement and its Performance Measurement System leverages its real-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures.

 

Our Transportation Systems segment is largely dependent upon governmental funding and is affected by state and local budgetary issues. We believe the overall expansion of our Transportation Systems segment in the future will at least in part be dependent on the passage of a new Federal Highway Bill. Congress is currently working on such a bill. The previous Federal Highway Bill expired in October 2009 but the funding levels under the expired bill have continued through a series of short-term extensions, the most recent of which extends funding through the end of June 2012. Continued delays in the enactment of such a new Federal Highway Bill, and until such time as a bill becomes law, will prolong the uncertainty regarding the allotment of transportation funds in federal, state and local budgets. We believe that prolonged uncertainty has adversely impacted, and may continue to adversely impact, our net sales and contract revenues and our overall financial performance in future periods.

 

With the addition of MET in January 2011, we have experienced seasonality particularly related to certain MDSS services in our first and second fiscal quarters mainly because MDSS services are generally not required in the summer months.

 

3



Table of Contents

 

During the fiscal year ended March 31, 2012 (“Fiscal 2012”), we began the development of IterisPeMS.  IterisPeMS is an advanced, real-time data collection, diagnostic, fusion and warehousing software platform used to aggregate and compute performance measures across multiple transportation modes, including travel time, travel time variability, delay and lost throughput. This information can then be analyzed by traffic professionals to measure how a transportation network is performing and identity potential areas of improvement. IterisPeMS is also capable of providing users with easy-to-use visualization and animation features for both historical and predictive traffic conditions.  Costs incurred during Fiscal 2012, which include research and development expense as well as sales and marketing expenditures were not allocated to either of the Roadway Sensors or Transportation Systems segments as this project was deemed to be a corporate level development.

 

Sales, Marketing and Principal Customers

 

We sell our Roadway Sensors products through indirect sales channels comprised of a network of independent dealers in the U.S. and certain foreign locations, who sell integrated systems and related products to the traffic management market, as well as directly to the traffic management market using a combination of our own sales personnel and an outside sales organization. Our independent dealers are trained in, and primarily responsible for, sales, installation, set-up and support of our products, and maintain an inventory of demonstration traffic products from various manufacturers and sell directly to government agencies and installation contractors. These dealers often have long-term arrangements with local government agencies in their respective territories for the supply of various products for the construction and renovation of traffic intersections, and are generally well-known suppliers of high-quality ITS products to the traffic management market. We periodically hold technical training classes for our dealers and end users and maintain a full-time staff of customer support technicians throughout the U.S. to provide technical assistance when needed. When appropriate, we have the ability to modify or make changes to our dealer network to accommodate the needs of the market and our customer base. In the states where we sell directly, we use our own staff to sell, oversee installations and set-up issues and support our products.

 

We market and sell our Transportation Systems services directly to government agencies pursuant to negotiated contracts that involve competitive bidding and specific qualification requirements. Most of our contracts are with federal, state and municipal customers and generally provide for cancellation or renegotiation at the option of the customer upon reasonable notice and fees paid for modification. We generally use selected members of our engineering, science and information technology teams on a regional basis to serve in sales and business development functions. Our contracts generally involve long lead times and require extensive specification development, evaluation and price negotiations.

 

A large portion of our revenues are derived from sales to federal, state and local government agencies. We currently have a diverse customer base, and no individual customer represented greater than 10% of our total net sales and contract revenues in Fiscal 2012 and in the fiscal years ended March 31, 2011 (“Fiscal 2011”) and March 31, 2010 (“Fiscal 2010”). Also refer to Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.

 

Manufacturing and Materials

 

We use contract manufacturers to build subassemblies that are used in our roadway sensors products. Additionally, we procure certain components from qualified suppliers, both globally and locally, and generally use multi-sourcing strategies when technically and economically feasible to mitigate supply risk. These subassemblies and components are delivered to our Santa Ana, California facility where they go through final assembly and testing prior to shipment to our customers. Our key suppliers include CTS Electronics Manufacturing Solutions, Inc., Total Electronics LLC, Sony Electronics, Inc. and LG Electronics, Inc. Our manufacturing activities are conducted in approximately 9,000 square feet of space at our Santa Ana facility. Production volume at our subcontractors is based upon quarterly forecasts that we generally adjust on a monthly basis to control inventory levels. We typically do not manufacture any of the hardware used in the transportation management and traveler information systems that we design and implement. Our production facility is currently ISO 9001 certified.

 

Customer Support and Services

 

We provide warranty service and support for our products, as well as follow-up service and support for which we charge separately. Such service revenue was not a material portion of our total net sales and contract revenues for each of Fiscal 2012, Fiscal 2011 and Fiscal 2010. We believe customer support is a key competitive factor.

 

Backlog

 

Our total backlog of unfulfilled firm orders was approximately $35.0 million as of March 31, 2012, which was comprised of $3.2 million related to Roadway Sensors and $31.8 million related to Transportation Systems. Substantially the entire backlog for Roadway Sensors is expected to be recognized as revenue in the fiscal year ending March 31, 2013. We have historically recognized between 50% to 70% of our Transportation Systems backlog as of the end of a fiscal year in the subsequent fiscal year, and currently expect that trend to continue for the near future.

 

4



Table of Contents

 

At March 31, 2011, we had backlog of approximately $28.2 million, which was comprised of $2.7 million related to Roadway Sensors and $25.5 million related to Transportation Systems.

 

The timing and realization of our backlog is subject to the inherent uncertainties of doing business with federal, state and local governments, particularly in view of budgetary constraints, cut-backs and other delays or reallocations of funding that these entities typically face.

 

Pursuant to the customary terms of our agreements with government contractors and other customers, customers can generally cancel or reschedule orders with little or no penalties. Lead times for the release of purchase orders often depend upon the scheduling and forecasting practices of our individual customers, which also can affect the timing of the conversion of our backlog into revenues. For these reasons, among others, our backlog at a particular date may not be indicative of our future revenues, in particular for our Roadway Sensors segment.

 

Product Development

 

Most of our product development activities are conducted at our principal facilities in Santa Ana, California. Our research and development costs and expenses were approximately $3.2 million for Fiscal 2012, $2.4 million for Fiscal 2011 and $2.6 million for Fiscal 2010. We expect to continue to pursue various product development programs and incur research and development expenditures in future periods.

 

We believe our engineering and product development capabilities are a competitive strength. We strive to continue to develop new products to meet the needs of the ever-changing ITS market as well as enhance and refine our existing product lines. Within the last four fiscal years, our Roadway Sensors segment has introduced our VersiCam and VersiCam wireless products, Pico, RZ-4 Advanced camera and our RZ-4 Advanced Wide Dynamic Range camera, which significantly improve video detection performance in certain harsh lighting conditions, and within the last fiscal year, Vantage Vector.  We have also upgraded our Abacus and VantageView software products within the last fiscal year. Additionally, during Fiscal 2012, we began development of our IterisPeMS Performance Measurement System. We plan to continue this development effort in our fiscal year ending March 31, 2013. We believe that developing new offerings across our segments and enhancing, refining and marketing our existing products is a key component of strong organic growth and profitability.

 

Competition

 

We generally face significant competition in each of our target markets. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

In the market for our Roadway Sensors vehicle detection products, we compete with manufacturers and distributors of other above ground video camera detection systems and other non-intrusive detection devices, including microwave, infrared, ultrasonic and magnetic detectors, as well as manufacturers and installers of in-pavement inductive loop products, which have historically, and currently continue to be, the predominant detection system in this market.

 

The markets in which our Transportation Systems segment operates is highly fragmented and subject to evolving national and regional quality, operations and safety standards. Our competitors vary in number, scope and breadth of the products and services they offer. Our competitors in advanced Transportation Systems include national corporations. Our competitors in transportation engineering, planning and design include major regional firms, as well as many smaller local engineering firms.

 

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

 

5



Table of Contents

 

Intellectual Property and Proprietary Rights

 

Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology. Our policy is to obtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed by us. We currently hold five U.S. patents, three pending foreign patents and two provisional patents. One U.S. patent, which expires in May 2019, is for general technology related to CMOS sensors. Four U.S. patents, which expire between 2013 and 2029, two pending foreign patents and two provisional patents relate specifically to our Roadway Sensors technology. One of these U.S. patents and the two pending foreign patents are for an Electronic Traffic Monitor related to our Abacus product in the Roadway Sensors segment. We cannot be certain that any new patents will be granted pursuant to these or subsequent applications. As a result of the Asset Sale, certain patents were transferred to Bendix. We believe these patents were specific to that segment and the transfer of ownership does not impair our proprietary rights related to our current product and service offerings.

 

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

 

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

 

Employees

 

We refer to our employees as associates. As of March 31, 2012, we employed an aggregate of 264 full-time associates, including 57 associates in general management, administration and finance; 19 associates in sales and marketing; 160 associates in engineering and product development; 15 associates in operations, manufacturing and quality; and 13 associates in customer service. None of our associates are represented by a labor union, and we have never experienced a work stoppage. We believe our relations with our associates are good.

 

Government Regulation

 

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

 

ITEM 1A.               RISK FACTORS

 

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

 

The economic slowdown has reduced and delayed government funding for transportation infrastructure projects and initiatives, decreased availability of financial capital for our customers and adversely impacted real estate development, all of which have adversely impacted our net sales and contract revenues. Decreased consumer spending, the failure of certain financial institutions and businesses, concerns about the availability and cost of credit, and reduced corporate profits and capital spending have resulted in a downturn in worldwide economic conditions, as well as budgetary shortfalls at all levels of government. These unfavorable economic conditions are having a negative impact on customer orders and government funding of infrastructure projects

 

6



Table of Contents

 

incorporating our products and services. Such factors have and may continue to result in delays, cancellations and rescheduling of backlog and customer orders. In addition, the decline in the U.S. real estate market, particularly in new home and commercial construction, has adversely impacted new road construction and has had and may continue to have adverse effects on Transportation Systems contract revenues and Roadway Sensors net sales. Any of the foregoing economic conditions may adversely affect our net sales and contract revenues in future periods and make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. Additionally, there continues to be uncertainty regarding allotment of government funds due to delays in the passage of a new Federal Highway Bill, which has adversely impacted, and may continue to adversely impact, our net sales and contract revenues and overall financial performance in future periods. The previous Federal Highway Bill expired in October 2009 but the funding levels under the previous bill have been continued through a series of short-term extensions, the most recent of which extends funding through the end of June 2012. If the conditions above continue or worsen, or delays in the passage of a new Federal Highway Bill continue, our business, financial condition and results of operations could be materially and adversely affected.

 

Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state and local governments, including budgetary issues and fixed price contracts. A significant portion of our net sales and contract revenues are derived from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. We anticipate that revenue from government contracts will continue to remain a significant portion of our net sales and contract revenues. Government business is, in general, subject to special risks and challenges, including:

 

·                                          delays in funding and uncertainty regarding the allocation of funds to state and local agencies from the U.S. federal government as a result of delays in the passage of a new Federal Highway Bill, as well as delays or reductions in other state and local funding dedicated for transportation projects;

 

·                                          other government budgetary constraints, cut-backs, delays or reallocation of government funding;

 

·                                          performance bond requirements;

 

·                                          long purchase cycles or approval processes;

 

·                                          competitive bidding and qualification requirements;

 

·                                          changes in government policies and political agendas;

 

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

 

·                                          international conflicts or other military operations that could cause the temporary or permanent diversion of government funding from transportation or other infrastructure projects.

 

Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflect political developments or agendas, significant changes in contract scheduling, intense competition for government business and termination of purchase decisions for the convenience of the governmental entity. Substantial delays in purchase decisions by governmental entities, and the current constraints on government budgets at the federal, state and local level, could cause our net sales and contract revenues and income to drop substantially or to fluctuate significantly between fiscal periods.

 

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

 

California state budgetary constraints may have a material adverse impact on us. The state of California has experienced, and is continuing to experience, a significant budget shortfall and other related budgetary issues and constraints. The state of California has historically been and is considered to be a key geographic region for our Roadway Sensors and Transportation Systems segments. Ongoing uncertainty as to the timing and accessibility of budgetary funding, changes in state funding allocations to local agencies and municipalities, or other delays in purchasing for, or commencement of, transportation projects have had and may continue to have a negative impact on our net sales and contract revenues and our income.

 

7



Table of Contents

 

If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive and there will be no demand for our products. Our markets are in general characterized by the following factors:

 

·                                          rapid technological advances;

 

·                                          downward price pressures in the marketplace as technologies mature;

 

·                                          changes in customer requirements;

 

·                                          additional qualification requirements related to new products or components;

 

·                                          frequent new product introductions and enhancements;

 

·                                          inventory issues related to transition to new or enhanced models; and

 

·                                          evolving industry standards and changes in the regulatory environment.

 

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

 

The markets in which we operate are highly competitive and have many more established competitors, which could adversely affect our net sales and contract revenues or the market acceptance of our products. We compete with numerous other companies in our target markets including, but not limited to, large, multinational corporations and many smaller regional engineering firms.

 

We compete with existing, well-established companies in our Roadway Sensors segment, both domestically and abroad. Certain technological barriers to entry make it difficult for new competitors to enter the market with competing video or other technologies; however, we are aware of new market entrants from time to time. Increased competition could result in loss of market share, price reductions and reduced gross margins, any of which could seriously harm our business, financial condition and results of operations.

 

The Transportation Systems market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smaller local regional firms.

 

In both of our segments, many of our competitors have far greater name recognition and greater financial, technological, marketing, and customer service resources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products than we can. Consolidations of end users, distributors and manufacturers in our target markets exacerbate this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

 

We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and could result in disruptions of our business and diversion of resources and management attention. We have completed three acquisitions since April 2009 and, in the future, we may acquire additional complementary businesses, products, and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

 

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

 

·                                          the failure to retain or integrate key acquired personnel;

 

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

 

·                                          increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services;

 

8



Table of Contents

 

·                                          the incurrence of unforeseen obligations or liabilities;

 

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

 

·                                          increased interest expense and amortization of acquired intangible assets, as well as unanticipated accounting charges.

 

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

 

We may be unable to attract and retain key personnel, which could seriously harm our business. Due to the specialized nature of our business, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. The loss of any of our officers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results of operations. Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel. In particular, the future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineers and planners. Competition for qualified employees, particularly development engineers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

 

Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systems workforce. The cost of providing our Transportation Systems engineering and consulting services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:

 

·                                          our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;

 

·                                          our ability to forecast demand for our services and thereby maintain an appropriate headcount in our various regions;

 

·                                          our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and

 

·                                          our ability to match the skill sets of our employees to the needs of the marketplace.

 

Our use of the percentage of completion method of accounting for our contract revenues could result in a reduction or reversal of previously recorded revenues and profits. A significant portion of contract revenues are measured and recognized using the percentage of completion method of accounting. Our use of this accounting method results in recognition of revenues and profits ratably over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, program management, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.

 

Our failure to successfully bid on new contracts and renew existing contracts could reduce our revenues and profits. Our business depends on our ability to successfully bid on new contracts and renew existing contracts with private and public sector customers. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which are affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a customer may require us to provide a surety bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions continue, or if we fail to secure adequate financing arrangements or the required governmental approval or fail to meet other required conditions, we may not be able to pursue particular projects, which could reduce or eliminate our profitability.

 

We may experience production gaps that could materially and adversely impact our sales and financial results and the ultimate acceptance of our products. It is possible that we could experience unforeseen quality control issues or part shortages as we adjust production to meet current demand for our products. We have historically used single suppliers for certain significant components in our products. Should any such delay or disruption occur, or should a key supplier discontinue operations because of the

 

9



Table of Contents

 

current economic climate, our future sales will likely be materially and adversely affected. Additionally, we rely heavily on select contract manufacturers to produce many of our products and do not have any long-term contracts to guarantee supply of such products. Although we believe our contract manufacturers have sufficient capacity to meet our production schedules for the foreseeable future and we believe we could find alternative contract manufacturing sources for many of our products, if necessary, we could experience a production gap if for any reason our contract manufacturers were unable to meet our production requirements and our cost of goods sold could increase, adversely affecting our margins.

 

If we are unable to develop and introduce new products and product enhancements successfully and in a cost-effective and timely manner, or are unable to achieve market acceptance of our new products, our operating results would be adversely affected. We believe our revenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our production costs. We cannot guarantee the success of these products, and we may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existing products.

 

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

 

Our business and results of operations could also be seriously harmed by any significant delays in our new product development. Certain of our new products could contain undetected design faults and software errors or “bugs” when first released by us, despite our testing. We may not discover these faults or errors until after a product has been installed and used by our customers. Any faults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our business and competitive position.

 

Our international business operations may be threatened by many factors that are outside of our control. While we historically have had limited international sales, contract revenues and operations experience, we began work on our first overseas contracts in the United Arab Emirates in the fiscal year ended March 31, 2010. We plan to expand our international efforts in the future with respect to all of our segments, but cannot assure you that we will be successful in those efforts. International operations subject us to various inherent risks including, among others:

 

·                                          currency fluctuations and restrictions;

 

·                                          political, social and economic instability, as well as international conflicts and acts of terrorism;

 

·                                          longer accounts receivable payment cycles;

 

·                                          import and export license requirements and restrictions of the U.S. and each other country in which we operate;

 

·                                          unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions;

 

·                                          the burdens of compliance with a wide variety of foreign laws and more restrictive labor laws and obligations;

 

·                                          difficulties in managing and staffing international operations;

 

·                                          potentially adverse tax consequences; and

 

·                                          reduced protection for intellectual property rights in some countries.

 

Substantially all of our international sales are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets. We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations.

 

10



Table of Contents

 

Any of the factors mentioned above may adversely affect our future international sales and contract revenues and, consequently, affect our business, financial condition and operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs could outpace our revenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are more established, have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world.

 

If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected. Section 404 of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate the effectiveness of our internal controls over financial reporting at the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. As a smaller reporting company, for our fiscal year ended March 31, 2012, we are exempt from the auditor attestation requirement over our internal control over financial reporting; however, to the extent we do not qualify as a non-accelerated filer or smaller reporting company in subsequent fiscal years, we will be subject to the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act. In such an event, we may not be able to complete the work required for such attestation on a timely basis and, even if we timely complete such requirements, our independent registered public accounting firm may still conclude that our internal controls over financial reporting are not effective.

 

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Iteris have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline. Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

 

·                                          delays in government contracts and funding from time to time and budgetary constraints at the federal, state and local levels;

 

·                                          our ability to access stimulus funding, funding from a new Federal Highway Bill or other funding;

 

·                                          declines in new home and commercial real estate construction and related road and other infrastructure construction;

 

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

 

·                                          the long lead times associated with government contracts;

 

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

 

·                                          our ability to control costs;

 

·                                          our ability to raise additional capital;

 

·                                          the mix of our products and services sold in a quarter, which has varied and is expected to continue to vary from time to time;

 

·                                          seasonality due to winter weather conditions;

 

·                                          seasonality with respect to revenues from our MDSS and related weather forecasting services due to the decrease in revenues generated for such services during the spring and summer time periods;

 

11



Table of Contents

 

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

 

·                                          market acceptance of the products incorporating our technologies and products;

 

·                                          the introduction of new products by competitors;

 

·                                          the availability and cost of components used in the manufacture of our products;

 

·                                          our success in expanding and implementing our sales and marketing programs;

 

·                                          the effects of technological changes in our target markets;

 

·                                          the amount of our backlog at any given time;

 

·                                          the nature of our government contracts;

 

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

 

·                                          risks and uncertainties associated with our international business;

 

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

 

·                                          general economic and political conditions;

 

·                                          international conflicts and acts of terrorism; and

 

·                                          other factors beyond our control, including but not limited to, natural disasters such as the earthquake, tsunami and related events in Japan.

 

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

 

We experienced declining or flat net sales and contract revenues in recent years. If we fail to manage this decline effectively, we may be unable to execute our business plan and may experience future weaknesses in our operating results. Based on our business objectives, and in order to achieve future growth, we will need to continue to add additional qualified personnel, and invest in additional research and development and sales and marketing activities, which could lead to increases in our expenses and future declines in our operating results. In addition, our past expansion has placed, and future expansion is expected to place, a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any revenue declines successfully, our growth, our business, our financial condition and our results of operations could continue to be adversely affected.

 

We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. As a result, we may not be able to protect our proprietary rights adequately in the U.S. or abroad.

 

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

 

12



Table of Contents

 

We may be subject to traffic related litigation. The traffic industry in general can be subject to litigation claims due to the nature of personal injuries that result from traffic accidents.  As a provider of traffic engineering services, products and solutions, we have been and could in the future be subject to litigation for traffic related accidents from time to time even if our products or services had nothing to do with the particular accident. While we carry insurance against such claims, if the damages in any given action were high or we were subject to multiple lawsuits, the damages and costs could exceed the limits of our insurance coverage. If we were required to pay substantial damages as a result of these lawsuits, it may harm our business and financial condition. Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention.

 

We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all. We have historically experienced volatility in our earnings and cash flows from operations from year to year. Although we have a $12.0 million revolving line of credit, should we have an event of default, which includes, among other things, a failure to meet certain financial covenants and a material adverse change in the business, the bank could choose to limit or take away our ability to borrow these or any funds. Should this occur, or if the credit markets further tighten or our business declines, we may need or choose to raise additional capital to repay indebtedness, pursue acquisitions or expand our operations. Such additional capital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.

 

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

 

·                                          market acceptance of our products and product enhancements, and the overall level of sales of our products;

 

·                                          our ability to control costs;

 

·                                          the supply of key components for our products;

 

·                                          our ability to increase revenue and net income;

 

·                                          increased research and development expenses and sales and marketing expenses;

 

·                                          our need to respond to technological advancements and our competitors’ introductions of new products or technologies;

 

·                                          capital improvements to new and existing facilities and enhancements to our infrastructure and systems;

 

·                                          potential acquisitions of businesses and product lines;

 

·                                          our relationships with customers and suppliers;

 

·                                          government budgets, political agendas and other funding issues, including potential delays in government contract awards;

 

·                                          our ability to successfully negotiate credit arrangements with our bank and the state of the financial markets, in general; and

 

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

 

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

 

We may be unable to maintain profitability on a quarterly or annual basis. We cannot assure you that we will be able to sustain or improve our financial performance, or that we will be able to continue to achieve profitability on a quarterly or annual basis in the future. Our ability to maintain profitability in future periods could be impacted by budgetary constraints, government and political agendas, economic instability and other items that are not in our control. Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may experience operating losses and net losses in the future, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline.

 

13



Table of Contents

 

The trading price of our common stock is highly volatile. The trading price of our common stock has been subject to wide fluctuations in the past. Since April 2008, our common stock has traded at closing prices as low as $0.90 per share and as high as $2.98 per share. The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:

 

·                                          quarterly variations in operating results;

 

·                                          our ability to control costs, improve cash flow and sustain profitability;

 

·                                          our ability to raise additional capital;

 

·                                          shortages announced by suppliers;

 

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

 

·                                          transitions to new products or product enhancements;

 

·                                          acquisitions of businesses, products or technologies;

 

·                                          the impact of any litigation;

 

·                                          changes in investor perceptions;

 

·                                          government funding, political agendas and other budgetary constraints;

 

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

 

·                                          international conflicts, political unrest and acts of terrorism.

 

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

 

Certain provisions of our charter documents may discourage a third party from acquiring us and may adversely affect the price of our common stock. Certain provisions of our certificate of incorporation could make it difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Under the terms of our certificate of incorporation, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock. In August 2009, we adopted a new stockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that if a person or group acquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged by us for common stock or the holders of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discount off of the then current market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or proxy contest more difficult.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

14



Table of Contents

 

ITEM 2.                   PROPERTIES

 

Our headquarters and principal operations are housed in approximately 52,000 square feet of leased office, manufacturing and warehouse space located in Santa Ana, California. This facility lease expires in 2015 and contains an option to extend the lease for an additional five years at the market rate at that time.

 

For additional information regarding our obligations under property leases, see Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.

 

ITEM 3.                   LEGAL PROCEEDINGS

 

The information set forth under the heading “Litigation and Other Contingencies” under Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, is incorporated herein by reference.

 

ITEM 4.                   MINE SAFETY DISCLOSURES

 

Not applicable.

 

15



Table of Contents

 

PART II

 

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

 

Market Information and Holders

 

Our common stock is traded on the NYSE Amex under the symbol “ITI.”  The following table sets forth, for the periods indicated, the highest and lowest sales prices for our common stock as reported by NYSE Amex:

 

 

 

High

 

Low

 

Fiscal 2012

 

 

 

 

 

Quarter Ended June 30, 2011

 

$

1.58

 

$

1.22

 

Quarter Ended September 30, 2011

 

1.35

 

0.90

 

Quarter Ended December 31, 2011

 

1.39

 

1.08

 

Quarter Ended March 31, 2012

 

1.58

 

1.31

 

 

 

 

 

 

 

Fiscal 2011

 

 

 

 

 

Quarter Ended June 30, 2010

 

$

2.25

 

$

1.26

 

Quarter Ended September 30, 2010

 

1.78

 

1.25

 

Quarter Ended December 31, 2010

 

1.93

 

1.33

 

Quarter Ended March 31, 2011

 

1.92

 

1.35

 

 

On June 1, 2012, the last reported sales price of our common stock on the NYSE Amex was $1.42. As of June 1, 2012, we had 425 holders of record of our common stock according to information furnished by our transfer agent.

 

Dividend Policy

 

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

 

Issuer Purchases of Equity Securities

 

On August 22, 2011, our Board of Directors approved a stock repurchase program. Under the program, we may acquire up to $3 million of our outstanding common stock from time to time until August 2012. Purchases may be made in the open market (including pursuant to Rule 10b5-1 trading plans), in privately negotiated transactions or in block purchases, depending on market conditions, share price and other factors. The table below details our common stock repurchases during the fourth quarter of Fiscal 2012.  All repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

 

Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs

 

Jan 1 to Jan 31, 2012

 

 

$

 

 

 

 

Feb 1 to Feb 29, 2012

 

239,273

 

1.48

 

239,273

 

 

 

Mar 1 to Mar 31, 2012

 

 

 

 

 

 

Total

 

239,273

 

$

1.48

 

239,273

 

$

2,239,470

 

 

16



Table of Contents

 

ITEM 6.                        SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to make any disclosure pursuant to this Item 6.

 

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

 

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this report and the “Risk Factors” section in Item 1A, as well as other cautionary statements and risks described elsewhere in this report, before deciding to purchase, hold or sell our common stock.

 

Overview

 

General. We are a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics and improve the safety of surface transportation systems infrastructure. Additionally, we believe that our products, services and solutions, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining image processing, traffic engineering, information technology and other products and services, we offer a broad range of ITS solutions to customers worldwide.

 

Acquisitions. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”), a privately-held company based in Berkeley, California which specializes in transportation performance measurement. On or shortly after the acquisition date, we paid a total of approximately $840,000 in cash. Additionally, we are scheduled to pay up to a total of $1.5 million within 36 months after the acquisition date pursuant to holdback, deferred payment and earn-out provisions.

 

In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”) for an initial cash payment of approximately $1.6 million. MET specializes in 511 advanced traveler information systems and offers Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. We also agreed to pay up to $1 million on each of the first two anniversaries of the closing of the acquisition, as well as up to an additional $2 million under a 24-month earn-out provision. In January 2012, we made a cash payment of approximately $668,000 of the first deferred payment to the shareholders of MET and held back $250,000 in accordance with certain provisions of the purchase agreement.  We expect the contingencies related to the $250,000 holdback to be resolved sometime in the first fiscal quarter of the fiscal year ending March 31, 2013, at which time we may or may not release the holdback. Additionally, no amounts were earned by the MET shareholders related to the first year earn-out provision.

 

In April 2009, we completed the acquisition of certain assets of Hamilton Signal, Inc., which included the Abacus system, for an aggregate purchase price of approximately $518,000 in cash.

 

Refer to Note 4 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for additional discussion on these acquisitions.

 

Sale of Vehicle Sensors. On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix pursuant to an Asset Purchase Agreement signed on July 25, 2011 (the “Asset Sale”). Upon closing, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. We are entitled to additional consideration in the form of certain performance and royalty-related earn-outs. As a result of the Asset Sale, we no longer operate in the Vehicle Sensors segment. Refer to Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for additional discussion on this transaction.

 

Business Segments. Subsequent to the Asset Sale, we now operate in two reportable segments: Roadway Sensors and Transportation Systems.

 

Roadway Sensors

 

The Roadway Sensors segment includes, among other products, our Vantage, Versicam, Pico, Vantage Vector and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications.

 

17



Table of Contents

 

Transportation Systems

 

The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation management and traveler information systems for the ITS industry. This segment includes the operations of MET, which specializes in 511 advanced traveler information systems and offers MDSS management tools that allow users to create solutions to meet roadway maintenance decision needs. Also included in this segment are the operations of BTS, which specializes in transportation performance measurement.

 

Business. Given the current ongoing uncertainties regarding global economic conditions, we continue to remain cautious about our overall business. We believe the overall ongoing unfavorable economic environment has negatively affected, and may continue to negatively affect, our financial results for the foreseeable future, and may impair our ability to accurately forecast our future financial performance and other business trends. In addition, since the end users of a majority of our products and services are governmental entities, we have been, and may continue to be, negatively affected by the budgetary issues and delays in purchasing decisions that many municipalities and other state and local agencies continue to face. Spending for new roadways, new systems to address traffic congestion and other transportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe the need to rebuild and modernize aging transportation infrastructure will continue, and in addition to funds available through recent federal stimulus packages and federal highway bills, there exist various other funding mechanisms that support transportation infrastructure and related projects. These include bonds, dedicated sales and gas tax measures and other alternative funding sources.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Revenue Recognition. Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

 

We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements that have stand alone value in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

 

We account for multiple-element arrangements that consist only of software and software-related services in accordance with industry-specific accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. When the

 

18



Table of Contents

 

fair value of a delivered element has not been established but VSOE of fair value exists for the undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

 

Revenues from follow-on service and support, for which we generally charge separately, are recorded in the period in which the services are performed and are included in our net sales.

 

Contract Revenues

 

Contract revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, contract revenues are recognized using the percentage of completion method of accounting. Under this method, revenue is recognized as contract performance progresses, and is based on the relationship of costs incurred to total estimated costs. We generally utilize a cost-to-cost approach in applying the percentage of completion method, whereby revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. Costs are generally determined from actual hours of labor effort expended. Direct non-labor costs are charged as incurred plus any mark-up permitted under the contract. Certain of our contract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Contract revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts for which no specific maximum contract values are stipulated.

 

Any anticipated losses on contracts are charged to operations when identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to recognized costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in contract revenues when their realization is reasonably assured. Under the percentage of completion method, recognition of profit is dependent upon the accuracy of a variety of estimates, including engineering progress, materials quantities, and achievement of milestones, incentives, penalty provisions, labor productivity, cost estimates and others. Such estimates are based on various professional judgments we make with respect to those factors and are subject to change as the project proceeds and new information becomes available. We have a history of making reasonably dependable estimates of the extent of progress towards completion and contract completion costs on our long-term contracts.  However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from our estimates. To the extent there are material differences between our estimates and our actual results, our future results of operations will be affected.

 

Substantially all of our contracts are of the following types:

 

Cost-Plus Fixed Fee. Under cost-plus fixed fee contracts, we charge our customers for our costs, including both direct and indirect costs, plus a fixed negotiated fee.

 

Fixed-Price. Under fixed-price contracts, our customers pay us an agreed fixed amount negotiated in advance for a specified scope of work. Prior to completion, our recognized profit margins on any fixed price contract depend on the accuracy of our estimates and will increase to the extent that our current estimates of aggregate actual costs are below amounts previously estimated. Conversely, if our current estimated costs exceed prior estimates, our profit margins will decrease and we may realize a loss on a project.

 

Time-and-Materials. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our customers based on the actual time that we spend on a project. In addition, customers reimburse us for our actual out-of-pocket costs of materials and other direct incidental expenditures incurred in connection with our performance under the contract. The majority of our time-and-material contracts are subject to maximum contract values and, accordingly, revenues under these contracts are generally recognized under the percentage of completion method.

 

Accounts Receivable. We estimate the collectability of customer receivables on an ongoing basis by reviewing invoices outstanding greater than a certain period of time. We record an allowance for doubtful accounts for specific receivables deemed to be at risk for collection as well as a general allowance based on our historical collections experience. Considerable judgment is required in assessing and estimating the ultimate realization of trade receivables, including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make required payments, additional allowances may be required that could adversely affect our operating results.

 

Inventories. Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or market. We write down the carrying value of our inventories to net realizable value for estimated excess and obsolete inventories in an amount equal to the difference between the cost of the inventories and their estimated realizable value. These estimates are based on management’s judgments and assumptions as to future demand requirements and our evaluation of market conditions. Demand for our

 

19



Table of Contents

 

products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. Estimated inventory write-downs, once established, are not reversed until the related inventory has been sold or scrapped, so if actual market conditions are more favorable in the fiscal periods subsequent to those in which we record significant write-downs, we may have higher gross margins when products are sold.

 

Goodwill and Other Long-Lived Assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Other long-lived assets primarily represent purchased intangible assets including developed technology, customer relationships, trade names and patents. We currently amortize our intangible assets with definitive lives over periods ranging from one to seven years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method over the estimated useful life of the asset.

 

We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We have determined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In Fiscal 2012, we early adopted the new provisions issued by the Financial Accounting Standard Board (“FASB”) that are intended to simplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

 

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.

 

Warranty. We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Defective products are either repaired or replaced, at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty provision is included within accrued expenses in the accompanying consolidated balance sheets. Should our actual experience of warranty returns be higher than anticipated, additional warranty reserves may be required, which would adversely affect our product gross profit and our operating results.

 

Income Taxes. We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made.

 

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with this anticipated rate. As the fiscal year progresses, we refine our estimates based upon actual events and financial results during the year. This estimation process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter.

 

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

20



Table of Contents

 

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.

 

Stock-Based Compensation. We record stock-based compensation in the statements of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period.  Our stock-based awards are currently comprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

 

Recent Accounting Pronouncements

 

Refer to Note 1 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for a discussion of recent accounting pronouncements.

 

Results of Operations

 

The following table sets forth certain statement of operations data as a percentage of total net sales and contract revenues for the periods indicated.

 

 

 

Year Ended March 31,

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net sales and contract revenues:

 

 

 

 

 

 

 

Net sales

 

47.4

%

54.3

%

49.0

%

Contract revenues

 

52.6

 

45.7

 

51.0

 

Total net sales and contract revenues

 

100.0

%

100.0

%

100.0

%

Costs of net sales and contract revenues:

 

 

 

 

 

 

 

Cost of net sales

 

22.9

 

25.9

 

23.8

 

Cost of contract revenues

 

37.6

 

30.1

 

33.6

 

Gross profit

 

39.5

 

44.0

 

42.6

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

30.8

 

32.7

 

30.4

 

Research and development

 

5.4

 

4.7

 

5.1

 

Amortization of intangible assets

 

0.9

 

0.3

 

0.2

 

Change in fair value of contingent acquisition consideration

 

(1.1

)

0.1

 

0.0

 

Impairment of goodwill

 

0.0

 

15.3

 

0.0

 

Total operating expenses

 

36.0

 

53.1

 

35.7

 

Operating income (loss)

 

3.5

 

(9.1

)

6.9

 

Non-operating income (expense):

 

 

 

 

 

 

 

Other income, net

 

0.0

 

0.0

 

0.1

 

Interest expense, net

 

(0.1

)

(0.3

)

(0.5

)

Income (loss) from continuing operations before income taxes

 

3.4

 

(9.4

)

6.5

 

Provision for income taxes

 

(1.1

)

(0.5

)

(1.9

)

Income (loss) from continuing operations

 

2.3

 

(9.9

)

4.6

 

Gain on sale of discontinued operation, net of tax

 

2.0

 

0.0

 

0.0

 

Income (loss) from discontinued operation, net of tax

 

0.0

 

(0.1

)

(0.4

)

Net income (loss)

 

4.3

%

(10.0

)%

4.2

%

 

21



Table of Contents

 

Analysis of Fiscal 2012, Fiscal 2011 and Fiscal 2010 Results of Operations

 

Net Sales and Contract Revenues. Net sales are comprised of sales from our Roadway Sensors segment. Contract revenues consist of revenues from our Transportation Systems segment.

 

The following tables present details of our net sales and contract revenues for Fiscal 2012 compared to Fiscal 2011, and Fiscal 2011 compared to Fiscal 2010:

 

 

 

Year Ended March 31,

 

Increase

 

%

 

 

 

2012

 

2011

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Net sales

 

$

27,679

 

$

28,208

 

$

(529

)

(1.9

)%

Contract revenues

 

30,727

 

23,758

 

6,969

 

29.3

 

Total net sales and contract revenues

 

$

58,406

 

$

51,966

 

$

6,440

 

12.4

 

 

 

 

Year Ended March 31,

 

Increase

 

%

 

 

 

2011

 

2010

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Net sales

 

$

28,208

 

$

25,341

 

$

2,867

 

11.3

%

Contract revenues

 

23,758

 

26,413

 

(2,655

)

(10.1

)

Total net sales and contract revenues

 

$

51,966

 

$

51,754

 

$

212

 

0.4

 

 

We currently have a diverse customer base, and no individual customer represented greater than 10% of our total a net sales and contract revenues for Fiscal 2012, Fiscal 2011 or Fiscal 2010.

 

Net Sales

 

Net sales of Roadway Sensors products in Fiscal 2012 were marginally lower compared to Fiscal 2011 due primarily to certain international customer orders in Fiscal 2011 which did not recur in the current year.  We believe we continued to gain domestic market share in Fiscal 2012, mainly as a result of new product introductions and other competitive advantages; however, our gains in market share were offset in part by lower prices due to competitive pressures. The increase in Roadway Sensors net sales in Fiscal 2011, as compared to Fiscal 2010, were driven by higher unit sales domestically from both our direct sales and dealer markets, which was offset in part by lower prices due to competitive pressures. We also saw particular strength, both domestically and internationally, in certain of our newer product lines which were introduced within the previous two fiscal years. Additionally, we believe we gained market share as a result of these new product introductions.

 

Contract Revenues

 

Our contract revenues are primarily dependent upon the continued availability of funding at the local, state and federal levels from the various agencies and departments of transportation. Contract revenues in Fiscal 2012 increased compared to Fiscal 2011 in part due to several significant project wins in the last two quarters of Fiscal 2012. Additionally in Fiscal 2012, we recognized $5.1 million and $936,000 of total contract revenues derived from our acquisitions of MET and BTS, respectively, which contributed to the overall increase. In Fiscal 2012, the Transportation System segment continued to experience similar general lengthening of overall sales cycles, government budget constraints and funding delays and/or reductions on various existing contracts that existed in Fiscal 2011. Our Transportation Systems contract revenues decreased in Fiscal 2011 compared to Fiscal 2010 primarily as a result of the ongoing weakness in the markets this segment serves, which has been aggravated by the general lengthening of the overall sales cycle, from the bid and proposal process, to the signing of a contract and commencement of work on a project. Government budgeting constraints and funding delays or reductions on various existing contracts, particularly in the Southeast region of the U.S., also contributed to the decline in our contract revenues. Our private planning group, which focuses on private development consulting, has likewise experienced particular weakness. Additionally, our Fiscal 2011 contract revenues included approximately $1.5 million of revenues attributable to MET, which we acquired in January 2011.

 

Going forward, we plan to continue to pursue larger contracts that may contain significant sub-consulting content, which will likely contribute to variability in the timing and amount of our contract revenues and margins from period to period. We also intend to continue to expand our foreign operations by pursuing additional international opportunities in the Middle East and other regions. Among other factors, we believe the ability of our Transportation Systems segment to grow and successfully win and service new contracts will be highly dependent upon our continued success in recruiting and retaining qualified personnel, as well as upon the passage of a new Federal Highway Bill and other government funding initiatives in the markets we serve.

 

22



Table of Contents

 

Gross Profit. The following tables present details of our gross profit for Fiscal 2012 compared to Fiscal 2011, and Fiscal 2011 compared to Fiscal 2010:

 

 

 

Year Ended March 31,

 

 

 

%

 

 

 

2012

 

2011

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Total gross profit

 

$

23,071

 

$

22,884

 

$

187

 

0.8

%

Total gross profit as a % of total net sales and contract revenues

 

39.5

%

44.0

%

 

 

 

 

Gross profit as a % of net sales

 

51.6

%

52.3

%

 

 

 

 

Gross profit as a % of contract revenues

 

28.6

%

34.2

%

 

 

 

 

 

 

 

Year Ended March 31,

 

 

 

%

 

 

 

2011

 

2010

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Total gross profit

 

$

22,884

 

$

22,042

 

$

842

 

3.8

%

Total gross profit as a % of total net sales and contract revenues

 

44.0

%

42.6

%

 

 

 

 

Gross profit as a % of net sales

 

52.3

%

51.4

%

 

 

 

 

Gross profit as a % of contract revenues

 

34.2

%

34.1

%

 

 

 

 

 

Our total gross profit as a percentage of total net sales and contract revenues decreased in Fiscal 2012 compared to Fiscal 2011 primarily as a result of our product and service mix, whereby Transportation Systems consulting revenues (discussed below) significantly increased as percentage of the total. Our net sales (derived from our Roadway Sensors segment) represented approximately 47% of our total net sales and contract revenues in Fiscal 2012 compared to 54% in Fiscal 2011. Our net sales generally carry higher margins than our contract revenues, which are derived primarily from our consulting services. Our total gross profit as a percent of total net sales and contract revenues increased in Fiscal 2011 compared to Fiscal 2010 primarily as a result of our product and service mix. In Fiscal 2011, our net sales represented approximately 54% of our total net sales and contract revenues as compared to 49% in Fiscal 2010.

 

The decrease in gross profit as a percent of net sales in Fiscal 2012 as compared to Fiscal 2011 was primarily a result of sales mix as well as certain manufacturing overhead costs previously absorbed by sales of Vehicle Sensors products. The Vehicle Sensors segment was divested in July 2011. Our gross margin on net sales can fluctuate in any specific quarter or year based on, among other factors, customer and product mix, competitive pricing requirements, product warranty costs and provisions for excess and obsolete inventories, as well as shifts of engineering resources from development activities to sustaining activities, which we record as cost of goods sold.

 

The increase in gross margin on net sales in Fiscal 2011 as compared to Fiscal 2010 was primarily a result of higher overall net sales and higher margins in Roadway Sensors during Fiscal 2011. Such higher margins were largely driven by our customer mix and lower costs for certain key materials. We generally enjoy higher gross margins on direct product sales as compared to sales throgh our dealer channel.

 

We recognize contract revenues and related gross profit using percentage of completion contract accounting when appropriate, while certain of our contract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Therefore, the underlying mix of contract activity can affect the related gross profit recognized in any given period. Gross profit as a percent of contract revenues in Fiscal 2012 was lower than in Fiscal 2011 primarily due to the overall mix of contract revenues which in the current year contained a significant proportion of lower-margin sub-consulting content as well as lower margins stemming from seasonality due to the decrease in revenues from certain of our MDSS and weather forecasting services in the spring and summer time periods. Gross profit as percent of contract revenues in Fiscal 2011 were highly consistent with those of Fiscal 2010. We expect the variability and timing of contract mix and related sub-consulting content in our Transportation Systems segment in future periods, as well as factors such as paid holidays and our ability to efficiently utilize our workforce, will cause fluctuations in our margins from contract revenues from period to period.

 

23



Table of Contents

 

Selling, General and Administrative Expense

 

The following table presents selling, general and administrative expense for Fiscal 2012 and Fiscal 2011:

 

 

 

Year Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

12,434

 

21.3

%

$

11,952

 

23.0

%

$

482

 

4.0

%

Facilities, insurance and supplies

 

1,853

 

3.2

 

1,379

 

2.7

 

474

 

34.4

 

Travel and conferences

 

1,568

 

2.7

 

1,205

 

2.3

 

363

 

30.1

 

Professional and outside services

 

1,778

 

3.0

 

2,150

 

4.1

 

(372

)

(17.3

)

Other

 

353

 

0.6

 

295

 

0.6

 

58

 

19.7

 

Selling, general and administrative

 

$

17,986

 

30.8

%

$

16,981

 

32.7

%

$

1,005

 

5.9

 

 

The increase in selling, general and administrative expenses in Fiscal 2012 as compared to Fiscal 2011 was primarily due to (i) higher salary, travel and headcount-related expenses as we added certain key sales and marketing personnel, (ii) added personnel as well as facilities and other related operating costs as a result of the MET and BTS acquisitions, (iii) legal and professional services related to the sale of our Vehicle Sensors segment and (iv) certain other corporate initiatives related to the development of our performance measurement software.

 

The following table presents selling, general and administrative expense for Fiscal 2011 and 2010:

 

 

 

Year Ended March 31,

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

11,952

 

23.0

%

$

10,496

 

20.3

%

$

1,456

 

13.9

%

Facilities, insurance and supplies

 

1,379

 

2.7

 

1,320

 

2.6

 

59

 

4.5

 

Travel and conferences

 

1,205

 

2.3

 

908

 

1.8

 

297

 

32.7

 

Professional and outside services

 

2,150

 

4.1

 

2,280

 

4.4

 

(130

)

(5.7

)

Other

 

295

 

0.6

 

706

 

1.4

 

(411

)

(58.2

)

Selling, general and administrative

 

$

16,981

 

32.7

%

$

15,710

 

30.5

%

$

1,271

 

8.1

 

 

The increase in selling, general and administrative expenses in Fiscal 2011 as compared to Fiscal 2010 was primarily due to (i) higher selling and commission-related expenses for our Roadway Sensors segment, as total net sales increased approximately 11%  from Fiscal 2010 levels, (ii) higher salary and headcount-related expenses as we have added certain key sales and marketing personnel in all of our business segments, including as a result of the acquisition of MET in January 2011, and (iii) additional legal and professional services related to our acquisition of MET, along with various other corporate initiatives. We also saw a shift from cost of sales to sales and marketing of certain of our headcount expenses in our Transportation Systems segment in Fiscal 2011 commensurate with the overall decline in this segment’s revenues and the reallocation of existing personnel in an effort to expand our contract backlog and increase contract revenues. Additionally, during Fiscal 2011, we realized approximately $250,000 in reversals of certain previously recorded bad debt expense (included in the “Other” category in the table above) as a result of collecting certain large accounts receivable balances. In prior periods, we had recorded an estimated allowance for doubtful accounts against these receivables given the uncertainty of collection at that time. In the future, our operating results in any given period may be favorably or adversely impacted as a result of our estimates of the realization of our accounts receivable.

 

24



Table of Contents

 

Research and Development Expense

 

The following table presents research and development expense for Fiscal 2012 and Fiscal 2011:

 

 

 

Year Ended March 31,

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

2,153

 

3.7

%

$

1,736

 

3.3

%

$

417

 

24.0

%

Facilities, development and supplies

 

792

 

1.3

 

557

 

1.1

 

235

 

42.2

 

Other

 

238

 

0.4

 

151

 

0.3

 

87

 

57.6

 

Research and development

 

$

3,183

 

5.4

%

$

2,444

 

4.7

%

$

739

 

30.2

 

 

Research and development expenses for Fiscal 2012 were higher than Fiscal 2011 primarily due to (i) the allocation of additional resources to various development projects in our Roadway Sensors segment, including our Vantage Vector vehicle detection sensor, (ii) development costs related to our IterisPeMS information management solution, and (iii) additional headcount and other expenses in Fiscal 2012 related to the MET and BTS acquisitions.

 

The following table presents research and development expense for Fiscal 2011 and 2010:

 

 

 

Year Ended March 31,

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

1,736

 

3.3

%

$

1,857

 

3.6

%

$

(121

)

(6.5

)%

Facilities, development and supplies

 

557

 

1.1

 

692

 

1.3

 

(135

)

(19.5

)

Other

 

151

 

0.3

 

96

 

0.2

 

55

 

57.3

 

Research and development

 

$

2,444

 

4.7

%

$

2,645

 

5.1

%

$

(201

)

(7.6

)

 

Research and development expenses for Fiscal 2011 were generally consistent, in total, with those of Fiscal 2010. We believe research and development activities are crucial to our ability to continue to be a leader in our markets.

 

Impairment of Goodwill

 

In Fiscal 2012, we early adopted the new provisions issued by the FASB that are intended to simplify goodwill impairment testing. The updated guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. We performed the annual impairment assessment of the carrying value of goodwill for Fiscal 2012 in the fourth fiscal quarter. Based on our assessments, we determined that no impairment was indicated as the estimated fair value of each reporting unit exceeded its respective carrying value.

 

During Fiscal 2011, due primarily to lower than expected operating results in our Transportation Systems reporting unit, as well as ongoing weakness specifically in the Transportation Systems markets, we determined it was necessary to perform an interim test of impairment of the carrying value of goodwill in our Transportation Systems reporting unit as of December 31, 2010. In performing the first step in this analysis, we estimated the fair value of our Transportation Systems reporting unit using the income approach. As of December 31, 2010, we determined that the carrying value of our Transportation Systems reporting unit exceeded its estimated fair value and, accordingly, we performed the second step of the impairment analysis to estimate the implied fair value of the goodwill of this reporting unit.

 

25



Table of Contents

 

The implied fair value of goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized in a business combination. To determine this value, we estimated the fair value of the assets and liabilities, including certain intangible assets, to be allocated to the Transportation Systems reporting unit as of December 31, 2010. The implied fair value of goodwill was measured as the difference between the estimated fair value of the reporting unit over the estimated fair value amounts of its assets and liabilities. The impairment loss for the Transportation Systems reporting unit was measured by the amount the carrying value of its goodwill exceeded the implied fair value of the goodwill. Accordingly, in order to write down Transportation Systems goodwill with a carrying value of $14.9 million to its implied fair value of $6.9 million, we recorded an impairment charge of $8.0 million in the three months ended December 31, 2010, the third quarter of Fiscal 2011.

 

As a result of the impairment charge taken in Fiscal 2011, we believe we have no goodwill at risk, as the estimated fair values of our Roadway Sensors and Transportations Systems reporting units significantly exceeded their carrying values at March 31, 2012. If our actual financial results, or the plans and estimates used in future goodwill impairment analyses, are lower than the original estimates used to assess for impairment of our goodwill, we could incur future goodwill impairment charges.

 

Interest Expense, Net

 

Net interest expense was approximately $72,000, $152,000 and $264,000 in Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively. The sequential decreases were primarily due to our lower overall level of borrowings, as we continue to make monthly principal payments on our term note. See “Liquidity and Capital Resources” below for additional details on our borrowings.

 

Income Taxes

 

The following table presents our provision for income taxes for Fiscal 2012, Fiscal 2011 and Fiscal 2010:

 

 

 

Year Ended March 31,

 

 

 

2012

 

2011

 

2010

 

 

 

(In thousands, except percentages)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

643

 

$

278

 

$

960

 

Effective tax rate

 

33.0

%

-5.7

%

28.6

%

 

Our effective tax rate for Fiscal 2012 was favorably impacted by the recognition of approximately $276,000 of previously unrecognized tax benefits during the year due to the expiration of statutes limitation in various jurisdictions, by the recognition of tax credits of approximately $246,000 for research and development activities, and by approximately $211,000 of tax benefit from non-taxable favorable fair value adjustments recognized for financial statement purposes. These favorable impacts were partially offset by the impact of recognizing approximately $466,000 of expense upon the expiration of a state net operating loss, net of federal benefit. Our effective tax rate for Fiscal 2011 was impacted unfavorably by a portion of the charge recorded for the impairment of goodwill, amounting to approximately $2.2 million, for which there is no corresponding tax basis. This unfavorable impact was partially offset by the impact of the recognition of approximately $327,000 of previously unrecognized tax benefits during the year due to expiration of certain federal and state statutes in various jurisdictions. Our effective tax rate for Fiscal 2010 was favorably impacted by the recognition of approximately $414,000 of unrecognized tax benefits during the year due to the expiration of certain federal and state statutes in various jurisdictions.

 

As of March 31, 2012 and 2011, respectively, we determined that it was more likely than not that our deferred tax assets will be realized. Accordingly, no valuation allowance has been recorded against our deferred tax assets as of either such dates. In making our determination as to the realizability of our deferred tax assets, we reviewed all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance.

 

As we update our estimates in future periods, adjustments to our deferred tax asset and valuation allowance may be necessary. We anticipate this will cause our future overall effective tax rate in any given period to fluctuate from prior effective tax rates and statutory tax rates. We utilize the liability method of accounting for income taxes. We record net deferred tax assets to the extent that we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including, but not limited to, scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.

 

26



Table of Contents

 

At March 31, 2012, we had $25.0 million of federal net operating loss carryforwards and $10.9 million of state net operating loss carryforwards that begin to expire in 2021 and 2014, respectively. Although the impact cannot be precisely determined at this time, we believe that our net operating loss carryforwards will cause us to have future income tax payments that are substantially lower than the income tax liability calculated using statutory tax rates. Due to changes in stock ownership, our federal net operating loss carryforwards and other federal attributes are subject to a Section 382 annual limitation.

 

Liquidity and Capital Resources

 

Cash Flows

 

We have historically financed our operations with a combination of cash flows from operations, borrowings under credit facilities and the sale of equity securities. We currently rely on cash flows from operations and the availability of borrowings on a line of credit facility to fund our operations, which we believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fund potential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors or by borrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders may experience significant dilution and any equity securities that may be issued may have rights senior to our existing stockholders.

 

At March 31, 2012, we had $28.4 million in working capital, which included no borrowings on our $12.0 million line of credit and $18.7 million in cash and cash equivalents. This compares to working capital of $24.8 million at March 31, 2011, which included no borrowings on our line of credit and $11.8 million in cash and cash equivalents.

 

The following table summarizes our cash flows for Fiscal 2012, Fiscal 2011 and Fiscal 2010:

 

 

 

Year Ended March 31,

 

 

 

2012

 

2011

 

2010

 

 

 

(In thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

668

 

$

5,346

 

$

6,484

 

Investing activities

 

10,002

 

(1,530

)

(594

)

Financing activities

 

(3,787

)

(2,403

)

(1,857

)

 

Operating Activities.  Cash provided by our operations in Fiscal 2012 was the result of (i) adding back to net income $907,000 of depreciation expense, $331,000 of stock-based compensation expense, $504,000 of amortization expense and $286,000 of deferred tax assets, (ii) deducting from net income $619,000 in changes in the fair value of contingent consideration related to our recent acquisition of MET and BTS and $1.2 million for the gain on sale of Vehicle Sensors and (iii) $2.1 million in negative cash flows resulting from changes in our operating assets and liabilities during Fiscal 2012, all of which was partially offset by our net income of $2.5 million for such fiscal year.

 

Our accounts receivable and net costs and estimated earnings in excess of billings increased approximately $3.0 million, or 22%, during Fiscal 2012 mainly as a result of a 12% year-over-year increase in net sales and contract revenues as well as the timing of collection on certain receivables. In the future, our accounts receivable and net costs and estimated earnings in excess of billings accounts are likely to be determined based upon, among other factors, increases or decreases in net sales and contract revenues, the timing of collections of existing receivables and our ability to timely bill billings in excess of costs amounts. We try to offset significant increases in accounts receivables through increased and focused collection efforts; however, we cannot assure you that our efforts will be successful.

 

The increase in accounts payable by approximately $1.1 million during Fiscal 2012 was largely driven by the general timing of payments to vendors and sub-consultants.

 

Cash provided by our operations in Fiscal 2011 was the result of (i) $9.9 million in non-cash items within the statement of operations, primarily $8.0 million for the impairment of goodwill, depreciation expense of $1.0 million and stock-based compensation expense of $382,000; and (ii) $614,000 in positive cash flows resulting from changes in our operating assets and liabilities during Fiscal 2011, all of which was partially offset by our net loss of $5.2 million for such fiscal year.

 

Our inventories increased approximately $953,000, or 35%, during Fiscal 2011 as we built up certain inventories on hand in Fiscal 2011 to meet anticipated increases in our product net sales in our the Roadway Sensors segment. In the future, our inventory levels are likely to continue to be determined based upon, among other factors, the level of purchase orders we receive from our customers, the stage at which our products are in their respective product life cycles, and competitive situations in the marketplace. We attempt to balance such considerations against risk of obsolescence and potentially excess inventory levels.

 

27



Table of Contents

 

The increase in accounts payable by approximately $920,000 from March 31, 2010 to March 31, 2011 was primarily driven by our increased inventory levels and the general timing of payments to vendors.

 

Cash provided by our operations in Fiscal 2010 was primarily the result of (i) our Fiscal 2010 net income of $2.2 million; (ii) $2.5 million in non-cash items within the statement of operations, primarily consisting of adjustments to our deferred tax assets of $1.0 million, depreciation expense of $986,000 and stock-based compensation expense of $375,000; and (iii) $1.7 million in cash resulting from changes in our operating assets and liabilities during the year.

 

Investing Activities.  Cash provided by our investing activities for Fiscal 2012 consisted of (i) $11.4 million in proceeds from the sale of the Vehicle Sensors segment, (ii) $1.0 million used for the acquisition of MET and BTS, which consisted of $840,000 for the initial purchase of BTS and $129,000 related to purchase price adjustments for the purchase of MET, (iii) purchases of property and equipment of $337,000 and (iv) capitalized software of $138,000 related to IterisPeMS.  Cash used in our investing activities for Fiscal 2011 consisted of $1.1 million used for the acquisition of MET and purchases of property and equipment of $414,000. Our investing activities for Fiscal 2010 consisted of purchases of property and equipment of $294,000, as well as $300,000 representing the initial payment for the acquisition of certain assets of Hamilton Signal, Inc. For further information on our acquisitions, refer to Note 4 of Notes to Consolidated Financial Statements included in Part IV, Item 15 of this report.

 

Financing Activities.  Net cash used in our financing activities during Fiscal 2012 primarily consisted of $2.3 million in payments on our long-term debt, which consists of a bank term note, $112,000 for the second anniversary payment for the Hamilton Signal acquisition, $676,000 related to the first year deferred payment to MET and $754,000 used to repurchase our common stock under our stock repurchase program announced in August 2011. Net cash used in our financing activities during Fiscal 2011 primarily consisted of $2.4 million in payments on our term note and $106,000 for the first anniversary payment for the Hamilton Signal acquisition. Net cash used in our financing activities during Fiscal 2010 consisted of net payments on our term note of $2.0 million. The net payments on our term note during Fiscal 2010 were partially offset by $143,000 in proceeds received from the exercise in Fiscal 2010 of outstanding stock options to purchase shares of our common stock.

 

Borrowings

 

In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (the “Bank”), which provided for a two-year revolving line of credit with borrowings of up to $12.0 million and a $7.5 million term note (discussed below). In September 2010, we entered into a modification agreement with the Bank to extend the expiration date of our revolving line of credit to October 1, 2012. Interest on borrowed amounts under the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at March 31, 2012) up to the current stated prime rate plus 0.50%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not contain any early termination fees and is secured by substantially all of our assets. As of March 31, 2012, no amounts were outstanding under the revolving line of credit portion of the facility. Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certain financial covenants, as described further below.

 

As of March 31, 2012, we had outstanding borrowings of approximately $634,000 under our bank term note, which expires on May 1, 2013. Principal payments under this term note are required to be repaid in monthly installments of $152,000. Additionally, beginning on November 1, 2009, and on November 1 of each year thereafter, we are required to repay additional principal of up to $500,000, calculated based on certain financial measures, as further defined in the loan agreement. These additional principal payments effectively reduce the total number of monthly installments necessary to repay the term note. To date, we have made additional principal payments of $500,000 on each of November 1, 2011, 2010 and 2009. Interest on the term note is payable monthly at a rate equal to the current stated prime rate plus 0.50% up to the current stated prime rate plus 1.00%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. The term note contains no early termination fees and, along with our revolving line of credit discussed above, is secured by substantially all of our assets. We currently expect the remaining outstanding balance of the term note will be paid off in full by June 30, 2012.

 

In connection with our credit facility and loan agreement with the Bank, we are also required to comply with certain quarterly financial covenants. These include achieving ratios for working capital and debt service, as well as maintaining a level of profitability, all of which are further defined in the agreement. While we believe we are currently in compliance with all such financial covenants, we cannot assure you that we will not violate one or more covenants in the future. If we were to be in violation of covenants under this agreement, our lender could choose to accelerate payment on all outstanding loan balances and pursue its security interest in our assets. In this event, we cannot assure you that we would be able to quickly obtain equivalent or suitable replacement financing on acceptable terms, on a timely basis, or at all. If we were not able to secure alternative sources of financing, such acceleration would have a material adverse impact on our business and financial condition.

 

28



Table of Contents

 

Off-Balance Sheet Arrangements

 

Other than our operating leases, which are further described at Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, we do not believe we have any other material off-balance sheet arrangements at March 31, 2012.

 

Seasonality

 

We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in our third and fourth fiscal quarters due to a reduction in road construction and repairs during the winter months due to inclement weather conditions. With the addition of MET in January 2011, we have also experienced seasonality related to certain MDSS services in our first and second fiscal quarters mainly because these services are generally not required in the summer months.

 

ITEM 7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to interest rate risk is limited to our line of credit and our bank term note. Our line of credit bears interest equal to the prevailing prime rate (3.25% at March 31, 2012) plus 0% to 1.0%. We do not believe that a 10% increase in the interest rate on our line of credit or term note would have a material impact on our financial position, operating results or cash flows. In addition, we believe that the carrying value of our outstanding debt under our credit facility approximates fair value.

 

ITEM 8.                        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by Regulation S-X are included in Part IV, Item 15 of this report.

 

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

 

None.

 

ITEM 9A.               CONTROLS AND PROCEDURES

 

(a)   Evaluation of disclosure controls and procedures.  In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as of the end of the period covered by this Annual Report on Form 10-K, management evaluated, with the participation of the our President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the date of such evaluation in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

(b)   Changes in internal control.    There was no change in our internal control over financial reporting that occurred during the fourth quarter of Fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Internal Control

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.

 

29



Table of Contents

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to management and our Board of Directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of published financial statements.

 

We have assessed the effectiveness of our internal controls over financial reporting as of March 31, 2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on our assessment, we believe that, as of March 31, 2012, our internal control over financial reporting is effective based on those criteria.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicable to smaller reporting companies.

 

ITEM 9B.              OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.                 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

(a)  Identification of Directors. The information under the caption “Election of Directors,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(b)  Identification of Executive Officers. The information under the caption “Executive Compensation and Other Information - Executive Officers,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(c)  Compliance with Section 16(a) of the Exchange Act. The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(d)  Corporate Governance. The information under the caption “Corporate Governance,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

(e)  Audit Committee. The information under the caption “Board Meetings and Committees — Audit Committee,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 11.                EXECUTIVE COMPENSATION

 

The information under the caption “Executive Compensation and Other Information,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

30



Table of Contents

 

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

 

The information under the captions “Equity Compensation Plans” and “Principal Stockholders and Common Stock Ownership of Certain Beneficial Owners and Management,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 13.            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information under the captions “Corporate Governance — Director Independence” and “Certain Transactions,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

ITEM 14.            PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information under the caption “Fees Paid to Independent Registered Public Accounting Firm,” appearing in our proxy statement for the 2012 Annual Meeting of Stockholders, is incorporated herein by reference.

 

PART IV

 

ITEM 15.            EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)              Documents filed as part of this report:

 

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

 

Report of Independent Registered Public Accounting Firm

 

34

 

Consolidated Balance Sheets as of March 31, 2012 and 2011

 

35

 

Consolidated Statements of Operations for the fiscal years ended March 31, 2012, 2011 and 2010

 

36

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the fiscal years ended March 31, 2012, 2011 and 2010

 

37

 

Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2012, 2011 and 2010

 

38

 

Notes to Consolidated Financial Statements

 

39

 

 

2.                                      Exhibits.

 

The exhibits listed on the accompanying Exhibit Index immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this report.

 

31



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Dated: June 11, 2012

ITERIS, INC.

 

(Registrant)

 

 

 

By

/S/ ABBAS MOHADDES

 

 

Abbas Mohaddes

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

POWER OF ATTORNEY

 

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

 

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

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ ABBAS MOHADDES

 

Director, President and Chief Executive Officer

 

June 11, 2012

Abbas Mohaddes

 

(principal executive officer)

 

 

 

 

 

 

 

/s/ JAMES S. MIELE

 

Chief Financial Officer

 

June 11, 2012

James S. Miele

 

(principal financial and accounting officer)

 

 

 

 

 

 

 

/s/ GREGORY A. MINER

 

Chairman of the Board

 

June 11, 2012

Gregory A. Miner

 

 

 

 

 

 

 

 

 

/s/ RICHARD CHAR

 

Director

 

June 11, 2012

Richard Char

 

 

 

 

 

 

 

 

 

/s/ KEVIN C. DALY

 

Director

 

June 11, 2012

Kevin C. Daly, Ph.D.

 

 

 

 

 

 

 

 

 

/s/ JOEL SLUTZKY

 

Director

 

June 11, 2012

Joel Slutzky

 

 

 

 

 

 

 

 

 

/s/ THOMAS L. THOMAS

 

Director

 

June 11, 2012

Thomas L. Thomas

 

 

 

 

 

 

 

 

 

/s/ MIKEL WILLIAMS

 

Director

 

June 11, 2012

Mikel Williams

 

 

 

 

 

32




Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

Iteris, Inc.

 

We have audited the accompanying consolidated balance sheets of Iteris, Inc. and subsidiaries as of March 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2012.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Iteris, Inc. and subsidiaries as of March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ McGladrey LLP

 

Irvine, California

 

June 11, 2012

 

 

34



Table of Contents

 

Iteris, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

18,701

 

$

11,818

 

Trade accounts receivable, net of allowance for doubtful accounts of $379 and $385 at March 31, 2012 and 2011, respectively

 

11,081

 

9,419

 

Costs in excess of billings on uncompleted contracts

 

5,360

 

4,070

 

Inventories

 

2,454

 

2,392

 

Deferred income taxes

 

2,904

 

2,967

 

Prepaid expenses and other current assets

 

425

 

392

 

Assets of discontinued operation

 

 

7,672

 

Total current assets

 

40,925

 

38,730

 

Property and equipment, net

 

1,948

 

2,461

 

Deferred income taxes

 

6,761

 

10,807

 

Intangible assets, net

 

2,578

 

1,845

 

Goodwill

 

17,318

 

16,522

 

Other assets

 

210

 

203

 

Total assets

 

$

69,740

 

$

70,568

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

4,044

 

$

2,985

 

Accrued payroll and related expenses

 

3,398

 

3,523

 

Accrued liabilities

 

2,942

 

3,181

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

1,542

 

1,335

 

Current portion of long-term debt

 

634

 

2,324

 

Current liabilities of discontinued operation

 

 

611

 

Total current liabilities

 

12,560

 

13,959

 

Long-term debt

 

 

640

 

Deferred rent

 

700

 

1,058

 

Unrecognized tax benefits

 

351

 

587

 

Other non-current liabilities

 

657

 

1,028

 

Total liabilities

 

14,268

 

17,272

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $1.00 par value:

 

 

 

 

 

Authorized shares - 2,000

 

 

 

 

 

Issued and outstanding shares - none

 

 

 

Common stock, $0.10 par value:

 

 

 

 

 

Authorized shares - 70,000 at March 31, 2012 and 2011

 

 

 

 

 

Issued and outstanding shares - 33,909 at March 31, 2012 and 34,364 at March 31, 2011

 

3,391

 

3,436

 

Additional paid-in capital

 

137,645

 

137,938

 

Accumulated deficit

 

(85,564

)

(88,078

)

Total stockholders’ equity

 

55,472

 

53,296

 

Total liabilities and stockholders’ equity

 

$

69,740

 

$

70,568

 

 

See accompanying notes.

 

35



Table of Contents

 

Iteris, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Year Ended March 31,

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net sales and contract revenues:

 

 

 

 

 

 

 

Net sales

 

$

27,679

 

$

28,208

 

$

25,341

 

Contract revenues

 

30,727

 

23,758

 

26,413

 

Total net sales and contract revenues

 

58,406

 

51,966

 

51,754

 

Costs of net sales and contract revenues:

 

 

 

 

 

 

 

Cost of net sales

 

13,393

 

13,447

 

12,313

 

Cost of contract revenues

 

21,942

 

15,635

 

17,399

 

Gross profit

 

23,071

 

22,884

 

22,042

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

17,986

 

16,981

 

15,709

 

Research and development

 

3,183

 

2,444

 

2,646

 

Amortization of intangible assets

 

504

 

176

 

113

 

Change in fair value of contingent acquisition consideration

 

(619

)

55

 

 

Impairment of goodwill

 

 

7,970

 

 

Total operating expenses

 

21,054

 

27,626

 

18,468

 

Operating income (loss)

 

2,017

 

(4,742

)

3,574

 

Non-operating income (expense):

 

 

 

 

 

 

 

Other income, net

 

4

 

18

 

44

 

Interest expense, net

 

(72

)

(152

)

(264

)

Income (loss) from continuing operations before income taxes

 

1,949

 

(4,876

)

3,354

 

Provision for income taxes

 

(643

)

(278

)

(960

)

Income (loss) from continuing operations

 

1,306

 

(5,154

)

2,394

 

Gain on sale of discontinued operation, net of tax

 

1,180

 

 

 

Income (loss) from discontinued operation, net of tax

 

28

 

(55

)

(191

)

Net income (loss)

 

$

2,514

 

$

(5,209

)

$

2,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic and diluted

 

$

0.04

 

$

(0.15

)

$

0.07

 

Gain per share from sale of discontinued operation - basic and diluted

 

$

0.03

 

$

0.00

 

$

0.00

 

Income (loss) per share from discontinued operation - basic and diluted

 

$

0.00

 

$

0.00

 

$

(0.01

)

Net income (loss) per share - basic and diluted

 

$

0.07

 

$

(0.15

)

$

0.06

 

 

 

 

 

 

 

 

 

Shares used in basic per share calculations

 

34,259

 

34,335

 

34,249

 

Shares used in diluted per share calculations

 

34,380

 

34,335

 

34,435

 

 

See accompanying notes.

 

36



Table of Contents

 

Iteris, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

(In thousands)

 

 

 

 

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Stock

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-In

 

Held in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Trust

 

Deficit

 

Income (Loss)

 

Equity

 

Balance at March 31, 2009

 

34,205

 

$

3,420

 

$

136,997

 

$

(31

)

$

(85,025

)

$

(3

)

$

55,358

 

Cumulative effect of adoption of change in accounting for warrants

 

 

 

 

 

(47

)

 

(47

)

Stock option exercises

 

113

 

12

 

131

 

 

 

 

143

 

Stock-based compensation

 

 

 

375

 

 

 

 

375

 

Issuance of shares held in trust

 

 

 

 

31

 

 

 

31

 

Components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

3

 

3

 

Net income

 

 

 

 

 

2,203

 

 

2,203

 

Comprehensive income

 

 

 

 

 

 

 

2,206

 

Balance at March 31, 2010

 

34,318

 

3,432

 

137,503

 

 

(82,869

)

 

58,066

 

Stock option exercises

 

46

 

4

 

53

 

 

 

 

57

 

Stock-based compensation

 

 

 

382

 

 

 

 

382

 

Net loss and comprehensive loss

 

 

 

 

 

(5,209

)

 

(5,209

)

Balance at March 31, 2011

 

34,364

 

3,436

 

137,938

 

 

(88,078

)

 

53,296

 

Stock option exercises

 

68

 

8

 

77

 

 

 

 

85

 

Stock-based compensation

 

 

 

331

 

 

 

 

331

 

Issuance of shares pursuant to vesting of restricted stock units

 

51

 

5

 

(5

)

 

 

 

 

Repurchases of common stock

 

(574

)

(58

)

(696

)

 

 

 

(754

)

Net income and comprehensive income

 

 

 

 

 

2,514

 

 

2,514

 

Balance at March 31, 2012

 

33,909

 

$

3,391

 

$

137,645

 

$

 

$

(85,564

)

$

 

$

55,472

 

 

See accompanying notes.

 

37



Table of Contents

 

Iteris, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Year Ended March 31,

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

2,514

 

$

(5,209

)

$

2,203

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Deferred income taxes

 

286

 

273

 

1,014

 

Depreciation of property and equipment

 

907

 

1,030

 

986

 

Stock-based compensation

 

331

 

382

 

375

 

Impairment of goodwill

 

 

7,970

 

 

Amortization of intangible assets

 

504

 

222

 

159

 

Change in fair value of contingent acquisition consideration

 

(619

)

55

 

 

Loss on disposal of equipment

 

1

 

9

 

 

Gain on sale of Vehicle Sensors

 

(1,180

)

 

 

Changes in operating assets and liabilities, net of effects of acquisitions and sale of Vehicle Sensors:

 

 

 

 

 

 

 

Accounts receivable

 

(1,826

)

1,052

 

1,137

 

Net costs and estimated earnings in excess of billings

 

(902

)

(501

)

917

 

Inventories

 

79

 

(953

)

2,954

 

Prepaid expenses and other assets

 

284

 

211

 

(350

)

Accounts payable and accrued expenses

 

289

 

805

 

(2,911

)

Net cash provided by operating activities

 

668

 

5,346

 

6,484

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(337