UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
May 29, 1997
Date of Report
(Date of earliest event reported)
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)
================================================================================
6/12/97
Item 5. Other Events
On May 29, 1997, Itron and its President and Chief Executive Officer,
Johnny M. Humphreys, received a complaint alleging securities fraud filed by
Mark G. Epstein, on his own behalf and alleged to be on behalf 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 seeks class action
status on behalf of all persons who purchased the common stock of the Company
during the period of September 11, 1995 through October 22, 1996, and lost
money. The complaint alleges, 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 automatic meter reading ("AMR") system, and regarding the suitability of
Itron's encoder receiver transmitter devices ("ERTs") for use with an advanced
Fixed Network AMR system. The complaint seeks monetary damages, costs and
attorneys' fees and unspecified equitable or injunctive relief. Neither the
Company nor Mr. Humphreys has filed an answer to the complaint as yet. However,
based on its preliminary review of the complaint, the Company believes it has
good defenses to the claims alleged, and the Company intends to vigorously
defend itself against this action.
There can be no assurance that the Company will prevail in the above
action or that, even if it does prevail, the costs incurred by the Company in
connection therewith will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Item 7. Exhibits
Exhibit
Number Description
99.1 Complaint filed with the U.S. District Court for the Eastern
District of Washington on May 23, 1997, Mark G.Epstein v.
Itron, Inc., and Johnny M. Humphreys -----------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has dully caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ITRON, INC.
(Registrant)
By:/S/ DAVID G. REMINGTON
David G. Remington
Chief Financial Officer
(Authorized officer and Principal
Financial Officer)
Dated: June 12, 1997
INDEX TO EXHIBITS
Exhibit
Number Description
99.1 Complaint filed with the U.S. District Court for the Eastern
District of Washington on May 23, 1997, Mark G. Epstein v.
Itron, Inc., and Johnny M. Humphreys ---------------------
Exhibit 99.1
Carl A. Taylor Lopez
LOPEZ & FANTEL
1510 14th Avenue
Seattle, Washington 98122
Steven J. Toll
Matthew J. Ide
COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C.
1301 Fifth Avenue, Suite 2905
Seattle, Washington 98101
Telephone: (206) 521-0080
Joseph J. Tabacco, Jr.
Christopher T. Heffelfinger
BERMAN, DeVALERIO, PEASE & TABACCO
425 California Street, Suite 2025
San Francisco, California 94104-2205
Telephone: (415) 433-3200
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON
AT SPOKANE
MARK G. EPSTEIN, on his own behalf and on
behalf of all others similarly situated, NO.
Plaintiff, CLASS ACTION
v. PLAINTIFF'S CLASS ACTION
COMPLAINT FOR VIOLATION OF
ITRON, INC., and JOHNNY M. THE FEDERAL SECURITIES LAWS
HUMPHREYS,
Defendant. JURY TRIAL DEMANDED
CLASS ACTIONPLAINTIFF'S CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL
SECURITIES LAWSJURY TRIAL DEMANDED ShortTitleShortTitle
CONTENTS
SUMMARY OF ACTION .......................................................... 3
JURISDICTION AND VENUE ..................................................... 7
CLASS ACTION ALLEGATIONS ................................................... 8
THE PARTIES ................................................................ 10
SUBSTANTIVE ALLEGATIONS .................................................... 10
Background ........................................................ 10
Itron's ERT Technology Is Unsuitable for Use With an Advanced, Full-
Function Fixed Network AMR System ........................... 13
Outsourcing Agreements With Utilities During Class Period ......... 16
The Scheme To Mislead Has Been Disclosed Only in Part ............. 17
FALSE AND MISLEADING STATEMENTS ............................................ 19
POST-CLASS STATEMENTS OF THE DEFENDANTS .................................... 34
THE FALSE AND MISLEADING NATURE OF DEFENDANTS'
REPRESENTATIONS .................................................. 38
COUNT I FOR VIOLATIONS OF ss.10(b) OF THE EXCHANGE ACT AND RULE
10b-5 (AGAINST BOTH DEFENDANTS)....................... ........... 42
COUNT II FOR VIOLATION OF ss.20(a) OF THE EXCHANGE ACT (AGAINST
DEFENDANT HUMPHREYS) ............................................. 44
PRAYER FOR RELIEF .......................................................... 45
JURY DEMAND ................................................................ 45
All factual allegations contained in this Class Action Complaint for
Violations of the Federal Securities Laws ("Complaint") have evidentiary
support, or there exists a reasonable basis for plaintiff to believe in the
truthfulness and accuracy of each of the factual assertions made herein.
SUMMARY OF ACTION
1. This Class Action is brought on behalf of all persons situated
similarly to plaintiff, excluding defendants, their immediate families and all
entities and affiliates they control, all present officers and directors of
Itron, Inc. ("Itron" or the "Company"), and all persons who were officers and/or
directors of Itron at any time during the period September 11, 1995 through
October 22, 1996 (the "Class Period"). On behalf of all others similarly
situated, Plaintiff seeks damages suffered by investors in Itron common stock as
a result of defendants' fraudulent scheme and course of conduct, which operated
as a fraud and deceit on all persons who purchased or otherwise acquired Itron
common stock during the Class Period.
2. During the Class Period, Itron developed, marketed, installed,
serviced and, in some instances, operated, hardware, software and integrated
systems for computer-based electronic meter reading ("EMR") and other types of
meter-measurement systems. According to the Company's public statements, the
Company's AMR (automatic meter reading) systems and products were developed to
enable utilities to reduce operating costs by eliminating the necessity for
expensive and inefficient visual, on-site meter readings. The Company's AMR
systems are based on a technology of using low-power, high-frequency radio and,
in some instances, telephonic communications, to remotely collect data from
utility meters in residential commercial and industrial locales.
3. The heart of Itron's EMR system is a device known as an
Encoder/Receiver/Transmitter ("ERT") meter module. The ERT meter modules are
incorporated into, or in close proximity with, consumption meters found on or
near buildings and residences consuming electric power, natural gas and/or
water. Millions of these devices have already been installed in the United
States and Canada. As part of an AMR system using other radio
transmitter/receivers, the ERT module substantially reduces the necessity of
inefficient and expensive visual, on-site meter readings by transmitting a
low-power, high-frequency radio signal from the module containing, inter alia,
meter reading information (i.e., power consumption readings) to a remote
collecting device. In turn, the remote collecting device gathers and
re-transmits the information, which eventually reaches the utility company.
According to Itron's public statements and filings, its AMR product line
encompasses off-site meter reading ("OMR") Mobile AMR (vehicle-based) and Fixed
Network AMR, as well as a variety of supporting services and products.
4. Itron's OMR consists of a hand-held computer, which is
modified with radio technology so as to allow it to communicate with meters
equipped with ERT meter modules. Hand-held OMR is usually implemented for
specific, hard-to-access meters in conjunction with an otherwise traditional,
on-site meter reading route. Mobile AMR, in comparison, involves collecting
meter reads from ERTs through the use of a portable transmitter/receiver and
computing device mounted in a vehicle, which then drives through areas within
the receiving/transmitting range of each ERT meter module to be read. Mobile
AMR, like traditional meter reading, is usually performed on a monthly basis.
Whereas a traditional, visual on-site meter-reading route might permit a single
utility employee to read a few hundred meters in a given workday, Mobile AMR
permits that same employee to read several thousand meters in a workday. The
capabilities of each of these technologies, however, pales in comparison to the
promise of Fixed Network AMR.
5. Fixed Network AMR, as implemented by Itron, consists of
mounting a transmitter/receiver (a.k.a., "Cell Control Unit") in a fixed
location (i.e., atop a power pole or street lamp) as part of a larger fixed
communications network. Each individual Cell Control Unit ("CCU") retrieves data
from numerous ERTs, and then re-transmits the data, along with other CCUs, to
Network Control Nodes ("NCNs"), which collect the information and re-transmits
it to the utility for billing and other uses. Although the Fixed Network is
designed to enhance efficiency in the basic meter-reading function, its greatest
value lies in its ability (in theory) to provide a variety of enhanced services
and functions, such as real-time meter reading, time-of-use meter reading, and
outage alarms.
6. The drive to implement Fixed Network AMR is, in part,
attributable to the efficiency and marketing gains that are hoped to be
realized, in addition to the competitive advantage these gains will provide over
competitors that do not implement a full function Fixed Network AMR system. In
addition, changes in the regulations affecting utilities are expected to soon
require that utilities implement technology capable of providing the
aforementioned enhanced services and functions, which further drives and lends
urgency to implementation of a Fixed Network AMR system. For example, the
California Public Utilities Commission and others had already begun pushing
utilities for hourly meter reading capabilities, which is only feasible with a
Fixed Network AMR system.
7. As the defendants knew throughout the Class Period, to the
extent that Fixed Network AMR technology can be successfully implemented,
hand-held OMR and, in particular, Mobile AMR, become obsolete. More importantly,
the defendants knew throughout the Class Period that unless Itron's utility
customers were convinced there was a clear migration path from its Mobile AMR in
particular to a Fixed Network AMR system, then the current market for its Mobile
AMR systems would disappear. Since Itron did not have (and still does not have)
a full-function Fixed Network AMR system, Itron relied and continues to rely on
convincing its utility customers to continue investing in its ERT-based
technology.
8. During the Class Period, defendants caused or permitted Itron
and certain of its officers, directors and/or representatives to issue false and
misleading public statements and financial disclosures that were contained in
press releases and other documents, including reports filed with the Securities
and Exchange Commission ("SEC"), regarding the performance and capabilities of
Itron's Fixed Network AMR system and equipment, the capabilities of Itron's ERT
meter modules and their ability to later integrate into a Fixed Network, the
status of Itron's performance under major customer contracts, and customer
levels of satisfaction or dissatisfaction with Itron's products, services and
capabilities. For example, both prior to and during the Class Period, defendants
repeatedly and continually represented that Itron's ERTs are fully operable
with, and suitable for use as part of, Itron's Fixed Network AMR. These
representations were false, and defendants knew them to be false, for the simple
reason that Itron has never overcome certain key technological hurdles, known by
the defendants to exist, which prevented, and continue to prevent, Itron's
existing installed base of ERTs from being fully operable with and suitable for
use as part of Itron's Fixed Network AMR. As such, as the defendants have known
throughout the Class Period, due to the inherent technological and functional
limitation of Itron's ERT meter modules, Itron's much-touted Fixed Network AMR
system is wholly incapable of delivering the enhanced functions promised to, and
required by, the utilities.
9. During the Class Period, fueled by defendants' false
statements, Itron's common stock traded as high as $60.00 per share. However, as
Itron's utility customers and the market began to suspect at least a portion of
the truth about Itron's products and performance, the stock steadily declined.
Ultimately, on October 22, 1996, Itron announced unexpectedly poor financial
results for the third quarter of 1996. Although Itron still failed to
acknowledge the full truth and real reason for its poor results (i.e., the
inherent technological and functional limitations of its ERT meter modules, and
their unsuitability for use as part of a full function Fixed Network AMR
system), the unexpected results caused Itron to lose credibility with the
investing public. Thus, on October 23, 1996 -- the first day of trading after
Itron's partial disclosure -- its common stock closed at $15.00 per share on
massive trading (over 1.76 million shares), representing a drop in value of over
26% on the day, and a loss of 75% of its value from its high during the Class
Period.
JURISDICTION AND VENUE
10. laintiff brings this action pursuant to Sections 10(b) and
20(a)of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.
ss.ss.78j(b) and 78(t), and Rule 10b-5, 17 C.F.P. Part 240.10b-5, promulgated
thereunder.
11. This Court has jurisdiction over this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. ss. 78aa and 28 U.S.C. ss. 1331.
12. Venue is proper in this district pursuant to Section 27 of the
Exchange Act, and 28 U.S.C. ss.1391(b). Many of the acts and transactions
complained of occurred in part in this district. In addition, the corporate
defendant maintains its principal place of business in this district.
13.......The defendants used the means and instrumentalities of
interstate commerce, including the mails, interstate wires, and the facilities
of the national securities exchange.
CLASS ACTION ALLEGATIONS
14. Plaintiff brings this action as a class action pursuant to
Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of all
persons who purchased or otherwise acquired Itron common stock during the Class
Period. Excluded from the Class are the defendants, members of their immediate
families and all entities and affiliates they control, all present officers and
directors of Itron, and all persons who were officers and/or directors of Itron
at any time during the Class Period.
15. The Class is composed of numerous residents of the State of
Washington, as well as persons dispersed throughout the United States, the
joinder of whom is impracticable. The disposition of their claims in a class
action will provide substantial benefits to the parties and the Court. During
the Class Period, Itron had approximately 13.4 million shares of common stock
outstanding, owned by thousands of shareholders. During the Class Period, Itron
common stock was traded on the NASDAQ national market under the symbol "ITRI."
16. There is a well-defined community of interest in the questions
of law and fact involved in this case. The questions of law and fact common to
the members of the Class which predominate over questions which may affect
individual Class members, include the following:
(a) Whether the federal securities laws were violated by
defendants;
(b) Whether defendants omitted and/or misrepresented
material facts which were disseminated to the general
public;
(c) Whether defendants failed to disclose facts necessary
to make the statements made not misleading;
(d) Whether defendants know or had reasonable basis to
1believe that the alleged statements were false and
misleading;
(e) Whether the price of Itron common stock was
artificially inflated during the Class Period; and
(f) The extent of damage sustained by Class members and
the appropriate measure of damages.
17. Plaintiff's claims are typical of those of the Class because
plaintiff and the Class sustained damages from the defendants' wrongful conduct.
18. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying adjudications.
19. Plaintiff will adequately protect the interests of the Class.
He has retained counsel who are experienced in class action securities
litigation. Plaintiff has no interests which conflict with those of the Class.
20. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy.
21. Plaintiff will rely, in part, upon the presumptions of
reliance established by the fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations or failed to disclose
material facts during the Class Period; (b) the omissions and
misrepresentations were material;
(c) the common stock of the Company traded in an efficient market;
(d) the misrepresentations and omissions alleged would tend to induce
a reasonable investor to misjudge the value of the Company's
common stock; and
(e) Plaintiff and the members of the Class purchased their Itron
common stock without knowledge of the omitted or misrepresented
facts.
THE PARTIES
22. Plaintiff Mark G. Epstein purchased 100 shares of Itron common
stock on January 15, 1996, and was damaged thereby.
23. Defendant Itron is headquartered in Spokane, Washington. Itron
was incorporated in Washington in 1977. The Company markets its meter
reading-related products, services and systems to the utility industry. Itron
has stated that its meter reading-related equipment is installed at several
hundred utilities in the United States and internationally.
24. Defendant Johnny M. Humphreys ("Humphreys") has been
President, Chief Executive Officer and a Director of Itron since 1987. According
to public documents, Humphreys is the owner of more than 260,000 shares of Itron
common stock.
SUBSTANTIVE ALLEGATIONS
Background
25. By the beginning of the Class Period, the defendants knew that
Itron would not be able to complete development and achieve suitable functioning
of its Fixed Network AMR technology and, therefore, would not be able to compete
effectively in the rapidly changing AMR market. Previously, Itron had enjoyed
success in the hand-held meter reading market, in which utility employees
visually inspect electric and gas meters, entering the data into a hand held
computer for later downloading upon return to the utility's offices. Then,
through its 1993 acquisition of Enscan, Inc., Itron entered the Mobile AMR
market, inheriting Enscan's successfully operating Mobile AMR technology and
Enscan's customer base. These customers included several gas utilities, with
installations and pending orders approximating five million ERT meter modules.
26. As early as 1991, defendants recognized that the needs of the
utility industry were changing and that Itron's business would rapidly decline
and fail without Fixed Network AMR technology. Fixed Network AMR provides for
automatically reading meters via a fixed communications network, and enables
many new, enhanced functions, such as real-time meter reading, time-of-use meter
reading, and outage alarms. These enhanced functions would necessarily include
the ability to permit hourly meter reading, as will soon be specifically
required of utilities by government regulators, and in general required to be
competitive in the new operating environment resulting from the significant
changes in utilities regulation. As a result of the specific demands of
government regulators, as well as the general competitive demands of the
marketplace, the many capabilities promised by Fixed Network AMR will render
obsolete monthly hand-held and/or Mobile AMR meter reading. In particular, the
defendants were well aware that Fixed Network AMR would largely replace, and
therefore largely eliminate, the market for Itron's hand-held and Mobile AMR
meter reading systems.
27. As early as 1991, defendants also began observing a number of
existing and potential competitors making rapid progress in developing Fixed
Network AMR systems. These competitors included Metricom, Inc.; Schlumberger,
Inc.; CellNet Data Systems, Inc.; and a joint venture of General Electric
Corporation and Ericsson. Defendants recognized that these competitors would
siphon significant business from Itron unless defendants could convince Itron's
existing and potential customers that it possessed a real and competitive Fixed
Network AMR solution.
28. In order to keep up the appearance that Itron could compete in
the Fixed Network AMR market and to maintain Itron's stock price at an
artificially high level, defendants bought time by convincing customers and
investors alike that Itron had developed a working, full-function Fixed Network
AMR system that would enable Itron to compete in the Fixed Network AMR market
when, in fact, they had not. Defendants scheme consisted of at least two
components. First, Itron continually sought to convince existing and potential
customers that its Fixed Network AMR technology was always significantly further
along in development than it actually was. Itron constantly assured the utility
industry and investors that it had successfully resolved all significant
technical hurdles to implementing a Fixed Network AMR solution, even though this
was, and remains, untrue.
29. Second, Itron continually sought to convince existing and
potential customers that they could invest in Itron's Mobile AMR systems and
technology, and in particular Itron's ERTs, with the assurance that it the
investment was protected by a real and cost-effective migration path to an
advanced, full-function, competitive Fixed Network AMR system. Underlying this
component of defendants' scheme was getting its existing and potential customers
to believe that Itron's ERTs (both those already installed and those to be
installed through continued purchases) were compatible with and suitable for
operation as part of an advanced, full-function Fixed Network AMR system. As the
defendants knew throughout the Class Period, however, this also was untrue, as
Itron had been unable, and remains unable, because of inherent technological and
functional limitations in the technology and design of Itron's existing ERTs.
30. Unfortunately, in spite of its major reliance (and its
customers' investments) in its ERT technology for OMR and Mobile AMR systems,
that technology could not and cannot meet the needs and demands of utilities for
Fixed Network AMR. Indeed, Itron hinted as much in a 1993 marketing brochure,
distributed on a limited basis to select customers (hereinafter, "Itron's 1993
Marketing Brochure"): "After considering all the things that affect readability
[of ERT meter modules], you can see it is not possible to simply stick a
stationary receiving antenna up in the air and expect to read all meters within
a range of a half-mile, one-tenth of a mile, or any other distance for that
matter." (Emphasis added). Moreover, as Itron had long since known, its
hand-held and Mobile AMR systems would not allow Itron to compete effectively in
a marketplace that would be dominated by advanced, full-function Fixed Network
AMR systems.
Itron's ERT Technology s Unsuitable for Use With an Advanced, Full-Function
Fixed Network AMR System
31. Notwithstanding defendants, frequent and continuing public
assertions otherwise, defendants have known since 1993 that Itron's ERTs are
unsuitable for and incompatible with an advanced, full-function Fixed Network
AMR, and that its ERTs do not and cannot provide a real and cost-effective
migration path to a Fixed Network AMR system. The reasons for this, known to
defendants all along, are two threshold technical obstacles which have
prevented, and continue to prevent, the Company from delivering the promised
functionality of an advanced Fixed Network AMR system with its existing ERTs.
32. The first obstacle is that the radio transmission power of
Itron's ERT is too low for its ERTs to broadcast data reliably in conjunction
with Fixed Network AMR. The Itron ERT was designed with an extremely low power
point output, consisting of 0.25 milli-watts (1/4,000th of a watt). This was so
the ERT could be battery powered, which would permit it to operate on gas
meters, which lack a source of electrical power to tap into. As a consequence of
the low power point, however, the ERT has an extremely limited range which,
although entirely suitable for use with a Mobile AMR system, is unsuitable for
use with the much more limiting fixed transmitter/receiver found in Fixed
Network AMR systems. As defendants have known all along, a moving antenna is
inherently more likely than a fixed antenna to locate the ERT's weak signal.
Itron's 1993 Marketing Brochure even stated that "[c]hances are pretty good
that, if it is kept moving, a receiving antenna will eventually find itself in
either the direct ERT signal or a reflection that is strong enough to be useable
by the receiver," and "[b]ecause an ERT's signal's wavelength is very short,
moving a receiving antenna only a few inches in any direction can . . .
determine whether a receiving antenna receives a resulting usable signal."
(Emphasis added.) Defendants thus knew that where a receiving antenna does not
move, as in the case of Fixed Network AMR, the capability of the antenna to pick
up and receive the ERT's weak signal is so limited as to be commercially
unacceptable and impractical.
33. The second technical reason Itron's ERTs are not suitable for
operation in conjunction with Fixed Network AMR is that they operate via
polling. This means that an Itron ERT sends data only after first being
"awakened" by a radio signal sent from the transmitter/receiver of the
collection unit (whether carried by the meter reader, mounted in a vehicle as
part of a Mobile AMR system, or fixed on a light pole as part of a Fixed
Network). It is only if and when the radio wake-up signal is received that the
ERT attempts to transmit its data back to the receiver. This particular design
limitation precludes the use of ERTs for reliable implementation of many of the
advanced functions required by utilities -- indeed, the raisons d'etre of Fixed
Network AMR -- including time-of-use metering, hourly metering and alarm
services including outage and home security alarms. There are three reasons why.
34. The first reason that the polling design makes Itron's ERTs
unsuitable for use in conjunction with Fixed Network AMR is that multiple ERTs
responding simultaneously to a wake-up signal cause data transmissions to cancel
one another. Only some of the transmissions are successful. With moving
receivers, as discussed above, successive transmissions of wake-up signals from
continuously changing locations provide a redundancy that results in more or
less reliable transmission of data. By contrast, with a fixed receiver, the same
signals tend to continuously cancel one another, resulting in unreliable and
commercially unacceptable transmission. Defendants have been aware of this
problem since 1993. As Itron's 1993 Marketing Brochure concedes, "it is not
possible to simply stick a stationary receiving antenna up in the air and expect
to read all meters within a range of a half-mile, one-tenth of a mile, or any
other distance, for that matter."
35. The second problem with polling for use in a fixed network is
that there is no redundancy of information. This makes time-of-use meter reading
and hourly meter reading unreliable, since loss of some transmissions means loss
of data. If one data transmission from an ERT is lost, that data is lost
forever. The result is that the time-of-use and hourly data is not usable for
billing by utilities. In a small-scale demonstration environment, where
interference can be controlled, Itron can demonstrate time-of-use meter reading
by issuing a wake-up signal at the beginning of the peak period, receiving the
ERT's data, and issuing another wake-up signal at the end of the peak period,
again receiving the ERT's data. As defendants are aware, however, the technology
does not work in a commercial-scale Fixed Network AMR deployment where there is
significant, real world interference.
36. The third problem with the polling design is its inability to
handle alarm system functions. Because ERTs must be "awakened" in order to send
data, they can not sua sponte send an outage alarm. ERTs must first wait until
they receive a wake-up signal, which means that there is no reliable way for the
Fixed Network to know at any given time that there is an outage at the meter.
The alternative is to wake-up all ERTs every few seconds, and assume there is an
outage if a particular ERT does not respond to its wake-up. However, as
discussed above, interference and insufficient signal strength result in many
ERT transmissions failing even in the absence of an outage, so there is no way
to know whether the failure of the ERT to respond is actually from an outage. In
short, this polling design of the Itron ERT prevents the alarm function from
being performed at commercially acceptable levels.
Outsourcing Agreements With Utilities During Class Period
37. During the Class Period, the Company made a number of
significant announcements related to various outsourcing agreements with
utilities. Chief among these announcements were agreements ostensibly reached
with Duquesne Light Company ($150 million), Baltimore Gas & Electric ($30
million), and Peoples Gas Light and Coke Company ($40 million). As announced by
the Company, these outsourcing agreements typically involved an agreement by the
Company to install, own and operate AMR systems, including implementation of
Fixed Network AMR, and to provide meter reading and advanced communications
services over a fixed period of time, such as fifteen years. The success of
these agreements, which contained periodic performance milestones to be met, was
in large part dependent on the Company's ability to make its ERTs suitably
operable with Itron's Fixed Network AMR system. Since the Company has been
unable to make its ERTs suitably operable with its Fixed Network AMR for, among
other reasons, the various technical factors discussed above, the value of these
outsourcing agreements was materially lower than publicly represented by Itron.
The Scheme To Mislead Has Been Disclosed Only in Part
38. Defendants knew that once utilities knew the truth surrounding
it inability to provide the Fixed Network AMR solution promised, the utilities
would stop wasting money further investing in the Itron AMR systems based on its
ERT, and would look to other companies to provide an advanced, full-function
Fixed Network AMR system. Defendants knew that to continue to compete in the
marketplace and have any hope of prospering as a company, Itron needed to
convince customers to continue to purchase and invest in its ERT-based systems,
including its purported Fixed Network AMR solution. To effect this, defendants
began a campaign to carefully and deliberately mislead Itron's customers and
investors by, inter alia:
a) overstating Itron's status and progress in developing an
advanced, full-function Fixed Network AMR solution; and
(b) overstating the suitability of Itron's ERTs for use with
and as providing a real and cost-efficient migration path
for advanced, full-function Fixed Network AMR;
39. In fraudulently and knowingly misrepresenting the above
information to its customers and the investing public, Itron sought to counter
the threat posed by competitors and to persuade utilities to continue purchasing
Itron ERTs. In short, defendants made or caused to be made a series of public
statements which misled the investing public into believing that with its
existing technology, Itron had a commercially acceptable advanced, full function
Fixed Network AMR solution using its existing ERT meter modules.
40. Ever since becoming a public company, defendants have
continued to fundamentally deceive customers and investors about Itron's Fixed
Network AMR, claiming it operates effectively and is capable of achieving major
success in the market. In all of these announcements, however, defendants failed
to disclose the truth about Itron's Fixed Network AMR, namely that: (a) it was
still under major development; (b) that the Fixed Network AMR system could not
operate in a real world environment conditions; (c) that the Fixed Network test
systems installed were simply developmental pilots; and, most significantly, (d)
that Itron's installed base of existing ERTs could not suitably operate with
Itron's Fixed Network due to a variety of inherent technological limitations.
For example, as early as March of 1994 -- eighteen months prior to the start of
the Class Period -- Itron announced that "the Itron ERT(R) meter module
installed on electric and gas meters can be remotely read, not only through the
"Genesis by Itron" fixed network, but also through third-party networks" and
"Itron currently has nine of its own 'Genesis by Itron' fixed networks projects
underway." In April 1994, defendant Humphreys stated: "We ... currently have
systems on trial with 9 utilities." In July 1994, Itron said it "plans ...
increased production of ... network products." In August 1994, Itron issued a
press release in which its largest customer, Public Service of Colorado,
discussed "further expanding our fixed networks." In January 1995, defendant
Humphreys stated that "20 utilities have been evaluating fixed networks." In
April 1995, Itron again stated that "20 [utilities] are evaluating fixed
networks. In July 1995, Itron reminded customers and investors that "20
[utilities] have installed fixed networks for evaluation." This pattern of
deception concerning the true status of the Company's Fixed Network AMR system
and its functionality continued into and throughout the Class Period.
41. Beginning in mid-1995, some customers and investors began
questioning the performance of Itron's Fixed Network AMR. These questions,
however, only served to inspire defendants to become more sophisticated in the
manner by which they continued to mislead customers and investors. For example,
in July 1995, Itron stated, "increasing competition led to fewer long-term
orders in the automatic meter reading (AMR) market. This has prompted the
company to increase spending on product development." Defendants failed to
reveal, however, that both the increased competition and increased product
development spending were attributable to problems encountered by Itron in
trying to implement its Fixed Network AMR technology.
FALSE AND MISLEADING STATEMENTS
42. Beginning in September 1995, and continuing throughout the
Class Period, defendants began orchestrating a series of announcements to
further ensconce among utility customers and investors the false impression that
Itron's Fixed Network AMR technology was full-function and operating
successfully. Specifically, on September 11, 1995, Itron issued a series of
press releases, including:
-- Itron Releases Next Generation Network Control Node;
-- Itron Releases New [Fixed Network AMR] Technologies
Designed to Create Opportunities For Utilities;
-- Itron Releases Suite of Genesis Applications; and
-- Itron Releases Next Generation Cell Control Unit With
"Beyond AMR Capabilities.
43. In another September 11, 1995 release, entitled Itron Releases
New AMR Technology, Itron proclaimed its release of the next generation of
Network Control Nodes ("NCN"), the critical components necessary to accept and
query data from neighborhood cell control units ("CCUs") and to process the
information electronically for submission to a utility's central processing
units. This release stated:
[Itron] has released next generation Genesis by Itron (R)
solutions that make it easier to deploy enterprise-wide
communications network capable of supporting applications that
go well beyond automatic meter reading.
The released Genesis by Itron (R) technologies are based on
industry standards and are open architectured to enable
utilities to integrate Genesis by Itron (R) solutions with a
wide variety of information systems and include the following:
Genesis Itron Host Processor (GIHP) which is the front-end and
host processor for the Genesis Fixed Network.
Network Control Node (NCN) which serves as the primary routing
and control device in the Genesis Fixed Network.
Cell Control Unit (CCU) which is a lightweight, intelligent,
low-cost independent controller and is the network's first
level data collection point from AMR meter modules.
Genesis Radio modems which are low-cost network gateways into
the home or business that can support applications that go
well beyond AMR.
Network Management Software which provides automatic
configuration, status and performance statistics, routing and
topology mapping capabilities.
Genesis Applications which include a suite of standard
applications that enable users to view and manage information
from the Genesis by Itron network. Standard applications
include consumption metering, load profiles, time-of-use,
tamper reporting, outage detection and real-time reads.
44. On December 6, 1995, Itron announced that it had formed a new
unit and hired an industry veteran to run the unit, the purpose of which was to
provide Customer Connectivity services to utilities. (The press release, made
available on Itron's website (feedback@itron.com), has since been deleted,
although other Itron press releases which pre-date and post-date this press
release remain available on the site.)
In the release, defendant Humphreys stated:
"Genesis Services will develop strategic partnering
relationships with utilities, not just to save costs, but also
to provide competitive advantage and develop new business
opportunities. Itron's advanced technology for customer
connectivity will thus be made available very cost-effectively
to Genesis Services utility partners."
45. In the same press release, Dom Geraghty, the recently-named
president of Itron's Genesis Services, stated:
"To our clients, we will be business partners assisting them
in the development of strategies related to AMR and other
business applications on our fixed communications network, "
Geraghty said. "Our objective here is to help utilities
identify and evaluate the array of connectivity solutions
while establishing a long-term relationship with them."
46. During an analyst conference call on January 31, 1996,
Humphreys confidently assured the market that there were no remaining material
technology issues involving Itron's fixed network:
[Q] Are there any uh, materially uh, technology issues left
with the client version of the, of the fixed network?
[A:] No. If I understand your question correctly, we don't
believe there are any material issues there.
47. On January 8, 1996, a Thomson Corporation newsletter related
Humphreys outlook for Itron, which Humphreys described in growing terms:
Humphreys reports that he thinks, Itron has really
hit a home run in terms of the integrated information and
communications systems they're offering at this crucial
transition point for utilities: The industry is being
reregulated in a way that utilities have to compete with each
other and Itron's products will allow the utilities ways to
lower operating costs while improving customer service.
According to Humphreys networks that Itron installs for
utilities is a huge growth market for them: Itron has only
penetrated about three percent of the automatic meter reading
market and yet they have delivered somewhere between 80 to 90
percent of all installed automatic meter reading equipment to
date. Itron is also doing well internationally and in addition
to further expansion in Europe they are looking at the Far
East. About their broadening product line, the CEO stresses
that Itron started with a gas meter, expanded to electric and
this year released a water meter solution. Humphreys hopes
that Itron will continue to grow at 25 percent or more
annually -- in a market for networks that he believes to be
between $1 and $2 billion in the U.S. and Canada alone.
48. On January 15, 1996, Itron issued a press release over PR
Newswire announcing that it had signed a $150 million contract with Duquesne
Light Company, in which Itron would install and which operate a Fixed Network
AMR system:
Itron (Nasdaq: ITRI) a leading supplier of energy
information and communications solutions to the utility
industry, announced today that it has signed an agreement
valued at more than $150 million, with Duquesne Light Company
(DLCo), of Pittsburgh, PA., to provided territory-wide energy
information services. The services will electronically connect
the utility more closely to its customer base to support
enhanced services and system reliability.
Under the agreement, Itron will install, own and
operate a Genesis Fixed Network automatic meter reading (AMR)
system that includes approximately 580,000 Itron ERT (R)
(Encoder, Receiver, Transmitter) meter modules installed on
electric meters throughout DLCo's service territory, an 800
square mile region that includes Pittsburgh and much of
Allegheny and Beaver counties. Installation will begin in the
first quarter of 1996 and will be completed in late 1997.
The Genesis by Itron (R) system will provide a
variety of advanced capabilities, including outage detection,
daily scheduled consumption readings, real-time on-demand
readings, start-and-end of service readings, time-of-use
readings, and the ability to monitor distribution system
activity. [Emphasis added.]
49. In its Form 10-K for the Fiscal Year ended December 31, 1995,
filed with the SEC on April 1, 1996, Itron stated that it was in the final
stages of field testing its latest generation of cell control units (CCU's), an
essential component of the Company's Fixed Network AMR system. Itron stated:
Itron's Fixed Network will provide a utility with the
capability of automating meter reading completely in a service
area and thereby eliminating the need to send meter readers to
or near customer premises in that area. The Fixed Network is
also designed to enable a utility to read meters on a
real-time basis for a variety of activities including finals
reads, connect or disconnect services, gas leak detection and
meter tampering. The Company's Fixed Network enables a utility
to communicate with any meter in its service territory at any
time and thereby dramatically increases the utility's
flexibility in organizing customer data. With a Fixed Network,
data gathering is no longer limited by the need to collect it
on physically contiguous routes. During 1995, the Company
introduced its latest generation of Fixed Network AMR
technologies which include various hardware components as well
as network management and applications software. The Company
is in the final stages of field testing its latest generation
pre-production cell control units (CCU's), an essential
component of its Fixed Network solution. (Emphasis added).
50. In its 1995 Annual Report to shareholders, filed with the SEC
on or about April 19, 1996, Itron stated that the Fixed Network could be easily
integrated to work with existing ERT's:
Since the ERT's introduction, Itron has continued to
bring innovation to the meter reading process with several
applications for communicating remotely with meters that have
been equipped with ERTs. Itron's latest Genesis solution, the
Fixed Network, utilizes a two-way radio network to collect
energy consumption and other data automatically from the ERTs
in a service area and to transmit that data back to a
utility's central office. This enterprise-wide communications
network is a critical platform upon which utilities can
develop new products and services. The Fixed Network can be
easily integrated with existing ERTs installed for Mobile AMR
and Offsite Meter Reading (OMR) systems and with the more than
1,300 utility billing systems for which Itron presently
provides interfaces.
[Emphasis added.]
51. Also in the 1995 Annual Report, Itron continued to extoll its
Genesis AMR product line, referring to it as "powerful and flexible," while
omitting any mention of the limitations of and difficulties experienced by its
Fixed Network AMR system:
According to industry estimates, the market for AMR
systems will grow more than $1.5 billion worldwide by the end
of the century. With its powerful and flexible Genesis product
line, creative service offerings and the proven experience of
working with more than 1,300 international electric, gas and
water utilities for almost two decades, Itron believes it is
particularly well positioned to capture a significant share of
the AMR market. Itron estimates there are 234 million meters
in North America and as many as two to three times that number
throughout the rest of the world. At the close of the fourth
quarter 1995, the Company had shipped almost 6 million meter
modules, the critical component of all AMR systems. These
meter modules represent approximately 80 percent of the entire
installed market and more than 10 times that of the nearest
competitor. [Emphasis added.]
The Company that pioneered automating meter reading
process is today helping utilities get in touch with their
customers. Nothing less can be expected from a world leader,
Itron: connecting utilities to their customers.
52. The 1995 Annual Report also lauded the $150 million Duquesne
agreement Itron had reached in January, 1996:
In January 1996, the Company signed an outsourcing
agreement with a customer for approximately $150 million,
payable in monthly installments of approximately $875,000 over
15 years. Under this agreement the Company will install, own
and operate a fixed network system and provide certain
services over the life of the agreement including meter
reading and maintenance. [Emphasis added.]
53. In its Form 10-Q for the fiscal quarter ended March 31, 1996,
filed with the SEC on or about May 22, 1996, Itron again touted the January 1996
Duquesne agreement under which Itron would install, own and operate a fixed
network system:
The Company announced its second, and largest,
outsourcing agreement in January of 1996. Under this agreement
the Company will install, own and operate a fixed network and
provide meter reading and advanced communications services
over a fifteen year period. There were no revenues related to
this agreement during the current quarter. The Company expects
that outsourcing revenues will become a larger percentage of
total revenues in the future." [Emphasis added.]
54. On May 30, 1996, Itron issued a press release over the PR
Newswire, in which the Company announced its expectation of flat income for the
second and third quarters of 1996. Rather than disclose the real reasons for
Itron's unexpected poor results, Itron attributed the poor showing to aggressive
pricing strategies and increased administrative costs:
Itron (Nasdaq: ITRI) a leading supplier of energy information
and communications solutions to the utility industry, said
today it expects net income for both the second and third
quarter of 1996 to be flat or somewhat lower than the first
quarter of 1996. The Company's expectation results primarily
from aggressive pricing strategies for its Automatic Meter
Reading (AMR) business as well as increased selling, general
and administrative expenses.
55. To cushion the market's reaction to the news, in the same PR
Newswire release defendant Humphreys disingenuously suggested that utility
customers were delaying decisions to move ahead with AMR because of the
complexity presented by the comprehensive set of AMR products and solutions
developed by Itron:
The Company has made several significant
announcements related to its AMR business this year including
orders earlier in the year received from the Duquesne Light
Company and Western Resources. In addition, the Company
announced today an order from Baltimore Gas & Electric to
double its existing AMR system to read one million meters. The
cumulative number of customers installing or piloting the
Company's AMR products was 208 at March 31, 1996, up 15% from
year end and almost double the number from one year ago.
"While we are pleased with the growth and progress in
our AMR business so far this year, it is apparent that we need
to focus our attention and strategies on working with
utilities and finding ways to make it easier for them to make
the decision to deploy AMR. The Company has added depth and
strength to its management and sales staff for that purpose,"
Humphreys said. "While this lowers our near-term earnings
expectations, we are more confident than ever about the
long-term opportunities for Itron in AMR. We believe the
Company's strong market share and increased sales focus will
position us well for revenue and earnings growth in the
future. [Emphasis added.]
56. In a Seattle Times article published May 31, 1996, Humphreys
sought to assuage investors' concerns of near-term earnings prospects by
emphasizing the Company's long-term opportunities in the AMR market:
"While this lowers our near-term earnings
expectations," said President Johnny Humphreys, "we are more
confident than ever about the long-term opportunities for
Itron in AMR (automated meter readers). We believe the
company's strong market share and increased sales focus will
position us well for revenue and earnings growth in the
future." [Emphasis added.]
The defendants utterly failed to disclose, however, the real reasons underlying
the performance disappointment, and continued their scheme to mislead investors
and customers alike.
57. Notwithstanding the defendants' attempted reassurance, the
market reacted swiftly and violently to the performance disappointment. On
volume of near 2.5 million shares, Itron common stock lost nearly 1/3 of its
value, plunging from $50.25 per share to close at $34 per share on May 31, 1996.
58. In its Form 10-Q, for the Fiscal Quarter ended June 30, 1996,
and filed with the SEC on or about August 15, 1996, Itron extolled the
performance of its CCUs during recent testing:
During the current quarter the Company shipped and
installed newly-designed CCUs to a number of utilities for
testing. These tests are progressing and the results overall
have been favorable and useful. These tests are primarily the
basis for final adjustments to the hardware and associated
software design. The Company is currently producing CCUs, and
high volume production will commence when the final
adjustments to the design are made. The Company expects to
produce approximately 7,000 CCUs this year.
59. In a PR Newswire release dated August 16, 1996, announcing a
recently signed contract with Korea Power Company (KEPCO), Humphreys touted
Itron's purported technology, once again implicating that Itron's ERT-based
systems provided a real and cost-efficient migration path to more advanced
(i.e., Fixed Network)AMR:
"We are extremely pleased that KEPCO has selected an
Itron meter muting solution," said Johnny Humphreys, Itron
president and CEO. "We were chosen largely on the basis of our
proven track record for installing high-quality EMR systems
worldwide, for our ability to meet KEPCO's quality and
extensive field deployment requirements, and for GPC's ability
to add radio-based automatic meter reading (AMR) capabilities
through a PC card. Itron's migration path to more advanced
forms of AMR also distinguished us from other suppliers."
[Emphasis added.]
60. On September 11, 1996, Itron issued an announcement over
Business Wire that its third quarter 1996 revenue would be significantly lower
than the general expectations analysts following the Company, and would result
in a loss for the quarter. Rather than disclose the real reason underlying the
poor performance, however, Itron took pains to continue misleading the market,
claiming the cause was:
primarily due to what appears to be a temporary industry-wide
slowdown in the pace of adding new automatic meter reading
(AMR) orders and a pushout of shipments on a large multi-year
AMR contract. The combination of the industry-wide slowdown
and the Company's continued and increased investment in its
development of fixed network technologies will result in the
expected loss.
61. In a September 11, 1996, Bloomberg article, Itron officer Mima
Scarpelli characterized the recent decline in Itron stock price as temporary:
"We don't see this as more than temporary," said Itron Treasurer Mima
Scarpelli. "We don't anticipate a loss in the fourth quarter. We're still
bullish about our business."
62. During a September 11, 1996 conference call with analysts,
Humphreys downplayed the poor third quarter, instead emphasizing Itron's recent
purported accomplishments and positioning for the future while failing to
disclose the truth about Itron's Fixed Network capabilities:
We continue to believe that we will get the majority of new
AMR orders. The majority of utilities in an active AMR
decision mode are substantially inclined toward Itron.
Major Itron announcements in 1996 include:
o Duquesne Light -- 15 year, $150 MM fixed network contract.
o expansion of BG&E mobile AMR and handheld contract --
includes over 1 million meter modules
o Western Resources fixed network pilot for 32,000 meters
o Phase 1 handheld EMR order for government-owned utility
serving all of South Korea. Along with our order last year
from Tokyo Electric, we believe this will lead to
substantial new business in Asia
Today, two new fixed network announcements:
o Nevada Power -- 4,500 meter installations in Laughlin, NV
o CSW Communications (subsidiary of CSW Corporation) ---
10,000 ERT installation in Georgetown, TX. Itron has
been selected by CSW Communications as its vendor of
choice in energy management pilot projects
These two announcement indicate a vote of confidence in
Itron's fixed network solution. [Emphasis added.]
63. During the same analyst conference call, Humphreys falsely
reassured the market that the Company's Fixed Network technology was operating
successfully in a highly favorable range and had no significant problems:
Q: One utility is telling me that your fixed network is
reading only 80% of the meters, while you need
economics in over the 90% range? Is part of the
problem that you are having delays on shipping ERTs?
. . .
A: There was a lot of confusing information in your
question. Our networks are better than that. That
customer was wrong; you were given some mistaken
information there. We read in the high-90s, for both
our fixed network and mobile. Pace of development of
our fixed network is not a significant factor
responsible for order delays and [sic] this point.
* * *
Q: What about the claim that your fixed network doesn't
work? That is the rap that's coming down.
A: It's not true. The opposite is true. The [fixed]
network is working. Our customers have not lost
confidence.
We've had one customer who's had to wait. That
customer is disturbed by how much time they've waited
[Emphasis added.]
64. During the same September 11, 1996, analyst conference call
Humphreys painstakingly diffused growing skepticism in the market about Itron's
Fixed Network AMR technology by downplaying the fact Itron was behind with the
Duquesne Fixed Network AMR installation:
Q: Are any delays related to product acceptance issues
with the fixed network?
[A:] We are a little behind with the Duquesne installation
related [to] the fixed network, although not in a
major way so as to upset the customer. If we had been
able to finish the Phase I in the 3rd quarter, it
would have helped revenues a little bit. [Emphasis
added.]
We're not nearly as behind on things we're doing here as
CellNet. If you look at their announcements as to what they
say they're going to do, and look at when they've done them,
they run behind by a factor or 2 to 1. We've never approached
being that far behind, and certainly not with [the Fixed
Network].
65. Notwithstanding the defendants' extensive campaign on to
downplay the unexpected announcement that third quarter 1996 results would fall
well below what the defendants had led the market believe, and to keep the
investing public from learning the real reason for it, Itron's continuing loss
of credibility caused its stock price to tumble from $29 per share on September
10, 1996, to close at $21 per share on September 11, 1996, sustaining a loss in
value of nearly 25%.
66. In a Business Wire release, dated October 21, 1996, entitled
"Itron announces successful Phase I Fixed Network AMR installation at Duquesne
Light Co." (emphasis added), the Company announced the completion of
installation and the purported successful reading of the initial 5,000 meters at
Duquesne Light Company:
Itron (NASDAQ:ITRI), a leading provider of automatic
meter reading (AMR) services and equipment to the utility
industry, today announced that they have completed the
installation of, and are successfully reading, the initial
5,000 meter required for Itron's Fixed Network AMR
installation at the Duquesne Light Co. (DLCo).
In the same press release, Itron also touted numerous other contracts it had
signed in 1996, including a $30 million contract with Baltimore Gas & Electric,
and a $40 million order from People's Gas Light and Coke Co.
67. Also in the October 21, 1996 release Humphreys once again
touted the performance of the Fixed Network AMR system:
"We are excited about the performance our Fixed
Network AMR system is demonstrating at DLCo and other
sophisticated, forward-looking utilities," said Johnny
Humphreys Itron president and CEO. "We look forward to fully
integrating our fixed network at DLCo in a way that maximizes
operating efficiencies and facilitates the future introduction
of valuable new services for DLCo's many customers."
68. During an October 21, 1996 analysts conference call, defendant
Humphreys extolled the numerous utilities utilizing Itron's new cell control
unit and the Company's progress in building more cell control units:
On the fixed network status, we are focusing on eight
utilities that we have running our new cell control unit. Our
new cell control unit of course is unmatched in the industry;
. . . We are now planning to build between 2,000 to 3,000 cell
control units by year end.
69. During the same October 21, 1996 analysts conference call,
Humphreys emphasized the purported superior level of accurate read rates
regarding the Duquesne project, while downplaying and distracting focus on the
fact that Itron, contrary to the headline of its October 21, 1996 press release,
had not met the criterion for successful implementation of Phase I of the
Duquesne contract:
Question:
... [W]ith regards to the Duquesne network, I think you had a
release yesterday, what percentage of accurate reads does the
network have right now? Do we have it up so it's close to 100%
read rate?
Answer:
Yes, it is.
* * *
Question:
That (Duquesne) would happens to be above the 99%?
Answer:
This one happens to be right at 100%.
* * *
Question:
That's great. So you got a 100% up there?
Answer:
Yes.
Question:
This 100% number, is this 100% of the reads give you a
consumption reading?
Answer:
Yes, on a daily basis.
Question:
Okay. The announcement you made yesterday, should we then
take that to mean that Duquesne has accepted the system for
the requirements of phase I?
Answer:
No, there's a lot of things that are bundled in to what I
would call cell phase 1 acceptance according to the Duquesne
contract, one of which includes agreement between the two
companies on what types of software releases will happen next,
what will the testing schedule will look like for phase 2,
etc. The announcement yesterday basically is an announcement
that we are meeting Duquesne's top criteria that they required
for their network, which is as Johnny said was the ability to
do daily consumption reads.
It also includes the ability to do on request reads, and it
includes the ability for Itron to get that information to
Duquesne's billing system. [Emphasis added.]
70. On October 22, 1996, Itron reported a loss of $4.5 million, or
34 cents per share, for the third quarter 1996. Not only were the results worse
than Itron's month-earlier warning had indicated, but for the first time the
defendants acknowledged that the poor performance was expected to continue into
the fourth quarter. Worse, the market was alarmed by the fact that the released
financials indicated that Itron had gone through $55 million in cash over the
first three quarters, and that the Company was scrapping nearly $3 million in
hardware.
71. Even though the defendants still failed to fully disclose the
whole truth about the inherent problems relating to Itron's Fixed Network, which
directly related to Itron's financial woes, defendants acknowledgment that
Itron's financial problems would persist resulted in defendants losing a
significant portion of Itron's market credibility. On October 23, 1996, the
price of Itron common stock sustained yet another precipitous drop, falling over
25% on volume exceeding 1.76 million shares to close at $15 per share.
POST-CLASS STATEMENTS OF THE DEFENDANTS
72. In a November 7, 1996 Business Wire release, the Company
announced the purported successful network acceptance test at Portland General
Electric:
Portland General Electric billing live using Itron's
fixed network in Murray Hills area of Portland[.] Itron
(NASDAQ: ITRI), a leading provider of automatic meter reading
(AMR) services and equipment to the utility industry, today
announced that they have successfully achieved and passed the
acceptance criteria required by Portland General Electric
(PGE) for PGE's pilot installation of Itron's Fixed Network
AMR system in Murray Hills, Ore.
PGE, a wholly owned subsidiary of Portland General
Corp. (NYSE:PGN), supplies electricity to more than 630,000
customers in Northwest Oregon.
Murray Hills was selected for the pilot at it
represents one of the more difficult environments for radio
communications in the Portland area. Underground power lines
and short decorative street lights in the area present a
challenge in terms of finding places to install the key
components for the network. In addition, the homes and lot
sizes are larger than average and there is a great deal of
foliage.
"Completion of the fixed network acceptance test at
PGE is a significant milestone for Itron because we have
proven that our Fixed Network AMR system works in the field
under very difficult radio communications environments," said
Johnny Humphreys, Itron president and CEO. [Emphasis added.]
"The fixed network technology is maturing rapidly and
we have demonstrated the capability to reliably acquire reads
for monthly billing over the network," said David Carboneau,
Portland General Corp. vice president of Information
Technology. "With continuing improvement in functionality, we
anticipate further successful deployment of Itron's Fixed
Network AMR system."
73. In its Form 10-Q for the Fiscal Quarter ended September 30,
1996, and filed with the SEC on or about November 16, 1996, the Company
continued to blame the slowdown in its revenues on utilities which allegedly
delayed AMR purchase decisions because of regulatory and merger and acquisition
activity:
Recently, many utilities that the Company has been
working with have taken much longer to make their AMR purchase
decisions than the Company had anticipated. These delays have
impacted the Company's AMR revenue growth trend. The Company
believes that these delays are caused in part by deregulation
issues and merger and acquisition activity, which are
affecting the industry as a whole. The Company believes that
many utilities are in the process of resolving these issues
and that the Company's AMR revenues will continue to grow.
However, in the near term, AMR revenues may not grow or may
grow at a different rate than the Company has experienced in
the past. [Emphasis added.]
74. In the same Form 10-Q for the Fiscal Quarter ended September
30, 1996, the Company described the successful efforts to date in reading meters
under the January 1996 outsourcing agreement:
The Company announced a significant outsourcing
agreement in January 1996 under which the Company will
install, own and operate a fixed network AMR system and
provide meter reading and advanced communications services
over a fifteen year period. Itron began installation efforts
for this agreement in the second quarter of this year. As of
the date of this report the Company has completed installation
and is successfully reading the initial 5,000 meters required
for the first phase of this project. The Company has installed
over 60,000 ERTs so far for the project. Contractual system
acceptance of the first phase and production release of the
Company's first level fixed network component, the Cell
Control Unit (CCU), are dependent on successful field testing
of a significant software release that is scheduled for late
1996. System expansion is expected to begin late in the fourth
quarter of 1996 or in the first quarter of 1997 once full
system acceptance for the first phase of the installation has
occurred.
75. In a January 15, 1997, press release, Humphreys commented on
the 1996 financial results and once again attributed Itron's disappointing
performance to regulatory uncertainties and merger activities among energy
utilities:
Commenting on the results for 1996, Johnny Humphreys,
Itron's president and CEO said, "We believe we are now at
about the midpoint of what is clearly a lost year from a
growth standpoint for the AMR industry. Beginning about
mid-1996, a number of utilities delayed AMR buying decisions
as a result of regulatory uncertainties affecting the electric
service industry and of merger activities among energy
utilities. Itron believes that the effects of those factors
are likely to continue through the first half of 1997, but
that the underlying issues will start to be resolved during
that period as legislative and regulatory deadlines require
the determination of pending issues. As the AMR industry
leader, Itron, in particular, suffered from these delays. Our
financial results in the second half of 1996 reflect the
industry-wide slowdown, as well as the fact that we spent very
heavily on our fixed network AMR development. We expect
financial results for the first and second quarters of 1997 to
be similar to those of the third and fourth quarters of 1996
with possible relative improvement in the second quarter of
1997 as the issues referred to above are resolved. We expect
the second half of 1997 to show a very marked improvement,
including a return to profitability.
76. In a February 5, 1997, press release announcing a $2.3 million
loss, or 17 cents per share, for the fourth quarter ended December 31, 1996,
defendant Humphreys still refused to acknowledge the problems with Itron's
attempted implementation of an advanced, full-function Fixed Network AMR,
instead claiming that Itron was in a very competitive posture to implement its
Fixed Network AMR system:
"We believe Itron's long-term competitive position
has strengthened because Itron's broad product line of
upgradeable technologies enables the company to sell products,
even in the current environment. That environment offers us a
unique opportunity to extend our lead in hand held AMR and
mobile AMR and to lay the groundwork with these customers for
implementation of an Itron fixed network AMR upgrade. The
state regulatory agencies and the state legislatures have
shown an increasing determination to subject the supply of
electricity to competition. We believe that competition in the
supply of electricity will require frequent collection of
metering information. Manual meter reading cannot economically
collect the required data. We believe only AMR can provide the
necessary meter data at the required frequency, and only AMR
can provide that data at a reasonable cost. To us, the initial
hesitation by utilities with respect to AMR will turn into a
broad scale industry adoption by utilities or their
competitors. When that happens, we believe Itron will be the
major beneficiary of the AMR industry's rapid expansion, and
perhaps even explosive growth."
77. In its Form 10-K for Fiscal Year ended December 31, 1996,
filed with the SEC on March 5, 1997, Itron discussed its commitment to expanding
the delivery of Fixed Network AMR:
Expanded Fixed Network AMR Technology and
Installations. The Company is committed to delivering Fixed
Network AMR solutions and believes that the demand for fixed
network AMR will grow significantly as electric utilities
increasingly focus on the consequences of competition brought
on by regulatory reform. The Company is committed to the
expansion and completion of its Fixed Network AMR installation
at Duquesne Light Company ("Duquesne), the expansion of select
pilot Fixed Network AMR installations, and the continued
enhancement of its Fixed Network AMR technologies and
products. The Company believes that fixed network AMR is, and
for the foreseeable future will continue to be, the
lowest-cost manner in which to provide frequent, time-critical
meter reads, and will increasingly be critical for the
competitive success of utility industry participants as
regulatory reform unfolds.
78. In the same 1996 10-K, however, the Company disclosed that it
had not met the requirements of the Phase I performance milestone under the
Duquesne Contract, and for the first time attributed these delays to ongoing
development of advanced meter reading functions and the software necessary to
complete these functions:
The Company has experienced delays in performing its
obligations under the Duquesne Contract. These delays relate
primarily to the development of certain advanced meter reading
functions and the software needed to complete these functions.
By the terms of the Duquesne Contract, the Company has not
achieved the defined Phase I milestone. The Company believes
that it has recently reached a verbal understanding with
Duquesne regarding amendments to the Duquesne Contract
pertaining to Phase I and other matters, which have not yet
been adhered to in writing as contract amendments. Meter
modules beyond the 5000 modules originally specified in the
Duquesne contract for Phase I have been and are being
installed without the benefit of a formal Duquesne Contract
amendment.
THE FALSE AND MISLEADING NATURE
OF DEFENDANTS' REPRESENTATIONS
79. At all times complained of herein, defendants misled the
investing public by failing to disclose that Itron's problems stemmed from its
inability to make its ERTs suitably operable with its Fixed Network AMR. During
the Class Period, defendants, and each of them, knew that there were
insurmountable technical hurdles, described supra, consisting of inter alia: (a)
low radio transmission power which prevented ERTs from broadcasting data
reliably to a Fixed Network; and (b) the polling method of operation which
prevented ERTs from being able to deliver the functionality required by
utilities for advanced, full-function Fixed Network AMR.
80. The September 11, 1995 press release commencing the Class
Period was materially false and misleading because it omitted to state that the
new generation of Genesis by Itron (R) solutions was not, at that time, capable
of working at a commercially acceptable level in a Fixed Network AMR
environment. Defendants misled the investing public into believing that Itron
had overcome the technological barriers to conversion from a mobile to a Fixed
Network when, in fact, such barriers had not been overcome and there was no
solution to such problems on the horizon.
81. Itron's December 6, 1995 press release announcing that it had
formed a new unit to provide Customer Connectivity services to utilities was
materially false and misleading at the time it was made because it failed to
disclose that Itron did not possess the technology or capability to provide
Fixed Network services to utility customers. Moreover, Itron's December 6, 1995
website release was similarly materially misleading because Itron was not in a
position either to develop strategic partnering relationships with utilities or
to offer its advanced technology for customer connectivity (Fixed Network
system) since its technology was not capable of working at a commercially
acceptable level in a Fixed Network AMR environment.
82. Defendant Humphreys' response during the January 31, 1996
analyst conference call was also materially misleading when he stated that there
were no material issues left involving the Fixed Network technology. In fact, as
discussed supra, there were still materially extant technical obstacles known to
defendants which prevented the Fixed Network technology from attaining
commercial viability.
83. The releases which discussed (a) Itron's financial outlook and
market for Fixed Networks in glowing terms, and (b) Itron's undertakings to
install, own and operate Fixed Network AMR systems under a number of outsourcing
agreements, were all similarly materially false and misleading for the reason
that defendants knew they were unable to make its ERTs suitably operable with
its Fixed Network AMR because they had not solved threshold technical problems
described supra, and because there were no reasonable solutions then known to
defendants to remedy these problems.
84. Itron's discussion in its 10-K for the Fiscal Year ended
December 31, 1995, and filed with the SEC on April 1, 1996, was also materially
misleading when it stated that "[t]he Company's Fixed Network enables a utility
to communicate with any meter in its service territory at any time and thereby
dramatically increases the utility's flexibility in organizing customer data."
This statement conveyed the untrue impression that the Company's Fixed Network
was up and running when, in fact, it was not. Moreover, it was also materially
false and misleading for the Company to state that "[t]he Company is in the
final stages of field testing its latest generation pre-production cell control
units (CCU's), an essential component of its Fixed Network solution." First, the
Company did not have a "Fixed Network Solution" because it had still not solved
the threshold technological problems described supra. Second, the Company was
nowhere near to the final stages of field testing its CCU's since, as the
Company itself had earlier acknowledged to certain select customers in 1993,
there was still no fix for the stationary antenna problem which was the function
performed by the CCU: "[a]fter considering all the things that affect
readability [of ERT meter modules], you can see it is not possible to simply
stick a stationary antenna up in the air and expect to read all meters within a
range of a half-mile, one-tenth of a mile, or any other distance for that
matter."
85. The claims in the October 21, 1996 press release that Itron
had completed installation of the 5,000 meters, and was successfully reading
them as required for Itron's Fixed Network AMR installation under the Duquesne
contract were false and misleading at the time they were made. As defendants
knew, yet failed to fully reveal, Itron had not met the Duquesne Phase I
requirements. In addition, Itron completely failed to disclose the problems it
had, and continued to have, implementing a full-scale advanced, full-function
Fixed Network AMR system based upon its existing ERTs.
86. The claims made by defendant Humphreys during the analysts'
conference call on October 21, 1996 that the percentage of accurate reads was
"right at 100%" and "on a daily basis" with regard to the Duquesne network were
blatantly and materially misleading. Furthermore, Humphreys' statement that the
Company was meeting Duquesne's top criteria required for their network was
materially false and misleading because defendants knew that Itron's ERTs were
not suitably operable with Fixed Network AMR, as defendants had not solved
threshold technical problems described supra, and because there were no
reasonable solutions then known to defendants to remedy these problems.
Significantly, during the conference call, Humphreys omits to reveal that
Itron's Fixed Network AMR system is incapable of performing advanced functions,
such as time-of-use and real-time pricing, as required by Duquesne for full
acceptance and, indeed, which are the primary rationales for incurring the
substantial cost of implementing Fixed Network AMR.
87. In the later stages of the Class Period when defendants were
forced to announce continuing losses, Humphreys attempted to "cushion" the blow
to Itron's common stock by blaming Itron's failed technology on "an industry
wide slowdown." Such announcements were materially misleading because, as the
defendants knew, the real reason for the losses and Itron's continuing poor
performance was that Itron was unable to make its ERTs suitably operable with
its Fixed Network AMR technology.
88. On October 22, 1996, Itron announced the actual results for
the quarter ended September 30, 1996, which were worse and more ominous than an
earlier warning had led the market to expect. While finally acknowledging that
Itron profits and revenues could be impacted through the fourth quarter,
Humphreys still failed to reveal that the primary reason for Itron's poor
performance was its inability to complete development of its Fixed Network AMR
system, and that because of this failure, utilities had become increasingly
suspicious and more hesitant to commit to Itron's purported Fixed Network AMR
"solution." Worse, utilities also became less willing to invest in any of
Itron's other AMR systems, such as its Mobile AMR, as doubt grew that these
systems, based on Itron's ERT technology, could ever provide a real,
cost-effective migration path to Fixed Network AMR. utility industry to mask the
failure of Itron to deliver the technology it had publicly promised.
89. As detailed above, the market has at best learned only a part
of the truth about the extent of the problems Itron has been experiencing with
the development and implementation of its Fixed Network AMR technology. Since
Fixed Network AMR represented, and continues to represent, the most significant
growth opportunity for the AMR market, defendants, not surprisingly, have
concealed Itron's failure to: (a) develop technology sufficient to permit
implementation of an advanced, full-function Fixed Network AMR system; and (b)
develop technology sufficient to permit its customers to later migrate from
Itron's Mobile AMR to Itron's Fixed Network AMR cost-effectively. As a result of
the defendants' scheme to defraud, the price of Itron's common stock was
inflated from the inception of the Class Period through at least October 22,
1996.
COUNT I
FOR VIOLATIONS OF ss.10(b) OF THE EXCHANGE ACT AND RULE
10b-5 (AGAINST BOTH DEFENDANTS)
90. Plaintiff incorporates by reference the preceding paragraphs
of this Complaint as if fully set forth herein.
91. This Count is asserted against both defendants for violation
of ss.10(b) of the Exchange Act.
92. During the Class Period, the defendants directly and
indirectly engaged and participated in a course of business to conceal adverse
material information about and make material misrepresentations concerning the
business and future prospects of Itron as specified herein. Defendants employed
devices and artifices to defraud and engaged in acts, practices and a course of
business as herein alleged in an effort to maintain an artificially high market
price for the common stock of Itron, which included the making of or
participation in the making of untrue statements of material facts and omitting
to state material facts necessary in order to make the statements made about
Itron, in light of the circumstances under which they were made, not
misleading and engaged in transactions, practices, and a course of business
which operated as a fraud and deceit upon the purchasers of Itron's common stock
during the Class Period.
93. The purpose of defendants' false statements and omissions was
to artificially inflate the price of Itron common stock during the Class Period
to induce plaintiff and members of the Class to purchase Itron common stock at
artificially inflated prices.
94. During the Class Period, defendants issued public statements
and reports including financial statements and other reports, releases and
statements as described hereinabove, which were materially false and misleading
in violation of the Exchange Act and applicable SEC regulations. These reports,
releases and statements were materially false and misleading in that they failed
to disclose material adverse information about Itron's products, operations and
business prospects.
95. Each of the defendants herein knew or recklessly disregarded
the fact that the aforesaid acts and practices, misleading statements and
omissions would adversely affect the integrity of the market in Itron common
stock and artificially inflate or maintain the prices of such stock. Defendants,
by acting as described herein, did so knowingly or in such a reckless or grossly
negligent manner as to constitute a fraud and deceit upon plaintiff and members
of the Class.
96. As a result of the dissemination of the aforementioned false
and misleading reports, releases and financial statements and manipulative
conduct, the market price of Itron common stock was artificially inflated
throughout the Class Period. In ignorance of the adverse facts concerning
Itron's operations concealed by defendants, plaintiff and the members of the
Class purchased Itron common stock at artificially inflated prices, relying upon
the integrity of the market, and were damaged thereby.
97. Had plaintiff and the members of the Class known of the
materially adverse information not disclosed by the defendants, they would not
have purchased Itron common stock at the artificially inflated prices they did.
COUNT II
FOR VIOLATION OF ss.20(a) OF THE EXCHANGE ACT
(AGAINST DEFENDANT HUMPHREYS)
98. Plaintiff incorporates by reference the preceding paragraphs
of this Complaint as if set forth fully herein.
99. This Count is asserted against defendant Humphreys for violation
of ss.20(a) of the Exchange Act.
100. Humphreys acted as a controlling person of the Company within
the meaning of ss.20(a) of the Exchange Act. By reason of his position as a
senior officer and his stock ownership, as alleged above, Humphreys had the
power and authority to cause the Company to engage in the wrongful conduct
complained of herein.
101 By reason of such wrongful conduct, Humphreys is liable
pursuant toss.20(a) of the Exchange Act.
102. As a direct and proximate result of the wrongful conduct,
plaintiff and other members of the Class suffered damages in connection with
their purchases of the Company's common stock during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
A. Declaring this action to be a proper class action on behalf of the Class
defined herein;
B. Awarding plaintiff and the members of the Class compensatory damages;
C. Awarding plaintiff and the members of the Class pre-judgment and
post-judgment interest, as well as reasonable attorneys' fees, expert
witness fees and other costs;
D. Awarding extraordinary, equitable and/or injunctive relief as permitted
by law; and
E. Awarding such other relief as this Court may deem just and proper.
JURY DEMAND
103. Platiff demands a trial by jury on all issues of fact.
Dated: May 23,1997
Respectfully submitted,
LOPEZ AND FANTEL
Carl A. Taylor Lopez
1510 14th Avenue
Seattle, Washington 98122
(206) 322-5200
Steven J. Toll
Matthew J. Ide
COHEN, MILSTEIN, HAUSFELD & TOLL,
P.L.L.C.
1301 Fifth Avenue, Suite 2905
Seattle, Washington 98101
Telephone: (206) 521-0080
Joseph J. Tabacco, Jr.
Christopher T. Heffelfinger
BERMAN, DeVALERIO, PEASE & TABACCO
425 California Street, Suite 2025
San Francisco, California 94104-2205
Telephone: (415) 433-3200
Attorneys for Plaintiff
