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<SEC-DOCUMENT>0001032210-02-000503.txt : 20020415
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ACCESSION NUMBER: 0001032210-02-000503
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020328
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ITRON INC /WA/
CENTRAL INDEX KEY: 0000780571
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 911011792
STATE OF INCORPORATION: WA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-22418
FILM NUMBER: 02592109
BUSINESS ADDRESS:
STREET 1: 2818 N SULLIVAN RD
CITY: SPOKANE
STATE: WA
ZIP: 99216
BUSINESS PHONE: 5099249900
MAIL ADDRESS:
STREET 1: 2818 NORTH SULLIVAN ROAD
CITY: SPOKANE
STATE: WA
ZIP: 99216
FORMER COMPANY:
FORMER CONFORMED NAME: ITRON INC
DATE OF NAME CHANGE: 19920724
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>ANNUAL REPORT FOR PERIOD OF 12/31/2001.
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-22418
-----------------
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)
-----------------
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
-----------------
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, 2002, there were outstanding 16,344,662 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, 2002) was approximately $338,244,991.
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 24, 2002.
================================================================================
<PAGE>
PART I
ITEM 1: BUSINESS
OVERVIEW
General
Itron, Inc., is a leading technology provider and source of knowledge to the
energy and water industries for collecting, analyzing, and applying critical
data about electric, gas, and water usage. Since our founding in 1977, we have
continually brought advancements in technology, both hardware and software, to
our customers to enable a transition from manpower intensive activities, such
as manual meter reading, to more automated and efficient systems that help them
optimize the delivery and use of energy and water.
Today, Itron provides the knowledge to shape the future of electric, gas and
water providers throughout the world. Over 2,000 utilities in more than 45
countries use our handheld meter reading hardware and software systems to
collect and process information from over 250 million meters. Those utilities
include over 75% of the largest electric and gas utilities in the US and
Canada. More than 850 utilities worldwide use our radio and telephone-based
technology to automatically collect, analyze and apply meter data from over 20
million electric, gas and water meters. Our enterprise software solutions for
managing complex commercial and industrial meter data are used by over 600
utilities worldwide, including over 90% of the largest electric and gas
utilities in the US and Canada. Our software systems are also in use at a
number of the newly created wholesale energy markets in the US and Canada to
provide critical data management, billing, and settlement systems for the power
flowing into and out of those deregulating markets. Our technology now
"touches" over $200 billion in energy and water transactions every year in
North America alone. In 2001 we began to expand our solutions portfolio for
optimizing the delivery and use of energy and water, beyond meter reading, with
the acquisition of licensing rights to software that enables utility field
workforce automation. Also, in March 2002, we acquired LineSoft Corporation, a
company that provides software tools and engineering consulting services to
electric utilities that are used for designing new transmission and
distribution lines and substations, as well as upgrades to existing facilities.
With overall penetration for meter reading automation in the US and Canada
at approximately 14 percent at December 31, 2001, we have plenty of room to
gain customers and increase revenues in this market alone. We believe our
technology, industry knowledge and relationships with virtually every large
utility in North America, give us a strong foothold for extending our
leadership into additional systems that give utilities and their customers the
knowledge to distribute and use electricity, gas and water more efficiently
than ever before. We are aggressively pursuing those opportunities. Knowledge
to shape your future--that's Itron.
Energy and Water Industries Overview
For a number of years, the energy and water markets have undergone
significant changes as governments in the United States and Canada have
significantly reduced the regulation of the electricity and gas markets in
order to stimulate competition. Transactions previously controlled by a single
vertically integrated provider may now be handled by a variety of unrelated
market participants. The move from regulated industries towards a deregulated
market model has resulted in numerous challenges for utilities to face in terms
of how to run their businesses and serve their customers.
At the same time, the energy and water industries have experienced the
effects of supply not keeping up with increasing demand. In the last decade,
electricity demand increased by 17% while supplies only increased by 2.3%.
Since 1970, the demand for water has tripled while the amount of potable water
remains stagnant at 1% of the earth's total supply. As many utilities have
discovered, building new generation, transmission, or distribution facilities
is time consuming, expensive, and with environmental and other permitting
requirements, very difficult to do.
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A number of utilities across the United States experienced a new height in
peak electric demands once or more in the summer of 2001. These records in peak
demand, coupled with insufficient transmission infrastructure to carry
electricity from the generation source to the distribution facilities, caused
blackouts or reductions in voltage on systems in several areas of the country
beyond California. Customer pressure for reliability is mounting as power
outages become increasingly expensive and disruptive. Extremely high wholesale
energy prices early in 2001 translated into a general trend toward rate
increases in the latter half of the year. The increased visibility of rolling
blackouts, system outages and disruptions, coupled with increased rates, have
resulted in a renewed interest in energy conservation, energy management, and
upgrading and adding technology to the infrastructure by utility commissions,
other political bodies, and consumers, both individuals and businesses.
Many regulatory issues whose outcomes for utilities were uncertain have
recently been clarified. The meter reading automation market has begun to
expand as issues surrounding metering, meter reading, customer service and
billing have begun to be resolved. At the same time, over 30 of the states in
the US have implemented performance-based rate systems, in which utilities are
measured against performance standards for things like billing accuracy,
customer service and satisfaction, outages and system reliability and
reductions in infrastructure cost. Meeting or surpassing these standards can
result in significant financial rewards while failure to meet them can result
in substantial financial penalties. Numerous merger-and-acquisition activities
are also prompting utilities to fulfill their promises to achieve new levels of
cost and operating synergies.
These market trends give utilities powerful incentives to reduce costs,
streamline operations, enhance system reliability and provide superior customer
service--the same goals targeted by Itron technology. All of these issues are
gaining momentum and attention, and we believe they will lead to increased
business for Itron as we help utilities solve these problems.
Itron's Vision and Strategy
Itron's growth potential may be viewed in two ways. First, we are an
industry leader and source of knowledge for meter data collection and
communication solutions and services. In 2001, the Company achieved revenue
growth of over 25% related to our core business. Automated data collection and
communication technologies are in place on only 14% of the approximately 270
million electric, gas and water meters in the United States and Canada. Of
those, at least 50% use Itron's technology. We will continue to aggressively
pursue the numerous opportunities available for the automation of meter reading
and utility revenue cycle services.
Secondly, Itron is expanding beyond meter data collection and communication
automation technologies. Utilities and their customers have entered an era that
underscores the critical need to understand more about how and when
electricity, natural gas and water are used--and how to better manage the
distribution of both. Knowledge-based systems that optimize the delivery and
use of energy and water are a natural extension of what we do. We believe our
customer relationships, industry knowledge and technology expertise ideally
position us to capture a significant part of the large growth opportunity
remaining in this market. They also give us excellent positioning to expand our
core competencies in meter reading data collection and information creation
into what we believe are even larger growth opportunities for data collection,
data and system analysis, and system planning and operations--all aimed at
giving utilities the knowledge to make their distribution systems more
efficient and help their customers increase energy and water usage efficiency.
With this strategic growth path in mind, our next-generation product
development is focused on data collection, communications equipment and
software applications--all of which will give utilities the knowledge to
distribute and use their valuable resources more efficiently than ever before.
In addition to internal development, we are also looking outside of Itron for
potential licensing, partnering and acquisition opportunities that will enable
us to expand our solutions portfolio. We may also provide services in data
collection and information provisioning.
3
<PAGE>
Market Opportunities
Meter Reading Systems and Services
Our handheld systems have been installed at over 2,000 utilities in more
than 45 countries and are being used to read approximately 250 million meters
worldwide. These installations include approximately 75% of the utilities in
North America that have meter populations greater than 50,000. While most
utilities in the US and Canada have handheld meter reading systems in use
today, this still represents a good market for us as these utilities upgrade
and replace their handheld meter reading systems, on average every 5 years.
Outside of the US and Canada, there are numerous opportunities for new handheld
meter reading system sales as well as upgrade and replacement opportunities. In
2001, handheld meter reading systems represented approximately 29% of our total
revenues.
We estimate there are approximately 130 million electric meters, 70 million
gas meters, and 70 million water meters in the US and Canada. Automated Meter
Reading ("AMR") technology is in use on approximately 37 million or 14% of the
total meters in the US and Canada. We estimate that there are another 600 to
800 million meters outside of the US and Canada with minimal AMR deployments.
We have established ourselves as the world's leading supplier of AMR systems
having shipped just over 20 million AMR meter modules to utilities in the US
and Canada, and approximately 500,000 to utilities elsewhere around the world
as of December 31, 2001. In total, over 850 utilities have installed our AMR
technology. With the direction of deregulation becoming clearer, many utilities
are returning to a "back to basics" strategy to running their business.
Fundamentals including cost reduction, improved reliability and enhanced
customer connections are the focus of many utility strategies. Automation
technology helps enable utilities to meet these goals.
Our industry-leading MV-90 commercial and industrial ("C&I") meter data
collection and analysis software is used by more than 600 utilities throughout
the world including more than 90% of the major electric and gas utilities in
the US and Canada. In 2001, we introduced MV-90 Enterprise Edition, an
enhancement to our core system that makes critical energy usage data readily
available to an entirely new cast of users, data subscribers and software
developers to support a wide variety of energy-related applications. As
deregulated market environments unfold and interest in energy management and
control increases, we expect timely and open access to energy usage information
to become increasingly important. All installed MV-90 software platforms are
available for upgrade to the new open architecture which provides utility
enterprise wide data access via standard internet and data exchange
technologies. MV-90 Enterprise Edition information exchange server software
along with our corresponding data analysis and web presentment solutions help
enable energy providers and their customers to have the information and
knowledge they need to make decisions on how to most efficiently and cost
effectively use energy.
Regional Transmission Grid Systems and Services
Regulatory reform is creating new opportunities on the "wholesale" side of
the business such as systems for reconciling the supply of power to, and
purchases of power from, electric power transmission grids. Our products and
systems are currently being used to manage critical market settlement
transactions between the myriad of market participants for electric
transmission grids in the UK, California, Arizona, and Alberta and Ontario,
Canada. Itron provides a comprehensive suite of proven software and business
solutions to meet the energy data collection and management needs of
participants in the new energy marketplace including generation companies,
transmission companies, distribution companies, energy service providers,
marketers and retailers, independent system operators (ISOs), and end
customers. While the 2001 energy crisis in California has slowed decisions
related to opening the wholesale markets in certain areas of the country, we
believe we will continue to see opportunities in this market as additional
regional and state transmission grids are established.
Utility Field Service Workforce Automation
Electric, gas and water utilities have a number of utility field workforces
that perform operations in the field. In 2001, we obtained exclusive rights to
market and sell a web-based, wireless mobile workforce
4
<PAGE>
automation management software package to utilities throughout the United
States, Canada, Mexico, Taiwan, the Peoples Republic of China, Japan and South
Korea. Many of the economic and other pressures that drive automation of meter
reading also result in the requirement for more immediate access to information
between the office and the field. This tool allows utility field workers to
access via the web the information they need to make decisions, eliminate
costly paperwork, and work more effectively for operations such as service
turn-ons/turn-offs, gas leak detection, credit and collections, meter services
and trouble calls. We estimate that many utilities have a field workforce for
these operations that is roughly three times the size of their meter reading
workforce. While a number of utilities have solutions in place for one or more
of their field workforce crews, we believe the need to increase operational
efficiency will drive further consolidation and automation of these crews.
Transmission and Distribution Products and Services
Significant utility budget dollars are spent annually on building,
maintaining and upgrading utility transmission and distribution ("T&D")
systems. Electrical Power Research Institute and Cambridge Energy Research
Associates reports indicate that approximately $10B is spent each year on the
construction and maintenance of T&D facilities. Research reports and market
conditions point to an increasing need for investments by utilities in their
transmission and distribution systems. There are a number of geographic areas
which lack adequate transmission system capacity to move electricity from the
generation facilities to the distribution systems. This has been one of the
causes of rolling blackouts in California and outages and voltage reductions in
the Northeast. To support the increase in energy demand, new transmission
system infrastructure must be built and existing infrastructure needs to be
upgraded. Efficiently designing and upgrading the distribution system can
improve reliability and safety.
In March, 2002, we acquired LineSoft Corporation, a leading provider of
software solutions and engineering consulting services for optimizing utility
transmission and distribution systems. Given the current state of utility
transmission and distribution systems, with demand far exceeding supplies in
many parts of the country, we believe there is an excellent market ahead for
the LineSoft suite of products. LineSoft provides software licenses and
software services for the optimized design of transmission and distribution
lines as well as distribution substations, applicable to new construction,
upgrades and maintenance; engineering design services for transmission and
distribution lines; and a joint use business, which helps utilities keep track
of what is attached to their existing distribution poles, what can be added to
them, whether or not the poles are in compliance with existing codes and safety
regulations, and whether they are being used most effectively.
Itron Products and Solutions
Itron has a broad portfolio of solutions for collecting and communicating
data from and throughout complex utility networks and creating information that
has high value to suppliers, distributors and end-users of electricity, natural
gas and water.
Our meter reading 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 meter reading automation 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
technologies 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.
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We have developed software solutions that integrate, store, manage and apply
information from diverse data collection systems and technologies. 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 also provides software solutions that take
collected load data and enable customized billing and settlement,
internet-based presentment and information exchange. 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.
Traditionally, many of our customers have deployed our technology 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 can 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 real process improvement, and
successfully evolving their businesses to manage the threats and seize the
opportunities presented by an increasingly competitive marketplace.
Automatic Meter Reading (AMR) Systems and Products
Our AMR product line primarily involves the use of radio and telephone
communications technology to collect and transmit meter data along with a host
of software solutions for billing and settlement, data storage and retrieval,
internet data presentment, load profiling and forecasting, and numerous other
applications for 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 consumers. This flexibility helps our
customers 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 encoder, receiver, transmitter (ERT) meter modules serve
as the data collection endpoint for Itron's fully integrated portfolio of
radio-based data collection solutions. ERTs are radio-based modules that fit on
electric, gas or water meters. The ERTs encode consumption and tamper
information from the meters and communicate the data via radio to Itron's
handheld, mobile and network radio data collection systems. ERTs can be
retrofitted to existing meters or installed on new meters during the
manufacturing process. Electric ERTs are installed under the glass of new or
existing electric meters and are powered by the electricity running to the
meter. Gas and water ERTs attach to the meter and are powered by long-life
batteries.
We also offer a separate line of meter modules for use outside of North
America. The primary differences between the meter modules used by the Company
in North America and those used in international markets are the radio
frequency band in which they operate and the physical configuration of the
module.
Off-Site Meter Reading: Off-site Meter Reading ("OMR") uses radio-equipped
handheld computers to read module-equipped electric, gas or water meters via
radio without the need to access the meter or customer premises. A radio is
integrated into a handheld computer. A software module in the meter reading
system allows the handheld computer to determine which meters are read by radio
vs. which are read manually, or by an optical probe. As a meter reader walks a
route, the radio-equipped handheld computer sends a radio "wake-up" signal to
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nearby radio-based meter modules that have been installed on electric, gas or
water meters. The unit then receives meter reading and tamper data back from
the meter modules. The same handheld computer can read any combination of
properly equipped electric, gas and water meter modules.
OMR is normally used to read the 5-10 percent of accounts within the utility
service territory that have high-cost or hazardous-to-read meters. The meters
are typically located in a geographically dispersed environment, scattered
throughout the service territory. These meters may be situated in a basement,
in a back yard with a bad dog or locked gate, or with an angry customer who
doesn't want the meter reader on the property.
Mobile AMR: Mobile AMR uses vehicles equipped with radio units to read ERT
module-equipped electric, gas or water meters via radio without the need to
access the meter. A radio transceiver, called a DataCommand Unit or a portable
DataPac, is installed in a utility vehicle. Route information is downloaded
from the utility billing system and loaded into the radio transceiver. While
driving along a meter reading route, the transceiver broadcasts a radio wake-up
signal to all ERT meter modules within range and receives the ERT messages when
they respond. Mobile AMR is usually used in areas where there may be large
populations of difficult-to-access, or hazardous-to-read meters. As a result of
this level of saturation, meter reading efficiency is dramatically improved. A
single DataCommand Unit transceiver reads an average of 10,000 to 12,000 meters
in an 8-hour shift, and can read up to 24,000 meters per day, depending on
meter density and system use. A portable DataPac reads an average of 4,000 to
5,000 meters per day. The same radio transceiver can read electric, gas and
water meter modules.
Network AMR: We offer a number of variations of Network AMR products. Our
Network solutions provide utilities with the capability of automating meter
reading in segments of a utility's service area, thereby eliminating the need
to send meter readers to or near customer premises. Our Network AMR technology
provides utilities with a number of utility-related applications, including
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.
Saturated Network Deployments: Our Network AMR solution for saturated
deployments uses a fixed radio communication network to collect data from
electric, gas or water meters equipped with ERT modules and transports the data
over a wide-area communications network to a central host processor. The
network components include a Cell Control Unit (CCU), Network Control Node
(NCN) and Itron Host Processor. The CCU is typically installed on power poles
or street light arms. It is a neighborhood concentrator that reads meter
modules, processes data into a variety of applications, stores data
temporarily, and transports the data to the host processor when required. The
NCN is a regional concentrator and routing device that is installed in radio
communication facilities, such as leased towers, substations or other
communication facilities. The primary functions of the NCN are data transfer
and information routing between CCUs and the host processor. The Itron Host
Processor is the head-end host processor. The software manages the collection
of data from the network devices and facilitates the download of schedules and
other application information to appropriate network devices. The host
processor also transfers the data to a database for storage and retrieval.
Drop-In Network Deployments: Our MicroNetwork is a drop-in network meter
reading and submetering solution that combines radio and telephone technology
to collect metering data from groups of electric, gas or water meters. The
MicroNetwork combines radio and telephone communications technology to collect
daily, weekly, monthly and on-request reads from groups of meters in a variety
of environments. The MicroNetwork consists of ERT meter modules, locally
installed communications nodes called Concentrators, and Itron meter reading
software and host processing station. Using RF communications technology, the
Concentrator Units automatically gather consumption information from electric,
gas or water meters equipped with ERT meter modules. Concentrators gather
information directly from ERT meter modules, or through a series of Repeater
Concentrators when direct communication to a particular ERT is difficult. The
MicroNetwork then employs existing public telephone networks to send the
gathered data from the Concentrator Units to the host processor. If desired,
data can also be gathered from MicroNetwork Concentrators using an Itron
DataCommand mobile AMR
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unit. The MicroNetwork is ideally suited for smaller clusters of meters that
require more frequent reads, but where there are not enough meter points to
effectively distribute the cost of fixed network infrastructure. Like all Itron
radio-based technologies, the MicroNetwork reads the same electric, gas and
water meter modules as OMR, Mobile AMR and Saturated Fixed Network AMR.
Commercial and Industrial (C&I) Network: Our C&I Network uses advanced,
peer-to-peer radio communications to transport metering data from solid-state
electric meters equipped with Itron External Meter Modems (EMMs). The data
travels from the EMMs, through a system of radio relays, to a hub, which then
routes the data using a single dedicated phone line to an Itron MV-90 host
processor. There the data can be integrated with a variety of Itron and other
software applications to provide a variety of billing, internet-based data
presentment, load forecasting and settlements, marketing, load curtailment,
energy management, load research and system engineering applications.
By using a system of radio frequency relays to communicate with these
meters, the C&I Network eliminates the need for dedicated phone lines and the
associated on-going phone charges to each meter. This makes the C&I Network a
very economical network communication solution and enables energy providers to
meet advanced data collection needs for a significantly broader segment of
commercial and industrial energy customers.
Telephone-Based Technology: Our telephone-based meter modules encode
consumption, interval and tamper information from meters, then transmit this
data via telephone communications to a host processor at pre-programmed times.
Module-equipped meters are installed at the customer location and a telephone
connection is installed between the meter and the telephone junction box. The
existing telephone line at the customer premises is used for communication
between the meter and host processor, so no installation of dedicated phone
lines to the meter is required. Our telephone-based technologies use "polite"
technology to detect when the customer is using the phone line. The modules
will not initiate calls or continue a call when the customer's phone line is in
use. Meter modules are programmed, from the host processor to collect and store
data in the module at scheduled times. The devices are also programmed to call
into the host processor at pre-scheduled times.
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, 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 do meters for residential customers. Therefore,
they collect much more data from the meter that must be conveyed back to energy
providers and others. There are a wide variety of these meters by multiple
meter vendors with no uniform communications standards. 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. These
systems include the following:
Our MV-90 system is the world's leading system for collection, validation
and editing of interval, register and event data from solid-state metering and
data-logging devices. The MV-90 system collects interval, register and event
data from over 120 different gas and electric metering devices. MV-90 has
extensive functionality to support data validation and data editing. A variety
of system interfaces and optional packages for data totalization, time-of-use
pricing, load research and interactive graphics are available to provide
complete meter data management services. MV-90 is very scalable and can be
operated on a single PC as well as in wide-area network operating environments
and distributed systems. Most functions within MV-90 are automated,
significantly improving the ability to process complex meter data.
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In late 2001, we introduced MV-90 Enterprise Edition, which enables MV-90 to
function as an advanced, two-way information exchange server for an array of
applications. These include billing and financial settlement, load forecasting
and demand management, distribution operations and planning, marketing and
customer care, deregulated marketplace transactions, and more. Energy providers
can use MV-90 Enterprise Edition to perform advanced load aggregation, generate
reports and view graphs, integrate the data with other systems, and more. Its
advanced search capabilities and thin-client architecture, incorporated into a
relational database, enable improved efficiencies while expanding access rich
and accurate information for value-added applications.
MV-90 Enterprise Edition features industry standard data exchange formats,
open access to MV-90 via an XML API services layer for third-party software
developers, a calculation engine to build and execute complex load
calculations, and a scalable Oracle relational database. MV-90 Enterprise
Edition supports Unix or Windows 2000 for the database platform, Windows 2000
as the application server platform and any Microsoft operating system on the
client/server.
In addition to the base MV-90 platforms, we offer a number of MV-90 add-on
software solutions that enable MV-90 to efficiently handle and store large
volumes of complex meter and load data, generate customized bills and invoices
to meet specific needs of C&I customers under a variety of complex rates,
supply contracts and schedules, perform billing and financial settlements, and
enable use of the Internet for C&I customers to view and graph load data.
Handheld Systems and Products
Almost all utilities in the US and Canada, and utilities in numerous other
countries around the world, use handheld meter reading systems to automate 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 the 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. Additionally,
handheld systems can collect non-meter reading information, including meter
condition, hazardous conditions, tamper information, survey data and high/low
reading checks. 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.
Utility Field Workforce Automation Software
For utilities of all service types and sizes, field service operations
represent an opportunity in which technologies such as wireless communications,
the Internet, and real-time data exchange can be applied to achieve operational
efficiency, productivity and customer service. In 2001, we acquired exclusive
distribution rights to Service-Link, a field service workforce automation
solution developed by eMobile Data of Vancouver, Canada. Service-Link enables
information to be downloaded to mobile computers via regular dial-up docking
station connections or via wireless communications. Service-Link supports
numerous handheld devices ranging from a pocket PC/PDA to a full Laptop.
Service-Link uses the Internet and a utility's local area network or wide area
network to provide connections between a server, dispatcher workstations,
customer service representatives, and the wireless network.
Transmission and Distribution Software and Engineering Services
In March 2002, we acquired LineSoft Corporation, a leading provider of
software solutions and engineering consulting services for optimizing utility
transmission and distribution systems. Specific LineSoft products
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include: (1) licensed software tools, typically sold on a seat license basis
with follow-on software maintenance contracts for transmission line design,
distribution line design, and substation design, (2) software services that
help utilities apply LineSoft's tools, including data entry of utility codes
and standards, electrical and mechanical design standards for the utility,
safety standards, electrical codes (local, state regional), interfaces to other
utility systems such as graphical information systems, work management systems,
material management systems, and accounting systems, (3) engineering consulting
services for transmission and distribution line design, and (4) joint use
business, which includes services and software tools, including services for
surveying utility poles in preparation for attachment of cables and equipment
of other carriers (cable companies, competitive local exchange carriers, etc.)
and software tools for calculating utility pole's capability for carrying wires
and other devices, creating work orders to repair or make poles ready for
additional attachments, and determining compliance with local codes and safety
rules.
Customers, Sales and Distribution
Today, Itron provides the knowledge needed to shape the future of electric,
gas and water utilities throughout the world. Our technology, industry
knowledge and relationships with virtually every large utility in the US and
Canada, and our relationships with a number of key utilities around the world,
give us a strong foothold for extending our leadership position in meter
reading into additional systems that give utilities and their customers the
knowledge they need to distribute and use electricity, gas and water more
efficiently than ever before. We are aggressively pursuing those opportunities.
Over 2,000 utilities in more than 45 countries use our handheld meter
reading hardware and software systems to collect and process information from
over 250 million meters. Those utilities include over 75% of the largest
electric and gas utilities in the US and Canada. Handheld meter reading sales
in the US and Canada are expected to be predominantly system upgrades and
replacements. We believe that international markets represent a growth
opportunity for sales of our handheld systems and AMR systems where penetration
of these systems is substantially less than that of our domestic market.
More than 850 utilities use our radio and telephone-based technology to
automatically collect, analyze and apply meter data from over 20 million
electric, gas and water meters. With overall penetration for meter reading
automation in the US and Canada at approximately 14 percent, and minimal AMR
penetration elsewhere, we have plenty of room to gain customers and increase
revenues in this market alone. We have established ourselves as the world's
largest provider of AMR solutions in the US and Canada as a result of having
shipped over 20 million meter modules as of December 31, 2001, which represents
slightly more than half of all modules shipped.
Our enterprise software solutions for managing complex commercial and
industrial meter data are used by over 600 utilities worldwide, including over
90% of the largest electric and gas utilities in the US and Canada. Our
software systems are also in use at a number of the wholesale energy markets in
the US and Canada, including California, Arizona, and Ontario to provide
critical billing and settlement systems for the power flowing into and out of
those deregulating markets.
With the acquisition of LineSoft in March 2002, we have over 130 utilities
in 14 countries that also use our software tools and engineering design
services for transmission and distribution system optimization.
In the US and Canada we use a combination of direct and indirect sales
channels. For the largest electric, gas and water utilities we primarily
utilize direct sales and technical and administrative support teams to serve
the needs of our customers. For smaller utilities, we conduct sales and
technical support activities primarily through numerous business associates and
manufacturer representatives, including several major meter manufacturers.
We segment the market in the US and Canada for all of our product offerings
according to the following market segments:
Natural Gas Systems: Our Natural Gas systems business unit focuses on 71
operating utilities encompassing approximately 37 million gas meters and
approximately 3 million electric meters. Of these
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utilities, the great majority use our handheld meter reading systems and two
thirds of these utilities have installed our AMR technology over portions of
their territories.
Water and Public Power Systems: This business unit focuses on approximately
60,000 water utilities and 3,000 municipal electric and gas and rural electric
cooperative utilities in the US and Canada. Only 60% of customers/households
are currently being metered for water. To serve the needs of the smaller
utilities within this segment, we use a network of 19 business associates. We
sell directly to the largest utilities within this segment, which includes
approximately 137 utilities, representing approximately 24 million water
meters, 4 million electric meters, and 1 million gas meters. Of these larger
utilities, many use our handheld meter reading technology and roughly 15% have
installed our AMR technology.
Electric Systems: The Electric systems business unit focuses on roughly 120
operating utilities, primarily large, investor-owned electric-only utilities
and electric and gas combination utilities. In total, these customers represent
approximately 102 million electric meters, 27 million gas meters, and 4 million
water meters. The great majority use our handheld meter reading systems, over
half have installed our AMR meter modules over portions of their territories,
and almost all of these utilities have installed our MV-90 software
applications.
In all of the above market segments, 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, we license certain AMR technology to Schlumberger. In 2001,
Schlumberger sold approximately 600,000 modules that went on electric meters
using the licensed technology.
International Systems: Our International business unit is focused on sales
of products, systems and services outside of the US and Canada. We estimate
that outside of the US and Canada, there are approximately 600 to 800 million
meters. The majority of revenues for this business unit currently consist of
sales and servicing of our handheld meter reading systems and commercial and
industrial data collection and analysis software. We have particularly strong
handheld meter reading market share with utilities in Japan, Korea, Australia,
and many parts of Europe. Interest in AMR systems and technology varies widely
from country to country and overall is at a very early penetration level. With
offices in the U.K., France and Australia, and excellent distributor
relationships in a number of other key areas, we believe that Itron's
International business unit has the technology, knowledge and global reach to
deliver the data collection and management solutions tailored to meet the
specific needs of electric, gas and water utilities in a wide variety of
business and operational environments throughout the world.
Marketing
Marketing activities include product marketing, industry marketing,
marketing communications, customer relationship management, and regulatory and
legislative affairs. Our marketing efforts focus on company and product
awareness and recognition principally through an integrated marketing
communications approach including trade shows, symposiums, brochures and
collateral, published papers, the Itron web site, advertising, direct mail,
electronic communications, newsletters, conferences, annual user's forums,
industry standards committee representation and regulatory support. We maintain
communications with our customers through integrated marketing communication
campaigns. Additionally, we are continuing to build and expand our customer
relationship management system based upon Siebel software.
We attend and participate in several major industry conferences each year,
including: the DistribuTECH Conference; the Automatic Meter Reading Association
conference; the Edison Electric Institute (EEI) Conference; Customer
Information Systems (CIS) Conference; American Water Works Association
Conference; the Geospacial Information Technology Association Conference,
Energy IT Conference and Metering Americas Conference. Our Annual Users
Conferences are an important opportunity for Itron our customers to come
together and share ideas about Itron products, industry happenings and customer
needs.
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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
next generation technology development is primarily focused on data collection
and communications technologies, and software applications. We also invest in
expanding and upgrading new hardware and software platforms for handheld and
automatic meter reading systems. We spent $30.0 million and $21.3 million on
product development in 2001 and 2000, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Operating Expenses 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 2001, we spent over 13%
of our revenues in product development, an investment level that will continue
for several years. By year-end, over 60% of our product development dollars
were being spent on products we do not expect to ship until at least the 2003
timeframe. 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. We outsource the
manufacturing of certain handheld systems and peripheral equipment, as well as
other lower-volume AMR products to a contract manufacturer in which we have a
minority ownership interest. The contract manufacturer leases from us
approximately 21% of the space in our Spokane facility, approximately 30,000
square feet. In addition, most of our handheld systems products, telephone
modules and international meter module products are manufactured for us by
third parties.
Our primary manufacturing facility is located in Waseca, Minnesota. We
currently have the capacity to produce approximately 5.2 million (combination
of electric, gas and water) meter modules annually on a three-shift basis. We
are currently running at approximately 80% capacity. In 2002, we intend to
begin to outsource a minimal amount of meter module production in order to gear
up for demands in excess of current capacity, should the need arise.
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. During 2001, we upgraded our quality
system to ISO 9001 certification.
Employees
As of February 28, 2002, we employed 1,092 full-time permanent and full-time
contract manufacturing persons, 36% in manufacturing, 23% in product
development, 3% in marketing, 13% in client service and support, 12% in finance
and corporate administration, and 12% in our business units. Of these
employees, 94% were located in the US and Canada, and the remainder in Europe
and Australia. With the LineSoft acquisition in March 2002, we added
approximately 200 more employees, primarily in software product development and
operations. None of our domestic employees is 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 in the US and
Canada, and in many other areas around the world, we face
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competition from a variety of companies in each of the markets we serve. The
large market potential for meter reading automation has led communications,
electronics and other companies to begin developing various systems. Some of
these companies currently compete, and in the future others may 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 certain competitive advantages. We believe the
diversity of our energy and water information collection, analysis and
application solutions is broader than that of other providers. This diversity
gives us the ability to provide value to our customers across a broad value
chain within their organizations. 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 larger
installed base of handheld and automated meter reading systems than any of our
competitors. We believe this 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.
As of December 31, 2001, we had at least a 50% market share in terms of AMR
meter modules shipped in the US and Canada. The next largest competitor is
Schlumberger Sema who represents roughly 20% of the installed market. There are
also a few new communications providers, radio-based, and
power-line-carrier-based, most of whom are narrowly focused, that have recently
been awarded systems at utilities, including companies such as Nexus, Hexagram,
Ramar, and DCSI. These companies currently offer alternative solutions and
compete aggressively with us.
In the area of energy information management, 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 Cap Gemini to offer a total
integrated system solution. We will continue to partner with some of these
companies, as well as other consulting and system integration companies, to
address future competitive energy markets with Itron systems.
We believe that as we expand our offerings towards optimizing energy
delivery 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, Hexagram, Ramar,
and Invensys. Similarly, we believe that as we move towards offering systems
and solutions for end-user customers, we will face competition from billing and
in-building controls companies. We hope to develop cooperative relationships
with several of these companies to jointly develop and offer solutions to the
market.
In the market for utility field workforce automation, we expect to compete
with companies such as MDSI and Utility Partners.
For our newly acquired transmission systems products, among others, we
compete with Power Lines Systems, the maker of PLS Cadd. In the distribution
software business, we compete with Cook-Hurlbert. Additionally, Roussey and
Enghouse offer underground distribution products. In the engineering consulting
business the primary competitors are Black and Veatch, Power Engineers and
Sargent and Lundy along with other regional players. In our Joint Use business,
the primary competition is Osmose.
Some 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. They may also be able 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
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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, copyrights, trademarks and other intellectual property have
significant value, there can be no assurance that these patents, copyrights or
trademarks, or any patents, copyrights or trademarks issued in the future, will
provide meaningful competitive advantages. The Company is currently involved a
legal action related to the Company's alleged infringement of a 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 that transmit information back to either the handheld, mobile or
network AMR reading devices in the 910-920 MHz band pursuant to these rules.
Our radio frequency 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 communication to and from some of our ERT meter modules,
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 do not expect the fact that
we are secondary to federal government operations to have material impact on
our business.
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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.
In June 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 the subject of additional
rulemaking proceedings by the FCC. On January 2, 2002, the FCC released a
Report and Order allocating the full 1427-32 MHz band. The FCC chose an
allocation that substantially incorporated a "band plan" suggested by Itron and
the representatives of wireless medical telemetry, but deferred to a further
proceeding adoption of service rules that would provide more assurance that
Itron would have access to adequate spectrum in this band. The FCC now has
issued a notice in that further proceeding containing proposed service rules
that would incorporate additional elements of the Itron-medical telemetry "band
plan" in its final rules. There can be no assurance, however, that the FCC will
adopt such rules as final or that the Company will have adequate spectrum in
the 1427-32 MHz band for its network systems.
If we are not successful in our efforts to obtain future spectrum
allocations 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
adequate or that we will have any useful 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
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. In
addition, with the recent acquisition of LineSoft, we will add more of a
software and service component to our business. To the extent that future
revenues are derived from our distribution channels, which typically have a
smaller order size that may book and ship within the same quarter, or from
software and service offerings verses product sales, backlog may not be as
reliable an indicator of future revenues. Our twelve-month revenue backlog of
unshipped factory orders at December 31, 2001 and 2000 was approximately $115
million and $56 million, respectively. We expect that substantially all of the
orders in twelve-month backlog at the end of 2001 will be shipped during 2002.
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 $203 million and $151
million at December 31, 2001 and 2000, respectively. Our backlog does not
include approximately $40 million in annual service contract revenues from
service contracts, many of which renew annually.
Environmental Regulations
In the ordinary course of our business, we use metals, solvents, and similar
materials that 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.
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Working Capital
Information on the Company's practice relating to working capital items is
contained in "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Note 1 to our accompanying financial
statements."
Financial Information by Geographic Area
Financial information for our International operation is contained in "Note
16 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
Itron is dependent on the utility industry, the economics of which are
uncertain due to 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, 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,
Pacific Gas and Electric Company has filed for bankruptcy and Southern
California Edison (SCE) has come close to bankruptcy. In the event that SCE or
additional utilities were to enter into bankruptcy proceedings, our business
could be adversely affected. See "Note 11 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
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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. The discontinuance of a utility's metering monopoly could have a
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.
Itron has suffered recent operating losses:
While we were profitable for the last seven quarters, we have experienced
operating losses in certain quarters and in the years from 1996 through the
first quarter of 2000. 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 automated meter reading 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.
Itron has a concentrated customer base, and therefore the loss of a single
customer could negatively affect its operating results:
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Itron depends on its ability to develop new products:
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 but not limited to the
following: changes in product definition during the development stage, changes
in customer or regulatory 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
17
<PAGE>
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.
Itron's acquisitions of and investments in third parties carry risks and may
result in losses:
Acquisitions and investments in third parties are an important part of our
business strategy. Since 1998 we have acquired or made investments totaling
approximately $6 million in five companies. In addition, we recently acquired
LineSoft Corporation.
Our acquisitions and investments may involve numerous risks, including:
. diversion of our senior management's attention from our existing
businesses, making it more difficult to manage effectively;
. concentration of our investments in a limited number of businesses that
are related to the energy and water industries;
. inability to maintain uniform product and service standards, controls,
procedures and policies;
. entry into product and service markets in which we have no direct prior
experience;
. improper evaluation of new services and technologies or inability to
fully exploit the anticipated opportunities;
. inability to successfully integrate the acquired businesses, technologies
and other assets;
. inability to retain customers or key personnel;
. inability to liquidate the investments or acquired companies in the event
of an economic downturn; and
. unforeseen losses by the companies that we invest in or acquire.
In addition, future acquisitions may involve the assumption of obligations
or large one-time write-offs and amortization expenses. In order to finance any
future acquisitions, we may also need to raise additional funds through public
or private financings. In this event, we could be forced to obtain equity or
debt financing on terms that are not favorable to us and that may result in
dilution to our shareholders. Any of the factors listed above could adversely
affect our results of operations.
Itron depends in part on the installation, operations and maintenance of
automated meter reading systems pursuant to outsourcing contracts:
A minor portion of our business today 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. We currently have three outsourcing contracts involving mobile AMR
solutions, which represented 2% of our 2001 revenues. We use the service method
of accounting for our outsourcing contracts. These outsourcing contracts are
subject to cancellation 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Revenues and Gross
Margins".
Itron is facing increasing competition in the telecommunications industry:
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, Hexagram, Ramar, and Nexus currently offer alternative solutions
to the utility industry and compete aggressively with us. There is an emerging
market for two-way communications systems for advanced metering and billing for
the utility industry, and a potential
18
<PAGE>
market for the same kind of systems to provide energy delivery optimization and
Internet connections to customers. This has 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. They may also be able 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. 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.
Itron may be affected by 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. 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. Further market
acceptance of 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.
The telecommunications industry is characterized by rapid technological
evolution:
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 offer 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.
Itron is susceptible to the 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
19
<PAGE>
obtained and periodically renewed. 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 2, 2002, the FCC released a Report and Order
choosing among three options for allocating the 1427-1432 MHz band. The FCC
chose a modified option that incorporated a "band plan" suggested by Itron and
the representatives of wireless medical telemetry, but deferred to a further
proceeding adoption of service rules that would provide more assurance that
Itron would have access to adequate spectrum in this 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."
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. 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
our intended uses. 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.
A number of key personnel are critical to the success of Itron's business:
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.
If Itron is not able to adequately protect its intellectual property, or if
Itron infringes the intellectual property of third parties, Itron may be
adversely affected:
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 there under 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.
Itron depends on certain key vendors for 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
20
<PAGE>
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. We may also 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. 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 ability to
develop alternative sources of supply quickly or cost-effectively could
materially affect our ability to manufacture our products and, therefore, could
have a material adverse effect on our business, financial condition and results
of operations. We have substantially decreased the number of sole-sourced
components over the last two years. We have chosen to take on increased raw
material inventory amounts to mitigate the sole-source situations we still have
in place. 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.
Itron is dependent 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
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 effect 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.
Itron is subject to international regulation and business uncertainties:
International sales and operations may be subject to risks such as the
following: 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.
Itron has anti-takeover provisions in place that make it more difficult for a
third party to acquire it:
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.
Itron is subject to regulatory compliance:
We are subject to various federal and state governmental regulations related
to occupational safety and health, labor, and wage practices. We are also
subject to federal, state, and local governmental regulations relating to the
storage, discharge, handling, emission, generation, manufacture, and disposal
of toxic or other
21
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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.
ITRON, ERT, Data Command, DataPac are registered trademarks of Itron, Inc.
MV-90, MV-RS, and "Knowledge to Shape Your Future" are trademarks of Itron, Inc.
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ITEM 1A: 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, 2002.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<C> <C> <S>
LeRoy D. Nosbaum......... 55 Chief Executive Officer
Robert D. Neilson........ 45 President and Chief Operating Officer
William L. Brown......... 56 Vice President, Competitive Resources
Michael Cantelme......... 48 Vice President, Client Services Group
Russell N. Fairbanks, Jr. 58 Vice President and General Counsel
Timothy J. Gelvin........ 48 Vice President and General Manager, International Systems
John W. Hengesh.......... 47 Vice President and General Manager, Natural Gas, and Water &
Public Power Systems
Randi L. Neilson......... 39 Vice President, Marketing
David G. Remington....... 60 Vice President and Chief Financial Officer
Jemima G. Scarpelli...... 43 Vice President, Investor Relations and Corporate Communications
John Smith............... 53 Vice President, Energy Information Systems Group
Douglas Staker........... 42 Vice-President, Mobile and Network Telemetry Systems Group
Russell E. Vanos......... 45 Vice President and General Manager, Electric Systems
Bob Whitney.............. 43 Vice President, Manufacturing and Supply Chain Management
</TABLE>
LeRoy Nosbaum was named 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 President in October 2001 and 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, Client Services
Group. 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 build
out, sales and customer installation for the 13 state
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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 Vice President, General Manager, 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 1986
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 Systems, 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 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 is Vice President and General Manager, Natural Gas Systems and
Water and Public Power Systems. Since joining Itron in 1984, he has served in a
number of positions 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. Before 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, 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, corporate communications
activities, and community support and involvement. 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.
John Smith was named Vice President, Energy Information Systems Group in
October 2001. John joined Itron in 1996 as a result of the company's merger
with Utility Translation Systems (UTS), where he was a partner since 1986. As
Director of Product Development and Chief Technical Officer at UTS, John
oversaw the creation of the MV-90 and MV-RS data collection and management
systems, which are now part of Itron's industry leading portfolio of software
solutions. After the merger, he stayed on as Vice President of Products and
Technology in the newly created Itron EIS group. Before joining UTS, John
worked for eleven years at
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Westinghouse Electric Corporation as Manager of Product Software. Before that,
he served as an officer in the United States Air Force while training as a
meteorologist at Texas A&M University and holding the position of Chief of
Computer Operations at the Environmental Technical Applications Center (ETAC)
in Washington, D.C. John earned a B.S. in Industrial Engineering from North
Carolina State University.
Doug Staker became Vice President, Mobile and Network Telemetry Systems
Group in January 2002. In his current role, Doug's wide-ranging
responsibilities include the development and product marketing of all of the
hardware and software that make up Itron's AMR and meter data collection
systems, with the exception of the MV-90 suite of software products. A twelve
year Itron veteran, Doug has held a number of positions within the company,
including International Business Analyst, Product Manager for Electric ERT
Products, Product Manager for Fixed Network Systems and, most recently,
Director of Product Marketing, where he was responsible for the product
marketing of Itron's various AMR technologies, fixed network systems, and
software interfaces. Before joining Itron, Doug was a Project Engineer for a
private firm that developed hydroelectric systems. Doug holds a B.S. in
Mechanical Engineering from the University of Idaho.
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 and Supply Chain
Management 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.
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, approximately 30,000 square feet, 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 April 2002
we are consolidating our Raleigh operations into one building consisting of
approximately 52,000 square feet of leased space. On February 25, 2002, we
agreed to sell our office building in Raleigh, NC. The sale is contingent on
the purchaser's completion of due diligence, and is expected to close on or
before July 1, 2002. In Waseca, Minnesota, we lease 106,000 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
have sub-leased 100% of the 31,000 square feet in the Lakeville facility as of
December 31, 2001. We have approximately 34,000 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 2001 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
25
<PAGE>
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. On April 2,
2001, the district court denied the motions for summary judgment filed by
Itron. On June 29, 2001, a court-ordered settlement hearing was held, which did
not result in a settlement of the case. The case is expected to go to trial in
September or October 2002. While we believe that our products do not infringe
the Benghiat patent, there can be no assurance that we 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. Any litigation, regardless of its
outcome, would probably be costly and require significant time and attention of
our key management and technical personnel.
Northfield Communications Sublease Litigation
On April 24, 2001, pursuant to an amended complaint, plaintiff Northfield
Communications, Inc. brought an action against us in the United States District
Court for the District of Minnesota (CF No. 01-117 JMR/FLN). Plaintiff is a
sub-lessee of property leased by Itron in Lakeville, Minnesota and has asked
the court to make a determination of its rights under its sublease and such
other relief as is appropriate. We denied the substantive allegations of the
complaint and filed a counterclaim against the plaintiff. On February 1, 2002
the court granted summary judgment in favor of the Company on two of the three
substantive claims in the complaint. The remaining claim relates to a
determination of plaintiff's rights in a small common area of the premises and
upon agreement of the parties was dismissed. This case is over for the most
part, unless Northfield Communications decides to appeal the grants of summary
judgment in the Company's favor.
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 2001.
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. The following
table reflects the range of high and low common stock sales prices for all four
quarters of 2001 and 2000 as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
2001 2000
------------- -----------
High Low High Low
------ ------ ----- -----
<S> <C> <C> <C> <C>
First Quarter.......................... $12.50 $ 3.50 $8.50 $4.50
Second Quarter......................... $18.98 $10.25 $8.75 $4.50
Third Quarter.......................... $23.84 $14.25 $8.38 $5.13
Fourth Quarter......................... $34.21 $20.13 $6.75 $3.14
</TABLE>
Holders
At February 28, 2002 there were approximately 523 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.
26
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- --------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues
Sales..................................................................... $183,425 $141,899 $ 147,128 $187,051 $164,325
Service................................................................... 42,130 38,042 46,284 54,351 51,792
-------- -------- --------- -------- --------
Total revenues......................................................... 225,555 179,941 193,412 241,402 216,117
Cost of revenues............................................................. 127,696 109,092 202,640 167,276 139,578
-------- -------- --------- -------- --------
Gross profit................................................................. 97,859 70,849 (9,228) 74,126 76,539
Operating expenses
Sales and marketing....................................................... 26,523 20,726 25,243 23,991 25,394
Product development....................................................... 30,000 21,331 26,764 33,493 32,220
General and administrative................................................ 15,209 17,565 13,498 12,834 12,064
Amortization of intangibles............................................... 1,486 1,762 1,986 2,261 2,190
Restructurings............................................................ (1,219) (185) 16,686 3,930 --
-------- -------- --------- -------- --------
Total operating expenses............................................... 71,999 61,199 84,177 76,509 71,868
Operating income (loss)...................................................... 25,860 9,650 (93,405) (2,383) 4,671
Other income (expense)
Equity in affiliates...................................................... (616) 1,069 (600) (1,154) (1,120)
Gain on sale of business interests........................................ -- -- -- -- 2,000
Interest, net............................................................. (3,878) (3,795) (6,261) (6,508) (3,916)
-------- -------- --------- -------- --------
Total other income (expense)........................................... (4,494) (2,726) (6,861) (7,662) (3,036)
-------- -------- --------- -------- --------
Income (loss) before income taxes and extraordinary item..................... 21,366 6,924 (100,266) (10,045) 1,635
Income tax (provision) benefit............................................... (7,916) (2,700) 28,010 3,820 (625)
-------- -------- --------- -------- --------
Net income (loss) before extraordinary item and cumulative effect of a change
in accounting principle..................................................... 13,450 4,224 (72,256) (6,225) 1,010
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)............................................................ $ 13,450 $ 2,706 $ (68,596) $ (6,225) $ 1,010
======== ======== ========= ======== ========
Earnings per share
Basic
Income (loss) before extraordinary item................................... $ .86 $ .28 $ (4.87) $ (.42) $ .07
Extraordinary item........................................................ -- .07 .25 -- --
Cumulative effect......................................................... -- (.17) -- -- --
-------- -------- --------- -------- --------
Basic net income (loss) per share......................................... $ .86 $ .18 $ (4.62) $ (.42) $ .07
-------- -------- --------- -------- --------
Diluted
Income (loss) before extraordinary item................................... $ .75 $ .27 $ (4.87) $ (.42) $ .07
Extraordinary item........................................................ -- .07 .25 -- --
Cumulative effect......................................................... -- (.17) -- -- --
-------- -------- --------- -------- --------
Diluted net income (loss) per share....................................... $ .75 $ .18 $ (4.62) $ (.42) $ .07
======== ======== ========= ======== ========
Average number of shares outstanding
Basic..................................................................... 15,639 15,180 14,851 14,668 14,118
Diluted................................................................... 18,834 15,385 14,851 14,668 14,562
Balance Sheet Data
Working capital........................................................... $ 66,646 $ 45,340 $ 44,261 $ 54,230 $ 68,307
Total assets.............................................................. 202,691 177,231 192,079 247,755 240,211
Total debt................................................................ 64,484 65,446 74,998 92,197 73,814
Shareholders' equity...................................................... 76,052 52,092 47,526 115,023 120,427
</TABLE>
27
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Information" and the Consolidated Financial
Statements and Notes thereto.
Certain Forward-Looking Statements
The following discussion of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. When included in this discussion, the words "expects," "intends,"
"anticipates," "believes," "plans," "projects," "estimates," "future" and
similar expressions are intended to identify forward-looking statements.
However, these words are not the exclusive means of identifying such
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are
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, increased competition and various other matters,
many of which are beyond our control. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this Form
10-K. The Company expressly disclaims any obligation or undertaking to update
or revise 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."
Overview
Itron is a leading provider and source of knowledge to the energy and water
industries for collecting, analyzing, and applying critical data about
electric, gas and water usage throughout the world. Over 2,000 utilities in
more than 45 countries use our handheld meter reading hardware and software
systems to collect and process information from over 250 million meters. Those
utilities include over 75% of the largest electric and gas utilities in the US
and Canada. More than 850 utilities worldwide use our radio and telephone-based
technology to automatically collect, analyze and apply meter data from over 20
million electric, gas and water meters. Our enterprise software solutions for
managing complex commercial and industrial meter data are used by over
600 utilities worldwide, including over 90% of the largest electric and gas
utilities in the US and Canada. Our software systems are also in use at a
number of the newly created wholesale energy markets in the US and Canada to
provide critical data management, billing, and settlement systems for the power
flowing into and out of those deregulating markets. Our technology now
"touches" over $200 billion in energy and water transactions every year in
North America alone. In 2001 we began to expand our solutions portfolio for
optimizing the delivery and use of energy and water, beyond meter reading, with
the acquisition of licensing rights to software that enables utility field
workforce automation. Also, in March 2002, we acquired LineSoft Corporation, a
company that provides software tools and engineering consulting services to
electric utilities that are used for the design of new and more efficient use
of transmission and distribution lines, substations, and upgrades to existing
facilities.
With overall penetration for meter reading automation in the US and Canada
at approximately 14 percent at December 31, 2001, we have plenty of room to
gain customers and increase revenues in this market alone. We believe our
technology, industry knowledge and relationships with virtually every large
utility in North America give us a strong foothold for extending our leadership
into additional systems that give utilities and their customers the knowledge
to distribute and use electricity, gas and water more efficiently than ever
before. We are aggressively pursuing those opportunities.
28
<PAGE>
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.
Critical Accounting Policies
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 installation,
operation and maintenance 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.
We recognize revenues from hardware and software license fees at the time of
shipment, receipt, or, if applicable, upon completion of customer acceptance
provisions. Revenues for project management, consulting, installation,
outsourcing and maintenance services are recognized at the time those services
are provided, with the related expenses recognized as incurred. Under
outsourcing arrangements, both installation costs and the costs of hardware and
software are capitalized and amortized over the term of the contract. Hardware
and software post-contract customer support fees are recognized over the life
of the related service contracts.
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. Inventory is subject to rapidly changing
technologies. There can be no assurance that technological advances will not
cause some or all of our inventory to become obsolete or uneconomical.
Warranty. We offer standard warranty terms on our product sales of between
one and three years. Provision for estimated warranty costs is recorded at the
time of sale and periodically adjusted to reflect actual experience. Our
long-term warranty reserve covers estimated standard warranty cost for the
second and third years of customer use and future expected costs of testing and
replacement of radio meter module batteries and fixed network equipment.
Management continually evaluates the sufficiency of warranty reserves and makes
adjustments when necessary. Actual warranty costs may fluctuate and may be
different than amounts accrued.
Concentration of credit risk: We currently derive the majority of our
revenues from sales of products and services to utilities. As a result, our
operations are subject to the same regulatory, political and economic risks
that affect that industry. Additionally, certain affiliates in which we have
invested are development stage enterprises in that they are subject to the risk
of obtaining sufficient capital or financing, developing a viable product and
obtaining sufficient customer demand.
Results of Operations
Effective January 1, 2002, we realigned our organization from six business
units, comprised of both market segments and products, to four business units
composed of market segments. Results from the former Client Services and Energy
Information Systems (EIS) segments, which are product lines, have been
reclassified into our Electric, Natural Gas, Water & Public Power, and
International segments for 2001, 2000, and 1999. This realignment better
reflects our approach to market segmentation and our focus on customer values
specific to each. Segment numbers throughout this report have been reclassified
to reflect our new 2002 organization.
Revenues for each business unit include hardware, custom and licensed
software, project management, installation and support activities, outsourcing
services, where we own and operate, or simply operate, systems
29
<PAGE>
for a periodic fee, and post-sale support activities. Inter-segment revenues
are immaterial. Within each business unit, product costs associated with
revenue are reported using standards, which include materials, direct labor and
an overhead allocation based on projected production for the year. Variances
from standard costs are included in corporate costs and are not allocated to
the business units.
Revenues
The following tables show our revenue and percent change from the prior year
by sales or service and by segment.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Change Change
2001 2000 2001-2000 1999 2000-1999
------ ------ --------- ------ ---------
Revenues ($ in millions)
<S> <C> <C> <C> <C> <C>
Sales............. $183.5 $141.9 29% $147.1 (4)%
Service........... 42.1 38.0 11 46.3 (18)
------ ------ ------
Total revenues. $225.6 $179.9 25% $193.4 (7)%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Change Change
2001 2000 2001-2000 1999 2000-1999
------ ------ --------- ------ ---------
Segment Revenues ($ in millions)
<S> <C> <C> <C> <C> <C>
Electric............ $ 99.7 $ 62.0 61% $ 64.3 (4)%
Natural Gas......... 35.7 39.8 (10) 50.3 (21)
Water & Public Power 65.1 60.1 8 61.2 (2)
International....... 25.1 18.0 39 17.6 2
------ ------ ------
Total revenues... $225.6 $179.9 25% $193.4 (7)%
====== ====== ======
</TABLE>
2001 compared with 2000
For the full year 2001, revenues were $225.6 million compared to $179.9
million in 2000. Revenue growth for the full year was driven largely by
expansion orders from existing customers for Mobile Automated Meter Reading
("MAMR") Systems, including one significant customer in Electric Systems.
Electric segment revenues in 2001 were 61% higher than 2000 revenues and
represented 44% of our total revenues for the year 2001. The majority of this
increase is due to continuing shipments on a multi-year contract with one
customer. This customer represented 34% and 6% of the Electric business unit
revenues and 15% and 2% of total company revenues in 2001 and 2000
respectively. Sales to this customer will continue to be a significant factor
in the Electric business unit through mid-2002 under current contractual
obligations.
Natural Gas segment revenues declined 10% in 2001 compared with 2000,
primarily due to the completion of large contracts in 2000 that were not
replaced by similar business during 2001. Revenue was relatively stable from
quarter to quarter in 2001.
Water and Public Power segment revenues were $5.0 million higher in 2001
compared to 2000. This growth was the result of the initial deployment of
modules for a multi-year AMR system for a new customer, the expansion of
systems for existing customers, and increased shipments to meter manufacturers.
Due to a strong mix of bookings that included several multi-year orders,
numerous smaller orders, and new customer contracts, revenues in the last half
of 2001 were up 56% over the first half of 2001. In addition, sales through
indirect channels are growing due to increased interest for automation within
the smaller utilities.
30
<PAGE>
International segment revenues increased 39% or $7.1 million over 2000, due
to significant handheld sales to customers in Japan. Increased meter module
sales in France and a large hardware installation of handheld sales in
Australia in the second half of the year also contributed to International
revenue growth.
2000 compared with 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 revenues related to the Duquesne
outsourcing contract, electric segment revenues were up 11% in 2000 over 1999.
Electric segment new contract bookings were strong in the second half of 2000,
and as a result, revenues in the last half of 2000 were up 14% over the first
half.
In 1999, a single customer accounted for approximately $14.4 million, or 29%
of Natural Gas segment revenues. Shipments under this large multi-year contract
began to wind down early in 2000 as the contract was 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.
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.
Gross Margin
The following tables show our gross margin and percent change from the prior
year by sales or service and by segment.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
Change Change
2001 2000 2001-2000 1999 2000-1999
---- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C>
Gross Margin
Sales................. 45% 41% 4% 36% 5%
Service............... 36 34 2 (133) 167
-- -- ----
Total gross margin. 43% 39% 4% (5)% 44%
== == ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Change Change
2001 2000 2001-2000 1999 2000-1999
---- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C>
Segment Gross Margin
Electric.............. 42% 44% (2)% (90) 134%
Natural Gas........... 54 56 (2) 51 5
Water & Public Power.. 44 44 -- 43 1
International......... 34 43 (9) 15 28
Corporate(1).......... (1) (7) 6 (3) (4)
-- -- ---
Total gross margin. 43% 39% 4% (5)% 44%
== == ===
</TABLE>
- --------
(1) Corporate is included so that total segment gross margin reconciles to
total gross margin above.
31
<PAGE>
2001 compared with 2000
Gross margins improved by 4% year-over-year, growing to 43% in 2001 compared
to 39% in 2000. During 2001, we began to realize the full benefit of the
manufacturing consolidation and supply chain management initiatives that began
in 2000. Increased production volumes and lower electronic component pricing in
the overall market also contributed to gross margin improvements. Gross margins
can vary substantially from period to period depending on component mix.
Gross margins for both the Electric and Natural Gas segments decreased 2% in
2001 compared to 2000 due to changes in the mix of customers and products.
International segment margins decreased from 43% in 2000 to 34% in 2001, or
9 percentage points. The majority of this decrease is due to large low margin
handheld shipments to customers in Japan early in the year. In addition, we had
higher revenues from low margin AMR module shipments to customers in France
2001 compared to 2000.
Corporate costs of sales were lower in 2001 compared to 2000, primarily due
to efficiencies gained through the consolidation of our manufacturing
facilities and higher than planned production volumes for 2001. Favorable
manufacturing variances associated with higher than planned production remain
in corporate costs of sales due to our standard cost of sales method. In
addition, purchase price variances, which are reflected in unallocated
corporate costs of sales, were favorable in 2001, due in part to lower market
prices for many electronic components.
2000 compared with 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 a $14.3 million forward loss accrued in 1999 for
estimated costs to complete our remaining obligations to this customer in
excess of contractual revenues. 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 $4.2 million price
concession to another customer for a large network installation. Without those
items, Electric gross margin in 1999 would have been approximately 14%.
The higher gross margin for our Natural Gas and Water & Public Power
segments in 2000 compared with 1999 resulted from lower standard costs in 2000
due to improved efficiencies in our manufacturing processes as discussed above.
Higher gross margin for International in 2000 reflects a shift in product
mix towards more profitable handheld and AMR systems and away from lower margin
custom development type systems in Europe.
32
<PAGE>
Operating Expenses
The following table shows our operating expenses and percent of revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
% of % of % of
2001 Revenue 2000 Revenue 1999 Revenue
----- ------- ----- ------- ----- -------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing......... $26.5 11.8% $20.7 11.5% $25.2 13.1%
Product development......... 30.0 13.3 21.3 11.9 26.8 13.8
General and administrative.. 15.2 6.7 17.6 9.8 13.5 7.0
Amortization of intangibles. 1.5 .7 1.8 1.0 2.0 1.0
Restructurings.............. (1.2) (.5) (.2) (.1) 16.7 8.6
----- ----- -----
Total operating expenses. $72.0 31.9% $61.2 34.0% $84.2 43.5%
===== ===== =====
</TABLE>
The increase in sales and marketing expenses between 2001 and 2000 is due to
investments in marketing programs and systems, primarily a new eCRM
(internet-based Customer Relationship Management) system, additional spending
related to strategy and business development activities, and increased
commissions due to higher revenues. Despite the $5.8 million increase in
spending, sales and marketing as a percentage of revenue remained stable at
11.8% and 11.5% for 2001 and 2000, respectively. Of the $4.5 million decrease
in sales and marketing expenses in 2000 compared to 1999, approximately $1.9
million was related to costs of certain items being transferred to general and
administrative expenses while $2.5 million was due to cost of sales transfers
as the result of our business unit reorganization at the start of 2000.
The increase in product development expenses in 2001 compared to 2000 is due
to a number of new products under development related to next generation data
collection and communications technology and software applications, and the
associated increased staffing. The decrease in product development expenses in
2000 compared with 1999 resulted primarily from restructuring measures that
included the closure of several product development locations and associated
staff reductions. As a percentage of revenues, product development spending was
13.3%, 11.9%, and 13.8% for 2001, 2000, and 1999, respectively.
The decrease in general and administrative expenses in 2001 compared to 2000
is largely due to the favorable negotiation of a new communications contract
and reduced legal fees for patent and FCC matters. In contrast, the increased
general and administrative expenses in 2000 compared with 1999 resulted 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 2000 were mostly the result of increased patent litigation and FCC
licensing expenses. As a percentage of revenues, general and administrative
expenses were 6.7%, 9.8%, and 7.0% for 2001, 2000, and 1999, respectively.
Restructurings in 2001 reflect a net credit as a result of reversals of
charges in previous periods. During the year, we reversed $1.0 million of loss
reserves previously accrued in 1999 for non-cancelable operating lease charges
for a closed facility based on the subsequent sublease of that office space
under more favorable terms than anticipated. We reversed another $412,000 based
on the decision by new management to remain in our current office in France
instead of abandoning and subleasing that building as originally planned. The
change in plans resulted from additional office space needs and a desire to
avoid disrupting development activities. Finally, in 2001, we increased our
severance accrual by $207,000 for remaining obligations. Restructuring measures
are substantially complete.
33
<PAGE>
Other Income (Expense)
The following table shows other income (expense) and percent change from the
prior year.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
Change Change
2001 2000 2001-2000 1999 2000-1999
----- ----- --------- ----- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Equity in affiliates......... $(0.6) $ 1.1 (155)% $(0.6) 283%
Interest, net................ (3.9) (3.8) (3) (6.3) 40
----- ----- -----
Other income (expense)....... $(4.5) $(2.7) (67)% $(6.9) 61%
===== ===== =====
</TABLE>
In 2001, we had a 50% ownership interest in an affiliate that acts as a
partnership for selling our water products in specific regions of the US, 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, and
a 44% ownership interest in an affiliate that provides meter reading services
to energy service providers and end user customers. The loss in 2001 is largely
due to the write off of $850,000 for our investment in the affiliate, plus
$7,000 in accrued interest related to the note receivable that provides meter
reading services. The loss from that write-off was partially offset with our
share of gains from the other affiliates.
The $1.1 million in equity in affiliates in 2000 resulted from increased
sales of our water products by our distributor affiliate and a $150,000 net
gain on the sale of our interest in another partially owned domestic affiliate.
Net interest remained relatively flat between 2001 and 2000. Higher cash and
investment balances in 2001 were offset by much lower interest rates in 2001
compared to 2000. Net interest expense decreased 40% in 2000 compared with 1999
due to lower short-term bank borrowings, a reduction of subordinated debt
outstanding, and increased net invested cash during 2000. We received $32.8
million from the sale of our outsourcing installation at Duquesne in the first
half of 2000 and used a portion of the proceeds to pay down short-term bank
borrowings.
Income Taxes
Our effective income tax rate was approximately 37% in 2001 compared with
39% in 2000 and a tax benefit of (28)% in 1999. In 1999 we had a pre-tax loss.
Because of this loss, the increase in our valuation allowances provided for
certain domestic tax credits and international net operating losses resulting
in a lower tax benefit. 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 $3.7 million.
Cumulative Effect of Change in Accounting Principle
During the fourth quarter of 2000, we implemented the SEC Staff Accounting
Bulletin No. 101 (SAB 101), which outlines the Staff's views on revenue
recognition. As a result, we have changed our revenue recognition for certain
transactions related to customer acceptance, F.O.B. destination shipments, and
outsourcing contracts under which we retain title to the related equipment. The
implementation has been accounted for as a cumulative change in accounting
principle effective January 1, 2000.
34
<PAGE>
Financial Condition
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
2001 2000 1999
------ ----- ------
($ in millions)
<S> <C> <C> <C>
Cash Flow Information
Operating activities........... $ 32.3 $ 3.8 $ 24.5
Investing activities........... (38.0) 20.8 (16.1)
Financing activities........... 5.1 (4.9) (9.6)
------ ----- ------
Net increase (decrease) in cash $ (0.6) $19.7 $ (1.2)
====== ===== ======
</TABLE>
Operating activities: We generated $32.3 million of cash from operations in
2001 compared to $3.8 million in 2000 and $24.5 million in 1999. Increased
earnings in 2001 is one of the primary factors driving the improved cash flow
from operations in 2001. Accounts payable and accrued expenses decreased $4.4
million in 2001 from 2000, primarily due to the use of, and adjustments to,
restructuring reserves, and the use of a forward loss accrual. In 2000 we used
$9.3 million of cash for severance and other restructuring expenditures that
were accrued 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 for 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.
Investing activities: The primary investing activity in 2001 was the
transfer of $22.2 million of cash and cash equivalents into short-term
investments with longer maturities, not exceeding 13 months, in order to
achieve higher interest yields. Also included in investing activities is a
reclassification of $5.1 million into restricted cash for a collateralized
letter of credit. Other activities included investments in and loans made to
three companies--a web based wireless workforce management company, a developer
of in-home energy gateway communication technology, and a meter reading
services provider. Our investment in the web based wireless workforce
management company of $2.0 million is in the form of convertible debt, which if
converted would give us an 18.8% ownership in the company assuming current
exchange rates and shares outstanding. We invested $500,000 in the home energy
gateway communication technology company, which grants us exclusive rights to
use and market their technology to customers in the U.S., Canada, and Mexico,
and non-exclusive rights to use and market their technology elsewhere. During
2001, our $850,000 investment in the meter reading services provider, $350,000
of which is held as a fully reserved note receivable and $500,000 of which was
an equity investment was written off. Fixed asset acquisitions, including
outsourcing equipment, were $7.6 million for 2001, down approximately $4.0
million from 2000 and down form $9.6 million in 1999. Most of the decrease is
due to decreases in outsourcing equipment that reflects that we have
substantially completed capital build-outs for our three outsourcing contracts.
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.
Financing activities: Net cash generated from financing activities of $5.1
million in 2001 included $7.8 million received from employee stock purchase
plan purchases and stock option exercises during the year offset by the
open-market purchase of 85,100 shares of our common stock for $1.9 million.
Financing activities used $4.9 million in cash in 2000 mostly due to $3.6
million in cash that was used to pay down short-term bank borrowings and $2.1
million for the repurchase of subordinated debt in the first quarter of 2000.
Financing activities used $9.6 million in 1999 mostly due to repayment of
short-term bank borrowings. Availability under our current line of credit is
$23.4 million as of February 28, 2002. We believe that existing cash resources
and available borrowings under our credit facility are more than adequate to
meet our cash needs through 2002. We have no off-balance sheet financing
arrangements.
Investments: We have a $2.0 million investment in a software development
company, in the form of a senior, secured convertible note, which we made on
September 4, 2001. The company has not yet established a
35
<PAGE>
history of consistent revenue. The company provides a wireless, automated
mobile workforce management software solution to the utility industry. We have
contracted with the firm to develop a new ERT installation and deployment tool,
which will be based on the mobile workforce management software solution. We
have also signed an exclusive distribution agreement with them to sell the
workforce management solution to the utility industries in North America and
parts of Asia. The company recently informed us that it would need additional
financial assistance, in part due to the delay in our development of a
supporting hardware product. Primarily due to the market acceptance that our
sales force has received regarding the workforce management software solution,
we have indicated to the company our willingness to increase our investment so
that it has sufficient resources to operate currently. If we had converted our
note into equity as of December 31, 2001, we would have held an 18.8% equity
interest in the firm.
On March 2, 2001 we invested $500,000 in the common stock of an early stage
metering services company. Later in 2001, we increased our investment by
$350,000 in the form of senior, secured convertible debt. At the end of 2001,
we wrote off the remaining amounts of our investment totaling $522,000, as all
but one employee had been let go and the prospects of obtaining both future
business and the funding necessary to remain a going concern were highly
doubtful. Currently, there still is only one employee and, while the company
now has four customers, it is not yet cash flow positive.
During 2000 we spun-off our low volume manufacturing operations and field
service depot repair operations to a group of former employees, retaining a 30%
equity interest in the form of convertible preferred stock. The company
continues to manufacture low volume product and perform repair operations for
us, which services amount to about 80% of the total revenues of the company.
Operations are profitable.
We have a 50% general partnership interest in a partnership with a utility,
which partnership's purpose is to serve as a marketing vehicle for a defined
territory comprised of, and surrounding, the utility's service territory.
During 2001, there was little partnership activity. As of December 31, 2001,
there was approximately $2.1 million of cash in the partnership.
During 2001 we made a $500,000 common stock investment in a startup involved
in developing gateway and other metering-related products, for which we
received a 10% equity interest. The company has not yet established a history
of consistent revenue, has not yet reached breakeven cash flow and is currently
looking for additional funding.
Liquidity, Sources and Uses of Capital: At December 31, 2001, we had
approximately $42.8 million in cash, cash equivalents, and short-term
investments. We have historically funded our operations and growth with cash
flow from operations, borrowings and sales of our stock. We are exposed to
changes in interest rates on cash equivalents and our short-term investments,
which are rated A or better by Standard & Poor's or Moody's and which have
market interest rates. Availability under our current $35 million revolving
line of credit is reduced only by our outstanding letters of credit of $11.6
million. We do not have plans to borrow under this credit facility at this
time. We have $53.3 million of convertible subordinated debentures that mature
in March 2004, $15.0 million of which have a conversion price of $9.65 and are
callable in March 2002 without premium. The remaining $38.3 million of notes
have a conversion price of $23.70 and have been callable with declining
premiums since March 2000. On March 18, 2002 we notified the holders of the
exchange notes totaling $15 million, that we will exercise our option to redeem
the notes on April 17, 2002. Holders of the debt have the option, until April
16, 2002, to convert the debt into shares of Itron common stock. Based on the
current market prices of our stock, we anticipate note holders will convert
rather than redeem. We anticipate that we will have sufficient cash generated
from operations to repurchase the remaining notes at maturity if they are not
converted earlier.
Working capital as of December 31, 2001 was $66.6 million, compared to $45.3
million at December 2000. The increase in working capital was due primarily to
an increase in short-term investments of $22.2 million. The number of days
outstanding for billed and unbilled accounts receivable was 69 and 84 days as
of December 31,
36
<PAGE>
2001 and December 31, 2000, respectively. This improvement is a result of
increased revenues from customers who pay consistently within our invoicing
terms and a shift in customer sales that are based on milestone billings that
replaced mobile handheld sales with longer payment terms.
Contractual cash obligations as of December 31, 2001, exclusive of our $5.1
million mortgage note that was paid in full in February 2002, were as follows:
<TABLE>
<CAPTION>
Due In
--------------------------------------
2002 2003-2004 2005-2006 Later Years
------ --------- --------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Project financing debt....... $ 635 $1,424 $1,657 $2,366
Operating leases, net........ 3,760 5,093 2,734 1,531
</TABLE>
Commercial commitments as of December 31, 2001 were as follows:
<TABLE>
<CAPTION>
Commitments In
---------------------------------------
2002 2003-2004 2005-2006 Later Years
------- --------- --------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Letters of credit(1)......... $11,575 $ -- $ -- $--
Performance bonds............ 40,174 -- -- --
Guarantees................... 157 360 299 --
</TABLE>
- --------
(1) Effective Q2 2002, our letters of credit will increase to $15.0 million.
During 2001, we made $3.4 million in investments in, and loans to, three
private companies as discussed above under "Investments." In addition, during
the first quarter of 2002, we acquired LineSoft, a privately held company, for
$41.4 million, which consisted of $20.4 million paid in cash and the issuance
of 848,870 shares of Itron common stock (see Note 18 to our consolidated
financial statements). We expect to continue to expand our operations and grow
our business through a combination of internal new product development as well
as licensing technology from others, partnership arrangements and acquisitions
of technology or, in some cases, other companies. We expect the majority of
these activities to be funded from existing cash, cash flow from operations,
and borrowings under existing credit facilities. We believe these sources of
liquidity will be sufficient to fund our operations for the foreseeable future,
but offer no assurances. From time to time, we evaluate potential acquisitions
and other growth opportunities, which might require us to seek additional
external financing or public or private issuances of equity or debt securities.
While we believe existing sources of liquidity are sufficient, our liquidity
could be affected by our dependence on the stability of the energy industry,
competitive pressures, international risks, intellectual property claims, as
well as other factors described under "Certain Risk Factors" and "Qualitative
and Quantitative Disclosures About Market Risk."
New Accounting Pronouncements
In late July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations be accounted for using the purchase
method of accounting; therefore, the pooling-of-interests method of accounting
is prohibited. SFAS No. 141 also requires that intangible assets acquired in a
business combination be recognized apart from goodwill if: (i) the intangible
assets arise from contractual or other legal rights or (ii) the acquired
intangible assets are capable of being separated from the acquired enterprise,
as defined in SFAS No. 141. SFAS No. 141 is effective for all business
combinations completed after June 30, 2001 and accounted for as a purchase and
for all business combinations "initiated" after June 30, 2001.
SFAS No. 142 requires that goodwill should not be amortized but should be
tested for impairment at the "reporting unit level" (Reporting Unit) at least
annually and more frequently upon the occurrence of certain
37
<PAGE>
events, as defined by SFAS No. 142. A Reporting Unit is the same level as or
one level below an "operating segment," as defined by SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. Identifiable
intangible assets with a finite life, as defined in SFAS No. 142, will be
amortized.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a
Reporting Unit to its carrying amount, including goodwill, to determine if the
fair value of the Reporting Unit is less than the carrying amount, which would
indicate that goodwill is impaired. If the company determines that goodwill is
impaired, the Company must compare the "implied fair value" of the goodwill to
its carrying amount to determine if there is an impairment loss. The "implied
fair value" is calculated by allocating the fair value of the Reporting Unit to
all assets and liabilities as if the Reporting Unit had been acquired in a
business combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations
completed prior to July 1, 2001, SFAS No. 142 is effective on January 1, 2002,
the date the Company is required to adopt SFAS No. 142. Goodwill and intangible
assets acquired in a business combination completed after June 30, 2001 are
required to be accounted for in accordance with the "amortization and
nonamortization" provisions of SFAS No. 142.
The Company expects the adoption of SFAS No. 141 and SFAS No. 142 will
result in a reduction in amortization of goodwill from 2001 of $648,000. In
addition, in March 2002, in conjunction with the LineSoft acquisition, we
acquired intangible assets, most of which we expect to amortize over three and
four years. Future business combinations may give rise to either significant
amortization expense from the acquisition of intangible assets with a finite
life or goodwill with significant impairment risk.
The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, that supercedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in
August, 2001. Statement No. 144 requires that long-lived assets be measured at
the lower of carrying amount or fair-value less cost to sell, whether reported
in continuing operations or in discontinued operations, to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of Statement No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. Management does not expect the adoption of SFAS No. 144 to
have a significant impact on the financial position or results of operations of
the Company, relative to its existing assets.
Business Outlook
The following statements are based on current expectations. These statements
are forward-looking, and actual results may differ materially due to a number
of risks and uncertainties. Itron undertakes no obligation to update publicly
or revise any forward-looking statements.
The following expectations do not include the financial impact of the
LineSoft acquisition, which closed on March 12, 2002.
We expect that revenues in 2002 will be between $250 million and $265
million, which is approximately 11% to 17% higher than 2001. We expect net
income per fully diluted share to be between 90 and 97 cents per share, which
represents earnings per share growth of approximately 20% to 29%.
We believe the acquisition of LineSoft will result in additional revenue for
2002 of approximately $16 million to $20 million and will be moderately
dilutive to breakeven in terms of net income, excluding the write-off of in
process R&D and additional intangible amortization associated with this
acquisition.
On a preliminary basis, we estimate the in process R&D charge, which will be
recognized in the first quarter of 2002, will be approximately $7 million. We
also estimate that there will be approximately $3 million in intangible
amortization in 2002 resulting from the LineSoft acquisition. These estimates
are based on independent valuations, which are being finalized and which are
subject to review by our outside auditors.
38
<PAGE>
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, 2001, we had
$64.5 million of long-term debt. (See Note 5 of our accompanying consolidated
financial statements). Our long-term debt is at fixed rates. However, a
hypothetical 100 basis point increase in the interest rate at December 31, 2001
would result in a $1.8 million increase in fair value. We do not use derivative
financial instruments to manage interest rate risk.
Foreign Currency Exchange Rate Risk: As a global concern, we conduct
business in a number of foreign countries and, therefore, face exposure to
adverse movements in foreign currency exchange rates. Total International
revenue was 11% of total revenue in 2001. Since we currently do not use
derivative instruments to manage foreign currency exchange rate risk, the
consolidated results of operations in U.S. dollars are subject to fluctuation
as foreign exchange rates change. In addition, our foreign currency exchange
rate exposures may change over time as business practices evolve and could have
a material impact on our financial results.
Our primary exposure relates to non-dollar denominated sales, cost of sales
and operating expenses in our subsidiary operations in France, the United
Kingdom, and Australia. This means we are subject to changes in the
consolidated results of operations expressed in US dollars. Other international
business, consisting primarily of shipments from the United States to
international distributors and customers in the Pacific Rim and Latin America,
is predominantly denominated in US dollars, which reduces our exposure to
fluctuations in foreign currency exchange rates. There has been, and there may
continue to be, large period-to-period fluctuations in the relative portions of
international revenue that are denominated in foreign currencies.
Risk-sensitive financial instruments in the form of inter-company trade
receivables are mostly denominated in US dollars, while inter-company notes are
denominated in local foreign currencies. As foreign currency exchange rates
change, inter-company trade receivables impact current earnings, while
inter-company notes are re-valued and result in translation gains or losses
that are reported in the comprehensive income portion of shareholders' equity
in our balance sheet.
Because our earnings are affected by fluctuations in the value of the US
dollar as compared to foreign currencies, we have performed a sensitivity
analysis assuming a hypothetical 10% increase in the value of the dollar
relative to the currencies in which our transactions are denominated. As of
December 31, 2001, 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 any risk-sensitive financial instruments. The model assumes a
parallel shift in the foreign currency exchange rates. Exchange rates rarely
move in the same direction. The assumption that exchange rates change in a
parallel fashion may overstate or understate the impact of changing exchange
rates on assets and liabilities denominated in a foreign currency.
Consequently, the actual effects on operations in the future may differ
materially from the results of the analysis. We may, in the future, experience
greater fluctuations in US dollar earnings from fluctuations in foreign
currency exchange rates. We will continue to monitor and assess the impact of
currency fluctuations and may seek to institute hedging alternatives as
business dictates.
39
<PAGE>
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 accounting
principles generally accepted in the United States of America. 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
Chief Executive Officer Vice President and Chief Financial Officer
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Itron, Inc.
We have audited the accompanying consolidated balance sheets of Itron, Inc.
and subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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, 2001 and 2000 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 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.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 12, 2002 (March 18, 2002 as to Note 18)
41
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues
Sales.............................................................. $ 183,425 $ 141,899 $ 147,128
Service............................................................ 42,130 38,042 46,284
----------- ----------- -----------
Total revenues................................................. 225,555 179,941 193,412
Cost of revenues
Sales.............................................................. 100,692 83,954 94,607
Service............................................................ 27,004 25,138 108,033
----------- ----------- -----------
Total cost of revenues......................................... 127,696 109,092 202,640
----------- ----------- -----------
Gross profit (loss)................................................... 97,859 70,849 (9,228)
Operating expenses
Sales and marketing................................................ 26,523 20,726 25,243
Product development................................................ 30,000 21,331 26,764
General and administrative......................................... 15,209 17,565 13,498
Amortization of intangibles........................................ 1,486 1,762 1,986
Restructurings..................................................... (1,219) (185) 16,686
----------- ----------- -----------
Total operating expenses....................................... 71,999 61,199 84,177
----------- ----------- -----------
Operating income (loss)............................................... 25,860 9,650 (93,405)
Other income (expense)
Equity in affiliates............................................... (616) 1,069 (600)
Interest, net...................................................... (3,878) (3,795) (6,261)
----------- ----------- -----------
Total other expense............................................ (4,494) (2,726) (6,861)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item.............. 21,366 6,924 (100,266)
Income tax (provision) benefit........................................ (7,916) (2,700) 28,010
----------- ----------- -----------
Net income (loss) before extraordinary item and cumulative effect of a
change in accounting principle...................................... 13,450 4,224 (72,256)
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)..................................................... $ 13,450 $ 2,706 $ (68,596)
=========== =========== ===========
Earnings per Share
Basic
Income (loss) before extraordinary item............................ $ .86 $ .28 $ (4.87)
Extraordinary item................................................. -- .07 .25
Cumulative effect.................................................. -- (.17) --
----------- ----------- -----------
Basic net income (loss) per share.................................. $ .86 $ .18 $ (4.62)
=========== =========== ===========
Diluted
Income (loss) before extraordinary item............................ $ .75 $ .27 $ (4.87)
Extraordinary item................................................. -- .07 .25
Cumulative effect.................................................. -- (.17) --
----------- ----------- -----------
Diluted net income (loss) per share................................ $ .75 $ .18 $ (4.62)
=========== =========== ===========
Average number of shares outstanding
Basic.............................................................. 15,639 15,180 14,851
Diluted............................................................ 18,834 15,385 14,851
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C>
Pro forma amounts assuming SAB 101 is applied retroactively
Net income (loss) before extraordinary item............................ $ 13,450 $ 4,224 $ (63,771)
Extraordinary gain on early extinguishment of debt, net of income taxes
of $570 and $1,970................................................... -- 1,044 3,660
----------- ----------- -----------
Net income (loss)...................................................... $ 13,450 $ 5,268 $ (60,111)
=========== =========== ===========
Earnings per Share
Basic
Income (loss) before extraordinary item............................. $ .86 $ .28 $ (4.29)
Extraordinary item.................................................. -- .07 .25
----------- ----------- -----------
Basic net income (loss) per share................................... $ .86 $ .35 $ (4.05)
=========== =========== ===========
Diluted
Income (loss) before extraordinary item............................. $ .75 $ .27 $ (4.29)
Extraordinary item.................................................. -- .07 .25
----------- ----------- -----------
Diluted net income (loss) per share................................. $ .75 $ .34 $ (4.05)
=========== =========== ===========
Average number of shares outstanding
Basic............................................................... 15,639 15,180 14,851
Diluted............................................................. 18,834 15,385 14,851
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
------------------
2001 2000
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................ $ 20,582 $ 21,216
Short-term investments, available for sale............................... 22,199 --
Accounts receivable, net................................................. 52,345 49,859
Inventories, net......................................................... 16,281 17,196
Deferred income taxes, net............................................... 4,134 4,852
Other.................................................................... 1,192 899
-------- --------
Total current assets................................................. 116,733 94,022
Property, plant and equipment, net....................................... 25,918 25,197
Equipment used in outsourcing, net....................................... 12,918 14,150
Intangible assets, net................................................... 11,035 12,836
Restricted cash.......................................................... 5,100 --
Deferred income taxes, net............................................... 24,952 27,287
Other.................................................................... 6,035 3,739
-------- --------
Total assets......................................................... $202,691 $177,231
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.................................... $ 24,689 $ 30,171
Wages and benefits payable............................................... 11,611 9,244
Current portion of long-term debt........................................ 229 242
Deferred revenue......................................................... 13,558 9,025
-------- --------
Total current liabilities............................................ 50,087 48,682
Convertible subordinated debt............................................ 53,313 53,459
Mortgage notes and leases payable........................................ 4,860 5,074
Project financing........................................................ 6,082 6,671
Warranty and other obligations........................................... 12,297 11,253
-------- --------
Total liabilities.................................................... 126,639 125,139
Commitments and contingencies (Note 5 and 12)
Shareholders' equity
Common stock, no par value, 75 million shares authorized, 16,221,468 and
15,329,361 shares issued and outstanding............................... 120,316 109,730
Accumulated other comprehensive loss..................................... (1,916) (1,840)
Accumulated deficit...................................................... (42,348) (55,798)
-------- --------
Total shareholders' equity........................................... 76,052 52,092
-------- --------
Total liabilities and shareholders' equity........................... $202,691 $177,231
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Accumulated
Comprehensive Earnings
Shares Amount Loss (Deficit) Total
------ -------- ------------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999................ 14,698 $106,039 $(1,108) $ 10,092 $115,023
Net loss................................... (68,596) (68,596)
Currency translation adjustment, net of tax (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................................. 2,706 2,706
Currency translation adjustment, net of tax (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.............. 15,329 $109,730 $(1,840) $(55,798) $ 52,092
Net income................................. 13,450 13,450
Currency translation adjustment, net of tax (114) (114)
Unrealized gain on investments, net of tax. 38 38
--------
Total comprehensive income................. 13,374
Stock issues (repurchases):
Options exercised....................... 842 7,396 7,396
Stock option income tax benefits........ 4,419 4,419
Stock repurchased by Company............ (85) (1,908) (1,908)
Director compensation................... 16 112 112
Conversion of subordinated debt......... 8 146 146
Employee stock purchase plan............ 111 421 421
------ -------- ------- -------- --------
Balances at December 31, 2001.............. 16,221 $120,316 $(1,916) $(42,348) $ 76,052
====== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
2001 2000 1999
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss)........................................... $ 13,450 $ 2,706 $(68,596)
Noncash charges (credits) to income:
Depreciation and amortization........................... 9,900 13,254 18,474
Stock option income tax benefits........................ 4,419 -- --
Deferred income tax provision (benefit)................. 3,053 3,811 (28,064)
Equity in affiliates, net............................... 616 (945) 600
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
Director compensation................................... 112 -- --
Changes in operating accounts
Accounts receivable......................................... (2,486) (2,488) 15,668
Inventories................................................. 915 277 5,354
Accounts payable and accrued expenses....................... (4,403) (1,936) 18,572
Wages and benefits payable.................................. 2,367 (7,072) 10,151
Deferred revenue............................................ 4,533 (4,407) (240)
Other, net.................................................. (139) (917) (1,622)
-------- ------- --------
Cash provided by operating activities.......................... 32,337 3,801 24,498
Investing activities:
Proceeds from the sale of investment securities............. 8,172 -- --
Purchase of investment securities........................... (30,371) -- --
Reclassification of restricted cash......................... (5,100) -- --
Acquisition of property, plant and equipment................ (7,564) (4,510) (7,416)
Equipment used in outsourcing............................... (78) (7,084) (9,859)
Proceeds from sale of equipment used in outsourcing, net.... -- 32,750 --
Proceeds from sale of business interest..................... -- 870 --
Other, net.................................................. (3,088) (1,251) 1,191
-------- ------- --------
Cash provided (used) by investing activities................... (38,029) 20,775 (16,084)
Financing activities:
Change in short-term borrowings, net........................ -- (3,646) (10,354)
Payments on project financing............................... (589) (545) (506)
Convertible subordinated debt repurchase.................... -- (2,101) --
Issuance of common stock.................................... 7,817 2,127 1,564
Repurchase of common stock.................................. (1,908) -- --
Payments on mortgage notes payable.......................... (214) (183) --
Other, net.................................................. (48) (550) (323)
-------- ------- --------
Cash provided (used) by financing activities................... 5,058 (4,898) (9,619)
-------- ------- --------
Increase (decrease) in cash and cash equivalents............... (634) 19,678 (1,205)
Cash and cash equivalents at beginning of period............... 21,216 1,538 2,743
-------- ------- --------
Cash and cash equivalents at end of period..................... $ 20,582 $21,216 $ 1,538
======== ======= ========
Non cash transactions:
Debt to equity conversion................................... $ 146 $ -- $ --
Supplemental disclosure of cash flow information:
Income taxes paid........................................... $ 184 $ 503 $ 614
Interest paid............................................... 4,335 4,289 5,279
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
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. We consolidate all entities in which we have a
greater than 50% ownership interest and over which we have control. We account
for entities in which we have a 50% or less investment and exercise significant
influence under the equity method of accounting. Entities in which we have less
than a 20% investment and do not exercise significant influence are recognized
on the cost method.
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.
Short-term Investments
The Company's short-term investments are classified as available-for-sale
and are recorded at market value. Investment purchases and sales are accounted
for on a trade date basis and market value at a period end is based upon quoted
market prices for each security. Realized gains and losses are determined on
the specific identification method. Unrealized holding gains and losses, net of
any tax effect, are recorded as a component of other comprehensive income.
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 repair service operation to an
outside vendor in which we have a 30% equity interest. As a result of this
transition, we had consigned inventory at our affiliate totaling $1.8 million
at December 31, 2001 and $3.2 million at December 31, 2000. Additionally we
reduce inventory for obsolescence or amounts in excess of requirements.
Property, Plant and Equipment and Equipment used in Outsourcing
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 costs and equipment used in outsourcing
contracts are 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-
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
line method. We review the carrying value of property, plant and equipment for
impairment on a periodic basis; no impairment has been recognized.
Capitalized Software Development Costs
Financial accounting standards require the capitalization of certain
software development costs after technological feasibility of the software is
established. Due to the relatively short period between technological
feasibility of a product and the completion of product development and the
insignificance of related costs incurred during this period, no software
development costs have been capitalized in the years ended December 31, 2001,
2000 and 1999. Internal use software development costs are capitalized and
amortized over the estimated useful life of three years. In 2001 we capitalized
approximately $250,000 for web-based development, which will be amortized over
three years.
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.
Warranty
We offer standard warranty terms on our product sales of between one and
three years. Provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience. Our short-term
warranty accrual is included in accounts payable and accrued expenses. Our
long-term warranty reserve covers estimated standard warranty cost for the
second and third years of customer use and future expected costs of testing and
replacement of radio meter module batteries and fixed network equipment.
Warranty expense was $4.4 million in 2001, $3.8 million in 2000 and $5.7
million in 1999.
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. The Company establishes a valuation allowance when
it is likely that we will not 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 installation, operation and
maintenance 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.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We recognize revenues from hardware and software license fees at the time of
shipment, receipt, or, if applicable, upon completion of customer acceptance
provisions. Revenue for project management, consulting, installation,
outsourcing and maintenance services is recognized at the time those services
are provided, with related expenses recognized as incurred. 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,
F.O.B. destination shipments, and outsourcing contracts under which the Company
retains title to the related equipment. The implementation was accounted for as
a cumulative change in accounting principle in 2000.
Revenues for both large custom systems and outsourcing contracts, prior to
adoption of SAB No. 101, were 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. Contract costs include all direct material and labor costs and other
indirect costs related to contract performance. 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. 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.
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.
Research and Development Expenses
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments,
and accounts receivable approximate fair value. The fair market value for
long-term debt is based on quoted market rates or prices where available (see
Note 8).
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 dilutive
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). (See Note 3)
Derivatives
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended, established accounting and reporting standards
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. We adopted SFAS No. 133 effective January 1, 2001;
the adoption did not have a significant impact on our financial statements.
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.
Concentration of credit risk
We currently derive the majority of our revenues from sales of products and
services to utilities. As a result, our operations are subject to the same
regulatory, political and economic risks that affect that industry.
Additionally, certain affiliates in which we have invested are development
stage enterprises in that they are subject to the risk of obtaining sufficient
capital or financing, developing a viable product and obtaining sufficient
customer demand.
Stock-Based Compensation
We follow SFAS No. 123, Accounting for Stock-Based Compensation. The
provisions of SFAS No. 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 6).
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 presentation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations be accounted for using the purchase
method of accounting; therefore, the pooling-of-interests method of accounting
is prohibited. SFAS No. 141 also requires that intangible assets acquired in a
business combination be recognized apart from goodwill if: (i) the intangible
assets arise from contractual or other legal rights or (ii) the acquired
intangible assets are capable of being separated from the acquired enterprise,
as defined in SFAS No. 141. SFAS No. 141 is effective for all business
combinations completed after June 30, 2001 and accounted for as a purchase and
for all business combinations "initiated" after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill should not be amortized but should
be tested for impairment at the "reporting unit level" (Reporting Unit) at
least annually and more frequently upon the occurrence of certain events, as
defined by SFAS No. 142. A Reporting Unit is the same level as or one level
below an "operating segment," as defined by SFAS
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No. 131, Disclosures About Segments of an Enterprise and Related Information.
Identifiable intangible assets with a finite life, as defined in SFAS No. 142,
will be amortized.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a
Reporting Unit to its carrying amount, including goodwill, to determine if the
fair value of the Reporting Unit is less than the carrying amount, which would
indicate that goodwill is impaired. If the company determines that goodwill is
impaired, the Company must compare the "implied fair value" of the goodwill to
its carrying amount to determine if there is an impairment loss. The "implied
fair value" is calculated by allocating the fair value of the Reporting Unit to
all assets and liabilities as if the Reporting Unit had been acquired in a
business combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations
completed prior to July 1, 2001, SFAS No. 142 is effective on January 1, 2002,
the date the Company is required to adopt SFAS No. 142. Goodwill and intangible
assets acquired in a business combination completed after June 30, 2001 are
required to be accounted for in accordance with the "amortization and
nonamortization" provisions of SFAS No. 142.
The Company expects the adoption of SFAS No. 141 and SFAS No. 142 will
result in a reduction in amortization of goodwill from 2001 of $648,000. In
addition, in March 2002, in conjunction with the LineSoft acquisition, we
acquired intangible assets, most of which we expect to amortize over three and
four years. Future business combinations may give rise to either significant
amortization expense from the acquisition of intangible assets with a finite
life or goodwill with significant impairment risk.
The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supercedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in
August, 2001. Statement No. 144 requires that long-lived assets be measured at
the lower of carrying amount or fair-value less cost to sell, whether reported
in continuing operations or in discontinued operations, to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001. Management does not expect the adoption of SFAS No. 144 to have a
significant impact on the financial position or results of operations of the
Company, relative to its existing assets.
Note 2: Short-Term Investments
Short-term investments consist of U.S. government and agency paper, money
market funds, repurchase agreements, master notes, and certificates of
deposits. Information related to such investments at December 31, 2001 is as
follows:
<TABLE>
<CAPTION>
Estimated
Unrealized Unrealized Fair
Cost Gains Loss Value
------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Money market funds and other.............. $ 1,000 $ 2 $ -- $ 1,002
Commercial paper.......................... 1,994 3 -- 1,997
U.S. government and agency debt securities 19,167 44 (11) 19,200
------- --- ---- -------
Total available-for-sale investments...... $22,161 $49 $(11) $22,199
======= === ==== =======
</TABLE>
At December 31, 2001 the contractual maturities of short-term investments
were $22.2 million within one year. Proceeds from the sale of investment
securities for the year ended December 31, 2001 were $8.2 million.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3: Earnings Per Share and Capital Structure
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
2001 2000 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common shareholders.............................. $13,450 $ 2,706 $(68,596)
Weighted average shares outstanding...................................... 15,639 15,180 14,851
------- ------- --------
Basic net income per share............................................... $ 0.86 $ 0.18 $ (4.62)
======= ======= ========
Diluted earnings per share:
Net income available to common shareholders.............................. $13,450 $ 2,706 $(68,596)
Interest on convertible debt, net of income taxes........................ 637 -- --
------- ------- --------
Adjusted net income available to common shareholders, assuming conversion $14,087 $ 2,706 $(68,596)
======= ======= ========
Weighted average shares outstanding...................................... 15,639 15,180 14,851
Effect of dilutive securities:
Stock options......................................................... 1,644 205 --
Convertible debt...................................................... 1,551 -- --
------- ------- --------
Adjusted weighted average shares and assumed conversions................. 18,834 15,385 14,851
------- ------- --------
Diluted net income per share............................................. $ 0.75 $ 0.18 $ (4.62)
======= ======= ========
</TABLE>
We have granted options to purchase shares of our common stock to directors,
employees and other key personnel at fair market value on the date of grant.
The average price of Itron common stock was $17.09 in 2001, compared to $6.06
in 2000 and $7.26 in 1999.
The dilutive effect of options is calculated using the "treasury stock"
method. The dilutive earnings per share impact of the additional 1.6 million
shares from the use of this method was $0.075, or 9%, for 2001. There was no
dilutive earnings per share impact of the additional 0.2 million shares for
2000. There was no dilutive effect for 1999.
We also have subordinated convertible debt outstanding with conversion
prices of $9.65, representing 1.5 million shares, and $23.70, representing an
additional 1.6 million shares. The dilutive effect of these notes is calculated
using the "if converted" method. Under this method, the after-tax amount of
interest expense related to the convertible debt is added back to net income.
The dilutive earnings per share impact of convertible debt was $0.037, or 4%,
for 2001. There was no dilutive effect in 2000 or 1999.
In 2001, 2000, and 1999 3.4 million, 6.2 million, and 6.3 million shares,
respectively, were not included in the calculation of fully diluted EPS as they
were antidilutive.
During the third quarter of 2001, we announced a plan to repurchase up to
300,000 shares of our common stock. As of December 31, 2001, we had repurchased
85,100 shares at an average price of $22.42.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Balance Sheet Components
<TABLE>
<CAPTION>
At December 31,
------------------
2001 2000
-------- --------
(in thousands)
<S> <C> <C>
Accounts receivable
Trade (net of allowance for doubtful accounts of $1,427 and $1,144). $ 38,342 $ 42,218
Unbilled revenue.................................................... 14,003 7,641
-------- --------
Total accounts receivable....................................... $ 52,345 $ 49,859
======== ========
Inventories, net
Material............................................................ $ 4,800 $ 5,721
Work in process..................................................... 720 737
Finished goods...................................................... 10,382 9,673
Field inventories awaiting installation............................. -- 50
-------- --------
Total manufacturing inventories................................. 15,902 16,181
Service inventories............................................. 379 1,015
-------- --------
Total inventories, net....................................... $ 16,281 $ 17,196
======== ========
Property, plant and equipment
Machinery and equipment............................................. $ 30,481 $ 31,317
Equipment used in outsourcing....................................... 15,986 15,903
Computers and purchased software.................................... 28,746 26,662
Buildings, furniture and improvements............................... 19,556 20,458
Land................................................................ 1,958 1,958
-------- --------
Total cost...................................................... 96,727 96,298
Accumulated depreciation........................................ (57,891) (56,951)
-------- --------
Property, plant and equipment, net........................... $ 38,836 $ 39,347
======== ========
Intangible assets
Goodwill............................................................ $ 16,991 $ 16,991
Capitalized software................................................ 5,065 6,309
Distribution and product rights..................................... 2,475 2,475
Patents............................................................. 7,086 7,086
-------- --------
Total cost...................................................... 31,617 32,861
Accumulated amortization........................................ (20,582) (20,025)
-------- --------
Intangible assets, net....................................... $ 11,035 $ 12,836
======== ========
</TABLE>
Note 5: Short-term Borrowings and Long-term Debt
Short-term Borrowings
In January 2000, we signed a four-year agreement with a bank for a revolving
line of credit up to a maximum amount of $35 million. Borrowings available
under this facility are based on qualified accounts receivable and inventory,
and are secured by those and certain cash accounts. At December 31, 2001, the
maximum amount we could borrow under this agreement was $13.4 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.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There were no amounts outstanding at December 31, 2001 or December 31, 2000.
Subsequent to December 31, 2001, we terminated the above mentioned line of
credit and obtained a new line of credit with a borrowing limit of $35 million;
such borrowings are not limited by amounts of accounts receivable and
inventory. The new line of credit expires on June 1, 2003. The maximum amount
of $35 million available is reduced by outstanding letters of credit,which at
December 31, 2001 were $11.6 million. We paid an origination fee of .125% and
are obligated to pay an annual commitment fee of .125% on the unused portion of
the available line of credit.
Mortgage Notes Payable
<TABLE>
<CAPTION>
At December 31,
---------------
2001 2000
------ ------
(in thousands)
<S> <C> <C>
Secured mortgage note payable to a shareholder with principal and interest payments of 9%
until maturity on August 1, 2015....................................................... $5,057 $5,237
</TABLE>
We incurred the above note in conjunction with the purchase of our
headquarters and related manufacturing space in Spokane, Washington. Principal
payments due under the remaining note are $197,000 in 2002, $216,000 in 2003,
$236,000 in 2004, $258,000 in 2005, $282,000 in 2006 and $3.9 million
thereafter. In January 2002, we paid a discounted amount of $4.9 million, and
satisfied the note in full.
Project Financing
<TABLE>
<CAPTION>
At December 31,
---------------
2001 2000
------ ------
(in thousands)
<S> <C> <C>
Secured note payable with principal and interest payments of 7.6% until maturity on May 31,
2009..................................................................................... $6,082 $6,671
</TABLE>
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 $635,000 in 2002, $685,000 in 2003,
$739,000 in 2004, $797,000 in 2005, $860,000 in 2006 and $2.4 million
thereafter.
Convertible Subordinated Debt
<TABLE>
<CAPTION>
At December 31,
---------------
2001 2000
------- -------
(in thousands)
<S> <C> <C>
Unsecured, convertible subordinated notes...................... $53,313 $53,459
</TABLE>
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. During 2001,
$146,000 of notes were converted to common stock by individual holders.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: 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 the first 6% of which we
match in cash, subject to statutory limitations. The expense for our matching
contribution was $1.1 million in 2001, $838,000 in 2000, and $1.2 million in
1999.
Stock Option Plans
At December 31, 2001, we had three stock-based compensation plans in effect,
only one of which we are currently granting options under, which are described
below. We apply APB 25 and related interpretations in accounting for our 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, 2001:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------- -------------------
Range of Exercise Shares Life Shares
Prices (in 000's) (years) Price (in 000's) Price
----------------- ---------- ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
$ 4.00 - $ 5.16 621 6.38 $ 4.96 608 $ 4.98
$ 6.00 - $ 8.66 1,966 8.61 7.30 304 7.76
$13.00 - $17.88 520 4.75 16.20 430 16.27
$19.88 - $24.50 272 4.40 21.86 254 21.96
$32.35 11 9.95 32.35 -- --
$58.75 12 3.84 58.75 12 58.75
----- -----
3,402 7.26 $ 9.66 1,608 $11.60
===== =====
</TABLE>
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. Because all stock options were
issued at fair value, no compensation cost has been recognized. 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 $24.50 in 2001, $.86 to $8.50
in 2000 and $.17 to $2.91 in 1999. At December 31, 2001, there were 3.7 million
shares of authorized but unissued common stock under the plans, of which
options for the purchase of 339,000 shares were available for future grants.
Share amounts (in thousands) and weighted average exercise prices are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
2001 2000 1999
------------- ------------- -------------
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,180 $ 9.97 2,910 $10.36 2,666 $10.42
Granted......................... 1,117 8.05 945 7.37 439 8.16
Exercised....................... (842) 8.74 (131) 5.18 (38) 2.47
Cancelled....................... (53) 8.29 (544) 8.71 (157) 7.17
----- ----- -----
Outstanding at end of year...... 3,402 9.66 3,180 9.97 2,910 10.36
===== ===== =====
Options exercisable at year end. 1,608 $11.60 1,657 $11.80 1,297 $12.85
</TABLE>
55
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
2001 2000 1999
------- ------ --------
(in thousands except per share data)
<S> <C> <C> <C>
Net income (loss)
As reported............ $13,450 $2,706 $(68,596)
Pro forma.............. 11,311 687 (68,801)
Diluted earnings per share
As reported............ $ .75 $ .18 $ (4.62)
Pro forma.............. .63 .04 (4.63)
</TABLE>
The weighted average fair value of options granted was $8.05, $7.37, and
$8.16 during 2001, 2000, and 1999 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:
<TABLE>
<CAPTION>
2001 2000 1999
----- ----- ----
<S> <C> <C> <C>
Dividend yield......... 0% 0% 0%
Expected volatility.... 84.3% 72.5% 59%
Risk-free interest rate 5.4% 7.1% 5.8%
Expected life (years).. 5.0 5.9 5.9
</TABLE>
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 111,459; 89,581 and 83,729 shares to employees in 2001,
2000 and 1999, respectively.
Note 7: Other Related Party Transactions
Three of our customers are also shareholders with officers that hold
positions on our Board of Directors. In addition, in 2000 and 1999, one of
those customers had a greater than 10% ownership interest. Revenues from these
three customers were $4.0 million in 2001, $3.6 million in 2000 and $4.6
million in 1999. Accounts receivable from these customers were $321,000,
$160,000 and $137,000 at December 31, 2001, 2000 and 1999, respectively.
Interest expense related to mortgage notes payable to one of these shareholders
was $464,000 in 2001, $532,000 in 2000 and $561,000 in 1999. In January 2002,
we paid $4.9 million, which represents a $200,000 discount to this shareholder
to fully satisfy our mortgage note.
In March 2001, we loaned $750,000 at an interest rate of 7% per annum to a
director. The loan was collateralized by 300,000 shares of our common stock.
The balance of the secured promissory note, including principal and interest,
was paid in full by November 2001.
In May 2000, we subleased a portion of our Spokane facility to an affiliate
in which we have a 30% interest. The lease runs through May 2003 with base
monthly payments of $14,430 payable to Itron.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8: 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, 2001
and 2000 and do not reflect subsequent changes in the economy, interest and tax
rates, and other variables that may affect determination of fair value. The
following methods and assumptions were used in estimating fair values.
Cash, cash equivalents, short-term investments and accounts receivable: The
carrying value approximates fair value due to the short maturity of these
instruments.
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.
<TABLE>
<CAPTION>
2001 2000
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Cash, cash equivalents, short-term investments and accounts
receivable............................................... $95,126 $95,126 $71,075 $71,075
Mortgage notes payable..................................... 5,057 5,578 5,237 5,553
Project financing.......................................... 6,082 6,013 6,671 6,568
Convertible subordinated debt.............................. 53,313 96,481 53,459 32,373
</TABLE>
Note 9: Restructurings
2001 Charges
During 2001, we increased our severance reserve by $207,000 for remaining
obligations, and decreased our consolidation of facilities reserve by $1.4
million based on our sublease of vacated space and the decision to continue to
occupy a facility we had originally planned to abandon. During the year we used
restructuring reserve balances from prior years for severance and related
charges and lease payments for abandoned facilities. Total restructuring
activity for the year ended December 31, 2001 is as follows:
<TABLE>
<CAPTION>
Reserve Reserve Reserve
Balance Balance Balance
Cash/Non-cash 12/31/00 Adjustments Payments 12/31/01
------------- -------- ----------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Severance and related charges Cash $ 159 $ 207 $(235) $131
Consolidation of facilities.. Cash 2,616 (1,426) (743) 447
------ ------- ----- ----
Total restructurings......... $2,775 $(1,219) $(978) $578
====== ======= ===== ====
</TABLE>
The reserve balances for severance and related charges are expected to be
fully utilized in 2002. Facility consolidation reserves are dependent on our
continued ability to sublease vacant space under a non-cancelable operating
lease through 2006.
2000 Charges
During 2000, we increased our severance reserve by $315,000 for remaining
obligations and decreased our asset impairment reserve by $500,000 based on
larger than anticipated proceeds from the sale of high volume
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
manufacturing equipment. 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.
Total restructuring activity for the year ended December 31, 2000 is as follows:
<TABLE>
<CAPTION>
Reserve Reserve Reserve
Balance Balance Balance
Cash/Non-cash 12/31/99 Adjustments Payments 12/31/00
------------- -------- ----------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Severance and related charges Cash $ 8,988 $ 315 $ (9,144) $ 159
Asset impairment............. Non-cash 3,600 (500) (3,100) --
Consolidation of facilities.. Cash 2,552 -- 64 2,616
------- ----- -------- ------
Total restructurings......... $15,140 $(185) $(12,180) $2,775
======= ===== ======== ======
</TABLE>
1999 Charges
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 workforce
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. Total restructuring activity for the year ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Reserve Reserve
Balance Restructuring Balance
Cash/Non-cash 12/31/98 Charges Payments 12/31/99
------------- -------- ------------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Severance and related charges Cash $ -- $ 9,237 $ (249) $ 8,988
Asset impairment............. Non-cash -- 4,764 (1,164) 3,600
Consolidation of facilities.. Cash 429 2,685 (562) 2,552
---- ------- ------- -------
Total restructurings......... $429 $16,686 $(1,975) $15,140
==== ======= ======= =======
</TABLE>
Note 10: Investments in Affiliates
At December 31, 2001, we had investments in two entities that were accounted
for under the equity method of accounting. We have a 50% interest in a company
that acts as a distributor for our water products in certain regions of the
U.S. (Company A) and a 30% interest in a company that serves both as a contract
manufacturer for our low volume products and as our handheld service repair
depot (Company B). We also have a 10% ownership interest in a company that
develops home energy gateway communication technology (Company C), which is
accounted for under the cost method, as we cannot exercise significant
influence over the company. Balances and operating activity relating to these
investments is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, December 31,
------------- ------------
2001 2000 2001 2000
------ ------ ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Company A.................... $1,160 $1,003 $157 $886
Company B.................... 1,145 1,060 85 45
Company C.................... 500 -- -- --
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We loaned $500,000 to Company B, in addition to our equity investment, at an
interest rate equal to prime plus 700 basis points through January 2003 and
prime plus 800 basis points from January 2003 through January 2004. The loan
matures in January 2004, but Company B can pay the outstanding balance to us in
part or in full at any time prior to maturity.
We also loaned $2.0 million, in the form of a convertible note receivable,
to a company that is developing a web based wireless workforce management tool.
The note receivable is payable at maturity in September 2006, with interest
accruing at 6%. We may convert all or any portion of the outstanding principal
to common stock until September 2005 at CDN $0.65. After September 2005, the
conversion price increases to CDN$ 0.73 per share. Had we converted our note at
December 31, 2001, we would have had approximately 4.9 million shares of stock
in this company, representing 18.8% ownership.
Additionally, during 2001, we invested $850,000 in a company developing a
meter reading product that ceased its operations during 2001, at which time we
wrote off our equity investment and fully reserved our note receivable.
Note 11: Sale of Outsourcing Equipment
In March 2000, we sold our network-based Automated Meter Reading (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. Negotiations commenced in 1999. In 1999, in anticipation of the sale,
we recorded a $49.8 million loss on the sale, which is included in cost of
revenues--service for the Electric Systems segment. The loss consisted of a
$34.5 million write-off of the Duquesne contracts receivable (both current and
non-current) and an $18.6 million impairment of the assets being sold, which
were partially offset by 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.
In March 2000, we 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 through December 31, 2013. We
will receive approximately $10 million ratably over the term of those services
and expected to incur approximately $24.3 million in expenses. As such, we
recorded a forward loss of $14.3 million in the fourth quarter of 1999 related
to this agreement. In connection with our performance responsibilities, we have
provided a $5 million standby letter of credit.
Note 12: 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. Rent expense under the
Company's operating leases was $3.2 million in 2001, $2.3 million in 2000.
Receipts under the Company's noncancelable subleases were $353,000 in 2001 and
$315,000 in 2000. Assets under capital leases are included in the consolidated
balance sheets as follows:
<TABLE>
<CAPTION>
At December 31,
--------------
2001 2000
----- ------
(in thousands)
<S> <C> <C>
Computers and software................. $ 118 $1,136
Accumulated depreciation............... (103) (686)
----- ------
Net capital leases..................... $ 15 $ 450
===== ======
</TABLE>
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments and sublease revenues, at December 31, 2001, under
the aforementioned leases and other non-cancelable operating leases and
subleases with initial or remaining terms in excess of one year are as follows,
(in thousands):
<TABLE>
<CAPTION>
Minimum Sublease Payments,
Payments Revenues Net
-------- -------- ---------
<S> <C> <C> <C>
2002................................... $ 4,130 $ 370 $ 3,760
2003................................... 3,207 278 2,929
2004................................... 2,378 214 2,164
2005................................... 1,802 217 1,585
2006................................... 1,333 184 1,149
Thereafter............................. 1,531 -- 1,531
------- ------ -------
Total minimum lease payments........... $14,381 $1,263 $13,118
======= ====== =======
</TABLE>
We entered into an agreement with one of our affiliates where we have agreed
to pay royalties in exchange for exclusive selling rights for certain
territories and products. Minimum royalty payments under this agreement are
approximately $1.4 million through June 2003.
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. Bonds in
force were $40 million and $48 million at December 31, 2001 and 2000,
respectively. Additionally, we have standby letters of credit to guarantee our
performance under certain contracts. The outstanding amounts of standby letters
of credit were $11.6 million, $11.8 million, and $6.3 million at December 31,
2001, 2000, and 1999, respectively. In addition, we guarantee lease payments
for certain equipment leased by an affiliated company. The guaranteed future
lease obligation at December 31, 2001 was $816,000.
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.
In addition, we are both a plaintiff and a defendant in litigation
concerning potential patent infringement. While we believe we will prevail in
this matter, the ultimate outcome and its impact on our financial statements is
indeterminable at this time. In the event the outcome is unfavorable to us,
there could be a material adverse effect on our financial condition.
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, 2001, we had trade and contracts
receivable totaling $305,000 from SCE and net capitalized equipment related to
this contract of $9.0 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 13: 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
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Funding received....................... $391 $ -- $382
Royalties paid......................... 605 800 506
</TABLE>
Note 14: 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 15: 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:
The domestic and foreign components of income before taxes were:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
2001 2000 1999
------- ------ ---------
(in thousands)
<S> <C> <C> <C>
Domestic............................... $21,590 $6,225 $ (92,108)
Foreign................................ (224) 699 (8,158)
------- ------ ---------
Income (loss) before income taxes...... $21,366 $6,924 $(100,266)
======= ====== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2001 2000 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Expected federal income tax provision (benefit) $ 7,478 $ 2,423 $(35,093)
Change in valuation allowance.................. (1,222) (1,760) 7,048
State income taxes............................. 231 221 (1,233)
Goodwill amortization.......................... 317 309 309
Tax credits.................................... 276 341 -
Foreign operations............................. 861 917 429
Meals and entertainment........................ 102 103 122
Other, net..................................... (127) 146 408
------- ------- --------
Total provision (benefit) for income taxes.. $ 7,916 $ 2,700 $(28,010)
======= ======= ========
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2001 2000 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current:
Federal.................................... $ 4,589 $ 1,177 $ (2,931)
State and local............................ 264 (49) 1,000
Foreign.................................... 9 6 10
------- ------- --------
Total current.......................... $ 4,862 $ 1,134 $ (1,921)
Deferred:
Federal.................................... 3,130 1,451 (28,625)
State and local............................ (39) 455 (2,076)
Foreign.................................... 1,185 1,420 (2,436)
------- ------- --------
Total deferred......................... 4,276 3,326 (33,137)
Change in valuation allowance................. (1,222) (1,760) 7,048
------- ------- --------
Total provision (benefit) for income taxes. $ 7,916 $ 2,700 $(28,010)
======= ======= ========
</TABLE>
Deferred income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets
Loss carryforwards..................... $22,688 $24,304 $20,796
Tax credits............................ 6,559 6,725 7,066
Accrued expenses....................... 3,734 3,101 6,507
Inventory valuation.................... 1,475 1,994 1,806
Depreciation and amortization.......... -- 531 356
Long-term contracts.................... 1,977 3,305 6,814
Other, net............................. 345 -- 284
------- ------- -------
Total deferred tax assets.......... 36,778 39,960 43,629
Deferred tax liabilities
Acquisitions........................... -- (86) (173)
Depreciation and amortization.......... (698) -- --
Other, net............................. (1,459) (977) --
------- ------- -------
Total deferred tax liabilities..... (2,157) (1,063) (173)
Valuation allowance.................... (5,535) (6,758) (8,518)
------- ------- -------
Net deferred tax assets................... $29,086 $32,139 $34,938
======= ======= =======
</TABLE>
Federal research and development tax credits of $4,616,000 expire from
2002-2012 and the federal loss carryforwards of $48,080,000 expire from
2018-2020. We also have alternative minimum tax credits, totaling $1,942,000
that are available to offset future tax liabilities indefinitely.
Valuation allowances of $5,535,000, $6,757,000, and $8,412,000 in 2001,
2000, and 1999 respectively, were provided for carryforwards attributable to
various items for which the Company may not receive future benefits.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16: Segment Information
Effective January 1, 2002, we are internally organized around four business
units focused on the customer segments that we serve. These business units are
Electric Systems, Natural Gas Systems, Water & Public Power Systems, and
International Systems.
Revenues for each business unit include hardware, custom and licensed
software, project management, installation and support activities, outsourcing
services, where we own and operate, or simply operate, systems for a periodic
fee, and post-sale support activities. Inter-segment revenues are immaterial.
Within each business unit, product costs associated with revenue are reported
using standards, which include materials, direct labor and an overhead
allocation based on projected production for the year. Variances from standard
costs are reported in corporate costs and are not allocated to the business
units.
Management has three primary measures for each of our operating segments:
revenue, gross profit, and operating income. Of these three measures, operating
income is our primary profit and loss measure. It is defined as operating
income after the allocation of basic services (such as floor space and
communication expense), excluding the allocation of corporate product
development, marketing, miscellaneous manufacturing and certain other corporate
expenses. Operating income is calculated as revenue, less direct costs
associated with that revenue, less operating expenses directly incurred by the
segment and less the allocations mentioned above. Operating expenses directly
associated with each segment may include sales, marketing, development, or
administrative expenses. Certain amounts in the 2000 and 1999 financial
statements have been reclassified to conform to the 2001 presentation. In the
table below corporate information, is included to reconcile segment activity to
the consolidated statements of operations.
<TABLE>
<CAPTION>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues
Electric Systems...................... $ 99,722 $ 61,985 $ 64,337
Natural Gas Systems................... 35,694 39,836 50,292
Water & Public Power Systems.......... 65,072 60,123 61,239
International Systems................. 25,067 17,997 17,544
-------- -------- --------
Total revenues.................... $225,555 $179,941 $193,412
======== ======== ========
Gross profit (loss)
Electric Systems...................... $ 42,352 $ 26,985 $(57,870)
Natural Gas Systems................... 19,370 22,361 25,693
Water & Public Power Systems.......... 28,791 26,450 26,180
International Systems................. 8,621 7,753 2,567
Corporate............................. (1,275) (12,700) (5,798)
-------- -------- --------
Total gross profit (loss)......... $ 97,859 $ 70,849 $ (9,228)
======== ======== ========
Operating income (loss)
Electric Systems...................... $ 37,201 $ 23,423 $(61,431)
Natural Gas Systems................... 16,738 19,956 23,287
Water & Public Power Systems.......... 25,295 23,660 23,390
International Systems................. 1,839 1,602 (7,624)
Corporate............................. (55,213) (58,991) (71,027)
-------- -------- --------
Total operating income (loss)..... $ 25,860 $ 9,650 $(93,405)
======== ======== ========
</TABLE>
During 2001 the Company had one Electric business unit customer, which
individually accounted for 15% of total company revenues.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17: Quarterly Results (Unaudited)
Quarterly results are as follows (in thousands, except per share and stock
price data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total Year
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
2001
Statement of operations data:
Total revenues....................................... $47,471 $53,014 $60,855 $64,215 $225,555
Gross profit......................................... 18,681 23,142 27,053 28,983 97,859
Net income........................................... $ 1,489 $ 3,158 $ 3,904 $ 4,899 $ 13,450
======= ======= ======= ======= ========
Basic net income per share
Basic net income per share........................... $ 0.10 $ 0.20 $ 0.25 $ 0.31 $ 0.86
======= ======= ======= ======= ========
Diluted net income per share
Diluted net income per share......................... $ 0.09 $ 0.18 $ 0.21 $ 0.26 $ 0.75
======= ======= ======= ======= ========
Stock Price:
High................................................. $ 12.50 $ 18.98 $ 23.84 $ 34.21 $ 34.21
Low.................................................. 3.50 10.25 14.25 20.13 3.50
2000
Statement of operations data:
Total revenues....................................... $46,925 $44,570 $40,692 $47,754 $179,941
Gross profit......................................... 17,306 17,564 16,329 19,650 70,849
Net income before extraordinary item and cumulative
effect of a change in accounting principle......... 302 1,115 624 2,183 4,224
Extraordinary gain on early extinguishment of debt,
net of income taxes of $570........................ 1,044 -- -- -- 1,044
Cumulative effect of change in accounting principle,
net of income taxes of $1,581...................... (2,562) -- -- -- (2,562)
Net income (loss).................................... $(1,216) $ 1,115 $ 624 $ 2,183 $ 2,706
======= ======= ======= ======= ========
Basic net income per share
Before extraordinary item and cumulative effect of a
change in accounting principle..................... $ .02 $ .07 $ .04 $ .14 $ .28
Extraordinary item................................... .07 -- -- -- .07
Cumulative effect.................................... (.17) -- -- -- (.17)
------- ------- ------- ------- --------
Basic net income (loss) per share.................... $ (.08) $ .07 $ .04 $ .14 $ .18
======= ======= ======= ======= ========
Diluted net income per share
Before extraordinary item and cumulative effect of a
change in accounting principle..................... $ .02 $ .07 $ .04 $ .14 $ .27
Extraordinary item................................... .07 -- -- -- .07
Cumulative effect.................................... (.17) -- -- -- (.17)
------- ------- ------- ------- --------
Diluted net income (loss) per share.................. $ (.08) $ .07 $ .04 $ .14 $ .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
</TABLE>
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 18: Subsequent Events
On March 12, 2002, Itron acquired all the outstanding shares of LineSoft
Corporation, a Spokane-based privately held company that is a leading provider
of innovative engineering design software applications and consulting services
for optimizing utility transmission and distribution systems. The initial
purchase price of $42 million is subject to a working capital adjustment that
will be finalized within 45 days from closing. At closing, the working capital
adjustment was preliminarily calculated as $600,000, resulting in a net
purchase price of $41.4 million. Of this amount $21 million was paid through
the issuance of 848,870 shares of Itron common stock and cash for fractional
interests. The remaining $20.4 million was paid in cash, except for
$1.0 million that was placed in escrow as security for the sellers'
indemnifications and $600,000 that was also placed in escrow as the initial
working capital price adjustment. In addition, Itron is required to pay
additional amounts to LineSoft shareholders of up to $13.5 million in the event
that certain defined revenue hurdles in 2002, 2003 and/or 2004 are exceeded.
Any earnout payments will also be paid half in cash and half in Itron common
stock.
On February 25, 2002, Itron agreed to sell an office building in Raleigh, NC
that we will no longer occupy effective April 2002. The sale, which is
contingent upon the purchaser's completion of due diligence, is expected to
close on or before July 1, 2002. The sales price of $1,825,000 represents a
gain of approximately $975,000.
On March 18, 2002 Itron notified the holders of the remaining exchange
notes, totaling $15 million, that we will exercise our option to redeem the
notes on April 17, 2002. The holders have until April 16, 2002 to convert their
shares into our common stock. Based on the current market prices of our stock,
we anticipate note holders will convert rather than redeem.
65
<PAGE>
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 24, 2002
(the "2001 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.
66
<PAGE>
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:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<C> <S>
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. (F) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of its executive officers. (G)
(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.
10.3 Form of Confidentiality Agreement normally entered into with employees. (A) (Exhibit 10.7)
10.4 Amended and Restated Registration Rights Agreement among the Registrant and certain holders of
its securities dated March 25, 1996 (D) (Exhibit 10.4)
10.5 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.6 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.7 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.8 Form of Indemnification Agreements between the Registrant and certain directors and officers. (G)
(Exhibit 10.9)
10.9 Schedule of directors and executive officers who are parties to Indemnification Agreements (see
Exhibit 10.8 hereto) with the Registrant.
10.10 Employment Agreement between the Registrant and David G. Remington dated February 29, 1996.
* (C) (Exhibit 10.16)
10.11 Office Lease between the Registrant and Woodville Leasing Inc. Dated October 4, 1993. (B)
(Exhibit 10.24)
10.12 Purchase Agreement between the Registrant and Pentzer Development Corporation dated July 11,
1995. (C) (Exhibit 10.19)
10.13 Loan Agreement between Itron, Inc. and GE Capital Corporation dated January 18, 2000. (G)
(Exhibit 10.16)
10.14 First Amendment to Credit Agreement dated February 28, 2000. (G) (Exhibit 10.18)
10.15 Asset Purchase Agreement between Itron, Inc. and DataCom Information Systems, LLC (e.g. an
affiliate of Duquesne Light company) dated March 30, 2000. (H) (Exhibit 10.19)
10.16 Warranty and maintenance Agreement between Itron, Inc. and DataCom Information Systems, LLC
dated March 30, 2000. (H) (Exhibit 10.20)
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<C> <S>
10.17 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated May 15, 2000. (I)
(Exhibit 10.23)
10.18 Credit Agreement between Itron, Inc. and Servatron dated June 22, 2000. (I) (Exhibit 10.23)
10.19 Third Amendment to Credit Agreement dated June 30, 2000. (J) (Exhibit 10.24)
10.20 Agreement and Plan of Reorganization Agreement between Itron, Inc. and LineSoft Corporation
dated February 14, 2002 (K) (Exhibit 2.1)
10.21 2000 Stock Option Incentive Compensation Plan (L)
10.22 2000 Restated Stock Option Grant Program for Nonemployee Directors
10.23 Loan Agreement between Itron, Inc. And Wells Fargo Bank, National Association dated
February 15, 2002.
12 Statement of Computation of Ratios Subsidiaries of the Registrant Independent Auditors' Consent
Financial Data Schedule.
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
</TABLE>
- --------
(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
Current Report on Form 8-K dated March 18, 1997.
(G) Incorporated by reference to designated exhibit included in the Company's
1999 Annual Report on Form 10-K dated March 26, 2000.
(H) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated May 15, 2000.
(I) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report of Form 10-Q dated August 14, 2000.
(J) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated November 14, 2000.
(K) Incorporated by reference to designated exhibit included in the Company's
Report on Form 8-K dated March 1, 2002.
(L) Incorporated by reference to Appendix A to the company's designated Proxy
Statement dated April 28, 2001 for its annual meeting of shareholders held
on May 16, 2001.
* Management contract or compensatory plan or arrangement.
(delta) 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
2001.
68
<PAGE>
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 28th day of March, 2002.
ITRON, INC.
By: /S/ DAVID G. REMINGTON
-----------------------------
David G. Remington
Vice President and 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 28th day of March, 2002.
Signature Title
--------- -----
/S/ S. EDWARD WHITE Chairman of the Board
- -----------------------------
S. Edward White
/S/ LEROY D. NOSBAUM Chief Executive Officer and
- ----------------------------- Director (Principal
LeRoy D. Nosbaum Executive Officer)
/S/ ROBERT D. NEILSON President and Chief Operating
- ----------------------------- Officer
Robert D. Neilson
/S/ DAVID G. REMINGTON Vice President and Chief
- ----------------------------- Financial
David G. Remington Officer (Principal
Financial and Accounting
Officer)
/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/ THOMAS S. GLANVILLE Director
- -----------------------------
Thomas S. Glanville
/S/ MARY ANN PETERS Director
- -----------------------------
Mary Ann Peters
/S/ GRAHAM M. WILSON Director
- -----------------------------
Graham M. Wilson
69
<PAGE>
Schedule II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at end
Additions of period
--------------------- -------------------
Balance at Charged to
beginning costs and
Description of period expenses Deductions Current Non current
- ----------- ---------- ---------- ---------- ------- -----------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Inventory obsolescence.......... $4,766 $2,697 $4,093 $3,370 $ --
Short and long-term warranty.... 5,946 5,717 4,801 6,062 800
Allowance for doubtful accounts. 1,485 4,808 4,982 1,311 --
Year ended December 31, 2000:
Inventory obsolescence.......... $3,370 $2,397 $1,991 $3,776 $ --
Short and long-term warranty.... 6,862 3,572 4,700 5,008 726
Allowance for doubtful accounts. 1,311 570 737 1,144 --
Year ended December 31, 2001:
Inventory obsolescence.......... $3,776 $2,511 $3,168 $3,119 $ --
Short and long-term warranty.... 5,734 2,759 2,166 3,229 3,098
Allowance for doubtful accounts. 1,144 2,129 1,846 1,427 --
</TABLE>
70
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<C> <S>
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. (F) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of its executive officers. (G)
(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.
10.3 Form of Confidentiality Agreement normally entered into with employees. (A) (Exhibit 10.7)
10.4 Amended and Restated Registration Rights Agreement among the Registrant and certain holders of
its securities dated March 25, 1996 (D) (Exhibit 10.4)
10.5 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.6 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.7 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.8 Form of Indemnification Agreements between the Registrant and certain directors and officers. (G)
(Exhibit 10.9)
10.9 Schedule of directors and executive officers who are parties to Indemnification Agreements (see
Exhibit 10.8 hereto) with the Registrant.
10.10 Employment Agreement between the Registrant and David G. Remington dated February 29, 1996.
* (C) (Exhibit 10.16)
10.11 Office Lease between the Registrant and Woodville Leasing Inc. Dated October 4, 1993. (B)
(Exhibit 10.24)
10.12 Purchase Agreement between the Registrant and Pentzer Development Corporation dated July 11,
1995. (C) (Exhibit 10.19)
10.13 Loan Agreement between Itron, Inc. and GE Capital Corporation dated January 18, 2000. (G)
(Exhibit 10.16)
10.14 First Amendment to Credit Agreement dated February 28, 2000. (G) (Exhibit 10.18)
10.15 Asset Purchase Agreement between Itron, Inc. and DataCom Information Systems, LLC (e.g. an
affiliate of Duquesne Light company) dated March 30, 2000. (H) (Exhibit 10.19)
10.16 Warranty and maintenance Agreement between Itron, Inc. and DataCom Information Systems, LLC
dated March 30, 2000. (H) (Exhibit 10.20)
10.17 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated May 15, 2000. (I)
(Exhibit 10.23)
10.18 Credit Agreement between Itron, Inc. and Servatron dated June 22, 2000. (I) (Exhibit 10.23)
10.19 Third Amendment to Credit Agreement dated June 30, 2000. (J) (Exhibit 10.24)
10.20 Agreement and Plan of Reorganization Agreement between Itron, Inc. and LineSoft Corporation
dated February 14, 2002 (K) (Exhibit 2.1)
10.21 2000 Stock Option Incentive Compensation Plan (L)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<C> <S>
10.22 2000 Restated Stock Option Grant Program for Nonemployee Directors
10.23 Loan Agreement between Itron, Inc. And Wells Fargo Bank, National Association dated
February 15, 2002.
12 Statement of Computation of Ratios Subsidiaries of the Registrant Independent Auditors' Consent
Financial Data Schedule.
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
</TABLE>
- --------
(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
Current Report on Form 8-K dated March 18, 1997.
(G) Incorporated by reference to designated exhibit included in the Company's
1999 Annual Report on Form 10-K dated March 26, 2000.
(H) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated May 15, 2000.
(I) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report of Form 10-Q dated August 14, 2000.
(J) Incorporated by reference to designated exhibit included in the Company's
Quarterly Report on Form 10-Q dated November 14, 2000.
(K) Incorporated by reference to designated exhibit included in the Company's
Report on Form 8-K dated March 1, 2002.
(L) Incorporated by reference to Appendix A to the company's designated Proxy
Statement dated April 28, 2001 for its annual meeting of shareholders held
on May 16, 2001.
* Management contract or compensatory plan or arrangement.
(delta) Confidential treatment requested for a portion of this agreement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>dex102.txt
<DESCRIPTION>SCHEDULE OF PARTIES TO CHANGE OF CONTROL AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.2
CHANGE OF CONTROL AGREEMENTS
Robert D. Neilson
LeRoy D. Nosbaum
David G. Remington
Jemima G. Scarpelli
Dennis A. Shepherd
John A. Smith
Russell E. Vanos
Russell N. Fairbanks, Jr.
Timothy J. Gelvin
William L. Brown
John W. Hengesh
Randi L. Neilson
Robert W. Whitney
Michael A. Cantelme
C. R. Dwiggins, Jr.
Douglas A. Staker
Dave Godwin
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>4
<FILENAME>dex109.txt
<DESCRIPTION>SCHEDULE OF PARTIES TO INDEMNIFICATION AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.9
INDEMNIFICATION AGREEMENTS
MariLyn R. Blair
Michael B. Bracy
Jemima G. Scarpelli f/k/a Brennan
Jon E. Eliassen
Graham M. Wilson
Robert D. Neilson
Ted C. DeMerritt
Mary Ann Peters
Russell E. Vanos
David G. Remington
Stuart Edward White
LeRoy D. Nosbaum
Dennis A. Shepherd
John A. Smith
Deloris R. Duquette
Michael Chesser
William L. Brown
Russell N. Fairbanks, Jr.
Timothy J. Gelvin
John W. Hengesh
Randi L. Neilson
Robert W. Whitney
Michael A. Cantelme
Larry Eggleston
Thomas S. Glanville
C. R. Dwiggins, Jr.
Douglas A. Staker
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>5
<FILENAME>dex1022.txt
<DESCRIPTION>AMENDED AND RESTATED STOCK OPTION GRANT PROGRAM
<TEXT>
<PAGE>
Exhibit 10.22
TERMS OF AMENDED AND RESTATED STOCK OPTION
GRANT PROGRAM FOR NONEMPLOYEE DIRECTORS UNDER THE
ITRON, INC. 2000 STOCK INCENTIVE PLAN
The following provisions set forth the terms of the amended and restated
stock option grant program (the "Program") for nonemployee directors of Itron,
Inc. (the "Company") under the Itron, Inc. 2000 Stock Incentive Plan (the
"Plan"). The following terms are intended to supplement, not alter or change,
the provisions of the Plan, and in the event of any inconsistency between the
terms contained herein and in the Plan, the Plan shall govern. All capitalized
terms that are not defined herein shall be as defined in the Plan.
1. Eligibility
Each elected or appointed director of the Company who is not otherwise an
employee of the Company or a Related Corporation (an "Eligible Director") shall
be eligible to receive Awards under the Plan, as described below.
2. Initial Grants
(a) A Nonqualified Stock Option to purchase 10,000 shares of the Company's
Common Stock shall be granted to each Eligible Director upon such Eligible
Director's initial election or appointment to the Board (each, an "Initial
Grant").
(b) Initial Grants shall be fully vested and exercisable on the Grant Date.
3. Annual Grants
(a) Commencing with the 2002 Annual Shareholders' Meeting, each Eligible
Director shall automatically receive a Nonqualified Stock Option to purchase
8,000 shares of Common Stock immediately following each year's Annual Meeting
(each, an "Annual Grant").
(b) Annual Grants shall be fully vested and exercisable on the Grant Date.
4. Retainer Grants
Each Eligible Director shall automatically receive, annually on or about
January 1 of each year, a Stock Award of a number of shares of the Company's
Common Stock having a value equal 60% of such Eligible Director's annual
retainer (as such retainer is established by the Board from time to time) in
lieu of cash payment of such portion of such retainer. The number of shares of
Common Stock issued pursuant to such Stock Award shall be based on the Fair
Market Value of such shares as defined in the Plan.
<PAGE>
5. Chairman of the Board and Committee Chair Grants
In addition to the foregoing Option and Stock Award Grants, commencing with
the 2002 Annual Shareholders' Meeting, (a) the Chairman of the Board shall
receive an additional Nonqualified Stock Option to purchase 1,250 shares of
Common Stock immediately following each year's Annual Meeting, and (b) the
chairman of each committee of the Board shall receive an additional Nonqualified
Stock Option to purchase 1,250 shares of Common Stock immediately following each
year's Annual Meeting, each such Option to be fully vested and exercisable on
the Grant Date.
6. Option Exercise Price
The exercise price of an Option shall be the Fair Market Value of the
Common Stock on the Grant Date.
7. Manner of Option Exercise
An Option shall be exercised by giving the required notice to the Company,
stating the number of shares of Common Stock with respect to which the Option is
being exercised; provided, however, that no fewer than 100 shares (or the
remaining shares then purchasable under the Option, if less than 100 shares) may
be purchased upon any exercise of an Option hereunder and that only whole shares
will be issued pursuant to the exercise of any Option. The notice shall be
accompanied by payment in full for such Common Stock, which payment may be in
whole or in part (a) in cash or check, (b) in shares of Common Stock owned by
the Eligible Director for at least six months having a fair market value on the
day prior to the exercise date equal to the aggregate option exercise price, or
(c) by delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, to promptly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price, all in accordance
with the regulations of the Federal Reserve Board.
8. Term of Options
Each Option shall expire ten years from the Grant Date thereof, but shall
be subject to earlier termination as follows:
(a) In the event that an Eligible Director ceases to be a director of the
Company for any reason other than the death of the Eligible Director, the Option
may be exercised by the Eligible Director only within one year after the date he
or she ceases to be a director of the Company or prior to the date on which the
Option expires by its terms, whichever is earlier.
(b) In the event of the death of an Eligible Director, whether during the
optionee's service as a director or during the one-year period referred to in
Section 8(a) the Option may be exercised only within one year after the date of
death of the Eligible Director or prior to the date on which the Option expires
by its terms, whichever is earlier, by the personal representative of the
Eligible Director's estate, the
<PAGE>
person(s) to whom the Eligible Director's rights under the Option have passed by
will or the applicable laws of descent and distribution, or the beneficiary
designated pursuant to the Plan.
9. Amendment
The Board may amend the provisions contained herein in such respects as it
deems advisable. Any such amendment shall not, without the consent of the
Eligible Director, impair or diminish any rights of an Eligible Director or any
rights of the Company under an Option.
Provisions of the Plan (including any amendments) that were not discussed
above, to the extent applicable to Eligible Directors, shall continue to govern
the terms and conditions of Awards granted to Eligible Directors pursuant to
this Program.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>6
<FILENAME>dex1023.txt
<DESCRIPTION>LOAN AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.23
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of February 15, 2002, by and between
ITRON, INC., a Washington corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
Borrower has requested that Bank extend or continue credit to Borrower as
described below, and Bank has agreed to provide such credit to Borrower on the
terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
---------
CREDIT TERMS
------------
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this Agreement,
Bank hereby agrees to make advances under a revolving line of credit to Borrower
from time to time up to and including May 31, 2003, not to exceed at any time
the aggregate principal amount of Thirty Five Million Dollars ($35,000,000.00)
("Line of Credit"), the proceeds of which shall be used to finance general
corporate purposes. Borrower's obligation to repay advances under the Line of
Credit shall be evidenced by a promissory note substantially in the form of
Exhibit "A" attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) Letter of Credit Subfeature. As a subfeature under the Line of Credit,
Bank agrees from time to time during the term thereof to issue or cause an
affiliate to issue commercial and standby letters of credit for the account of
Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit");
provided however, that the aggregate undrawn amount of all outstanding Letters
of Credit shall not at any time exceed Fifteen Million Dollars ($15,000,000.00).
The form and substance of each Letter of Credit shall be subject to approval by
Bank, in its sole discretion. No Letter of Credit shall have an expiration date
beyond the maturity date of the Line of Credit. The undrawn amount of all
Letters of Credit shall be reserved under the Line of Credit and shall not be
available for borrowings thereunder. Each Letter of Credit shall be subject to
the additional terms and conditions of the Letter of Credit agreements,
applications and any related documents required by Bank in connection with the
issuance thereof. Each draft paid under a Letter of Credit shall be deemed an
advance under the Line of Credit and shall be repaid by Borrower in accordance
with the terms and conditions of this Agreement applicable to such advances;
provided however, that if advances under the Line of Credit are not available,
for any reason, at the time any draft is paid, then Borrower shall immediately
pay to Bank the full amount of such draft, together with interest thereon from
the date such draft is paid to the date such amount is fully repaid by Borrower,
at the rate of interest applicable to advances under the Line of Credit. In such
event Borrower agrees that Bank, in its
-1-
<PAGE>
sole discretion, may debit any account maintained by Borrower with Bank for
the amount of any such draft.
(c) Borrowing and Repayment. Borrower may from time to time during the term
of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum aggregate principal amount available thereunder, as set
forth above.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Revolving Line of
Credit shall bear interest, at the rate of interest set forth in the Revolving
Line of Credit Note.
(b) Computation and Payment. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in each promissory note or other instrument required hereby.
(c) Prime Rate. The term "Prime Rate" shall mean at any time the rate of
interest most recently announced within Bank at its principal office as its
Prime Rate, with the understanding that the Prime Rate is one of Bank's base
rates and serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto, and is evidenced by the
recording thereof in such internal publication or publications as Bank may
designate. Each change in the rate of interest shall become effective on the
date each Prime Rate change is announced within Bank.
(d) Commitment Fee. Borrower shall pay to Bank a non-refundable commitment
fee for the Revolving Line of Credit equal to $43,750.00, which fee shall be due
and payable in full on the date of this Agreement.
(e) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one
hundred twenty-five thousandths percent (.125%) per annum (computed on the basis
of a 360-day year, actual days elapsed) on the average daily unused amount of
the Revolving Line of Credit, which fee shall be calculated on a quarterly basis
by Bank and shall be due and payable by Borrower in arrears on each April 1,
June 1, October 1 and December 1.
(f) Letter of Credit Fees. Borrower shall pay to Bank (i) fees upon the
issuance of each standby Letter of Credit equal to nine-tenths percent (.90%)
per annum (computed on the basis of a 360-day year, actual days elapsed) of the
face amount thereof, (ii) fees upon the issuance of any other Letter of Credit,
fees upon the payment or negotiation of each draft under any Letter of Credit
and fees upon the occurrence of any other activity with respect to any Letter of
Credit (including without limitation, the transfer, amendment or cancellation of
any Letter of Credit) determined in accordance with Bank's standard fees and
charges then in effect for such activity.
SECTION 1.3. COLLATERAL.
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in all
Borrower's accounts receivable and other similar rights to receive payment from
customers of the Borrower, and inventory, and general
-2-
<PAGE>
intangibles other than Borrower's intellectual property, except as set forth in
Exhibit B, which is a listing of current Outsourcing Project Assets (as
hereinafter defined) that are the subject of a first perfected security interest
already granted to a project finance lender under an Outsourcing Project (as
hereinafter defined). Bank agrees that the Borrower may from time to time enter
into long-term, fixed rate, third party project financing arrangements for an
Outsourcing Project, in the ordinary course of its business, with such financing
to be secured by the Outsourcing Project Assets related thereto. Bank agrees to
release any security interest it may have in such related Outsourcing Project
Assets at the time Borrower obtains such project financing arrangements.
As used in this Agreement, the term "Outsourcing Project" means a
project under which Borrower, constructs a meter reading system consisting
of hardware and software within the service territory of a utility or the
equivalent ("Utility"), and enters into a contract with such Utility for
the construction of the meter reading system and the long-term operations
and maintenance thereof, including without limitation, furnishing the
Utility with the output of the system, which primarily consist of meter
readings, for a price to be paid as the output is delivered.
As used in this Agreement, the term "Outsourcing Project Assets" means
assets that comprise an Outsourcing Project, including the hardware and
software components of the meter reading system that has been constructed
and installed in a Utility's service territory, contracts between Borrower
and the Utility with respect to the Outsourcing Project, use rights to
trademarks, copyrights, patents, and licenses as necessary to operate and
maintain the Outsourcing Project, the trade and contract receivables
arising from the Borrower's performance under such contracts, and, if the
ownership of Outsourcing Project assets has been contributed or otherwise
transferred to a special and single purpose entity for the purpose of
permitting or facilitating project financing, all of the stock of such
special and single purpose entity.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the State of Washington, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
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SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory
note, contract, instrument and other document required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in the
financial statements referred to in Section 2.5 and in Exhibit "C."
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated September 30, 2001, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year,
except as disclosed in Exhibit "D."
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects with
all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations
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as they come due in accordance with the Plan documents and under generally
accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
materials lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
ARTICLE III
-----------
CONDITIONS
-----------
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the extension
of credit by Bank shall be satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and each promissory note or other instrument
required hereby.
(ii) Certificate of Incumbency.
(iii) Corporate Resolution: Borrowing.
(iv) Security Agreement: Rights to Payment and Inventory.
(v) Insurance Letter
(vi) Such other documents as Bank may require under any other Section
of this Agreement.
(c) Financial Condition. There shall have been no material adverse change,
as determined by Bank, in the financial condition or business of Borrower, nor
any material decline, as determined by Bank, in the market value of any
collateral required hereunder or a substantial or material portion of the assets
of Borrower.
(d) Insurance. Borrower shall have delivered to Bank evidence of insurance
coverage on all Borrower's property, in form, substance, amounts, covering risks
and issued by
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companies satisfactory to Bank, and where required by Bank, with loss payable
endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank
to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained herein and in
each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents, which
may be required in connection with such extension of credit.
ARTICLE IV
----------
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants that so long as Bank is obligated to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in
form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year, a
copy of the 10K Report of Borrower, and any other reports or information, filed
with the Securities and Exchange Commission, to include a copy of the annual
budget for the current year then commenced and information showing the
performance of the Borrower for the previous year relative to the annual budget
for the previous year;
(b) not later than 60 days after and as of the end of each quarter, a 10Q
Report of Borrower, with any other reports or information filed with the
Securities and Exchange Commission;
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(c) contemporaneously with each quarterly financial statement of Borrower
required hereby, a certificate of the president or chief financial officer of
Borrower that said financial statements are accurate and that there exists no
Event of Default nor any condition, act or event which with the giving of notice
or the passage of time or both would constitute an Event of Default;
(d) not later than 30 days after and as of the end of each month, a
borrowing base certificate, an inventory collateral report, and an aged summary
of accounts receivable;
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all material licenses,
permits, governmental approvals, rights, privileges and franchises necessary for
the conduct of its business; and comply with the material provisions of all
documents pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the material requirements of all laws, rules,
regulations and orders of any governmental authority applicable to Borrower
and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types
and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts reasonably satisfactory to Bank,
and deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, ordinary wear and tear
excepted, and from time to time make necessary repairs, renewals and
replacements thereto.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower for which public disclosure
would be required by the requirements of the Securities and Exchange Commission
or NASDAQ.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition
as follows using generally accepted accounting principles consistently applied
and used consistently with prior practices (except to the extent modified by the
definitions herein):
(a) Current Ratio not at any time less than 1.50 to 1.00, with "Current
Ratio" defined as total current assets divided by total current liabilities.
(b) Tangible Net Worth not at any time less than $100,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets.
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(c) Net income after taxes not less than $1.00 on an annual basis,
determined as of each fiscal year end.
(d) Total Funded Debt to EBITDA not more than 3.0 to 1.00 as of the end of
each fiscal quarter, on a trailing four-quarter basis, with "Funded Debt"
defined as the sum of all obligations for borrowed money (including subordinated
debt), plus all obligations with respect to the principal component of capital
leases, and with "EBITDA" defined as net profit before tax plus interest expense
(net of capitalized interest expense), depreciation expense and amortization
expense.
(e) Total Direct Funded Debt to EBITDA not more than 2.25 to 1.00 as of the
end of each fiscal quarter, on a trailing four-quarter basis, with "Funded Debt"
defined as the sum of all obligations for borrowed money (including subordinated
debt but excluding borrowings for Outsourcing Projects), plus all obligations
with respect to the principal component of capital leases, and with "EBITDA"
defined as net profit before tax plus interest expense (exclusive of income and
interest expense related to Outsourcing Projects) (net of capitalized interest
expense), depreciation expense and amortization expense.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5)
days after the occurrence of each such event or matter) give written notice to
Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any
condition, event or act which with the giving of notice or the passage of time
or both would constitute an Event of Default; (b) any change in the name or the
legal organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property in
excess of an aggregate of $5,000,000.00.
ARTICLE V
---------
NEGATIVE COVENANTS
------------------
Borrower further covenants that so long as Bank is obligated to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended
hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity (other than wholly-owned subsidiaries); make
any substantial change in the nature of Borrower's business as conducted as of
the date hereof; acquire all or substantially all of the assets of any other
entity; nor sell, lease, transfer or otherwise dispose of all or a substantial
or material portion of Borrower's assets except in the ordinary course of its
business.
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SECTION 5.3. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank, except those disclosed in Exhibit "E."
SECTION 5.4. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or
investments in any person or entity, except disclosed in Exhibit "F."
SECTION 5.5. BASKET OF PERMITTED TRANSACTIONS. Notwithstanding Sections
5.2, 5.3 and 5.4, Borrower may: (a) acquire all or substantially all of the
assets of any non-affiliated entity; (b) guarantee or become liable as surety or
endorser; and (c) make loans or advances to or investments in any person or
entity, as long as the aggregate amount of (a), (b) and (c) immediately has not
exceeded $10.0 million, including those items in Exhibits "E" and "F."
SECTION 5.6. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding, except
the Borrower may use up to $10.0 million of its funds to repurchase or otherwise
acquire shares of any class of the Borrower's stock.
SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, all or any portion of Borrower's assets now
owned or hereafter acquired, except (i) any of the foregoing in favor of Bank or
which is disclosed in Exhibit "G," (ii) Outsourcing Project Assets and (iii)
purchase money liens and equipment leases for equipment used in Borrower's
business.
ARTICLE VI
----------
EVENTS OF DEFAULT
-----------------
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection
with, or any representation or warranty made by Borrower or any other party
under this Agreement or any other Loan Document shall prove to be incorrect,
false or misleading in any material respect when furnished or made.
(c) Any material default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above, and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.
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(d) Any material default in the payment or performance of any obligation,
or any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has incurred
any debt or other liability to any person or entity, including Bank, which debt
or liability shall exceed $100,000.00.
(e) The filing of a notice of judgment lien against Borrower, or the or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower; and with
respect to any of the foregoing, the amount is in excess of $5,000,000.00 and
has not been vacated, discharged, stayed or bonded pending appeal within forty
five (45) days from such filing, recording, service or entry.
(f) Borrower shall become insolvent, or shall suffer or consent to or apply
for the appointment of a receiver, trustee, custodian or liquidator of itself or
any of its property, or shall generally fail to pay its debts as they become
due, or shall make a general assignment for the benefit of creditors; Borrower
shall file a voluntary petition in bankruptcy, or seeking reorganization, in
order to effect a plan or other arrangement with creditors or any other relief
under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended
or recodified from time to time ("Bankruptcy Code"), or under any state or
federal law granting relief to debtors, whether now or hereafter in effect; or
any involuntary petition or proceeding pursuant to the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors is filed or commenced against Borrower, or Borrower
shall file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower shall be adjudicated a
bankrupt, or an order for relief shall be entered against Borrower by any court
of competent jurisdiction under the Bankruptcy Code or any other applicable
state or federal law relating to bankruptcy, reorganization or other relief for
debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes materially impairs, or is substantially likely to materially
impair, the prospect of payment or performance by Borrower of its obligations
under any of the Loan Documents.
(h) The death or incapacity of Borrower. The dissolution or liquidation of
Borrower; or Borrower, or any of its directors, stockholders or members, shall
take action seeking to effect the dissolution or liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all
indebtedness of Borrower under each of the Loan Documents, any term thereof to
the contrary notwithstanding, shall at Bank's option and without notice become
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are hereby expressly waived by each Borrower; (b) the
obligation, if any, of Bank to extend any further credit under any of the Loan
Documents shall immediately cease and terminate; and (c) Bank shall have all
rights, powers and remedies available under each of the Loan Documents, or
accorded by law, including without limitation the right to resort to any or all
security for any credit subject hereto and to exercise any or all of the rights
of a beneficiary or secured party pursuant to applicable law. All rights, powers
and remedies of Bank may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.
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ARTICLE VII
-----------
MISCELLANEOUS
-------------
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER:
ITRON, INC.
2818 North Sullivan Road
Spokane, WA 99216
BANK:
WELLS FARGO BANK, NATIONAL ASSOCIATION
221 North Wall Street
Spokane, WA 99201
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all reasonable payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of Bank's in-house
counsel), expended or incurred by Bank in connection with (a) the negotiation
and preparation of this Agreement and the other Loan Documents, Bank's continued
administration hereof and thereof, and the preparation of any amendments and
waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the rights to
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sell, assign, transfer, negotiate or grant participations in all or any part of,
or any interest in, Bank's rights and benefits under each of the Loan Documents.
In connection therewith, Bank may disclose all documents and information, which
Bank now has or may hereafter acquire relating to any credit subject hereto,
Borrower or its business, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan
Documents constitute the entire agreement between Borrower and Bank with respect
to each credit subject hereto and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in writing signed by each
party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington.
SECTION 7.11. ARBITRATION.
(a) Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan Documents which are the subject of
this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.
(b) Governing Rules. Any arbitration proceeding will (i) proceed in a
location in Washington selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large,
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complex commercial disputes (the commercial dispute resolution procedures or the
optional procedures for large, complex commercial disputes to be referred to, as
applicable, as the "Rules"). If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall control.
Any party who fails or refuses to submit to arbitration following a demand by
any other party shall bear all costs and expenses incurred by such other party
in compelling arbitration of any dispute. Nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. ss.91 or any similar applicable state law.
(c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in sections (i), (ii) and (iii) of this paragraph.
(d) Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of Washington or a neutral retired judge of the
state or federal judiciary of Washington, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of Washington and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the Washington Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.
(e) Discovery. In any arbitration proceeding discovery will be permitted in
accordance with the Rules. All discovery shall be expressly limited to matters
directly relevant to the dispute being arbitrated and must be completed no later
than 20 days before the hearing date and within 180 days of the filing of the
dispute with the AAA. Any requests for an extension of the discovery periods, or
any discovery disputes, will be subject to final determination by the arbitrator
upon a showing that the request for discovery is essential for the party's
presentation and that no alternative means for obtaining information is
available.
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(f) Class Proceedings and Consolidations. The resolution of any dispute
arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.
(g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all
costs and expenses of the arbitration proceeding.
(h) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ITRON, INC. NATIONAL ASSOCIATION
By: /s/ David G. Remington By: /s/ Thomas Beil
--------------------------- ---------------------------------
Thomas Beil, Relationship Manager
Title: VP & CFO
------------------------
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ADDENDUM TO PROMISSORY NOTE
(LIBOR PRICING ADJUSTMENTS)
THIS ADDENDUM is attached to and made a part of that certain promissory note
executed by ITRON, INC. ("Borrower") and payable to WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), or order, dated as of February 15, 2002, in the principal
amount of Thirty Five Million Dollars ($35,000,000.00) (the "Note").
The following provisions are hereby incorporated into the Note to reflect the
interest rate adjustments agreed to by Bank and Borrower:
INTEREST RATE ADJUSTMENTS:
(a) Initial LIBOR Margin. The initial LIBOR margin applicable to this Note shall
be as set forth in the "Interest" paragraph herein.
(b) LIBOR Rate Adjustments. Bank shall adjust the LIBOR margin used to determine
the rate of interest applicable to LIBOR options selected by Borrower under this
Note on a quarterly basis, commencing with the calendar quarter ending September
30, 2001, if required to reflect a change in Borrower's ratio of Funded Debt To
EBITDA (as defined in the Credit Agreement referenced herein), in accordance
with the following grid:
Funded Applicable Annual Unused
Debt/EBITDA LIBOR Margin Fee
-------------- -------------- --------------
2.00 to 2.24 Libor + 2.00% .250%
1.75 to 1.99 Libor + 1.75% .125%
1.50 to 1.74 Libor + 1.50% .125%
1.49 or less Libor + 1.25% .125%
Each such adjustment shall be effective on the first Business Day of the
calendar quarter following the quarter during which Bank receives and reviews
Borrower's most current calendar quarter-end financial statements in accordance
with any requirements established by Bank for the preparation and delivery
thereof.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the
Note.
ITRON, INC
By: /s/ DAVID G. REMINGTON
-------------------------
Title: VP & CFO
-------------------------
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<PAGE>
WELLS FARGO BANK REVOLOVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------
$35,000,000.00 Spokane, Washington
February 15, 2002
FOR VALUE RECEIVED, the undersigned ITRON, INC. ("Borrower") promises to pay to
the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at
Inland Northwest RCBO, 221 North Wall, Suite 310, Spokane, WA 99201, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of
$35,000,000.00, or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other day on
which commercial banks in Washington are authorized or required by law to close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and continuing
for See Pricing Grid, as designated by Borrower, during which all or a portion
of the outstanding principal balance of this Note bears interest determined in
relation to LIBOR; provided however, that no Fixed Rate Term may be selected for
a principal amount less than $100,000.00; and provided further, that no Fixed
Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed
Rate Term would end on a day which is not a Business Day, then such Fixed Rate
Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1 %) determined by dividing Base LIBOR by a percentage
equal to 100% less any LIBOR Reserve Percentage.
(i) "Base LIBOR" means the rate per annum for United States dollar deposits
quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding
that such rate is quoted by Bank for the purpose of calculating effective rates
of interest for loans making reference thereto, on the first day of a Fixed Rate
Term for delivery of funds on said date for a period of time approximately equal
to the number of days in such Fixed Rate Term and in an amount approximately
equal to the principal amount to which such Fixed Rate Term applies. Borrower
understands and agrees that Bank may base its quotation of the Inter-Bank Market
Offered Rate upon such offers or other market indicators of the Inter-Bank
Market as Bank in its discretion deems appropriate including, but not limited
to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
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<PAGE>
(d) "Prime Rate" means at any time the rate of interest most recently announced
within Bank at its principal office as its Prime Rate, with the understanding
that the Prime Rate is one of Bank's base rates and serves as the basis upon
which effective rates of interest are calculated for those loans making
reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear interest
(computed on the basis of a 360-day year, actual days elapsed) either (i) at a
fluctuating rate per annum equal to the Prime Rate in effect from time to time,
or 00 at a fixed rate per annum determined by Bank to be 1.50000% above LIBOR in
effect on the first day of the applicable Fixed Rate Term. When interest is
determined in relation to the Prime Rate, each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within Bank. With respect to each LIBOR selection option selected hereunder,
Bank is hereby authorized to note the date, principal amount, interest rate and
Fixed Rate Term applicable thereto and any payments made thereon on Bank's books
and records (either manually or by electronic entry) and/or on any schedule
attached to this Note, which notations shall be prima facie evidence of the
accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this Note
bears interest determined in relation to LIBOR, it may be continued by Borrower
at the end of the Fixed Rate Term applicable thereto so that all or a portion
thereof bears interest determined in relation to the Prime Rate or to LIBOR for
a new Fixed Rate Term designated by Borrower. At any time any portion of this
Note bears interest determined in relation to the Prime Rate, Borrower may
convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone (or such other electronic
method as Bank may permit) so long as, with respect to each LIBOR selection, (A)
if requested by Bank, Borrower provides to Bank written confirmation thereof not
later than three (3) Business Days after such notice is given, and (B) such
notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate
Term, or at a later time during any Business Day if Bank, at it's sole option
but without obligation to do so, accepts Borrower's notice and quotes a fixed
rate to Borrower. If Borrower does not immediately accept a fixed rate when
quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request
from Borrower shall be subject to a redetermination by Bank of the applicable
fixed rate. If no specific designation of interest is made at the time any
advance is requested hereunder or at the end of any Fixed Rate Term, Borrower
shall be deemed to have made a Prime Rate interest selection for such advance or
the principal amount to which such Fixed Rate Term applied.
(c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon
demand, in addition to any other amounts due or to become due hereunder, any and
all (i) withholdings, interest equalization taxes, stamp taxes or other taxes
(except income and franchise taxes) imposed by any domestic or foreign
governmental authority and related in any manner to LIBOR, and 00 future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental
authority or
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<PAGE>
resulting from compliance by Bank with any request or directive (whether or not
having the force of law) from any central bank or other governmental authority
and related in any manner to LIBOR to the extent they are not included in the
calculation of LIBOR. In determining which of the foregoing are attributable to
any LIBOR option available to Borrower hereunder, any reasonable allocation made
by Bank among its operations shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable on the
15th day of each month, commencing March 15, 2002.
(e) Default Interest. From and after the maturity date of this Note, or such
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.
(f) Collection of Payments. Borrower authorizes Bank to collect all interest due
hereunder by charging Borrower's deposit account number 4311265953 with Bank, or
any other deposit account maintained by any Borrower with Bank, for the full
amount thereof. Should there be insufficient funds in any such deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the term of
this Note borrow, partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of the Credit Agreement between Borrower and Bank defined below; provided
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on May 31, 2003.
(b) Advances. Advances hereunder, to the total amount of the principal sum
available hereunder, may be made by the holder at the oral or written request of
(i) DAVID G. REMINGTON, LEROY NOSBAUM, ROB NEILSON, any one acting alone, who
are authorized to request advances and direct the disposition of any advances
until written notice of the revocation of such authority is received by the
holder at the office designated above, or (ii) any person, with respect to
advances deposited to the credit of any deposit account of any Borrower, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. [Except as requested by (b) (i) above]. The holder shall have no
obligation to determine whether any person requesting an advance is or has been
an authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be credited
first, to any interest then due and second, to the outstanding principal balance
hereof. All payments credited to principal shall be applied first, to the
outstanding principal balance of this Note which bears interest determined in
relation to the Prime Rate, if any, and second, to the outstanding principal
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<PAGE>
balance of this Note which bears interest determined in relation to LIBOR, with
such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to the Prime Rate at any time, in any
amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note which bears
interest determined in relation to LIBOR at any time and in the minimum amount
of $100,000.00; provided however, that if the outstanding principal balance of
such portion of this Note is less than said amount, the minimum prepayment
amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall P6come due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:
(i) Determine the amount of interest which would have accrued each month on the
amount prepaid at the interest rate applicable to such amount had it remained
outstanding until the last day of the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of interest
which would have accrued for the same month on the amount prepaid for the
remaining term of such Fixed Rate Term at LIBOR in effect on the date of
prepayment for new loans made for such term and in a principal amount equal to
the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges
that prepayment of such amount may result in Bank incurring additional costs,
expenses and/or liabilities, and that it is difficult to ascertain the full
extent of such costs, expenses and/or liabilities. Each Borrower, therefore,
agrees to pay the above-described prepayment fee and agrees that said amount
represents a reasonable estimate of the prepayment costs, expenses and/or
liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the
amount of such prepayment fee shall thereafter bear interest until paid at a
rate per annum 2.000% above the Prime Rate in effect from time to time (computed
on the basis of a 360-day year, actual days elapsed). Each change in the rate of
interest on any such past due prepayment fee shall become effective on the date
each Prime Rate change is announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that
certain Credit Agreement between Borrower and Bank dated as of February 15,
2002, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
MISCELLANEOUS:
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<PAGE>
(a) Remedies. Upon the occurrence of any Event of Default, the holder of this
Note, at the holder's option, may declare all sums of principal and interest
outstanding hereunder to be immediately due and payable without presentment,
demand, notice of nonperformance, notice of protest, protest or notice of
dishonor, all of which are expressly waived by each Borrower, and-the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity sign
this Note as a Borrower, the obligations of each such Borrower shall be joint
and several.
(c) Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first
written above.
ITRON, INC.
By: /s/ DAVID G. REMINGTON
-------------------------
Title: VP & CFO
-------------------------
CONTINUING SECURITY AGREEMENT:
RIGHTS TO PAYMENT AND INVENTORY
1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned
ITRON, INC., a Washington corporation, or any of them ("Debtor"), hereby grants
and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security
interest in all accounts, deposit accounts, chattel paper (whether electronic or
tangible), instruments, promissory notes, documents, general intangibles (other
than intellectual property), payment intangibles, letter or credit rights,
health-care insurance receivables and other rights to payment (collectively
called "Rights to Payment"), now existing or at any time hereafter, and prior to
the termination hereof, arising (whether they arise from the sale, lease or
other disposition of inventory or from performance of contracts for service,
manufacture, construction, repair or otherwise or from any other source
whatsoever), including all securities, guaranties, warranties, indemnity
agreements, insurance policies, supporting obligations and other agreements
pertaining to the same or the property described therein, and in all goods
returned by or repossessed from Debtor's customers, together with a security
interest in all inventory, goods
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held for sale or lease or to be furnished under contracts for service, goods so
leased or furnished, raw materials, component parts and embedded software, work
in process or materials used or consumed in Debtor's business and all warehouse
receipts, bills of lading and other documents evidencing goods owned or acquired
by Debtor, and all goods covered thereby, now or at any time hereafter, and
prior to the termination hereof, owned or acquired by Debtor, wherever located,
and all products thereof (collectively called "Inventory"), whether in the
possession of Debtor, warehousemen, bailees or any other person, or in process
of delivery, and whether located at Debtor's places of business or elsewhere
(with all Rights to Payment and Inventory referred to herein collectively as the
"Collateral"), together with whatever is receivable or received when any of the
Collateral or proceeds thereof are sold, leased, collected, exchanged or
otherwise disposed of, whether such disposition is voluntary or involuntary,
including without limitation, all Rights to Payment, including returned
premiums, with respect to any insurance relating to any of the foregoing, and
all Rights to Payment with respect to any claim or cause of action affecting or
relating to any of the foregoing (hereinafter called "Proceeds").
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and
performance of: (a) all present and future Indebtedness of Debtor to Bank; (b)
all obligations of Debtor and rights of Bank under this Agreement; and (c) all
present and future obligations of Debtor to Bank of other kinds. The word
"Indebtedness" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of Debtor, or any of them,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Debtor may
be liable individually or jointly with others, or whether recovery upon such
Indebtedness may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of all
obligations of Debtor to Bank, including without limitation, the payment of all
Indebtedness of Debtor to Bank, and the termination of all commitments of Bank
to extend credit to Debtor, existing at the time Bank receives written notice
from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any
money received by Bank in respect of the Collateral may be deposited, at Bank's
option, into a non-interest bearing account over which Debtor shall have no
control, and the same shall, for all purposes, be deemed Collateral hereunder.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that:
(a) Debtor's legal name is exactly as set forth on the first page of this
Agreement, and all of Debtor's organizational documents or agreements delivered
to Bank are complete and accurate in every respect; (b) Debtor is the owner and
has possession or control of the Collateral and Proceeds; (c) Debtor has the
exclusive right to grant a security interest in the Collateral and Proceeds; (d)
all Collateral and Proceeds are genuine, free from liens, adverse claims,
setoffs, default, prepayment, defenses and conditions precedent of any kind or
character, except the lien created hereby or as otherwise agreed to by Bank, or
as heretofore disclosed by Debtor to Bank, in writing; (e) all statements
contained herein and, when made and where applicable, in the Collateral are true
and complete in all material respects; (f) no financing statement covering any
of the Collateral or Proceeds, and naming any secured party other than Bank, is
on file in any public office; (g) all persons appearing to be obligated on
Rights to Payment and Proceeds have and will continue to have authority and
capacity to contract and are and will be bound as they appear to be; (h) all
property subject to chattel paper has been properly registered and filed
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in compliance with law and to perfect the interest of Debtor in such property;
and (i) all Rights to Payment and Proceeds comply and will comply with all
applicable laws concerning form, content and manner of preparation and
execution, including where applicable Federal Reserve Regulation Z and any State
consumer credit laws.
6. COVENANTS OF DEBTOR.
(a) Debtor agrees in general: (i) to pay Indebtedness secured hereby when due;
(ii) to indemnify Bank against all losses, claims, demands, liabilities and
expenses of every kind caused by property subject hereto; (iii) to pay all costs
and expenses, including reasonable attorneys' fees, incurred by Bank in the
perfection and preservation of the Collateral or Bank's interest therein and/or
the realization, enforcement and exercise of Bank's rights, powers and remedies
hereunder; (iv) to permit Bank to exercise its powers; (v) to execute and
deliver such documents as Bank deems necessary to create, perfect and continue
the security interests contemplated hereby; (vi) not to change its name, and as
applicable, its chief executive office, its principal residence or the
jurisdiction in which it is organized and/or registered without giving Bank
prior written notice thereof; (vii) not to change the places where Debtor keeps
any Collateral or Debtor's records concerning the Collateral and Proceeds
without giving Bank prior written notice of the address to which Debtor is
moving same; and (viii) to cooperate with Bank in perfecting all security
interests granted herein and in obtaining such agreements from third parties as
Bank deems necessary, proper or convenient in connection with the preservation,
perfection or enforcement of any of its rights hereunder.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees
otherwise in writing: (i) that Bank is authorized to file financing statements
in the name of Debtor to perfect Bank's security interest in Collateral and
Proceeds; (ii) to insure Inventory and, where applicable, Rights to Payment with
Bank as loss payee, in form, substance and amounts, under agreements, against
risks and liabilities, and with insurance companies satisfactory to Bank; (iii)
not to use any Inventory for any unlawful purpose or in any way that would void
any insurance required to be carried in connection therewith; (iv) not to remove
Inventory from Debtor's premises, except in the ordinary course of Debtor's
business and except Inventory which consists of mobile goods as defined in the
Washington Uniform Commercial Code, in which case Debtor agrees not to remove or
permit the removal of the Inventory from its state of domicile for a period in
excess of thirty (30) calendar days; (v) not to permit any senior lien on the
Collateral or Proceeds, including without limitation, liens arising from the
storage of Inventory, except in favor of Bank; (vi) not to sell, hypothecate or
dispose of, nor permit the transfer by operation of law of, any of the
Collateral or Proceeds or any interest therein, except sales or dispositions of
Inventory in the ordinary course of Debtor's business; (vii) to furnish reports
to Bank of all acquisitions, returns, sales and other dispositions of Inventory
in such form and detail and at such times as Bank may require; (viii) to permit
Bank to inspect the Collateral at any time; (ix) to keep, in accordance with
generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time; (x) if requested by Bank, to
receive and use reasonable diligence to collect Rights to Payment and Proceeds,
in trust and as the property of Bank, and to immediately endorse as appropriate
and deliver such Rights to Payment and Proceeds to Bank daily in the exact form
in which they are received together with a collection report in form
satisfactory to Bank; (xi) not to commingle Rights to Payment, Proceeds or
collections thereunder with other property; (xii) to give only normal allowances
and credits and to advise Bank thereof immediately in writing if they affect any
Rights to Payment or Proceeds in any material respect; (xiii) on demand, to
deliver to Bank returned property resulting from, or payment equal to, such
allowances or credits on any Rights to Payment or Proceeds or
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to execute such documents and do such other things as Bank may reasonably
request for the purpose of perfecting, preserving and enforcing its security
interest in such returned property; (xiv) from time to time, when requested by
Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject
to this Agreement and to assign in writing and deliver to Bank all accounts,
contracts, leases and other chattel paper, instruments, documents and other
evidences thereof; (xv) in the event Bank elects to receive payments of Rights
to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in
connection therewith, including expenses of accounting, correspondence,
collection efforts, reporting to account or contract debtors, filing, recording,
record keeping and expenses incidental thereto; and (xvi) to provide any service
and do any other acts which may be necessary to maintain, preserve and protect
all Collateral and, as appropriate and applicable, to keep all Collateral in
good and saleable condition, to deal with the Collateral in accordance with the
standards and practices adhered to generally by users and manufacturers of like
property, and to keep all Collateral and Proceeds free and clear of all
defenses, rights of offset and counterclaims.
7. POWERS OF BANK. Debtor appoints Bank its true attorney in fact to perform any
of the following powers, which are coupled with an interest, are irrevocable
until termination of this Agreement and may be exercised from time to time by
Bank's officers and employees, or any of them, after the occurrence of a
default: (a) to perform any obligation of Debtor hereunder in Debtor's name or
otherwise; (b) to enforce or forbear from enforcing Bank's rights in the
Collateral and Proceeds, and make extension or modification agreements with
respect thereto; (c) to release or substitute persons liable on the Collateral
or Proceeds and to give receipts and acquittances and compromise disputes in
connection therewith; (d) to release or substitute security; (e) to resort to
security in any order; (f) to receive, open and read mail addressed to Debtor;
(g) to endorse, collect, deliver and receive payment under instruments for the
payment of money constituting or relating to Proceeds; (h) to exercise all
rights, powers and remedies which Debtor would have, but for this Agreement,
with respect to all the Collateral and Proceeds subject hereto; (n) to make
withdrawals from and to close deposit accounts or other accounts with any
financial institution, wherever located, into which Proceeds may have been
deposited, and to apply funds so withdrawn to payment of the Indebtedness; (i)
to preserve or release the interest evidenced by chattel paper to which Bank is
entitled hereunder and to endorse and deliver any evidence of title incidental
thereto; and j) to do all acts and things and execute all documents in the name
of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in
connection with the enforcement of its rights hereunder.
Debtor appoints Bank its true attorney in fact to perform any of the following
powers, which are coupled with an interest, are irrevocable until termination of
this Agreement and may be exercised from time to time by Bank's officers and
employees, or any of them, whether or not Debtor is in default: (a) to prepare,
execute, file, record or deliver notes, assignments, schedules, designation
statements, financing statements, continuation statements, termination
statements, statements of assignment, applications for registration or like
papers to perfect, preserve or release Bank's interest in the Collateral and
Proceeds; (b) to take cash, instruments for the payment of money and other
property to which Bank is entitled; (c) to verify facts concerning the
Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own
name or a fictitious name; (d) to prepare, adjust, execute, deliver and receive
payment under insurance claims with respect to any Collateral, and to collect
and receive payment of and endorse any instrument in payment of loss or returned
premiums or any other insurance refund or return, and to apply such amounts
received by Bank, at Bank's sole option, toward repayment of the Indebtedness or
replacement of the Collateral; (e) to enter onto Debtor's premises in inspecting
the Collateral; (f) to give notice to account debtors or others of Bank's rights
in the Collateral and Proceeds; and (g) to do all acts and things and execute
all
-23-
<PAGE>
documents in the name of Debtor or otherwise, deemed by Bank as necessary,
proper and convenient in connection with the preservation or perfection of its
rights hereunder.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to
pay, prior to delinquency, all insurance premiums, taxes, charges, liens and
assessments against the Collateral and Proceeds, and upon the failure of Debtor
to do so, Bank at its option may pay any of them and shall be the sole judge of
the legality or validity thereof and the amount necessary to discharge the same.
Any such payments made by Bank shall be obligations of Debtor to Bank, due and
payable immediately upon demand, together with interest at a rate determined in
accordance with the provisions of Section 15 hereof, and shall be secured by the
Collateral and Proceeds, subject to all terms and conditions of this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement: (a) any representation or warranty made
by Debtor herein shall prove to be incorrect, false or misleading in any matey6l
respect when made; (b) Debtor shall fail to observe or perform any obligation or
agreement contained herein beyond any cure period as set forth in the Credit
Agreement (as hereinafter defined), (c) any defined Event of Default as set
forth in the Credit Agreement; (d) any material impairment in the rights of Bank
in any Collateral or Proceeds, and (e) Bank, in good faith, believes all or any
material portion of the Collateral and/or Proceeds to be in danger of misuse,
dissipation, commingling, loss, theft, damage or destruction, or otherwise in
jeopardy or unsatisfactory in character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the
right to declare immediately due and payable all or any Indebtedness secured
hereby and to terminate any commitments to make loans or otherwise extend credit
to Debtor. Bank shall have all other rights, powers, privileges and remedies
granted to a secured party upon default under the Washington Uniform Commercial
Code or otherwise provided by law, including without limitation, the right (a)
to contact all persons obligated to Debtor on any Collateral or Proceeds and to
instruct such persons to deliver all Collateral and/or Proceeds directly to
Bank, and (b) to sell, lease, license or otherwise dispose of any or all
Collateral. All rights, powers, privileges and remedies of Bank shall be
cumulative. No delay, failure or discontinuance of Bank in exercising any right,
power, privilege or remedy hereunder shall affect or operate as a waiver of such
right, power, privilege or remedy; nor shall any single or partial exercise of
any such right, power, privilege or remedy preclude, waive or otherwise affect
any other or further exercise thereof or the exercise of any other right, power,
privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank
of any default hereunder, or any such waiver of any provisions or conditions
hereof, must be in writing and shall be effective only to the extent set forth
in writing. It is agreed that public or private sales or other dispositions, for
cash or on credit, to a wholesaler or retailer or investor, or user of property
of the types subject to this Agreement, or public auctions, are all commercially
reasonable since differences in the prices generally realized in the different
kinds of dispositions are ordinarily offset by the differences in the costs and
credit risks of such dispositions. While an Event of Default exists: (a) Debtor
will deliver to Bank from time to time, as requested by Bank, current lists of
all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or
Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will
assemble and deliver all Collateral and Proceeds, and books and records
pertaining thereto, to Bank at a reasonably convenient place designated by Bank;
and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and
take possession of the Collateral. With respect to any sale by Bank of any
Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the
right to sell such Collateral using any or all of Debtor's trademarks, trade
names, trade name rights and/or proprietary labels or marks. Debtor
-24-
<PAGE>
further agrees that Bank shall have no obligation to process or prepare any
Collateral for sale or other disposition.
11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In
disposing of Collateral hereunder, Bank may disclaim all warranties of title,
possession, quiet enjoyment and the like. Any proceeds of any disposition of any
Collateral or Proceeds, or any part thereof, may be applied by Bank to the
payment of expenses incurred by Bank in connection with the foregoing, including
reasonable attorneys' fees, and the balance of such proceeds may be applied by
Bank toward the payment of the Indebtedness in such order of application as Bank
may from time to time elect. Upon the transfer of all or any part of the
Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds
and shall be fully discharged thereafter from all liability and responsibility
with respect to any of the foregoing so transferred, and the transferee shall be
vested with all rights and powers of Bank hereunder with respect to any of the
foregoing so transferred; but with respect to any Collateral or Proceeds not so
transferred, Bank shall retain all rights, powers,' privileges and remedies
herein given.
12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full
and all commitments by Bank to extend credit to Debtor have been terminated, the
power of sale or other disposition and all other rights, powers, privileges and
remedies granted to Bank hereunder shall continue to exist and may be exercised
by Bank at any time and from time to time irrespective of the fact that the
Indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all Indebtedness
secured hereunder.
13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word
"Debtor" shall mean all or any one or more of them as the context requires; (b)
the obligations of each Debtor hereunder are joint and several; and (c) until
all Indebtedness shall have been paid in full, no Debtor shall have any right of
subrogation or contribution, and each Debtor hereby waives any benefit of or
right to participate in any of the Collateral or Proceeds or any other security
now or hereafter held by Bank. Debtor hereby waives any right to require Bank to
(i) proceed against Debtor or any other person, (ii) proceed against or exhaust
any security from Debtor or any other person, (iii) perform any obligation of
Debtor with respect to any Collateral or Proceeds, and (d) make any presentment
or demand, or give any notice of nonpayment or nonperformance, protest, notice
of protest or notice of dishonor hereunder or in connection with any Collateral
or Proceeds. Debtor further waives any right to direct the application of
payments or security for any Indebtedness of Debtor or indebtedness of customers
of Debtor.
14. NOTICES. All notices, requests and demands required under this Agreement
must be in writing, addressed to Bank at the address specified in any other loan
documents entered into between Debtor and Bank and to Debtor at the address of
its chief executive office (or principal residence, if applicable) specified
below or to such other address as any party may designate b y written notice to
each other party, and shall be deemed to have been given or made as follows: (a)
if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of
the date of receipt or three (3) days after deposit in the U.S. mail, first
class and postage prepaid; and (c) if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately
upon demand the full amount of all payments, advances, charges, costs and
expenses, including reasonable attorneys' fees (to include outside counsel fees
and all allocated costs of Bank's in-house counsel), expended or incurred by
Bank in exercising any right, power,
-25-
<PAGE>
privilege or remedy conferred by this Agreement or in the enforcement thereof,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Debtor or in any way affecting any of the Collateral or Bank's ability to
exercise any of its rights or remedies with respect thereto. All of the
foregoing shall be paid by Debtor with interest from the date of demand until
paid in full at a rate per annum equal to the greater of ten percent (10%) or
Bank's Prime Rate in effect from time to time.
16. SUCCESSORS; ASSIGNS; AMENDMENT; CREDIT AGREEMENT. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties, and may be amended
or modified only in writing signed by Bank and Debtor. This Agreement is made in
connection with that certain Credit Agreement between Debtor and Bank dated as
of February 5th, 2002, as amended, restated or replaced from time to time (the
"Credit Agreement"). Nothing in this Agreement is intended to be inconsistent
with the terms of the Credit Agreement. To the extent of any direct conflict
between this Agreement and the Credit Agreement, the Credit Agreement shall
govern and prevail.
17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement
as Debtor hereby expressly agrees that recourse may be had against his or her
separate property for all his or her Indebtedness to Bank secured by the
Collateral and Proceeds under this Agreement.
18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held
to be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
Debtor warrants that Debtor is an organization registered under the laws of the
State of Washington.
Debtor warrants that its chief executive office (or principal residence, if
applicable) is located at the following address: 2818 N. Sullivan Rd., Spokane,
WA 99216.
Debtor warrants that the Collateral (except goods in transit) is located or
domiciled at the following additional addresses: 2401 N. State Street Waseca, MN
56093: 120 17th Avenue NE, Waseca, MN 56093.
IN WITNESS WHEREOF, this Agreement has been duly executed as of February 15,
2002.
ITRON, INC.
By: /s/ DAVID G. REMINGTON
-------------------------
Title: VP & CFO
-------------------------
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>7
<FILENAME>dex12.txt
<DESCRIPTION>STATEMENT OF COMPUTATION OF RATIOS
<TEXT>
<PAGE>
Exhibit 12
STATEMENT OF COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
Year Ended December 31,
2001 2000 1999 1998 1997
-------------- -------------- --------------- ------------ -------------
(in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income (loss) 21,366 6,924 (100,266) (10,045) 1,635
Fixed charges:
Convertible debt amortization 229 259 311 426 357
Interest capitalized 0 0 0 260 994
Interest expense, gross 5,199 5,608 6,405 6,557 3,834
-------------- -------------- --------------- ------------ -------------
a) Fixed charges 5,428 5,867 6,716 7,243 5,185
-------------- -------------- --------------- ------------ -------------
b) Earnings for ratio 26,794 12,791 (93,550) (2,802) 6,820
Ratio:
Earnings to fixed charges (b/a) 4.9 2.2 n/a n/a 1.3
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>8
<FILENAME>dex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE>
Exhibit 21
Itron Domestic Subsidiaries
- --------------------------------------------------------------------------------
Itron, Inc.
Corporate Headquarters
2818 N. Sullivan Rd.
Spokane, WA 99216-1897
P.O. Box 15288, Spokane, WA 99215-5288
Genesis Services Pittsburgh, Inc.
2818 N. Sullivan Rd.
Spokane, WA 99216-1897
Itron International, Inc.
2818 N. Sullivan Rd.
Spokane, WA 99216-1897
Itron Finance, Inc.
2818 N. Sullivan Rd.
Spokane, WA 99216-1897
Itron Connecticut Finance, Inc.
2818 N. Sullivan Rd.
Spokane, WA 99216-1897
Itron International Subsidiaries
- --------------------------------------------------------------------------------
Itron S.A.
Espace St. Germain
30 Avenue du General Leclerc
38208 Vienne, Cedex
FRANCE
Itron Ltd.
Kilnbrook House, Rose Kiln Lane
Reading, Berkshire RG2 0BY
UNITED KINGDOM
Itron Australasia Pty. Ltd.
Level 5, 33 Erskine Street
Sydney, NSW 2000
AUSTRALIA
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>9
<FILENAME>dex23.txt
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
- --------------------------------------------------------------------------------
We consent to the incorporation by reference in Registration Statement Nos.
333-28933, 333-63147, 333-04685, 333-86581, 333-40356, 333-81925, and 333-86196
of Itron, Inc. and subsidiaries on Form S-8 of our report dated February 12,
2002, and March 18, 2002, as to Note 18, (which expresses an unqualified opinion
and includes an explanatory paragraph relating to the change in the method of
accounting for revenues in 2000) appearing in this Annual Report on Form 10-K of
Itron, Inc. and subsidiaries for the year ended December 31, 2001.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 28, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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