Acquisitions

12 Months Ended

Mar. 31, 2012

Acquisitions

Acquisitions

4.Acquisitions

Berkeley Transportation Systems, Inc.

In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”). BTS was a privately-held company based in Berkeley, California, which specializes in transportation performance measurement. BTS’ Performance Measurement System leverages its real-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures. This information is used to analyze how a transportation system is performing based on pre-determined measures of effectiveness such as stops, delays and travel time. Our primary reasons for the acquisition were to add key technologies to complement our iPerform solution and strengthen our performance measurement and management initiative as a whole.

Our consolidated financial statements for Fiscal 2012 include the results of operations of BTS commencing as of the acquisition date. BTS contributed approximately $936,000 of Contract Revenue and approximately$38,000 of operating income since the acquisition date included in the consolidated statement of operations for Fiscal 2012. On or shortly after the acquisition date, we paid a total of approximately $840,000 in cash to BTS. Additionally, we are also scheduled to pay (i) up to $250,000 at the 24-month anniversary of the closing of the acquisition, pursuant to a holdback provision, (ii) up to $500,000 at the 36-month anniversary of the closing of the acquisition, pursuant to a deferred payment provision, and (iii) up to $750,000 pursuant to an earn-out provision based on revenue and operating income achieved from BTS’ operations during the 18 months ending June 30, 2013. Our potential obligation pertaining to the various contingent consideration payments ranges from zero to $1.5 million. Acquisition-related costs were not significant and are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for Fiscal 2012.

Acquisition Accounting

We have accounted for the acquisition of BTS as a business combination in accordance with applicable accounting guidance. We measured the fair value of the consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value of consideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at the acquisition date.

The BTS acquisition is recorded as follows (in thousands):

Fair value of consideration transferred:
Cash paid on or shortly after acquisition date	$	840
Estimated fair value of contingent consideration	971
Total	1,811
Allocation:
Accounts receivable	(164		)
Other tangible assets	(375		)
Purchased intangible assets	(1,100		)
Liabilities	624
Goodwill	$	796

The excess of the fair value of the BTS business over the aggregate fair values of identifiable assets acquired and liabilities assumed was recorded as goodwill. The primary factor that resulted in the recognition of goodwill was the acquisition of BTS’ assembled workforce, which is not a separately identifiable intangible asset. The goodwill is not expected to be deductible for income tax purposes.

Purchased Intangible Assets

The following table presents details of the intangible assets acquired from BTS:

	Estimated Useful Life	Amount
	(In years)	(In thousands)
Backlog	3	$	330
Technology	6	290
Customer contracts / relationships	6	250
Other purchased intangible assets	5 - 7	230
		$	1,100

Meridian Environmental Technology, Inc.

In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”), a privately-held company based in Grand Forks, North Dakota. MET specializes in 511 advanced traveler information systems, as well as Maintenance Decision Support System management tools that allow users to create solutions to meet roadway maintenance decision needs. Our primary reasons for the acquisition were (i) to enhance our ability to provide travelers and traffic management authorities with more accurate and real-time information and network performance management tools and (ii) to provide Iteris with key capabilities in the emerging performance measurement and management market. From the date of acquisition through the end of Fiscal 2011, MET contributed approximately $1.5 million of Contract Revenue and approximately $77,000 of operating income included in the consolidated statement of operations for Fiscal 2011.

Our consolidated financial statements for the fiscal years ended March 31, 2012 and 2011 include the results of operations of MET commencing as of the acquisition date. On or shortly after the acquisition date, we paid approximately $1.6 million in cash, exclusive of $369,000 of cash acquired. We also agreed to pay up to $1 million on each of the first two anniversaries of the acquisition date, subject to adjustments related to the retention of various key employees and certain other adjustments as further defined in the agreement. Additionally, we agreed to pay up to an additional $1 million per year for two years pursuant to an earn-out provision, based on revenue and operating income achieved from MET’s operations during the twelve months ending December 31, 2011 and 2012.  Acquisition-related costs were not significant and are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for Fiscal 2011.  In January 2012, we made a cash payment of approximately $676,000 related to 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 hold-back 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 hold-back. No amounts were earned by the shareholders of MET related to the first year earn-out provision. As a result of the first year deferred payment and that no amounts were earned related to the first year earn-out provision, the potential outcomes pertaining to the remaining contingent consideration payments at March 31, 2012 range from zero to approximately $1.8 million.

Acquisition Accounting

We have accounted for the acquisition of MET as a business combination in accordance with applicable accounting guidance. We measured the fair value of the consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value of consideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at the acquisition date.

The acquisition is recorded as follows (in thousands):

Fair value of consideration transferred:
Cash paid on or shortly after acquisition date	$	1,622
Estimated fair value of contingent consideration	2,473
Total	4,095
Allocation:
Cash	(369		)
Accounts receivable	(682		)
Other tangible current assets	(531		)
Property and equipment	(682		)
Purchased intangible assets	(1,620		)
Liabilities	1,161
Goodwill	$	1,372

The excess of the fair value of the business over the aggregate fair values of identifiable assets acquired and liabilities assumed was recorded as goodwill. The primary factor that resulted in the recognition of goodwill was the acquisition of MET’s assembled workforce, which is not a separately identifiable intangible asset. The goodwill is not expected to be deductible for income tax purposes.

Purchased Intangible Assets

The following table presents details of the intangible assets acquired from MET:

	Estimated Useful Life	Amount
	(In years)	(In thousands)
Technology	6	$	570
Customer contracts / relationships	6	500
Other purchased intangible assets	3 - 7	550
		$	1,620

Supplemental Pro Forma Data (Unaudited)

The unaudited pro forma data below presents selected details of our results of operations as if the acquisition of BTS had occurred on April 1, 2010 (the beginning of Fiscal 2011). The following data includes the amortization of purchased intangible assets. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the acquisition taken place on April 1, 2010.

	Year Ended March 31,
	2012		2011
	(In thousands, except per share data)
Pro forma net sales and contract revenues	$	59,553	$	53,722
Pro forma net income (loss)	$	2,383	$	(5,433	)
Pro forma net income (loss) per share - basic and diluted	$	0.07	$	(0.16	)

Hamilton Signal, Inc.

In April 2009, we completed the acquisition of certain assets of Hamilton Signal, Inc., a privately-held developer of video processing algorithms enabling state and local governments to conduct real-time analysis on fixed and pan-tilt-zoom camera feeds. Our primary reasons for the acquisition were to expand our product portfolio in the traffic management market and to integrate enhanced functionality into and complement our Roadway Sensors technologies.

The total purchase consideration was approximately $518,000, of which we paid $300,000 in cash upon execution of the purchase agreement and of which, pursuant to the purchase agreement, we paid $106,000 on the first anniversary of the acquisition date and $112,000 on the second anniversary of the acquisition date. Pursuant to the purchase agreement, the selling stockholder became an employee of Iteris and was eligible to receive compensation based on net sales of certain products during the three-year period ended March 31, 2012, subject to continued employment and other limitations.

We accounted for this acquisition as a business combination in accordance with applicable accounting guidance. We estimated the fair value of the assets acquired to allocate the purchase price, which is summarized as follows (in thousands):

Developed technology	$	501
Goodwill	17
	$	518

The purchased developed technology was determined to have an estimated useful life of five years.

Our consolidated financial statements for the fiscal years ended March 31, 2012, 2011 and 2010 include the results of operations of Hamilton Signal commencing as of the acquisition date. Disclosures required for material business combinations have been limited due to the immateriality of the acquisition of Hamilton Signal to our consolidated financial statements.