================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
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_____
As of July 31, 1999, there were outstanding 14,887,138 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
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<PAGE>
Part 1: Financial Information
Item 1: Financial Statements
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
=========================================================================================================================
1999 1998 1999 1998
<S> <C> <C> <C> <C>
-------------- ---------------- -------------- ---------------
Revenues
AMR systems $29,054 $44,235 $ 59,973 $ 94,591
Handheld systems 16,391 11,530 32,738 21,210
Outsourcing 5,776 5,004 10,455 8,676
-------------- -------------- -------------- ---------------
Total revenues 51,221 60,769 103,166 124,477
Cost of revenues
AMR systems 18,997 30,656 38,668 65,424
Handheld systems 10,000 5,991 19,140 11,116
Outsourcing 5,023 4,154 8,856 7,174
-------------- -------------- --------------- ---------------
Total costs of revenues 34,020 40,801 66,664 83,714
-------------- -------------- -------------- ---------------
Gross profit 17,201 19,968 36,502 40,763
Operating expenses
Sales and marketing 7,061 6,976 13,495 13,570
Product development 6,953 8,997 13,555 17,920
General and administrative 3,362 3,287 6,387 6,304
Amortization of intangibles 490 588 980 1,179
Restructuring charges - - 1,121 -
-------------- -------------- -------------- ---------------
Total operating expenses 17,866 19,848 35,538 38,973
-------------- -------------- -------------- ---------------
Operating income (loss) (665) 120 964 1,790
Other income (expense)
Equity in affiliates (146) (230) (311) (350)
Interest, net (1,443) (1,636) (3,298) (2,933)
-------------- -------------- -------------- ---------------
Total other income (expense) (1,589) (1,866) (3,609) (3,283)
Income (loss) before extraordinary item and Income (2,254) (1,746) (2,645) (1,493)
taxes
Income tax (provision) benefit 670 670 830 570
-------------- -------------- -------------- ---------------
Net income (loss) before extraordinary item (1,584) (1,076) (1,815) (923)
Extraordinary gain on extinguishment - - 3,660 -
of debt, net of income taxes of $1,970
-------------- -------------- -------------- ---------------
Net income (loss) $(1,584) $ (1,076) $ 1,845 $ (923)
-------------- -------------- -------------- ---------------
Basic net income (loss) per share:
Before extraordinary item $ (0.11) $ (0.07) $ (0.12) $(0.06)
Extraordinary item - - 0.25 -
-------------- -------------- -------------- ---------------
Basic net income (loss) per share $ (0.11) $ (0.07) $ 0.12 $(0.06)
Diluted net income (loss) per share:
Before extraordinary item $ (0.11) $ (0.07) $ (0.12) $(0.06)
Extraordinary item - - 0.24 -
-------------- -------------- -------------- ---------------
Diluted net income (loss) per share $ (0.11) $ (0.07) $ 0.12 $(0.06)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
June 30, December 31,
========================================================================================================================
1999 1998
<S> <C> <C>
---------------- ----------------
Assets
Current assets
Cash and cash equivalents $ 2,888 $ 2,743
Accounts receivable, net 46,269 62,253
Current portion of long-term contracts receivable 14,552 13,498
Inventories 20,328 20,654
Deferred income taxes, net 5,803 6,938
Other 1,285 2,306
----------------- ----------------
Total current assets 91,125 108,392
----------------- ----------------
Property, plant and equipment, net 39,497 42,390
Equipment used in outsourcing, net 53,939 50,746
Intangible assets, net 16,627 18,142
Long-term contracts receivable 27,228 23,712
Other 4,135 4,373
----------------- ----------------
Total assets $ 232,551 $ 247,755
----------------- ----------------
Liabilities and shareholders' equity
Current liabilities
Short-term borrowings $ 8,824 $ 14,000
Accounts payable and accrued expenses 22,490 25,263
Wages and benefits payable 7,019 6,246
Deferred revenue 5,030 8,653
----------------- ----------------
Total current liabilities 43,363 54,162
----------------- ----------------
Convertible subordinated debt 57,234 63,400
Mortgage notes payable 6,162 6,242
Project financing 7,474 7,722
Warranty and other obligations 1,100 1,207
----------------- ----------------
Total noncurrent liabilities 71,970 78,571
----------------- ----------------
Shareholders' equity
Common stock 106,783 106,039
Retained earnings 11,935 10,090
Other (1,500) (1,107)
----------------- ----------------
Total shareholders' equity 117,218 115,022
----------------- ----------------
Total liabilities and shareholders' equity $ 232,551 $ 247,755
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended June 30,
====================================================================================================================================
1999 1998
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,845 $ (923)
Noncash charges (credits) to income:
Depreciation and amortization 9,347 9,292
Deferred income tax provision (benefit) (841) (513)
Equity in affiliates, net 311 350
Extraordinary gain on extinguishment of debt (3,660) -
Changes in operating accounts:
Accounts receivable 15,960 194
Inventories 326 7,132
Accounts payable and accrued expenses (3,152) (4,339)
Wages and benefits payable 773 (3,790)
Long-term contracts receivable (4,570) (5,810)
Deferred revenue (3,623) (792)
Other, net 251 (1,089)
-------------- --------------
Cash provided (used) by operating activities 12,967 (288)
-------------- --------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (3,331) (3,960)
Equipment used in outsourcing (4,751) (6,419)
Other, net 153 (1,264)
-------------- --------------
Cash used by investing activities (7,929) (11,643)
-------------- --------------
FINANCING ACTIVITIES
Change in short-term borrowings, net (5,176) 8,382
Project financing (248) 5,547
Issuance of common stock 744 1,495
Purchase and retirement of common stock - (1,203)
Other, net (213) 445
-------------- --------------
Cash provided (used) by financing activities (4,893) 14,666
-------------- --------------
Increase in cash and equivalents 145 2,735
Cash and cash equivalents at beginning of period 2,743 3,023
-------------- --------------
Cash and cash equivalents at end of period $ 2,888 $ 5,758
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Note 1: Basis of Presentation
The consolidated financial statements presented in this Form 10-Q are unaudited
and reflect, in the opinion of management, all normal recurring adjustments
necessary for a fair presentation of operations for the three month and six
month periods ended June 30, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Form 10-K for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission on March 30, 1999. The results of operations
for the three and six-month periods ended June 30, 1999, are not necessarily
indicative of the results expected for the full fiscal year or for any other
fiscal period.
Note 2: Earnings Per Share and Capital Structure
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 14,807 14,686 14,782 14,658
Effect of dilutive securities:
Stock options - - 556 -
Convertible debt - - - -
----------- ------------ ------------ ----------
Weighted average shares outstanding assuming conversion 14,807 14,686 15,338 14,658
----------- ------------ ------------ ----------
</TABLE>
The Company has granted options to purchase common stock to directors, employees
and other key personnel at fair market value on the date of grant. The dilutive
effect of these options is included for purposes of calculating dilutive
earnings per share ("EPS") using the "treasury stock" method. The Company also
has 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.
Note 3: Restructuring
In 1998, in connection with management's measures to reduce costs and improve
operating efficiencies, the Company recorded a restructuring charge of $3.9
million. During the first quarter of 1999 the Company recorded a further
restructuring charge of $1.1 million as part of its ongoing efforts to improve
operating efficiencies. The restructuring measures primarily involved a
workforce reduction, the write-off of certain of the Company's intangible assets
and the closure and consolidation of facilities. Cumulative restructuring
charges of $5.1 million are as follows:
<TABLE>
<CAPTION>
Reserve
Cash/ Restructuring Balance
(in thousands) Non-Cash Charge Activity 06/30/99
================================================= ================ ============= ============= ===========
<S> <C> <C> <C> <C>
Severance and related charges Cash $ 2,658 $ 2,103 $ 555
Write-down of intangible assets Non-Cash 1,104 1,104 -
Consolidation of facilities Cash 1,048 - 1,048
Other Non-Cash 241 241 -
------------- ------------ -----------
Total restructuring charge $ 5,051 $ 3,448 $1,603
------------- ------------ -----------
</TABLE>
<PAGE>
Note 4: Balance Sheet Components
<TABLE>
<CAPTION>
June 30, December 31,
====================================================================================================================================
(Inventories, in thousands) 1999 1998
------------ ------------
<S> <C> <C>
Material $ 5,964 $12,498
Work in process 1,460 2,339
Finished goods 9,663 7,240
Field inventories awaiting installation 663 596
------------ ------------
Total manufacturing inventories 17,750 22,673
Service inventories 2,578 2,180
------------ ------------
Total inventories $20,328 $ 24,853
------------ ------------
</TABLE>
Note 5: Segment Information
While the Company analyzes its operations in various ways, the chief executive
officer primarily reviews the Company's manufacturing and sales operations on a
domestic vs. international basis and reviews the Company's revenues and cost of
sales by the major product lines of AMR systems, handheld systems and
outsourcing. The Company has outsourcing agreements in which it both owns and
operates AMR systems. These agreements require a large amount of capital
investment, with related project and other debt, and long-term contract payments
that are predominantly financing payments. Consequently outsourcing accounts are
included in the Company's finance operations. Outsourcing contracts in which the
Company operates, but does not own, AMR systems are included in the Company's
normal manufacturing and sales operations. The chief executive officer 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 the Company's 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 various Company-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.
The Company does not allocate income taxes to its operating segments.
<TABLE>
<CAPTION>
Six months ended June 30, 1999
=========================================================================================================================
Manufacturing and Sales
-------------------------------------
(in thousands, except ratios) Domestic International Total Finance Eliminated Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers:
AMR systems $58,903 $ 1,070 $59,973 $ - $ - $ 59,973
Handheld systems 26,161 6,577 32,738 - - 32,738
Outsourcing 656 - 656 9,799 - 10,455
Intersegment revenues 747 24 771 - (771) -
------------ ------------ ----------- ------------ ------------- -------------
Total revenues $86,467 $ 7,671 $94,138 $ 9,799 $ (771) $103,166
Segment income (loss) (1)(2) 2,657 (3,933) (1,276) 4,150 111 2,985
Segment assets 170,180 10,232 180,412 96,060 (43,921) 232,551
Segment debt 6,854 20,658 27,512 77,324 (24,427) 80,409
Cash flows:
Operating activities $18,723 $ (825) $17,898 $ (4,931) $ - $ 12,967
Investing activities (3) (3,190) (73) (3,263) (4,666) - (7,929)
------------ ------------ ----------- ------------ ------------- -------------
Net operating and investing $15,533 $ (898) $14,635 $ (9,597) $ - $ 5,038
EBITDA(4) $ 9,346 $ (2,280) $7,066 $ 8,564 $ - $ 15,630
Segment debt/annual EBITDA(5) 0.37 * 1.95 4.51 * 2.57
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
==========================================================================================================================
Manufacturing and Sales
-------------------------------------
(in thousands, except ratios) Domestic International Total Finance Eliminated Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers:
AMR systems $90,344 $ 4,247 $94,591 $ - $ - $ 94,591
Handheld systems 15,936 5,274 21,210 - - 21,210
Outsourcing 139 - 139 8,537 - 8,676
Intersegment revenues 1,033 100 1,133 - (1,133) -
------------ ------------ ------------ ------------ ------------- -------------
Total revenues $107,452 $ 9,621 $117,073 $ 8,537 $ (1,133) $124,477
Segment income (loss) (2) 1,755 (2,220) (465) (552) (476) (1,493)
Segment assets 170,458 12,000 182,458 73,968 (12,709) 243,717
Segment debt 7,373 17,580 24,953 63,623 - 88,576
Cash flows:
Operating activities $ 6,230 $ (1,570) $ 4,660 $ (4,948) $ - $ (288)
Investing activities (3) (5,015) (226) (5,241) (6,402) - (11,643)
------------ ------------ ------------ ------------ ------------- -------------
Net operating and investing $ 1,215 $ (1,796) $ ( 581) $(11,350) $ - $ (11,931)
EBITDA (4) $ 8,740 $ (808) $ 7,932 $ 2,799 $ - $ 10,731
Segment debt/annual EBITDA (5) 0.42 * 1.57 11.37 * 4.13
</TABLE>
(1) Segment income (loss) for Finance includes $5.6 million pre-tax gain on debt
extinguishment in 1999
(2) Itron does not allocate income taxes to its segments.
(3) Investing activities primarily consist of capital expenditures for each
segment.
(4) EBITDA is calculated by adding net interest, depreciation and amortization
expense to pre-tax income or loss after extraordinary item and is presented
because the Company believes that it allows for a more complete analysis of the
Company's results of operations. This information should not be considered as an
indicator of the Company's overall financial performance. Additionally, EBITDA
as reported herein may not be comparable to similarly titled measures reported
by other companies.
(5) Total debt to annualized EBITDA is calculated by dividing
total segment debt by the product of EBITDA multiplied by 2.
* Not meaningful.
Note 6: Contingencies
The Company, together with its Chairman Johnny M. Humphreys, , is a defendant in
a class action filed by certain former shareholders in federal court, alleging
violations of the federal securities laws arising out of alleged misleading
disclosures or omissions made by the Company regarding its business and
technology. On June 3, 1999 the Company announced that it reached an agreement
to settle this lawsuit by payment of $12 million to the plaintiff class, all of
which will be covered by insurance proceeds. The settlement is subject to
certain customary conditions, including notice to the potential class members
and approval by the court. Neither the Company nor Mr. Humphreys have admitted
any wrongdoings or liability and no wrongdoing or liability was found by the
court.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Itron is a leading global provider of integrated systems solutions for
collecting, communicating, analyzing, and managing information about electric,
gas and water usage. The Company designs, develops, manufactures, markets,
installs and services hardware, software and integrated systems that enable
customers to obtain, analyze and use meter data. The Company's major product
lines include Automatic Meter Reading ("AMR") systems and Electronic Meter
Reading ("EMR") or Handheld systems. The Company both sells its products and
provides outsourcing services.
The Company's 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 fitted into an
Itron handheld computer that collects data from meters equipped with the
Company's radio meter modules. Mobile AMR uses a transceiver in a vehicle to
collect data from meters equipped with the Company's radio meter modules as the
vehicle passes by. The Company offers 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.
The Company's EMR 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 meter reading systems to provide meter information for billing
and management purposes. Outsourcing contracts usually cover long timeframes and
typically involve contracts in which either a customer owns the equipment and
the Company provides meter information for a specified fee, or the Company both
owns and operates the system.
The Company currently derives substantially all of its revenues from sales of
its products and services to utilities, however, the Company's business may
increasingly consist of sales to other utility industry participants such as
energy service providers, end user customers and others. The Company has
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 been a result of changes
or potential changes to the federal and state regulatory frameworks within which
the electric utility industry operates and mergers and acquisitions in the
utility industry, many of which are also driven by deregulation.
RESULTS OF OPERATIONS
Revenues
Total Company revenues for the quarter and six months ended June 30, 1999
decreased $9.6 million and $21.3 million from the same periods in 1998. Both the
quarter and the six month decreases were primarily due to the substantial
completion of one large AMR systems contract in late 1998, which are described
in greater detail below.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------- ----------------------------------------
(in millions) Increase Increase
Revenues 1999 (Decrease) 1998 1999 (Decrease) 1998
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMR systems $29.0 (34%) $44.3 $ 60.0 (37%) $ 94.6
Handheld systems 16.4 42% 11.5 32.7 54% 21.2
Outsourcing 5.8 15% 5.0 10.5 21% 8.7
------------ --------- ----------- -----------
Total revenues $51.2 (16%) $60.8 $103.2 (17%) $124.5
============ ========= =========== ===========
</TABLE>
<PAGE>
AMR systems revenues decreased $15.2 million and $34.6 million in the three and
six-month periods ended June 30, 1999 from the same periods in 1998. There were
three primary reasons for the decreases. First, a large portion of the decreases
was due to meter module shipments in the 1998 periods to Virginia Power
("Virginia"). The Company's contract with Virginia required the installation of
a fixed network covering approximately 460,000 meter modules in three separate
geographic regions. The majority of the shipments and installation activities
for this contract occurred during 1998. This was the most condensed fixed
network installation that the Company had ever achieved. Because of the
accelerated installation schedule, revenue in 1998 was much higher than in the
current periods. Approximately 30% of the quarter and year-to-date AMR revenues
in 1998 were from the Virginia contract. Second, the 1999 periods reflect a
negotiated $4.2 million price concession from a contract amendment with Virginia
for outage detection functionality that Virginia eliminated from the system
requirements. The impact of this price concession is reflected in the quarter
and year to date 1999 periods as a $4.2 million reduction in revenues, gross
profit and operating income. Third, lower installation revenues in 1999 also
contributed to the lower AMR revenue in the year. Installation revenues were
higher in 1998 because the Company had several contracts for "turn-key" systems
in which it was responsible for meter module installation. Average selling
prices for meter modules increased somewhat during the 1999 periods, primarily
reflecting a shift in mix from electric meter modules to gas and water meter
modules.
Handheld systems revenues for the three and six months ended June 30, 1999 were
significantly higher than the same three and six month periods in 1998. The
large increases in handheld systems revenues were primarily due to a large
number of customers upgrading and replacing systems for their Year 2000
requirements, along with sales of the Company's new portable network ("PN") card
for handheld computers. The PN card is a lower cost, lighter weight, credit card
sized radio device, which was introduced in late 1998.
Outsourcing revenues increased $800,000 for the quarter and $1.8 million for the
six-month period in over the same periods in 1998. Outsourcing revenues continue
to be driven primarily by the Company's contract with the Duquesne Light Company
("Duquesne"). The Company is currently in the operations phase of its contract
with Duquesne, which will continue through 2013. The Company expects that total
revenues in the second half of 1999 will be flat or slightly lower than revenues
in the first half of the year.
Gross Margin
Overall gross margins for the three and six-month periods ended June 30, 1999
were slightly higher than the same periods in 1998. The percentages for 1999 and
1998 in the table below reflect gross margins as a percentage of corresponding
revenues and the percentage point change from the prior year.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------- -----------------------------------------
Increase Increase
Gross margin 1999 (Decrease) 1998 1999 (Decrease) 1998
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMR systems 35% 4% 31% 36% 5% 31%
Handheld systems 39% (9%) 48% 42% (6%) 48%
Outsourcing 13% (4%) 17% 15% (2%) 17%
Total gross margin 34% 1% 33% 35% 3% 33%
</TABLE>
AMR systems gross margins for the three and six months ended June 30, 1999
increased four and five percentage points respectively, over the comparable
periods in 1998, despite the $4.2 million impact of the Virginia contract
amendment. Without the revenue reduction in the second quarter of 1999, the
Company would have had a gross margin of 39% for the quarter and 38% for the
year-to-date period. The margin improvement for both the quarter and the six
months reflects the absence of the lower margin contract with Virginia.
Additional improvements in the margin for the three and six month periods in
1999 result from a shift in mix from electric to gas meter modules and a smaller
proportion of installation activities, which tend to have lower margins, in 1999
than in 1998. The Company expects gross margins to continue to be higher in 1999
than in 1998, because of the absence of the low margin impact from the Virginia
contract and a lower proportion of installation activities in 1999 compared to
1998. However, the Company expects more of an impact from manufacturing
over-capacity in the second half of 1999 than it experienced in the first six
months, due primarily to planned increases in manufacturing and finished goods
inventory in the first half of 1999 related to meter module changes.
Handheld systems margins decreased by nine percentage points and six percentage
points in the three and six months of 1999, respectively, from the 48% level in
1998. The lower margins in the current year were primarily due to lower service
margins caused by new warranty periods associated with the new system upgrade
sales (during which the Company does not receive service revenues) that the
Company provides for customer upgrades.
Outsourcing margins of 13% and 15% of revenues in the quarter and year-to-date
periods of 1999 are somewhat lower than the 17% margins in the comparable 1998
periods. The lower margin in both periods is a result of a greater proportion of
total outsourcing revenues in the 1999 periods derived from the Company's
contract with Duquesne. The gross margin on the Duquesne contract is low because
it was the Company's first large sale Network AMR system.
Operating Expenses
Total operating expenses for the three months ended June 30, 1999 were
approximately $2 million lower than the second quarter of 1998. Operating
expenses for the six months ended June 30, 1999 were $3.5 million lower than the
comparable six-month period in 1998, despite a $1.1 million restructuring charge
in the first quarter of 1999. The restructuring charge was primarily for
severance and other expenses related to the closure of the Company's Saratoga,
California product development office. The development activities from this
office are being consolidated into the Company's other product development
locations. Without this restructuring charge, total year-to-date operating
expenses were $4.6 million, or 12%, lower than the same period in 1998.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------- -----------------------------------------
(in millions) Increase Increase
Operating expenses 1999 (Decrease) 1998 1999 (Decrease) 1998
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 7.1 1% $ 6.9 13.5 (1%) $ 13.6
Product development 6.9 (23%) 9.0 13.5 (24%) 17.9
General and administrative 3.4 2% 3.3 6.4 1% 6.3
Amortization of intangibles 0.5 (17%) 0.6 1.0 (17%) 1.2
Restructuring Charge - 100% - 1.1 100% -
---------- ---------- ----------- ---------- -----------
Total operating expenses $17.9 (10%) $19.8 $ 35.5 (9%) $ 39.0
========== ========== ========== ===========
</TABLE>
Sales and marketing expenses for the three and six months ended June 30, 1999
were approximately level with the comparable periods in 1998. Product
development expenses were significantly lower in the 1999 quarter and year to
date periods compared to last year. The lower expenses are primarily the result
of restructuring measures the Company began to implement in the third quarter of
1998 (see restructuring charge discussed below). General and administrative
expenses in 1999 were substantially level with the 1998 periods. Amortization of
intangibles decreased slightly in both the three and six months ended June 30,
1999 compared to 1998, yet remained at 1% of total revenues. Amortization
expenses are lower in the current period because the Company wrote off certain
intangible assets in the third quarter of 1998. The Company expects that
operating expenses will be lower in 1999 compared to 1998 because of the
restructuring measures. Although the Company has expensed all known
restructuring charges as of June 30, 1999, additional charges may be incurred in
conjunction with certain strategic planning activities the Company is
considering.
<PAGE>
In the third quarter of 1998 the Company announced, and began the implementation
of, restructuring measures to reduce costs and improve operating efficiencies.
These measures resulted in a $3.9 million restructuring charge in 1998 and an
additional restructuring charge of $1.1 million in the first quarter of 1999.
The restructuring measures involved a workforce reduction - (primarily in
product development), the write-off of certain intangible assets due to a
reduction in the scope of planned technology development, closure of some of the
Company's facilities and discontinuation of a jointly owned entity. (See Note 3
of the accompanying financial statements.) The Company's comparatively high
product development spending in the prior years expanded the number of models of
meter modules produced, enhanced module functionality, and expanded network
capabilities and products. Because the Company now has a broad product line
including commercial and industrial ("C&I") products, Mobile AMR, handheld
systems, telephone modules and electric, gas and water meter modules, product
development spending has been scaled back to lower levels.
Interest and Other, Net
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------- ---------------------------------------
(in millions) Increase Increase
Other income (expense) 1999 (Decrease) 1998 1999 (Decrease) 1998
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity in affiliates loss $(0.2) (37%) $(0.2) $ (0.3) (11%) $ (0.4)
Net interest income (expense) (1.4) (12%) (1.7) (3.3) 12% (2.9)
---------- ---------- ---------- ----------
Total other income (expense) $(1.6) (15%) $(1.9) $ (3.6) 10% $ (3.3)
========== ========== ========== ===========
</TABLE>
The Company had net interest expense of $ 1.4 million for the three months ended
June 30, 1999, which is comparable to net interest expense in the same periods
of 1998. Net interest expense of $3.3 million in the first half of 1999 was
higher than the same period in 1998, primarily due to capitalized interest,
which reduces net interest expense in 1998. The Company capitalized interest
related to outsourcing installations of $260,000 in the first quarter of 1998.
No interest was capitalized in the second quarter of 1998 or the 1999 periods.
Income Taxes
The Company had an income tax benefit of approximately 30% of pre-tax earnings
from continuing operations for the six months ended June 30, 1999 compared to a
benefit of 38% for the full year 1998. The lower comparative tax rate in 1999,
is primarily caused by a concentration of state tax obligations and lower
expected R&D tax credits. To the extent pre-tax earnings from continuing
operations, or the components of those earnings, differ from the Company's
current expectations, the effective tax rate for the year could change. When the
Company has a lower level of consolidated earnings, it expects its tax rate will
be significantly higher than the statutory rate, primarily due to the impact of
the state and foreign taxes.
Extraordinary Item - Gain on Extinguishment of Debt
In March 1999 the Company completed its offer ("Exchange Offer") to exchange up
to $15.8 million principal amount of its 6 3/4% Convertible Subordinated Notes
due 2004 ("Exchange Notes"), for up to $22.0 million principal amount of its 6
3/4% Convertible Subordinated Notes due 2004 ("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. A total of $15.8 million aggregate
principal amount of Exchange Notes was issued related to the transaction. The
Company generated a pre-tax gain on extinguishment of debt, net of debt issuance
expenses, of $5.6 million in the first quarter of 1999 related to the exchange.
The after-tax effect of the gain on extinguishment was $3.7 million.
<PAGE>
FINANCIAL CONDITION
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------- -----------------------------------------
(in millions) Increase Increase
Cash flows information 1999 (Decrease) 1998 1999 (Decrease) 1998
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating activities $ 6.9 (2%) $ 6.8 $ 12.9 * $ (0.6)
Investing activities (4.5) (33%) (3.4) (7.9) 30% (11.4)
Financing activities (1.4) (319%) 0.6 (4.9) (133%) 14.7
---------- --------- ----------- -----------
Net inc. (dec.) in cash $ 1.0 (76%) $ 4.0 $ 0.1 (95%) $ 2.7
========== ========== =========== ===========
</TABLE>
o not meaningful
Operating activities generated approximately the same amount of cash in the
second quarter of 1999 as they did in the second quarter of 1998. For the first
six months of 1999 the Company generated $12.90 million in cash compared to a
usage of $600,000 in cash in the first six months of 1998. The $13.6 million
improvement in cash flow was primarily driven by increased collections of
accounts receivable and a reduction in the Company's unbilled receivables.
Unbilled receivables were higher in the 1998 period because of a high level of
turnkey installations, which typically have deferred billing terms. The 1998
period also included cash used for payment of 1997 performance incentives of
approximately $4 million.
Investments totaled $4.5 million during the second quarter of 1999, up somewhat
from the $3.4 million in the prior year's quarter due primarily to the
acquisition of C&I meters for Duquesne. Investments were 30% lower in the first
six months of 1999 compared to the same six months of 1998 because of a
reduction in the amount of equipment needed for outsourcing installations and
lower capital acquisitions for internal use.
Financing activities used $1.4 million and $4.9 million in the three and six
months ended June 30, 1999 compared to generating $649,000 and $14.7 million
during the same periods in 1998. Financing activities in the 1999 quarter
primarily consisted of paying down the Company's bank line of credit. During
1998 the Company primarily generated cash from financing activities by borrowing
against the bank line of credit and obtaining project financing for an
outsourcing contract.
Existing sources of liquidity at June 30, 1999 include approximately $2.9
million of existing cash and cash equivalents and $20 million of available
borrowings under the revolving credit facility. The Company expects to spend
less in 1999 on equipment used for outsourcing installations than it did in 1998
because outsourcing installations on current contracts have been completed or
are nearing completion. However, investments in equipment for outsourcing may
increase in late 1999 and 2000 as the Company begins installation of a new
outsourcing system for Southern California Edison. The Company expects to spend
somewhat more on capital assets for internal use during 1999 than it did in
1998. The Company believes that existing cash, together with available
borrowings and cash generated from operating activities, will be more than
sufficient to fund operations, exclusive of any new large outsourcing
arrangements, for the remainder of 1999 and into 2000. The Company intends to
fund future outsourcing contracts with project financing to the extent possible.
RECENT FCC ACTIONS
The Company uses licensed multiple address system ("MAS") frequencies in the 928
- - 959 MHz band to interrogate or "wake-up" some of its meter modules. (See
"Description of Business - FCC Regulation" and "Certain Risk Factors -
Availability and Regulation of Radio Spectrum" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.) On July 1, 1999 the Federal
Communications Commission ("FCC") issued a Notice of Proposed Rule Making
("NPRM") that contains a clause stating that the FCC temporarily will not accept
any new applications after July 3, 1999 for MAS frequencies in this band. The
NPRM does not have an effect on existing licenses. Most utilities use MAS
licenses for many purposes, including meter reading, mobile dispatch and
supervisory control and distribution automation. In addition, other companies in
the gas pipeline, railroad and petroleum industry use MAS licenses in the
frequency band. Both utilities and these other businesses need to obtain new
licenses to grow and broaden their business. The Company and many of these other
companies are planning on filing an emergency petition with the FCC to seek
relief from the moratorium on new license applications, and are aggressively
lobbying the issue with appropriate Congressmen and Senators. One additional
action the company is taking to minimize the impact of this moratorium on its
business is to arrange for the sharing of existing licenses between customers.
Although the Company believes that it will be successful in its efforts to seek
relief from this NPRM, and that the matter will be favorably settled by
year-end, there can be no assurance that it will be. As long as the NPRM is in
effect the Company may experience delays in revenue from some customers,
particularly smaller utilities and municipalities who do not currently hold or
have availability to these licenses. Currently the Company estimates that
approximately $5 million of revenue in the second half of 1999 could be impacted
by this action.
YEAR 2000 COMPLIANCE
In general, the "Year 2000 problem" concerns software programs that contain only
a two-digit year value (99 to 00) rather than a four-digit year value (1999 to
2000) to indicate a change from 1999 to 2000. The issue is whether computer
systems and non-information technology systems, such as embedded
micro-controllers, will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company instituted
a Year 2000 program in 1997 to identify potential risks and to develop solutions
to mitigate those risks. The Company believes that it will be successful in
implementing the identified solutions in a timely manner in order to mitigate
potential Year 2000 problems.
The Company has potential risks related to the Year 2000 problem in three areas:
1) suppliers, 2) internally developed software and hardware the Company sells,
and 3) internal software and hardware systems. The following discussion
addresses each of these potential risk areas.
Suppliers: The Company has received confirmation from all critical suppliers
indicating their Year 2000 readiness. The majority of the critical suppliers are
already Year 2000 compliant. Of those not yet fully in compliance, the vast
majority indicated that they would reach full compliance by the end of July and
a smaller number indicated that they would in October. The Company will pursue
the issue with those suppliers who are not yet compliant to insure compliance
within the time frames indicated.
Internally developed software and hardware for sale to customers: The Company
has completed the process of identifying which of its products available for
sale to customers were not Year 2000 compliant. The Company began the process of
upgrading software and hardware in late 1997 and completed all major standard
applications updates by December 1998. A small number of hardware and software
platforms will not be upgraded and all customers affected were notified.
Alternatives, including upgrading systems, were developed for them.
Substantially all of the customers with maintenance contracts with the Company
have had their systems upgraded.
Internal software and hardware systems: The Company upgraded its financial
software including general ledger, manufacturing and sales order processing to
be Year 2000 compliant during the second quarter of 1998 for domestic and
Australian operations. The Company's United Kingdom operations and subsidiary in
France were upgraded in the fourth quarter of 1998 and the second quarter of
1999, respectively. The Company also has a variety of other software and
hardware, including personal computer software and software used in engineering
functions, all of which are now Year 2000 compliant.
The Company believes that the reasonably most likely worst-case scenario it
might confront with respect to Year 2000 issues has to do with the possible
failure of third party systems over which the Company has no control. These
systems may include, but are not limited to, power and telecommunications
services. The Company has purchased several generators for its headquarters in
Spokane to temporarily run critical systems such as computer systems, lights and
telephones if needed. Some problems, however, may remain uncorrected, and could
materially adversely affect the Company's business, financial condition and
operating results. The Company may also experience reduced sales of its products
as potential current customers reduce their budgets for meter-reading and data
management solutions because of increased expenditures on their own Year 2000
compliance efforts. The Company does not anticipate that it will incur further
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant. Total costs for the Year 2000
issue are estimated to be approximately $1.5 million, of which approximately
$1.3 million has been spent to date. However, as the compliance process is not
yet complete, some uncertainty exists concerning total costs associated with
Year 2000 compliance. Any Year 2000 compliance problem of either the Company or
its collaborative partners could have a material adverse effect on the Company's
business, financial condition and results of operations.
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
actual results to differ materially from those reflected in such
forward-looking statements. Such risks and uncertainties include, among
others, changes in the utility regulatory environment, pending FCC
regulations, 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 the Company's control. For a more complete
description of these and other risks, see "Recent FCC Actions" section in this
document and "Certain Risk Factors" and "Description of Business - FCC
Regulation" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. 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.
<PAGE>
Part 2: Other Information
Item 1: Legal Proceedings
On May 29, 1997, Itron and its Chairman, Johnny M. Humphreys, were served with a
complaint alleging securities fraud filed by Mark G. Epstein (Epstein vs Itron,
etal) on his own behalf and alleged to be on behalf of a class of all similarly
situated, in the US District Court of Easter Washington (Civil Action) The
complaint alleged, among other matters, that Itron 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 Itron's Fixed Network AMR
system and regarding the suitability of Itron's 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 Itron Common Stock between September 11,
1995 and October 22, 1996 except for the Defendants and persons or entities
having a relationship with the Defendants.
On June 3, 1999 Itron, Inc. reached an agreement to settle the lawsuit by a
payment to the plaintiff class of $12 million, all of which will be funded by
insurance proceeds. The settlement is subject to certain customary conditions,
including notice to the potential class members and approval by the court.
Neither the Company, nor Johnny Humphreys, Itron's Chairman who was also named
in the lawsuit, have admitted any wrongdoing or any liability and none has been
found by the court.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 5, 1999. Three
directors were elected for three year terms at the meeting, Ted C. DeMerritt,
Jon E. Eliassen and Stuart Ed White. Johnny M. Humphreys, Mary Ann Peters,
Michael B. Bracy, Graham M. Wilson and Paul A. Redmond continued their terms as
Directors. The following summarizes all matters voted on at the meeting:
<TABLE>
<CAPTION>
Matter 1. Election of Directors:
Nominee In Favor Withheld
-------------------------------------- -------------------------- --------------------------
<S> <C> <C>
Ted C. DeMerritt 12,421,301 145,380
Jon E. Eliassen 12,422,364 144,317
Stuart Edward White 12,416,773 149,908
</TABLE>
<TABLE>
<CAPTION>
Matter 2. Amendment of the Company's 1996 Employee Stock Purchase Plan:
For Against Abstain Broker Non-Votes
------------------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
11,555,746 943,312 67,623 -
</TABLE>
<TABLE>
<CAPTION>
Matter 3. Ratify Deloitte & Touche LLP as Independent Auditors:
For Against Abstain Broker Non-Votes
-------------------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
12,506,568 40,907 19,206 -
</TABLE>
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.17 - Employment Agreement between the Registrant and Michael
J.Chesser dated May 17,1999
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
A report on Form 8-K, dated June 30, 1999 was filed on July 1,
1999, pursuant to Item 5 of that form. The report related to an
amendment to a contract with Virginia Power that resulted in a
$4.2 million reduction in the price paid by Virginia for an AMR
system.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Commission Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITRON, INC.
(Registrant)
By: /s/ DAVID G. REMINGTON
David G. Remington
Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Date: August 13, 1999
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), dated as of May 17, 1999,
is entered into between Itron, Inc., a Washington corporation ("Itron"), and
Michael Chesser ("Executive").
1. Employment
Itron will employ Executive and Executive will accept employment by
Itron as its chief executive officer, beginning June 7, 1999. Executive will
have the authority, subject to Itron's Articles of Incorporation and Bylaws, as
may be granted from time to time by the Board of Directors of Itron. Executive
will perform the duties customarily performed by the chief executive officer of
a corporation which is, in all respects, similar to Itron and such other duties
as may be assigned from time to time by the Board of Directors of Itron, which
relate to the business of Itron, its subsidiaries, its parent corporation (if
any), or any business ventures in which Itron, its subsidiaries or its parent
corporation may participate. Executive will be appointed to the Board of
Directors of Itron promptly following the commencement of his employment
hereunder, and Executive will serve as a member of Itron's Board of Directors,
subject to shareholder approval, for so long as he continues to serve as Itron's
chief executive officer.
2. Attention and Effort
Executive will devote all of his entire productive time, ability,
attention and effort to Itron's business and will skillfully serve its interests
during the term of this Agreement; provided, however, that Executive may devote
reasonable periods of time to (a) engaging in personal investment activities,
(b) serving on the Board of Directors of other corporations, if such service
would not otherwise be prohibited by Section 8 hereof, and (c) engaging in
charitable or community service activities, so long as none of the foregoing
additional activities materially interfere with Executive's duties under this
Agreement.
3. Term
Unless otherwise terminated pursuant to Section 6 of this Agreement,
Executive's term of employment under this Agreement shall expire on June 6,
2002, after which time Executive's employment will be terminable at will, and
the provisions of Section 6 of this Agreement will have no further force or
effect.
4. Compensation, Stock Options and Relocation Allowance
During the term of this Agreement, Itron agrees to pay or cause to be
paid to Executive, and Executive agrees to accept in exchange for the services
rendered hereunder by him, the following compensation:
4.1 Base Salary
Executive's compensation shall consist, in part, of an annual base
salary of $400,000 before all customary payroll deductions. Such annual base
salary shall be paid in substantially equal installments and at the same
intervals as other officers of Itron are paid. The Board of Directors of Itron
or the Compensation Committee thereof shall determine any increases in the
amount of the annual base salary in future years.
4.2 1999 Bonus
Executive will be eligible to receive, in addition to the annual base
salary described above, an annual bonus under Itron's Executive Incentive
Compensation Plan (the "EIC Plan") for 1999 (based on the objectives that have
been established under the EIC Plan of Itron's executive officers, or such other
objectives as may be agreed to by Executive and the Compensation Committee of
Itron's Board of Directors). Upon achievement of EIC Plan targets at the 100%
level, Executive will be entitled to receive 60% of his annual base salary for
the period of 1999 during which he was employed by Itron (which is $138,500,
assuming Executive's employment commences on June 7, 1999 and continues through
at least the end of 1999). Depending on the extent to which established EIC Plan
targets are met, Executive will be entitled to receive up to 150% of his
targeted bonus award.
4.3 EVA Bonus Plan
Itron agrees that it will adopt and institute an Economic Value Added
Bonus Plan (the "EVA Bonus Plan") for its officers, including Executive,
effective at the beginning of calendar year 2000, subject to shareholder
approval if necessary. The parameters of the EVA Bonus Plan are to be approved
by Itron's Board of Directors.
4.4 Stock Options
Executive will be granted an award of options to purchase 200,000
shares of Itron common stock upon commencement of Executive's employment
hereunder. The exercise price of the options will be the average of the high and
low sales prices of Itron common stock at the date Executive's employment
hereunder commences. Such options will be ISOs issued pursuant to Itron's 1989
Restated Stock Option Plan to the extent permitted by the tax code, and the
balance will be nonqualified options. All of such options will vest in equal
annual installments over a three-year period.
The option letter agreements evidencing these options will provide that
in the event of a Change of Control (as defined in the Change of Control
Agreement referenced in Section 7.4 hereof), the vesting of such options will
accelerate so that they are exercisable as follows:
Duration of Employment Exercisable Portion of Option
less than 6 months 33%
at least 6 months 66%
at least 12 months 100%
Notwithstanding anything in the Change of Control Agreement to the contrary, the
acceleration of vesting of any portion of the 200,000 options contemplated by
this Section 4.4 will not be taken into account in calculating the "Option
Acceleration Value" under Section 6.2 of the Change of Control Agreement, and
accordingly the amount otherwise payable to Executive in accordance with Section
6.1 of the Change of Control Agreement will not be reduced by virtue of the
acceleration of vesting of any of these options.
4.5 Relocation and Moving Expenses
Itron shall pay or reimburse Executive for the following expenses
incurred by Executive in connection with his relocation to the Spokane,
Washington area:
(a) reasonable temporary living expenses, for a period of up to 180
days, incurred by Executive and his family for food, lodging and other
incidentals, including a rental or leased car if necessary;
(b) reasonable costs incurred by Executive for trips between Lynnwood,
New Jersey and Spokane, Washington during the temporary living period;
(c) reasonable expenses (including airfare, lodging and meals) incurred
by Executive's spouse in connection with homefinding trips to Spokane,
Washington;
(d) reasonable moving expenses incurred by Executive and his family in
connection with the moving of their household goods, personal possessions and
cars (mileage or moving expense) from Lynnwood, New Jersey to the Spokane,
Washington area (moving company to be selected by Executive from three bids);
(e) if Executive sells his home in Lynnwood, New Jersey, reasonable
expenses associated with that sale, including commissions; if Executive is
unable with reasonable effort to sell his home in Lynnwood, New Jersey by
September 1, 1999, the costs associated with purchase and resale of said home
through an executive relocation home purchase firm; and
(f) a lump sum payment equal to two months of Executive's base salary
to cover incidental expenses associated with the relocation of Executive and his
family to Spokane, Washington.
5. Benefits
During the term of this Agreement, Executive will be entitled to
participate, subject to and in accordance with applicable eligibility
requirements, in fringe benefit programs, including, but not limited to, health,
dental and vision insurance, group life insurance and such other programs as
shall be provided from time to time by, to the extent required, action of
Itron's Board of Directors (or any person or committee appointed by the Board of
Directors to determine fringe benefit programs and other emoluments). Executive
shall also be entitled to four weeks vacation per year.
6. Termination
Employment of Executive pursuant to this Agreement may be terminated as
follows, but in any case, the provisions of Section 8 hereof shall survive the
termination of this Agreement and the termination of Executive's employment
hereunder:
6.1 By Itron
With or without Cause (as defined below), Itron may terminate the
employment of Executive at any time during the term of employment upon giving
Notice of Termination (as defined below).
6.2 By Executive
Executive may terminate his employment at any time, for any reason,
upon giving Notice of Termination.
6.3 Automatic Termination
This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
disability" as used herein shall mean Executive's inability to perform the
duties set forth in Section 1 hereof for a period or periods aggregating 120
calendar days in any 12-month period as a result of physical or mental illness,
loss of legal capacity or any other cause beyond Executive's control, unless
Executive is granted a leave of absence by the Board of Directors of Itron.
Executive and Itron hereby acknowledge that Executive's ability to perform the
duties specified in Section 1 hereof is of the essence of this Agreement.
Termination hereunder shall be deemed to be effective (a) at the end of the
calendar month in which Executive's death occurs or (b) immediately upon a
determination by the Board of Directors of Itron of Executive's total
disability, as defined herein.
6.4 Notice
The term "Notice of Termination" shall mean at least 30 days' written
notice of termination of Executive's employment, during which period Executive's
employment and performance of services will continue; provided, however, that
Itron may, upon notice to Executive and without reducing Executive's
compensation during such period, excuse Executive from any or all of his or her
duties during such period. The effective date of the termination of Executive's
employment hereunder shall be the date on which such 30-day period expires.
7. Termination Payments
In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this Section 7:
7.1 Termination by Itron
If Itron terminates Executive's employment without Cause prior to the
end of the term of this Agreement, Executive shall be entitled to receive (a)
termination payments equal to twenty-four (24) months' annual base salary and
(b) any unpaid annual base salary which has accrued for services already
performed as of the date termination of Executive's employment becomes
effective. If Executive is terminated by Itron for Cause, Executive shall not be
entitled to receive any of the foregoing benefits, other than those set forth in
clause (b) above.
7.2 Termination by Executive
In the case of the termination of Executive's employment by Executive,
Executive shall not be entitled to any payments hereunder, other than those set
forth in clause (b) of Section 7.1 hereof.
7.3 Expiration of Term
In the case of a termination of Executive's employment as a result of
the expiration of the term of this Agreement, Executive shall not be entitled to
receive any payments hereunder, other than those set forth in clause (b) of
Section 7.1 hereof.
7.4 Termination in Connection With a Change in Control
Concurrent with the commencement of Executive's employment hereunder,
Executive and Itron shall enter into a Change of Control Agreement with Itron, a
copy of which is attached hereto as Exhibit A. Notwithstanding Sections 7.1 and
7.2 of this Agreement and in full substitution therefor, if Executive's
employment terminates under circumstances described in the Change of Control
Agreement, Executive's rights upon termination will be governed by terms of the
Change of Control Agreement and his right to termination payments under this
Employment Agreement shall cease.
7.5 Payment Schedule
All payments under this Section 7 shall be made to Executive at the
same interval as payments of salary were made to Executive immediately prior to
termination.
7.6 Cause
Wherever reference is made in this Agreement to termination being with
or without Cause, "Cause" shall include, without limitation, the occurrence of
one or more of the following events:
(a) Failure or refusal to carry out the lawful duties of
Executive described in Section 1 hereof or any directions of the Board
of Directors of Itron, which directions are reasonably consistent with
the duties herein set forth to be performed by Executive;
(b) Violation by Executive of a state or federal criminal law
involving the commission of a crime against Itron or a felony;
(c) Current use by Executive of illegal substances; deception,
fraud, misrepresentation or dishonesty by Executive; any incident
materially compromising Executive's reputation or ability to represent
Itron with the public; any act or omission by Executive which
substantially impairs Itron's business, good will or reputation; or any
other misconduct; or
(d) Any other material violation of any provision of this
Agreement.
8. Noncompetition and Nonsolicitation
8.1 Applicability
This Section 8 shall survive the termination of Executive's employment
with Itron or the expiration of the term of this Agreement.
8.2 Scope of Competition
Executive agrees that he will not, directly or indirectly, during his
employment and for a period of two years from the date on which his employment
with Itron terminates for any reason, whether before or after the expiration of
this Agreement, be employed by, consult with or otherwise perform services for,
own, manage, operate, join, control or participate in the ownership, management,
operation or control of or be connected with, in any manner, any Competitor. A
"Competitor" shall include any entity which, directly or indirectly, competes
with Itron or produces, markets, distributes or otherwise derives benefit from
the production, marketing or distribution of products or services which compete
with products then produced or services then being provided or marketed, by
Itron or the feasibility for production of which Itron is then actually
studying, or which is preparing to market or is developing products or services
that will be in competition with the products or services then produced or being
studied or developed by Itron, in each case within the global marketplace in
which Itron does business, unless released from such obligation in writing by
Itron's Board of Directors. Executive shall be deemed to be related to or
connected with a Competitor if such Competitor is (a) a partnership in which he
is a general or limited partner or employee, (b) a corporation or association of
which he is a shareholder, officer, employee or director, or (c) a partnership,
corporation or association of which he is a member, consultant or agent;
provided, however, that nothing herein shall prevent the purchase or ownership
by Executive of shares which constitute less than five percent of the
outstanding equity securities of a publicly or privately held corporation, if
Executive had no other relationship with such corporation.
8.3 Scope of Nonsolicitation
Executive shall not directly or indirectly solicit, influence or
entice, or attempt to solicit, influence or entice, any employee or consultant
of Itron to cease his or her relationship with Itron or solicit, influence,
entice or in any way divert any customer, distributor, partner, joint venturer
or supplier of Itron to do business or in any way become associated with any
Competitor. This Section 8.3 shall apply during the time period and geographical
area described in Section 8.2 hereof.
8.4 Assignment of Intellectual Property
All concepts, designs, machines, devices, uses, processes, technology,
trade secrets, works of authorship, customer lists, plans, embodiments,
inventions, improvements or related work product (collectively "Intellectual
Property") which Executive develops, conceives or first reduces to practice
during the term of his employment hereunder or within one year after the
termination of his employment hereunder or the expiration of this Agreement,
whether working alone or with others, shall be the sole and exclusive property
of Itron, together with any and all Intellectual Property rights, including,
without limitation, patent or copyright rights, related thereto, and Executive
hereby assigns to Itron all of such Intellectual Property. "Intellectual
Property" shall include only such concepts, designs, machines, devices, uses,
processes, technology, trade secrets, customer lists, plans, embodiments,
inventions, improvements and work product which (a) relate to Executive's
performance of services under this Agreement, to Itron's field of business or to
Itron's actual or demonstrably anticipated research or development, whether or
not developed, conceived or first reduced to practice during normal business
hours or with the use of any equipment, supplies, facilities or trade secret
information or other resource of Itron or (b) are developed in whole or in part
on Itron's time or developed using Itron's equipment, supplies, facilities or
trade secret information, or other resources of Itron, whether or not the work
product relates to Itron's field of business or Itron's actual or demonstrably
anticipated research.
8.5 Disclosure and Protection of Inventions
Executive shall disclose in writing all concepts, designs, processes,
technology, plans, embodiments, inventions or improvements constituting
Intellectual Property to Itron promptly after the development thereof. At
Itron's request and at Itron's expense, Executive will assist Itron or its
designee in efforts to protect all rights relating to such Intellectual
Property. Such assistance may include, without limitation, the following: (a)
making application in the United States and in foreign countries for a patent or
copyright on any work products specified by Itron; (b) executing documents of
assignment to Itron or its designee of all of Executive's right, title and
interest in and to any work product and related intellectual property rights;
and (c) taking such additional action (including, without limitation, the
execution and delivery of documents) to perfect, evidence or vest in Itron or
its designee all right, title and interest in and to any Intellectual Property
and any rights related thereto.
8.6 Nondisclosure; Return of Materials
During the term of his employment by Itron and following termination of
such employment, he will not disclose (except as required by his duties to
Itron), any concept, design, process, technology, trade secret, customer list,
plan, embodiment, or invention, any other Intellectual Property or any other
confidential information, whether patentable or not, of Itron of which Executive
becomes informed or aware during his employment, whether or not developed by
Executive. In the event of the termination of his employment with Itron or the
expiration of this Agreement, Executive will return all documents, data and
other materials of whatever nature, including, without limitation, drawings,
specifications, research, reports, embodiments, software and manuals to Itron
which pertain to his employment with Itron or to any Intellectual Property and
shall not retain or cause or allow any third party to retain photocopies or
other reproductions of the foregoing.
8.7 Equitable Relief
Executive acknowledges that the provisions of this Section 8 are
essential to Itron, that Itron would not enter into this Agreement if it did not
include this Section 8 and that damages sustained by Itron as a result of a
breach of this Section 8 cannot be adequately remedied by damages, and Executive
agrees that Itron, notwithstanding any other provision of this Agreement,
including, without limitation, Section 15 hereof, and in addition to any other
remedy it may have under this Agreement or at law, shall be entitled to
injunctive and other equitable relief to prevent or curtail any breach of any
provision of this Agreement, including, without limitation, this Section 8.
8.8 Effect of Violation
Executive and Itron acknowledge and agree that additional consideration
has been given for Executive entering into this Section 8, such additional
consideration including, without limitation, relocation allowances, bonus
eligibility and certain provisions for termination payments pursuant to Section
7 of this Agreement. Violation by Executive of this Section 8 shall relieve
Itron of any obligation it may have to make any further such payments, but shall
not relieve Executive of his obligations, as required hereunder, not to compete.
8.9 Definition of Itron
For purposes of Section 8.2 and Section 8.3 hereof, "Itron" shall
include all subsidiaries of Itron, Itron's parent corporation, if any, and any
business ventures in which Itron, its subsidiaries or its parent corporation may
participate.
9. Representations and Warranties
In order to induce Itron to enter into this Agreement, Executive
represents and warrants to Itron as follows:
9.1 No Violation of Other Agreements
Neither the execution nor the performance of this Agreement by
Executive will violate or conflict in any way with any other agreement by which
Executive may be bound, or with any other duties imposed upon Executive by
corporate or other statutory or common law.
9.2 Patents, Etc.
Executive has prepared and attached hereto as Schedule 1 a list of all
inventions, patent applications and patents made or conceived by Executive prior
to the date hereof, which are subject to prior agreement or which Executive
desires to exclude from this Agreement, or, if no such list is attached,
Executive hereby represents and warrants to Itron that there are no such
inventions, patent applications or patents.
10. Indemnification
Concurrent with the commencement of Executive's employment hereunder,
Executive and Itron shall enter into an Indemnification Agreement in the form
attached hereto as Exhibit B.
11. Notice and Cure of Breach
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, other than pursuant to the definition of "Cause" set forth in
Section 7.6 hereof, before such action is taken, the party asserting the breach
of this Agreement shall give the other party at least twenty (20) days' prior
written notice of the existence and the nature of such breach before taking
further action hereunder and shall give the party purportedly in breach of this
Agreement the opportunity to correct such breach during the 20-day period.
12. Form of Notice
All notices given hereunder shall be given in writing, shall
specifically refer to this Agreement and shall be personally delivered or sent
by telecopy or other electronic facsimile transmission or by registered or
certified mail, return receipt requested, at the address set forth below or at
such other address as may hereafter be designated by notice given in compliance
with the terms hereof:
If to Executive: Michael Chesser
If to Itron: Itron, Inc.
Attn: Chairman of the Board
2818 N. Sullivan Rd.
Spokane, WA 99216
Copy to: Linda A. Schoemaker
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
If notice is mailed, such notice shall be effective upon mailing, or if notice
is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.
13. Assignment
This Agreement is personal to Executive and shall not be assignable by
Executive. Subject to the provisions of Section 7.4 hereof, Itron may assign its
rights hereunder to (a) any corporation resulting from any merger, consolidation
or other reorganization to which Itron is a party or (b) any corporation,
partnership, association or other person to which Itron may transfer all or
substantially all of the assets and business of Itron existing at such time. All
of the terms and provisions of this Agreement shall be binding upon and shall
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
14. Waivers
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, shall constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance shall not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
15. Arbitration
Subject to the provisions of Section 8.7 hereof, any controversies or
claims arising out of or relating to this Agreement shall be fully and finally
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect (the "AAA Rules"), conducted
by one arbitrator either mutually agreed upon by Itron and Executive or chosen
in accordance with the AAA Rules, except that the parties thereto shall have any
right to discovery as would be permitted by the Federal Rules of Civil Procedure
for a period of 90 days following the commencement of such arbitration and the
arbitrator thereof shall resolve any dispute which arises in connection with
such discovery. The prevailing party shall be entitled to costs, expenses and
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
16. Amendments in Writing
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated or discharged and signed by Itron and
Executive, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by Itron and Executive.
17. Applicable Law
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the state of Washington, without regard
to any rules governing conflicts of laws.
18. Severability
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may be possible, (b) such
invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision hereof, and (c) any court or
arbitrator having jurisdiction thereover shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.
19. Headings
All headings used herein are for convenience only and shall not in any
way affect the construction of, or be taken into consideration in interpreting,
this Agreement.
20. Counterparts
This Agreement, and any amendment or modification entered into pursuant
to Section 16 hereof, may be executed in any number of counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
21. Entire Agreement
This Agreement, including exhibits hereto incorporated by reference, on
and as of the date hereof constitutes the entire agreement between Itron and
Executive with respect to the subject matter hereof and all prior or
contemporaneous oral or written communications, understandings or agreements
between Itron and Executive with respect to such subject matter are hereby
superseded and nullified in their entireties.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
Michael Chesser:
/s/ Michael Chesser
----------------------
Itron, Inc.:
/s/ Johnny Humphreys
----------------------
By
Its: Chairman of the Board
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