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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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. ____
As of February 29, 2000, there were outstanding 15,037,724 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
29, 2000) was approximately $112,797,930.
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 June 28, 2000.
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PART I
Item 1: BUSINESS
OVERVIEW
General
Itron, Inc. was incorporated in Washington in 1977 and is a leading global
provider of integrated system solutions for collecting, communicating, analyzing
and managing information about energy and water usage. We design, develop,
manufacture, market, install and service hardware, software and integrated
systems primarily for use by the utility industry. Our expertise is in providing
communications technologies and data management products for automatic meter
reading and advanced data collection systems ("AMR"), which systems also include
commercial and industrial ("C&I") meter data collection systems, and complex
billing and settlement systems for the wholesale energy markets.
Our first systems, shipped in the early 1980s, consisted of handheld
computers and software, which replaced the manual, paper-intensive systems used
by most utilities at that time to read meters. Handheld systems allow a utility
to capture visually obtained meter data in a handheld computer for billing
purposes. Many of these systems are still in wide use today. Over 1,500
utilities around the world in more than 45 counties use our handheld systems to
read approximately 275 million meters. Our systems are installed at
approximately 75% of the largest utilities (those with 50,000 or more meters) in
the United States and Canada including 22 of the largest 25 utilities. Handheld
products and services represented 36% of our total revenues in 1999.
In the early 1990s, we took meter reading one step further with the
introduction of highly automated and integrated AMR technologies, primarily
focused on residential customers. In 1996, we expanded further into advanced
energy usage data collection and analysis with the acquisition of technologies
for C&I customers. In the late 1990s we also began working on systems for
managing transactions related to wholesale energy distribution. Our AMR
technologies today provide utilities and their customers with information that
goes far beyond meter reading. Using an assortment of communications
technologies, our AMR systems collect data from a variety of residential,
commercial and industrial meters and deliver it to our customers as value-added
information. We are the largest supplier of systems for the AMR market having
shipped over 15.4 million AMR meter modules to 550 utilities as of December 31,
1999. In addition, our C&I data collection systems are now used by more than 500
utilities throughout the world. AMR systems sales, services, and outsourcing,
were 64% of our total revenues in 1999.
Industry Overview and Current Market for AMR
The electric utility industry is undergoing a structural sea change as
electric power generation is opened up to full competition with retail customers
ultimately having access to multiple suppliers. We believe there are additional
changes in the industry that will have an impact on how energy and water
providers run their businesses and serve their customers. These include:
|X| The growth and development of new energy generation and delivery
technologies, which incorporate fuel cells, micro turbines and other
innovations will create an entirely new type of energy delivery
infrastructure characterized by distributed generation and microgrids. Our
competencies in communications technologies and advanced energy information
management position us well to provide solutions that will help manage this
new industry dynamic.
|X| Energy and water suppliers must find new ways to interact with their
customers or they will risk losing them. The data and information we
collect is a part of the vital new link to their customers. With the rapid
deployments of advanced broadband technologies we have an even greater
opportunity to assist our customers' abilities to repackage the information
we collect and deliver it in new and exciting ways. Our goal is to become
an integral part of changing the way energy and water suppliers communicate
with their customers.
While utility companies may retain many of their traditional functions, we
expect it is likely that our future customer base will consist of traditional
utility companies as well as new market entrants. Some functions will be
provided by new entities such as Independent System Operators ("ISOs") and
Energy Service Providers ("ESPs"). Utilities may turn the operational control of
certain of their transmission facilities over to ISOs. Our Energy Information
Systems ("EIS") strategic business unit has developed some new products and is
already working with a number of new entities in the wholesale energy markets.
ESPs and aggregators are expected to provide both electricity and natural gas to
commercial, industrial and residential customers and may, in some places,
perform meter reading and customer billing. In addition to ESPs, a number of new
entities will likely emerge to provide metering and data services. Such
companies also may buy and sell electricity and may have to deal with the
frequent changes in prices and costs for the transfer of power.
In the gas industry, we believe deregulation will create many of the same
needs as deregulation of the electric industry, such as an increased focus on
customer retention and the ability to forecast usage requirements more
accurately.
In addition to changes in the electric and gas industries, there are a
number of changes and important factors to consider in the water industry as
well. Only 60% of the households in North America are being metered for water
usage today. There are approximately 60 million water meters in North America
with new construction adding approximately 4.5 million new meters every year.
With utility rate increases for water averaging twice that of the annual
consumer price index in the last four years, there is tremendous pressure on
water utilities to reduce operating costs through metering and technology
solutions.
We believe that the major changes taking place in the energy and water
industries will create opportunities which we are well positioned to take
advantage of. Our advanced energy data management and communications product
offerings are more extensive than those of any other AMR supplier. Our solutions
support electric, gas, and water service and include all customer types -
residential, commercial and industrial. We utilize radio, telephone and cellular
technologies as well as private and public communications networks. We have
significant experience in high-volume AMR meter module production. We have
established relationships with over 1,500 utilities worldwide and proven
interfaces with numerous utility host-billing systems. We have communications
capabilities and advanced software for large commercial and industrial customers
and systems that provide critical billing and settlement transactions for open
supply markets. We have and are increasingly moving into the new and rapidly
growing market for water submetering.
1999 Highlights
We hired a new CEO, Mike Chesser, in June 1999 and made a number of key
changes to the executive management team. In the last half of 1999, under the
direction of the executive team, we took a very hard look at our business with a
focus on improving our profitability and prospects for growth. Our efforts were
largely directed at creating a more efficient, effective and focused
organization. We refined our vision and strategies and made a number of sweeping
and fundamental changes in our organization, people, business processes, and
culture.
Effective January 1, 2000, we replaced our product-driven organizational
structure with strategic business units ("SBUs") focused on specific customer
segments that we serve. These new business units include Electric Systems,
Natural Gas Systems, Water and Public Power Systems, and International Systems.
In addition, an Energy Information Systems SBU was created to capitalize on our
rapidly growing business of developing customized wholesale energy information
systems. These business units now have strategic, financial, and resource
development targets to drive performance and accountability. In conjunction with
this reorganization we streamlined processes, functions and headcount throughout
the company.
In addition to the organizational structure changes, we took action in the
last half of 1999 in a number of other key areas:
|X| We consolidated our high-volume manufacturing operations from three
locations to one. We expect this to result in a significant reduction in
our manufacturing costs by reducing overhead and increasing factory
efficiency.
|X| We consolidated handheld, mobile, network and AMR telephone development and
support into one group. We continued the reduction in the number of meter
reading hardware and software platforms we are offering.
|X| We substantially repositioned our European operations with a sharp
reduction in the scope and spending level of product development not
related to our core business. We are also moving from a direct sales
approach to one that is more distributor-based.
Overall, the organizational restructuring and other actions above resulted
in a total company-wide headcount reduction of approximately 15%, with a
reduction in management levels of close to 25%. Charges during 1999 for all
restructuring actions totaled $16.7 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In February 2000, we signed a non-binding memorandum of understanding with
DQE, the parent company of Duquesne Light Company ("Duquesne"), for their
purchase (by Duquesne or an affiliate) of our network-based system, which
provides AMR services to Duquesne. We expect to incur a loss of approximately
$50 million in connection with this sale, which is reflected in our 1999
financial results. The sale will free up a large amount of cash which will give
us additional financial resources to pursue other investment opportunities,
which we believe will result in greater financial returns. The sale does not
indicate any change in our plans to sell and install new network-based systems
or to develop new applications for our network products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In March 2000, we announced that LeRoy D. Nosbaum, our chief operating
officer, had been named president and CEO, replacing Mike Chesser, chairman,
president and CEO, who was leaving the Company to become president and CEO of a
large east coast utility in April 2000. In addition, Rob Neilson, vice-president
strategy and business development was named chief operating officer, and S.
Edward White, a director and a former executive officer of ours, was named
chairman of the board.
DESCRIPTION OF BUSINESS
Itron Solutions and Benefits
Solutions
We have an extensive and cost-effective portfolio of energy and water data
management and communication solutions that provide utilities and other industry
participants with numerous options for responding to evolving operational needs,
marketing opportunities and regulatory reform requirements.
Our solutions integrate a broad array of meter modules, radio and telephone
based communications systems, and data management, delivery and storage
applications. This integrated approach provides our customers with the
flexibility needed to apply the most cost-effective solution to each of their
situations - rural, suburban, urban; residential, commercial, industrial;
electricity, natural gas, and water.
Our technologies are designed to accommodate the inevitability of change so
that our customers can select solutions that meet their needs today while also
laying the foundation for more advanced solutions to meet their future corporate
goals and objectives. Our radio-based solutions encompass handheld ("off-site"),
mobile and network reading technology options. Because the same radio-based
meter modules can be used with any of these alternatives, our products
facilitate the migration from one level of systems automation to another. Our
telephone-based solutions offer an economically attractive alternative for low
density or selective deployment situations.
We have developed software solutions with applications that integrate,
manage and store data from various data collection systems. These applications
enable our customers to integrate data from different technologies into a common
format. This allows the deployment of various collection technologies within a
service territory, tailored to the economic and functional considerations of
different portions of the territory.
We work with our customers to facilitate alternative ways in which to
finance our technologies. We sell products, outsource entire systems, provide
installation, operations, and maintenance services, and arrange customized
financial solutions for our customers. These customized financial solutions vary
from simple third party leases to complex project financing structures depending
on the financial and operational goals of our customers.
Benefits
AMR market penetration is still at an early stage. Traditionally, our
customers that have deployed AMR technology territory-wide have done so
primarily on the basis of reducing costs and improving the efficiency of meter
reading applications. While this remains a critical piece of the AMR value
proposition, our products, systems and solutions provide a wide range of
benefits to our customers that go far beyond meter reading and billing. Our
customers are finding that AMR technology 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. Our AMR technologies provide our customers
with operational improvements and returns on investment in the areas of:
|X| Revenue Cycle Services
|X| Management of Distribution Assets
|X| Management of Market Change and Customer Choice
|X| Delivery of New Value-Added Services
Revenue Cycle Services: Automation of the meter reading function results in
a number of obvious benefits in the area of revenue cycle services including
reductions in meter reading staff and the operational support costs, increased
accuracy, improved safety, elimination of estimated reads, elimination of or
large reductions in special reads, reductions in customer complaints and call
center traffic, and reductions in billing adjustments. One of our customers, a
large water utility, reduced their percentage of estimated (rather than actual)
reads from 70% to less than 1% with the installation of our AMR technology. That
improvement resulted in significant reductions in costs associated with customer
complaints, billing adjustments and back-office administrative functions.
Another customer, a large electric utility, reduced their read to bill period
for special reads from nine days to one day resulting in significant
improvements in cash flow. Our technology also provides benefits to improve
revenue assurance through tamper and energy theft detection, which is an ongoing
benefit, as well as a one time benefit from improved meter accuracy as meters
are inspected during the installation process. One of our large electric and gas
customers experienced a year-to-year revenue increase of $2 million for 200,000
accounts by removing older, slow-running meters from service during the AMR
installation process.
Management of Distribution Assets: The use of metering information to
manage local distribution systems more efficiently applies to electric, gas and
water utilities. Our technologies, installed in a saturated or a selective
deployment basis, increase the number of outage detection points throughout our
customers' distribution systems. This increased ability to pinpoint where
electric system outages have occurred can dramatically improve service, and
ultimately, improve distribution system reliability. By delivering accurate load
(electric and gas) and volume (water) information, our technologies provide
utilities with the information they need to identify, locate and replace
improperly sized equipment, and to identify potential equipment failures and
leaks. This information helps our customers fine tune the deployment of their
distribution assets and take corrective action before improperly sized or under
rated equipment results in service disruptions, expensive maintenance, property
damage and customer complaints. Optimizing the use of current distribution
assets helps our customers avoid, minimize or defer expensive investments in
additional infrastructure. For example, a mid-sized water utility customer is
using our technology to understand residential water usage patterns in order to
create conservation programs and incentives they hope will aid their effort to
minimize or defer expensive investments in water purification and treatment
facilities as the area's population grows.
Management of Market Change and Customer Choice: With deregulation plans
underway in at least half the states, customer choice is moving from the
exception to the norm. Our communications and energy data management technology
and systems provide critical information to our customers and others to
effectively manage how much energy is put into distribution systems and by whom,
and how much is taken out and by whom. Our technology enables access to critical
information necessary for reconciliation and settlements in a timely manner for
a number of market participants. In several deregulated states, utilities face a
variety of financial or pricing penalties associated with deviations from
scheduled usage. Load information provided by our technology enables utilities
to increase their forecasting accuracy. Our technology has enabled one of our
large electric customers to improve their forecasted use to within one percent
of actual usage in a state that has mandated a 1 1/2% deviation rule. In many
deregulated states, load profiling is becoming increasingly necessary and a
common requirement for sample customers or for different customer classes. Our
communications and energy data management technology enables our customers to
cost-effectively perform load-profiling functions without the burdensome task of
moving expensive load profile meters from place to place. Our technology helps
utilities receive incentives rather than incur penalties in deregulating states
where performance-based rate making is resulting in new requirements such as
reductions in estimated reads and reductions in the number and duration of
outages.
Delivery of New Value-Added Services: To ensure growth and success in a
competitive marketplace, utilities must develop, market and deliver new products
and services that offer real value to their customers. We believe a key to
successfully developing and marketing new products and services is getting to
know the customer better - who they are, how and when they use energy and water,
and what services deliver value to them. A few of the value-added new product
and service offerings that advanced AMR technology creates include aggregated or
disaggregated billing options for customers with multiple meters at multiple
sites, selectable billing dates or frequency, customized billing and invoicing,
outage monitoring and notification services, Internet access to data, usage
management and consulting, and forecasting services.
Itron's Vision and Strategies
Our current products and systems touch some portion of nearly 70% of the
energy transactions representing $200 billion of energy related business in
North America alone. We will continue to aggressively pursue the numerous
opportunities available for advanced metering and billing systems. From the
strong standing we have in the AMR market, we believe we are well positioned to
move in two directions, energy delivery optimization and connecting energy
customers and suppliers. We will be pursuing opportunities for electric, gas and
water utilities to optimize their assets and increase their gross margins by
applying our current and future technologies, advanced energy information
management systems and industry knowledge. Our goal will be to provide solutions
that enhance our customers' abilities to delivery energy and water more reliably
and cost effectively. In addition, energy and water suppliers are looking for
ways to serve and communicate with their customers. We will help them by
providing new ways to interact with their customers, such as delivering and
receiving the valuable information we collect over the Internet.
Core Business Strategies
In our core business we will continue to build upon our extensive customer
base and industry experience. We have established ourselves as the world's
leading supplier of AMR systems having shipped more than 15.4 million AMR meter
modules to approximately 550 utilities as of December 31, 1999. Our C&I data
collection systems are used by more than 500 utilities throughout the world
including more than 70% of the major electric utilities in North America. Our
handheld systems have been installed at over 1,500 utilities in more than 45
countries and are being used to read approximately 275 million meters worldwide.
These installations include approximately 75% of the utilities in North America
that have meter populations greater than 50,000. We believe our extensive
customer base, long-term customer relationships, upgrade and migration
capabilities of our current products, multiple systems integration capabilities,
and proven interfaces with numerous utility host billing systems, provide us
with a solid foundation upon which we can expand our product offerings and
services to existing utility customers, as well as new utility customers and
other industry participants.
Following are key elements of our strategies for our core business SBUs:
Natural Gas Systems: There are approximately 66 million total gas meters in
North America, of which 9 million have AMR technology installed. Of those, 93%
are using Itron's AMR technology. Our AMR technology is compatible with more gas
meter types than that of any other vendor. Our battery life for our AMR meter
modules is unmatched in the industry. We have a number of new, lower-cost AMR
reading technologies that make the value proposition even more economically
attractive for gas utilities. The Natural Gas Systems SBU is focused on
approximately 60 primarily natural gas only utilities, which represent about 36
million gas meters. The vast majority of these meters, roughly 27 million, do
not have AMR technology and are being read today using our handheld systems.
This large base of current customers represents a strong upgrade opportunity for
us in this market segment.
Water and Public Power Systems: There are approximately 60,000 water
utilities and 3,000 municipal electric and gas and rural electric cooperative
utilities in North America that are the focus of this market segment. These
water utilities represent approximately 60 million water meters. With only 60%
of customers/households being metered for water, new construction is resulting
in an addition of roughly 4.5 million meters annually. Only about 2% of water
meters are currently automated. With utility rate increases for water averaging
two times that of the annual consumer price index in the last four years, there
is tremendous pressure on water utilities to reduce operating costs through
metering and technology solutions. The public power utilities in this segment
represent approximately 30 million electric and gas meters. Public power
utilities are increasingly feeling the effects of deregulation and the pressure
to operate more efficiently and improve customer service. As in Natural Gas
Systems, we have a number of new, lower-cost AMR reading technologies that make
the value proposition economically attractive for these utilities. We will
continue to expand our product offerings for this market. Sales in this SBU are
primarily through a distributor-based model, of which we have approximately 30.
We are well positioned with a number of the key water meter manufacturers,
including ABB, Badger, and Hersey. We will continue to seek new relationships
for delivery of our products and services in this SBU.
Electric Systems: There are approximately 170 operating utilities in this
market segment, primarily large, investor-owned electric only and electric and
gas combination utilities. In total, these customers represent 102 million
electric meters and 11 million gas meters. Roughly 10% of those meters have or
are scheduled to have AMR technology installed in them today, half of which is
our technology. Close to 90% of these customers are currently using our handheld
meter reading systems and almost all of them use our MV-90 software systems to
read their large commercial and industrial meters. C&I customers are the ones
most currently impacted by the industry transformation to a competitive
marketplace. Because of the service territories and the mix of customers the
utilities in this segment serve - electric and gas; residential, commercial and
industrial; rural, suburban and urban populations - they have diverse needs when
it comes to advanced metering. We believe we have a more extensive AMR product
offering than any other supplier to provide these utilities with multiple
cost-effective solutions to meet their diverse needs. Electric utility
executives are beginning to understand that AMR goes beyond just meter reading
cost reductions and operating efficiencies. We intend to expand our strategic
relationships and product offerings in order to deliver more value for
optimizing distribution system benefits and to enhance their connections with
their customers.
International Systems: This SBU is focused on sales of products, systems
and services outside of North America. We estimate that outside of North
America, there are two to three times the number of meters as there are inside
North America.. The majority of revenues for this SBU consist of sales and
servicing of our handheld meter reading systems. Interest in AMR systems and
technology varies widely from country to country and overall is at a very early
penetration level. In late 1999, we began transitioning this SBU to a
"distributor model" as our primary sales channel. In that, we are focused on
establishing new relationships and enhancing existing relationships with a
number of strategic partners. In addition, we are eliminating non-core business
development projects and are consolidating development activities with those of
our North American operations. Near term, we are focused on improving the
profitability of our international operations while laying a strong foundation
for growth as interest in AMR develops internationally.
New Business Strategies
We intend to leverage our expertise, market position and radio
communications competencies in order to deliver new products and services
outside of our core business. We believe that as the industry transformation
continues, there will be a heightened focus by utilities, ESPs and others on
serving the advanced metering needs of the largest users of electricity. There
will also be opportunities for the sale of systems directly to end-user
customers. Regulatory reform is also 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. We
believe there are numerous possibilities for growth.
Energy Information Systems: The EIS market encompasses a broad range of
customer segments including distribution utilities, power generators, and large
regional and state independent system operators (ISO). This SBU is currently
taking the greatest advantage of the deregulating energy market. EIS products
and systems are currently being used to manage critical market settlement
transactions for the electric transmission grids in the UK, California, Arizona,
and Ontario, Canada. In addition to supplying timely and accurate information
for managing the wholesale energy market, EIS products and systems provide
value-added services for data retrieval, analysis and billing from large
commercial and industrial meters, outage and alarm monitoring, data delivery via
the Internet, data warehousing, load profiling and forecasting, and information
on customer switching. Over 70% of the commercial and industrial meters in the
U.S. and Canada are read using our MV-90 software systems. We will focus on
selling additional products and services to our current installed base. We will
also leverage our experience and relationships on the wholesale side to pursue
additional opportunities to participate in state and regional ISO and power grid
market settlement systems.
Submetering: An exciting new business opportunity we are pursuing is water
submetering. Submetering is the automated process of collecting consumption data
and generating invoices to bill tenants directly for their actual water usage,
thereby eliminating water utility costs from a property owner's monthly
operating expenses. A submetering system integrates AMR technology with radio,
telephone, and/or cellular communications to collect and transmit usage data
from tenant meters to a standard computer for processing. There are
approximately 10 million apartments in the U.S. alone that contain 50 or more
apartments. Submetering includes both the sale of equipment as well as monthly
transaction reading services. We will pursue opportunities in this market
through indirect sales and our strategy is to develop several strong business
reseller relationships for equipment sales. We also intend to expand our
services offering by providing services for billing and collection.
Automatic Meter Reading Systems and Products
Our AMR product line primarily involves the use of radio and telephone
communications technology to collect and transmit meter data. The Company's
radio-based AMR solutions encompass Off-Site AMR, Mobile AMR and Network AMR.
Due to the geographic features and varying population density of a utility's
service territory, generally no single meter reading solution is technologically
or economically suited to all parts of the utility's service territory. Our AMR
applications are intended to provide flexibility ranging from selective
installation for high cost-to-read meters or geographically dispersed meters
requiring advanced metering functionality, to full implementation of an AMR
system covering a large portion of a utility's service area. In a deregulated
marketplace, target marketing of specific features will be desirable. We provide
technology that can be selectively deployed to targeted end-use customers. This
flexibility enables our customers to achieve economic and operational benefits
from their initial investments in our AMR systems, while enabling migration to
more comprehensive AMR solutions in the future as the marketplace requires.
Meter Modules: Our core business AMR product offerings are based on a
family of meter modules. These meter modules, which can be easily attached to
utility meters, encode consumption and tamper information and transmit this
data, including meter module identification, to a remote receiver. We began
shipping our radio meter modules to customers in late 1986 and have adapted the
radio meter module core technology to read numerous types of electric, gas and
water meters, including the most common meter types made by major meter
manufacturers. Our compact radio meter modules for gas and water meters are
self-contained low-power units, powered by long-life batteries with an expected
minimum life in excess of ten years. Radio meter modules for electric meters,
which are normally integrated under the glass of standard residential meters,
are powered by the electrical current in the meter and do not require batteries.
Radio meter modules can be installed by the meter manufacturer during the
manufacturing process or can easily be retrofitted in existing meters.
We also offer a separate line of meter modules for use outside of North
America. The primary differences between 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: Our Off-Site AMR solution enables radio-equipped
meters to be read remotely, by a person with a handheld computer equipped with a
radio unit. Off-Site AMR offers a practical and cost-effective way for utilities
to read high cost-to-read meters by eliminating the need for meter readers to
gain visual access to those meters. Once a customer has upgraded our handheld
computers with radio technology, they can selectively install meter modules on
high cost-to-read meters. System software automatically identifies
radio-equipped meters within a route. When remote reads are needed, the handheld
prompts the meter reader to initiate a radio read. Meter information is shown on
the handheld display and is automatically recorded in the handheld database,
allowing the meter reader to move on to the next meter on a route. When a route
is completed, data from both visual and radio reads are uploaded from the
handheld computer to the utility host system for customer billing.
Mobile AMR: Our Mobile AMR solution uses a Data Collection Unit ("DCU"),
which is mounted in a vehicle, or a Datapac which is transportable between
vehicles, to collect and store data transmitted by meter modules as the vehicle
passes module-equipped meters. The DCU or Datapac receives information
transmitted by multiple meter modules simultaneously. A touch-screen display
enables the operator to observe and operate the equipment. The Mobile AMR
application includes software that manages and moves information to and from a
utility's billing system. Once installed, the software transfers information
from the host system to create route files for the DCU and Datapac for each
route, manages the storage of the meter data as it is collected and, at the end
of the day, uploads the information to the utility's billing system. A Mobile
AMR system enables an operator to read in an eight-hour day an average of 10,000
to 12,000 meters with a DCU or roughly half that number of meters with a
Datapac. This compares to an average walking route of 300 to 500 meters per day.
Factors affecting the actual number of reads per day include, among others,
route density and design, speed limits, weather and environment, and other
factors.
Network AMR: We offer a number 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. We have large scale Network AMR
deployments with two utilities and smaller scale installations at ten utilities
covering approximately one million meters. 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.
Meter data collected by our radio meter modules is transmitted to a Cell
Control Unit ("CCU"). The CCU is a neighborhood concentrator that reads meter
modules, processes data into a variety of applications, stores data temporarily,
and transports data to the host processor when required. Weighing approximately
15 pounds, our CCU can be easily installed on utility poles, streetlights, or
other locations. While the geographic area covered by each CCU varies depending
on local topography, physical structures, terrain and other factors, in general
each CCU serves an average of 50 homes. Information collected by CCUs is then
transmitted to a Network Control Node ("NCN"), which is a regional concentrator
and routing device that is installed in radio communications facilities such as
leased towers, substations or other communication facilities. Each NCN typically
supports between 250 to 400 CCUs. NCNs manage information routing in the network
between CCUs and the system host processor and can serve as a gateway to other
communication networks. Communications between the CCUs and NCNs utilize the
Company's nationwide licensed frequencies in the 1427-1432 MHz band.
The final link in our Network AMR solution is from the NCNs to one or more
head-end host processors, known as the Genesis Itron Host Processors ("GIHP").
The GIHP manages the collection of data from network devices and facilitates the
download of schedules and other application information to appropriate network
devices. The GIHP also transfers the data to a database for storage and
retrieval. Communications between NCNs and the utility's GIHP typically utilize
radio, telephone, frame relay or other wired communication media.
In late 1998, we introduced a new Network AMR product known as the
MicroNetwork. The MicroNetwork is a low-cost, drop-in network meter reading
solution that can be selectively deployed to deliver monthly, weekly, or daily
and unscheduled reads from groups of meters in a wide variety of service
environments. It is suited for smaller clusters of meters that require more
frequent reads, but where there are not enough meter points to justify the cost
of saturated network infrastructure. This makes it an ideal data collection
solution for apartment complexes, campuses, small residential communities, high
rise buildings, strip malls, suburban neighborhoods and rural communities.
Our MicroNetwork infrastructure consists of a series of Concentrator Units
deployed over radio-based meter modules installed on electric, gas and / or
water meters that communicate using 900 MHz channels. The locally installed
Concentrator Units collect data from meter modules, temporarily store it, and
then forward the data to the host processor via public network communications
such as telephone and cellular systems.
Telephone-Based Technology. We also offer products that allow electric and
gas utilities to implement telephone-based AMR solutions. These systems use
inbound communications in which the meter modules call in to the utility's
central processing computer at pre-scheduled times to report meter reading
information. The devices are connected to and share existing customer telephone
lines. Telephone-based AMR functionality is primarily designed for selective
deployments of direct access customers or for geographically dispersed customers
requiring advanced metering functionality such as regional or national accounts.
Additionally, telephone-based devices that report power outages and power
quality events (over and under voltages) can be selectively deployed to
strategic points in the utility distribution system. This provides a target
solution to achieve operational and system reliability improvements where a full
saturation network is difficult to cost justify. This technology may also be
used to automate areas not suited for cost-effective implementation of radio
technologies such as remote or rural areas.
For residential and commercial applications, our telephone based modules
for electric meters attach under the glass of those meters and collect and
report consumption, demand, time-of-use and load profile data. In addition,
certain telephone-based modules for electric use report power outages,
restoration of power and power quality information. For the electric market, in
addition to meter reading devices, we also offer other telephone-based devices
that monitor and report power outage, restoration and power quality (over/under
voltage) information. These devices are easily installed by the end-use
customer. The devices may be deployed at key locations throughout a utility's
distribution system to improve operations, enhance power quality and improve
overall system reliability and service by allowing utilities to isolate outages
and determine when power has been restored more quickly. 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,
including hard-to-read meters, modules are attached to existing or new
residential gas meters to provide consumption and load survey data.
Commercial and Industrial Data Collection and Management Solutions
Commercial and industrial ("C&I") meters have much more sophisticated
measurement capabilities than do meters for residential customers. Therefore,
they have much more data that must be conveyed back to energy providers from the
meter. There are a wide variety of these meters with no standards for
communications agreed upon by the multiple meter vendors. We are the leading
worldwide provider of software systems for metering data acquisition and
analysis for the large C&I customers of electric and gas utilities. We believe
that competition in the utility industry will drive metering technology and
systems toward enhancing and facilitating communications between large C&I
customers and their power suppliers and we have released a number of new
products in the last few years aimed at this critical customer group.
Our proprietary MV-90 product gathers, processes and analyzes large
quantities of complex data for revenue billing, load research and demand-side
management and is used by approximately 70% of the major utilities in the United
States and most of the electric and gas utilities in Canada, Europe, the Middle
East, Australia, Central America and South America. MV-90 supports all methods
of data retrieval from large C&I meters (handheld readers, radio, telephone and
other communication technologies) and was designed with a full range of
applications software to support data collection from meters, data validation
and editing, and analysis of energy usage data. MV-90 software can be licensed
for use on single computers or local/wide area networks. In addition to the base
system, there are layered application packages that support applications such as
load research, real time pricing (hourly price transmission to C&I customers),
gas transportation, outage and alarm monitoring, and data aggregation. MV-90
software allows C&I customers to read the energy provider's delivery point
meters (both electric and gas) on a frequent basis to analyze their own energy
consumption and can provide hourly pricing data from energy suppliers for
customers who purchase power on a real-time pricing basis (price varies by the
hour).
Our proprietary MV-PBS billing and settlement solution provides a client
server-based billing application that produces customized bills and invoices for
commercial, industrial and wholesale energy users. The application interfaces to
MV-90 and supports billing on demand, energy rates, real-time pricing
applications, interruptible rates and gas transportation, and settlement
charges. With MV-PBS, a bill can be tailored to meet specific customer
requirements. Prior to MV-PBS, these key customers were often billed manually
due to the expense associated with modifying traditional billing systems for
different customer rates and tariffs. MV-PBS is capable of generating and
sending invoices directly to customers via email or the Internet. The system
also supports financial settlement for the state and regional competitive
markets.
In order to manage high volumes of C&I meters, we developed MV-COMM, a
communications front-end processor for the base MV-90 platform that greatly
enhances speed, performance and communication between meters and the host
processor. MV-COMM supports many different communication formats - TCP/IP, CDPD,
PSTN, ARDIS, RF, etc. Initially developed for the ISO in California, MV-COMM
enabled the Company to meet the ISO's requirement to read a minimum of 3,000
electronic meters with five-minute interval data within two-minute time periods
at the end of each hour. MV-COMM has now been installed at several other
locations, including in the UK, where more than 80,000 electronic meters with
1/2 hourly data are read each night. MV-COMM enables energy providers to
transition from operating systems serving low volumes of C&I customers to
successfully managing large-scale, advanced data collection systems for high
volumes of widely-dispersed C&I customers.
We have exclusive distribution rights in North America for the STAR Data
Management System (MV-STAR). MV-STAR was originally developed by UKDCS, the
operator of the meter data collection system supporting the competitive
electricity supply market in England and Wales and is now being modified by us
for the North America competitive energy markets. When integrated with MV-90,
MV-STAR is a data warehouse solution that manages and stores extremely large
volumes of load profile data gathered from C&I meters, wholesale delivery
points, and major entity grid points. This data is processed in a very short
time period and delivered, via batch or interactive mode to the system users and
data subscribers in industry standard data formats. MV-STAR also provides the
ability to retain data history as it changes over time, preserving all versions
of the data and tagging the data to show how it has been used in the reporting
process. In ISO environments, MV-STAR supports contract management of ISO / ESP
end-customer relationships, including historical storage of contract changes.
The system also supports data aggregation and load profile inputs into the
settlements process.
Large energy users are increasingly looking for easy access to load data.
They need to forecast energy costs, adjust usage, react to rate changes and
manage their energy consumption and bottom-line. By using the Internet to
deliver load data, customers can use proven, cost-effective communications
infrastructure that is already in place to access their detailed interval-load
data. Our MV-WEB product interfaces to the MV-90 base platform and to MV-STAR.
Designed to work with standard web browsers, MV-WEB provides a secure Internet
connection for C&I customers to view and graph recorded quantities of interval
load data, as well as calculated quantities. MV-Web also provides a flexible
method of data delivery to energy market participants.
In 1998, we completed initial testing of our new C&I Network and are
currently beta testing the product at one customer. The C&I Network operates in
much the same manner as the Company's MicroNetwork but is specifically designed
for solid state C&I electric and gas meters. Traditionally, the only way
utilities could deliver advanced metering and data management functionality to
their key C&I customers was to install a dedicated phone line. While utilities
could easily cost justify that ongoing expense for large C&I customers, it often
proved cost-prohibitive for smaller customers. Our C&I Network utilizes our
radio-based communications technology combined with available public
communications technology and systems to provide the benefits of advanced
metering to this critical customer group at a much lower cost by eliminating the
ongoing expense of dedicated phone lines.
The C&I Network accomplishes this by deploying our external meter modems,
or EMM's, to communicate advanced energy usage data from solid-state electric
and gas meters. Using our radio communications technology, the metering data is
transmitted from the meter modems, using peer to peer communications, through a
system of radio relays to a hub which routes data from a designated population
of C&I meters. Using telephone and/or cellular communications, the hub then
routes all the data collected from C&I meters in its area to an MV-90 host
processor, where the data is used for a variety of billing, load research and
system engineering applications.
Handheld Systems and Products
Almost all utilities in the U.S. and Canada, and utilities in numerous
other countries around the world, use handheld meter reading systems 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, including 22 of the largest 25 utilities, 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. 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.
Customers
Our handheld systems are installed at over 1,500 electric, gas, water and
combination utilities in more than 45 countries and are being used to read
approximately 275 million meters worldwide. Approximately 75% of the largest
utilities (those with 50,000 or more meters), in the United States and Canada,
including 22 of the largest 25 utilities, use our handheld systems. As a result
of the high market penetration we have already achieved in the domestic market,
handheld sales are expected to be predominantly system upgrades and
replacements. We estimate that the number of meters outside of the domestic
market is approximately two to three times the number of meters within that
market. Because utilities in many industrialized countries outside of the
domestic market are only now beginning to automate their meter reading function,
we believe that international markets represent a growth opportunity for sales
of our handheld systems.
We have established ourselves as the world's largest supplier of meter
modules for the expanding AMR market as a result of having shipped over 15.4
million meter modules as of December 31, 1999 to approximately 550 customers
around the world. In total our shipments represent approximately 65% of all AMR
meter module shipments.
We have installed the great majority of the world's largest AMR systems for
electric, gas and water utilities. The largest AMR system is at New Century
Energies (formerly Public Service Company of Colorado) and is comprised of over
1.5 million electric and gas meter modules. The largest gas installation is at
Minnegasco, representing just over 900,000 endpoints. Finally, the largest water
AMR system is installed with the City of Philadelphia Water Department covering
approximately 430,000 water meters.
We also have 500 energy providers and wholesalers using our C&I data
collection and management systems. In our EIS customer segment, we have a number
of large systems installed or currently being installed for the competitive
wholesale energy data markets such as systems in the UK, the ISO for the state
of California, Tucson Electric Power and the Independent Market Operator (IMO)
in Ontario, Canada.
Sales and Distribution
In our Electric Systems SBU, Natural Gas Systems SBU, and Energy
Information Systems SBU, we primarily utilize direct sales, and technical and
administrative support teams to serve the needs of the customers that are the
focus of these SBUs. In our Water and Public Power SBU, we primarily conduct
sales and technical support activities through numerous business associates and
manufacturer representatives, including several major meter manufacturers.
To serve International customers, we have subsidiary operations located in
Reading, England; Vienne, France; and Sydney, Australia. While we utilize a
direct sales approach in some areas, we are transitioning to a distributor-based
model in most areas outside of North America.
We also sell electric and water meter modules through original equipment
manufacturer ("OEM") arrangements with several major meter manufacturers, in
which the manufacturers incorporate our meter modules at their own facilities
into new meters and then offer them for sale. In addition to direct sales, we
also offer products and services through long-term outsourcing arrangements,
which may include providing AMR products, system project management and
installation, on going meter reading services, meter shop services and other
services. Outsourcing contracts usually cover long timeframes and typically
involve contracts in which either a customer owns the equipment and we provide
services for a fee, or where we both own and operate the system for a fee.
Marketing
Marketing activities include product marketing, industry marketing, and
marketing communications. Our marketing efforts focus on product and company
awareness principally through trade shows, symposiums, published papers,
advertising and direct mail. These marketing efforts include brochures,
newsletters, exhibits, conferences, an annual user's forum, industry standards
committee representation and regulatory support. Several major industry
conferences are keystones in the Company's marketing program, including the
Distributech Conference held every winter, the Company's Annual Users
Conference, typically held in June in conjunction with the National Meter
Reading Association meetings, and the Automatic Meter Reading Association
conference usually held in September. The Company maintains communications with
its customers through its Users Advisory Board and a program of regular
mailings, newsletters and new customer announcements.
Global Service and Support
We provide our customers with implementation services that include among
other things, system design, installation, training and project management. Each
of these services is tailored to meet a particular customer's needs. In
addition, for Network AMR systems, we offer network design, propagation
analysis, mapping support, centralized operation and system support. We offers
system maintenance and support services to each of our customers. Service
contract prices are based on a number of factors, including system size and
complexity and the expected degree of service support required. Our system
maintenance and support services include 24-hour, toll-free hot line support,
customer service representatives, consulting services, regional training
programs, equipment repair and preventative maintenance, software support and
maintenance, system troubleshooting and network management services.
Product Development
We have maintained our leadership position in part because of our
commitment to developing new products and continued enhancement of existing
products. Our product development efforts have been focused on expanding and
upgrading our communications and energy data collection product offerings,
particularly for C&I customers, and developing new hardware and software
platforms for handheld systems. In 1998 and 1999, we undertook major
restructuring measures which included the consolidation of development
activities both geographically and in terms of product teams. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring."
Our future success will depend in part on our ability to continue to
develop or acquire new competitive products and technology. In particular, our
ability to further enhance our network and other products or to develop or
acquire new products that provide energy suppliers with the ability to optimize
the distribution aspects of their business and to provide Internet connections
to energy consumers. There can be no assurance that we will not experience
unforeseen problems or delays with respect to our product development efforts.
Delays in the availability of new and enhanced products could have a material
adverse effect on our business, financial condition and results of operations.
See "Certain Risk Factors--Dependence on New Product Development."
Manufacturing
We manufacture meter modules, network components and other communications
technology products, as well as certain handheld computers and peripheral
equipment. Our primary manufacturing objective is to design and produce
cost-effective, high-quality meter modules and other network components
utilizing high-volume automation equipment.
In 1999, our restructuring measures included the consolidation of our high
volume products into one location. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Restructuring." Our primary
manufacturing facility is located in Waseca, Minnesota. We currently have the
capacity to produce approximately 3.3 million (combination of electric, gas and
water) meter modules annually on a two-shift basis. With the addition of a third
shift and certain ancillary equipment, we could expand our capacity to
approximately 4.8 million meter modules annually.
We have installed extensive automated testing equipment in our
manufacturing facilities to provide quality control and process repeatability.
Our testing includes both visual inspection and automated testing of technical
parameters established for each of our products. Our quality control equipment
also includes a sophisticated information system that collects data from testing
equipment and provides extensive reports and analyses of such data. This
information system permits us to promptly identify potential problems or
weaknesses in our manufacturing processes. We have been ISO 9000 certified since
1993 and received ISO 9002 certification of our Waseca facility in 1998.
In the near-term, our Spokane manufacturing facility is responsible for
manufacturing certain handheld systems and peripheral equipment, as well as
other lower-volume AMR products, and is the primary repair facility for our
handheld systems products. We have signed a memorandum of understanding ("MOU")
and are in the process of negotiating definitive agreements to outsource these
activities to a contract manufacturer. The MOU provides that the contract
manufacturer will purchase certain of our manufacturing equipment and inventory
from us and lease approximately two thirds of the space in our Spokane
manufacturing facility, approximately 24,000 square feet.
Certain of our handheld systems products, telephone modules and
international meter module products are manufactured for us by third parties.
Employees
As of March 1, 2000, we employed 935 full-time persons: 31% in
manufacturing, 14% in product development, 4% in marketing, 14% in global
service and support, 18% in finance and corporate administration, and 19% in our
SBUs. Of these employees, 92% were located in the U.S. and Canada, and the
remainder in Europe and Australia. We continues to recruit and seek to maintain
highly qualified management, marketing, technical and administrative personnel.
None of our 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, we face
competition from a variety of companies in each of the markets we serve. The
emerging market for network communications systems for the utility industry,
together with the potential market for other two-way communications
applications, have led communications, electronics and utility companies to
begin developing various systems, some of which currently compete, and others of
which may in the future compete, with the our products, systems, and services.
These competitors can be expected to offer a variety of technologies and
communications approaches, as well as meter reading, installation and other
services to utilities and other industry participants.
We believe that we enjoy a number of competitive advantages. We believe the
diversity of our energy and water data collection products is broader than that
of any other provider. This diversity gives us the ability to provide
comprehensive solutions to our customers. Our radio-based communications
solutions utilize the same AMR radio meter modules and facilitate the migration
from one level of systems automation to another. We believe that we are able to
price our AMR meter modules competitively as a result of our highly automated
manufacturing lines as well as high production volumes. We have a substantially
larger installed base of handheld-based EMR systems and AMR meter modules than
any of our competitors which gives us the advantage of a proven record of
providing cost-efficient, quality products and services and the proven ability
to interface meter data with a wide variety of utility host billing systems. In
addition, we benefit from our nationwide license of 5 MHz of spectrum in the
1427-1432MHz band. See "FCC Regulation."
As of December 31, 1999, we had roughly 65% market share in terms of AMR
meter modules shipped. Our largest competitors in the AMR meter module market
include CellNet Data Systems ("CellNet") and Schlumberger, in particular
Schlumberger's Resource Management Services division. These companies currently
offer alternative solutions and compete aggressively with us. In addition to
being a competitor, Schlumberger also acts as a reseller and integrator of our
solutions. In February 2000, it was announced that CellNet would be filing for
bankruptcy and that Schlumberger intended to acquire CellNet's assets. On a
combined basis, they would have roughly 20% of AMR meter module shipments.
In our EIS market, there are many market participants that may be both
competitors and potential partners. We face competition from a number of
companies such as ABB, Siemens, Lodestar, Ernst & Young, and Anderson
Consulting. In competitive wholesale markets in California and Ontario, Canada,
we have partnered with ABB and Ernst & Young to offer a total integrated system
solution. We will continue to partner with some of these companies to address
future competitive energy markets.
We believe that as we expand our offerings towards optimizing energy
delivery products, systems and solutions, there are several very large suppliers
of equipment, services or technology to the utility industry that have developed
or could develop competitive products for this market, such as ABB, Siemens,
Invensys, and Honeywell. Similarly, we believe that as we move towards offering
systems and solutions for end-user customers, we will face competition from
telecommunications, billing, and controls companies. We expect to develop
cooperative relationships with several of these companies to jointly develop and
offer solutions to the market.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and manufacturing resources, and in some cases,
greater name recognition and experience. Our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products and services than we can. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of the our prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. There can be no assurance that
we will be able to compete successfully against current and future competitors,
and any failure to do so would have a material adverse effect on our business,
financial condition, results of operations and cash flow. See "Certain Risk
Factors--Competition."
Intellectual Property
We own or license numerous United States, Canadian and foreign patents and
have filed various patent applications. These patents cover a range of
technologies for meter reading, portable handheld computer and AMR-related
technologies. We also rely on copyrights to protect our proprietary software and
documentation. We have registered trademarks for most of our major product lines
in the United States and many foreign countries. While we believe that our
patents, trademarks and other intellectual property have significant value,
there can be no assurance that these patents or trademarks, or any patents or
trademarks issued in the future, will provide meaningful competitive advantages.
The Company is currently involved in a number of legal actions related to
infringement of its patents or the Company's alleged infringement of other
patents, 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 Intellectual Property
Certain of our products made for use in the United States use radio
frequencies, the access to and use of which are regulated by the FCC pursuant to
the Communications Act of 1934, as amended. In general, a radio station license
issued by the FCC is required to operate a radio transmitter. The FCC issues
these licenses for a fixed term, and the licenses must be periodically renewed.
Because of interference constraints, the FCC can generally issue only a limited
number of radio station licenses for a particular frequency band in any one
area.
Although radio licenses generally are required for radio stations, Part 15
of the FCC's rules permit certain low-power radio devices ("Part 15 devices") to
operate on an unlicensed basis. Part 15 devices are designed to be used on
frequencies used by others. These other users may include licensed users, which
have priority over Part 15 users. Part 15 devices are not permitted to cause
harmful interference to licensed users and must be designed to accept
interference from licensed radio devices. Our radio meter modules are Part 15
devices which transmit information back to either the our handheld, mobile or
network AMR reading devices in the 910-920 MHz band pursuant to these rules.
Our 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 late February 1997, the FCC adopted a Notice of Proposed Rule Making
("NPRM") seeking comments concerning the rules for multiple address systems
("MAS"). We use licensed MAS frequencies to interrogate or "wake up" our meter
modules. The FCC proposed to change the method for licensing some MAS
frequencies from individual site licenses to wide area licenses and to conduct
auctions for mutually exclusive applications in some MAS frequency bands. In
conjunction with the NPRM, the FCC instituted a freeze on accepting applications
proposing to use our MAS frequency bands for subscriber-based services,
effectively confining the use of these frequency bands to "private" operations,
such as ours.
In July 1999, the FCC issued a further NPRM and extended its freeze, for
applications after July 1, 1999, to applications for private operations in the
MAS bands we use. The FCC issued a Report and Order in January 2000, lifting the
freeze on new license applications but providing that our MAS bands can be used
only for private operations. During the time that our customers were unable to
obtain new MAS licenses, our business was adversely affected.
We also have been issued a non-exclusive nationwide FCC license to operate
in the 1427-1432 MHz band. With the exception of meter modules that operate in
the MAS bands and the 910-920 MHz band described above, our network products
operate within this band. At the time our license was issued, the 1427-1432 MHz
band was allocated primarily for the use of 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 a material impact on our business.
The 1427-1432 MHz band is among 235 MHz of spectrum that has been earmarked
for reallocation from federal government users to private sector users (to be
licensed by the FCC). The band is subject to continuing federal government use
in specified areas through 2004. The FCC initially decided to include the
1427-1432 MHz band in a spectrum reserve that would not be reallocated and
assigned until 2006. In July 1999, however, the FCC proposed to accelerate this
timetable and allocate the upper portion of the band for medical telemetry
operations. Itron has filed a petition for rulemaking proposing instead that the
band be allocated for automatic meter reading and utility telemetry operations.
Itron also has had discussions with the medical telemetry community concerning
the possibility of sharing the band. There can be no assurance that these
discussions will be successful, or that the FCC will adopt an allocation for the
band that is compatible with Itron's business.
The regulatory environment we operate in is subject to change. There can be
no assurance that the FCC or Congress will not take regulatory actions in the
future that would have a material adverse effect on us. See "Certain Risk
Factors--Availability and Regulation of Radio Spectrum." We are also subject to
regulatory requirements in international markets. These regulations, which vary
by country, require modifications to our products, including operating on
different frequencies with different power specifications.
Backlog of Orders
Our twelve-month revenue backlog of unshipped factory orders at the end of
1999 and 1998 was approximately $50 million and $69 million, respectively,
excluding amounts related to our contract with Duquesne. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Duquesne Contract". We expect that substantially all of the orders in
twelve-month backlog at the end of 1999 will be shipped during 2000. 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 $164 million and $195
million at December 31, 1999 and 1998, respectively, excluding amounts related
to our contract with Duquesne. While backlog is one indicator of future revenues
for us, our backlog fluctuates from quarter-end to quarter-end primarily as a
result of the timing of large contracts. In recent years we have increased the
amount of revenue derived from distribution channels for smaller utilities and
municipalities. To the extent that future revenues are derived from this segment
of the market, which typically has a smaller order size that may book and ship
within the same quarter, or from service offerings verses product sales, backlog
may not be as reliable an indicator of near-term revenues.
Environmental Regulations
In the ordinary course of our business, we use metals, solvents, and
similar materials which are stored on site. The waste created by use of these
materials is transported off site on a regular basis by a state-registered waste
hauler. Although we are not aware of any material claim or investigation with
respect to these activities, there can be no assurance that such a claim may not
arise in the future or that the cost of complying with governmental regulations
in the future will not have a material adverse effect on us.
Other
We do not have any contracts with the federal government. Our business is
not significantly seasonal.
Certain Risk Factors
Dependence on Utility Industry; Uncertainty Resulting From Mergers and
Acquisitions and Regulatory Reform: We derive substantially all of our revenues
from sales of products and services to the utility industry. We have experienced
variability of operating results, on both an annual and a quarterly basis, due
primarily to utility purchasing patterns and delays of purchasing decisions as a
result of mergers and acquisitions in the utility industry and changes or
potential changes in the state and federal regulatory frameworks within which
the utility industry operates.
The utility industry, both domestic and foreign, is generally characterized
by long budgeting, purchasing and regulatory process cycles that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Purchases of our products are,
to a substantial extent, deferrable in the event that utilities reduce capital
expenditures as a result of mergers and acquisitions, pending or unfavorable
regulatory decisions, poor revenues due to weather conditions, rising interest
rates or general economic downturns, among other factors.
The domestic electric utility industry is currently the focus of regulatory
reform initiatives in virtually every state. These initiatives have resulted in
significant uncertainty for industry participants and raised concerns regarding
assets that would not be considered for recovery through ratepayer charges.
Consequently, in recent years, many utilities have delayed purchasing decisions
that involve significant capital commitments. While we expect some states will
act on these regulatory reform initiatives in the near term, and some states
have, there can be no assurance that the current regulatory uncertainty will be
resolved in the near future or that the advent of new regulatory frameworks will
not have a material adverse effect on our business, financial condition and
results of operations. Moreover, in part as a result of the competitive
pressures in the utility industry arising from the regulatory reform process,
many utility companies are pursuing merger and acquisition strategies. We have
experienced considerable delays in purchase decisions by utilities that have
become parties to merger or acquisition transactions. Typically, such purchase
decisions are put on hold indefinitely when merger negotiations begin. The
pattern of merger and acquisition activity among utilities may continue for the
foreseeable future. If such merger and acquisition activity continues at its
current rate or intensifies, our revenues may continue to be materially
adversely affected.
Certain state regulatory agencies are considering the "unbundling" of
metering and certain other services from the basic transport aspects of
electricity distribution. Unbundling includes the identification of the separate
costs of metering and other services and may extend to subjecting metering and
other services to competition. For example, in California, the CPUC issued a
decision that subjects metering, billing and related services to competitive
supply. Other states, including Arizona, Nevada and Pennsylvania, have adopted
or are adopting similar measures. The discontinuance of a utility's metering
monopoly could have a significant impact upon the manner in which we market and
sell our products and services. As the customer for our products and services
could change from utilities alone to utilities and their competitive suppliers
of metering services, we could also be required to modify our products and
services (or develop new products and services) to meet the needs of the
participants in a competitive meter services market.
Recent Operating Losses: We have experienced operating losses in certain
quarters of each of the past four years and may experience quarterly losses in
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 been
adversely affected by excess manufacturing capacity. We expect competition in
the AMR market to increase as current competitors and new market entrants
introduce competitive products. Operating margins also may be affected by other
factors. For example, in the past, we entered into large network AMR contracts
with Duquesne and Virginia Power with margins significantly below our historical
margins due to the early stage of the our network products at the time those
systems were shipped and installed, and due to competitive pressures.
Customer Concentration: In some years, our revenues are concentrated with a
limited number of customers, the identity of which changes over time. From time
to time, we are dependent on large, multiyear contracts that are subject to
cancellation or rescheduling by our customers. Cancellation or postponement of
one or more of these contracts would have a material adverse effect on us.
Dependence on New Product Development: We have made, and expect to continue
to make, substantial investments in technology development. Our future success
will depend, in part, on our ability to continue to design and manufacture new
competitive products and to enhance our existing products. This product
development will require continued investment in order to maintain our market
position. There can be no assurance that unforeseen problems will not occur with
respect to the development, performance or market acceptance of our technologies
or products. Development schedules for technology products are subject to
uncertainty, and there can be no assurance that we will meet our product
development schedules. We have previously experienced significant delays and
cost overruns in the development of new products, and there can be no assurance
that delays or cost overruns will not be experienced in the future. Delays in
new product development, including software, can result from a number of causes,
including changes in product definition during the development stage, changes in
customer requirements, initial failures of products or unexpected behavior of
products under certain conditions, failure of third-party-supplied components to
meet specifications or lack of availability of such components, unplanned
interruptions caused by problems with existing products that can result in
reassignment of product development resources, and other factors. Delays in the
availability of new products, or the inability to successfully develop or
acquire products that meet customer needs, could result in increased
competition, the loss of revenue or increased service and warranty costs, any of
which would have a material adverse effect on our business, financial condition
and results of operations.
Dependence on the Installation, Operations and Maintenance of AMR Systems
Pursuant to Outsourcing Contracts: A portion of the our business consists of
outsourcing, wherein we install, operate and maintain AMR systems that we may
continue to own in order to provide meter reading and other related services to
utilities and their customers. We currently have four outsourcing contracts. The
largest of the contracts, which is with Duquesne Light Company, involves network
AMR. The other three contracts involve mobile AMR solutions and, in one of those
cases, the system has been sold on a turnkey basis. We use the cost-to-cost
percentage of completion method of accounting for our long-term outsourcing
contracts which involves our having to estimate revenues and expenses into the
future. To the extent we need to revise our estimates, our financial results can
be adversely affected. For example, in 1999 we incurred approximately $24.1
million in charges related to revisions of our estimates on the Duquesne
contract. See "Management's Discussion and Analysis of Financial Condition and
Result of Operations - Revenues and Gross Margins and Note 3 to our accompanying
financial statements." In addition, these long-term outsourcing contracts are
subject to cancellation or termination in certain circumstances in the event of
a material and continuing failure on our part to meet contractual performance
standards on a consistent basis over agreed time periods.
In February 2000, we signed a non-binding memorandum of understanding with
DQE, the parent company of Duquesne, for their purchase (by Duquesne or an
affiliate) of our network-based AMR system in Pittsburgh which we were currently
operating for Duquesne pursuant to our outsourcing contract with them. We expect
to incur a loss of approximately $50 million in connection with this sale, which
is reflected, in our 1999 financial results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Revenues and Gross
Margins."
Increasing Competition: We face competitive pressures from a variety of
companies in each of the markets we serve. In the radio-based network AMR
market, companies such as CellNet, Whisper and Schlumberger currently offer
alternative solutions to the utility industry and compete aggressively with us.
The emerging market for two-way communications systems for advanced metering and
billing for the utility industry, together with the potential market for the
same kind of systems to provide energy delivery optimization and Internet
connections to customers, have led communications, electronics and utility
companies to begin developing various systems, some of which currently compete,
and others of which may in the future compete, with the 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 and manufacturing
resources, and in some cases, greater name recognition and experience than we
do. Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products and services than we
can. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that increase their ability to address the needs of our
prospective customers. It is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. For example, in February 2000, it was announced that CellNet would be
filing for bankruptcy and that Schlumberger intended to acquire CellNet's
assets. On a combined basis, they would account for roughly 20% of the market in
terms of AMR meter module shipments to date. There can be no assurance that we
will be able to compete successfully against current and future competitors, and
any failure to do so would have a material adverse effect on our business,
financial condition, results of operations and cash flow.
Uncertainty of Market Acceptance of New Technology: The AMR market is
evolving, and it is difficult to predict the future growth rate and size of this
market with any assurance. The AMR market has not grown as quickly in recent
years as we expected. Further market acceptance of the our new AMR products and
systems, will depend in part on our ability to demonstrate cost effectiveness,
and strategic and other benefits, of our products and systems, the utilities'
ability to justify such expenditures and the direction and pace of federal and
state regulatory reform actions. In the event that the utility industry does not
adopt our technology or does not adopt it as quickly as we expect, our future
results will be materially and adversely affected. International market demand
for AMR systems varies by country based on such factors as the regulatory and
business environment, labor costs and other economic conditions.
Rapid Technological Change: The telecommunications industry, including the
data transmission segment thereof, currently is experiencing rapid and dramatic
technology advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, and private communications networks have
greatly expanded communications capabilities and market opportunities. Many
companies from diverse industries are actively seeking solutions for the
transmission of data over traditional communications mediums, including
radio-based and cellular telephone networks. Competitors may be capable of
offering significant cost savings or other benefits to our customers. There can
be no assurance that technological advances will not cause our technology to
become obsolete or uneconomical.
Availability and Regulation of Radio Spectrum: A significant portion of our
products use radio spectrum and in the United States are subject to regulation
by the U.S. Federal Communications Commission (the "FCC"). Licenses for radio
frequencies must be obtained and periodically renewed, and there can be no
assurance that any license granted to us or our customers will be renewed on
acceptable terms, if at all, or that the FCC will keep in place rules for our
frequency bands that are compatible with our business. In the past, the FCC has
adopted changes to the requirements for equipment using radio spectrum, and
there can be no assurance that the FCC or Congress will not adopt additional
changes in the future. For example, in July 1999, the FCC instituted a freeze
precluding new licenses in a band used for certain of our AMR products, and the
freeze remained in effect until January 2000. During the time that our customers
were unable to obtain new licenses and our business was adversely affected.
There can be no assurance that the FCC will not take similar actions in the
future.
We have committed, and will continue to commit, significant resources to
the development of products that use particular radio frequencies. Action by the
FCC could require modifications to our products, and there can be no assurance
that we would be able to modify our products to meet such requirements, that we
would not experience delays in completing such modifications or that the cost of
such modifications would not have a material adverse effect on our future
financial condition and results of operations.
Our radio-based products currently employ both licensed and unlicensed
radio frequencies. There must be sufficient radio spectrum allocated by the FCC
for the use we intend. As to the licensed frequencies, there is some risk that
there may be insufficient available frequencies in some markets to sustain our
planned operations. The unlicensed frequencies are available for a wide variety
of uses and are not entitled to protection from interference by other users. In
the event that the unlicensed frequencies become unacceptably crowded or
restrictive, and no additional frequencies are allocated, tour business will be
materially adversely affected.
We are also subject to regulatory requirements in international markets
that vary by country. To the extent we wish to introduce products designed for
use in the United States or another country into a new market, such products may
require significant modification or redesign in order to meet frequency
requirements and power specifications. Further, in some countries, limitations
on frequency availability or the cost of making necessary modifications may
preclude us from selling our products.
Dependence on Key Personnel: Our success depends in large part upon our
ability to retain highly qualified technical and management personnel, the loss
of one or more of whom could have a material adverse effect on our business. Our
success depends upon our ability to continue to attract and retain highly
qualified personnel in all disciplines. There can be no assurance that we will
be successful in hiring or retaining the requisite personnel.
Intellectual Property: While we believe that our patents, trademarks and
other intellectual property have significant value, there can be no assurance
that these patents and trademarks, or any patents or trademarks issued in the
future, will provide meaningful competitive advantages. There can be no
assurance that our patents or pending applications will not be challenged,
invalidated or circumvented by competitors or that rights granted thereunder
will provide meaningful proprietary protection. Despite our efforts to safeguard
and maintain our proprietary rights, there can also be no assurance that such
rights will remain protected or that our competitors will not independently
develop patentable technologies that are substantially equivalent or superior to
our technologies.
Dependence on Key Vendors, Components, and Internal Manufacturing
Capabilities: Certain of our products, subassemblies and components are procured
from a single source, and others are procured only from limited sources. Our
reliance on such components or on these limited or sole source vendors or
subcontractors involves certain risks, including the possibility of shortages
and reduced control over delivery schedules, manufacturing capability, quality
and costs. In particular, we currently obtain the majority of our handheld
devices from one vendor located in the United Kingdom. Also, we may be affected
by worldwide shortages of certain components such as capacitors, inductors and
certain types of memory and discrete semiconductor devices. A significant price
increase in certain components or subassemblies could have a material adverse
effect on our results of operations. Although we believe alternative suppliers
of these products, subassemblies and components are available, in the event of
supply problems from our sole- or limited-source vendors or subcontractors, our
inability to develop alternative sources of supply quickly or cost-effectively
could materially impair our ability to manufacture our products and, therefore,
could have a material adverse effect on our business, financial condition and
results of operations. In the event of a significant interruption in production
at our manufacturing facilities, considerable time and effort could be required
to establish an alternative production line. Depending on which production lines
were affected, such a break in production would have a material adverse effect
on our business, financial condition and results of operations.
Dependence on Outsourcing Financing: We intend to utilize limited recourse,
long-term, fixed-rate project financing for our future outsourcing contracts. We
have established Itron Finance, Inc. as a wholly owned Delaware subsidiary and
plan to establish bankruptcy-remote, single and special purpose subsidiaries of
Itron Finance, Inc. for this purpose. Although we completed a project financing
facility for an AMR project in 1997, and we currently have a commitment for a
project financing that we expect to close in 2000, there can be no assurance
that we will be able to close the current commitment or 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.
International Operations: International sales and operations may be subject
to risks such as the imposition of government controls, political instability,
export license requirements, restrictions on the export of critical technology,
currency exchange rate fluctuations, generally longer receivables collection
periods, trade restrictions, changes in tariffs, difficulties in staffing and
managing international operations, potential insolvency of international dealers
and difficulty in collecting accounts receivable. In addition, the laws of
certain countries do not protect our products to the same extent as do the laws
of the United States. There can be no assurance that these factors will not have
a material adverse effect on our future international sales and, consequently,
on our business, financial condition and results of operations.
Anti-takeover Considerations: We have the authority to issue 10 million
shares of preferred stock in one or more series and to fix the powers,
designations, preferences, and relative, participating, optional or other rights
thereof without any further vote or action by our shareholders. The issuance of
preferred stock could dilute the voting power of holders of Common Stock and
could have the effect of delaying or preventing a change in control of the
Company. Certain provisions of our Restated Articles of Incorporation, Restated
Bylaws, shareholder rights plan and employee benefit plans, as well as
Washington law, may operate in a manner that could discourage or render more
difficult a takeover of the Company or the removal of management or may limit
the price certain investors may be willing to pay in the future for our shares
of Common Stock.
Regulatory Compliance: We are subject to various federal and state
governmental regulations related to occupational safety and health, labor, and
wage practices as well as federal, state, and local governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture,
and disposal of toxic or other hazardous substances used to produce our
products. We believe that we are currently in material compliance with such
regulations. Failure to comply with current or future environmental regulations
could result in the imposition of substantial fines on us, suspension of
production, alteration of our production processes, cessation of operations, or
other actions which could materially and adversely affect our business,
financial condition, and results of operations. In the ordinary course of our
business, we use metals, solvents, and similar materials, which are stored on
site. The waste created by use of these materials is transported off site on a
regular basis by a state-registered waste hauler. Although we are not aware of
any material claim or investigation with respect to these activities, there can
be no assurance that such a claim will not arise in the future, or that the cost
of complying with governmental regulations in the future, will not have a
material adverse effect on us.
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 March 15, 2000.
Name Age Position
Current Officers:
LeRoy D. Nosbaum 51 President and Chief
Executive Officer
Robert D. Neilson 43 Chief Operating Officer
Andrew H. Alpert 35 Vice President and General
Manager, Water & Public
Power Systems
William L. Brown 51 Vice President, Competitive
Resources
Russel N. Fairbanks, Jr. 56 Vice President and General
Counsel
John W. Hengesh 45 Vice President and General
Manager, Natural Gas Systems
Randi L. Neilson 37 Vice President, Marketing
David G. Remington 58 Vice President and Chief
Financial Officer
Jemima G. Scarpelli 41 Vice President, Investor
Relations and Corporate
Communications
Dennis A. Shepherd 51 Vice President and General
Manager, EIS Systems
Past Officers:
Michael J. Chesser 51 Chairman, President, and
Chief Executive Officer
LeRoy Nosbaum was named President and Chief Executive Officer in March
2000. Previously, he had been Chief Operating Officer. LeRoy joined Itron in
March 1996 and had Vice President responsibilities covering manufacturing,
product development, operations and marketing before being promoted to Chief
Operating Officer. Before joining us, LeRoy was Executive Vice President and
General Manager of Metricom, Inc.'s UtiliNet Division, and held a variety of
positions with Metricom from 1989 to 1996. Prior to joining Metricom, he was
employed by Schlumberger, Ltd. and Sangamo Electric for 20 years, most recently
as General Manager of the Integrated Metering Systems Division of Electricity
Management--North America, an operating group of Schlumberger.
Rob Neilson was named Chief Operating Officer in March 2000. Previously, he
had been Vice President, Strategy and Business Development since October 1997
and Vice President, Marketing from 1993 to 1997. He joined Itron in 1983 as
manager of market development and planning, and served as Director of Marketing
from 1987 to 1993. As Director of Marketing, Rob's responsibilities included
marketing for AMRplus Partners.
Andrew Alpert became Vice President and General Manager, Water & Public
Power Systems in January 2000. With Itron since 1996, Andrew was previously Vice
President Customer Solutions and Business Development. Prior to Itron, Andrew
was an Associate Director in the Communications and Electronics practice at A.T.
Kearney/EDS, a Manager in the consulting practice of Deloitte and Touche, and
worked at GTE Telephone Operations in network planning, engineering, and
operations.
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. Prior to joining Itron, 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.
Russ Fairbanks joined Itron in January 2000 as Vice President and General
Counsel. Previously, 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 when Cyrix became a subsidiary of National
Semiconductor. Russ was with EDS corporation from 1985 to 1993 and served in a
variety of corporate law and strategic roles.
John Hengesh has been with Itron since 1984 and became Vice President and
General Manager, Natural Gas Systems in January 2000. He has served in a number
of positions with Itron covering sales, marketing, hardware and software
development, manufacturing, quality and customer and field support. He was most
recently Vice President Handheld, Mobile and Telephone Solutions, and previous
to that was General Manager for Itron Telephone Solutions in Boise. Prior to
joining Itron, John was the western regional sales manager for the Computer
Products Division of General Instrument.
Randi Neilson was named Vice President, Marketing in January 2000 and has
responsibility for all marketing communications, market research, product
management, regulatory and marketing support. Randi joined Itron in 1990 and has
served in a number of positions, most recently as Director of Solutions and
Product Marketing where her responsibilities included product marketing, program
management, installation and servicing of Itron's radio-based network AMR
products as well as marketing communications. Prior to joining Itron, Randi was
the Director of Marketing for American Sign and Indicator, a leading supplier of
electronic signage and scoreboard systems.
Dave Remington joined Itron in early 1996 as Vice President and Chief
Financial Officer. Before joining Itron, Dave was an investment banker and
Managing Director at Dean Witter Reynolds Inc. or Dean Witter Realty Inc. from
1988 to 1996. Previously, he spent 15 years in the financial services industry
and two years with a high technology firm. During this time, he was Vice
President-Finance, and later President, of Steiner Financial Corporation and the
founding President of one if its subsidiaries.
Mima Scarpelli was promoted from Director to Vice President, Investor
Relations and Corporate Communications in January 2000. She has responsibilities
for all investor relations activities, employee communications, and corporate
communications activities. Mima has been with Itron since 1985 and has held
numerous positions in the finance and accounting area including Treasurer and
Controller before assuming her present responsibilities in 1995. Prior to
joining Itron, Mima was a CPA and audit manager with the Seattle office of
Deloitte & Touche.
Dennis Shepherd was named Vice President and General Manager, Energy
Information Systems in January 2000. Prior to assuming his present position, he
was Vice President, Commercial & Industrial Systems since July 1998. Dennis
joined Itron as Vice President of Marketing and Sales of Utility Translation
Systems, Inc. in March 1996, when Itron acquired UTS. Dennis worked for UTS for
11 years where he led the company's sales and marketing and product planning
activities. Prior to joining UTS, Dennis was an industrial engineer and
marketing representative for Westinghouse Electric Corporation.
Mike Chesser was President and Chief Executive Officer of Itron from June
1999 until March 2000 when he resigned to become Chief Executive officer and
president of GPU Energy. Prior to joining Itron, he was with Atlantic Energy
Inc., the holding company for Atlantic City Electric and other companies, where
he served as President and Chief Operating Officer from 1994 to 1998. Prior to
that, Mike spent 23 years with Baltimore Gas & Electric where he held a number
of executive positions in the areas of marketing and customer service, including
all metering, billing and collection activities.
Item 2: PROPERTIES
Our headquarters are located in approximately 137,000 square feet of owned
space in Spokane, Washington, including 50,000 square feet of manufacturing
space. We are in the process of subleasing the majority of the manufacturing
space in this facility to a subcontract manufacturer who will manufacture most
of our low volume hardware products. We also own a building adjacent to our
Spokane facility with approximately 28,000 square feet of manufacturing and
office space. We intend to sell or sublease this facility. In Raleigh, North
Carolina, we own approximately 24,000 square feet and are leasing an additional
25,000 square feet used for activities related to our EIS Systems business. In
Waseca, Minnesota, we lease 86,000 square feet of manufacturing and engineering
space. In late 1998, we began relocating activities from our facility in
Lakeville, Minnesota to the Waseca facility and have sub-leased approximately
40% of the 32,000 square feet in the Lakeville facility. We have approximately
54,000 square feet of leased space in various cities in North America for sales
and service including 14,000 square feet of leased space in Pittsburgh,
Pennsylvania which is used for our operations and maintenance of our outsourcing
activities at Duquesne. Additionally, we lease sales offices in the United
Kingdom, France and Australia and in various cities throughout the United
States. Our 1999 aggregate domestic and international base monthly lease
obligation was approximately $135,000. 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
On October 3, 1996, the Company filed a patent infringement suit against
CellNet Data Systems ("CellNet") in the United States District Court for the
District of Minnesota, alleging that CellNet is infringing on its United States
Patent No. 5,553,094, entitled "Radio Communication Network for Remote Data
Generating Stations," issued on September 3, 1996. The Company is seeking
injunctive relief as well as monetary damages, costs and attorneys' fees. On
January 28, 1999, the Court issued its decision on motions and cross motions for
summary judgment that had previously been filed by the Company and CellNet. In
its decision, the Court held the Company's patent valid, but not infringed. The
Company believes the non-infringement decision was incorrect and has filed an
appeal. The appeal is currently stayed as a result of CellNet's filing for
bankruptcy protection. The Company is seeking a lift of the stay. There can be
no assurance that the Company will prevail on appeal in this action or, even if
it does prevail, that legal costs incurred in connection therewith will not have
a material adverse effect on its financial condition.
On April 29, 1997, CellNet served the Company with a complaint alleging
patent infringement in the United States District Court for the District of
California. CellNet sought injunctive relief and damages. On November 2, 1998,
the District Court ruled in the Company's favor that none of the Company's
accused products infringed any of the asserted claims in CellNet's patent, and
the Court of Appeals for the Federal Circuit affirmed the ruling. The case was
returned to the District Court for disposition of the Company's counterclaim of
invalidity, and motion for attorney's fees, and then stayed as a result of
CellNet's filing for bankruptcy protection.
On May 29, 1997, the Company and its then President and Chief Executive
Officer, Johnny M. Humphreys, were served with a complaint alleging securities
fraud filed by Mark G. Epstein (Epstein v Itron, et al.) on his own behalf and
alleged to be on behalf of a class of all others similarly situated, in the U.S.
District Court for the Eastern District of Washington (Civil Action No.
CS-97-214 RHW). The complaint alleges, among other matters, that the Company and
Mr. Humphreys violated Section 10(b) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 thereunder by making allegedly false statements
regarding the development status, performance and technological capabilities of
its Fixed Network AMR system and regarding the suitability of its encoder
receiver transmitter devices for use with an advanced Fixed Network AMR system.
The complaint sought monetary damages, costs and attorneys' fees and unspecified
equitable or injunctive relief. On March 10, 1999, the Court certified this
action as a class action on behalf of all purchasers of the Company's common
stock between September 11, 1995 and October 22, 1996.
On June 3, 1999 the Company reached an agreement to settle the lawsuit by a
payment to the plaintiff class of $12 million, all of which was funded by
insurance proceeds. The court finally approved the settlement on November 19,
1999. Neither the Company nor Mr. Humphreys have admitted wrongdoing or any
liability and none has been found by the court.
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. Benghiat has filed a counterclaim alleging patent
infringement in the United States District Court for the District of Minnesota.
The patent infringement allegations relate to certain of the Company's handheld
meter reading technology. The matter is currently in the discovery stage with a
ready trial date in October, 2000. While the Company believes the allegations of
infringement are incorrect, there can be no assurance that it will prevail in
this matter, or that if it does prevail, that legal costs incurred in connection
therewith will not have a material adverse effect on its financial condition.
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 1999.
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 closing sales prices for all four
quarters of 1999 and 1998 as reported by the NASDAQ National Market.
1999 1998
--------------------------------------------------------------------
HIGH LOW HIGH LOW
--------------------------------------------------------------------
First Quarter $9.56 $6.88 $21.69 $15.69
Second Quarter 9.50 6.75 20.63 12.75
Third Quarter 8.88 5.88 13.50 6.38
Fourth Quarter 6.94 4.25 9.50 4.63
Holders
At March 15, 2000, there were approximately 600 holders of record of our
Common Stock.
Dividends
We have never declared or paid cash dividends. We intend to retain future
earnings, if any, for the development of our business and do not anticipate
paying cash dividends in the foreseeable future.
Item 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year Ended December 31,
Statement of Operations Data 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues
AMR systems $111,449 $164,148 $143,472 $129,576 $ 98,724
Handheld systems 69,557 53,957 49,409 45,084 60,952
Outsourcing 12,406 23,297 23,236 2,924 1,659
------------ ------------- --------------- ------------ -------------
Total revenues 193,412 241,402 216,117 177,584 161,335
Cost of revenues 200,104 164,599 135,359 104,708 89,596
------------ ------------- --------------- ------------ -------------
Gross profit (6,692) 76,803 80,758 72,876 71,739
Operating expenses
Sales and marketing 27,780 26,668 29,613 28,847 20,054
Product development 26,764 33,493 32,220 33,285 27,080
General and administrative 13,497 12,834 12,064 10,970 7,589
Amortization of intangibles 1,986 2,261 2,190 1,542 2,336
Restructuring charges 16,686 3,930 - - -
------------ ------------- --------------- ------------ -------------
Total operating expenses 86,713 79,186 76,087 74,644 57,059
Operating income (loss) (93,405) (2,383) 4,671 (1,768) 14,680
Other income (expense)
Equity in affiliates (600) (1,154) (1,120) (50) -
Gain on sale of business interests - - 2,000 - -
Interest, net (6,261) (6,508) (3,916) (316) 1,721
------------ ------------- --------------- ------------ -------------
Total other income (expense) (6,861) (7,662) (3,036) (366) 1,721
------------ ------------- --------------- ------------ -------------
Income (loss) before taxes and extraordinary (100,266) (10,045) 1,635 (2,134) 16,401
item
Income tax benefit (provision) 28,010 3,820 (625) 670 (5,250)
------------ ------------- --------------- ------------ -------------
Net income (loss) before extraordinary item (72,256) (6,225) 1,010 (1,464) 11,151
Extraordinary gain on early extinguishment of
debt, net of income taxes of $1,970 3,660 - - - -
------------ ------------- --------------- ------------ -------------
------------ ------------- --------------- ------------ -------------
Net income (loss) $(68,596) $ (6,225) $ 1,010 $(1,464) $11,151
------------ ------------- --------------- ------------ -------------
Earnings per Share
Basic
Income (loss) before extraordinary item $ (4.87) $ (.42) $ .07 $ (.11) $ .85
Extraordinary item .25 - - - -
------------- ------------ --------------- ------------ ------------
Basic net income (loss) per share $ (4.62) $ (.42) $ .07 $ (.11) $ .85
------------- ------------ --------------- ------------ ------------
Diluted
Income (loss) before extraordinary item $ (4.87) $ (.42) $ .07 $ (.11) $ .81
Extraordinary item .25 - - - -
------------- ------------ --------------- ------------ ------------
Diluted net income (loss) per share $ (4.62) $ (.42) $ .07 $ (.11) $ .81
------------- ------------ --------------- ------------ ------------
Average number of shares outstanding
Basic 14,851 14,668 14,118 13,297 13,095
Diluted 14,851 14,668 14,562 13,297 13,775
Balance Sheet Data
Working capital $ 44,260 $ 54,230 $ 68,307 $ 26,239 $ 64,536
Total assets 192,079 247,755 240,211 186,671 149,718
Total debt 74,998 92,197 73,814 39,502 5,668
Shareholders' equity 47,525 115,022 120,427 114,222 111,273
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.
Overview
Itron is a leading provider to the energy and water industry of integrated
systems solutions for collecting, communicating, analyzing and managing
information about energy and water usage. We design, develop, manufacture,
market, install and service hardware, software and integrated systems that
enable customers to obtain, analyze and use meter data. Our major product lines
include Automatic Meter Reading ("AMR") systems and electronic meter reading or
Handheld systems. We both sell our products and provide outsourcing services.
Effective January 2000, we reorganized internally around strategic business
units ("SBUs") focused on the customer segments that we serve. These include
Natural Gas Systems, Water and Public Power Systems, Electric Systems,
International Systems and Energy Information Systems. We have also created an
SBU focused on potential new business. Future reporting of financial and
operating results will include information about SBU results.
Our AMR solutions primarily utilize radio and telephone technology to
collect meter data and include Off-Site AMR, Mobile AMR and Network AMR
technology reading options. Off-Site AMR utilizes a radio device attached to an
Itron handheld computer that collects data from meters equipped with our radio
meter modules. Mobile AMR uses a transceiver in a vehicle to collect data from
meters equipped with our radio meter modules as the vehicle passes by. We offer
a number of Network AMR solutions that utilize radio, telephone, cellular, or a
combination of these technologies, to collect and transmit meter information
from a variety of fixed locations. Our handheld systems product line includes
the sale and service of ruggedized handheld computers and supporting products
that record visually obtained meter data. Outsourcing services typically involve
the installation, operation and/or maintenance of systems that provide meter
information for billing and management purposes. Outsourcing contracts usually
cover long timeframes and typically involve contracts in which we own, operate
and maintain the system for a periodic fee.
We currently derive substantially all of our revenue from product sales and
services to utilities. However, we have done business with other utility
industry participants such as energy service providers and end user customers,
and we may see an increasing percentage of sales to these customers. 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. In recent years these delays have generally resulted from changes or
potential changes to the federal and state regulatory frameworks in the electric
utility industry, and mergers and acquisitions in the utility industry.
Prior to 1999, our growth was driven primarily by new product introductions
and by acquisitions of businesses or technologies for the AMR market. We
expected the AMR market prior to 1999 to grow much faster than it did and
invested in manufacturing capacity and product development to support that
growth. Partly as a result of slower overall market growth than expected, we
incurred losses for five of the last eight quarters. With minimal overall AMR
market penetration, we believe that there are still tremendous growth
opportunities in that market.
In 1998 we initiated some limited restructuring measures to reduce costs
and improve operating efficiencies. In 1999, we aggressively extended our
restructuring activities to further reduce spending and to provide greater
focus. These restructuring activities are described in more detail below and
have resulted in significant changes, which will enable us to be profitable in
2000.
Results of Operations
Revenues
The following table shows our revenue and percent change from the prior
year by type of system or service.
Year Ended December 31,
====================================================================================================================================
(in millions) 1999 Change 1998 Change 1997
- -----------------------------------------------------------------------------------------------------------------------------------
AMR systems $111.4 (32)% $164.1 14% $143.5
Handheld systems 69.6 29% 54.0 9% 49.4
Outsourcing 12.4 (47)% 23.3 3% 23.2
------------ ------------ -------------
Total revenues $193.4 (20)% $241.4 12% $216.1
------------ ------------ -------------
1999 compared to 1998
1999 marked the first year in our history in which AMR systems revenues
declined from the previous year. The largest decrease in AMR revenues was in the
electric segment of the market, which is our market segment most impacted by
deregulation and industry consolidation. Also affecting AMR revenues for 1999
was an order issued by the FCC mid-year, which temporarily restricted our
customers' abilities to get access to radio licenses required to use certain of
our AMR products and therefore resulted in lower AMR revenues in the last half
of 1999. The order was lifted shortly before the end of 1999. We shipped 435,000
electric meter modules in 1999, down 50% from the 870,000 units shipped in 1998.
The largest factor impacting this was that in 1998, we had a very large order
with one electric utility customer for a network AMR system covering over
400,000 meters that we did not replace with a similar sized order in 1999.
Additionally, 1999 revenues from that same customer were reduced by a $4.2
million price concession related to a number of changes in the customer's
requirements for the system, including the elimination of their need for
meter-level outage information.
Both gas and water meter module shipment volume increased in 1999 and was
1.3 million units total on a combined basis, representing an 8% increase over
1998. We believe revenues in our gas business will be somewhat flat or slightly
lower in 2000 compared to 1999 as we complete shipments on a contract to a
single large gas utility in the first half of 2000. We expect to continue to see
good growth in our water market as only 2% of meters in this market are
currently automated.
AMR revenues from the sale of products in our Energy Information Systems
(EIS) market increased 38% to $16 million in 1999. EIS systems include products
for large commercial and industrial (C&I) customers of utilities, such as power
billing systems, as well as products and systems for deregulated environments to
manage wholesale market settlement transactions. We believe that we will
continue to experience good growth in the EIS market as products and systems
aimed at C&I customers (the largest users of energy and water) and wholesale
markets will be of increasing importance as deregulation of the energy
marketplace continues.
Handheld systems revenues increased 29% over 1998 from increased volume to
both North American and International markets. Customer upgrades to handheld
systems that were Y2K compliant and sales of our portable network ("PN") radio
card, a new product introduced in late 1998, drove the increase. We expect to
have future handheld systems revenues from upgrades and replacements of systems
in North America and from further penetration into International markets. We
expect revenues from these systems to be somewhat flat over the long term.
Outsourcing revenues, which are included in our finance segment, declined
47%, or $11 million, in 1999. We use the cost-to-cost percentage-of-completion
method of accounting for outsourcing contracts and about $6.6 million of the
decrease resulted from an adjustment to our estimates of revenues to be received
in providing meter reads under our contract with Duquesne Light Company
("Duquesne"). This contract is a 15-year outsourcing agreement, in which we own
and operate a network AMR system, and provide information from that system to
Duquesne. We update our estimates every quarter for our outsourcing contracts
and as required by the percentage of completion accounting method, record any
material changes in estimates in the quarter they are determined. We recorded
the $6.6 million reduction in outsourcing revenues in the fourth quarter for
changed estimates on the Duquesne contract. Subsequent to December 31, 1999, we
entered into a non-binding MOU with Duquesne to sell the system to them. See
additional comments below under "Gross Margin" and Note 3 to our accompanying
financial statements.
Assuming the sale to Duquesne is completed and no other large outsourcing
agreements are signed, we expect our outsourcing revenues to decrease
significantly in 2000.Additional information about revenues is provided in Note
15 of our accompanying financial statements.
1998 compared to 1997
In 1998, AMR systems revenues increased 14%, or $20.7 million, over 1997.
The increased revenues were primarily the result of shipments to, and
installation of, a large network system for one electric utility. Substantially
all shipments and installations under this contract were completed by the end of
1998. Sales of new AMR hardware, primarily for water meters, and software
products introduced in 1997 also contributed to the increase.
Handheld systems revenues increased $4.5 million, or 9%, in 1998 over 1997.
The increased revenues came from sales of the new PN cards for handheld
computers. PN cards are credit card sized radio devices, that provide remote
reads of meters equipped with Itron radio meter modules. 1998 also had a higher
proportion of software and service revenue than 1997.
Outsourcing revenues in 1998 remained fairly level with 1997. The majority
of outsourcing revenues for 1998 were related to the Company's contract with
Duquesne.
Gross Margin
Our gross margin was (3)% in 1999 compared to 32% in 1998 and 37% in 1997.
The table below reflects gross margin as a percentage of corresponding revenue
and the percentage change from the prior year.
Year Ended December 31,
============================================================================================================================
Increase Increase
1999 (Decrease) 1998 (Decrease) 1997
- ----------------------------------------------------------------------------------------------------------------------------
AMR systems 31% 3% 28% (13%) 41%
Handheld systems 43% (6%) 49% 16% 33%
Outsourcing operations cost (172)% (188%) 16% (6%) 22%
Outsourcing - loss on
project sale (402)% - - - -
Total gross margin (3)% (35%) 32% (5%) 37%
1999 compared to 1998
There were a number of significant charges affecting gross margins in 1999.
These included a $49.8 million charge for the write-down of outsourcing assets
related to the proposed sale of those assets to Duquesne (see additional
discussion under outsourcing gross margins below), a $6.6 million reduction in
revenue and a $17.5 million increase to cost of sales for the impact of changes
in estimates to complete the Duquesne contract (see additional discussion under
the "Revenues" caption above and outsourcing gross margins below), the $4.2
million sales concession mentioned under the "Revenues" caption above, and $2.9
million of forward losses on AMR development contracts in Europe in which we now
expect costs to exceed the committed funding. The international forward losses
were discovered in our analysis of European operations during the fourth quarter
of 1999, at which time it was determined that we had significantly
underestimated the development efforts needed to complete our commitments under
four development contracts. The total of the above items is approximately $81
million, and without them, gross margin for the year would have been closer to
the level reported for 1997.
Overall AMR systems gross margin in 1999 improved as a percentage of
revenue, but declined in total dollars, due to lower sales volumes. AMR margins
would have been even higher as a percentage of revenues without the sales
concession and international forward losses discussed above. Margins on the
large network system in 1998 for the electric utility mentioned in the revenues
discussion above were significantly lower than normal, and the 1999 margin
improvement reflects the absence of that lower margin business.
We shipped approximately 1.9 million meter modules in 1999, down
approximately 20% from 1998. Reduced capacity utilization has burdened overall
gross margins in recent years. Our 1999 restructuring actions included the
consolidation of high volume manufacturing operations from Spokane, Washington
and Boise, Idaho into our Waseca, Minnesota plant (see discussion below under
"Restructuring"). The consolidation was substantially completed in the fourth
quarter of 1999 and we expect to reduce annual manufacturing costs by $4 to $5
million as a result of these actions.
Handheld gross margins decreased to 43% of revenues in 1999 from 49% in
1998. In 1999, handheld systems revenues were mostly from upgrade and
replacement sales, which typically have lower net selling prices. In addition,
each sale of upgrade/replacement systems initiates a new warranty period for the
customer where we do not receive post-sale service revenue for a period of time,
typically one year. The mix of sales between North American and International
customers, and the size of the systems sold, can also significantly affect
handheld systems gross margins.
Outsourcing gross margins were negative (574%) in 1999 because of an
expected loss on the sale of our outsourced network AMR system at Duquesne to an
affiliate of Duquesne, and because of additional accruals in 1999 for estimated
costs to complete our remaining obligations for this customer. These two items
had the impact of reducing outsourcing gross profits by approximately $67.3
million.
On February 8, 2000, we entered into a Memorandum of Understanding ("MOU")
with DQE, the parent of Duquesne Light Company, to sell them (or an affiliate of
theirs) our network AMR system that provides Duquesne with meter information for
billing and other purposes for their customers in the Pittsburgh area. The sale,
which is dependent upon satisfactory completion of due diligence and is
scheduled to close in late March or early April 2000, provides for a cash
payment of $33 million for the purchase of the system. The expected $49.8
million loss resulting from this sale has been recognized in 1999 in outsourcing
cost of sales, consisting primarily of a write-off of all of the Duquesne
contract receivables (current and non-current, net of certain liabilities),
which was approximately $31.2 million, and an $18.6 million impairment charge
for the assets being sold. In connection with the sale, we will enter into a
warranty and maintenance agreement under which Duquesne will pay us for the
period from closing through December 31, 2013, for certain defined services
related to the equipment.
We use the cost-to-cost percentage of completion method of accounting for
our long-term outsourcing contracts which involves our having to estimate
revenues and expenses, typically for periods of ten to fifteen years into the
future. During the fourth quarter of 1999, in connection with our normal
practice of reviewing estimates for the Duquesne contract, and in the first
quarter of 2000, in connection with due diligence on the above sale, we
determined that we needed to increase our estimates for future costs, primarily
for ongoing maintenance and support activities, and to decrease our revenue
estimates for future services related to advanced services reads. We estimate
that we will incur approximately $24 million in expenditures between now and
December 31, 2013 to complete all remaining obligations to Duquesne. Our
remaining expenditures will be partially offset by approximately $10 million
that we will receive from Duquesne over that period for warranty and maintenance
services.
In the fourth quarter of 1999, to reflect the changes in estimates for our
outsourcing contract as well as obligations under the warranty and maintenance
agreement, we recorded a $6.6 million reduction in outsourcing revenues and
accrued an additional $17.5 million forward loss accrual which is reflected in
outsourcing cost of sales. See additional details on this transaction in
"Revenues" above, "Financial Condition" below and in Note 3 to our accompanying
financial statements.
1998 compared to 1997
AMR systems margins were 28% of AMR systems revenues in 1998 compared to
41% in 1997 and 1996. This margin decline is primarily the result of the large
network system for the electric utility customer at substantially lower margins
and a higher level of installation activities, which tend to have lower margins,
in 1998. The large lower margin contract was primarily driven by the early life
cycle status of our network products and related installation activities at that
time.
Handheld systems margins of 49% in 1998 were significantly better than the
33% experienced in 1997. The increased margins in 1998 were due to a higher
component of total revenues derived from software and services, which tend to
have higher margins, and a new higher margin hardware product. Additionally,
handheld systems margins were down in 1997 because of a lower than average
margin sale to a large international customer.
Outsourcing margins dropped to 16% in 1998 from 22% in 1997. The decreased
margins were due to a larger portion of outsourcing revenues from our contract
with Duquesne. Outsourcing revenues in 1997 were also largely derived from
Duquesne revenues; however, overall outsourcing margins in 1997 were better than
in 1998 because one customer converted its outsourcing contract to a purchase
that resulted in a one-time gain.
Operating Expenses
Total 1999 operating expenses increased to $86.7 million from $79.2 million
in the prior year mostly due to increased restructuring charges.
Year Ended December 31,
=============================================================================================================================
Increase Increase
(in millions) 1999 (Decrease) 1998 (Decrease) 1997
- -----------------------------------------------------------------------------------------------------------------------------
Sales and marketing $27.8 4% $26.7 (10%) $29.6
Product development 26.8 (20%) 33.5 4% 32.2
General and administrative 13.5 5% 12.8 6% 12.1
Amortization of intangibles 2.0 (12%) 2.3 3% 2.2
Restructuring charges 16.6 325% 3.9 - -
------------ ------------ ------------
Total operating expenses $86.7 10% $79.2 4% $76.1
------------ ------------ ------------
1999 compared to 1998
Sales and marketing expenses increased 4% in 1999 to represent 14% of
revenues, up from 11% of revenues in 1998. Most of the increased expenses were
caused by staff additions for our EIS systems product marketing, sales and sales
support activities. As noted above, sales for this market increased 38% in 1999.
Total sales and marketing expenses in 2000 are expected to remain relatively
flat.
1999 product development expenses decreased 20% from 1998 as a result of
our restructuring activities. During 1999 we consolidated our handheld, mobile,
network and AMR telephone development operations into one group, resulting in
the closure of development operations in Minnesota and California. We also
announced a plan to consolidate our Boise, Idaho operations, and sharply reduce
our European development activities not related to our core business over the
course of 2000. Product development expenses are expected to decline slightly in
2000.
General and administrative expenses were up 5% in 1999 over 1998, primarily
from recruiting and relocation expenses. Overall general and administrative
expenses are expected to remain relatively level in 2000.
Amortization of intangibles decreased slightly in 1999 and is expected to
remain approximately level in 2000. Additional information about operating
expenses by business segment is provided in Note 15 of our accompanying
financial statements.
Restructuring
Restructuring expenses of $16.7 million in 1999 were incurred for
severance, facility closures, and the disposition of excess manufacturing
equipment (see Note 2 to our accompanying financial statements). Restructuring
actions taken during 1999 included: 1) consolidation of high volume
manufacturing operations from three locations to one; 2) a reduction of meter
reading hardware and software platforms supported, and consolidation of
geographically diverse development operations; 3) substantial repositioning of
operations in Europe to reduce the scope of development activities and change
from a direct sales approach to one that is more distributor based; and 4) key
changes in the executive management team. Approximately 300 people were
terminated as part of the 1999 restructuring activities, half of which were in
manufacturing, 25% in product development, and the rest in sales and marketing,
and general and administrative functions. We expect to replace about 100
manufacturing positions as part of the consolidation of high volume
manufacturing operations in our Waseca, Minnesota plant. Management positions
accounted for about 25% of the total staff reductions.
We expect the restructuring measures to reduce annual manufacturing costs
by $4 to $5 million with much improved capacity utilization. We also expect to
reduce annual operating expenses by a like amount; however these reductions will
be offset by payments of approximately $1 million in project completion bonuses
and relocation payments for key personnel, and may be further partially offset
by investments in new business initiatives and by incentive compensation, to the
extent it is earned based on our financial and operating performance. We believe
our restructuring measures will provide for a return to profitability for the
year 2000.
1998 compared to 1997
Sales and marketing expenses in 1998 decreased $2.9 million from 1997 and
decreased as a percentage of revenues from 14% to 11%. The lower expenses in
1998 resulted from: 1) a corporate reorganization in 1997 that redefined certain
jobs previously classified as sales and marketing to general and administrative;
and 2) a greater utilization of sales support personnel for revenue-producing
activities, resulting classification of those expenses as cost of sales.
Product development expenses in 1998 increased by $1.3 million, or 4%, over
1997 but decreased as a percentage of revenues from 15% to 14%. The lower
expenses as a percent of revenue were caused by restructuring activities in the
third quarter of 1998 where we eliminated approximately 150 positions, most of
which were in product development.
General and administrative expenses in 1998 increased approximately
$770,000, or 3%, over 1997, but decreased as a percentage of revenues to 5% from
6%. The increased expenses in 1998 were primarily due to the reclassification of
expenses discussed in sales and marketing above.
Restructuring
In the third quarter of 1998 we began to implement restructuring measures
to reduce costs and improve operating efficiencies. These measures resulted in
$3.9 million in restructuring charges (see Note 2 to our accompanying financial
statements.) Restructuring measures involved the elimination or consolidation of
approximately 150 positions, primarily product development, the write-off of
certain intangible assets due to a reduction in the scope of planned technology
development, consolidation of some of our facilities and discontinuation of a
jointly owned entity.
Other Income (Expense)
Year Ended December 31,
==============================================================================================================================
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Equity in affiliates $(0.6) $(1.2) $(1.1)
Gain on sale of business interest - - 2.0
Interest, net (6.3) (6.5) (3.9)
------------ ------------ --------------
Total other income (expense) $(6.9) $(7.7) $(3.0)
------------ ------------ --------------
Over the three-year period, we have had a shared ownership interest in
three entities, which have been accounted for using the equity method. These
entities provide specialized services, such as installation, load profiling, and
meter reading services, or act as distributors for our products in specific
utility market segments. Equity in affiliates' net operating losses decreased
markedly in 1999 due to improved sales of products through one entity and
curtailed operations of another entity. In 1997 we recorded a $2 million gain on
the sale of our ownership interest in a jointly owned entity. In March 2000, we
sold our interest in another entity to our partner for $400,000, resulting in a
gain of approximately $170,000.
Net interest expense in 1999 decreased slightly from 1998 due to lower
average short-term borrowings. Additionally, in the first quarter of 1999 we
completed an offer to exchange convertible subordinated notes for new notes
carrying a lower conversion price. The offer is described further below under
"Extraordinary Item." The effect of the exchange offer was to reduce the
principal amount of outstanding notes, thereby also reducing annual interest
expense. Interest expense increased in 1998 over 1997 due to the original
issuance of the convertible subordinated notes. See Note 5 to our accompanying
financial statements. We capitalized $260,000 of interest costs in 1998 related
to the construction of outsourcing projects in that year, down from $994,000
capitalized in 1997. No interest was capitalized in 1999.
Income Taxes
The effective income tax rate in 1999 decreased to 28% from the 38% rate
recorded in 1998 and 1997. The lower effective rate in 1999 resulted from
valuation allowances provided for certain domestic tax credits and international
net operating losses, which may be subject to expiration before they can be
utilized. Our effective income tax rate may vary from year to year because of
fluctuations in foreign operating results, changes in valuation allowances on
deferred tax assets, new or revised tax legislation, and changes in the level of
business performed in differing tax jurisdictions.
Extraordinary Item - Gain on Early Extinguishment of Debt
In March 1999 we completed an offer ("exchange offer") to exchange $15.8
million principal amount of 6 3/4% convertible subordinated notes due 2004
("exchange notes") for $22.0 million principal amount of original convertible
subordinated notes ("original notes"). The exchange offer was made on the basis
of $720 principal amount of exchange notes for $1,000 principal amount of
original notes. The exchange notes have substantially the same terms and
conditions as the original notes, except for a reduction in the conversion price
for converting the notes into common stock, an extension of the date before
which we may not call the exchange notes, and the removal of the redemption
premium. The exchange offer reduced our long-term debt and annual interest
expense by taking advantage of market discounts. The gain on early debt
extinguishment, net of issuance expenses and income taxes, was $3.7 million.
Financial Condition
Year Ended December 31,
==============================================================================================================================
Increase Increase
Cash flow information (in millions) 1999 (Decrease) 1998 (Decrease) 1997
- ------------------------------------------------------------------------------------------------------------------------------
Operating activities $ 24.5 1390% $ (1.9) 72% $(3.2)
Investing activities (16.1) (6%) (17.1) (47%) (34.1)
Financing activities (9.6) (151%) 18.7 (51%) 38.1
--------- ------------ ----------
Net increase (decrease) in cash $(1.2) (330%) $ (0.3) (136%) $ .8
--------- ------------ ----------
Operating activities provided $24.5 million in 1999 compared to consuming
$1.9 million in 1998 and $3.2 million in 1997. Wages and benefits payable
increased $10 million in 1999 from restructuring charges for involuntary
employee termination benefits that will be paid in 2000. Restructuring charges
for facility closures and cost of sales charges for forward losses on contracts
not yet complete will require approximately $8 million in cash in 2000, and $12
million total over subsequent years. Operating cash flow for 1999 was much
improved over 1998 from decreases in unbilled accounts receivable and lower
inventory levels. Unbilled accounts receivable are recorded when revenues are
recognized upon product shipment or service delivery and invoicing occurs at a
later date, and there are no material uncertainties related to system
acceptance. Unbilled receivables decreased $14 million in 1999 due to the
billing and collection of two large, turnkey installations. Further improvements
in inventory management across all product lines and locations reduced
inventories by $5 million in 1999. 1999 operating cash flow was offset by
deferred income tax benefits for net operating loss carryforwards. Operating
activities used less cash in 1998 than 1997 because of improved inventory
management and improved accounts receivables turns.
Investing activities required $16.1 million in 1999, compared to $17.1
million in 1998 and $34.1 million in 1997. Construction of the Duquesne
outsourcing project required significant cash over the three-year period. The
sale of the Duquesne system in March 2000 is expected to reduce investments in
equipment used for outsourcing in 2000. See additional details on this
transaction in "Revenues" and "Gross Margin" above and in Note 3 to our
accompanying financial statements. We intend to project finance a mobile
outsourcing project currently under construction and due to be completed in 2000
with long-term, fixed-rate debt. The project financing is expected to be
approximately $9 million compared to an installed project cost of $12 million,
of which we spent $3.3 million in cash on this project in 1999. Capital
acquisitions for internal use in 1999 were approximately level with 1998 and are
expected to remain level in 2000.
Financing activities required $9.6 million in 1999 mostly due to repayment
of short-term bank borrowings. Financing cash in 1998 was provided from
short-term bank borrowings and project financing of one outsourcing project. In
1997 we issued $63.4 million of convertible subordinated notes payable, the
proceeds from which were used primarily to repay short-term bank borrowings. The
exercise of employee stock options and employee stock purchases provided cash of
$1.6 million in 1999, $2.4 million in 1998, and $4.6 million in 1997. In January
2000, we signed an agreement with a bank for a new four-year revolving line of
credit up to a maximum amount of $35 million. As with the previous line of
credit, borrowings available under the new facility are based on accounts
receivable and inventory. Availability under the new line of credit has
decreased since the end of the year primarily due to lower levels of accounts
receivable.
We expect to collect approximately $33 million in cash from the sale of the
Duquesne system in March or April of 2000. The cash received will be used to
repay any short term borrowings, cover the cash needs of restructuring measures
discussed above, and for general corporate purposes. Some portion of excess
cash, if any, may be used to retire long-term debt or to repurchase stock.
Management believes that the cash to be received from the Duquesne sale, the new
borrowing facility, project financing proceeds and cash to be generated from
operations are more than adequate to meet our needs for 2000.
Year 2000 Compliance
None of our products, internal business systems, or suppliers incurred any
significant problems related to the "year 2000 rollover". Our total spending to
address year 2000 issues was approximately $2.4 million.
Certain Forward-Looking Statements
When included in this discussion, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and similar expressions are
intended to identify forward-looking statements. Such statements, are inherently
subject to a variety of risks and uncertainties that could cause our actual
results to differ materially from those reflected in such forward-looking
statements. Such risks and uncertainties include, among others, our ability to
complete negotiations with Duquesne for the systems sale, our ability to
accurately forecast future revenues and costs on long-term contracts, our
estimates of the future impact of restructuring measures, changes in law and
regulation (including FCC licensing actions), changes in the utility regulatory
environment, delays or difficulties in introducing new products and acceptance
of those products, ability to obtain project financing in amounts necessary to
fund future outsourcing agreements, increased competition and various other
matters, many of which are beyond our control. These forward-looking statements
speak only as of the date of this report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change on the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. For a more complete
description of these and other risks, see our Annual Report of Form 10-K for the
year ended December 31, 1999.
Item 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk from our short-term and long-term
debt. Our long-term debt is fixed rate and the short-term debt is variable rate.
We had $70.7 million and $77.7 million of long-term debt at December 31, 1999
and 1998, respectively. (See Note 5 of our accompanying financial statement for
additional information on its short-term and long-term borrowings). Market risk
for fixed-rate long-term debt is estimated as the potential decrease in fair
value resulting from a hypothetical 100 basis points increase in interest rates
and amounts to $2.9 million as of December 31, 1999. We do not use derivative
financial instruments to manage interest rate risk.
From time to time, we enter into forward contracts on known purchase
commitments in foreign currencies and for inter-company settlements. We do not
enter into derivatives for trading purposes. As of December 31, 1999 we did not
have any outstanding foreign exchange contracts.
Our earnings are affected by fluctuations in the value of the U.S. dollar,
as compared to foreign currencies, as a result of transactions in foreign
markets. We have performed a sensitivity analysis assuming a hypothetical 10%
strengthening in the value of the dollar relative to the currencies in which our
transactions are denominated. As of December 31, 1999, 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 our 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 the
impact of changing exchange rates on assets and liabilities denominated in a
foreign currency, consequently, actual effects on operations in the future may
differ materially from that analysis.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Board of Directors and Shareholders of Itron, Inc.
Management is responsible for the preparation of our consolidated financial
statements and related information appearing in this annual report. Management
believes that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
our financial position and results of operations in conformity with generally
accepted accounting principles. Management has included in our financial
statements amounts based on estimates and judgments that it believes are
reasonable under the circumstances.
Management's explanation and interpretation of our overall operating
results and financial position, with the basic financial statements presented,
should be read in conjunction with the entire report. The Notes to Consolidated
Financial Statements, an integral part of the basic financial statements,
provide additional detailed financial information. Our Board of Directors has an
Audit Committee composed of non-management Directors. The Committee meets
regularly with financial management and Deloitte & Touche LLP to review
accounting control, auditing and financial reporting matters.
LeRoy D. Nosbaum David G. Remington
President and Chief Vice President and Chief
Executive Officer Financial Officer
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, 1999 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Itron, Inc. and subsidiaries at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles. 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.
Deloitte & Touche LLP
Seattle, Washington
March 28, 2000
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(in thousands, except per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Revenues
AMR systems $111,449 $164,148 $143,472
Handheld systems 69,557 53,957 49,409
Outsourcing 12,406 23,297 23,236
-------------- ------------ ------------
Total revenues 193,412 241,402 216,117
Cost of revenues
AMR systems 76,826 117,519 84,069
Handheld systems 39,704 27,415 33,108
Outsourcing 83,574 19,665 18,182
--------------
------------ ------------
Total cost of revenues 200,104 164,599 135,359
-------------- ------------ ------------
Gross profit (6,692) 76,803 80,758
Operating expenses
Sales and marketing 27,780 26,668 29,613
Product development 26,764 33,493 32,220
General and administrative 13,497 12,834 12,064
Amortization of intangibles 1,986 2,261 2,190
Restructuring charges 16,686 3,930 -
-------------- ------------ ------------
Total operating expenses 86,713 79,186 76,087
-------------- ------------ ------------
Operating income (loss) (93,405) (2,383) 4,671
Other income (expense)
Equity in affiliates (600) (1,154) (1,120)
Gain on sale of business interest - - 2,000
Interest, net (6,261) (6,508) (3,916)
-------------- ------------ ------------
Total other income (expense) (6,861) (7,662) (3,036)
-------------- ------------ ------------
Income (loss) before income taxes and extraordinary item (100,266) (10,045) 1,635
Income tax benefit (provision) 28,010 3,820 (625)
-------------- ------------ ------------
Income (loss) before extraordinary item (72,256) (6,225) 1,010
Extraordinary gain on early extinguishment of debt,
net of income taxes of $1,970 3,660 - -
-------------- ------------ ------------
Net income (loss) $(68,596) $(6,225) $1,010
--------------- ------------ ------------
Earnings per Share
Basic and diluted
Income (loss) before extraordinary item $(4.87) $(.42) $.07
Extraordinary item .25 - -
-------------- ------------ ------------
Basic net income (loss) per share $(4.62) $(.42) $.07
-------------- ------------ ------------
Average number of shares outstanding
Basic 14,851 14,668 14,118
Diluted 14,851 14,668 14,562
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEETS
At December 31,
(in thousands, except share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $1,538 $2,743
Accounts receivable, net 46,561 62,253
Current portion of long-term contracts receivable 2,579 13,498
Inventories, net 15,300 20,654
Equipment held for sale, net 32,750 -
Deferred income tax asset 8,016 6,938
Other 1,340 2,306
------------ ------------
Total current assets 108,084 108,392
Property, plant and equipment, net 31,627 42,390
Equipment used in outsourcing, net 5,951 50,746
Intangible assets, net 15,196 18,142
Long-term contracts receivable 1,813 23,712
Deferred income tax asset 26,922 1,906
Other 2,486 2,467
------------ ------------
Total assets $192,079 $247,755
------------ ------------
Liabilities and shareholders' equity
Current liabilities
Short-term borrowings $3,646 $ 14,000
Accounts payable and accrued expenses 34,747 24,791
Wages and benefits payable 16,396 6,246
Mortgage notes and leases payable 622 472
Deferred revenue 8,413 8,653
------------ ------------
Total current liabilities 63,824 54,162
Mortgage notes and leases payable 6,280 6,603
Convertible subordinated debt 57,234 63,400
Project financing 7,216 7,722
Warranty and other obligations 10,000 846
------------ ------------
Total liabilities 144,554 132,733
Commitments and contingencies (Note 8) - -
Shareholders' equity
Common stock, no par value, 75 million shares authorized,
14,958,788 and 14,698,121 shares issued and outstanding 107,603 106,039
Accumulated other comprehensive income (1,572) (1,107)
Retained earnings (deficit) (58,506) 10,090
------------ ------------
Total shareholders' equity 47,525 115,022
------------ ------------
Total liabilities and shareholders' equity $192,079 $247,755
------------ ------------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehen- Retained
(in thousands) Shares Amount Warrants sive Income Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 13,387 $98,686 $ 338 $ (107) $ 15,305 $ 114,222
Net income 1,010 1,010
Currency translation adjustment (974) (974)
-------------
Total comprehensive income 36
Stock issues:
Options exercised and
related tax benefits 57 827 827
Employee savings plan 44 935 935
Employee stock purchase plan 43 451 451
Warrants exercised 312 3,915 (281) 3,634
DCI acquisition 759 322 322
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 14,602 105,136 57 (1,081) 16,315 120,427
Net loss (6,225) (6,225)
Currency translation adjustment (26) (26)
-------------
Total comprehensive income (6,251)
Stock issues:
Options exercised and
related tax benefits 37 452 452
Stock repurchased by Company (109) (1,554) (1,554)
Employee savings plan 87 1,161 1,161
Employee stock purchase plan 81 787 787
Warrants expired 57 (57) -
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 14,698 106,039 - (1,107) 10,090 115,022
Net loss (68,596) (68,596)
Currency translation adjustment (465) (465)
-------------
Total comprehensive income (69,061)
Stock issues:
Options exercised and
related tax benefits 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 $ - $(1,572) $(58,506) $47,525
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $(68,596) $ (6,225) $ 1,010
Noncash charges (credits) to income:
Depreciation and amortization 18,474 19,865 16,781
Deferred income tax provision (benefit) (28,064) (4,550) 107
Equity in affiliates, net 600 1,154 (880)
Extraordinary gain on early extinguishment of debt (3,660) - -
Write-off of long-term contracts receivable 34,492 - -
Loss on equipment sale or disposal 23,369 - -
Changes in operating accounts, net of acquisitions:
Accounts receivable 15,668 (1,811) (19,158)
Inventories 5,354 11,331 3,194
Accounts payable and accrued expenses 18,572 (2,663) 7,107
Wages and benefits payable 10,151 (2,935) 5,177
Deferred revenue (240) 1,894 (8)
Long-term contracts receivable (1,674) (17,646) (18,377)
Other, net 52 (312) 1,829
------------ ------------ ------------
Cash provided (used) by operating activities 24,498 (1,898) (3,218)
Investing activities
Acquisition of property, plant and equipment (7,416) (6,364) (9,329)
Equipment used in outsourcing (9,859) (10,746) (27,478)
Proceeds from sale of equipment used in outsourcing - - 3,035
Proceeds from sale of business interest - 1,000 1,000
Acquisitions of intangibles and patent defense costs (171) (1,002) (1,703)
Other, net 1,362 8 410
------------ ------------ ------------
Cash (used) by investing activities (16,084) (17,104) (34,065)
Financing activities
Change in short-term borrowings, net (10,354) 12,440 (31,502)
Proceeds from (payments on) project financing (506) 5,308 2,414
Issuance of common stock 1,564 2,400 6,169
Purchase and retirement of common stock - (1,554) -
Issuance of convertible subordinated debt - - 63,400
Debt issuance costs - - (2,355)
Other, net (323) 128 (63)
------------ ------------ ------------
Cash provided (used) by financing activities (9,619) 18,722 38,063
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,205) (280) 780
Cash and cash equivalents at beginning of period 2,743 3,023 2,243
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,538 $ 2,743 $ 3,023
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Business
We are a leading global provider of solutions for utilities and other
customers to collect, communicate, analyze and manage information about energy
and water usage. We design, develop, manufacture, market, sell, install and
service hardware, software and integrated systems for automatic meter reading
("AMR") and electronic meter reading or Handheld systems. We both sell our
products and provide outsourcing services.
Basis of Consolidation
The consolidated financial statements include the accounts of Itron, Inc.
and our wholly owned subsidiaries. All significant intercompany transactions and
balances are eliminated. Investments in affiliates, in which we have a
non-controlling interest, are accounted for using the equity method. At December
31, 1999 we had a 50% interest in two joint ventures. In March 2000, we sold our
interest in one of those to our partner. In 1997 and 1998, we had a 50% interest
in another venture, and in 1998, sold that interest to our partner.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents are recorded at cost,
which approximates fair value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Cost includes raw materials and labor, plus applied direct and
indirect costs. Service inventories consist primarily of sub-assemblies and
components necessary to support post-sale maintenance.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation, which
includes the amortization of assets recorded under capital leases, is computed
using the straight-line method over the assets estimated useful lives of three
to seven years, or over the term of the applicable capital lease, if shorter.
Equipment used in outsourcing contracts is depreciated using the straight-line
method over the shorter of the useful life or the term of the contract. Plant is
depreciated over 30 years using the straight-line method. We review the carrying
value of property, plant and equipment on a regular basis for impairment. In
1999, 1998 and 1997 total interest expense was $6.7 million, $6.6 million and
$5.2 million, respectively. Of these amounts, we capitalized interest as a
component of the cost of property, plant and equipment constructed for our own
use of $260,000 and $994,000 in 1998 and 1997, respectively. No interest was
capitalized in 1999. Equipment held for sale is reported at the selling price,
less estimated selling costs of $250,000.
Intangible Assets
Goodwill represents the excess cost of businesses that we have acquired
over the fair value of their net assets and is amortized using the straight-line
method over periods ranging from three to 20 years. Patents, patent defense
costs, distribution and product rights are amortized using the straight-line
method over their remaining lives of three to 17 years. Capitalized software
includes costs incurred subsequent to the establishment of technological
feasibility of the related product and is amortized using the straight-line
method for a period not to exceed five years. We regularly review the carrying
value of intangible assets for impairment.
Warranty
We offer standard warranty terms on our product sales. Provision for
estimated warranty costs is recorded at the time of sale and periodically
adjusted to reflect actual experience. The long-term warranty reserve covers
future expected costs of testing and replacement of radio meter module
batteries. Warranty expense was $5.7 million in 1999, $4.2 million in 1998 and
$3.8 million in 1997.
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. We believe that it is more likely than not that we will
generate sufficient taxable income to allow the realization of our deferred net
tax asset.
Foreign Exchange
Our consolidated financial statements are prepared in United States
dollars. Assets and liabilities of foreign subsidiaries are denominated in
foreign currencies and are translated to United States dollars at the exchange
rates in effect on the balance sheet date. Revenues, costs of revenues and
expenses for these subsidiaries are translated using an average rate for the
relevant reporting period. Translation adjustments resulting from this process
are a component of comprehensive income in shareholders' equity.
Revenue Recognition
System sales: Revenues from sales of hardware and software licenses are
generally recognized upon shipment. Service revenues are recognized ratably over
the periods covered by the service contracts or as the services are performed.
Revenues for shipments or post-sale maintenance not yet billed are included in
accounts receivable or other long-term assets 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, and there are no material
uncertainties related to system acceptance.
Large custom systems and outsourcing contracts: Large custom systems
include those in which there is a substantial amount of custom software
development. Outsourcing services may encompass the installation, operation
and/or maintenance of meter reading systems to provide meter information to a
customer for billing and management purposes. Revenues for both large custom
systems and outsourcing contracts are recognized using the cost-to-cost,
percentage-of-completion method of long-term contract accounting. Under this
method, revenue reported during a period is based on the percentage of estimated
total revenues to be received under the contract measured by the percentage of
costs incurred to date to total estimated costs for each contract. This method
is used because we believe costs incurred are the best available measure of
progress on these contracts. Contract costs include all direct material and
labor costs and other indirect costs related to contract performance such as
indirect labor, supplies, tools, repairs and depreciation costs. Provisions for
estimated losses on uncompleted contracts are recognized in the period in which
such losses are determined and were $20.4 million in 1999, $750,000 in 1998 and
$0 in 1997. Changes in estimated profitability, including those arising from
contract penalty provisions and final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Revenues from large custom systems and outsourcing
contracts that are recognized in excess of amounts billed are included in
long-term contracts receivable or the current portion of long-term contracts
receivable depending on the expected period of collection. Amounts billed
related to our outsourcing contracts were $10.7 million, $5.6 million and $2.6
million in 1999, 1998 and 1997, respectively.
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 the dilutive options had been issued and convertible
subordinated notes had been converted. Diluted EPS assumes that common shares
were issued upon exercise of stock options for which the market price exceeded
the exercise price, less shares that could have been repurchased with the
related proceeds ("Treasury Stock" method). It also assumes that any dilutive
convertible subordinated notes outstanding at the beginning of each year were
converted, with related interest adjusted accordingly ("if converted" method).
Derivatives
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We limit our use of
derivative financial instruments to the management of foreign currency risk and
had no derivatives outstanding during 1999. We are currently evaluating the
impact of SFAS 133 on our financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Our accounting for long-term contracts requires that we
estimate our total revenues and our costs of providing outsourcing and other
services over long periods of time, typically 15 years. Because of various
factors affecting future costs and operations, actual results could differ from
estimates.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
Note 2: Restructuring
1999 Charges:
In our ongoing efforts to improve efficiencies and reduce costs we recorded
restructuring charges of $16.7 million during 1999. Our restructuring plan
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, the transition in
Europe from direct sales to more of a distributor-based sales approach and
changes in key management positions. The majority of the charges were related to
a reduction in force of approximately 300 people of which approximately 50% were
in manufacturing, 25% in product development and the remainder throughout the
Company. Twenty-five percent of the reductions were management positions. The
additional charges relate to impairment of equipment and estimated future lease
payments for abandoned facilities. Total 1999 restructuring charges as of
December 31, 1999, are as follows:
Reserve
Cash/ Restructuring Balance
(in thousands) Non-cash Charge Activity 12/31/99
--------------- ----------------- ------------ -------------
Severance and related charges Cash $9,237 $249 $8,988
Asset impairment Non-cash 4,764 1,164 3,600
Consolidation of facilities Cash 2,685 133 2,552
----------------- ------------ -------------
Total restructuring charges $ 16,686 $1,546 $15,140
----------------- ------------ -------------
The reserve balances for severance and related charges and asset impairment
are expected to be fully utilized in 2000. Facility consolidation reserves are
dependent on our ability to sublease vacant space, which is under a
non-cancelable operating lease through 2008.
1998 Charges:
In 1998, in connection with management's measures to reduce costs and
improve operating efficiencies, we recorded restructuring charges of $3.9
million. The restructuring measures primarily involved the elimination or
consolidation of approximately 150 positions, primarily in product development,
the write-off of certain of our intangible assets and the consolidation of one
of our product development locations. Total 1998 restructuring charges as of
December 31, 1999, are as follows:
Reserve
Cash/ Restructuring Balance
(in thousands) Non-cash Charge Activity 12/31/99
----------------- ----------------- ------------ -------------
Severance and related charges Cash $1,920 $1,920 -
Intangible asset impairment Non-cash 1,104 1,104 -
Consolidation of facilities Cash 665 236 429
Other Non-cash 241 241 -
----------------- ------------ -------------
Total restructuring charges $3,930 $3,501 $429
----------------- ------------ -------------
Facility consolidation reserves are dependent on our ability to sublease
vacant space, which is under a non-cancelable operating lease through 2008.
Note 3: Sale of Outsourcing Equipment
On February 8, 2000, we entered into a Memorandum of Understanding with
DQE, the parent of Duquesne Light Company, to sell them (or an affiliate of
theirs) our network AMR system that provides Duquesne with meter information for
billing and other purposes for their customers in the Pittsburgh area. The sale,
which is dependent upon satisfactory completion of due diligence and is
scheduled to close in late March or early April 2000, provides for a cash
payment of $33 million for the purchase of the system, $1 million of which will
be held in escrow for post closing items. The expected $49.8 million loss
resulting from this sale has been recognized in 1999 in outsourcing cost of
sales, consisting primarily of a write-off of all of the Duquesne contracts
receivable (both current and non-current, net of certain liabilities) of
approximately $31.2 million, and $18.6 million for the impairment of the assets
being sold. In connection with this sale, we will enter into a warranty and
maintenance agreement under which we will provide Duquesne with certain
maintenance and support services for the period from closing through December
31, 2013. Duquesne will pay us approximately $695,000 per year for those
services. In connections with our performance responsibilities thereunder, we
have furnished Duquesne with a $5 million standby letter of credit. As of
December 31, 1999, we accrued forward losses for expenditures related to our
remaining obligations to Duquesne that were in excess of amounts to be received.
Note 4: Balance Sheet Components
At December 31,
(in thousands): 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Accounts receivable
Trade (net of allowance for doubtful accounts of $1,311 and $1,485) $ 40,747 $ 41,702
Unbilled revenue 5,814 20,551
------------ ------------
Total accounts receivable $ 46,561 $ 62,253
------------ ------------
Inventories, net
Material $6,428 $9,041
Work in process 1,462 1,599
Finished goods 5,702 6,947
Field inventories awaiting installation 466 -
------------ ------------
Total manufacturing inventories 14,058 17,587
Service inventories 1,242 3,067
------------ ------------
Total inventories $ 15,300 $ 20,654
------------ ------------
Property, plant and equipment
Machinery and equipment $ 37,740 $ 44,140
Equipment used in outsourcing 13,257 54,766
Computers and purchased software 28,331 25,909
Buildings, furniture and improvements 22,132 21,412
Land 2,195 2,195
------------ ------------
Total cost 103,655 148,422
Accumulated depreciation (66,077) (55,286)
------------ ------------
Property, plant and equipment, net $ 37,578 $ 93,136
------------ ------------
Intangible assets
Goodwill $ 16,991 $ 16,991
Capitalized software 6,309 6,370
Distribution and product rights 2,475 2,475
Patents 6,968 6,737
------------ ------------
Total cost 32,743 32,573
Accumulated amortization (17,547) (14,431)
------------ ------------
Intangible assets, net $ 15,196 $ 18,142
------------ ------------
Note 5: Short-term Borrowings and Long-term Debt
Short-term Borrowings
In January 2000 we signed a new four-year agreement with a bank for a
revolving line of credit up to a maximum amount of $35 million. This replaced
the previous line of credit that we had with two banks. Borrowings available
under the new facility are based on accounts receivable and inventory and are
secured by those and certain cash accounts. 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 new agreement contains covenants
which require the Company to maintain certain liquidity and coverage ratios. Any
borrowings mature on January 19, 2004. Our previous revolving line of credit
also allowed maximum borrowings up to $35 million, based on and secured by
accounts receivable and inventory. At December 31, 1999, the maximum amount we
could borrow under this agreement was $20 million. At December 31, 1999 and
1998, the weighted average interest rate was approximately 9.0% and 7.9%. This
line of credit, which contained certain financial covenants, was fully paid in
January 2000.
Mortgage Notes Payable
At December 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Secured mortgage note payable to a shareholder with principal and
interest payments of 9% until maturity on August 1, 2015. $5,402 $5,555
Secured mortgage note payable to a shareholder with principal and
interest payments of 8 1/2% until maturity on June 1, 2019. $ 832 $ 840
We incurred the above notes in conjunction with the purchase of our
headquarters and related manufacturing space in Spokane, Washington. Principal
payments due under these notes are $182,000 in 2000, $199,000 in 2001, $217,000
in 2002, $238,000 in 2003, $260,000 in 2004 and $5.1 million thereafter.
Project Financing
At December 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Secured note payable with principal and interest payments
of 7.6% until maturity on May 31, 2009. $7,216 $7,722
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 $546,000 in 2000, $589,000 in 2001,
$635,000 in 2002, $685,000 in 2003, $739,000 in 2004 and $4.0 million
thereafter.
Convertible Subordinated Debt
At December 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Unsecured, convertible subordinated notes. $57,234 $63,400
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.
The excess of principal amount of the original notes exchanged over that of the
exchange notes, net of issuance costs, has been recognized as an extraordinary
gain on early extinguishment of debt.
Note 6: 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, 1999
and 1998 and do not reflect subsequent changes in the economy, interest and tax
rates, and other variables that may effect determination of fair value. The
following methods and assumptions were used in estimating fair values.
Cash, cash equivalents and accounts receivable: The carrying value
approximates fair value due to the short maturity of these instruments.
Long-term contracts receivable: The fair value of the non-current portion
of long-term contracts receivable is based on the discounted value of expected
cash flows at our current borrowing rate.
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.
1999 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and accounts receivable $48,099 $48,099 $64,996 $64,996
Long-term contracts receivable 1,813 1,616 23,712 20,662
Mortgage notes payable 6,234 6,191 6,395 6,949
Project financing 7,216 6,715 7,722 7,722
Convertible subordinated debt 57,234 32,910 63,400 41,210
Note 7: Statement of Cash Flows Data Supplemental disclosure of cash flow
information:
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $614 $156 $569
Interest paid 5,279 6,037 3,580
Note 8: Commitments and Contingencies
Commitments
We have noncancelable capital leases for computer equipment and software,
and operating leases for office, production and storage space expiring at
various dates through June 2008. Rents under the Company's operating leases were
$2.4 million in 1999, $2.0 million in 1998 and $1.6 million in 1997. Assets
under capital leases are included in the consolidated balance sheets as follows:
At December 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Computers and software $1,188 $905
Accumulated amortization (394) (172)
------------ ------------
Net capital leases $794 $733
------------ ------------
Future minimum payments, by year and in the aggregate, under the
aforementioned leases and other non-cancelable operating leases with initial or
remaining terms in excess of one year are as follows:
At December 31,
Capital Operating
(in thousands) Leases Leases
- ----------------------------------------------------------------------------------------------------------------------------
2000 $449 $2,973
2001 93 1,972
2002 13 1,454
2003 _ 926
2004 _ 644
Thereafter _ 1,327
------------ ---------------
Total minimum lease payments $555 $9,296
Less amount representing interest (19)
------------
Present value of net minimum lease payment 536
Less current portion (433)
------------
Long-term portion $ 103
------------
In order to maintain certain distribution rights, we have agreed to
purchase minimum quantities of components from various suppliers. Minimum
purchase requirements under these agreements are approximately $7.9 million in
2000, $1.0 million in 2001 and $1.0 million in 2002. We believe these
commitments are not in excess of our requirements.
Contingencies
We maintain performance bonds for certain customers. The performance bonds
usually cover the installation phase of a contract and may on occasion cover the
operations and maintenance phase of outsourcing contracts. Additionally, we have
standby letters of credit to guarantee our performance under certain contracts.
The outstanding amounts of standby letters of credit were $6.3 million and
$778,000 at December 31, 1999 and 1998 respectively.
We are a party to various lawsuits and claims, both as plaintiff and
defendant, and have contingent liabilities arising from the conduct of business,
none of which, in the opinion of management, 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.
Note 9: 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 10: Business Combination
On May 2, 1997, we acquired Design Concepts, Inc. ("DCI"), an Idaho-based
company that supplies outage detection, power quality monitoring and AMR
systems, that communicate collected data over telephone lines for electric
meters. Pursuant to the acquisition, we issued 759,297 shares of unregistered
Itron common stock to the shareholders of DCI in exchange for all outstanding
shares of DCI. Certificates representing 75,930 shares issued in the acquisition
were placed in escrow. In 1998, all but 1,517 of the shares were released to DCI
shareholders and the remaining shares were cancelled and not issued because of
expenses we incurred in relation to former DCI obligations. The transaction was
accounted for as pooling-of-interests.
Note 11: Earnings Per Share and Capital Structure
Year Ended December 31,
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 14,851 14,668 14,118
Effect of dilutive securities:
Warrants - - 107
Stock options - - 337
------------ ------------ ------------
Weighted average shares outstanding assuming conversion 14,851 14,668 14,562
------------ ------------ ------------
We have granted options to purchase common stock to directors, employees
and other key personnel at fair market value on the date of grant. Additionally,
we issued warrants in conjunction with a private placement in 1989 and 1990 for
the formation of AMRplus Partners. As of December 31, 1998 there were no further
warrants outstanding. The dilutive effect of these options and warrants is
included for purposes of calculating dilutive EPS using the "treasury stock"
method. We also have subordinated convertible notes outstanding. These notes are
not included in the above calculation as the shares are anti-dilutive in all
periods when using the "if converted" method. There is no dilutive effect in
1999 and 1998, as the Company incurred a loss for each year and including the
securities would have been anti-dilutive.
Note 12: Employee Benefit Plans
Employee Savings Plan
We have an employee incentive savings plan in which substantially all
employees are eligible to participate. Employees may contribute, on a
tax-deferred basis, up to 22% of their salary, 50% of which we match by issuance
of common stock, subject to certain limitations. The expense for our matching
contribution was $1.2 million in 1999, $1.2 million in 1998 and $1.1 million in
1997. We do not offer post-employment or post-retirement benefits.
Stock Option Plans
At December 31, 1999, we had two stock-based compensation plans, which
are described below. We apply APB Opinion 25 and related interpretations in
accounting for our plans. Because all stock options were issued at fair value,
no compensation cost has been recognized for our stock option plans. The
following table summarizes information about stock options (including the
weighted average remaining contractual life and the weighted average exercise
price) outstanding at December 31, 1999:
Outstanding Options Exercisable Options
----------------------------------------------------------------------------------------
Shares Life Shares
Range of Exercise Prices (in 000's) (years) Price (in 000's) Price
- -----------------------------------------------------------------------------------------------------------------------------
$ .86 - $ 2.91 6 3.70 $1.87 6 $1.89
$ 4.63 - $ 5.16 1,361 8.82 4.97 461 4.97
$ 6.20 - $ 8.66 657 8.66 7.91 110 7.73
$12.60 - $17.88 674 6.23 15.90 481 16.02
$19.88 - $24.50 359 6.84 22.04 227 22.41
$58.75 12 6.33 58.75 12 58.75
--------------- -------------
$ .86 - $58.75 3,069 7.97 $10.20 1,297 $12.85
--------------- -------------
1989 Restated Stock Option Plan
Under our 1989 Restated Stock Option Plan, we have granted options to
purchase shares of common stock to employees at prices no less than the fair
market value on the date of grant. Those options become fully exercisable within
three or four years from the date granted and terminate ten years from the date
granted. Incentive stock options and nonqualified options are exercisable at
prices ranging from $.86 to $24.25 per share. The price range of options
exercised was $.17 to $2.91 in 1999, $.86 to $17.88 in 1998 and $.86 to $24.25
in 1997. At December 31, 1999, there were 3.1 million shares of unissued common
stock under the plan, of which options for the purchase of 314,040 shares were
available for future grants. Share amounts (in thousands) and weighted average
exercise prices are as follows:
Year Ended December 31,
1999 1998 1997
------------------------ ----------------------- -------------------------
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,557 $ 9.76 1,995 $18.78 1,267 $17.24
Granted 427 8.16 2,283 8.55 843 21.29
Exercised 38 2.47 (36) 12.45 (57) 10.98
Canceled 157 7.17 (1,685) 18.72 (58) 23.27
---------- ---------- -----------
Outstanding at end of year 2,789 $ 9.76 2,557 $ 9.76 1,995 $18.78
---------- ---------- -----------
Options exercisable at year end 1,176 $11.68 542 $14.96 690 $15.69
1992 Stock Option Plan for Nonemployee Directors
Our 1992 Stock Option Plan for Nonemployee Directors provides for the
annual grant of nonqualified options to purchase 2,000 shares of common stock to
our nonemployee directors at an exercise price that is not less than the fair
market value per share at the date of grant. Outstanding options granted under
the plan are exercisable at prices ranging from $8.29 to $58.75 per share. The
granted options are fully vested and immediately exercisable. At December 31,
1999, there were 153,000 shares of unissued common stock under the plan, of
which options for the purchase of 32,000 shares were available for future grant.
Share amounts (in thousands) and weighted average exercise prices are as
follows:
Year Ended December 31,
1999 1998 1997
------------------------- ------------------------- -------------------------
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 109 $25.96 97 $27.11 85 $28.14
Granted 12 8.29 12 16.63 12 19.88
Exercised - - - - -
--------- ----------- ----------
Outstanding at end of year 121 $24.21 109 $25.96 97 $27.11
--------- ----------- ----------
Options exercisable at year end 121 $24.21 109 $25.96 97 $27.11
Pro forma Net Income and Per Share Amounts
Had the compensation cost for our stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed in SFAS No. 123, our net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Year Ended December 31,
(in thousands except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) As reported (68,596) $(6,225) $1,010
Pro forma (68,801) (9,012) (3,679)
Diluted earnings per share As reported (4.62) (.42) .07
Pro forma (4.63) (.61) (.25)
The weighted average fair value of options granted was $8.16, $7.82 and
$12.86 during 1999, 1998 and 1997 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:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Dividend yield 0% 0% 0%
Expected volatility 59% 64% 57%
Risk-free interest rate 5.8% 4.7% 6.5%
Expected life (years) 5.9 5.3 6.0
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan, we are authorized to issue up to
430,000 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.
Approximately 23% of eligible employees have participated in the Plan since its
inception on July 1, 1996. Under the Plan we sold 81,382, 88,683 and 42,558
shares to employees in 1999, 1998 and 1997, respectively.
Note 13: Income Taxes
A reconciliation of income taxes at the U.S. federal statutory rate of 35%
to the consolidated effective tax for continuing operations is as follows:
Year Ended December 31,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Expected federal income tax provision (benefit) $ (35,093) $ (3,515) $ 572
Change in valuation allowance 7,048 (200) 739
State income taxes (1,233) (397) 89
Goodwill amortization 309 309 302
Foreign sales corporation - (158) (107)
Tax credits - (285) (348)
Foreign operations 429 307 (913)
UTS acquisition - - 152
Meals and entertainment 122 212 134
Other, net 408 (93) 5
--------------- ------------ ------------
Total provision (benefit) for income taxes $ (28,010) $ (3,820) $ 625
--------------- ------------ ------------
The domestic and foreign components of income before taxes were:
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Domestic $ (92,108) $ (8,296) $2,965
Foreign (8,158) (1,749) (1,330)
---------------- ------------ ------------
Income (loss) before income taxes $ (100,266) $(10,045) $1,635
---------------- ------------ ------------
The provision for income taxes consisted of the following:
Year Ended December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ (2,931) $ 344 $ 331
State and local 1,000 324 133
Foreign 10 60 54
-------------- ------------ ------------
Total current $ (1,921) $ 728 $ 518
Deferred:
Federal (28,625) (3,332) 762
State and local (2,076) (651) 38
Foreign (2,436) (365) (1,432)
-------------- ------------ ------------
Total deferred (33,137) (4,348) (632)
Change in valuation allowance 7,048 (200) 739
-------------- ------------ ------------
Total provision (benefit) for income taxes $(28,010) $ (3,820) $ 625
-------------- ------------ ------------
Deferred income taxes consisted of the following:
At December 31,
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Loss carry forwards $20,796 $ 14,715 $ 6,259
Tax credits 7,066 5,925 4,999
Accrued expenses 6,507 5,367 4,033
Inventory valuation 1,806 1,889 2,175
Depreciation and amortization 356 - -
Long term contracts 6,814 - -
Other, net 284 228 97
-------------- ------------ -------------
Total deferred tax assets $43,629 $28,124 $17,563
Deferred tax liabilities
Acquisitions (173) (292) (391)
Depreciation and amortization - (2,789) (4,469)
Long term contracts - (14,729) (6,739)
-------------- ------------ -------------
Total deferred tax liabilities (173) (17,810) 11,599
Valuation allowance (8,518) (1,470) (1,670)
-------------- ------------ -------------
Net deferred tax assets $34,938 $ 8,844 $ 4,294
-------------- ------------ -------------
Valuation allowances of $0 and $5.4 million in 1999, $70,000 and $1.4
million in 1998 and $70,000 and $1.6 million in 1997, were provided for capital
loss carryforwards and foreign net operating loss carryforwards, respectively,
for which we may not receive future benefits. A valuation allowance of $3.0
million was provided for research and development tax credits in 1999.
We have research and development tax credits and net operating loss
carryforwards available to offset future income tax liabilities. The tax credits
of $4.5 million expire from 2000-2012 and the loss carryforwards of $21.8
million begin to expire in 2018.
We also have alternative minimum tax credits, totaling $830,000 that are
available to offset future tax liabilities indefinitely.
Note 14: Other Related Party Transactions
Certain of our customers are also shareholders with more than 10% ownership
interest and/or hold positions on our Board of Directors. Revenue from such
customers was $4.6 million in 1999, $4.5 million in 1998 and $4.8 million in
1997. Accounts receivable from these customers were $137,000 and $303,000 at
December 31, 1999 and 1998, respectively. Interest expense related to mortgage
notes payable to a shareholder was $561,000 in 1999, $475,000 in 1998 and
$483,000 in 1997.
Note 15: Segment Information
We review our operations using a variety of matrices, however, senior
management has primarily reviewed our manufacturing and sales operations on a
domestic vs. international basis and revenues and cost of sales have been
reviewed based on our major product lines of AMR systems, handheld systems and
outsourcing. Our outsourcing agreements are reported in the finance segment and
include those in which we both own and operate the system. These agreements
require a large amount of capital investment and related project and other debt.
Senior management reviews financing operations separately from manufacturing and
sales operations because they are essentially different businesses with
significantly different operating and leverage characteristics.
Segment debt and interest expense related to our finance and international
operations includes both direct and allocated debt and interest expense. Segment
debt and related interest expense are allocated based on each segment's funding
requirements for capital or operations. Intersegment revenues include shipments
to wholly owned subsidiaries and are eliminated in consolidation. EBITDA
includes earnings for each segment before interest, taxes, depreciation and
amortization and is used to allow a comparison of each segment's operating
results. Segment Debt/EBITDA is a ratio that is used to compare segment leverage
ratios to comparable industry ratios. We do not allocate income taxes to our
operating segments and the accounting policies of our reportable segments are
the same as those described in Note 1 to the Notes to Consolidated Financial
Statements.
Year Ended December 31, 1999
Manufacturing and Sales
--------------------------------------------
(in thousands) Domestic International Total Finance Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
AMR systems $108,436 $3,013 $111,449 _ _ $111,449
Handheld systems 52,469 17,088 69,557 _ _ 69,557
Outsourcing _ _ _ 12,406 _ 12,406
Intersegment revenues 1,241 157 1,398 _ (1,398) _
------------ ------------- ------------- ------------- -------------- --------------
Total revenues $162,146 $20,258 $182,404 $12,406 $ (1,398) $193,412
Interest income 382 47 429 _ (327) 102
Interest and other expense (1,227) (2,305) (3,532) (3,758) 327 (6,963)
Depreciation and amortization 14,515 660 15,175 3,299 _ 18,474
Segment loss (15,702) (9,757) (25,459) (69,296) 119 (94,636)
Segment assets 137,426 11,159 148,585 43,494 192,079
Segment debt 39,335 25,319 64,654 10,343 74,997
Cash flows:
Operating activities $52,152 $ (4,999) $47,153 $(22,654) _ $24,498
Investing activities (1) (6,150) (168) (6,318) (9,766) _ (16,084)
------------ ------------- ------------- ------------- -------------- --------------
Net operating and investing $46,002 $ (5,167) $40,835 $(32,420) _ $8,414
EBITDA (2) $(946) $ (6,716) $(7,662) $(62,239) _ $ (69,901)
Segment debt/EBITDA * * * * * *
Year Ended December 31, 1998
Manufacturing and Sales
--------------------------------------------
(in thousands) Domestic International Total Finance Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
AMR systems $155,511 $ 8,637 $164,148 $ - $ - $164,148
Handheld systems 42,774 11,183 53,957 - - 53,957
Outsourcing - - - 23,297 - 23,297
Intersegment revenues 3,680 211 3,891 - (3,891) -
------------ ------------- ------------- ------------- -------------- --------------
Total revenues $201,965 $20,031 $221,996 $23,297 $ (3,891) $241,402
Interest income 408 46 454 21 - 475
Interest and other expense (972) (1,715) (2,687) (4,296) - (6,983)
Depreciation and amortization 15,585 1,554 17,139 2,726 - 19,865
Segment loss (3,009) (4,915) (7,924) (664) (1,457) (10,045)
Segment assets 172,700 12,533 185,233 88,623 (26,101) 247,755
Segment debt 7,010 19,787 26,797 74,083 (8,683) 92,197
Cash flows:
Operating activities $13,153 $ (3,416) $9,737 $ (11,635) $ - $ (1,898)
Investing activities (1) (5,716) (537) (6,253) (10,851) - (17,104)
------------ ------------- ------------- ------------- -------------- --------------
Net operating and investing $ 7,437 $ (3,953) $3,484 $ (22,486) $ - $ (19,002)
EBITDA (2) $11,554 $ (1,584) $9,970 $ 6,358 $ - $ 16,328
Segment debt/EBITDA .61 * 3.10 11.65 - 5.65
Year Ended December 31, 1997
Manufacturing and Sales
--------------------------------------------
(in thousands) Domestic International Total Finance Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers:
AMR systems $138,109 $ 5,363 $143,472 $ - $ - $143,472
Handheld systems 31,907 17,502 49,409 - - 49,409
Outsourcing - - - 23,236 - 23,236
Intersegment revenues 817 658 1,475 - (1,475) -
------------ ------------- ------------- ------------- -------------- --------------
Total revenues $170,833 $23,523 $194,356 $ 23,236 $ (1,475) $216,117
Interest income 529 15 544 - (71) 473
Interest (expense) (206) (1,477) (1,683) (2,777) 71 (4,389)
Depreciation and amortization 14,316 1,289 15,605 1,176 - 16,781
Segment income (loss) 3,783 (3,634) 149 2,206 (720) 1,635
Segment assets 178,465 11,763 190,228 62,805 (12,822) 240,211
Segment debt 6,440 16,140 22,580 51,425 (191) 73,814
Cash flows:
Operating activities $ 3,405 $ 946 $ 4,351 $(7,569) $ - $ (3,218)
Investing activities (1) (9,029) (662) (9,691) (24,374) - (34,065)
------------ ------------- ------------- ------------- -------------- --------------
Net operating and investing $ (5,624) $ 284 $ (5,340) $(31,943) $ - $ (37,283)
EBITDA (2) $17,478 $ (1,305) $ 16,173 $ 6,159 $ - $ 22,332
Segment debt/EBITDA .37 * 1.40 8.35 - 3.31
Domestic information includes the United States and Canada. International
information includes the results of wholly owned subsidiaries located in the
United Kingdom, France and Australia, as well as sales to international
distributors, which were $7.5 million in 1999, $3.0 million in 1998 and $9.7
million in 1997. International revenue includes sales to customers located in
Asia, Europe, Australia, Japan, Latin America and the Middle East. Approximately
16% of 1998 consolidated revenue related to a contract with Virginia Power is
included in the domestic manufacturing and sales segment. At December 31, 1999
and 1998, approximately 4% and 34%, respectively, of total accounts and
contracts receivable were due from one customer.
1 Investing activities primarily consist of capital expenditures for each
segment
2 EBITDA is calculated by adding net interest, depreciation, and amortization
expense to pre-tax income or loss, including extraordinary item, and is
presented because we believe that it allows for a more complete analysis of our
results of operations. This information should not be considered as an indicator
of our overall financial performance. Additionally, EBITDA as reported herein
may not be comparable to similarly titled measures reported by other companies.
* Not meaningful.
Note 16: Development Agreements
We received funding to develop certain products under joint development
agreements with several companies. We retain the intellectual property rights to
the products that are developed. Funding received under these agreements is
credited against product development expenses. The agreements require us to pay
royalties if successful products are developed and sold. Additionally, we are
required to pay royalties on future sales of products incorporating certain AMR
technologies. Funding received and royalty expense under these arrangements is
as follows:
Year Ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Funding received $382 $ 485 $731
Royalties paid 506 1,130 1,524
Note 17: Quarterly Results (Unaudited) Quarterly results are as follows:
(in thousands, except per share and stock First Second Third Fourth Total
price data) Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------------------------------
1999
Statement of operations data:
Total revenues $51,945 $51,221 $48,533 $41,713 $193,412
Gross profit 19,301 17,201 18,293 (61,487) (6,692)
Net income (loss) before
extraordinary item (231) (1,584) (5,868) (64,573) (72,256)
Gain on extinguishment of debt 3,660 - - - 3,660
Net income (loss) $3,429 $(1,584) $(5,868) $ (64,573) $(68,596)
Basic net income (loss) per share
Before extraordinary item $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item .25 - - - .25
------------ ------------ ------------ ------------- -------------
Basic net income (loss) per share $ .23 $ (.11) $ (.39) $ (4.32) $ (4.62)
Diluted net income (loss) per share
Before extraordinary item $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item .24 - - - .25
------------ ------------ ------------ ------------- -------------
Basic net income (loss) per share $ .22 $ (.11) $ (.39) $ (4.32) $ (4.62)
Stock Price:
High $ 9.56 $ 9.50 $ 8.88 $ 6.94 $ 9.56
Low $ 6.88 $ 6.75 $ 5.88 $ 4.25 $ 4.25
1998
Statement of operations data:
Total revenues $63,708 $60,769 $54,839 $62,086 $241,402
Gross profit 20,795 19,968 15,031 21,009 76,803
Net income (loss) 153 (1,076) (5,929) 627 (6,225)
Basic net income (loss) per share $ .01 $(.07) $(.40) $ .04 $ (.42)
Diluted net income (loss) per share $ .01 $(.07) $(.40) $ .04 $ (.42)
Stock Price:
High $21.69 $20.63 $13.50 $9.50 $21.69
Low $15.69 $12.75 $6.38 $4.63 $4.63
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 June 28, 2000
(the "2000 Proxy Statement") sets forth certain information with regard to our
directors and is incorporated herein by reference.
Certain information with respect to persons who are or may be deemed to be
executive officers of Itron is set forth under the caption "Executive Officers
of the Registrant" in Part I of this Annual Report on Form 10-K.
Item 11: EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the 2000 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 2000 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 TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
appearing in the 2000 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.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
2) List of Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
3) Exhibits:
Exhibit
Number Description of Exhibits
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit 3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2) [Need to file]
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A) (Exhibit 4.1)
4.2 Indenture dated as of March 12, 1997 between the Registrant and
Chemical Trust Company of California, as trustee. *(G) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain
of its executive officers, together with schedule executive
officers who are parties thereto. *
10.2 Schedule of certain executive officers who are parties to Change of
Control Agreements (see Exhibit 10.1 hereto) with the Registrant.
10.4 Form of Confidentiality Agreement normally entered into with employees.
(A) (Exhibit 10.7)
10.5 Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of its securities dated March 25, 1996
(D) (Exhibit 10.4)
10.6 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.7 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.8 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.9 Form of Indemnification Agreements between the Registrant and
certain directors and officers.
10.10 Schedule of directors and executive officers who are parties to
Indemnification Agreements (see Exhibit 10.09 hereto) with the
Registrant.
10.11 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (C) (Exhibit 10.16)
10.12 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24).
10.13 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. (DELTA) (C) (Exhibit 10.18)
10.14 Amendment No. 1 to Amended and Restated Utility Automated Meter Data
Acquisition Lease and Services Agreement between the Registrant and
Duquesne Light Company dated September 11, 1997. (DELTA)(F)(Exhibit 10)
10.15 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (C) (Exhibit 10.19)
10.16 Loan Agreement between Itron, Inc. and GE Capital Corporation dated
January 18, 2000.
10.17 Employment Agreement between the Registrant and Michael J. Chesser
dated May 17, 1999. * (I) (Exhibit 10.17)
10.18 First Amendment to Credit Agreement dated February 28, 2000.
12 Statement of Computation of Ratios
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule.
- --------------------------------------------------------------------------------
(A) Incorporated by reference to designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration #33-49832),
as amended, filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the
Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the
Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.
(D) Incorporated by reference to designated exhibit included in the
Company's 1996 Annual Report on Form 10-K filed on March 5, 1997.
(E) Incorporated by reference to Appendix A to the Company's designated
Proxy Statement dated April 4, 1997 for its annual meeting of
shareholders held on April 29, 1997.
(F) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(G) Incorporated by reference to designated exhibit included in the
Company's Current Report on Form 8-K dated March 18, 1997.
(H) Incorporated by reference to designated exhibit included in the
Company's 1997 Annual Report on Form 10-K dated March 30, 1998.
(I) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated August 13, 1999.
* 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 1999.
Schedule II: VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars) Additions
----------
Balance at Charged to Balance at end of period
beginning costs and ----------------------------
Description of period expenses Deductions Current Non current
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Inventory obsolescence 4,131 7,831 8,138 3,824
Warranty 3,369 7,600 7,451 2,666 852
Allowance for doubtful accts. 752 745 745 752
Year ended December 31, 1998:
Inventory obsolescence 3,824 8,316 7,374 4,766
Warranty 3,518 7,381 4,953 5,100 846
Allowance for doubtful accts. 752 952 219 1,485
Year ended December 31, 1999:
Inventory obsolescence 4,766 2,697 4,093 3,370
Warranty 5,946 5,717 4,801 6,062 800
Allowance for doubtful accts. 1,485 4,808 4,982 1,311
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 26th day of March 2000.
ITRON, INC.
By /s/DAVID G. REMINGTON
David G. Remington
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated
below on the 26th day of March, 2000.
Signature Title
/s/LEROY D. NOSBAUM President and Chief Executive
LeRoy D. Nosbaum Officer (Principal Executive
Officer)
/s/DAVID G. REMINGTON Chief Financial Officer
David G. Remington (Principal Financial and
Accounting Officer)
/s/S. EDWARD WHITE Chairman of the Board
S. Edward White
/s/MICHAEL B. BRACY Director
Michael B. Bracy
/s/MICHAEL J.CHESSER Director
Michael J. Chesser
/s/TED C. DEMERRITT Director
Ted C. DeMeritt
/s/JON E. ELIASSEN Director
Jon E. Eliassen
/s/MARY ANN PETERS Director
Mary Ann Peters
/s/PAUL A. REDMOND Director
Paul A. Redmond
/s/GRAHAM M. WILSON Director
Graham M. Wilson