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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
[x] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to ____________to____________
Commission file number 0-22418
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ITRON, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1011792
(State of Incorporation) (I.R.S. Employer Identification Number)
2818 North Sullivan Road
Spokane, Washington 99216-1897
(509) 924-9900
(Address and telephone number of registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
Common stock, no par value
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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 [_]
Indicate by 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]
As of February 28, 2001, there were outstanding 15,386,061 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the registrant (based on
the closing price for the common stock on the Nasdaq National Market on February
28, 2001) was approximately $116,841,747.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held May 16, 2001.
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This amendment on Form 10-K of Itron, Inc. incorporates certain revisions
to historical financial data and related descriptions but is not intended to
update other information presented in this report as originally filed, except
where specifically noted. The amendment reflects the restatement of the
Registrant's consolidated financial statements for the year ended December 31,
2000, included in its Form 10-K for the year ended December 31, 2000, filed on
March 22, 2001, related to its accounting for certain outsourcing contracts
under which the Company retains title to the related equipment. See Note 16 to
the consolidated financial statements for further discussion of this matter.
2
PART I
ITEM 1: BUSINESS
OVERVIEW
General
Itron, Inc. was incorporated in Washington State in 1977. For two decades,
Itron's technology, products and services have enabled utilities to transition
from manual meter reading operations to more sophisticated and automated meter
reading systems. In the last few years, Itron has advanced beyond a company
known primarily for handheld computer systems and data acquisition technologies
into a market leading solution provider for collecting, communicating, analyzing
and managing critical data about energy and water usage. Our hardware, software
and communications solutions serve a worldwide customer base, touching more than
$200 billion in energy and water transactions every year in North America alone.
It is becoming increasingly clear that the costs of generating electricity
and the costs of delivering electricity, natural gas and water will continue to
go up over the next few years. Consequently, utilities and their customers must
find ways to minimize those costs. We believe that the first step in mitigating
rising energy costs is to gather data related to the management of supply and
demand. That is a large part of what Itron does today.
The second step is to turn that data into useful information and knowledge
about when and how consumers use energy. Whether it is time-of-use information,
aggregation of loads or the settlements process, our software products and
systems do that today. With our technology, energy and water distributors,
generators, and marketers are streamlining operations, improving customer
service, simplifying load forecasting, and launching new services. Energy
transmission grid operators are turning to Itron for our software technology and
industry expertise in developing new systems to handle the high volume of
transactions and the complex financial reconciliation and settlements required
for competitive energy markets.
The third step is to then take the knowledge gained from the above and use
it to manage the use of energy and water. Itron's data acquisition and
information provisioning expertise will form the basis for this growth
opportunity. We are focusing our future efforts on the needs of our customers'
customers and helping them mange their energy and water usage. We are creating
an expanded value proposition to the energy and water industries that is simple.
With the addition of data collection, communication, control and management
tools, energy and water providers can:
. Reduce distribution infrastructure and component investment,
. Avoid building peak generation capacity,
. Provide reserve energy for sale,
. Increase the reliability and the quality of the energy offering,
. Provide value-added services to their customers to minimize the high
costs of energy
Itron designs, develops, manufactures, markets, installs and services
hardware, software and integrated systems for use by the energy and water
industries. Our expertise lies in providing communications technologies, data
management products and application software for automated meter reading and
data acquisition systems for the electric, gas and water industries; providing
financial settlements and reconciliation systems for wholesale energy markets;
and marketing and sales to utilities worldwide.
Using an assortment of communications technologies, our systems collect
data from a variety of residential, commercial and industrial meters and deliver
it to our customers and their customers as value-added information. Over 2,000
utilities in more than 45 countries use our systems to capture data from 275
million meters. Our data collection software systems for a utility's commercial
& industrial (C&I) customers are used by more than 500 utilities throughout the
world, including 90% of the largest electric and gas utilities in the United
States and Canada. In addition, our highly sophisticated software systems are
being used to manage the critical data management, billing and settlement
requirements for newly deregulating wholesale electric markets in California,
Arizona, Alberta and Ontario, Canada, as well as the more established wholesale
energy markets in the United Kingdom and New Zealand.
3
We believe there are numerous growth opportunities available to Itron in
the current markets that we serve:
. Of the 270 million electric, gas and water meters in the United
States and Canada, data is collected from approximately 31 million,
or 11%, using automated data collection technologies. Itron is the
largest supplier of these systems having shipped over 17.6 million
meter modules to more than 625 utilities. We believe our large
installed base of existing handheld and automated meter reading
systems, at over 2,000 utilities around the world, provides us with
an excellent growth opportunity as energy and water providers
continue to automate data collection from meters.
. Given the industry's heightened focus on enhancing services to and
communications between utilities and large C&I users, our
established base of over 500 utilities using our C&I software
systems provides us with additional growth opportunities for the
add-on software applications we have developed in recent years
specifically targeted to C&I customers. In addition, in late 2000,
we introduced a new radio-based network communications system that
provides utilities with a cost-effective way to gather critical data
from large numbers of geographically dispersed C&I meters.
. There are an increasing number of states and regions in the United
States and Canada that are forming regional transmission
organizations (RTOs) as the supply of electricity is opened up to
competition. We have expertise in developing and installing the
critical data gathering, processing, billing and settlement systems
needed to run those markets effectively.
Industry Overview
The electric utility industry is undergoing significant change as we move
away from a regulated industry towards full competition with retail customers
ultimately having access to multiple suppliers and additional services. In
total, thirteen states are open or are completing the transition to an open
market. Ten other states are partially open or expected to be open in one to two
years. The remaining states are in the early stages of deregulation and have not
yet established timelines. The recent problems in California have prompted some
states, such as Nevada and Arkansas, to delay the start of deregulation.
However, for the most part, competitive programs in other states such as
Pennsylvania, New York, Texas, Ohio, Massachusetts and Michigan, have largely
avoided the pitfalls that have beset California, and are moving forward.
To a large degree, the energy industry as a whole has not yet implemented
the data collection and information management systems, nor has it mastered the
new business processes necessary, to successfully manage a market in which
suppliers and marketers compete to sell commodities to far-away customers using
a common distribution channel. We believe that a key to the successful
transition to full competition in energy markets is to balance supply more
precisely with overall demand. Shoring up the supply side of the equation
represents a long-term strategy as it will take a number of years to build new
capacity.
At Itron, we believe that in the near-term, there are numerous
opportunities to manage the demand side more effectively through automating the
acquisition and communication of energy and water consumption data. Automation
enables deregulated markets to more closely match energy supply and demand
through precision load forecasting, effective load management, demand side
management programs and incentives, development of more dynamic rate structures,
and knowledge-driven conservation programs. In particular, the opportunity is
most immediate with commercial and industrial energy customers that typically
account for two-thirds or more of a utility's total load, and for the
aggregation of residential and small commercial customers.
In addition to electricity deregulation and the move to open markets, there
are additional changes in the industry that will have an impact on how energy
and water providers run their businesses and serve their customers.
. The growth and development of new energy generation and delivery
technologies, incorporating fuel cells, micro turbines and other
innovations, will create an entirely new type of energy delivery
infrastructure characterized by distributed generation and
micro-grids. Competencies in communications technologies and
advanced energy information management position Itron well to
provide solutions that will help manage this new industry dynamic.
. Energy and water suppliers must find new ways to interact with their
customers or they will risk losing them. The data Itron collects and
turns into information is a part of the vital new link to their
customers. With the rapid deployments of advanced broadband
technologies, we have an even greater opportunity to assist our
customers' abilities to repackage and deliver the data we collect.
Our goal is to become an integral part of changing the way energy
and water suppliers communicate with their customers by collecting
data, changing it into information and delivering knowledge with
which they can shape their future and their customer's futures.
4
. While utility companies may retain many of their traditional
functions, some functions will be provided by new entities such as
Independent System Operators (ISOs), Regional Transmission Operators
and Energy Service Providers (ESPs). Utilities may turn the
operational control of certain of their transmission facilities over
to ISOs and RTOs. ESPs and aggregators are expected to provide both
electricity and natural gas to commercial, industrial and residential
customers and may, in some places, perform meter reading and customer
billing. In addition to ESPs, a number of new entities will likely
emerge to provide metering and data services. Such companies also may
buy and sell electricity and may have to deal with the frequent
changes in prices and costs for the transfer of power. All of these
new market entrants will require meter data collection expertise
provided by Itron. Our Energy Information Systems (EIS) strategic
business unit has developed new products and is already working with a
number of new entities in the wholesale energy markets.
. In the gas industry, we believe deregulation will create many of the
same needs as deregulation of the electric industry, such as ways to
mitigate rapidly increasing prices of natural gas and an increased
focus on customer retention by improving customer service. The ability
to forecast usage requirements more accurately is also a driver. Of
the 11 million gas meters being read automatically today, over 90% are
being read with Itron technology and we will continue to enhance our
products for this segment of the market.
. Just as in the electric and gas industries, the water industry is also
experiencing significant price increases which is putting tremendous
pressure on water utilities to reduce operating costs through metering
and technology solutions. Only 60% of the households in North America
are being metered for water usage today. There are approximately 61
million water meters in North America with new construction adding new
meters every year. As metering technology is added or replaced,
automation of data collection and communications technologies is easy
and economical. We are well positioned with a number of the key water
meter manufacturers, including ABB and Badger Meter and will continue
to seek new relationships to maximize delivery of our water products
and services.
DESCRIPTION OF BUSINESS
Itron Solutions and Benefits
Solutions
We have an extensive and cost-effective portfolio of data acquisition,
communication and management solutions providing energy and water utilities and
other industry participants with numerous options for responding to evolving
operational needs, market opportunities and regulatory reform requirements.
Our solutions integrate a broad array of meter modules, private and public
radio- and telephone-based communications systems, and data management, storage
and delivery applications. Our solutions support electric, gas, and water
service. Itron's integrated approach provides our customers with the flexibility
needed to apply a cost-effective solution to each of their situations--rural,
suburban, urban; residential, commercial, and industrial.
Our technologies are designed to accommodate the inevitability of change so
that our customers can select solutions that meet their needs today while also
laying the foundation for more advanced solutions to meet their future goals and
objectives. Our radio-based solutions encompass handheld (off-site), mobile and
network reading technology options. Because the same radio-based meter modules
can be used with any of these alternatives, our products facilitate the
migration from one level of systems automation to another by eliminating the
need to replace the meter endpoint. Our telephone-based solutions offer an
economically attractive alternative for low density or selective deployment
situations.
We have developed software solutions with applications that integrate,
manage and store data from various data collection systems which enables our
customers to integrate data from different technologies into a common database.
This allows for the deployment of various collection technologies within a
service territory, tailored to the economic and functional considerations of
different portions of the territory. Itron software solutions are integrated
with the widest array of utility billing systems in the industry, with our
communication protocols, in many respects, representing the defacto industry
standard. In addition, Itron has one of the largest project management
organizations in the industry supporting our products and services.
5
Benefits
Traditionally, many of our customers that have deployed our technology have
done so primarily on the basis of reducing costs and improving the efficiency of
their meter reading applications. While this remains a critical piece of Itron's
value proposition, our products, systems and solutions provide a wide range of
benefits to our customers that go far beyond meter reading and billing. Our
customers are finding that Itron's technology and services can be an integral
component of their operational and strategic objectives of reducing costs,
improving customer service, delivering process improvement, and successfully
evolving their businesses to manage the threats and seize the opportunities
presented by an increasingly competitive marketplace. Our technologies provide
our customers with benefits in the areas of:
. Revenue Cycle Services
. Management of Distribution Assets
. Management of Market Change and Customer Choice
. Delivery of New Value-Added Services
Revenue Cycle Services: Automation of the meter reading function results in
a number of benefits for revenue cycle services including reductions in meter
reading staff and meter reading operational support costs, increased accuracy,
improved safety, elimination of estimated reads, elimination of or large
reductions in special reads, reductions in customer complaints and call center
traffic, and reductions in billing adjustments. One of our customers, a large
water utility, reduced its percentage of estimated reads from 70% to less than
1% with the installation of our mobile automated meter reading technology. That
improvement resulted in significant reductions in costs associated with customer
complaints, billing adjustments and back-office administrative functions.
Another customer, a large electric utility, reduced its read-to-bill period for
special reads from nine days to one day resulting in significant improvements in
cash flow. Our technology also provides tamper and energy theft detection.
Management of Distribution Assets: The use of metering information and load
control technologies to manage local distribution systems more efficiently
applies to electric, gas and water utilities. Our technologies, installed in a
saturated or in a selective deployment basis, increase the number of outage
detection points throughout our customers' distribution systems and increase a
utility's ability to pinpoint where electric system outages have occurred as
well as where power has been restored. By delivering accurate load (electric and
gas) and volume (water) information, our technologies provide utilities with the
information they need to identify, locate and replace improperly sized
equipment, and to identify potential equipment failures and leaks. This
information helps our customers fine tune the deployment of their distribution
assets and take corrective action before improperly sized or under rated
equipment results in service disruptions, expensive maintenance, property damage
and customer complaints. Optimizing the use of current distribution assets helps
our customers avoid, minimize or defer expensive investments in additional
infrastructure. For example, a mid-sized water utility customer is using our
technology to understand residential water usage patterns in order to create
conservation programs and incentives they hope will aid their effort to minimize
or defer expensive investments in water purification and treatment facilities as
the area's population grows.
Management of Market Change and Customer Choice: Our communications and
energy data management technology and systems provide critical information to
our customers and others to effectively manage how much energy is put into
distribution systems and by whom, and how much is taken out and by whom. Our
technology enables access to critical information necessary for reconciliation
and settlements in a timely manner for a number of market participants. Load
information provided by our technology enables utilities to improve their
forecasting accuracy. In several deregulated states, utilities face a variety of
financial or pricing penalties associated with deviations from scheduled usage.
Our technology has enabled one of our large electric customers to improve its
forecasted use to within one percent of actual usage in a state that has imposed
penalties for deviations greater than 1-1/2%. In many deregulated states, load
profiling, developing patterns of usage for different customer groups, is
becoming increasingly necessary or required. Our communications and energy data
management technology enables our customers to cost-effectively perform
load-profiling functions without the burdensome task of moving expensive load
profile meters from place to place. Our technology helps utilities receive
incentives rather than incur penalties in deregulating states where
performance-based rate making is resulting in new requirements such as
reductions in estimated reads and reductions in the number and duration of
outages.
6
Delivery of New Value-Added Services: To ensure growth and success in a
competitive marketplace, utilities must develop, market and deliver new products
and services that offer real value to their customers. We believe a key to
successfully developing and marketing new products and services is getting to
know the customer better--who they are, how and when they use energy and water,
and what services deliver value to them. A few of the value-added new product
and service offerings that our technology enables include new rates structured
for specific customer types or classes, aggregated or disaggregated billing
options for customers with multiple meters at multiple sites, selectable billing
dates or frequency, customized billing and invoicing, outage monitoring and
notification services, Internet access to data, usage management and consulting,
and forecasting services.
Itron's Vision and Strategies
Itron's growth potential needs to be viewed in two ways. First, we are a
premier supplier of automated meter reading products, systems and services. We
have just completed a significant restructuring and financial turnaround of the
Company and are expecting revenue growth between 5% and 15% in 2001. Automated
data collection and communication technologies are in place on only 11% of the
270 million electric, gas and water meters in the United States and Canada. Of
those, more than 55% use Itron's technology. We will continue to aggressively
pursue the numerous opportunities available for the deployment of meter reading
automation and communication technologies.
Second, we believe that the costs of generating electricity, and the costs
of distributing electricity, natural gas and water will continue to rise. Our
customers and their customers are going to look for ways to reduce those rising
costs. This will stimulate an increasing hunger for data on which to make
evidence-based decisions.
The first step in mitigating rising energy and water costs is to gather
data. We do that today and we do it quite well.
The second step is to transform the data into useful
information--knowledge--on how and when consumers use energy. We do this today
with our advanced software products that gather large quantities of complex data
for revenue billing, load research, demand-side management, real-time pricing
applications, interruptible rates and gas transportation, and financial
settlements and reconciliations for competitive energy markets. This knowledge
is essential for customers to change their usage patterns or curb their loads,
for utilities to redistribute power during peak loads to avoid blackouts, and to
inform suppliers on what needs to be produced to meet anticipated demand.
The third step is to take that valuable knowledge and use it to shape a
customer's energy needs. It is in this arena where we are planning to become
more active, targeting our customers' customers and helping them manage their
energy usage. We are engaged in discussions to join forces with technology,
service and solutions providers who can benefit from our data gathering and
communications expertise.
Strategic Business Unit ("SBU") Strategies
We believe our extensive customer base, long-term customer relationships,
upgrade and migration capabilities of our current products, multiple systems
integration capabilities, proven interfaces with numerous utility host billing
systems, and new uses of the gathered information (i.e. other departments within
our existing customers/utilities, such as distribution system planning,
engineering and marketing) provide us with a solid foundation upon which we can
expand our product offerings and services to existing utility customers, as well
as new utility customers and other industry participants in each of the markets
that we serve.
Natural Gas Systems: There are approximately 66 million gas meters in North
America, of which 11 million have AMR technology installed. Of those, more than
90% are using Itron's AMR technology. Our AMR technology is compatible with more
gas meters than any other vendor. Our battery life for our AMR meter modules is
unmatched in the industry. The Natural Gas Systems SBU is focused on
approximately 60 utilities that are primarily natural gas only, which represent
about 36 million gas meters. The vast majority of these meters, roughly 27
million, do not have AMR technology and are primarily being read today using our
handheld systems. This large base of current customers represents a strong
upgrade opportunity for us in this market segment.
7
Water and Public Power Systems: There are approximately 60,000 water
utilities and 3,000 municipal electric and gas and rural electric cooperative
utilities in North America that are the focus of this market segment. These
water utilities represent approximately 61 million water meters. Only 60% of
customers/households are currently being metered for water and only 5% of water
meters are currently automated. With utility rate increases for water averaging
two times that of the annual consumer price index in the last few years, there
is tremendous pressure on water utilities to reduce operating costs through
metering and technology solutions. The public power utilities in this segment
represent approximately 30 million electric and gas meters. Public power
utilities are increasingly feeling the effects of deregulation and the pressure
to operate more efficiently and improve customer service. We will continue to
expand our product offerings for this market. Sales in this SBU are a
combination of direct and distributor-based sales, of which we have
approximately 25 indirect sales representatives. We are well positioned with a
number of the key water meter manufacturers, including ABB and Badger Meter. We
will continue to seek new relationships to maximize delivery of our products and
services in this SBU.
Electric Systems: There are approximately 170 operating utilities in this
market segment, primarily large, investor-owned electric only utilities and
electric and gas combination utilities. In total, these customers represent 116
million electric meters and 25 million gas meters. Roughly 11% of electric
meters in the United States and Canada meters have AMR technology installed in
them today, a little over one-third of which have Itron's technology. Close to
95% of these utilities are currently using our handheld meter reading systems
and nearly 100% use our MV-90 software systems to read their large commercial
and industrial meters. Electric utility executives are understanding that AMR
provides immediate near-term benefits in terms of cost reductions and operating
efficiencies, and while also starting them down the path of increasing
communications with and service offering to their customers. We will continue to
actively pursue additional AMR opportunities within this market. Additionally,
electric utilities are facing increasing pressure from utility commissions and
consumers to maintain the reliability of their systems without expending large
amounts of money on their infrastructure. This increases the need for more
detailed information on load at various points within the distribution system as
well as faster notification of power outages and restoration of power. We are
engaged in discussions to join forces with technology, service and solutions
providers who can benefit from our data gathering and communications expertise
in this area.
There is an increasing focus on improving data collection and
communications with the largest users of electricity, the C&I consumers. Our C&I
Network became commercially available in the first quarter of 2001. The C&I
Network primarily utilizes our wireless radio communications for local hubs and
a public network (typically telephone) for the wide area to provide a
cost-efficient data collection system for solid-state electric meters. This
flexible, scalable solution helps electricity providers gather the critical
usage information that their C&I customers demand more often, at a lower cost
and with a higher degree of accuracy than ever before.
International Systems: This SBU is focused on sales of products, systems
and services outside of North America. We estimate that outside of North
America, there are two to three times the available number of meters as there
are in North America. The majority of revenues for this SBU consist of sales and
servicing of our handheld meter reading systems and MV-90 data collection
systems. Interest in AMR systems and technology varies widely from country to
country and overall is at a very early penetration level. Our focus is on
establishing new relationships and enhancing existing relationships with a
number of strategic partners, both utility and non-utility, to expand our
International distribution channels and development opportunities.
Energy Information Systems: Our EIS market encompasses a broad range of
customer segments including distribution utilities, energy suppliers, power
generators, and large regional and state independent system operators. EIS
products and systems are currently being used to manage critical market
settlement transactions between the myriad of market participants for the
electric transmission grids in the UK, California, Arizona, Alberta and Ontario,
Canada. In addition to supplying timely and accurate information for managing
the wholesale energy market, EIS products and systems provide value-added
services for data retrieval, analysis and billing from large commercial and
industrial meters, outage and alarm monitoring, data delivery via the Internet,
data warehousing, load profiling and forecasting, and information on customer
switching. Over 90% of the large C&I meters in the U.S. and Canada are read
using our MV-90 software systems. We will focus on selling additional products
and services to this installed base as well as pursuing the growing number of
market participants interested in this information--ISOs, RTOs, end user
customers, ESPs, public utility commissions, and others. We will also leverage
our experience and relationships on the wholesale side to pursue additional
opportunities to participate in state and regional ISO and power grid market
settlement systems.
Additional information concerning our segments is contained in Note 14 to
our consolidated financial statements.
8
Automatic Meter Reading Systems and Products
Our AMR product line primarily involves the use of radio and telephone
communications technology to collect and transmit meter data. The Company's
radio-based AMR solutions encompass Off-Site AMR, Mobile AMR and Network AMR.
Due to the geographic features and varying population density of a utility's
service territory, generally no single meter reading solution is technologically
or economically suited to all parts of the utility's service territory. Our AMR
applications are intended to provide flexibility ranging from selective
installation for high cost-to-read meters or geographically dispersed meters
requiring advanced metering functionality, to full implementation of an AMR
system covering a large portion of a utility's service area. In a deregulated
marketplace, target marketing of specific features will be desirable. We provide
technology that can be selectively deployed to targeted end-use customers. This
flexibility enables our customers to achieve economic and operational benefits
from their initial investments in our AMR systems, while enabling migration to
more comprehensive AMR solutions in the future as the marketplace requires.
Meter Modules: Our AMR product offerings are based on a family of meter
modules. These meter modules, which can be easily attached to utility meters,
encode consumption and tamper information and transmit this data to a remote
receiver. We began shipping our radio meter modules to customers in late 1986
and have adapted the radio meter module core technology to read numerous types
of electric, gas and water meters, including the most common meter types made by
major meter manufacturers. Our compact radio meter modules for gas and water
meters are self-contained low-power units, powered by long-life batteries with
an expected minimum life in excess of ten years. Radio meter modules for
electric meters, which are normally integrated under the glass of standard
residential meters, are powered by the electrical current in the meter and do
not require batteries. Radio meter modules can be installed by the meter
manufacturer during the manufacturing process or can easily be retrofitted in
existing meters.
We also offer a separate line of meter modules for use outside of North
America. The primary differences between our meter modules in North America
versus international markets are the radio frequency bands in which they operate
and the physical configurations of the modules.
Off-Site Meter Reading: Our Off-Site AMR solution enables radio-equipped
meters to be read remotely, by a person with a handheld computer equipped with a
radio unit. Off-Site AMR offers a practical and cost-effective way for utilities
to read high cost-to-read meters by eliminating the need for meter readers to
gain visual access to those meters. Customers who have our handheld computers
with radio technology can selectively install meter modules on high cost-to-read
meters. System software automatically identifies radio-equipped meters within a
route. When remote reads are needed, the handheld prompts the meter reader to
initiate a radio read. Meter information is shown on the handheld display and is
automatically recorded in the handheld database, allowing the meter reader to
move on to the next meter on a route. When a route is completed, data from both
visual and radio reads is uploaded from the handheld computer to the utility
host system for customer billing.
Mobile AMR: Our Mobile AMR solution uses a Data Collection Unit (DCU),
which is mounted in a vehicle, or a Datapac which is transportable between
vehicles, to collect and store data transmitted by meter modules as the vehicle
passes module-equipped meters. The DCU or Datapac can receive information
transmitted by multiple meter modules simultaneously. A touch-screen display
enables the operator to observe and operate the equipment. The Mobile AMR
application includes software that manages and moves information to and from a
utility's billing system. The software transfers information from the host
system to create route files for the DCU and Datapac for each route, manages the
storage of the meter data as it is collected and, at the end of the day, uploads
the information to the utility's billing system. A Mobile AMR system enables an
operator to read in an eight-hour day an average of 10,000 to 12,000 meters with
a DCU or roughly half that number of meters with a Datapac. This compares to an
average walking route of 300 to 500 meters per day. Factors affecting the actual
number of reads per day include, among others, route density and design, speed
limits, weather and the environment.
Network AMR: We offer a number of Network AMR products. Our Network
solutions eliminate the need to send meter readers to or near customer premises
through completely automating meter reading in segments of a utility's service
area. We have large-scale Network AMR deployments with two utilities and smaller
scale installations at several utilities covering approximately one million
meters. Our Network AMR technology provides utilities with daily or more
frequent meter reads, time-of-use pricing, on-request meter reads for final
reads or customer inquiries, tamper monitoring and reporting, high-level outage
detection and power restoration reporting, load profiling and virtual
connect/disconnect capabilities.
9
Saturated Network Deployments: Meter data collected by our radio meter
modules is transmitted to a Cell Control Unit (CCU). The CCU is a neighborhood
concentrator that reads meter modules, processes data into a variety of
applications, stores data temporarily, and transports data to the host processor
when required. Weighing approximately 15 pounds, our CCU can be easily installed
on utility poles, streetlights, or other locations. While the geographic area
covered by each CCU varies depending on local topography, physical structures,
terrain and other factors, in general each CCU serves an average of 50 homes.
Information collected by CCUs is then transmitted to a Network Control Node
(NCN), which is a regional concentrator and routing device that is installed in
radio communications facilities such as leased towers, substations or other
communication facilities. Each NCN typically supports between 250 to 400 CCUs.
NCNs manage information routing in the network between CCUs and the system host
processor and can serve as a gateway to other communication networks.
Communications between CCUs and NCNs utilize the Company's nationwide licensed
frequencies in the 1427-1432 MHz band.
The final link in our Network AMR solution is from the NCNs to one or more
head-end host processors, known as the Genesis Itron Host Processors (GIHP). The
GIHP manages the collection of data from network devices and facilitates the
download of schedules and other application information to appropriate network
devices. The GIHP also transfers the data to a database for storage and
retrieval. Communications between NCNs and the utility's GIHP typically utilize
radio, telephone, frame relay or other wired communication media.
Drop-In Network Deployments: Our MicroNetwork is a low-cost network meter
reading solution that can be selectively deployed to deliver monthly, weekly,
daily or unscheduled reads from groups of meters in a wide variety of service
environments. It is suited for smaller clusters of meters that require more
frequent reads, but where there are not enough meter points to justify the cost
of saturated network infrastructure. This makes it an ideal data collection
solution for apartment complexes, campuses, small residential communities,
high-rise buildings, strip malls, suburban neighborhoods and rural communities.
Our MicroNetwork infrastructure consists of a series of Concentrator Units
deployed over radio-based meter modules installed on electric, gas or water
meters that communicate using 900 MHz channels. The locally installed
Concentrator Units collect data from meter modules, temporarily store it, and
then forward the data to the host processor via public network communications
such as telephone and cellular systems.
Itron's Commercial & Industrial Network became commercially available in
the first quarter of 2001, and utilizes public telephone and Itron's 1427-1432
MHz band wireless radio communications to provide a cost-efficient data
collection system for solid-state electric meters. This flexible, scalable
solution helps electricity providers gather the critical usage information that
their C&I customers demand more often, at a lower cost and with a higher degree
of accuracy than ever before. The C&I Network supports various meter
manufacturers' native protocols.
Itron's C&I Network accomplishes this by transmitting metering data from
radio meter modems installed on solid state electric meters to a network hub
that collects data from a designated population of C&I meters. Using telephone
or cellular communications, the hub then sends all the data collected from the
C&I meters in its area to Itron's MV-90 host processor, where the data is used
for a variety of billing, load forecasting, marketing, load research and system
engineering applications.
Traditionally, advanced metering services have only been offered to the
largest C&I customers, as they required the use of a dedicated phone line. With
Itron's C&I Network, hundreds of meters can share a single phone line enabling
electricity providers to offer these services to a significantly broader number
of C&I customers than they have been able to in the past when dedicated phone
lines to each meter were required. And, because geographically dispersed
metering data can be sent, the C&I Network gives utilities a powerful tool for
managing local, regional and national accounts.
Telephone-Based Technology: We also offer products that allow electric and
gas utilities to implement telephone-based AMR solutions. These systems use
inbound communications in which the meter modules call in to the utility's
central processing computer at pre-scheduled times to report meter reading
information. The devices are connected to and share existing customer telephone
lines. Telephone-based AMR functionality is primarily designed for selective
deployments of direct access customers or for geographically dispersed customers
requiring advanced metering functionality such as regional or national accounts.
Telephone-based technology can provide operational and system reliability
improvements where full saturation networks are difficult to cost justify. This
technology may also be used to automate areas not suited for cost-effective
implementation of radio technologies such as remote or rural areas.
10
For residential and commercial applications, our telephone based modules
for electric meters attach under the glass of those meters and collect and
report consumption, demand, time-of-use and load profile data. In addition,
certain telephone-based modules for electric use report power outages and
restoration of power. For large volume gas meters, our telephone-based modules
collect information that is used to bill transport gas and interruptible gas
customers, as well as critical load survey data for applications such as peak
day forecasting, supply forecasting and assessments, rate design and marketing.
For residential gas applications, modules are attached to existing or new
residential gas meters to provide consumption and load survey data.
Commercial and Industrial Data Collection and Management Software
Commercial and industrial (C&I) meters have much more sophisticated
measurement capabilities than residential meters and more data that must be
conveyed back to energy providers from the meter. There are a wide variety of
these meters with no uniform communications standards by the multiple meter
vendors. We are the leading worldwide provider of software systems for metering
data acquisition and analysis for the large C&I customers of electric and gas
utilities. We believe that competition in the utility industry will drive
metering technology and systems toward enhancing and facilitating communications
between large C&I customers and their power suppliers and we have released a
number of new products in the last few years aimed at this critical customer
group.
Our MV-90 product gathers, processes and analyzes large quantities of
complex data for revenue billing, load research and demand-side management and
is used by approximately 90% of the major utilities in the United States and
Canada and most of the electric and gas utilities in Canada, Europe, the Middle
East, Australia, Central America and South America. MV-90 supports all methods
of data retrieval from large C&I meters (handheld readers, radio, telephone and
other communication technologies) and was designed with a full range of
applications software to support data collection from meters, data validation
and editing, and analysis of energy usage data. MV-90 software can be licensed
for use on single computers or local/wide area networks. In addition to the base
system, there are layered application packages that support applications such as
load research, real-time pricing (hourly price transmission to C&I customers),
gas transportation, outage and alarm monitoring, and data aggregation. MV-90
software allows C&I customers to read the energy provider's delivery point
meters (both electric and gas) on a frequent basis to analyze their own energy
consumption and can provide hourly pricing data from energy suppliers for
customers who purchase power on a real-time pricing basis (price varies by the
hour).
Our MV-PBS billing and settlement solution provides a client server-based
billing application that produces customized bills and invoices for commercial,
industrial and wholesale energy users. The application interfaces to MV-90 and
MV-STAR and supports billing on demand, energy rates, real-time pricing
applications, interruptible rates, gas transportation, multi-site customers, and
settlement charges. With MV-PBS, a bill can be tailored to meet specific
customer requirements. Prior to MV-PBS, these key customers were often billed
manually due to the expense associated with modifying traditional billing
systems for complex customer rates and contracts. MV-PBS is capable of
generating and sending invoices directly to customers via email or the Internet.
The system also supports financial settlement and reconciliation for the state
and regional competitive markets.
In order to manage high volumes of C&I meters, we developed MV-COMM, a
communications front-end processor for the base MV-90 platform that greatly
enhances speed, performance and communication between meters and the host
processor. MV-COMM supports many different communication formats--TCP/IP, CDPD,
PSTN, ARDIS, RF, etc. Initially developed for the ISO in California, MV-COMM
enabled the Company to meet the ISO's requirement to read a minimum of 3,000
electronic meters with five-minute interval data within two-minute time periods
at the end of each hour. MV-COMM has now been installed at several other
locations, including in the UK, where more than 80,000 electronic meters with
1/2 hourly data are read each night. MV-COMM enables energy providers to
transition from operating systems serving low volumes of C&I customers to
successfully managing large-scale, advanced data collection systems for high
volumes of widely-dispersed C&I customers.
We have distribution rights in North America for the STAR Data Management
System (MV-STAR). MV-STAR was originally developed to support the competitive
electricity supply market in England and Wales and has now been modified by us
for the North America competitive energy markets. When integrated with MV-90,
MV-STAR is a data warehouse solution that manages and stores extremely large
volumes of load profile data gathered from C&I meters, wholesale delivery
points, and major entity grid points. This data is processed in a very short
time period and delivered, via batch or interactive mode to the system users and
data subscribers in industry standard data formats. MV-STAR also provides the
ability to retain data history as it changes over time, preserving all versions
of the data and tagging the data to show how it has been used in the reporting
11
process. In ISO environments, MV-STAR supports contract management of ISO/ESP
end-customer relationships, including historical storage of contract changes.
The system also supports data aggregation and load profile inputs into the
settlements process.
Large energy users are increasingly looking for easy access to load data.
They need to forecast energy costs, adjust usage, react to rate changes and
manage their energy consumption and bottom-line. By using the Internet to
deliver load data, customers can use proven, cost-effective communications
infrastructure that is already in place to access their detailed interval-load
data. Our MV-WEB product interfaces to the MV-90 base platform and to MV-STAR.
Designed to work with standard web browsers, MV-WEB provides a secure Internet
connection for C&I customers to view and graph recorded quantities of interval
load data, as well as calculated quantities. MV-Web also provides a flexible
method of data delivery to energy market participants.
Handheld Systems and Products
Almost all utilities in the U.S. and Canada, and utilities in numerous
other countries around the world, use handheld meter reading systems for a
substantial portion of their meter reading and billing functions. Approximately
75% of the largest utilities (those with 50,000 or more meters), in the United
States and Canada, use our handheld systems. We provide several models of
handheld computers to meet the varying requirements of our customers. Each model
is designed for use in harsh environments with standard text and graphics,
back-lit displays, several memory sizes, multiple communications options,
interface devices for electronic meters and easy to use keyboards that can be
customized to the needs of our customers.
Handheld systems are used as follows: (1) key customer data is downloaded
from the utility's host processor to our handheld computers prior to
commencement of a meter reader's daily route; (2) a meter reader visually reads
meters along a route and enters the readings into a handheld computer; and (3)
after a meter reader's daily route has been completed, collected data is
uploaded directly into the utility's host billing system. Our family of software
systems provides data consolidation and storage, reformatting, linkage to a
utility's host billing system, meter reading route management, route downloading
and time-of-use and interval data recording data management and distribution.
In late 2000, we launched the Itron G5, a new technology designed to set a
new standard for handheld meter reading performance and ergonomics. The G5
brings together the latest handheld component technology and functionality to
provide a rugged platform and feature rich architecture for delivering improved
meter reading performance and processing speed in a smaller-than-ever package.
The G5 has a new power management system that allows the operator to choose from
several processing modes--including low speed, high speed, doze mode, suspend
mode, and critical mode. This power management system allows the operator to
read more meters for a longer period without having to recharge the battery. The
G5's full-duplex radio utilizes the latest in digital signaling and correlation
technology to slice through radio noise levels and enhance radio reading
performance. We also provide a full suite of peripheral products to support the
G5.
Customers
Our handheld systems are installed at over 2,000 electric, gas, water and
combination utilities in more than 45 countries and are being used to read
approximately 258 million meters worldwide. Approximately 75% of the largest
utilities (those with 50,000 or more meters) in the United States and Canada use
our handheld systems. As a result of the high market penetration we have already
achieved in the domestic market, additional handheld sales are expected to be
predominantly system upgrades and replacements. We estimate that the number of
available meters outside of the domestic market is approximately two to three
times the number of meters within that market. We believe that international
markets represent a growth opportunity for new sales of our handheld systems and
new AMR systems where penetration of these systems is substantially less than
that of our domestic market.
We have established ourselves as the world's largest supplier of meter
modules for the expanding AMR market as a result of having shipped over 17.6
million meter modules as of December 31, 2000 to more than 625 customers around
the world. In total our shipments represent more than 55% of all AMR meter
module shipments.
We have installed most of the world's largest AMR systems for electric, gas
and water utilities. The largest AMR system is at New Century Energies (formerly
Public Service Company of Colorado) and is comprised of over 1.5 million
electric and gas meter modules. One of the largest gas installations is at
Minnegasco, representing just over 900,000 endpoints. The largest water AMR
system is installed with the City of Philadelphia Water Department covering
approximately 430,000 water meters.
We also have more than 500 energy providers and wholesalers using our C&I
data collection and management systems. In our EIS customer segment, we have a
number of large systems installed or currently being installed for the
competitive wholesale energy data markets such as systems in the UK, the ISO for
the state of California, Tucson Electric Power, Enmax in Alberta and the
Independent Market Operator (IMO) in Ontario, Canada.
12
Sales and Distribution
In our Electric Systems SBU, Natural Gas Systems SBU, and Energy
Information Systems SBU, we primarily utilize direct sales, and technical and
administrative support teams to serve the needs of our customers. In our Water
and Public Power SBU, we conduct sales and technical support activities through
direct sales and numerous business associates and manufacturer representatives,
including several major meter manufacturers.
To serve international customers, we have subsidiary operations located in
Reading, England; Vienne, France; and Sydney, Australia. While we utilize a
direct sales approach in some areas, we use a distributor-based model in most
areas outside of North America.
We also sell electric and water meter modules through original equipment
manufacturer arrangements with several major meter manufacturers, in which the
manufacturers incorporate our meter modules at their own facilities into new
meters and then offer them for sale. In addition to direct sales, we also offer
products and services through long-term outsourcing arrangements, which include
AMR products, project management and installation services, on going meter
reading services, meter shop services and other services. Outsourcing contracts
usually cover long timeframes and typically involve contracts in which either a
customer owns the equipment and we provide services for a fee, or where we both
own and operate the system for a fee.
Marketing
Marketing activities include product marketing, industry marketing, and
marketing communications. Our marketing efforts focus on product and company
awareness principally through trade shows, symposiums, published papers,
advertising and direct mail. These marketing efforts include brochures,
newsletters, exhibits, conferences, an annual user's forum, industry standards
committee representation and regulatory support. Several major industry
conferences are keystones in the Company's marketing program, including the
Distributech Conference held in February 2001, two Annual Users Conferences, one
specifically for MV-90 users, both of which will be held in October 2001, and
the Automatic Meter Reading Association conference which will be held in
September 2001. The Company maintains communications with its customers through
its Users Advisory Board and a program of regular mailings, newsletters and new
customer announcements.
Global Service and Support
We provide our customers with implementation services that include among
other things, system design, installation, training and project management. Each
of these services is tailored to meet a particular customer's needs. In
addition, for Network AMR systems, we offer network design, propagation
analysis, mapping support, centralized operation, disaster recovery/backup and
system support. We offer system maintenance and support services to each of our
customers. Service contract prices are based on a number of factors, including
system size and complexity and the expected degree of service support required.
Our system maintenance and support services include 24-hour, toll-free hot line
support, customer service representatives, consulting services, regional
training programs, equipment repair and preventative maintenance, software
support and maintenance, system troubleshooting and network management services.
Product Development
We have maintained our leadership position in part because of our
commitment to developing new products and continued enhancement of existing
products. Our product development efforts have been focused on expanding and
upgrading our communications and energy data collection product offerings,
particularly for C&I customers, and developing new hardware and software
platforms for handheld systems. In 1998 and 1999, we undertook major
restructuring measures which included the consolidation of development
activities both geographically and in terms of product teams. We spent $21.3
million and $26.7 million on product development in 2000 and 1999, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Operating Expenses and Note 8 to our accompanying financial
statements."
Our future success will depend in part on our ability to continue to
develop or acquire new competitive products and technology. In particular, our
ability to further enhance our network and other products or to develop or
acquire new products that provide energy suppliers with the ability to optimize
the distribution aspects of their business and to provide Internet
connections
13
to energy consumers. There can be no assurance that we will not experience
unforeseen problems or delays with respect to our product development efforts.
Delays in the availability of new and enhanced products could have a material
adverse effect on our business, financial condition and results of operations.
See "Certain Risk Factors-Dependence on New Product Development."
Manufacturing
We manufacture meter modules and other communications technology products,
as well as certain peripheral equipment. Our primary manufacturing objective is
to design and produce cost-effective, high-quality meter modules and other
network components utilizing high-volume automation equipment.
In 1999, our restructuring measures included the consolidation of our high
volume products into one location. See "Note 8 to our accompanying financial
statements." Our primary manufacturing facility is located in Waseca, Minnesota.
We currently have the capacity to produce approximately 3.3 million (combination
of electric, gas and water) meter modules annually on a two-shift basis. With
the addition of a third shift and certain ancillary equipment, we could expand
our capacity to approximately 4.8 million meter modules annually.
We have installed extensive automated testing equipment in our
manufacturing facilities to provide quality control and process repeatability.
Our testing includes both visual inspection and automated testing of technical
parameters established for each of our products. Our quality control equipment
also includes a sophisticated information system that collects data from testing
equipment and provides extensive reports and analyses of such data. This
information system permits us to promptly identify potential problems or
weaknesses in our manufacturing processes. Our Spokane facility has been ISO
9002 certified since 1993 and our Waseca facility received ISO 9002
certification in 1998.
In 2000, we outsourced the manufacturing of certain handheld systems and
peripheral equipment, as well as other lower-volume AMR products from our
Spokane manufacturing location to a contract manufacturer in which we have a
minority ownership interest. The contract manufacturer purchased certain of our
manufacturing equipment and inventory from us and is leasing approximately two
thirds of the space in our Spokane manufacturing facility, approximately 24,000
square feet.
In addition, certain of our handheld systems products, telephone modules
and international meter module products are manufactured for us by non-related
third parties.
Employees
As of February 28, 2001, we employed 877 full-time persons, 32% in
manufacturing, 13% in product development, 3% in marketing, 11% in global
service and support, 14% in finance and corporate administration, and 27% in our
SBUs. Of these employees, 92% were located in the U.S. and Canada, and the
remainder in Europe and Australia. None of our employees are represented by a
labor union. We have not experienced any work stoppages and consider our
employee relations to be good.
Competition
Although we are the industry leader in supplying energy and water data
collection products, systems and services to the utility industry, we face
competition from a variety of companies in each of the markets we serve. The
emerging market for network communications systems for the utility industry,
together with the potential market for other two-way communications
applications, have led communications, electronics and utility companies to
begin developing various systems, some of which currently compete, and others of
which may in the future compete, with our products, systems, and services. These
competitors can be expected to offer a variety of technologies and
communications approaches, as well as meter reading, installation and other
services to utilities and other industry participants.
We believe that we enjoy a number of competitive advantages. We believe the
diversity of our energy and water data collection products is broader than that
of any other provider. This diversity gives us the ability to provide
comprehensive solutions to our customers. Our radio-based communications
solutions utilize the same AMR radio meter modules and facilitate the migration
from one level of systems automation to another. We believe that we are able to
price our AMR meter modules competitively as a result of our highly automated
manufacturing lines as well as high production volumes. We have a substantially
larger installed base of handheld and automated meter reading systems than any
of our competitors which gives us the advantage of a proven record of providing
cost-efficient, quality products and services and the proven ability to
interface meter data with a wide variety of utility host billing systems.
14
As of December 31, 2000, we had more than 55% market share in terms of AMR
meter modules shipped. Our largest competitor in the AMR meter module market is
Schlumberger's Resource Management Services division, which acquired a former
competitor, CellNet Data Systems in March 2000. In addition to being a
competitor, Schlumberger also acts as a reseller and integrator of our
solutions. There are also a few new communications providers, radio-based,
Internet-based, and public network-based, most of whom are narrowly focused,
that have recently been awarded pilot systems at utilities, including companies
such as Nexus and Innovatec. These companies currently offer alternative
solutions and compete aggressively with us.
In our EIS market, there are many market participants that may be both
competitors and potential partners. We face competition from a number of
companies such as ABB, Siemens, Lodestar, ICF Kaiser, and Accenture. In
competitive wholesale markets in California and Ontario, Canada, we have
partnered with ABB and Ernst & Young to offer a total integrated system
solution. We will continue to partner with some of these companies to address
future competitive energy markets.
We believe that as we expand our offerings towards optimizing energy
delivery products, systems and solutions, there are several very large suppliers
of equipment, services or technology to the utility industry that have developed
or could develop competitive products for this market, such as ABB, Siemens,
Invensys, and Honeywell. Similarly, we believe that as we move towards offering
systems and solutions for end-user customers, we will face competition from
telecommunications, billing, and controls companies. We expect to develop
cooperative relationships with several of these companies to jointly develop and
offer solutions to the market.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and manufacturing resources, and in some cases,
greater name recognition and experience. Our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products and services than we can. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of our prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. There can be no assurance that we
will be able to compete successfully against current and future competitors, and
any failure to do so would have a material adverse effect on our business,
financial condition, results of operations and cash flow. See "Certain Risk
Factors--Competition."
Intellectual Property
We own or license numerous United States, Canadian and foreign patents and
have filed various patent applications. These patents cover a range of
technologies for meter reading, portable handheld computer and AMR-related
technologies. We also rely on copyrights to protect our proprietary software and
documentation. We have registered trademarks for most of our major product lines
in the United States and many foreign countries. While we believe that our
patents, trademarks and other intellectual property have significant value,
there can be no assurance that these patents or trademarks, or any patents or
trademarks issued in the future, will provide meaningful competitive advantages.
The Company is currently involved in a legal action related to the Company's
alleged infringement of another patent; see "Legal Proceedings." We believe that
our continued success will be based on continued innovation, market knowledge,
technical and marketing capabilities, existing product relationships with
utilities and a fundamental commitment to customer service excellence. See
"Certain Risk Factors--Intellectual Property."
FCC Regulation and Allocation of Radio Frequencies
Certain of our products made for use in the United States use radio
frequencies, the access to and use of which, are regulated by the FCC pursuant
to the Communications Act of 1934, as amended. In general, a radio station
license issued by the FCC is required to operate a radio transmitter. The FCC
issues these licenses for a fixed term, and the licenses must be periodically
renewed. Because of interference constraints, the FCC can generally issue only a
limited number of radio station licenses for a particular frequency band in any
one area.
Although radio licenses generally are required for radio stations, Part 15
of the FCC's rules permit certain low-power radio devices ("Part 15 devices") to
operate on an unlicensed basis. Part 15 devices are designed to be used on
frequencies used by others. These other users may include licensed users, which
have priority over Part 15 users. Part 15 devices are not permitted to cause
harmful interference to licensed users and must be designed to accept
interference from licensed radio devices. Our radio meter modules are Part 15
devices which transmit information back to either the handheld, mobile or
network AMR reading devices in the 910-920 MHz band pursuant to these rules.
15
Our RF products are designed to eliminate virtually all interference to
other frequency users, while still enabling a complete and accurate read from
our radio meter modules. However, if we were unable to eliminate harmful
interference caused by our Part 15 devices through technical or other means, we
or our customers could be required to cease operations in the band in the
locations affected by the harmful interference. Further, in the event that the
unlicensed frequencies used by our customers and us become unacceptably crowded
or restrictive, and no additional frequencies that are suitable are available or
allocated, our business could be materially and adversely affected.
In 1994 the Company was issued a non-exclusive nationwide Federal
Communications Commission (FCC) license to operate in the 1427-1432 MHz band.
With the exception of meter modules and handheld or mobile reading devices that
operate in MAS bands and the 910-920 MHz band, our network products operate in
parts of this band. At the time our license was issued, the 1427-1432 MHz band
was allocated primarily for use by the federal government, which consented to
our use of the band on a secondary, non-interference basis. Current government
use of the band is limited to a discrete number of well-defined locations, and
we did not expect the fact that we were secondary to federal government
operations to have either a present or future material impact on our business.
The 1427-1432 MHz band is among 235 MHz of spectrum that has been earmarked
for reallocation from federal government users to private sector users (to be
licensed by the FCC). The band is subject to continuing federal government use
in specified areas through 2004. On June 8, 2000, the FCC issued a Report and
Order allocating three MHz of the band (1429-1432MHz) on a primary basis for use
by wireless medical telemetry. Use of the remaining two MHz (1427-1429MHz) was
to be the subject of further rulemaking proceedings by the FCC, which may or may
not grant Itron the right to use that band. Until that time, we may continue
operating in the 1427-1429MHz band. On January 23, 2001, the FCC published in
the Federal Register a Notice of Proposed Rulemaking that invites public comment
on three options for allocating the 1427-32 MHz band. Option 2, which the
Company supports, allocates the band to utility telemetry and medical telemetry.
Options 1 and 3 require utility and medical telemetry to share a portion of the
band and allocates the rest of the band to fixed and mobile terrestrial
communication and low earth orbit users respectively. There can be no assurance
that the Company will have adequate spectrum in the 1427-32 MHz band for its
network systems if Option 1 or Option 3 is adopted.
If we are not successful in our efforts to continue operations in the
1427-1432 MHz band under favorable conditions, we believe that current
installations will be permitted to continue under a grandfathering provision.
However, there can be no assurance that such grandfathering will be permitted or
that we will have any rights whatsoever in the band after final rulemaking by
the FCC. In such event, our network products (other than modules) would have to
be redesigned to operate at a different frequency spectrum, and the cost
associated with that could have a material adverse effect on our business.
The regulatory environment we operate in is subject to change. There can be
no assurance that the FCC or Congress will not take regulatory actions in the
future that would have a material adverse effect on us. See "Certain Risk
Factors--Availability and Regulation of Radio Spectrum." We are also subject to
regulatory requirements in international markets. These regulations, which vary
by country, require modifications to our products, including operating on
different frequencies with different power specifications.
Backlog of Orders
Our twelve-month revenue backlog of unshipped factory orders at December
31, 2000 and 1999 was approximately $56 million and $58 million, respectively.
We expect that substantially all of the orders in twelve-month backlog at the
end of 2000 will be shipped during 2001. In addition, we have multi-year
contracts to supply radio meter modules and multi-year outsourcing arrangements
with several customers. Total backlog, including revenues beyond the next twelve
months, was $154 million and $155 million at December 31, 2000 and 1999,
respectively. While backlog is one indicator of future revenues for us, our
backlog fluctuates from quarter-end to quarter-end primarily as a result of the
timing of large contracts. In recent years we have increased the amount of
revenue derived from distribution channels for smaller utilities and
municipalities. To the extent that future revenues are derived from this segment
of the market, which typically has a smaller order size that may book and ship
within the same quarter, or from service offerings verses product sales, backlog
may not be as reliable an indicator of near-term revenues.
16
Environmental Regulations
In the ordinary course of our business, we use metals, solvents, and
similar materials which are stored on site. The waste created by use of these
materials is transported off site on a regular basis by a state-registered waste
hauler. Although we are not aware of any material claim or investigation with
respect to these activities, there can be no assurance that such a claim may not
arise in the future or that the cost of complying with governmental regulations
in the future will not have a material adverse effect on us.
Working Capital
Information on the Company's practice relating to working capital items is
contained in "Notes 1 and 3 to our accompanying financial statements."
Other
We do not have any contracts with the federal government. Our business is
not significantly seasonal.
Certain Risk Factors
Dependence on Utility Industry; Uncertainty Resulting From Mergers and
Acquisitions and Regulatory Reform: We derive substantially all of our revenues
from sales of products and services to the utility industry. We have experienced
variability of operating results, on both an annual and a quarterly basis, due
primarily to utility purchasing patterns and delays of purchasing decisions as a
result of changes or potential changes in the state and federal regulatory
frameworks within which the utility industry operates, and mergers and
acquisitions in the utility industry.
The utility industry, both domestic and foreign, is generally characterized
by long budgeting, purchasing and regulatory process cycles that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Purchases of our products are,
to a substantial extent, deferrable in the event that utilities reduce capital
expenditures as a result of mergers and acquisitions, pending or unfavorable
regulatory decisions, poor revenues due to weather conditions, rising interest
rates or general economic downturns, among other factors.
The domestic electric utility industry is currently the focus of regulatory
reform initiatives in virtually every state. These initiatives have resulted in
significant uncertainty for industry participants and raised concerns regarding
assets that would not be considered for recovery through ratepayer charges.
Consequently, in recent years, many utilities have delayed purchasing decisions
that involve significant capital commitments. While we expect some states will
act on these regulatory reform initiatives in the near term, and some states
have, there can be no assurance that the current regulatory uncertainty will be
resolved in the near future or that the advent of new regulatory frameworks will
not have a material adverse effect on our business, financial condition and
results of operations. For example, in California, where the new regulatory
framework put utilities in the position of selling electricity at prices
substantially below their cost, several of the large investor owned utilities,
including Southern California Edison (SCE) have come close to bankruptcy. In the
event SCE were to enter into bankruptcy proceedings, our business could be
adversely affected. See "Note 10 to our accompanying financial
statements--Commitments and Contingencies."
Moreover, in part as a result of the competitive pressures in the utility
industry arising from the regulatory reform process, many utility companies are
pursuing merger and acquisition strategies. We have experienced considerable
delays in purchase decisions by utilities that have become parties to merger or
acquisition transactions. Typically, such purchase decisions are put on hold
indefinitely when merger negotiations begin. The pattern of merger and
acquisition activity among utilities may continue for the foreseeable future. If
such merger and acquisition activity continues at its current rate or
intensifies, our revenues may continue to be materially adversely affected.
Certain state regulatory agencies are considering the "unbundling" of
metering and certain other services from the basic transport aspects of
electricity distribution. Unbundling includes the identification of the separate
costs of metering and other services and may extend to subjecting metering and
other services to competition. For example, in California, the CPUC issued a
decision that subjects metering, billing and related services to competitive
supply. Other states, including Arizona, Nevada and Pennsylvania, have adopted
or are adopting similar measures. The discontinuance of a utility's metering
monopoly could have a
17
significant impact upon the manner in which we market and sell our products
and services. As the customer for our products and services could change from
utilities alone to utilities and their competitive suppliers of metering
services, we could also be required to modify our products and services (or
develop new products and services) to meet the needs of the participants in a
competitive meter services market.
Recent Operating Losses: While we were profitable in the last three
quarters of 2000, we have experienced operating losses in certain quarters and
years from 1996 through 1999. There can be no assurance that we will maintain
consistent profitability on a quarterly or annual basis. We have experienced
variability of quarterly results and believe our quarterly results will continue
to fluctuate as a result of factors such as size and timing of significant
customer orders, delays in customer purchasing decisions, FCC or other
governmental actions, timing and levels of development and other operating
expenses, shifts in product or sales channel mix, and increased competition. Our
operating margins have in the past been adversely affected by excess
manufacturing capacity. We expect competition in the AMR market to increase as
current competitors and new market entrants introduce competitive products.
Operating margins also may be affected by other factors. For example, in the
past, we entered into large network AMR contracts with Duquesne and Virginia
Power with margins significantly below our historical margins due to the early
stage of our network products at the time those systems were shipped and
installed, and due to competitive pressures.
Customer Concentration: In some years, our revenues are concentrated with a
limited number of customers, the identity of which changes over time. From time
to time, we are dependent on large, multi-year contracts that are subject to
cancellation or rescheduling by our customers. Cancellation or postponement of
one or more of these contracts would have a material adverse effect on us.
Dependence on New Product Development: We have made, and expect to continue
to make, substantial investments in technology development. Our future success
will depend, in part, on our ability to continue to design and manufacture new
competitive products and to enhance our existing products. This product
development will require continued investment in order to maintain our market
position. There can be no assurance that unforeseen problems will not occur with
respect to the development, performance or market acceptance of our technologies
or products. Development schedules for technology products are subject to
uncertainty, and there can be no assurance, that we will meet our product
development schedules. We have previously experienced significant delays and
cost overruns in development of new products, and there can be no assurance that
delays or cost overruns will not be experienced in the future. Delays in new
product development, including software, can result from a number of causes,
including changes in product definition during the development stage, changes in
customer requirements, initial failures of products or unexpected behavior of
products under certain conditions, failure of third-party-supplied components to
meet specifications or lack of availability of such components, unplanned
interruptions caused by problems with existing products that can result in
reassignment of product development resources, and other factors. Delays in the
availability of new products, or the inability to successfully develop or
acquire products that meet customer needs, could result in increased
competition, the loss of revenue or increased service and warranty costs, any of
which would have a material adverse effect on our business, financial condition
and results of operations.
Dependence on the Installation, Operations and Maintenance of AMR Systems
Pursuant to Outsourcing Contracts: A portion of our business consists of
outsourcing, wherein we install, operate and maintain AMR systems that we may
continue to own in order to provide meter reading and other related services to
utilities and their customers. During 2000, we had three outsourcing contracts
involving mobile AMR solutions. These long-term outsourcing contracts are
subject to cancellation or termination in certain circumstances in the event of
a material and continuing failure on our part to meet contractual performance
standards on a consistent basis over agreed time periods. In 1999 we incurred
approximately $24.1 million in charges related to revisions of our estimates on
an outsourcing contract with Duquesne Light Company. In March 2000, we sold the
system at Duquesne to DQE, the parent company of Duquesne, and incurred a loss
of approximately $50 million in connection with this sale, which is reflected,
in our 1999 financial results. In addition, these contracts are fixed price
contracts but costs are subject to change that could result in losses at some
future point. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Revenues and Gross Margins, and Note 9 to our
accompanying financial statements."
18
Increasing Competition: We face competitive pressures from a variety of
companies in each of the markets we serve. In the radio-based network AMR
market, companies such as Schlumberger, Nexus and Innovatec currently offer
alternative solutions to the utility industry and compete aggressively with us.
The emerging market for two-way communications systems for advanced metering and
billing for the utility industry, together with the potential market for the
same kind of systems to provide energy delivery optimization and Internet
connections to customers, have led communications, electronics and utility
companies to begin developing various systems, some of which currently compete,
and others of which may in the future compete, with our current and future
product and service offerings. These competitors can be expected to offer a
variety of technologies and communications approaches, as well as meter reading,
installation and other services, to utilities and other industry participants.
We believe that several large suppliers of equipment, services or
technology to the utility industry may be developing competitive products for
the AMR market. In addition, large meter manufacturers could expand their
current product and services offerings so as to compete directly with us. To
stimulate demand, and due to increasing competition in the AMR market, we have
from time to time lowered prices on our AMR products and may continue to do so
in the future. We also anticipate increasing competition with respect to the
features and functions of our products. In the handheld systems market, we have
encountered competition from a number of companies, resulting in margin
pressures in the maturing domestic handheld systems business and in some
international markets.
Many of our present and potential future competitors have or may have
substantially greater financial, marketing, technical or manufacturing
resources, and in some cases, greater name recognition and experience than we
do. Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products and services than we
can. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that increase their ability to address the needs of our
prospective customers. It is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. For example, in 2000, one of our competitors, Schlumberger, acquired the
assets of another competitor in bankruptcy, CellNet. There can be no assurance
that we will be able to compete successfully against current and future
competitors, and any failure to do so would have a material adverse effect on
our business, financial condition, results of operations and cash flow.
Uncertainty of Market Acceptance of New Technology: The AMR market is
evolving, and it is difficult to predict the future growth rate and size of this
market with any assurance. The AMR market has not grown as quickly in recent
years as we expected. Further market acceptance of the our new AMR products and
systems, will depend in part on our ability to demonstrate cost effectiveness,
strategic and other benefits of our products and systems, the utilities' ability
to justify such expenditures and the direction and pace of federal and state
regulatory reform actions. In the event that the utility industry does not adopt
our technology or does not adopt it as quickly as we expect, our future results
will be materially and adversely affected. International market demand for AMR
systems varies by country based on such factors as the regulatory and business
environment, labor costs and other economic conditions.
Rapid Technological Change: The telecommunications industry, including the
data transmission segment, currently is experiencing rapid and dramatic
technology advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, and private communications networks have
greatly expanded communications capabilities and market opportunities. Many
companies from diverse industries are actively seeking solutions for the
transmission of data over traditional communications mediums, including
radio-based and cellular telephone networks. Competitors may be capable of
offering significant cost savings or other benefits to our customers. There can
be no assurance that technological advances will not cause our technology to
become obsolete or uneconomical.
Availability and Regulation of Radio Spectrum: See "FCC Regulation and
Allocation of Radio Frequencies." A significant portion of our products use
radio spectrum and in the United States are subject to regulation by the FCC.
Licenses for radio frequencies must be obtained and periodically renewed, and
there can be no assurance that any license granted to us or our customers will
be renewed on acceptable terms, if at all, or that the FCC will keep in place
rules for our frequency bands that are compatible with our business. In the
past, the FCC has adopted changes to the requirements for equipment using radio
spectrum, and there can be no assurance that the FCC or Congress will not adopt
additional changes in the future.
More recently, on January 23, 2001, the FCC published in the Federal
Register a Notice of Proposed Rulemaking that invites public comment on three
options for allocating the 1427-1432 MHz band. There can be no guarantee that
the FCC ruling on this matter will not have a materially adverse impact on the
Company's financial condition. See "FCC Regulation and Allocation of Radio
Frequencies."
19
We have committed, and will continue to commit, significant resources to
the development of products that use particular radio frequencies. Action by the
FCC could require modifications to our products, and there can be no assurance
that we would be able to modify our products to meet such requirements, that we
would not experience delays in completing such modifications or that the cost of
such modifications would not have a material adverse effect on our future
financial condition and results of operations.
Our radio-based products currently employ both licensed and unlicensed
radio frequencies. There must be sufficient radio spectrum allocated by the FCC
for the use we intend. As to the licensed frequencies, there is some risk that
there may be insufficient available frequencies in some markets to sustain our
planned operations. The unlicensed frequencies are available for a wide variety
of uses and are not entitled to protection from interference by other users. In
the event that the unlicensed frequencies become unacceptably crowded or
restrictive, and no additional frequencies are allocated, our business could be
materially adversely affected.
We are also subject to regulatory requirements in international markets
that vary by country. To the extent we wish to introduce products designed for
use in the United States or another country into a new market, such products may
require significant modification or redesign in order to meet frequency
requirements and power specifications. Further, in some countries, limitations
on frequency availability or the cost of making necessary modifications may
preclude us from selling our products.
Dependence on Key Personnel: Our success depends in large part upon our
ability to retain highly qualified technical and management personnel, the loss
of one or more of whom could have a material adverse effect on our business. Our
success depends upon our ability to continue to attract and retain highly
qualified personnel in all disciplines. There can be no assurance that we will
be successful in hiring or retaining the requisite personnel.
Intellectual Property: While we believe that our patents, trademarks and
other intellectual property have significant value, there can be no assurance
that these patents and trademarks, or any patents or trademarks issued in the
future, will provide meaningful competitive advantages. There can be no
assurance that our patents or pending applications will not be challenged,
invalidated or circumvented by competitors or that rights granted thereunder
will provide meaningful proprietary protection. Despite our efforts to safeguard
and maintain our proprietary rights, there can also be no assurance that such
rights will remain protected or that our competitors will not independently
develop patentable technologies that are substantially equivalent or superior to
our technologies.
Dependence on Key Vendors, Components, and Internal Manufacturing
Capabilities: Certain of our products, subassemblies and components are procured
from a single source, and others are procured only from limited sources. Our
reliance on such components or on these limited or sole source vendors or
subcontractors involves certain risks, including the possibility of shortages
and reduced control over delivery schedules, manufacturing capability, quality
and costs. In particular, we currently obtain the majority of our handheld
devices from one vendor with locations in the United Kingdom and Liberty Lake,
Washington. Also, we may be affected by worldwide shortages of certain
components such as capacitors, inductors and certain types of memory and
discrete semiconductor devices. A significant price increase in certain
components or subassemblies could have a material adverse effect on our results
of operations. Although we believe alternative suppliers of these products,
subassemblies and components are available, in the event of supply problems from
our sole- or limited-source vendors or subcontractors, our inability to develop
alternative sources of supply quickly or cost-effectively could materially
impair our ability to manufacture our products and, therefore, could have a
material adverse effect on our business, financial condition and results of
operations. In the event of a significant interruption in production at our
manufacturing facilities, considerable time and effort could be required to
establish an alternative production line. Depending on which production lines
were affected, such a break in production would have a material adverse effect
on our business, financial condition, and results of operations.
Dependence on Outsourcing Financing: We intend to utilize limited recourse,
long-term, fixed-rate project financing for our future outsourcing contracts. We
have established Itron Finance, Inc. as a wholly owned Delaware subsidiary and
plan to establish bankruptcy-remote, single and special purpose subsidiaries of
Itron Finance, Inc. for this purpose. Although we completed a project financing
facility for an AMR project in 1997, there can be no assurance that we will be
able to affect other project financing facilities. If we are unable to utilize
limited recourse, long-term, fixed-rate project financing for our outsourcing
contracts, our borrowing capacity will be reduced, and we may be subject to the
negative effects of floating interest rates if we cannot hedge this exposure.
International Operations: International sales and operations may be subject
to risks such as the imposition of government controls, political instability,
export license requirements, restrictions on the export of critical technology,
currency exchange rate fluctuations, generally longer receivables collection
periods, trade restrictions, changes in tariffs, difficulties in staffing and
managing international operations, potential insolvency of international dealers
and difficulty in collecting accounts receivable. In addition, the laws of
certain countries do not protect our products to the same extent as do the laws
of the United States. There can be no assurance that these factors will not have
a material adverse effect on our future international sales and, consequently,
on our business, financial condition, and results of operations.
20
Anti-takeover Considerations: We have the authority to issue 10 million
shares of preferred stock in one or more series, and to fix the powers,
designations, preferences, and relative, participating, optional or other rights
thereof without any further vote or action by our shareholders. The issuance of
preferred stock could dilute the voting power of holders of Common Stock and
could have the effect of delaying or preventing a change in control of the
Company. Certain provisions of our Restated Articles of Incorporation, Restated
Bylaws, shareholder rights plan and employee benefit plans, as well as
Washington law, may operate in a manner that could discourage or render more
difficult a takeover of the Company or the removal of management or may limit
the price certain investors may be willing to pay in the future for our shares
of Common Stock.
Regulatory Compliance: We are subject to various federal and state
governmental regulations related to occupational safety and health, labor, and
wage practices as well as federal, state, and local governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture,
and disposal of toxic or other hazardous substances used to produce our
products. We believe that we are currently in material compliance with such
regulations. Failure to comply with current or future environmental regulations
could result in the imposition of substantial fines on us, suspension of
production, alteration of our production processes, cessation of operations, or
other actions which could materially and adversely affect our business,
financial condition, and results of operations. In the ordinary course of our
business, we use metals, solvents, and similar materials, which are stored on
site. The waste created by use of these materials is transported off site on a
regular basis by a state-registered waste hauler. Although we are not aware of
any material claim or investigation with respect to these activities, there can
be no assurance that such a claim will not arise in the future, or that the cost
of complying with governmental regulations in the future, will not have a
material adverse effect on us.
21
ITEM lA: EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with the Company, and principal
occupations and employment for the last five years of the persons serving as
executive officers of Itron as of February 28, 2001.
Name Age Position
---- --- --------
LeRoy D. Nosbaum............ 54 President and Chief Executive Officer
Robert D. Neilson........... 44 Chief Operating Officer
William L. Brown............ 55 Vice President, Competitive Resources
Michael A. Cantelme......... 47 Vice President, Global Services
Russell N. Fairbanks, Jr. .. 57 Vice President and General Counsel
Timothy J. Gelvin........... 47 Vice President and General Manager, International Division
John W. Hengesh............. 46 Vice President and General Manager, Natural Gas and Water & Public Power Systems
Randi L. Neilson............ 38 Vice President, Marketing
David G. Remington.......... 59 Vice President and Chief Financial Officer
Jemima G. Scarpelli......... 42 Vice President, Investor Relations and Corporate
Communications
Dennis A. Shepherd.......... 52 Vice President and General Manager, EIS Systems
Russell E. Vanos............ 44 Vice President and General Manager, Electric Systems
Robert W. Whitney........... 42 Vice President, Manufacturing
LeRoy Nosbaum was named President and Chief Executive Officer in March
2000. Previously, he had been Chief Operating Officer. LeRoy joined Itron in
March 1996 and had Vice President responsibilities covering manufacturing,
product development, operations and marketing before being promoted to Chief
Operating Officer. Before joining us, LeRoy was Executive Vice President and
General Manager of Metricom, Inc.'s UtiliNet Division, and held a variety of
positions with Metricom from 1989 to 1996. Prior to joining Metricom, he was
employed by Schlumberger, Ltd. and Sangamo Electric for 20 years, most recently
as General Manager of the Integrated Metering Systems Division of Electricity
Management--North America, an operating group of Schlumberger.
Rob Neilson was named Chief Operating Officer in March 2000. Previously, he
had been Vice President, Strategy and Business Development since October 1997
and Vice President, Marketing from 1993 to 1997. He joined Itron in 1983 as
manager of market development and planning, and served as Director of Marketing
from 1987 to 1993.
Bill Brown was named Vice President, Competitive Resources in January 2000
and has responsibility for human resources, information systems, corporate
training, facilities and security. Bill joined Itron in 1997 as Vice President,
Network Systems Operations responsible for deploying Itron's radio-based network
AMR systems. He later became Vice President, Residential Systems Operations
where he assumed responsibility for customer service as well as project
management for all domestic AMR systems. From 1969 to 1996, Bill served in
numerous operational assignments with the federal government throughout the
world, including serving as the U.S. Defense Representative to the government of
Norway, and as a senior advisor on defense matters to the U.S. Ambassador to
Honduras.
Mike Cantelme joined Itron in July 2000 as Vice President, Global Services.
From 1998 to 2000, Mike worked with Teligent, L.L.C. as Region Vice President
for the Southern Region. Teligent is one of the largest competitive local
exchange carriers (CLEC) in the country, and while there, Mike had
responsibilities for real estate acquisition, network and central office
buildout, sales and customer installation for the 13 state southern region. Part
of that responsibility also included the initial launch of telephone service in
4 of the first 10 of Teligent's service cities. From 1976 to 1998, Mike spent 22
years with AT&T in a number of positions, most recently Vice President, General
Manager in Middle Markets. Previous to being promoted to V.P., G.M., Mike was
the Director for Sales Training for AT&T.
Russ Fairbanks joined Itron in January 2000 as Vice President and General
Counsel. From 1997 to 1999, Russ served as Vice President and General Counsel
for ASM America, Inc., a manufacturer of chemical vapor deposition equipment
used to make integrated circuits. Prior to that, he was Vice President, General
Counsel and Secretary for Cyrix Corporation, a manufacturer of high performance
X-86 microprocessors from 1993 until 1997 at which time Cyrix became a
subsidiary of National Semiconductor. Russ was with EDS Corporation from 1985 to
1993 and served in a variety of corporate law and strategic roles.
Tim Gelvin joined Itron in June 2000 as Vice President and General Manager,
International Division, which encompasses all of Itron's operations, including
sales and support, outside of the U.S. and Canada. In the year prior to joining
Itron, Tim had been
22
managing director of R.P.G. & Associates Inc., an energy marketing and
consultancy firm. From 1995 to 1999, Tim was with UtiliCorp United, an
international growth-oriented energy and services company based in Kansas City,
Missouri, where he held a number of executive positions with broad marketing
responsibilities covering operations in the U.S. and Canada, Europe, Australia
and New Zealand. Prior to UtiliCorp, he was with Florida Power Corporation from
1977 to 1995 where he had responsibilities covering sales, marketing, operations
and customer service.
John Hengesh has been with Itron since 1984 is Vice President and General
Manager, Natural Gas Systems and Water and Public Power Systems. He has served
in a number of positions with Itron covering sales, marketing, hardware and
software development, manufacturing, quality and customer and field support.
Prior to his present responsibilities, John was Vice President Handheld, Mobile
and Telephone Solutions, and previous to that was General Manager for Itron
Telephone Solutions in Boise. Prior to joining Itron, John was the western
regional sales manager for the Computer Products Division of General Instrument.
Randi Neilson was named Vice President, Marketing in January 2000 and has
responsibility for all marketing communications, market research, product
management, regulatory and marketing support. Randi joined Itron in 1990 and has
served in a number of positions, most recently as Director of Solutions and
Product Marketing where her responsibilities included product marketing, program
management, installation and servicing of Itron's radio-based network AMR
products as well as marketing communications. Prior to joining Itron, Randi was
the Director of Marketing for American Sign and Indicator, a leading supplier of
electronic signage and scoreboard systems.
Dave Remington joined Itron in early 1996 as Vice President and Chief
Financial Officer. Before joining Itron, Dave was an investment banker and
Managing Director at Dean Witter Reynolds Inc. or Dean Witter Realty Inc. from
1988 to 1996. Previously, he spent 15 years in the financial services industry
and two years with a high technology firm. During this time, he was Vice
President-Finance, and later President, of Steiner Financial Corporation and the
founding President of one if its subsidiaries.
Mima Scarpelli was named Vice President, Investor Relations and Corporate
Communications in January 2000. She has responsibilities for all investor
relations activities, employee communications, and corporate communications
activities. Mima has been with Itron since 1985 and has held numerous positions
in the finance and accounting area including Treasurer and Controller. Prior to
joining Itron, Mima was a CPA and audit manager with the Seattle office of
Deloitte & Touche LLP.
Dennis Shepherd was named Vice President and General Manager, Energy
Information Systems in January 2000. Prior to assuming his present position, he
was Vice President, Commercial & Industrial Systems since July 1998. Dennis
joined Itron as Vice President of Marketing and Sales of Utility Translation
Systems, Inc. in March 1996, when Itron acquired UTS. Dennis worked for UTS for
11 years where he led the company's sales and marketing and product planning
activities. Prior to joining UTS, Dennis was an industrial engineer and
marketing representative for Westinghouse Electric Corporation.
Russ Vanos returned to Itron as Vice President and General Manager,
Electric Systems in January 2001. Prior to returning to Itron, Russ was Vice
President, sales for LineSoft, a software and consulting firm specializing in
power line design and optimization from January through October, 2000. His
experience in the utility industry spans two decades, much of it related to
advanced data collection systems and distribution system optimization. Russ
first joined Itron in 1980 as a field service representative responsible for
installation of Itron's first generation meter-reading system, and from there,
held numerous positions of increasing responsibility, including Vice President,
Utility and Energy Services Solutions from 1997 until January, 2000.
Bob Whitney was named Vice President, Manufacturing in April 2000 and has
been with Itron since 1992. Bob has responsibility for the fabrication of all of
Itron's hardware products including supply chain management, development and
administration of contract manufacturing relationships, and interfacing with
internal product development and marketing. Prior to assuming his present
position, he was Director of Manufacturing for Itron's Minnesota operations from
1994 until 1999 when he assumed director responsibilities for all of Itron's
manufacturing operations. Previous to Itron, Bob held various manufacturing
positions with EF Johnson, a two-way radio manufacturing company.
23
ITEM 2: PROPERTIES
Our headquarters are located in approximately 141,000 square feet of owned
space in Spokane, Washington. In May 2000, we subleased the majority of the
manufacturing space in our facility to a subcontract manufacturer, in which we
have a minority ownership interest, and who manufactures most of our low volume
hardware products. In Raleigh, North Carolina, we own approximately 18,000
square feet and are leasing an additional 25,000 square feet used for activities
related to our business. In Waseca, Minnesota, we lease 86,000 square feet of
manufacturing and engineering space. In late 1998, we began relocating
activities from our facility in Lakeville, Minnesota to the Waseca facility and
had sub-leased approximately 40% of the 32,000 square feet in the Lakeville
facility as of December 31, 2000. In February 2001 we subleased the remaining
space in the Lakeville facility. We have approximately 40,000 square feet of
leased space in various cities in North America for sales and service.
Additionally, we lease sales offices in the United Kingdom, France and Australia
and in various cities throughout the United States. Our 2000 aggregate domestic
and international base monthly lease obligation was approximately $142,000. All
the above facilities are in good condition and we believe our current
manufacturing and other properties will be sufficient to support our operations
for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
Benghiat Patent Litigation
On April 3, 1999, the Company served Ralph Benghiat, an individual, with a
complaint seeking a declaratory judgment that a patent owned by Benghiat is
invalid and not infringed by Itron's handheld meter reading devices in the
United States District Court for the District of Minnesota (Civil Case No.
99-cv-501). Benghiat has filed a counterclaim alleging patent infringement by
the same devices. Both lawsuits were filed in the United States District Court
for the District of Minnesota. The lawsuit is currently in the motion stage with
a trial date expected some time in 2001. While the Company believes that its
products do not infringe the Benghiat patent, there can be no assurance that it
will prevail in this matter, in which case a decision or settlement of this case
may have a material adverse effect on our financial condition and if the Company
does prevail, there can be no assurance that legal costs incurred in connection
therewith will not have a material adverse effect on its financial condition.
CellNet Patent Litigation
On October 3, 1996, the Company filed a patent infringement suit against
CellNet Data Systems (CellNet) in the United States District Court for the
District of Minnesota (Civil Case No. 4-96-972). The suit alleged that CellNet
infringed on its United States Patent No. 5,553,094 entitled "Radio
Communication Network for Remote Data Generating Stations," issued on September
3, 1996. The Company sought injunctive relief as well as monetary damages, costs
and attorneys' fees. On January 28, 1999, the Court issued its decision on
motions and cross motions for summary judgment that had previously been filed by
the Company and CellNet. In its decision, the Court held the Company's patent
valid, but not infringed. Both parties appealed the decision to the federal
Circuit Court of Appeals. Oral arguments were heard on the appeal in October
2000 and the appellate court upheld the lower court decision in all respects.
This case is now over.
The Company is not involved in any other material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Itron during the
fourth quarter of 2000.
24
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
Itron's common stock is traded on the NASDAQ National Market (ITRI). The
following table reflects the range of high and low closing sales prices for all
four quarters of 2000 and 1999 as reported by the NASDAQ National Market.
2000 1999
---- ----
High Low High Low
---- --- ---- ---
First Quarter................... $8.50 $4.50 $9.56 $6.88
Second Quarter.................. 8.75 4.50 9.50 6.75
Third Quarter................... 8.38 5.13 8.88 5.88
Fourth Quarter.................. 6.75 3.14 6.94 4.25
Holders
At February 28, 2001 there were approximately 600 holders of record of our
Common Stock.
Dividends
We have never declared or paid cash dividends. We intend to retain future
earnings, if any, for the development of our business and do not anticipate
paying cash dividends in the foreseeable future.
Unregistered Equity Security Sales
None.
25
ITEM 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data of the Company should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in this Form 10-K/A. As discussed in Note 16 to the
consolidated financial statements, the selected financial data for the year
ended December 31, 2000, has been restated.
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
----- ----- ----- ----- ----
(As Restated)
(in thousands, except per share data)
Statement of Operations Data
Revenues
Sales ........................................................ $ 141,899 $ 147,128 $ 187,051 $ 164,325 $ 150,770
Service ...................................................... 38,042 46,284 54,351 51,792 26,814
---------- ------------ ---------- --------- ---------
Total revenues ............................................... 179,941 193,412 241,402 216,117 177,584
Cost of revenues .................................................. 109,092 202,640 167,276 139,578 108,541
---------- ------------ ---------- --------- ---------
Gross profit ...................................................... 70,849 (9,228) 74,126 76,539 69,043
Operating expenses
Sales and marketing .......................................... 20,726 25,243 23,991 25,394 25,014
Product development .......................................... 21,331 26,764 33,493 32,220 33,285
General and administrative ................................... 17,565 13,498 12,834 12,064 10,970
Amortization of intangibles .................................. 1,762 1,986 2,261 2,190 1,542
Restructurings ............................................... (185) 16,686 3,930 -- --
---------- ------------ --------- ----------- ----------
Total operating expenses ..................................... 61,199 84,177 76,509 71,868 70,811
Operating income (loss) ........................................... 9,650 (93,405) (2,383) 4,671 (1,768)
Other income (expense)
Equity in affiliates ......................................... 1,069 (600) (1,154) (1,120) (50)
Gain on sale of business interests ........................... -- -- -- 2,000 --
Interest, net ................................................ (3,795) (6,261) (6,508) (3,916) (316)
---------- ------------ ---------- ----------- ----------
Total other income (expense) ...................................... (2,726) (6,861) (7,662) (3,036) (366)
---------- ------------ ---------- ----------- ----------
Income (loss) before income taxes and
extraordinary item ............................................. 6,924 (100,266) (10,045) 1,635 (2,134)
Income tax (provision) benefit .................................... (2,700) 28,010 3,820 (625) 670
---------- ------------ ---------- ----------- ---------
Net income (loss) before extraordinary item and cumulative
effect of a change in accounting principle ..................... 4,224 (72,256) (6,225) 1,010 (1,464)
Extraordinary gain on early extinguishment of debt, net of
income taxes of $570 and $1,970 ................................ 1,044 3,660 -- -- --
Cumulative effect of change in accounting principle, net of
income taxes of $1,581 ......................................... (2,562) -- -- -- --
------ ---------- ------------ ---------- ----------- ----------
Net income (loss) ................................................. $ 2,706 $ (68,596) $ (6,225) $ 1,010 $ (1,464)
========== ============ =========== ============ ==========
Earnings per share
Basic
Income (loss) before extraordinary item ........................... $ .28 $ (4.87) $ (.42) $ .07 $ (.11)
Extraordinary item ................................................ .07 .25 -- -- --
Cumulative effect ................................................. (.17) -- -- -- --
---------- ------------ ----------- ----------- ----------
Basic net income (loss) per share ................................. $ .18 $ (4.62) $ (.42) $ .07 $ (.11)
========== ============ =========== =========== ==========
Diluted
Income (loss) before extraordinary item ...................... $ .28 $ (4.87) $ (.42) $ .07 $ (.11)
Extraordinary item ........................................... .07 .25 -- -- --
Cumulative effect ............................................ (.17) -- -- -- --
---------- ------------ ----------- ----------- ----------
Diluted net income (loss) per share .......................... $ .18 $ (4.62) $ (.42) $ .07 $ (.11)
========== ============ =========== =========== ==========
Average number of shares outstanding
Basic ........................................................ 15,180 14,851 14,668 14,118 13,297
Diluted ...................................................... 15,385 14,851 14,668 14,562 13,297
Balance Sheet Data
Working capital .............................................. $ 45,340 $ 44,261 $ 54,230 $ 68,307 $ 26,239
Total assets ................................................. 177,231 192,079 247,755 240,211 186,671
Total debt ................................................... 65,446 74,998 92,197 73,814 39,502
Shareholders' equity ......................................... 52,092 47,526 115,023 120,427 114,222
26
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects certain restatements to our previously
reported results of operations for these periods. See Note 16 to the
consolidated financial statements for a discussion of this matter.
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Information" and the Consolidated Financial
Statements and Notes thereto.
Overview
Itron is a leading provider of data collection and management solutions for
electric, gas and water utilities throughout the world. Itron technology is used
by more than 2,000 utilities in over 45 countries around the world to collect
data from 275 million electric, gas and water meters. Of those, more than 625
customers are using our radio and telephone-based technology to automatically
collect and process information from nearly 17.6 million meters. In addition,
our technology is being used by a number of the newly created wholesale energy
markets in the U.S. and Canada to provide critical billing and settlement
systems for deregulated markets. Our systems touch more than $200 billion in
energy and water transactions every year in North America alone.
Only 11% of the electric, gas and water meters in North America are read
using automated meter data collection and communication systems. While we are
aggressively pursuing the numerous opportunities remaining for advanced metering
and billing systems, we also intend to use our core technology and industry
knowledge to move beyond meter reading and open up new opportunities for growth.
These new opportunities are centered on supplying systems, technology and
services to help electric, gas and water utilities:
. Run their distribution systems more efficiently,
. Automate the data and information requirements of deregulation and
performance-based ratemaking, and
. Outsource services utilities no longer want to or no longer have
the people or expertise to perform.
We design, develop, manufacture, market, install and service hardware,
software and integrated systems. Sales include hardware, custom and licensed
software, consulting, project management and installation and sales support
activities. Services include post-sale maintenance support and outsourcing
services where we own and operate, or simply operate systems for a periodic fee.
We currently derive the majority of our revenues from sales of products and
services to utilities. However, our business may increasingly consist of sales
to other energy and water industry participants such as energy service
providers, end user customers, wholesale power markets, and others.
27
Results of Operations
Revenues
The following tables show our revenue and percent change from the prior
year by sales or service and by segment.
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
($ in millions)
Revenues
Sales ................................. $ 141.9 $ 147.1 (4)% $ 187.1 (21)%
Service ............................... 38.0 46.3 (18) 54.3 (15)
-------- -------- --------
Total Revenues ................... $ 179.9 $ 193.4 (7)% $ 241.4 (20)%
======== ======== ========
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
($ in millions)
Segment Revenues
Electric .............................. $ 55.0 $ 57.4 (4)% $ 119.6 (52)%
Natural Gas ........................... 39.7 46.6 (15) 40.1 16
Water & Public Power .................. 47.5 53.3 (11) 51.9 3
Energy Information Systems ............ 20.5 16.0 28 10.0 60
International ......................... 17.2 20.1 (14) 19.8 2
-------- -------- --------
Total Revenues ................... $ 179.9 $ 193.4 (7)% $ 241.4 (20)%
======== ======== ========
2000 compared to 1999
For the full year 2000, revenues were $179.9 million compared to $193.4
million in 1999. Service revenues were down in 2000 compared to 1999, primarily
as a result of less outsourcing revenues in 2000. In March 2000, we sold our
outsourcing system at Duquesne Light Company to an affiliate of Duquesne. That
system produced service revenues of $9.9 million in 1999 compared to $1.8
million in 2000.
Electric segment revenues in 2000 were negatively impacted by the sale of
the outsourcing system above. Excluding those revenues in both periods, electric
segment revenues were up 12% in 2000 over 1999. Our electric segment signed a
number of new contract bookings in the second half of 2000, and as a result,
revenues in the last half of 2000 were up 15% over the first half, excluding the
$1.8 million in Duquesne outsourcing revenues in the first half.
In 1999, a single customer accounted for approximately $14.4 million, or
31% of Natural Gas segment revenues. Shipments under this large multi-year
contract began to wind down early in 2000 as the contract completed, and
accounted for only $7.3 million, or 18% of year-to-date Natural Gas segment
revenues in 2000. Excluding activity for that single customer, Natural Gas
segment revenues were relatively flat year-to-year.
The lower revenues in 2000, compared with 1999, in our Water & Public Power
segment result primarily from lower handheld electronic meter reading system
revenues in 2000. Handheld sales in 1999 were higher than normal due to customer
upgrades to handheld systems that were Y2K compliant.
Energy Information Systems ("EIS") includes products for large commercial
and industrial (C&I) customers of utilities, such as power billing systems, as
well as products and systems for deregulated environments to manage wholesale
market settlement transactions. Revenues in our EIS segment increased 28% in
2000 compared with 1999, primarily as a result of substantial consulting, energy
settlement systems, and software customization activities in the wholesale
energy market in Ontario, Canada. The start-up of operations for the Ontario
wholesale market was delayed in the third quarter of 2000 by approximately 6
months. This resulted in slower revenue growth in the second half for EIS
compared to EIS's revenue growth rates for the first half of 2000.
28
International revenues in both 2000 and 1999 are primarily derived from
sales of handheld systems. Handheld system sales in 1999 were higher as a result
of customer upgrades to Y2K compliant systems. Our International systems
revenues in the last six months of 2000 were approximately twice those in the
first six months of 2000, as a result of a large handheld system order in Japan
and a large AMR sale to Mexico.
1999 compared to 1998
The large decrease in revenues in 1999 from 1998 was primarily from our
Electric segment. In 1998, we had a very large order with one electric utility
customer for a network AMR system covering over 400,000 meters that we did not
replace with a similar size order in 1999. Additionally, 1999 revenues from that
customer were reduced by a $4.2 million price concession related to a number of
changes in the customer's requirement for the system. Also contributing to the
decrease in Electric revenues in 1999 was a $6.6 million reduction in revenues
related to changed estimates on our outsourcing contract with Duquesne Light. In
March 2000, we sold that system to an affiliate of Duquesne. See additional
comments below under "Gross Margin" and Note 9 to our accompanying financial
statements.
Natural Gas segment revenues increased 16% in 1999 over 1998 primarily
related to a contract with a single large gas utility under which we completed
installations in the first half of 2000.
Revenues from the sale of products in our EIS segment increased 60% to
$16.0 million in 1999. Contributing to the increase in 1999 were development
activities for wholesale energy markets in Arizona and Ontario, Canada.
Gross Margin
The following tables show our gross margin and percent change from the
prior year by sale or service and by segment.
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
($ in millions)
Gross Margin
Sales...................................... 41% 36 % 5% 32% 4 %
Service ................................... 34 (133) 167 27 (160)
Total gross margin.................... 39% (5)% 44% 31% (36)%
== ==== ==
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
($ in millions)
Segment Gross Margin
Electric................................... 35% (111)% 146 % 23% (134)%
Natural Gas................................ 46 48 (2) 37 11
Water & Public Power....................... 34 36 (2) 33 3
Energy Information Systems................. 47 56 (9) 68 (12)
International.............................. 43 18 25 39 (21)
Total gross margin.................... 39% (5)% 44 % 31% (36)%
== ==== ==
2000 compared to 1999
In late 1999, we implemented a number of restructuring actions, including
the consolidation of our high volume manufacturing operations from three
locations to one and the spin-off of our low volume manufacturing. As a result,
our overall gross margin in 2000 reflects improved efficiencies.
Electric gross margin was negative in 1999 as a result of a loss on the
sale of our outsourced network AMR system at Duquesne Light to an affiliate of
Duquesne and because of additional accruals in 1999 for estimated costs to
complete our remaining obligations to this customer. These two items had the
impact of reducing 1999 Electric gross profit by $67.3 million. In addition, in
the second quarter of 1999, gross margin in our Electric segment was impacted by
a $4.2 million price concession to another customer for a large network
installation. Without those items, Electric gross margin in 1999 would have been
approximately 14%.
29
The lower gross margin for our Natural Gas segment in 2000 compared with 1999
results from lower average selling prices in 2000 as a result of changes in
customer mix.
The lower gross margin in our Water & Public Power segment in 2000 result
from lower average selling prices due to a higher proportion of business in 2000
sold through indirect selling channels as well as higher service costs in 2000.
A substantial portion of revenues in our EIS segment come from custom
software and development activities related to wholesale energy systems. Margins
can vary from period to period depending on the mix of license revenues versus
custom development activities, but are typically much higher than in our other
business segments. Margins in the third and fourth quarters of 2000 were
negatively impacted by the delay in the start-up of operations for the Ontario
wholesale market.
Higher gross margin for International in 2000 reflects a shift in product
mix towards more profitable handheld and AMR systems and away from lower margin
development systems in Europe.
1999 compared to 1998
See discussion above for electric gross margin in 1999. Electric gross
margins in 1998 and 1999 were unusually low, reflecting a number of unusually
large contracts at very low margins. International gross margin in 1999 was down
from 1998 primarily from the accrual of $2.9 million in 1999 for forward losses
for three AMR development contracts in Europe, in which costs were expected to
exceed committed customer funding.
Operating Expenses
The following table shows our operating expenses and percent change from
the prior year.
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- ---------- ----- ---------
($ in millions)
Sales and marketing .............................. $ 20.7 $ 25.2 (18)% $ 24.0 5%
Product development .............................. 21.3 26.8 (21) 33.5 (20)
General and administrative ....................... 17.6 13.5 30 12.8 6
Amortization of intangibles ...................... 1.8 2.0 (10) 2.3 (13)
Restructurings ................................... (.2) 16.7 (101) 3.9 328
------- ------- -------
Total operating expenses ................ $ 61.2 $ 84.2 (27)% $ 76.5 10%
======= ======= =======
Effective January 1, 2000 we reorganized into strategic business units.
With the reorganization, certain personnel that had been classified as sales and
marketing in previous years are now classified as general and administrative or
cost of sales related to changes in their overall responsibilities.
Approximately $1.9 million of the decrease in sales and marketing is due to
transfers to general and administrative and $2.5 million of the decrease is due
to cost of sales transfers. The remaining decrease results from a reduction in
international staff, fewer domestic salespeople for the comparative periods, and
lower commission expense from lower revenues.
The decrease in product development expenses in 2000 compared with 1999,
and 1999 compared with 1998, results primarily from restructuring measures which
included the closure of several product development locations and associated
staff reductions.
The increased general and administrative expenses in 2000 compared with
1999 result from: the reclassification of personnel previously included in sales
and marketing; expenses for executive recruiting and relocation; increased legal
and consulting costs; and earned bonus and performance incentives. Higher legal
costs in the current year are mostly the result of increased patent litigation
and FCC licensing expenses.
Restructuring charges in the first half of 2000 reversed slightly due to
the sale of equipment. Restructuring measures started in late 1999 are
substantially complete.
30
Other Income (Expense)
The following table shows other income (expense) and percent change from
the prior year.
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- ---------- ---- ---------
($ in millions)
Equity in affiliates.............................. $ 1.1 $(0.6) 283% $(1.2) 50%
Interest, net..................................... (3.8) (6.3) 40 (6.5) 3
----- ----- -----
Equity in affiliates.............................. $(2.7) $(6.9) 61 $(7.7) 10
===== ===== =====
In 2000, we had a 50% ownership interest in an affiliate, that acts as a
distributor for our water products in specific regions of the U.S., and a 30%
ownership interest in an affiliate, that serves as a contract manufacturer of
our low volume products and as our handheld service repair depot provider. The
$1.1 million in equity in affiliates in 2000 compared with a $600,000 loss in
1999 largely results from increased water sales by our distributor affiliate. In
addition, year-to-date equity in affiliates in 2000 includes a $150,000 net gain
on the sale of our interest in another partially owned domestic affiliate.
Net interest expense decreased 40% in 2000 compared with 1999 due to lower
short-term bank borrowings, a reduction of subordinated debt outstanding, and
net invested cash during 2000. We received $33 million from the sale of our
outsourcing installation at Duquesne in the first half of this year and used the
proceeds to pay down short-term bank borrowings. Excess cash is invested in
short-term investment grade securities. The reduction in subordinated debt
resulted from a debt repurchase transaction in the first quarter of 2000.
Income Taxes
Our effective income tax rate was approximately 39% in 2000 compared with a
tax benefit of (28)% in 1999 and an effective rate of 38% in 1998. The reduced
tax benefit in 1999 resulted from valuation allowances provided for certain
domestic tax credits and international net operating losses, which may be
subject to expiration before they can be utilized. Our effective income tax rate
can vary from period to period because of fluctuations in foreign operating
results, changes in the valuation allowances for deferred tax assets, new or
revised tax legislation, and changes in the level of business performed in
different tax jurisdictions.
Extraordinary Item--Gain on Early Extinguishment of Debt
In the first quarter of 2000 we repurchased $3.8 million principal amount
of subordinated debt for $2.1 million in cash. The gain on this early
extinguishment of debt, net of expenses and income taxes, was $1.0 million. In
March 1999 we completed an offer to exchange $15.8 million principal amount of
new subordinated debt for $22.0 million principal amount of original
subordinated debt. The after-tax effect of the transaction, net of expenses, was
a gain of $3.7 million.
Cumulative Effect of Change in Accounting Principle
During the fourth quarter of 2000, the Company implemented the SEC's Staff
Accounting Bulletin No. 101 (SAB 101), which outlines the Staff's views on
revenue recognition. As a result, we have changed our revenue recognition for
certain transactions related to customer acceptance and F.O.B destination
shipments. The implementation has been accounted for as a cumulative change in
accounting principle. We restated our financial results for the first three
quarters of 2000 to conform revenue recognition to the requirements of SAB 101.
In addition, subsequent to the issuance of our consolidated financial
statements for the year ended December 31, 2000, we changed our revenue
recognition practice for certain outsourcing contracts under which we retain
title to the related equipment retroactively to January 1, 2000. See Note 16 to
the consolidated financial statements.
31
Financial Condition
Year Ended December 31,
-----------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
($ in millions)
Cash Flow Information
Operating activities............................. $ 3.8 $ 24.5 (84)% $ (1.9) 1,389 %
Investing activities............................. 20.8 (16.1) 229 (17.1) 6
Financing activities............................. (4.9) (9.6) 49 18.7 (151)
------ ------ ------
Net increase (decrease) in cash............. $ 19.7 $ (1.2) 1,742 % $ (0.3) (300)%
====== ====== ======
Operating activities: We generated $3.8 million of cash from operations in
2000 compared to $24.5 million generated in 1999 and ($1.9) million used in
1998. In 2000 we used $9.3 million of cash for severance and other restructuring
expenditures that were accrued for in 1999. Excluding those payments, adjusted
cash flow from operations in 2000 was $13.1 million. Cash generated from
operations in 1999 was $24.5 million and was unusually large as a result of
collections in 1999 from two large turnkey installations in which invoicing had
been deferred. Wages and benefits payable decreased $7.1 million in 2000 from
1999, primarily due to employee termination benefits paid in 2000. Accounts
receivable increased $2.5 million from 1999 primarily due to the fact that the
last two days of 2000 were weekend days. Collections of accounts receivable in
the first week of January 2001 totaled $5.2 million.
Investing activities: In 2000 we received $32.8 million, net of expenses,
from the sale of our network system at Duquesne Light Company, which is
reflected in investing activities. Capital acquisitions, including outsourcing
equipment requirements, were $11.6 million for 2000, down approximately $5.7
million from 1999 and $5.5 million from 1998. Most of the decrease was due to
decreases in outsourcing investments which reflected that we had substantially
completed capital build-outs for new systems. Capital acquisitions for internal
use are expected to increase slightly in 2001 as a result of upgrades in our
Waseca factory and information technology systems.
Financing activities: Financing activities required the use of $4.9 million
in cash in 2000 mostly due to $3.6 million in cash used to pay down short-term
bank borrowings and $2.1 million to repurchase and retire subordinated debt in
the first quarter of 2000. In January 2000, we signed an agreement with a bank
for a new four-year revolving line of credit for up to $35 million. As with the
previous line of credit, borrowings available under the new facility are based
on qualified accounts receivable and inventory. Financing activities required
$9.6 million in 1999 mostly due to repayment of short-term bank borrowings.
Financing cash in 1998 was provided from short-term bank borrowings and project
financing of one outsourcing project. At December 31, 2000, we had $21.2 million
in cash and cash equivalents and no borrowings under our line of credit. We
believe that existing cash resources and available borrowings under our credit
facility are more than adequate to meet our cash needs through 2001.
Business Outlook
The following statements are based on current expectations. These
statements are forward-looking, and actual results may differ materially. Itron
undertakes no obligation to update publicly or revise any forward-looking
statements.
We expect that revenues in our current business in 2001 will be 5% to 15%
higher than in 2000, and net income after tax is expected to grow by at least
30%. We expect our operating margin will improve throughout 2001 based on
additional improvements in gross margins offset by slightly higher investments
in product development.
32
Certain Forward-Looking Statements
When included in this discussion, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and similar expressions are
intended to identify forward-looking statements. Such statements are inherently
subject to a variety of risks and uncertainties that could cause our actual
results to differ materially from those reflected in such forward-looking
statements. Such risks and uncertainties include, among others, the rate of
customer demand for our products, forecast future revenues and costs on
long-term contracts, changes in law and regulation (including FCC licensing
actions), changes in the utility regulatory environment, delays or difficulties
in introducing new products and acceptance of those products, ability to obtain
project financing in amounts necessary to fund future outsourcing agreements,
our ability to accurately forecast future revenues and costs on long-term
contracts, increased competition and various other matters, many of which are
beyond our control. These forward-looking statements speak only as of the date
of this report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change on the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based. For a more complete description of these and other risks,
see "Certain Risk Factors."
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk: We are subject to market risk exposure related to
changes in interest rates on our long-term debt. At December 31, 2000, we had
$65.3 million of long-term debt. (See Note 4 of our accompanying financial
statements). Our long-term debt is at fixed rates. However, a hypothetical 100
basis point increase in the interest rate at December 31, 2000 would result in a
$2.8 million increase in fair value. We do not use derivative financial
instruments to manage interest rate risk.
Foreign Currency Exchange Rate Risk: Our earnings are affected by
fluctuations in the value of the U.S. dollar, as compared to foreign currencies,
as a result of transactions in foreign markets. We have performed a sensitivity
analysis assuming a hypothetical 10% strengthening in the value of the dollar
relative to the currencies in which our transactions are denominated. As of
December 31, 2000, the analysis indicated that such market movements would not
have had a material effect on our consolidated results of operations or on the
fair value of out risk-sensitive financial instruments. The model assumes a
parallel shift in the foreign exchange rates. Exchange rates rarely move in the
same direction. The assumption that exchange rates change in a parallel fashion
may overstate the impact of changing exchange rates on assets and liabilities
denominated in a foreign currency, consequently, actual effects on operations in
the future may differ materially from that analysis.
33
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Board of Directors and Shareholders of Itron, Inc.
Management is responsible for the preparation of our consolidated financial
statements and related information appearing in this annual report. Management
believes that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
our financial position and results of operations in conformity with generally
accepted accounting principles. Management has included in our financial
statements amounts based on estimates and judgments that it believes are
reasonable under the circumstances.
Management's explanation and interpretation of our overall operating
results and financial position, with the basic financial statements presented,
should be read in conjunction with the entire report. The Notes to Consolidated
Financial Statements, an integral part of the basic financial statements,
provide additional detailed financial information. Our Board of Directors has an
Audit and Finance Committee composed of non-management Directors. The Committee
meets regularly with financial management and Deloitte & Touche LLP to review
accounting control, auditing and financial reporting matters.
LeRoy D. Nosbaum David G. Remington
President and Chief Executive Vice President and Chief Financial
Officer Officer
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Itron, Inc.
Spokane, Washington
We have audited the accompanying consolidated balance sheets of Itron, Inc.
and subsidiaries (the Company) as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Itron, Inc. and subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for revenues in 2000. Also, as
discussed in Note 16, the accompanying 2000 consolidated financial statements
have been restated.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 2, 2001
(February 5, 2002 as to Note 16)
34
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(As Restated)
(in thousands, except per share data)
Revenues
Sales .................................................................... $ 141,899 $ 147,128 $ 187,051
Service .................................................................. 38,042 46,284 54,351
--------- --------- ---------
Total revenues ...................................................... 179,941 193,412 241,402
Cost of revenues
Sales .................................................................... 83,954 94,607 127,761
Service .................................................................. 25,138 108,033 39,515
--------- --------- ---------
Total cost of revenues .............................................. 109,092 202,640 167,276
--------- --------- ---------
Gross profit (loss) ........................................................... 70,849 (9,228) 74,126
Operating expenses
Sales and marketing ...................................................... 20,726 25,243 23,991
Product development ...................................................... 21,331 26,764 33,493
General and administrative ............................................... 17,565 13,498 12,834
Amortization of intangibles .............................................. 1,762 1,986 2,261
Restructurings ........................................................... (185) 16,686 3,930
--------- --------- ---------
Total operating expenses ............................................ 61,199 84,177 76,509
--------- --------- ---------
Operating income (loss) ....................................................... 9,650 (93,405) (2,383)
Other income (expense)
Equity in affiliates ..................................................... 1,069 (600) (1,154)
--------- --------- ---------
Interest, net ............................................................ (3,795) (6,261) (6,508)
--------- --------- ---------
Total other expense ................................................. (2,726) (6,861) (7,662)
--------- --------- ---------
Income (loss) before income taxes and extraordinary item ...................... 6,924 (100,266) (10,045)
Income tax (provision) benefit ................................................ (2,700) 28,010 3,820
--------- --------- ---------
Net income (loss) before extraordinary item and cumulative effect of
change in accounting principle ............................................. 4,224 (72,256) (6,225)
Extraordinary gain on early extinguishment of debt, net of income taxes
of $570 and $1,970 ......................................................... 1,044 3,660 --
Cumulative effect of change in accounting principle, net of income
taxes of $1,581 ............................................................ (2,562) -- --
--------- --------- ---------
Net income (loss) ............................................................. $ 2,706 $ (68,596) $ (6,225)
========= ========= =========
Earnings per Share
Basic
Income (loss) before extraordinary item .................................. $ .28 $ (4.87) $ (.42)
Extraordinary item ....................................................... .07 .25 --
Cumulative effect ........................................................ (.17) -- --
--------- --------- ---------
Basic net income (loss) per share ........................................ $ .18 $ (4.62) $ (.42)
========= ========= =========
Diluted
Income (loss) before extraordinary item .................................. $ .28 $ (4.87) $ (.42)
Extraordinary item ....................................................... .07 .25 --
Cumulative effect ........................................................ (.17) -- --
--------- --------- ---------
Diluted net income (loss) per share ...................................... $ .18 $ (4.62) $ (.42)
========= ========= =========
Average number of shares outstanding
Basic .................................................................... 15,180 14,851 14,668
Diluted .................................................................. 15,385 14,851 14,668
The accompanying notes are an integral part of these consolidated financial
statements.
35
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Pro forma amounts assuming SAB 101 is applied retroactively
Net income (loss) before extraordinary item ................................... $ 4,224 $ (63,771) $ (8,249)
Extraordinary gain on early extinguishment of debt, net of income taxes
of $570 and $1,970 ......................................................... 1,044 3,660 --
---------- ---------- ----------
Net income (loss) ............................................................. $ 5,268 $ (60,111) $ (8,249)
========== ========== ==========
Earnings per Share
Basic
Income (loss) before extraordinary item .................................. $ .28 $ (4.29) $ (.56)
Extraordinary item ....................................................... .07 .25 --
---------- ---------- ----------
Basic net income (loss) per share ........................................ $ .35 $ (4.05) $ (.56)
========== ========== ==========
Diluted
Income (loss) before extraordinary item .................................. $ .27 $ (4.29) $ (.56)
Extraordinary item ....................................................... .07 .25 --
Diluted net income (loss) per share ...................................... $ .34 $ (4.05) $ (.56)
========== ========== ==========
Average number of shares outstanding
Basic .................................................................... 15,180 14,851 14,668
Diluted .................................................................. 15,385 14,851 14,668
36
CONSOLIDATED BALANCE SHEETS
At December 31,
---------------
2000 1999
----- ----
(As Restated)
-------------
(in thousands, except
share data)
ASSETS
Current assets
Cash and cash equivalents ...................................................................... $ 21,216 $ 1,538
Accounts receivable, net ....................................................................... 49,859 46,561
Current portion of long-term contracts receivable .............................................. -- 2,579
Inventories, net ............................................................................... 17,196 15,300
Equipment held for sale, net ................................................................... -- 32,750
Deferred income taxes .......................................................................... 4,852 8,016
Other .......................................................................................... 899 1,340
--------- ---------
Total current assets ...................................................................... 94,022 108,084
Property, plant and equipment, net ............................................................. 25,197 31,627
Equipment used in outsourcing, net ............................................................. 14,150 5,951
Intangible assets, net ......................................................................... 12,836 15,196
Long-term contracts receivable ................................................................. -- 1,813
Deferred income taxes .......................................................................... 27,287 26,922
Other .......................................................................................... 3,739 2,486
--------- ---------
Total assets .............................................................................. $ 177,231 $ 192,079
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............................................................................... $ -- $ 3,646
Accounts payable and accrued expenses ............................................................... 30,171 34,746
Wages and benefits payable .......................................................................... 9,244 16,396
Mortgage notes and leases payable ................................................................... 242 622
Deferred revenue .................................................................................... 9,025 8,413
--------- ---------
Total current liabilities ................................................................. 48,682 63,823
Convertible subordinated debt ....................................................................... 53,459 57,234
Mortgage notes and leases payable ................................................................... 5,074 6,280
Project financing ................................................................................... 6,671 7,216
Warranty and other obligations ...................................................................... 11,253 10,000
--------- ---------
Total liabilities ......................................................................... 125,139 144,553
Commitments and contingencies (Notes 4 and 10) ...................................................... -- --
Shareholders' equity
Common stock, no par value, 75 million shares authorized, 15,329,361 and
14,958,788 shares issued and outstanding .................................................... 109,730 107,603
Accumulated other comprehensive loss ........................................................... (1,840) (1,573)
Accumulated deficit ............................................................................ (55,798) (58,504)
--------- ---------
Total shareholders' equity ................................................................ 52,092 47,526
--------- ---------
Total liabilities and shareholders' equity ................................................ $ 177,231 $ 192,079
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Retailed
Comprehensive Earnings
Shares Amount Warrants Loss (Deficit) Total
------ ------ -------- ---- --------- -----
(in thousands)
Balances at December 31, 1997 ...................... 14,602 $ 105,136 $ 57 $ (1,082) $ 16,317 $ 120,428
Net loss ........................................... (6,225) (6,225)
Currency translation adjustment .................... (26) (26)
---------
Total comprehensive income ......................... (6,251)
Stock issues:
Options exercised ............................. 37 452 452
Stock repurchased by Company .................. (109) (1,554) (1,554)
Employee savings plan ......................... 87 1,161 1,161
Employee stock purchase Plan .................. 81 787 787
Warrants expired .............................. (57) 57 --
-------- --------- --------- --------- --------- ---------
Balances at December 31, 1998 ...................... 14,698 $ 106,039 $ -- $ (1,108) $ 10,092 $ 115,023
Net loss ........................................... (68,596) (68,596)
Currency translation adjustment .................... (465) (465)
---------
Total comprehensive income ......................... (69,061)
Stock issues:
Options exercised ............................. 38 95 95
Employee savings plan ......................... 139 1,045 1,045
Employee stock purchase Plan .................. 84 424 424
-------- --------- --------- --------- --------- ---------
Balances at December 31, 1999 ...................... 14,959 $ 107,603 $ -- $ (1,573) $ (58,504) $ 47,526
Net income (as restated) ........................... 2,706 2,706
Currency translation adjustment .................... (267) (267)
---------
Total comprehensive income ......................... 2,439
Stock issues:
Options exercised ............................. 132 681 681
Employee savings plan ......................... 148 988 988
Employee stock purchase Plan .................. 90 458 458
-------- --------- --------- --------- --------- ---------
Balances at December 31, 2000 (as restated) 15,329 $ 109,730 $ -- $ (1,840) $ (55,798) $ 52,092
======== ========= ========= ========= ========= =========
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(As Restated)
-------------
(in thousands)
OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ 2,706 $(68,596) $ (6,225)
Noncash charges (credits) to income
Depreciation and amortization ...................................... 13,254 18,474 19,865
Deferred income tax provision (benefit) ............................ 3,811 (28,064) (4,550)
Equity in affiliates, net .......................................... (945) 600 1,154
Extraordinary gain on early extinguishment of debt ................. (1,044) (3,660) --
Cumulative effect of change in accounting principle ................ 2,562 -- --
Write-off of long-term contracts receivable ........................ -- 34,492 --
Loss on equipment sale or disposal ................................. -- 23,369 --
Changes in operating accounts
Accounts receivable ..................................................... (2,488) 15,668 (1,811)
Inventories ............................................................. 277 5,354 11,331
Accounts payable and accrued expenses ................................... (1,936) 18,572 (2,663)
Wages and benefits payable .............................................. (7,072) 10,151 (2,935)
Deferred revenue ........................................................ (4,407) (240) 1,894
Long-term contracts receivable .......................................... -- (1,674) (17,646)
Other, net .............................................................. (917) 52 (312)
-------- -------- --------
Cash provided (used) by operating activities ................................. 3,801 24,498 (1,898)
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............................ (4,510) (7,416) (6,364)
Equipment used in outsourcing ........................................... (7,084) (9,859) (10,746)
Proceeds from sale of equipment used in outsourcing, net ................ 32,750 -- --
Proceeds from sale of business interest ................................. 870 -- 1,000
Investment in affiliates ................................................ (500) -- --
Acquisitions of intangibles and patent defense costs .................... (117) (171) (1,002)
Other, net .............................................................. (634) 1,362 8
-------- -------- --------
Cash provided (used) by investing activities ................................. 20,775 (16,084) (17,104)
FINANCING ACTIVITIES:
Change in short-term borrowings, net .................................... (3,646) (10,354) 12,440
Proceeds from (payments on) project financing, net ...................... (545) (506) 5,308
Convertible subordinated debt repurchase ................................ (2,101) -- --
Issuance of common stock ................................................ 2,127 1,564 2,400
Purchase and retirement of common stock ................................. -- -- (1,554)
Payments on mortgage notes payable ...................................... (183) -- --
Other, net .............................................................. (550) (323) 128
-------- -------- --------
Cash provided (used) by financing activities ................................. (4,898) (9,619) 18,722
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............................. 19,678 (1,205) (280)
Cash and cash equivalents at beginning of period ............................. 1,538 2,743 3,023
-------- -------- --------
Cash and cash equivalents at end of period ................................... $ 21,216 $ 1,538 $ 2,743
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid ....................................................... $ 503 $ 614 $ 156
Interest paid ........................................................... 4,289 5,279 6,037
The accompanying notes are an integral part of these consolidated financial
statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Business
We are a leading technology provider to the energy and water industries for
collecting, communicating, analyzing and managing information about electric,
gas and water usage. We design, develop, manufacture, market, sell, install and
service hardware, software and integrated systems for automatic and electronic
meter reading systems and for wholesale energy market billing and settlement
systems. We both sell our products and provide outsourcing services.
Basis of Consolidation
The consolidated financial statements include the accounts of Itron, Inc.
and our wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated. Investments in affiliates, in which we have a
non-controlling interest, are accounted for using the equity method. At December
31, 2000 we had a 50% interest in a sales and marketing joint venture and a 30%
interest in a contract manufacturing joint venture. In 1999, we had a 50%
interest in two joint ventures, and sold our interest in one to our partner in
2000. In 1998, we had a 50% interest in another venture, and in 1998, sold that
interest to our partner.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents are recorded at cost,
which approximates fair value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Cost includes raw materials and labor, plus applied direct and
indirect costs. Service inventories consist primarily of sub-assemblies and
components necessary to support post-sale maintenance. During 2000, we spun-off
our low volume manufacturing and handheld service to an outside vendor in which
we have a 30% equity interest. As a result of this transition, we have consigned
inventory at the vendor totaling $3.2 million at December 31, 2000.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation, which
includes the amortization of assets recorded under capital leases, is computed
using the straight-line method over the assets estimated useful lives of three
to seven years, or over the term of the applicable capital lease, if shorter.
Project management and installation cost and equipment used in outsourcing
contracts is depreciated using the straight-line method over the shorter of the
useful life or the term of the contract. Plant is depreciated over 30 years
using the straight-line method. We review the carrying value of property, plant
and equipment on a regular basis for impairment. In 1998, we capitalized
interest as a component of the cost of property, plant and equipment constructed
for our own use of $260,000. No interest was capitalized in 2000 or 1999.
Intangible Assets
Goodwill represents the excess cost of businesses that we have acquired
over the fair value of their net assets and is amortized using the straight-line
method over periods ranging from three to 20 years. Patents, patent defense
costs, distribution and product rights are amortized using the straight-line
method over their remaining lives of three to 17 years. Capitalized software
includes costs incurred subsequent to the establishment of technological
feasibility of the related product and is amortized using the straight-line
method for a period not to exceed five years. We regularly review the carrying
value of intangible assets for impairment.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warranty
We offer standard warranty terms on our product sales. Provision for
estimated warranty costs is recorded at the time of sale and periodically
adjusted to reflect actual experience. The long-term warranty reserve covers
future expected costs of testing and replacement of radio meter module batteries
and fixed network equipment. Warranty expense was $3.8 million in 2000, $5.7
million in 1999 and $4.2 million in 1998.
Income Taxes
We account for income taxes using the asset and liability method. Under
this method, deferred income taxes are recorded for the temporary differences
between the financial reporting basis and tax basis of our assets and
liabilities. These deferred taxes are measured using the provisions of currently
enacted tax laws. Based on our forecasts, we believe that it is more likely than
not that we will generate sufficient taxable income to allow the realization of
our deferred net tax asset.
Foreign Exchange
Our consolidated financial statements are prepared in United States
dollars. Assets and liabilities of foreign subsidiaries are denominated in
foreign currencies and are translated to United States dollars at the exchange
rates in effect on the balance sheet date. Revenues, costs of revenues and
expenses for these subsidiaries are translated using an average rate for the
relevant reporting period. Translation adjustments resulting from this process
are a component of comprehensive income in shareholders' equity.
Revenue Recognition
Sales consist of hardware, software license fees, custom software
development, project management services, consulting and installation services.
Service revenues include post-sale maintenance support and outsourcing services.
Outsourcing services encompass operation and maintenance, and in some cases
installation, of meter reading systems to provide meter information to a
customer for billing and management purposes. Outsourcing services can be
provided for systems we own as well as those owned by our customers or others.
We typically recognize revenues from hardware and software license fees at
the time of shipment or, if applicable, upon completion of customer acceptance
provisions, and for project management, consulting, installation, outsourcing
and maintenance services at the time those services are provided. Hardware and
software post-contract customer support fees are recognized over the life of the
related service contracts. In the fourth quarter of 2000, we implemented SEC
Staff Accounting Bulletin No. 101, as amended, Revenue Recognition in Financial
Statements (SAB No. 101), which provides the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
As a result, effective January 1, 2000, we changed our revenue recognition for
certain transactions related to customer acceptance, and F.O.B. destination
shipments. The implementation has been accounted for as a cumulative change in
accounting principle. In addition, subsequent to the issuance of the 2000
consolidated financial statements, the Company changed its revenue recognition
practice for certain outsourcing contracts under which the Company retains title
to the related equipment, retroactive to January 1, 2000 (see Note 16).
Revenues for both large custom systems and outsourcing contracts, prior to
adoption of SAB No. 101, are recognized using the cost-to-cost,
percentage-of-completion method of long-term contract accounting. Under this
method, revenue reported during a period is based on the percentage of estimated
total revenues to be received under the contract measured by the percentage of
costs incurred in the period to total estimated costs for each contract. This
method is used because we believe costs incurred are the best available measure
of progress on these contracts. Contract costs include all direct material and
labor costs and other indirect costs related to contract performance such as
indirect labor, supplies, tools, repairs and depreciation costs. Changes in
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs and
income and are recognized on a cumulative basis in the period in which the
revisions are determined. Provisions for estimated losses on uncompleted
contracts are recognized in the period in which such losses are determined and
were $6.8 million in 1999 and $750,000 in 1998. Prior to January 1, 2000,
revenues from certain outsourcing contracts that were recognized in excess of
amounts billed were included in long-term contracts receivable or the current
portion of long-term contracts receivable depending on the expected period of
collection. Amounts billed related to these outsourcing contracts were $10.7
million and $5.6 million in 1999 and 1998, respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred revenue is recorded for products or services that have been paid
for by a customer but have not yet been provided. Unbilled receivables are
recorded when revenues are recognized upon product shipment or service delivery
and invoicing occurs at a later date.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents and accounts receivable
approximate fair value. The fair market value for long-term receivables and
long-term debt notes payable (see Note 7) is based on quoted market rates or
prices where available.
Earnings per Share
Basic earnings per share ("EPS") is calculated using net income divided by
the weighted average common shares outstanding during the year. Diluted EPS is
similar to Basic EPS except that the weighted average common shares outstanding
are increased to include the number of additional common shares that would have
been outstanding if dilutive options had been exercised and convertible
subordinated notes had been converted. Diluted EPS assumes that common shares
were issued upon the exercise of stock options for which the market price
exceeded the exercise price, less shares that could have been repurchased with
the related proceeds ("Treasury Stock" method). It also assumes that any
dilutive convertible subordinated notes outstanding at the beginning of each
year were converted, with related interest adjusted accordingly ("if converted"
method).
Derivatives
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended, established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. We adopted SFAS 133 effective
January 1, 2001. Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Because of various factors affecting
future costs and operations, actual results could differ from estimates.
Stock-Based Compensation
We follow SFAS No. 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. We have elected to continue to
apply APB 25 in accounting for our stock option incentive plans (see Note 5).
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
Note 2: Earnings Per Share and Capital Structure
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Weighted average shares outstanding ...................................... 15,180 14,851 14,668
Effect of dilutive stock options ......................................... 205 -- --
------ ------ ------
Weighted average shares outstanding assuming conversion .................. 15,385 14,851 14,668
====== ====== ======
We have granted options to purchase common stock to directors, employees
and other key personnel at fair market value on the date of grant. The dilutive
effect of these options is included for purposes of calculating dilutive EPS
using the "treasury stock" method. We also have subordinated convertible notes
outstanding. These notes are not included in the above calculation as the shares
are anti-dilutive in all periods when using the "if converted" method. There is
no dilutive effect in 1999 and 1998, as the Company incurred a loss for each
year and including the securities would have been anti-dilutive.
Note 3: Balance Sheet Components
At December 31,
---------------
2000 1999
---- ----
(in thousands)
Accounts receivable
Trade (net of allowance for doubtful accounts of $1,144 and $1,311).................... $ 42,218 $ 40,134
Unbilled revenue....................................................................... 7,641 6,427
-------- --------
Total accounts receivable.................................................... $ 49,859 $ 46,561
======== ========
Inventories, net
Material............................................................................... $ 5,721 $ 6,428
Work in process........................................................................ 737 1,462
Finished goods......................................................................... 9,673 5,702
Field inventories awaiting installation................................................ 50 466
Total manufacturing inventories................................................... 16,181 14,058
Service inventories............................................................... 1,015 1,242
-------- --------
Total inventories............................................................ $ 17,196 $ 15,300
======== ========
Property, plant and equipment
Machinery and equipment................................................................ $ 31,317 $ 37,740
Equipment used in outsourcing.......................................................... 15,903 13,257
Computers and purchased software....................................................... 26,662 28,331
Buildings, furniture and improvements.................................................. 20,458 22,132
Land .................................................................................. 1,958 2,195
-------- --------
Total cost........................................................................ 96,298 103,655
Accumulated depreciation.......................................................... (56,951) (66,077)
-------- -------
Property, plant and equipment, net........................................... $ 39,347 $ 37,578
======== ========
Intangible assets
Goodwill $ 16,991 $ 16,991
Capitalized software................................................................... 6,309 6,309
Distribution and product rights........................................................ 2,475 2,475
Patents ............................................................................... 7,086 6,968
-------- --------
Total cost........................................................................ 32,861 32,743
Accumulated amortization.......................................................... (20,025) (17,547)
-------- -------
Intangible assets, net....................................................... $ 12,836 $ 15,196
======== ========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Short-term Borrowings and Long-term Debt
Short-term Borrowings:
In January 2000, we signed a new four-year agreement with a bank for a
revolving line of credit up to a maximum amount of $35 million. Borrowings
available under the new facility are based on qualified accounts receivable and
inventory, and are secured by those and certain cash accounts. At December 31,
2000, the maximum amount we could borrow under this agreement was $18 million.
Interest rates depend on the form of borrowing and vary based on published rates
and financial performance. Additionally, an annual commitment fee of .375% is
required on the unused portion of the available line of credit. The agreement
contains covenants, which require us to maintain certain liquidity and coverage
ratios. Any borrowings mature in January 2004. There were no amounts outstanding
at December 31, 2000.
Our previous revolving line of credit also allowed maximum borrowings up to
$35 million, based on and secured by accounts receivable and inventory. At
December 31, 1999, there were $3.6 million in borrowings outstanding at a
weighted average interest rate of approximately 9.0%. This line of credit was
fully paid in January 2000.
Mortgage Notes Payable
At December 31,
---------------
2000 1999
------ ------
(in thousands)
Secured mortgage note payable to a shareholder with principal and interest
payments of 9% until maturity on August 1, 2015.......................................... $5,237 $5,402
Secured mortgage note payable to a shareholder with principal and interest
payments of 8 1/2% until maturity on June 1, 2019........................................ $ -- $ 832
We incurred the above notes in conjunction with the purchase of our
headquarters and related manufacturing space in Spokane, Washington. During 2000
we sold one of our facilities to a third party and satisfied the related note.
Principal payments due under the remaining note are $180,000 in 2001, $197,000
in 2002, $216,000 in 2003, $236,000 in 2004, $258,000 in 2005 and $4.2 million
thereafter.
Project Financing
At December 31,
---------------
2000 1999
------ ------
(in thousands)
Secured note payable with principle and interest payments of 7.6% until maturity
on May 31, 2009......................................................................... $6,671 $7,216
We incurred the above note in conjunction with project financing for one of
our outsourcing contracts. The note is secured by the assets of the project.
Principal payments due under the note are $589,000 in 2001, $635,000 in 2002,
$685,000 in 2003, $739,000 in 2004, $797,000 in 2005 and $3.2 million
thereafter.
Convertible Subordinated Debt
At December 31,
---------------
2000 1999
-------- ----------
(in thousands)
Unsecured, convertible subordinated notes................................................. $53,459 $57,234
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We completed a $63.4 million convertible subordinated note offering in
March and April 1997. Interest of 6 3/4% on the notes is payable semi-annually
on March 31 and September 30 of each year until maturity on March 31, 2004. In
February 1999 we exchanged $22 million principal amount of original notes for
$15.8 million principal amount of exchange notes. The exchange notes have the
same maturity date, interest payment dates and rate of interest as the original
notes. Both the original notes and the exchange notes have no sinking fund
requirements and are redeemable, in whole or in part, at our option at any time
on or after April 4, 2000, (for the original notes) or March 12, 2002 (for the
exchange notes). The notes are convertible, in whole or in part, at the option
of the holder at any time prior to maturity at a price of $23.70 per common
share for the original notes and $9.65 per common share for the exchange notes.
In March 2000, we repurchased $3.8 million of notes from a holder for $2.1
million. The gains on the exchange and repurchase transactions have been
recognized as extraordinary gains on early extinguishment of debt.
Note 5: Employee Benefit Plans
Employee Savings Plan
We have an employee incentive savings plan in which substantially all
employees are eligible to participate. Employees may contribute, on a
tax-deferred basis, up to 22% of their salary, 50% of which we match subject to
statutory limitations. Through September 30, 2000, our match was through the
issuance of common stock. Subsequent to that date, our match was and will be in
cash. The expense for our matching contribution was $838,000 in 2000, $1.2
million in 1999, and $1.2 million in 1998. We do not offer post-employment or
post-retirement benefits.
Stock Option Plans
At December 31, 2000, we had three stock-based compensation plans, which
are described below. We apply APB Opinion 25 and related interpretations in
accounting for our plans. Because all stock options were issued at fair value,
no compensation cost has been recognized for our stock option plans. The
following table summarizes information about stock options (including the
weighted average remaining contractual life and the weighted average exercise
price) outstanding at December 31, 2000:
Outstanding Options Exercisable Options
------------------- -------------------
Range of Shares Life Shares
--------
Exercise Prices (in 000's) (years) Price (in 000's) Price
---------------- ---------- ------- ----- ---------- -----
$ .86-$5.16 1,041 6.63 $ 4.97 680 $ 4.99
6.00- 8.66 1,190 8.79 7.62 187 8.12
12.60-17.88 634 4.36 15.90 532 16.00
19.88-24.50 303 5.02 21.98 246 22.11
58.75 12 5.33 58.75 12 58.75
------ -----
3,180 6.83 $ 9.97 1,657 $11.80
====== =====
Under our three stock option plans, we have granted options to purchase
shares of common stock to employees and nonemployee directors at prices no less
than the fair market value on the date of grant. Those options terminate ten
years from the date granted. For grants to employees, the options become fully
exercisable within three or four years from the date granted. Grants to
nonemployee directors are fully vested and immediately exercisable. The price
range of options exercised was $.86 to $8.50 in 2000, $.17 to $2.91 in 1999 and
$.86 to $17.88 in 1998. At December 31, 2000, there were 4.6 million shares of
unissued common stock under the plans, of which options for the purchase of 1.4
million shares were available for future grants. Share amounts (in thousands)
and weighted average exercise prices are as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year............... 2,910 $10.36 2,666 $10.42 2,092 $18.78
Granted........................................ 945 7.37 439 8.16 2,295 8.59
Exercised...................................... (131) 5.18 (38) 2.47 (36) 12.45
Canceled....................................... (544) 8.71 (157) 7.17 (1,685) 18.72
----- ----- -------
Outstanding at end of year..................... 3,180 9.97 2,910 10.36 2,666 10.42
===== ===== =======
Options exercisable at year end................ 1,657 $11.80 1,297 $12.85 651 $16.82
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma Net Income and Per Share Amounts
Had the compensation cost for our stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed in SFAS No. 123, our net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands except per share data)
Net income (loss)
As reported.................................................................. $ 2,706 $(68,596) $ (6,225)
Pro forma.................................................................... 687 (68,801) (9,012)
Diluted earnings per share
As reported.................................................................. $ .18 $ (4.62) $ (.42)
Pro forma.................................................................... .04 (4.63) (.61)
The weighted average fair value of options granted was $7.39, $8.16, and
$7.82 during 2000, 1999, and 1998 respectively. The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-pricing
model using the following assumptions:
2000 1999 1998
---- ---- ----
Dividend yield.............................. 0% 0% 0%
Expected volatility......................... 72.5% 59% 64%
Risk-free interest rate..................... 7.1% 5.8% 4.7%
Expected life (years)....................... 5.9 5.9 5.3
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan, we are authorized to issue shares
of common stock to our eligible employees who have completed three months of
service, work more than 20 hours each week and are employed more than five
months in any calendar year. Employees who own 5% or more of our common stock
are not eligible to participate in the Plan. Under the terms of the Plan,
eligible employees can choose payroll deductions each year of up to 10% of their
regular cash compensation. Such deductions are applied toward the discounted
purchase price of our common stock. The purchase price of the common stock is
85% of the fair market value of the stock as defined in the Plan. Under the Plan
we sold 89,581, 83,729, and 80,741 shares to employees in 2000, 1999, and 1998,
respectively.
Note 6: Other Related Party Transactions
Certain of our customers are also shareholders with more than 10% ownership
interest and/or hold positions on our Board of Directors. Revenue from such
customers was $3.6 million in 2000, $4.6 million in 1999 and $4.5 million in
1998. Accounts receivable from these customers were $160,000, $137,000 and
$303,000 at December 31, 2000, 1999 and 1998, respectively. Interest expense
related to mortgage notes payable to a shareholder was $532,000 in 2000,
$561,000 in 1999 and $475,000 in 1998.
In May 1996, we purchased an additional facility from a shareholder for
some of our manufacturing and engineering operations. We paid $210,000 of the
total purchase price at closing, with the remaining $840,000 due under a note
payable. During 2000, this facility was sold to an unrelated third party. A
portion of the proceeds was utilized to satisfy the remaining balance on the
note payable to the shareholder.
Note 7: Fair Values of Financial Instruments
The estimated fair value of financial instruments has been determined by
using available market information and appropriate valuation methodologies. The
values provided are representative of fair values only as of December 31, 2000
and 1999 and do not reflect subsequent changes in the economy, interest and tax
rates, and other variables that may effect determination of fair value. The
following methods and assumptions were used in estimating fair values.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Cash, cash equivalents and accounts receivable: The carrying value
approximates fair value due to the short maturity of these instruments.
Long-term contracts receivable: The fair value of the non-current portion
of long-term contracts receivable is based on the discounted value of expected
cash flows at our current borrowing rate. With the adoption of SAB 101 effective
January 1, 2000, the Company no longer records long-term contracts receivable
from outsourcing contracts.
Mortgage notes payable: The fair value is estimated based on current
borrowing rates available for similar debt.
Project financing: The fair value is estimated based on quoted spreads
above treasury rates for similar issues.
Convertible subordinated debt: The fair value is estimated based on the
current trading activity of the notes.
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ ------- -----
(in thousands)
Cash, cash equivalents and accounts receivable......................... $71,075 $71,075 $48,099 $48,099
Long-term contracts receivable......................................... - - 1,813 1,616
Mortgage notes payable................................................. 5,237 5,553 6,234 6,191
Project financing...................................................... 6,671 6,568 7,216 6,715
Convertible subordinated debt.......................................... 53,459 32,373 57,234 32,910
Note 8: Restructuring
2000 Charges:
There were no restructuring charges in 2000. During the year we used
restructuring reserve balances from prior years for severance and related
charges, asset impairments, lease payments for abandoned facilities, and the
sale of a building and equipment.
1999 Charges:
In our ongoing efforts to improve efficiencies and reduce costs we recorded
restructuring charges of $16.7 million during 1999. Our restructuring actions
included the consolidation of high volume manufacturing to our plant in
Minnesota, a reduction of products and software platforms supported by the
Company, consolidation of product development locations, and a reduction in
activities in Europe not related to our core business. The majority of our
restructuring charges were related to a reduction in force of approximately 300
people of which approximately 50% were in manufacturing, 25% in product
development and the remainder throughout the Company. Twenty-five percent of the
reductions were management positions. The remaining charges relate to impairment
of equipment and estimated future lease payments for abandoned facilities.
1998 Charges:
In 1998, in connection with management's measures to reduce costs and
improve operating efficiencies, we recorded restructuring charges of $3.9
million. The restructuring measures primarily involved the elimination or
consolidation of approximately 150 positions, primarily in product development,
the write-off of certain of our intangible assets and the consolidation of one
of our product development locations.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Restructuring Activity:
Combined restructuring activity for 2000, 1999 and 1998 and remaining
reserve balances at December 31, 2000 are as follows:
Restructuring Reserve Balance
Cash/Non-cash Charges Activity 12/31/00
------------- ------- -------- --------
(in thousands)
Severance and related charges.......................... Cash $ 11,472 $11,313 $ 159
Asset impairment....................................... Non-cash 5,368 5,368 --
Consolidation of facilities............................ Cash 3,350 734 2,616
Other.................................................. Non-cash 241 241 --
-------- ------- -------
Total restructurings................................... $ 20,431 $17,656 $ 2,775
======== ======= =======
The reserve balances for severance and related charges are expected to be
fully utilized in 2001. Facility consolidation reserves are dependent on our
ability to sublease vacant space, which is under a non-cancelable operating
lease through 2006.
Note 9: Sale of Outsourcing Equipment
In March 2000, we sold our network-based AMR system in Pittsburgh, that
we used to provide Duquesne Light Company with meter information for billing and
other purposes, to an affiliate of Duquesne for $33 million. Since negotiation
commenced in 1999, in anticipation of the sale we recorded a $49.8 million loss
on the sale, which is reported in cost of revenues-service, consisting of a
$34.5 million write-off of all of the Duquesne contracts receivable (both
current and non-current) and an $18.6 million impairment of the assets being
sold, which was partially offset with the reversal of a previously recognized
forward loss of $3.3 million. Impaired assets under the sale of the network AMR
system to the Duquesne subsidiary included hardware and software installed at
the customer's site. The assessment of the impairment was based on the carrying
value of the assets net of the sales proceeds minus selling costs. The
impairment of the assets was recorded on the Consolidated Statements of
Operations - Cost of Revenues Service for $18.6 million and on the Consolidated
Statements of Cash Flows - Loss on equipment sale or disposal in 1999. The
business segment affected by this impairment is Electric Systems.
In March 2000, we also entered into a warranty and maintenance agreement
with the purchasing Duquesne affiliate, pursuant to which we will provide
certain maintenance and support services for the network from closing over a
term ending December 31, 2013. We will receive approximately $10 million ratably
over the term of those services and have recorded a forward loss of $14.3
million in the fourth quarter of 1999. In connection with our performance
responsibilities, we furnished the purchasing affiliate with a $5 million
standby letter of credit.
Note 10: Commitments and Contingencies
Commitments
We have noncancelable capital leases for computer equipment and software,
and operating leases for computers, office, production and storage space
expiring at various dates through December 2009. Rents under the Company's
operating leases were $2.3 million in 2000, $2.4 million in 1999. Assets under
capital leases are included in the consolidated balance sheets as follows:
At December 31,
--------------
2000 1999
---- ----
(in thousands)
Computers and software................ $1,136 $1,188
Accumulated amortization.............. (686) (394)
------ ------
Net capital leases............... $ 450 $ 794
====== ======
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Future minimum payments, net of sublease payments, at December 31, 2000,
under the aforementioned leases and other non-cancelable operating leases with
initial or remaining terms in excess of one year are as follows, (in thousands):
2001............................................ $ 2,393
2002............................................ 1,681
2003............................................ 1,055
2004............................................ 706
2005............................................ 476
Thereafter...................................... 618
-------
Total minimum lease payments............... $ 6,929
=======
In order to maintain certain distribution rights, we have agreed to
purchase minimum quantities of components from various suppliers. Minimum
purchase requirements under these agreements are not in excess of our
requirements.
Contingencies
We maintain performance and bid bonds for certain customers. The
performance bonds usually cover the installation phase of a contract and may on
occasion cover the operations and maintenance phase of outsourcing contracts.
Additionally, we have standby letters of credit to guarantee our performance
under certain contracts. The outstanding amounts of standby letters of credit
were $11.8 million and $6.3 million at December 31, 2000 and 1999, respectively.
We are a party to various lawsuits and claims, both as plaintiff and
defendant, and have contingent liabilities arising from the conduct of business,
none of which, in our opinion, is expected to have a material effect on our
financial position or results of operations. We believe that we have made
adequate provisions for such contingent liabilities.
We have a long-term contract with Southern California Edison ("SCE"), in
which we own, operate and maintain a Mobile AMR System for approximately 360,000
of their meters. At December 31, 2000, we had trade and contracts receivable
totaling approximately $400,000 from SCE and net capitalized equipment related
to this contract of $10.0 million. In January 2001, in response to the
California energy market situation, SCE announced it was suspending payments on
certain debt and purchased power obligations. SCE has not notified us of any
intention to suspend payments on this contract and has continued to make timely
monthly payments on its obligation to us. If SCE were to suspend payments, or
enter into bankruptcy proceedings, such action could result in a full or partial
write-off of the assets and receivables. No loss contingency for this
uncertainty has been accrued in the financial statements.
Note 11: Development Agreements
We received funding to develop certain products under joint development
agreements with several companies. We retain the intellectual property rights to
the products that are developed. Funding received under these agreements is
credited against product development expenses. The agreements require us to pay
royalties if successful products are developed and sold. Additionally, we are
required to pay royalties on future sales of products incorporating certain AMR
technologies. Funding received and royalty expense under these arrangements is
as follows:
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Funding received........................ $ -- $382 $ 485
Royalties paid.......................... 800 506 1,130
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 12: Shareholder Rights Plan
We adopted a Shareholder Rights Plan and in November 1993 declared a
dividend of one common share purchase right (a "Right") for each outstanding
share of our common stock. Under certain conditions, each Right may be exercised
to purchase one share of common stock at a purchase price of $135 per share,
subject to adjustment. The Rights will be exercisable only if a person or group
has acquired 15% or more of the outstanding shares of our common stock
(excluding certain persons who owned more than 15% of the common stock when the
Shareholder Rights Plan was adopted). If a person or group acquires 15% or more
of the then outstanding shares of common stock, each Right will entitle its
holder to receive, upon exercise, common stock having a market value equal to
two times the exercise price of the Right. In addition, if we are acquired in a
merger or other business combination transaction, each Right will entitle its
holder to purchase that number of the acquiring company's common shares having a
market value of twice the Right's exercise price. We are entitled to redeem the
Rights at $.001 per Right at any time prior to the earlier of the expiration of
the Rights in July 2002 or the time that a person has acquired a 15% position.
The Rights do not have voting or distribution rights, and until they become
exercisable they have no effect on our earnings.
Note 13: Income Taxes
A reconciliation of income taxes at the U.S. federal statutory rate of 35%
to the consolidated effective tax for continuing operations is as follows:
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Expected federal income tax provision (benefit)..................... $ 2,423 $(35,093) $(3,515)
Change in valuation allowance....................................... (1,760) 7,048 (200)
State income taxes.................................................. 221 (1,233) (397)
Goodwill amortization............................................... 309 309 309
Foreign sales corporation........................................... -- -- (158)
Tax credits......................................................... 341 -- (285)
Foreign operations.................................................. 917 429 307
Meals and entertainment............................................. 103 122 212
Other, net.......................................................... 146 408 (93)
------- -------- -------
Total provision (benefit) for income taxes..................... $ 2,700 $(28,010) $(3,820)
======= ======== =======
The domestic and foreign components of income before taxes were:
Year Ended December 31,
----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Domestic............................................................ $6,225 $ (92,108) $ (8,296)
Foreign............................................................. 699 (8,158) (1,749)
------ --------- --------
Income (loss) before income taxes.............................. $6,924 $(100,266) $(10,045)
====== ========= ========
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes consisted of the following:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Current:
Federal ......................................... $ 1,177 $ (2,931) $ 344
State and local ................................. (49) 1,000 324
Foreign ......................................... 6 10 60
-------- -------- --------
Total current .............................. $ 1,134 $ (1,921) $ 728
Deferred:
Federal ......................................... 1,451 (28,625) (3,332)
State and local ................................. 455 (2,076) (651)
Foreign ......................................... 1,420 (2,436) (365)
-------- -------- --------
Total deferred ............................. 3,326 (33,137) (4,348)
Change in valuation allowance ........................ (1,760) 7,048 (200)
-------- -------- --------
Total provision (benefit) for income taxes $ 2,700 $(28,010) $ (3,820)
======== ======== ========
Deferred income taxes consisted of the following:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(in thousands)
Deferred tax assets
Loss carry forwards ................................. $ 24,304 $ 20,796 $ 14,715
Tax credits ......................................... 6,725 7,066 5,925
Accrued expenses .................................... 3,101 6,507 5,367
Inventory valuation ................................. 1,994 1,806 1,889
Depreciation and amortization ....................... 531 356 --
Long term contracts ................................. 3,305 6,814 --
Other, net 0 284 228
-------- -------- --------
Total deferred tax assets ...................... 39,960 43,629 28,124
Deferred tax liabilities
Acquisitions ....................................... (86) (173) (292)
Other, net .......................................... (977)
Depreciation and amortization ....................... -- -- (2,789)
Long term contracts ................................. -- -- (14,729)
-------- -------- --------
Total deferred tax liabilities ................. (1,063) (173) (17,810)
Valuation allowance ................................. (6,758) (8,518) (1,470)
-------- -------- --------
Net deferred tax assets .................................. $ 32,139 $ 34,938 $ 8,844
======== ======== ========
Valuation allowances of $0 and $4,098,000 in 2000, $0 and $5,412,000 in
1999, and $70,000 and $1,400,000 in 1998 were provided for capital loss
carryforwards and foreign net operating loss carryforwards, respectively, for
which the Company may not receive future benefits. Valuation allowances of
$2,659,000 and $3,000,000 in 2000 and 1999, respectively, were provided for
research and development tax credit carryforwards for which the Company may not
receive future benefits.
The Company has research and development tax credits and net operating loss
carryforwards available to offset future income tax liabilities. The federal
research and development tax credits of $4,892,000 expire from 2001-2012 and the
federal loss carryforwards of $49,242,000 expire from 2018-2019.
The Company also has alternative minimum tax credits, totaling $1,832,000
that are available to offset future tax liabilities indefinitely.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14: Segment Information
Effective January 2000, we organized internally around strategic business
units (SBUs) focused on the customer segments that we serve. These SBUs include
Electric Systems, Natural Gas Systems, Water & Public Power Systems, Energy
Information Systems, and International Systems. Our Energy Information Systems
SBU has two main areas of focus today, advanced software solutions for
commercial and industrial users of energy, and advanced software systems for
financial settlements, load analysis and billing for wholesale energy markets.
Sales for these SBUs include hardware, custom and licensed software,
consulting, project management, and installation and support activities. Service
revenues are derived from post-sale maintenance support and outsourcing
services, where we own and operate, or simply operate systems for a periodic
fee. Intersegment revenues are immaterial.
During 2000, management's primary measures of profit and loss includes
revenues and gross profit for each segment. Gross profit for each segment is
calculated as revenue (as defined above), less direct costs associated with that
revenue (including standard hardware costs, and direct costs associated with
providing custom software, installation, support, and services). We do not
allocate assets or liabilities between our segments. Certain amounts in the 1999
and 1998 financial statements have been reclassified to conform to the 2000
presentation.
2000 1999 1998
---- ---- ----
Revenues
Electric Systems ........................................ $ 54,996 $ 57,380 $ 119,633
Natural Gas Systems ..................................... 39,655 46,606 40,086
Water & Public Power Systems ............................ 47,573 53,340 51,901
Energy Information Systems .............................. 20,473 15,990 9,962
International Systems ................................... 17,244 20,096 19,820
--------- --------- ---------
Total revenues ..................................... $ 179,941 $ 193,412 $ 241,402
========= ========= =========
Gross Profit
Electric Systems ........................................ $ 19,436 $ (63,376) $ 27,661
Natural Gas Systems ..................................... 18,197 22,285 14,918
Water & Public Power Systems ............................ 16,184 19,303 17,121
Energy Information Systems .............................. 9,680 8,920 6,730
International Systems ................................... 7,352 3,640 7,696
--------- --------- ---------
Total gross profit ................................. $ 70,849 $ (9,228) $ 74,126
========= ========= =========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 15: Quarterly Results (Unaudited)
Quarterly results for 2000 have been restated to conform revenue
recognition to the requirements of SAB 101. (See Notes 1 and 16). Quarterly
results are as follows (in thousands, except per share and stock price data):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total Year
-------- -------- -------- -------- ----------
As As As As As
Previously As Previously As Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
2000
Statement of operations
data:
Total revenues ........... $ 48,587 $ 46,925 $ 45,385 $ 44,570 $ 41,819 $ 40,692 $ 48,182 $ 47,754 $183,972 $179,941
Gross profit ............. 18,437 17,306 17,625 17,564 16,701 16,329 19,755 19,650 72,518 70,849
Net income before
extraordinary item and
cumulative effect of a
change in accounting
principle ................ 1,004 302 1,153 1,115 853 624 2,249 2,183 5,259 4,224
Extraordinary gain on early
extinguishment of debt,
net of income taxes of
$570 ..................... 1,044 1,044 -- -- -- -- -- -- 1,044 1,044
Cumulative effect of change
in accounting principle, net
of income taxes of
$1,581 ................... (1,646) (2,562) -- -- -- -- -- -- (1,646) (2,562)
Net income (loss) ........... $ 402 $ (1,216) $ 1,153 $ 1,115 $ 853 $ 624 $ 2,249 $ 2,183 $ 4,657 $ 2,706
======== ======== ======== ======== ========== ======== ========== ======== ======== ========
Basic net income per share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle ................ $ .07 $ .02 $ .08 $ .07 $ .06 $ .04 $ .15 $ .14 $ .35 $ .28
Extraordinary item .......... .07 .07 .07 .07
Cumulative effect ........... (.11) (.17) (.11) (.17)
-------- -------- -------- -------- ---------- -------- ---------- -------- -------- --------
Basic net income per share .. $ .03 $ (.08) $ .08 $ .07 $ .06 $ .04 $ .15 $ .14 $ 31 $ .18
======== ======== ======== ======== ========== ======== ========== ======== ======== ========
Diluted net income per
share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle ................ $ .07 $ .02 $ .08 $ .07 $ .06 $ .04 $ .15 $ .14 $ .34 $ .28
Extraordinary item .......... .07 .07 .07 .07
Cumulative effect ........... (.11) (.17) (.11) (.17)
-------- -------- ======== ========
Diluted net income per
share ....................... $ .03 $ (.08) $ .08 $ .07 $ .06 $ .04 $ .15 $ .14 $ .30 $ .18
======== ======== ======== ======== ========== ======== ========== ======== ======== ========
Stock Price:
High 8.50 8.75 8.38 6.75 8.75
Low 4.50 4.50 5.13 3.14 3.14
1999
Statement of operations
data:
Total revenues .............. $ 51,945 $ 51,221 $ 48,533 $ 41,713 $193,412
Gross profit ................ 18,664 16,718 17,627 (62,237) (9,228)
Net loss before
extraordinary item ....... (231) (1,584) (5,868) (64,573) (72,256)
Extraordinary gain on early
extinguishment of debt,
net of income taxes of
$1,970 ................... 3,660 -- -- -- 3,660
Net income (loss) ........... $ 3,429 $ (1,584) $ (5,868) $ (64,573) $(68,596)
======== ======== ========== ========== ========
Basic net income (loss) per
share:
Before extraordinary item ... $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item .......... .25 .25
Basic net income (loss) per
share .................... $ .23 $ (.11) $ (.39) $ (4.32) $ (4.62)
======== ======== ========== ========== ========
Diluted net income (loss) per
share:
Before extraordinary item ... $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item .......... .24 -- -- -- .25
-------- -------- ---------- ---------- --------
Basic net income (loss) per
share .................... $ .22 $ (.11) $ (.39) $ (4.32) $ (4.62)
======== ======== ========== ========== ========
Stock Price
High $ 9.56 $ 9.50 $ 8.88 $ 6.94 $ 9.56
Low $ 6.88 $ 6.75 $ 5.88 $ 4.25 $ 4.25
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 16: Restatement
During February 2002, subsequent to the issuance of the Company's 2000
financial statements, the Company determined that in our adoption of SAB 101 we
should have adopted service contract accounting for certain of our outsourcing
contracts where we retain title to the related equipment. Accordingly, the
Company changed its method of accounting for these contracts from the percentage
of completion method under SOP 81-1 to service contract accounting. As a result,
the accompanying consolidated financial statements as of December 31, 2000 and
for the year then ended have been restated to give effect to the changes as of
January 1, 2000. A summary of the significant effects of the restatement is as
follows:
2000
As previously
Reported As Restated
--------------- -----------
At December 31:
Accounts receivable, net $ 49,734 $ 49,859
Current portion of long-term contracts receivable 3,178 -
Equipment used in outsourcing, net 9,757 14,150
Long-term contracts receivable 3,194 -
Deferred income taxes 26,091 27,287
Warranty and other obligations 9,961 11,253
Accumulated deficit (53,847) (55,798)
For the year ended December 31:
Service revenues $ 42,073 $ 38,042
Service cost of revenues 27,500 25,138
Income tax (provision) benefit (3,334) (2,700)
Net income (loss) before extraordinary item and cumulative effect 5,259 4,224
of change in accounting principle
Cumulative effect of change in accounting principle, net of income (1,646) (2,562)
taxes of $1,581
Net income (loss).............................................. $ 4,657 $ 2,706
Basic
Income (loss) before extraordinary item................... .35 .28
Cumulative effect (.11) (.17)
Basic net income (loss per share) .31 .18
Diluted
Income (loss) before extraordinary item................... .34 .28
Cumulative effect (.11) (.17)
Diluted net income (loss per share) .30 .18
54
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" appearing in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2001 (the
"2000 Proxy Statement") sets forth certain information with regard to our
directors and is incorporated herein by reference.
Certain information with respect to persons who are or may be deemed to be
executive officers of Itron is set forth under the caption "Executive Officers
of the Registrant" in Part I of this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the 2001 Proxy
Statement sets forth certain information (except for those sections captioned
"Compensation Committee Report on Executive Compensation" and "Performance
Graph", which are not incorporated by reference herein) with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the 2001 Proxy Statement sets forth certain information
with respect to the ownership of the Registrant's Common Stock and is
incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
appearing in the 2001 Proxy Statement sets forth certain information with
respect to the certain business relationships and transactions between the
Registrant and its directors and officers and is incorporated herein by
reference.
55
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
2) List of Financial Statement Schedules;
Schedule II--Valuation and Qualifying Accounts
3) Exhibits:
Exhibit
Number Description of Exhibits
------- -----------------------
3.1 Restated Articles of Incorporation of the Registrant. (A)
(Exhibit 3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company
of California dated as of July 15, 1992. (A) (Exhibit 4.1)
4.2 Indenture dated as of March 12, 1997 between the Registrant and
Chemical Trust Company of California, as trustee. (G) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain
of its executive officers, together with schedule executive officers
who are parties thereto. (I) (Exhibit 10.1)
10.2 Schedule of certain executive officers who are parties to Change of
Control Agreements (see Exhibit 10.1 hereto) with the Registrant.
(I) (Exhibit 10.2)
10.4 Form of Confidentiality Agreement normally entered into with
employees. (A) (Exhibit 10.7)
10.5 Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of its securities dated March 25,
1996 (D) (Exhibit 10.4)
10.6 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.7 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.8 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.9 Form of Indemnification Agreements between the Registrant and
certain directors and officers. (I) (Exhibit 10.9)
10.10 Schedule of directors and executive officers who are parties to
Indemnification Agreements (see Exhibit 10.09 hereto) with the
Registrant. (I) (Exhibit 10.10)
10.11 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (C) (Exhibit 10.16)
10.12 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24)
10.13 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. (C) (Exhibit 10.18)
10.14 Amendment No. 1 to Amended and Restated Utility Automated Meter Data
Acquisition Lease and Services Agreement between the Registrant and
Duquesne Light Company dated September 11, 1997. (F) (Exhibit 10)
10.15 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (C) (Exhibit 10.19)
10.16 Loan Agreement between Itron, Inc. and GE Capital Corporation dated
January 18, 2000. (I) (Exhibit 10.16)
10.17 Employment Agreement between the Registrant and Michael J. Chesser
dated May 17, 1999. * (H) (Exhibit 10.17)
56
Exhibit
Number Description of Exhibits
------- -----------------------
10.18 First Amendment to Credit Agreement dated February 28, 2000. (I)
(Exhibit 10.18)
10.19 Asset Purchase Agreement between Itron, Inc. and DataCom Information
Systems, LLC (e.g. an affiliate of Duquesne Light Company) dated
March 30, 2000. (J) (Exhibit 10.19)
10.20 Warranty and maintenance Agreement between Itron, Inc. and DataCom
Information Systems, LLC dated March 30, 2000. (J) (Exhibit 10.20)
10.21 Form of Change of Control Agreement between Registrant and executive
officers Tim Gelvin and Bob Whitney. (A) (10.1)
10.22 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated
May 15, 2000. (K) (Exhibit 10.22)
10.23 Credit Agreement between Itron, Inc. and Servatron dated June 22,
2000. (K) (Exhibit 10.23)
10.24 Third Amendment to Credit Agreement dated June 30, 2000. (L)
(Exhibit 10.24)
12 Statement of Computation of Ratios. (M) (Exhibit 12)
21 Subsidiaries of the Registrant. (M) (Exhibit 21)
23 Independent Auditors' Consent
--------------
(A) Incorporated by reference to designated exhibit included in the Company's
Registration Statement on Form S-1 Registration #33-49832), as amended,
filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the Company's
1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the Company's
1995 Annual Report on Form 10-K filed on March 30, 1996.
(D) Incorporated by reference to designated exhibit included in the Company's
1996 Annual Report on Form 10-K filed on March 5, 1997.
(E) Incorporated by reference to Appendix A to the Company's designated Proxy
Statement dated April 4, 1997 for its annual meeting of shareholders held
on April 29, 1997.
(F) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(G) Incorporated by reference to designated exhibit included in the Company's
Current Report on Form 8-K dated March 18, 1997. (H) Incorporated by
reference to designated exhibit included in the Company's Quarterly Report
on Form 10-Q dated August 13, 1999.
(I) Incorporated by reference to designated exhibit included in the Company's
1999 Annual Report on Form 10-K dated March 26, 2000.
(J) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated May 15, 2000.
(K) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated August 14, 2000.
(L) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated November 14, 2000.
(M) Incorporated by reference to designated exhibit included in the Company's
2000 Annual Report on Form 10-K dated March 22, 2001.
* Management contract or compensatory plan or arrangement.
Confidential treatment requested for a portion of this agreement.
4) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the fourth quarter
of 2000.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Spokane, State of Washington, on the 1st day of March, 2002.
ITRON, INC.
By: /s/ David G. Remington
------------------------------
David G. Remington
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated
below on the 1st day of March, 2002.
Signature Title
--------- -----
/s/ S. Edward White Chairman of the Board
-----------------------------------------------------------
S. Edward White
/s/ LeRoy D. Nosbaum President, and Chief Executive Officer and Director
----------------------------------------------------------- (Principal Executive Officer)
LeRoy D. Nosbaum
/s/ David G. Remington Chief Financial Officer
----------------------------------------------------------- (Principal Financial and Accounting Officer)
David G. Remington
/s/ Michael B. Bracy Director
-----------------------------------------------------------
Michael B. Bracy
/s/ Michael J. Chesser Director
-----------------------------------------------------------
Michael J. Chesser
/s/ Ted C. DeMerritt Director
-----------------------------------------------------------
Ted C. DeMerritt
/s/ Jon E. Eliassen Director
-----------------------------------------------------------
Jon E. Eliassen
/s/ Mary Ann Peters Director
-----------------------------------------------------------
Mary Ann Peters
/s/ Thomas S. Glanville Director
-----------------------------------------------------------
Thomas S. Glanville
/s/ Graham M. Wilson Director
-----------------------------------------------------------
Graham M. Wilson
58
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at end of period
--------- ------------------------
Balance at beginning Charged to costs
Description of period and expenses Deductions Current Non current
----------- --------- ------------ ---------- -------- -----------
($ in thousands)
Year ended December 31, 1998:
Inventory obsolescence................. $ 3,824 $ 8,316 $ 7,374 $ 4,766 $ --
Warranty............................... 3,518 7,381 4,953 5,100 846
Allowance for doubtful accts........... 752 952 219 1,485 --
Year ended December 31, 1999:
Inventory obsolescence................. $ 4,766 $ 2,697 $ 4,093 $ 3,370 $ --
Warranty............................... 5,946 5,717 4,801 6,062 800
Allowance for doubtful accts........... 1,485 4,808 4,982 1,311 --
Year ended December 31, 2000:
Inventory obsolescence................. $ 3,370 $ 2,397 $ 1,991 $ 3,776 $ --
Warranty............................... 6,862 3,572 4,618 5,090 726
Allowance for doubtful accts........... 1,311 570 737 1,144 --
59
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit
3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A)
(Exhibit 4.1)
4.2 Indenture dated as of March 12, 1997 between the Registrant and
Chemical Trust Company of California, as trustee. (G) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of
its executive officers, together with schedule executive officers who
are parties thereto. (I) (Exhibit 10.1)
10.2 Schedule of certain executive officers who are parties to Change of
Control Agreements (see Exhibit 10.1 hereto) with the Registrant. (I)
(Exhibit 10.2)
10.4 Form of Confidentiality Agreement normally entered into with
employees. (A) (Exhibit 10.7)
10.5 Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of its securities dated March 25, 1996
(D) (Exhibit 10.4)
10.6 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.7 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.8 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.9 Form of Indemnification Agreements between the Registrant and certain
directors and officers. (I) (Exhibit 10.9)
10.10 Schedule of directors and executive officers who are parties to
Indemnification Agreements (see Exhibit 10.09 hereto) with the
Registrant. (I) (Exhibit 10.10)
10.11 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (C) (Exhibit 10.16)
10.12 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24)
10.13 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. (C) (Exhibit 10.18)
10.14 Amendment No. 1 to Amended and Restated Utility Automated Meter Data
Acquisition Lease and Services Agreement between the Registrant and
Duquesne Light Company dated September 11, 1997. (F) (Exhibit 10)
10.15 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (C) (Exhibit 10.19)
10.16 Loan Agreement between Itron, Inc. and GE Capital Corporation dated
January 18, 2000. (I) (Exhibit 10.16)
10.17 Employment Agreement between the Registrant and Michael J. Chesser
dated May 17, 1999. * (H) (Exhibit 10.17)
10.18 First Amendment to Credit Agreement dated February 28, 2000. (I)
(Exhibit 10.18)
10.19 Asset Purchase Agreement between Itron, Inc. and DataCom Information
Systems, LLC (e.g. an affiliate of Duquesne Light Company) dated
March 30, 2000. (J) (Exhibit 10.19)
10.20 Warranty and maintenance Agreement between Itron, Inc. and DataCom
Information Systems, LLC dated March 30, 2000. (J) (Exhibit 10.20)
Exhibit
Number Description of Exhibits
------ -----------------------
10.21 Form of Change of Control Agreement between Registrant and executive
officers Tim Gelvin and Bob Whitney. (A) (10.1)
10.22 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated
May 15, 2000. (K) (Exhibit 10.22)
10.23 Credit Agreement between Itron, Inc. and Servatron dated June 22,
2000. (K) (Exhibit 10.23)
10.24 Third Amendment to Credit Agreement dated June 30, 2000. (L) (Exhibit
10.24)
12 Statement of Computation of Ratios. (M) (Exhibit 12)
21 Subsidiaries of the Registrant. (M) (Exhibit 21)
23 Independent Auditors' Consent
___________________
(A) Incorporated by reference to designated exhibit included in the Company's
Registration Statement on Form S-1 (Registration #33-49832), as amended,
filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the Company's
1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the Company's
1995 Annual Report on Form 10-K filed on March 30, 1996.
(D) Incorporated by reference to designated exhibit included in the Company's
1996 Annual Report on Form 10-K filed on March 5, 1997.
(E) Incorporated by reference to Appendix A to the Company's designated Proxy
Statement dated April 4, 1997 for its annual meeting of shareholders held
on April 29, 1997.
(F) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(G) Incorporated by reference to designated exhibit included in the Company's
Current Report on Form 8-K dated March 18, 1997.
(H) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated August 13, 1999.
(I) Incorporated by reference to designated exhibit included in the Company's
1999 Annual Report on Form 10-K dated March 26, 2000.
(J) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated May 15, 2000.
(K) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated August 14, 2000.
(L) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated November 14, 2000.
(M) Incorporated by reference to designated exhibit included in the Company's
2000 Annual Report on Form 10-K dated March 22, 2001.
* Management contract or compensatory plan or arrangement.
Confidential treatment requested for a portion of this agreement.