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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO
COMMISSION FILE NUMBER 0-22418
ITRON, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1011792
(State of Incorporation) (I.R.S. Employer Identification Number)
2818 NORTH SULLIVAN ROAD
SPOKANE, WASHINGTON 99216-1897
(509) 924-9900
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
TITLE OF EACH CLASS
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__X___ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__
As of February 26, 1996, there were outstanding 13,418,684 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non affiliates of the registrant (based on
the closing price for the common stock on the Nasdaq National Market on
February 26, 1996) was approximately $138,931,538.
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the
Company to be held April 29, 1997.
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PART I
ITEM 1: BUSINESS
OVERVIEW
Itron, Inc. ("Itron" or the "Company"), was incorporated in Washington
in 1977 and is a leading global provider to the utility industry of data
acquisition and wireless communications solutions for collecting, communicating
and analyzing electric, gas and water usage. The Company designs, develops,
manufactures, markets, installs and services hardware, software and integrated
systems for handheld computer-based electronic meter reading ("EMR"), automatic
meter reading ("AMR") and other measurement systems.
Since the early 1980s, Itron has been the leading supplier of EMR
systems to utilities. Today, Itron's EMR systems are installed at over 1,500
utility customers in more than 40 countries and are being used to read
approximately 275 million meters worldwide. Itron's EMR systems are installed at
80% of the 249 utilities in North America with 50,000 or more meters, including
21 of the largest 25 utilities. EMR systems and services currently account for
approximately 25% of the Company's total revenues.
In the early 1990s, Itron expanded its product line to include AMR
systems and services. The Company estimates there are approximately 268 million
meters in North America, of which only approximately 12 million, or 5%,
currently have installed AMR technology. Outside North America, the Company
estimates there are two to three times that number of meters and minimal AMR
installations. The Company has shipped over 8.4 million AMR meter modules to 269
utilities as of December 31, 1996, and has thereby established itself as the
world's leading supplier of AMR systems. Fifty-seven of these 269 utilities have
made a sizable commitment to Itron AMR products by having installed at least
10,000 Itron AMR meter modules. AMR systems and services now represent
approximately 75% of the Company's total revenues.
The Company's AMR systems and products were initially developed to
enable utilities to reduce operating costs and improve quality of service and
are being expanded to provide a full range of utility and nonutility related
data management capabilities and communications-based options. The Company
believes its AMR product offerings are more extensive than that of any other AMR
supplier. The Company's AMR systems and products support electric, gas, water
and combination utilities and include solutions for all classes of utility
customers--residential, commercial and industrial. The Company's AMR solutions
involve the use of radio and, in some instances, telephone technology to collect
meter data. The Company's radio-based AMR solutions include handheld
("Off-Site"), vehicle-based ("Mobile") and fixed network ("Fixed Network")
reading technology options. Each of the radio-based reading options utilizes the
same AMR meter module technology, which therefore provides a compatible
migration path from basic Off-Site AMR to more advanced Mobile and Fixed Network
systems. This compatibility allows Itron's customers to initiate AMR
installation on a limited number of meters with the flexibility to expand to
full-scale, system-wide implementation on a large number of meters, where
multiple AMR solutions may be required. The range of Itron's AMR product
offerings enables its customers to deploy the solutions that are the most
effective in each portion of the utility's service territory at the appropriate
time.
Regulatory reform initiatives and merger activity are causing
significant changes in the utility industry and have recently caused some
utility customers to delay implementation of AMR technology. The Company
believes that regulatory reform will require more frequent collection of meter
data with a degree of resolution not previously needed and therefore will
increase demand for AMR products. In addition, the Company believes that, over
the long term, regulatory reform in many states will create new AMR
opportunities for the Company such as the development of reconciliation systems
for the supply of power to, and purchase of power from, the electric power
transmission grids, software to support the complex
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billing for large commercial and industrial customers, franchise operations,
national accounts and aggregators (power brokers that purchase power on behalf
of many customers), and products to support nontraditional utility applications
such as energy management programs, home automation systems, and premise
monitoring services, such as home security.
The Company believes that its broad offering of AMR products provides
utilities and other industry participants with numerous options for converting
recurring operating expenses of meter reading into strategic investments that
provide high-value communications links with customers. The Company believes
this extensive product portfolio, along with significant experience in
high-volume AMR meter module production, established relationships with over
1,500 utilities worldwide, proven interfaces with numerous utility host billing
systems, and advanced software for large commercial and industrial customers and
power exchanges, positions the Company to take advantage of this significant AMR
market opportunity.
DESCRIPTION OF BUSINESS
OVERVIEW OF CURRENT ENVIRONMENT IN THE UTILITY INDUSTRY
The utility industry is undergoing fundamental structural changes.
Current restructuring in the electric utility industry is focused on opening the
electric power generation industry to full competition and ultimately providing
retail customers access to multiple suppliers (referred to as "direct access").
Similar to regulatory changes that have already occurred in the transportation
and telecommunications industries, customer demands and regulatory mandates by
federal and state governments are forcing utilities to make the transition from
regulated monopolies in certain respects into competitive enterprises.
Federal legislation, such as the National Energy Policy Act of 1992
(the "EP Act"), eased restrictions on independent power producers in an effort
to increase competition in the wholesale electric power generation market and
authorized the Federal Energy Regulatory Commission ("FERC") to mandate
utilities to transport and deliver ("wheel") energy for a supplier of bulk power
to wholesale customers. On April 24, 1996, in a landmark ruling, FERC announced
two new rules (Order Nos. 888 and 889) designed to accelerate competition and
bring lower prices and more choices to energy consumers. Order No. 888 opens
wholesale power sales to competition by requiring public utilities to offer
nondiscriminatory pricing to all users of their transmission lines. Order No.
888 also provides for the full recovery of stranded costs. Order No. 889, also
known as the Open Access Same-time Information System ("OASIS") rule, requires
public utilities to obtain information about their transmission system for their
own wholesale power transactions, such as available capacity, in the same way
their competitors do--via OASIS on the Internet.
Regulatory and legislative activity at the state level regarding retail
wheeling and direct access has recently increased dramatically. While regulatory
initiatives vary from state to state, many involve the separation of certain
functions currently performed by utilities, including energy generation,
transmission and distribution (functional unbundling) and a shift from
rate-of-return to performance-based ratemaking or market-based pricing. All
states except one have undertaken some form of regulatory reform, with 35 states
having discussion forums on the topic, 17 states having undertaken legislative
studies and 22 states having had relevant bills introduced in their
legislatures.
California is the furthest along in implementing retail wheeling,
requiring utilities to offer an initial group of customers the ability to choose
their electricity supplier by January 1, 1998, with all customers having this
ability by 2002. California is considering many regulatory reform alternatives,
including functional unbundling, as well as the possible unbundling of the
metering function and the customer billing function. Regulators in New York,
Massachusetts, Michigan, New Hampshire and Vermont have all
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ordered utilities to file restructuring plans which would address, among other
competitive issues, a schedule for implementing retail wheeling over the next
several years.
While some utility companies may retain some, most or all of their
traditional functions, the Company believes that it is likely that some of these
functions will, in some jurisdictions, also be provided by separate independent
system operators ("ISOs") and energy service providers ("ESPs"). Utilities may
turn the operational control of certain of their transmission facilities over to
ISOs. ESPs are expected to provide both electricity and natural gas to
commercial, industrial and residential customers and may, in some jurisdictions,
perform meter reading and customer billing for themselves and/or several
utilities. ESPs have already emerged, and may continue to emerge, as individual
companies (e.g., Enron) or consortiums. Thus, the Company's future customer base
will likely be comprised of both ESPs and traditional utility companies. Such
companies also will buy and sell electricity and will have to deal with the
frequent specification of prices and costs for the transference of power. As
such companies emerge, the Company believes that the ability to measure the
supply and use of energy on a frequent basis will become increasingly critical
and that the electric service industry will be driven toward hourly or
half-hourly usage and pricing.
The Company believes the advancement of regulatory reform initiatives
will motivate utilities and industry participants to increase operating
efficiencies, enhance service quality and offer services not traditionally
offered by utilities. In light of this, the Company believes industry
participants will:
- require a variety of AMR alternatives to address diverse
characteristics across service territories;
- strive to reduce the recurring operating cost of meter
reading;
- move toward the use of real time pricing, which requires more
frequent reads;
- ensure distribution reliability by pinpointing outages rapidly
and line loss problems accurately; and
- differentiate services by offering innovative billing plans
and nonutility services such as home security, energy
management and remote status monitoring.
ITRON SOLUTIONS
The Company believes it has an extensive and cost-effective portfolio
of AMR solutions that provides utilities and other industry participants with
numerous options for responding to evolving operational needs, marketing
opportunities and regulatory reform requirements.
Broad Product Line Offering. Itron's core AMR meter module technology
has been adapted to read numerous types of electric, gas and water meters,
including the most common meter types made by major meter manufacturers. Itron's
broad product line enables utilities and other industry participants to perform
meter reading functions for themselves, as well as for other utilities or power
suppliers serving a particular geographic area. Itron's AMR solutions include
the use of both radio- and telephone-based technologies and support all classes
of utility customers--residential, commercial, large commercial and industrial.
Low Cost Provider--Manufacturing Capabilities and Experience. Having
shipped more than 8.4 million meter modules since 1987, the Company believes it
is the AMR industry's most experienced meter module provider. The Company
believes that its low AMR meter module production costs are a key
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competitive advantage and generally allow it to offer utilities economically
justifiable AMR solutions. The Company made substantial investments in
high-speed automation and test manufacturing equipment in 1996 to strengthen
further its position as a low-cost provider of meter modules.
Technology Migration Pathways. The Company's radio-based AMR solutions
encompass Off-Site, Mobile and Fixed Network reading technology options. Because
the same AMR radio meter modules can be used with any of these alternatives, the
Company's products facilitate the migration from one level of systems automation
to another. This flexibility means that utilities can begin to achieve immediate
economic benefits from their initial investments in AMR systems, while also
expecting these systems to be the foundation on which to build future AMR
solutions.
Benefit Optimized Deployment. The range of AMR solutions offered by the
Company enables its customers to deploy the solutions that are the most cost
effective in each portion of the utility's service territory. The Company has
developed a conceptual and analytical methodology--termed "Benefit Optimized
Deployment"--which facilitates a potential AMR customer's comprehensive and
quantified analysis of the question "What technology, where and when?" The
Company has implemented this methodology in the form of a user-friendly
Windows-based computer program to assist utilities and other industry
participants in evaluating and then optimizing the use of different product
solutions in different circumstances and at different times.
Nationwide Radio Spectrum and Intellectual Property Rights. The Company
has been issued a renewable nationwide U.S. Federal Communications Commission
("FCC") license to operate in the 1427-1429 MHz band, allowing it to operate its
Fixed Network AMR technology throughout the United States. Itron believes the
spectrum available under this license is adequate to meet the spectrum
requirements for Fixed Network AMR and the requirements for a substantial
implementation of advanced utility functionality, as well as certain nonutility
applications. Itron also owns what it believes to be a significant patent
relating to network-based AMR that provides it with numerous options for further
AMR deployment, including licensing its technology to others.
Multiple Financing Solutions. The Company provides alternative ways
in which to finance AMR technologies. The Company sells products, outsources
entire systems and arranges lease financing for its customers.
ITRON'S STRATEGIES
Itron's objective is to continue to be a leading provider of AMR
solutions to utilities as well as other industry participants and to maintain
over time the broadest portfolio of cost-effective AMR and related solutions.
Following are key elements of the Company's strategy:
Provide Cost-Effective Meter Reading Solutions. The Company intends to
take advantage of the current regulatory environment to expand further its
Off-Site and Mobile AMR customer base. The Company offers a broad range of meter
reading solutions that allow utilities to realize immediate cost savings through
automation of their meter reading function. Despite concerns of stranded assets
and other uncertainties caused by impending regulatory reform of the electric
utility industry, utilities can confidently invest in the Company's core
business products (EMR, Off-Site and Mobile AMR) because of the relatively short
period of time in which they can recoup their investment through cost savings.
Investments in these core business products enable utilities to convert
recurring operating expense of meter reading into strategic investments that
provide a migration path to Itron's Fixed Network AMR solution and a high-value
communications link with customers.
Expand 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
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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.
Develop Additional Products to Serve Large Commercial and Industrial
Markets. The Company intends to substantially broaden its AMR product line for
large commercial and industrial customers, which represent on average
approximately 35% of a utility's total customer revenues. This includes
developing power billing systems targeted to utilities and power marketers that
must support complex billing for large commercial and industrial customers,
franchise operations, national accounts and aggregators (power brokers that
purchase energy on behalf of many customers), expanding and modifying its
software currently used in the United Kingdom for reconciliation of power
provided by generators to, and withdrawn by distribution companies from,
electric power transmission grids for use in the United States, interfacing UTS
software with the Company's other AMR products, and adapting and integrating
certain aspects of the Company's international Fixed Network solutions for large
commercial and industrial customers.
Build Upon Extensive Customer Base and Industry Experience. Itron has
established itself as the world's leading supplier of AMR systems as a result of
its having shipped more than 8.4 million AMR meter modules to 269 utilities as
of December 31, 1996. The Company's EMR systems have been installed at over
1,500 utilities in more than 40 countries, and are being used to read
approximately 275 million meters worldwide. Further, the Company's handheld EMR
systems have been installed at more than 80% of the 249 utilities in North
America that have meter populations greater than 50,000 reported customer
meters. The Company believes that its extensive customer base, long-term
relationships with its customers, and proven interfaces with numerous utility
host billing systems provide a solid foundation upon which the Company can
expand its product offerings and services to existing utility customers, as well
as new utility customers and other industry participants.
Develop Technology for Related Nonutility Applications. The Company is
working with a number of strategic partners and others on the development of its
AMR systems and products in order to support nonutility services. These services
could include premise automation and monitoring services such as security and
alarm services, remote status monitoring of vending machines, traffic lights and
propane tanks, and energy management solutions.
AUTOMATIC METER READING SYSTEMS AND PRODUCTS
The Company's AMR product line, known as "Genesis by Itron(R),"
involves the use of radio and, in some instances, telephone technology to
collect meter data. The Company's radio-based AMR solutions encompass Off-Site
AMR, Mobile AMR and Fixed Network AMR, as well as a variety of supporting
services and products. Due to the geographic features and varying population
density of a utility's coverage area, generally no single meter reading solution
is ideally suited to all parts of the utility's service area. Itron's AMR
applications are intended to provide functionality ranging from selective
installation on high-cost-to-read meters to full implementation of an AMR system
covering appropriate segments of a utility's service area. This flexibility
enables utilities to achieve immediate economic benefits from their initial
investments in the Company's AMR systems, while enabling migration to a more
comprehensive AMR solution in the future.
Meter Modules. The Company's AMR product offerings are based on a
family of meter modules. These meter modules, which can be easily attached to
utility meters, encode consumption and tamper information and transmit this
data, including meter identification, to a remote receiver. The Company
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intends to continue to expand its meter module offerings through development of
meter modules that read additional meter types, as well as development of
modules with differing capabilities that will enable utilities to use the most
cost-effective module for a particular meter reading need.
The Company began shipping its ERT (encoder, receiver, transmitter)
model of radio meter modules to customers in late 1986. Itron has adapted the
ERT's proven core technology to read numerous types of electric, gas and water
meters, including the most common electric and gas meter types made by major
meter manufacturers. The Company's compact radio meter modules for gas and water
meters are self-contained low-power units, powered by long-life batteries with
an expected minimum life in excess of ten years. Radio meter modules for
electric meters are normally integrated under the glass of standard residential
meters and do not require battery power. Radio meter modules can be installed by
the meter manufacturer during the manufacturing process or easily retrofitted in
existing meters.
In addition to its radio meter modules, the Company also offers
its gas utility customers telephone-based AMR technology with its Metscan
product line. For commercial and industrial applications, the Company's Metscan
meter modules attach to large-volume gas meters and collect data, including
consumption and interval-based time-of-use data used to bill transport gas and
interruptible gas customers, as well as provide critical load survey data for
applications such as peak day forecasting, supply forecasting and assessments,
rate design and marketing. For residential applications, including hard-to-read
meters, Metscan modules are attached to existing or new residential gas meters
to provide consumption and load survey data.
The Company also offers a separate line of meter modules for use
outside North America. The primary differences between the meter modules used by
the Company in North America and those used in international markets are the
radio frequency band in which they operate and the physical configuration of the
module. In addition, the Company has developed meter module technology to
address opportunities available in international markets that are not present in
North America. For example, in certain European countries usage of steam and hot
water produced by a central facility for residential heating is metered using
devices known as "heat allocators" located on radiators. The Company has
developed a radio-based meter module that enables remote collection of data
recorded by heat allocators, eliminating the need to access each radiator in
order to collect consumption data.
Off-Site Meter Reading. The Company's Off-Site AMR solution enables
meters on which meter modules have been installed to be read remotely, by a
person up to 800 feet away, with a handheld computer equipped with a radio unit.
Off-Site AMR offers a practical and cost-effective way for utilities to read
high-cost-to-read meters by eliminating the need for meter readers to gain
visual access to those meters. Once a utility has upgraded its Itron handheld
computers with radio technology, it can selectively install meter modules on
high-cost-to-read meters. System software automatically identifies
module-equipped meters within a route. When remote reads are needed, the system
prompts the meter reader to initiate the wireless remote read. Meter information
is shown on the handheld display and is automatically recorded in the handheld
data base, allowing the meter reader to move on to the next meter on a route.
When a route is completed, data from both visual and radio reads are uploaded
from the handheld computer to the utility host system for customer billing.
Mobile AMR. The Company's Mobile AMR solution uses a data collection
device mounted in a vehicle to collect and store data transmitted by meter
modules as the vehicle passes module-equipped meters. The data collection device
receives information transmitted by multiple meter modules simultaneously. A
touch-screen display enables the operator to observe and operate the data
collection device. The Mobile AMR application includes software which manages
and moves information to and from a utility's billing system. Once installed,
the software transfers information from the host system to create route files
for the data collection device for each route, manages the storage of the meter
data as it is
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collected and, at the end of the day, uploads the information to the utility's
billing system. A Mobile AMR system enables an operator to read up to 10,000 to
15,000 meters in an eight-hour day, compared to an average walking route of 500
meters per day. Factors affecting the actual number of reads per day include,
among others, route density and design, speed limits, weather and environment.
Mobile AMR also improves meter reader safety.
Fixed Network AMR. Itron's Fixed Network provides utilities with the
capability of completely automating meter reading in desired segments of a
utility's service area and thereby eliminating the need to send meter readers to
or near customer premises. Ten of the Company's AMR customers have pilot
installations of the Company's Fixed Network AMR system, and under a contract
with Duquesne (the "Duquesne Contract"), the Company is installing a Fixed
Network system that, when fully installed, will cover approximately 615,000
meters. It is intended that the Company's Fixed Network technology will be able
to provide utilities with a number of utility-related applications, such as
daily or more frequent meter reads, time of use pricing, on-demand meter reads,
tamper monitoring and reporting, outage detection and power restoration
reporting, load profiling and virtual connect/disconnect capabilities.
Implementation of a Fixed Network AMR system would also enable a utility to
perform meter reading services for other utilities in the same area, and to
offer and develop new revenue-generating services, such as energy management
programs, home automation systems and premise monitoring services, such as home
security. Meter data collected by the Company's radio meter modules is
transmitted to a Cell Control Unit ("CCU"), which is a neighborhood
communications controller. The CCU performs memory and computational functions,
in addition to functioning as a radio receiver and transmitter.
Weighing approximately 15 pounds, Itron's CCU can be easily installed on
utility poles, street lights, buildings or other locations. While the
geographic area covered by each CCU varies depending on local topography,
physical structures and other factors, in general the Company expects each
CCU to serve approximately 50 homes. Information collected by CCUs
is then transmitted to a Network Control Node ("NCN"), which is the primary
routing and control device for the Fixed Network. The Company expects that each
NCN will typically support approximately 500 CCUs. NCNs manage information in
the network, communicate with CCUs and other NCNs and can serve as a gateway to
other networks.
The final link in Itron's Fixed Network is from the NCNs to one or more
of a utility's host computers, known as a Genesis Itron Host Processor (the
"GIHP"). The GIHP is an open-architected control computer and database
management system that provides network control and advanced AMR functionality,
and acts as the interface to the Fixed Network from other utility systems. The
GIHP acts as a Standard Query Language ("SQL") database server to utility host
billing and operating systems. Communications between CCUs and NCNs and the
utility's GIHP utilize the Company's nationwide licensed frequencies in the
1427-1429 MHz band. Communications between NCNs and a GIHP may utilize these
frequencies or wired technology.
The Company made substantial investments in development of its Fixed
Network in 1995 and 1996, and expects to continue to devote a significant
portion of its product development spending in 1997 to Fixed Network
development. Current product development efforts are focused on performance
enhancements and additional functionality. See "-- Product Development."
EMR HANDHELD SYSTEMS AND PRODUCTS
Itron's handheld systems allow utilities to automate a substantial
portion of their meter reading and billing functions. Itron provides six basic
models of handheld computers to meet the varying requirements of its utility
customers. Each model is designed for use in harsh environments with standard
text and
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graphics, backlit displays, several memory sizes, multiple communications
options, interface devices for electronic meters and easy to use keyboards that
can be customized for the needs of the utility customer.
Handheld systems are used as follows: (1) key customer data is
downloaded from a GIHP to an Itron handheld computer prior to commencement of a
meter reader's daily route; (2) the meter reader visually reads the meters along
a route and enters the readings into an Itron handheld computer; and (3) after a
meter reader's daily route has been completed, collected data is uploaded
directly into a utility's host billing system. Itron's family of software
systems provides data consolidation and storage, reformatting, linkage to the
utility's host billing system, meter reading route management, route
downloading, and time of use data management and distribution.
COMMERCIAL AND INDUSTRIAL SOFTWARE PRODUCTS AND SERVICES
The Company's UTS subsidiary is the leading provider in the United
States of software systems for metering data acquisition and analysis for the
large commercial and industrial customers of electric and gas utilities. UTS
also has systems installed in about 20 countries outside the United States.
Commercial and industrial meters have much more sophisticated
measurement capabilities than meters for residential customers, and therefore
have much more data that must be conveyed back to a utility from the meter.
There is a wide variety of these meters with no standards for communications
between meters supplied by multiple vendors and central utility computers. The
key to UTS' development of the commercial and industrial products and services
market has been its establishment of strategic relationships with meter
suppliers around the world to solve the "no standard communication protocol"
problem.
UTS' Multiple Vendor Data Collection and Analysis System (the "MV-90")
supports communication protocols for almost all the large commercial and
industrial electric and gas meter suppliers in the United States and Europe.
UTS' multi-vendor data retrieval and analysis systems support all methods of
data retrieval from large commercial and industrial meters (handheld readers,
cartridges and telephone). The MV-90 was designed with a full range of
applications software to support data collection from meters, data validation
and editing and analysis of energy usage data. MV-90 software can be licensed
for use on single computers and local/wide area networks, and on a site license
basis. In addition to the base system there are layered application packages
that support applications such as load research, real time pricing (hourly price
transmission to commercial and industrial customers), gas transportation and
interruptible rates (notification and control of loads at large commercial and
industrial customers).
UTS has capitalized on a specialized market within the electric utility
industry and now supplies MV-90 software for revenue billing, load research and
demand-side management to approximately 70% of the major utilities in the United
States and to most of the utilities in Canada, Europe, the Middle East,
Australia, Central America and South America. The Company estimates that
approximately 35% of the $250 billion annual revenues billed by the electric
utility industry in the United States is billed using data collected by the
MV-90 software systems.
The Company believes that competition in the utility industry will
drive metering technology and systems toward enhancing and facilitating
communications between large commercial and industrial customers and their power
suppliers. UTS has developed a "read only" version of the MV-90 software which
allows the commercial and industrial customers to read the utility's delivery
point meters (both electric and gas) on a frequent basis to analyze their energy
consumption. This software can also receive hourly pricing data from the energy
supplier for customers who purchase power on a real time pricing basis (price
varies by the hour). It also supports load curtailment with messaging to notify
larger commercial and industrial customers of these events. The read only, real
time pricing, and load control software is sold to commercial and industrial
customers by the marketing departments of various utilities. This secondary
market is very significant because the large base of commercial and industrial
customers that become candidates for this software.
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UTS is now developing a large power billing system (the "MV-PBS")
targeted to utilities and power marketers that must support complex billing for
large commercial and industrial customers, franchise operations, national
accounts and aggregators (power brokers who purchase energy on behalf of many
customers). The MV-PBS is designed to allow utilities to bill energy and related
services sold under complex contracts, where each contract for products and
services may be unique to that customer. The current legacy billing systems were
designed for large volume, rate class billing with very little flexibility to
bill complex contracts required for unbundling of power (generation,
transmission and distribution), as well as new products such as real time
pricing and retail wheeling. The MV-PBS will be developed for use in a
client-server environment and is fully integrated with the MV-90 multi-vendor
data collection system.
As the electric utility industry is restructured in certain
jurisdictions, the metering function of the generation/transmission/distribution
systems interface will sometimes be managed by independent entities such as
power exchanges and ISOs. UTS currently supplies the software to collect the
metering data for the power exchanges in the United Kingdom, Australia and New
Zealand. UTS is in an excellent position to also supply software to states such
as California, New York, Pennsylvania, Michigan and others as they establish
similar power exchange/independent system operations to manage the deregulated
power supply industry in their states.
The Company also has increased its domestic product development efforts
towards substantially broadening its large commercial and industrial AMR product
line. This development includes interfacing MV-90 software with the Company's
radio-based AMR meter modules and other AMR products.
STRATEGIC ALLIANCES
From time to time, the Company enters into strategic alliances with
utilities and others for the development of systems and products. The Company
has a strategic alliance with IBM Global Services, a division of International
Business Machines, to develop and market network solutions jointly in support of
customer services such as automated meter reading, as well as premise
automation, home security, vending machine monitoring and other nonregulated
services. In support of this alliance, IBM Global Services has integrated the
Company's Fixed Network AMR with its back office applications and billing
systems in its Utility Industry Applied Technology Lab.
In addition, the Company has entered and expects to enter into a number
of joint ventures or alliances with both nonregulated and regulated utility
entities, among others. These alliances and joint ventures are expected to offer
a wide range of services, such as resale of Itron products, meter module and
network installation, AMR outsourcing, network-based information services and
further development of applications to maximize the benefit and use of Itron's
AMR product offerings.
CUSTOMERS
Itron has established itself as a leading supplier of handheld EMR
systems and AMR meter modules for the AMR market. The Company believes that its
extensive customer base, long-term customer relationships and experience in
meeting the needs of the utility industry provide a solid foundation from which
it can supply additional products and services to its existing customers, as
well as new utility customers and other industry participants.
Itron's EMR systems are installed at over 1,500 electric, gas, water
and combination utilities in more than 40 countries and are being used to read
approximately 275 million meters worldwide. Itron's EMR systems are installed at
80% of the largest utilities in North America. These 249 utilities, with greater
than 50,000 customer meters each, represent approximately 176 million of the
approximately 268 million meters in North America. As a result of the high
market penetration the Company has already achieved in
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the United States, domestic EMR sales are expected to be predominantly system
upgrades and replacements. The Company estimates that the number of meters
outside North America is approximately two to three times the number of meters
in North America. Because utilities in many industrialized countries outside
North America are only now beginning to automate their meter reading function,
the Company believes that international markets represent a growth opportunity
for sales of its EMR systems.
The Company has established itself as the world's largest supplier of
meter modules for the expanding AMR market as a result of having shipped over
8.4 million meter modules as of December 31, 1996. During the year ended
December 31, 1996, the Company shipped a record 2.5 million AMR meter modules
and added 88 utilities to its list of AMR customers, bringing the total number
of the Company's AMR customers to 269 utilities, including 20 utilities located
outside the United States. Fifty seven of Itron's 269 AMR customers have made a
sizable commitment to Itron AMR products by having each ordered and installed at
least 10,000 of the Company's meter modules as of December 31, 1996, for a
combined installation total of 8 million meter modules by these 57 customers.
The Company has installed the world's largest AMR system for Public
Service Company of Colorado ("PSCo"), with currently over one million meter
modules. This system is being read with Mobile AMR technology. The Company also
is in the process of installing what it believes is currently the world's
largest announced radio-based water AMR system with the city of Milwaukee. The
Company also is in the process of installing a radio-based commercial and
industrial AMR project with Energy Australia, that involves the installation of
3,000 end points and represents a significant entry by the Company into product
lines that serve this critical group of customers.
In addition, ten of the Company's AMR customers have pilot
installations of the Company's AMR Fixed Network system and, under the Duquesne
Contract, the Company is installing a Fixed Network system that, when fully
installed, will cover approximately 615,000 meters. See "Certain Risk Factors--
Dependence on the Installation, Operations and Maintenance of AMR Systems
Pursuant to Outsourcing Contracts."
SALES, DISTRIBUTION AND MARKETING
Itron utilizes a direct sales and technical support team to serve its
major accounts, with sales and technical support offices located in multiple
cities throughout the United States. For smaller utilities and municipalities in
North America, Itron conducts sales and support activities through numerous
distributors. As of January 31, 1997, the Company's North American direct sales
force was comprised of 20 account executives and three area vice presidents, who
are supported by three sales engineers. In addition, the Company's direct sales
force includes four individuals who are responsible for managing the Company's
relationships with its distributors. Outside North America, the Company
maintains direct sales organizations within subsidiary operations in the United
Kingdom, France and Australia. To reach the broader international market, the
Company conducts sales through distributors in approximately 45 other countries.
In addition to direct sales and sales through distributors, the Company
makes electric meter modules available to utilities through original equipment
manufacturer ("OEM") arrangements with several major electric meter
manufacturers, who incorporate the Company's meter modules at their own
facilities into new electric meters. The Company intends to enter into
additional OEM or other similar arrangements if it has attractive opportunities
to do so. Further, the Company has licensed certain aspects of its meter module
technology to Schlumberger Ltd. ("Schlumberger") and may enter into additional
licensing agreements with other meter manufacturers or other industry
participants in the future.
The Company also offers its products and services through long-term
outsourcing arrangements, which may include providing AMR products, system
installation, meter reading services and meter shop
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services for periods of 15 years or more. Outsourcing arrangements can be
structured in a variety of ways to address a utility's specific needs and range
from providing basic meter reading systems and services to providing systems and
services with advanced functionality. The Company offers these services to
utilities directly and through joint ventures with utilities and other industry
participants. To date, the Company has entered into three outsourcing
arrangements. See "Certain Risk Factors--Dependence on the Installation,
Operations and Maintenance of AMR Systems Pursuant to Outsourcing Contracts."
Key components of the Company's sales and marketing strategy are to
provide utilities with cost-benefit analyses of potential purchases of the
Company's products and to help utilities design a deployment strategy for the
Company's products that will optimize the benefits realized by the utility. See
"-- Itron's Strategies--Provide Cost-Effective Meter Reading Solutions." The
Company believes that the relatively short cost recovery period for deployment
of Off-Site and Mobile AMR systems, particularly on hard-to-read meters, makes
an investment in such technology an attractive solution for a utility's meter
reading needs, despite uncertainty caused by industry consolidation and
regulatory reform. The Company's marketing program also emphasizes the diversity
and flexibility of its product line and the Company's ability to offer total
product solutions to each of its utility customers.
The Company's other marketing efforts focus on product awareness
principally through trade shows, symposiums, published papers and direct mail.
These marketing efforts include brochures, newsletters, exhibits, conferences,
an annual user's forum, industry standards committee representation and
regulatory support. Several major industry conferences are keystones in the
Company's marketing program, including the Distribution Automation/Demand Side
Management Conference held every January, the Company's Annual Users Conference
held every June in conjunction with the National Meter Reading Association
meetings and the Automatic Meter Reading Association conference usually held in
September. The Company maintains communications with its customers through its
Users Advisory Board and its Fixed Network Advisory Group and a program of
regular mailings, newsletters and new customer announcements.
CUSTOMER SERVICE AND SUPPORT
Itron provides its utility customers with full implementation services,
including system design, installation, training and project management. Each of
these services is tailored to meet a particular utility's needs. For large-
scale AMR installations, Itron offers turn-key programs under which it is
responsible for installing meter modules and a communications network. Itron
also offers system maintenance and support services to each of its customers.
Service contract prices are based on a number of factors, including system size
and complexity and the expected degree of service support required. The
Company's system maintenance and support services include 24-hour, toll-free hot
line support, customer service representatives, consulting services, regional
training programs, equipment repair and preventative maintenance, software
support and maintenance, system troubleshooting and network management services.
COMPETITION
Although the Company is the industry leader in sales of AMR meter
modules and AMR systems and services to the utility industry, it faces
competitive pressures from a variety of companies in each of the markets it
serves. In the radio-based Fixed Network AMR market, for example, companies such
as CellNet Data Systems, Inc. ("CellNet") currently offer alternative solutions
to the utility industry and compete aggressively with the Company. The emerging
market for Fixed Network AMR systems for the utility industry, together with the
potential market for other applications once such Fixed Network systems are in
place, have led communications, electronics and utility companies to begin
developing various systems, some of which currently compete, and others of which
may in the future compete, with the Company's Fixed Network AMR system. These
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competitors can be expected to offer a variety of technologies and
communications approaches, as well as meter reading, installation and other
services to utilities and other industry participants.
The Company believes that several large suppliers of equipment,
services or technology to the utility industry have developed or are currently
developing competitive products for the AMR market. For example, Schlumberger
offers a competitive electric meter module for its newly manufactured meters and
has entered into a joint venture with Motorola, Inc. for AMR product
development. In addition, other large meter manufacturers could expand their
current product and services offerings so as to compete directly with the
Company. To stimulate demand, and due to increasing competition in the AMR
market, the Company has from time to time lowered prices on its AMR products and
may continue to do so in the future. The Company also anticipates increasing
competition with respect to the features and functions of such products. In the
handheld systems market, Itron has encountered competition from a number of
companies, resulting in margin pressures in the maturing domestic handheld
systems business.
The Company believes, however, that it enjoys several competitive
advantages in each of its markets. It has a substantially larger installed base
of handheld-based EMR systems and AMR meter modules than any of its competitors.
The Company's relatively large installed base of these systems gives it the
advantage of a proven record of providing cost-efficient, quality products and
services that enable utilities to migrate from a selective installation of AMR
solutions to a more comprehensive deployment of AMR. In addition, through these
installations, the Company has the proven ability to interface meter data with a
wide variety of utility host billing systems. The diversity of the Company's
product lines gives it the flexibility to provide comprehensive solutions to its
utility customers, and affords the Company the flexibility to respond to changes
in the utility industry and the regulatory environment. The Company believes
that it is able to price its products competitively as a result of its highly
automated manufacturing lines. In addition, the Company believes that its
nationwide license of 1-2 MHz of spectrum in the 1427-1429 MHz band gives it a
significant advantage over its current competitors in serving its current and
future customers. See "-- FCC Regulation."
Many of the Company's present and potential competitors have
substantially greater financial, marketing, technical and manufacturing
resources, name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products and services than the Company.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with third parties
that increase their ability to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and any failure to do so
would have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. See "Certain Risk
Factors--Competition."
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on further
expanding and upgrading its meter module and other product offerings for its AMR
systems and developing new hardware and software platforms for handheld systems.
The Company has product development facilities located in Spokane, Washington;
Lakeville and Waseca, Minnesota; Raleigh, North Carolina; and Saratoga,
California. It also conducts some development activities in each of its foreign
subsidiaries. The Company has maintained its leadership position in part because
of its commitment to new products and continued enhancement of existing
products. The Company spent approximately $33.3 million in 1996, $27.1 million
in 1995 and $18.1 million in 1994 on product development. Product development
expenses in 1995 and 1994 were net of capitalized software costs of $62,000 and
$3.1 million, respectively. The Company did not capitalize any software costs in
1996.
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The Company expects to continue to invest substantial amounts on new
product development for the foreseeable future as it continues to expand and
enhance its AMR and other product offerings. Utilizing its broad knowledge of
the utility industry and the regulatory environment, the Company prioritizes its
product development opportunities to attempt to satisfy current customer needs
on a timely basis. In the last two years, a significant portion of the Company's
product development expenditures has been for development of its Fixed Network
technology. The Company expects that the single largest category of its future
product development expenditures will be for the commercial delivery of advanced
functionalities for its Fixed Network.
The Company's future success will depend in part on its ability to
continue to design and manufacture new competitive products, as well as to
enhance its Fixed Network and other AMR products. There can be no assurance that
the Company will not experience unforeseen problems or delays with respect to
its product development efforts. Delays in the availability of new and enhanced
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Certain Risk
Factors--Dependence on New Product Development."
INTELLECTUAL PROPERTY
Itron owns or licenses numerous United States, Canadian and foreign
patents and has filed various patent applications. These patents cover a range
of technologies for meter reading, portable handheld computer and AMR-related
technologies. In September 1996, the U.S. Patent and Trademark Office issued to
the Company what the Company believes to be a very significant patent for
radio-based network AMR systems. On October 3, 1996, the Company brought an
action in the United States District Court for the District of Minnesota against
CellNet claiming infringement of this patent. The discovery phase of this
proceeding has commenced. See "-- Legal Proceedings." The Company also relies on
copyrights to protect its proprietary software and documentation. The Company
has registered trademarks for most of its major product lines in the United
States and many foreign countries.
While the Company believes that its patents, trademarks and other
intellectual property have significant value, there can be no assurance that
these patents or trademarks, or any patents or trademarks issued in the future,
will provide meaningful competitive advantages. The Company believes that its
continued success will be based on continued excellence and innovation of its
products, market knowledge, technical and marketing capabilities, existing
relationships with utilities and a fundamental commitment to customer service
excellence. See "Certain Risk Factors--Intellectual Property."
FCC REGULATION
Certain of the Company's products made for use in the United States use
radio frequencies, the access to and use of which are regulated by the FCC
pursuant to the Communications Act of 1934, as amended. In general, a radio
station license issued by the FCC is required in order to operate a radio
transmitter. The FCC issues these licenses for a fixed term, and the licenses
must be periodically renewed. Because of interference constraints, the FCC can
generally issue only a limited number of radio station licenses for a particular
frequency band in any one area.
Although radio licenses generally are required for radio stations, Part
15 of the FCC's rules permits certain low-power radio devices ("Part 15
devices") to operate on an unlicensed basis. Part 15 devices are designed to be
used in frequencies licensed to and used by others. Such licensed users have
preferential status within their respective frequencies. Part 15 devices are not
permitted to cause harmful interference with such preferred uses and must be
designed to accept interference from licensed radio devices. The Company's radio
meter modules transmit in the 910-920 MHz band pursuant to these rules.
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Itron's products are designed to eliminate virtually all interference
with other frequency uses, while still enabling a complete and accurate "read"
from its radio meter modules. However, if the Company were unable to eliminate
harmful interference caused by its Part 15 devices through technical or other
means, the Company or its customers could be required to cease operations in the
band in the locations affected by the harmful interference. Further, in the
event that the unlicensed frequencies used by the Company and its customers
become unacceptably crowded or restrictive, and no additional frequencies are
allocated, the Company's business could be materially adversely affected.
In late February 1997, the FCC adopted a Notice of Proposed Rulemaking
seeking comments concerning the rules for multiple address systems. The Company
uses licensed multiple address system frequencies to interrogate its meter
modules. The FCC is proposing to change the method for licensing some multiple
address system frequencies from individual site licenses to wide area licenses,
and to conduct auctions for mutually exclusive applications in some multiple
address frequency bands. The FCC has proposed to confine the use of the multiple
address frequencies used by the Company to "private" use, and has instituted a
freeze on accepting applications proposing to use the frequencies for nonprivate
operations. The freeze does not affect license applications for private
operations. Itron believes that its operations under outsourcing contracts
qualify it as a private operator. Although the Company's customers generally
hold the private operator licenses for the multiple address frequencies used in
connection with the Company's products that the utility purchases, in limited
instances the Company has applied to hold such licenses as a private carrier.
The FCC's freeze will prevent the Company from applying for additional private
carrier multiple address licenses while the FCC's rulemaking is pending. While
the Company does not believe that the proposed changes to the method of
licensing multiple address system frequencies will prevent it or its customers
from obtaining necessary licenses, there can be no assurance that the rule
changes will be adopted as proposed or that they will not have a material
adverse effect on the ability of the Company or its customers to timely receive
necessary licenses.
The Company also has been issued a renewable nationwide FCC license to
operate in the 1427-1429 MHz band. With the exception of meter modules which
operate in the 910-920 MHz band as described above, the Company's Fixed Network
products operate within this band. This frequency band currently is under the
exclusive control of the federal government, which has consented to the FCC's
issuance of a license for Itron's use of the band. Current government use of the
band is limited to a discrete number of well-defined locations, and the Company
believes the secondary nature of its license does not have a material impact on
its business.
The 1427-1429 MHz band is scheduled to be transferred from exclusive
federal government jurisdiction to the FCC in 1998. The FCC has agreed to permit
continued government use of the frequency through 2006, at which time the
frequency could be subject to auction. To date, however, the FCC's approach has
been to "grandfather" incumbent users and permit their continued operation, or,
alternatively, to provide a period for incumbents to transition to other
frequencies, with the auction winners having to compensate the incumbent users
for relocation expenses. However, there can be no assurance that the FCC will
follow precedent in this respect. The Company believes that it may have a
significant installed base of products operating in the 1427-1429 MHz band by
the time the band may become subject to auction. Consequently, the Company
believes that it would be difficult for any potential bidder to overcome the
public interest in the Company's continued use of the spectrum on behalf of
utilities and that it likely would be cost-prohibitive for any potential bidder
to provide compensation to the Company for relocation of the installed base.
Further, the Company believes that commercial demand for the 1427-1429 MHz band
is likely to be relatively low due to its proximity to a worldwide "exclusion
zone" of radio astronomy frequencies that may not be used for any commercial
purposes.
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The regulatory environment the Company operates in is subject to
change. There can be no assurance that the FCC or Congress will not take
regulatory actions in the future that would have a material adverse effect on
the Company. See "Certain Risk Factors--Availability and Regulation of Radio
Spectrum." The Company is also subject to regulatory requirements in
international markets. These regulations, which vary by country, require
modifications to the Company's products, including operating on different
frequencies with different power specifications.
MANUFACTURING
The Company manufactures meter modules, Fixed Network components and
other AMR products, as well as handheld computers and peripheral equipment. The
Company's primary manufacturing objective is to design and produce low-cost,
high-quality meter modules and other Fixed Network components utilizing
high-volume automation equipment. The Company's primary manufacturing facilities
are located in Spokane, Washington and Waseca, Minnesota. The Company currently
has the capacity to produce over 4.6 million meter modules annually on a
two-shift basis. With the addition of a third shift and certain ancillary
equipment, the Company has the capacity to produce 7.0 million meter modules
annually. Certain of the Company's handheld system products and international
meter module products are manufactured for the Company by third parties.
The Company's manufacturing operations are organized into three
business units: Endpoint and Mobile Systems Operations; Network Systems
Operations; and Handheld Operations. The Company recently combined its
engineering and manufacturing departments, permitting its engineering and
manufacturing staff to work more closely to enhance manufacturing efficiency and
develop lower-cost product solutions.
The Company's Waseca manufacturing facility produces all of the
Company's gas and water meter modules, data collection units used in Mobile AMR
and handheld meter module installation and programming devices. The Company's
Waseca operations are highly automated and designed for high-volume
manufacturing requirements. The key processes include a ceramic board processing
facility, automated surface mount placement equipment and both passive and
active laser tuning equipment. The Waseca operation also is responsible for all
of the Company's production of power supply subassemblies for electric meter
modules and Mobile AMR systems products.
The Company's Spokane manufacturing facility was designed for
manufacturing flexibility and automation, and is responsible for final assembly
related to electric meter modules and CCU production. The key processes include
automated surface mount placement equipment, laser tuning equipment and
automated test capabilities. The Spokane facility is also responsible for
manufacturing handheld systems and peripheral equipment, as well as other
lower-volume AMR products, and is the primary repair facility for Itron's
handheld systems products. In the first half of 1996, the Company expanded its
manufacturing capacity in Spokane through the installation of high-speed
automation and test equipment in order to support the anticipated growth in
meter module and CCU production. Because this anticipated growth did not
materialize, the Company currently has excess manufacturing capacity which has
resulted in an increase in cost of sales per unit.
The Company has installed extensive automated testing equipment in both
its manufacturing facilities to ensure quality control and process
repeatability. The Company's testing includes both visual inspection and
automated testing of technical parameters established for each of its products.
The Company's quality control equipment also includes a sophisticated
information system that collects data from its testing equipment and provides
extensive reports and analyses of such data. This information system permits the
Company to promptly identify potential problems or weaknesses in its
manufacturing processes. The Company has been ISO 9000 certified since 1993 and
received ISO 9002 recertification of
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its Spokane facility in April 1996 and expects to receive ISO 9002 certification
of its Waseca facility by 1998.
INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS
The Company does not have any reportable industry segments other than
foreign and domestic operations. Although the Company has two distinct product
lines, AMR and Off-Site systems, they are not considered industry segments as
there is commonality in all expenses associated with these product lines.
Itron's foreign operations consist of three fully consolidated subsidiaries as
well as international distributors. Subsidiary operations are located near
Reading, England; Lyon, France; and Sydney, Australia. These offices are
responsible for all utility sales and customer support within their respective
countries. To reach the broader international market, the Company conducts sales
through distributors appointed in approximately 45 other countries. See Note 12
of Notes to Consolidated Financial Statements.
BACKLOG OF ORDERS AND INVENTORY
The backlog of unshipped factory orders at the end of 1996 and 1995 was
approximately $72.8 million and $71.9 million, respectively. The Company expects
that all the orders in backlog at the end of 1996 will be shipped during 1997.
In addition, the Company has multi-year contracts to supply radio meter modules
and/or for outsourcing arrangements with several customers. The value of these
contracts not included in the above backlog figures was $240.3 million and $66.8
million at December 31, 1996 and 1995, respectively. Inventories at December 31,
1996 and 1995 were $33.4 million and $18.1 million, respectively.
ENVIRONMENTAL REGULATIONS
Compliance with environmental regulations has not had a material
effect on the Company's capital expenditures, earnings or competitive position.
EMPLOYEES
As of December 31, 1996, the Company employed 1,006 full-time persons;
394 in manufacturing, 244 in product development, 189 in sales and marketing, 83
in customer service and support and 96 in finance and administration. Of these
employees, 48 were located in Europe, 30 in Australia and the remainder in the
United States. The Company continues to recruit and seeks to maintain highly
qualified management, marketing, technical and administrative personnel. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its employee relations to be good.
OTHER
Itron does not have any contracts with the federal government. The
Company's business is not significantly seasonal.
CERTAIN RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking
statements. These forward-looking statements reflect management's best judgment
based on factors known to them at the time of such statements, but are subject
to a variety of risks and uncertainties, including, without limitation, those
set forth below, many of which are beyond the Company's control, that could
cause actual results to differ materially from those anticipated. The factors
set forth below should be carefully considered when evaluating the Company's
business and prospects and the forward-looking information provided by Itron
pursuant to the safe harbor provisions established by recent securities
legislation. See "--Certain Forward-Looking Statements."
Dependence on Utility Industry; Uncertainty Resulting From Mergers and
Acquisitions and Regulatory Reform. The Company derives substantially all of its
revenues from sales of its products and services to the utility industry. 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 as a result of mergers and acquisitions in the utility
industry and changes or potential changes to the federal and state regulatory
frameworks within which the electric utility industry operates.
The utility industry, both domestic and foreign, is generally
characterized by long budgeting, purchasing and regulatory process cycles that
can take up to several years to complete. The Company's utility customers
typically issue requests for quotes and proposals, establish committees to
evaluate the purchase, review different technical options with vendors, analyze
performance and cost/benefit justifications and perform a regulatory review, in
addition to applying the normal budget approval process within a utility.
Purchases of the Company's products are, to a substantial extent, deferable in
the event that utilities reduce capital expenditures as a result of mergers and
acquisitions, pending or unfavorable regulatory decisions, poor revenues due to
weather conditions, rising interest rates or general economic downturns, among
other factors.
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The domestic electric utility industry is currently the focus of
regulatory reform initiatives in virtually every state, which initiatives have
resulted in significant uncertainty for industry participants and raised
concerns regarding assets that would not be considered for recovery through
ratepayer charges. Consequently, many utilities are delaying purchasing
decisions that involve significant capital commitments. While the Company
expects some states will act on these regulatory reform initiatives in the near
term, there can be no assurance that the current regulatory uncertainty will be
resolved in the near future or that the advent of new regulatory frameworks will
not have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, in part as a result of the
competitive pressures in the utility industry arising from the regulatory reform
process, many utility companies are pursuing merger and acquisition strategies.
The Company has experienced considerable delays in purchase decisions by
utilities that have become parties to merger or acquisition transactions.
Typically, such purchase decisions are put on hold indefinitely when merger
negotiations begin. The pattern of merger and acquisition activity among
utilities may continue for the foreseeable future. If such merger and
acquisition activity continues at its current rate or intensifies, the Company's
revenues may continue to be materially adversely affected.
Certain state regulatory agencies are considering the "unbundling" of
metering and certain other services from the basic transport aspects of the
electricity distribution function. Unbundling includes the identification of the
separate costs of metering and other services and may extend to subjecting
metering and other services to competition. For example, the California Public
Utilities Commission (the "CPUC") issued a draft opinion regarding the
unbundling of metering, billing and related services. The discontinuance of a
utility's metering monopoly could have a significant impact upon the manner in
which the Company markets and sells its products and services. As the customer
for the Company's products and services would change from utilities alone, to
utilities and their competitive suppliers of metering services, the Company
could also be required to modify its products and services (or develop new
products and services) to meet the needs of the participants in a competitive
meter services market.
Recent Operating Losses. The Company experienced operating losses in
each of the past two quarters and expects to experience similar financial
results in the first two quarters of 1997. There can be no assurance that the
Company will thereafter achieve or maintain consistent profitability on a
quarterly or annual basis. The Company has experienced variability of quarterly
results and believes its quarterly results will continue to fluctuate as a
result of factors such as size and timing of significant customer orders, delays
in customer purchasing decisions, timing and levels of operating expenses,
shifts in product or sales channel mix, and increased competition. Beginning in
1996, the Company increased its rate of spending on its Fixed Network AMR
operations, which has left the Company subject to net operating losses caused by
fluctuations in revenues. Recently, the Company's operating margins have been
adversely affected by excess manufacturing capacity. The Company expects
competition in the AMR market to increase as current competitors and new market
entrants introduce competitive products. Operating margins also may be affected
by other factors.
Customer Concentration. The Company's revenues in any particular year
tend to be concentrated with a limited number of customers, the identity of
which changes from year to year. In 1996, the Company had ten multi-year AMR
contracts (excluding outsourcing contracts), which accounted for 44% of AMR
revenues, or 33% of total Company revenues. One of these contracts was with
Public Service Company of Colorado, and accounted for 22% of the Company's
revenues in 1996. These contracts are subject to cancellation or rescheduling by
customers. Cancellation or postponement of one or more of these contracts would
have a material adverse effect on the Company. For example, beginning in the
third quarter of 1996, the Company's revenues were adversely affected by an
indefinite delay by a large customer in taking delivery of the Company's
products pursuant to a multi-year contract. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and "Description of Business--Customers."
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Volatility of Share Price. The price of the Common Stock has traded in
the range of $14.50 to $60.00 per share since January 1, 1996. The price of the
Common Stock could continue to fluctuate significantly as a result of factors
such as the Company's quarterly operating results, announcements by the Company
or its competitors, changes in general conditions in the economy, the
introduction of new products or technology, changes in earnings estimates by
analysts or changes in the financial markets or the utility industry. In
addition, in future quarters the Company's results of operations may be below
the expectations of equity research analysts and investors, in which event the
price of the Common Stock would likely be materially adversely affected.
Further, in recent years the stock market has experienced significant price and
volume fluctuations. These broad market fluctuations may materially adversely
affect the market price of the Common Stock. See "Market for Registrant's
Common Equity and Related Stockholder Matters."
Dependence on New Product Development. The Company has made and expects
to continue to make a substantial investment in technology development. The
Company's future success will depend in part on its ability to continue to
design and manufacture new competitive products and to enhance its existing
products and achieve large-scale implementation for its Fixed Network AMR
products. This product development will require continued substantial investment
in order to maintain the Company's market position. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Business--Product Development." There can be no assurance that unforeseen
problems will not occur with respect to the development, performance or market
acceptance of the Company's technologies or products. Development schedules for
high-technology products are subject to uncertainty, and there can be no
assurance that the Company will meet its product development schedules. During
1996, and in previous years, the Company has experienced significant delays and
cost overruns in the development of new products, and there can be no assurance
that delays or cost overruns will not be experienced in the future. Delays in
new product development, including software, can result from a number of causes,
including changes in product definition during the development stage, changes in
customer requirements, initial failures of products or unexpected behavior of
products under certain conditions, failure of third-party supplied components to
meet specifications or lack of availability of such components, unplanned
interruptions caused by problems with existing products that can result in
reassignment of product development resources, and other factors. Delays in the
availability of new products or the inability to develop successfully products
that meet customer needs could result in the loss of revenue or increased
service and warranty costs, any of which would have a material adverse effect on
the Company's business, financial condition and results of operations.
Dependence on the Installation, Operations and Maintenance of AMR
Systems Pursuant to Outsourcing Contracts. A portion of the Company's business
consists of outsourcing, wherein the Company installs, operates and maintains
AMR systems that it continues to own in order to provide meter reading and other
related services to utilities and their customers. The Company's long-term
outsourcing contracts are subject to cancellation or termination in certain
circumstances in the event of a material and continuing failure on the Company's
part to meet contractual performance standards on a consistent basis over agreed
time periods. The Company currently has three outsourcing contracts. The largest
of the contracts, which is with Duquesne, involves Fixed Network AMR; the other
two utilize a Mobile AMR solution.
The Duquesne Fixed Network AMR system is at this time only partially
installed. Of a total of approximately 615,000 meter modules to be installed,
approximately 240,000 were installed as of February 24, 1997. With respect to
the Mobile AMR outsourcing contracts, installation of meter modules has been
completed under one contract and has just commenced under the other contract.
There can be no assurance that the Company will complete current installation
requirements under the Duquesne Contract, the uncompleted Mobile AMR contract
and any future outsourcing contracts.
Page 18
21
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. While the Company is currently providing daily consumption
meter data and tamper alarm capabilities for approximately 5,000 meters in
Duquesne's service territory using its Fixed Network products, and has
demonstrated additional advanced metering functions required under the Duquesne
Contract, these additional functions are in a late development stage. While the
Company believes that the next version of its Fixed Network AMR software will
provide remaining advanced functions on a basis acceptable to Duquesne, and that
it will complete the development of requisite capabilities to complete the
installation of the AMR system specified in the Duquesne Contract in all
material respects, there can be no assurance that it will be able to do so.
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 agreed to in
writing as contract amendments. Meter modules beyond the 5,000 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.
Given the large investment already made by the Company in meter modules and
network equipment now installed at Duquesne, and the amount of revenues expected
under the contract over its 15-year term, which is approximately $150 million,
the Company's financial condition would be materially adversely affected if
Duquesne were to terminate the Duquesne Contract.
Increasing Competition. The Company faces competitive pressures from a
variety of companies in each of the markets it serves. In the radio-based fixed
network AMR market, companies such as CellNet currently offer alternative
solutions to the utility industry and compete aggressively with the Company. The
emerging market for fixed network AMR systems for the utility industry, together
with the potential market for other applications once such fixed network systems
are in place, have led communications, electronics and utility companies to
begin developing various systems, some of which currently compete, and others of
which may in the future compete, with the Company's Fixed Network AMR system.
These competitors can be expected to offer a variety of technologies and
communications approaches, as well as meter reading, installation and other
services to utilities and other industry participants.
The Company believes that several large suppliers of equipment,
services or technology to the utility industry have developed or are currently
developing competitive products for the AMR market. For example, Schlumberger
offers a competitive electric meter module for its newly manufactured meters and
has entered into a joint venture with Motorola, Inc. for AMR product
development. In addition, other large meter manufacturers could expand their
current product and services offerings so as to compete directly with the
Company. To stimulate demand, and due to increasing competition in the AMR
market, the Company has from time to time lowered prices on its AMR products and
may continue to do so in the future. The Company also anticipates increasing
competition with respect to the features and functions of such products. In the
handheld systems market, Itron has encountered competition from a number of
companies, resulting in margin pressures in the maturing domestic handheld
systems business.
Many of the Company's present and potential future competitors have
substantially greater financial, marketing, technical and manufacturing
resources, name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products and services than the Company.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with third parties
that increase their ability to address the needs of the Company's prospective
customers.
Page 19
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Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors, and any failure to do so would have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flow. See "Description of Business--Competition."
Uncertainty of Market Acceptance of New Technology. The AMR market is
evolving, and it is difficult to predict the future growth rate and size of this
market with any assurance. The AMR market did not grow as quickly in 1996 as the
Company expected. Further market acceptance of the Company's new AMR products
and systems, such as its Fixed Network products, will depend in part on the
Company's ability to demonstrate cost effectiveness, and strategic and other
benefits, of the Company's products and systems, the utilities' ability to
justify such expenditures and the direction and pace of federal and state
regulatory reform actions. In the event that the utility industry does not adopt
the Company's technology or does not adopt it as quickly as the Company expects,
the Company's future results will be materially and adversely affected.
International market demand for AMR systems varies by country based on such
factors as the regulatory and business environment, labor costs and other
economic conditions. See "Description of Business--Sales, Distribution and
Marketing."
Rapid Technological Change. The telecommunications industry, including
the data transmission segment thereof, currently is experiencing rapid and
dramatic technology advances. The advent of computer-linked electronic networks,
fiber optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, and private communications networks have
greatly expanded communications capabilities and market opportunities. Many
companies from diverse industries are actively seeking solutions for the
transmission of data over traditional communications media, including
radio-based and cellular telephone networks. Competitors may be capable of
offering significant cost savings or other benefits to the Company's customers.
There can be no assurance that technological advances will not cause the
Company's technology to become obsolete or uneconomical.
Availability and Regulation of Radio Spectrum. A significant portion of
the Company's products use radio spectrum and in the United States are subject
to regulation by the FCC. In the past, the FCC has adopted changes to the
requirements for equipment using radio spectrum, and there can be no assurance
that the FCC or Congress will not adopt additional changes in the future.
Licenses for radio frequencies must be renewed, and there can be no assurance
that any license granted to the Company or its customers will be renewed on
acceptable terms, if at all. The Company has committed, and will continue to
commit, significant resources to the development of products that use particular
radio frequencies. Action by the FCC could require modifications to the
Company's products, and there can be no assurance that the Company would be able
to modify its products to meet such requirements, that it would not experience
delays in completing such modifications or that the cost of such modifications
would not have a material adverse effect on the Company's future financial
condition and results of operations.
The Company's radio-based products currently employ both licensed and
unlicensed radio frequencies. There must be sufficient radio spectrum allocated
by the FCC for the use the Company intends. As to the licensed frequencies,
there is some risk that there may be insufficient available frequencies in some
markets to sustain the Company's planned operations. The unlicensed frequencies
are available for a wide variety of uses and are not entitled to protection from
interference by other users. In the event that the unlicensed frequencies become
unacceptably crowded or restrictive, and no additional frequencies are
allocated, the Company's business will be materially adversely affected. See
"Description of Business--FCC Regulation."
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The Company is also subject to regulatory requirements in international
markets that vary by country. To the extent the Company wishes to introduce
products designed for use in the United States or another country into a new
market, such products may require significant modification or redesign in order
to meet frequency requirements and power specifications. Further, in some
countries, limitations on frequency availability or the cost of making necessary
modifications may preclude the Company from selling its products.
Dependence on Key Personnel. The Company's success depends in large
part upon its ability to retain highly qualified technical and management
personnel, the loss of one or more of whom could have a material adverse effect
on the Company's business. The Company's success also depends upon its ability
to continue to attract and retain highly qualified personnel in all disciplines.
There can be no assurance that the Company will be successful in hiring or
retaining the requisite personnel. See "Executive Officers of the Registrant."
Intellectual Property. While the Company believes that its patents,
trademarks and other intellectual property have significant value, there can be
no assurance that these patents and trademarks, or any patents or trademarks
issued in the future, will provide meaningful competitive advantages. There can
be no assurance that the Company's patents or pending applications will not be
challenged, invalidated or circumvented by competitors or that rights granted
thereunder will provide meaningful proprietary protection. Despite the Company's
efforts to safeguard and maintain its proprietary rights, there can also be no
assurance that such rights will remain protected or that the Company's
competitors will not independently develop patentable technologies that are
substantially equivalent or superior to the Company's technologies. See
"Description of Business--Intellectual Property." On October 3, 1996, the
Company brought an action in the United Stated District Court for the District
of Minnesota against CellNet claiming infringement of one of Itron's patents.
That action is pending, and the discovery phase thereof has commenced. There can
be no assurance that the Company will prevail in such action or, even if it
prevails, that the legal costs incurred by the Company in connection with such
action will not have a material adverse effect on the Company's financial
condition or results of operations. See "Legal Proceedings."
Dependence on Key Vendors and Internal Manufacturing Capabilities.
Certain of the Company's products, subassemblies and components are procured
from a single source, and others are procured only from limited sources. In
particular, the Company currently obtains approximately 50% of its handheld
devices from one vendor located in the United Kingdom and obtains all the
microcontrollers for its AMR meter modules from a single source, National
Semiconductor. The Company's reliance on such components or on these sole- or
limited-source vendors or subcontractors involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and costs. In addition, Itron may be affected
by worldwide shortages of certain components, such as memory chips. A
significant price increase in certain of such components or subassemblies could
have a material adverse effect on the Company's results of operations. Although
the Company believes alternative suppliers of these products, subassemblies and
components are available, in the event of supply problems from the Company's
sole- or limited-source vendors or subcontractors, the Company's inability to
develop alternative sources of supply quickly or cost-effectively could
materially impair the Company's ability to manufacture its products and,
therefore, could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event of a significant
interruption in production at the Company's manufacturing facilities,
considerable time and effort could be required to establish an alternative
production line. Depending on which production line were affected, such a break
in production would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and "Description of Business--Manufacturing."
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Dependence on Outsourcing Financing. The Company intends to utilize
limited recourse, long-term, fixed rate project financing for its future
outsourcing contracts. It has established Itron Finance, Inc. as a wholly owned
Delaware subsidiary and plans to establish bankruptcy remote, single and special
purpose subsidiaries of Itron Finance, Inc. for this purpose. Although the
Company has entered into a letter of intent and is in the process of negotiating
definitive documents for what it believes to be the first AMR project financing,
there can be no assurance that the Company will indeed close such financing or
that it will be able to effect other project financings. If the Company is
unable to utilize limited resource, long-term, fixed rate project financing for
its outsourcing contracts, its borrowing capacity will be reduced and it may be
subject to the negative effects of floating interest rates if it cannot hedge
this exposure.
International Operations. International sales and operations may be
subject to risks such as the imposition of government controls, political
instability, export license requirements, restrictions on the export of critical
technology, currency exchange rate fluctuations, generally longer receivables
collection periods, trade restrictions, changes in tariffs, difficulties in
staffing and managing international operations, potential insolvency of
international dealers and difficulty in collecting accounts receivable. In
addition, the laws of certain countries do not protect the Company's products to
the same extent as do the laws of the United States. There can be no assurance
that these factors will not have a material adverse effect on the Company's
future international sales and, consequently, on the Company's business,
financial condition and results of operations. See "Description of
Business--Sales, Distribution and Marketing."
Control by Existing Shareholders and Antitakeover Considerations.
Current executive officers and directors and their affiliates own or control in
the aggregate approximately 20% of the outstanding Common Stock. As a result of
such ownership, such persons may have significant influence over all matters
requiring approval by the Company's shareholders, including the election of the
Company's Board of Directors. The Company has the authority to issue 10 million
shares of preferred stock in one or more series and to fix the powers,
designations, preferences and relative, participating, optional or other rights
thereof without any further vote or action by the Company's shareholders. The
issuance of preferred stock could dilute the voting power of holders of Common
Stock and could have the effect of delaying or preventing a change in control of
the Company. Certain provisions of the Company's Restated Articles of
Incorporation, Restated Bylaws, shareholder rights plan and employee benefit
plans, as well as Washington law, may operate in a manner that could discourage
or render more difficult a takeover of the Company or the removal of management
or may limit the price certain investors may be willing to pay in the future for
shares of Common Stock.
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ITEM 1a: EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with Itron, and principal
occupations and employment for the last five years of the persons serving as
executive officers of Itron as of March 1, 1997.
NAME AGE POSITION
---- --- --------
Johnny M. Humphreys 59 President, Chief Executive Officer
and Director
Carl Robert Aron 53 Executive Vice President and Chief
Operating Officer
Stuart Edward White 46 President, Utility Translation
Systems, Inc. and Director
Richard G. Geiger 47 Senior Vice President, Chief
Technical Officer
Klaus O. Huschke 63 Senior Vice President, International
Robert D. Neilson 40 Senior Vice President, Strategy and
Business Development
Michael J. O'Callaghan 57 Senior Vice President, Services
Larry A. Panattoni 58 Senior Vice President, Manufacturing
David G. Remington 55 Vice President and Chief Financial
Officer
Russell E. Vanos 40 Vice President, Sales
LeRoy D. Nosbaum 50 Vice President, Marketing
Johnny M. Humphreys has been President, Chief Executive Officer and a
director of Itron since 1987. From 1975 to 1986, Mr. Humphreys was employed by
Datachecker Systems, Inc. ("Datachecker"), a subsidiary of National
Semiconductor Corporation ("NSC"), in various executive positions, including
President from 1980 to 1986. In 1986, Mr. Humphreys was appointed Senior Vice
President of NSC's Information Systems Group and was responsible for strategic
planning for three operating divisions, National Advanced Systems, Microcomputer
Products Group and Datachecker.
Carl Robert Aron has been Executive Vice President and Chief Operating
Officer of Itron since November 1995. Prior to joining Itron, Mr. Aron had been
employed by EDS Management Consulting Services as the National Director of its
Wireless Consulting Practice and its Utilities Telecommunications Practice since
1994. From 1981 to 1994, Mr. Aron was Chief Executive Officer of RAM
Broadcasting Corporation, a provider of mobile communications services. From
1967 to 1990, Mr. Aron was an attorney with the law firm of Rubin Baum Levin
Constant & Friedman.
Stuart Edward White joined Itron as President of Utility Translation
Systems, Inc. in March 1996, when Itron acquired UTS. Mr. White has been a
director of the Company since 1996. Mr. White has been President of UTS since
its inception in 1980. Prior to founding UTS, Mr. White held numerous
engineering and marketing management positions with Westinghouse Electric
Corporation, Meter Division, for 13 years.
Richard G. Geiger was promoted to Senior Vice President and Chief
Technology Officer of Itron in January 1996. Previously, Mr. Geiger had been
Vice President, Product Development of Itron since 1993. From 1989 to 1992, Mr.
Geiger was Vice President and General Manager of AMRplus Partners. From 1986 to
1989, Mr. Geiger was President of Mitsumi Technology, Inc., a research and
development subsidiary of Mitsumi Company Limited, a developer of new
electronics products. From 1984 to 1986, Mr. Geiger was Vice President and
General Manager of Commodore Amiga, prior to which he spent four years with
Apple Computer, Inc. as Manager of Advanced Development and four years with
Digital Equipment Corporation.
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26
Klaus O. Huschke was promoted to Senior Vice President, International
of Itron in January 1996. Previously, Mr. Huschke had been Vice President,
International of Itron since 1987. From 1982 to 1987, Mr. Huschke was Vice
President, International Operations at Datachecker. Prior to joining
Datachecker, he spent 21 years in a variety of sales and management positions
with Anker Data Systems Corporation, a German point-of-sale manufacturer, in its
German, Italian and American headquarters.
Robert D. Neilson was promoted to Senior Vice President, Strategy and
Business Development of Itron in January 1996. Previously, Mr. Neilson had been
Vice President, Marketing since 1993. Mr. Neilson joined Itron in 1983 as
manager of market development and planning, and served as Director of Marketing
from 1987 to 1993. As Director of Marketing, Mr. Neilson's responsibilities
included marketing for AMRplus Partners.
Michael J. O'Callaghan was promoted to Senior Vice President, Service
of Itron in July 1995. Mr. O'Callaghan joined Itron in 1987 as Vice President,
Utility Systems. Before joining Itron, Mr. O'Callaghan was Vice President, Sales
of NSC's microcomputer division. Prior to joining NSC, he was Vice President,
Sales of Byvideo, Inc., a manufacturer of computer-based video kiosks for remote
purchases. Prior to joining Byvideo, Inc., he was Vice President, Sales and
Marketing of Onyx Systems, Inc., a manufacturer of UNIX-based microcomputers,
for three years and was with NSC for nine years in various sales and marketing
management positions.
Larry A. Panattoni was promoted to Senior Vice President, Manufacturing
of Itron in January 1996. Mr. Panattoni joined Itron in 1990 as Vice President,
Manufacturing. He previously spent 21 years in financial and operation
management positions of increasing responsibility with NSC, most recently as
Vice President of Administration. He was also Vice President of Manufacturing
Operations and Administration, and Vice President of Finance and Administration
with Datachecker.
David G. Remington joined Itron in early 1996 as Vice President and
Chief Financial Officer. Before joining Itron, Mr. Remington was a Managing
Director of Dean Witter Reynolds Inc. or Dean Witter Realty Inc. from 1988 to
1996. Previously, he spent 17 years with three financial services firms and a
high technology firm. Immediately prior to Dean Witter Reynolds, he was Vice
President-Finance and later President of Steiner Financial Corporation.
Russell E. Vanos has been Vice President, Sales of Itron since July
1995. Previously, Mr. Vanos had been the Western area sales director for Itron
since 1988. Mr. Vanos joined Itron in 1980 as a field service representative
installing the first generation of Itron EMR systems, and has served in numerous
management positions with implementation, customer service and sales
responsibilities.
LeRoy D. Nosbaum joined the Company as a Vice President in March 1996
and was named Vice President, Marketing in October 1996. Before joining Itron,
Mr. Nosbaum was Executive Vice President and General Manager of Metricom, Inc.'s
UtiliNet Division, and has held a variety of positions with Metricom since 1989.
Prior to joining Metricom, Mr. Nosbaum was employed by Schlumberger Ltd. and
Sangamo Electric for 20 years, most recently as General Manager of the
Integrated Metering Systems Division of Electricity Management--North America,
an operating group of Schlumberger.
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ITEM 2: PROPERTIES
The Company's headquarters are located in approximately 137,000 square
feet of owned space in Spokane, Washington, including 60,000 square feet of
manufacturing space. The Company also owns a building adjacent to its Spokane
facility with approximately 28,000 square feet of manufacturing and engineering
space. In Raleigh, North Carolina, the Company owns approximately 24,000 square
feet used for all activities related to its UTS subsidiary. In Waseca,
Minnesota, the Company leases 70,000 square feet of manufacturing and
engineering space. The Company also has facilities in Saratoga, California;
Lakeville, Minnesota; and Clearwater, Florida with approximately 80,000 square
feet of total leased space. These facilities are used primarily for product
development. The Company expects to consolidate its Clearwater operations with
its operations in other locations and to close that facility in the second
quarter of 1997. Additionally, the Company leases sales offices in the United
Kingdom, France and Australia and in various cities throughout the United
States. The Company's 1997 aggregate domestic and international base monthly
lease obligation is approximately $156,000. All the above facilities are in good
condition and the Company believes that its current manufacturing and other
properties will be sufficient to support its operations for the foreseeable
future.
ITEM 3: LEGAL PROCEEDINGS
On October 3, 1996, Itron filed a patent infringement suit against
CellNet in the United States District Court for the District of Minnesota,
claiming that CellNet is infringing on the Company's United States Patent No.
5,553,094, entitled "Radio Communication Network for Remote Data Generating
Stations," issued on September 3, 1996. The Company is seeking injunctive relief
as well as monetary damages, costs and attorneys' fees. CellNet filed a motion
for a change of venue of the suit to the Northern District of California, which
was denied in January 1997. The discovery phase of this lawsuit has commenced.
There can be no assurance that the Company will prevail in this action or, even
if it does prevail, that the legal costs incurred by the Company in connection
therewith will not have a material adverse effect on the Company's financial
condition. See "Certain Risk Factors--Intellectual Property."
The Company is not involved in any other material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Itron during the
fourth quarter of fiscal 1996.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Itron's Common Stock is traded on the Nasdaq National Market. The
following table reflects the range of high and low closing sales prices for all
four quarters of 1996 and 1995 as reported by the Nasdaq National Market.
1996 1995
-------------------------------------------
HIGH LOW HIGH LOW
First Quarter $51.50 $29.50 $27.25 $18.00
Second Quarter $60.00 $27.75 $33.50 $22.50
Third Quarter $36.75 $19.75 $33.50 $20.75
Fourth Quarter $26.00 $14.50 $34.50 $23.50
HOLDERS
At January 31, 1997, there were approximately 10,700 holders of record
of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid cash dividends. The Company
intends to retain future earnings, if any, for the development of its business
and does not anticipate paying cash dividends in the foreseeable future. Prior
to the merger with the Company, UTS paid dividends of $1,607,000, $1,650,000
and $200,000 in the years ended December 31, 1994, 1995 and 1996, respectively.
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ITEM 6: SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA
Revenues
AMR systems $ 132,500 $ 100,383 $ 65,009 $ 43,679 $ 32,531
Handheld systems 45,084 60,952 60,905 49,021 38,221
--------- --------- --------- --------- ---------
Total revenues 177,584 161,335 125,914 92,700 70,752
Cost of Revenues 104,708 89,596 69,481 49,527 37,165
--------- --------- --------- --------- ---------
Gross profit 72,876 71,739 56,433 43,173 33,587
Operating expenses
Sales and marketing 28,847 20,054 17,159 13,353 11,547
Product development 33,285 27,080 18,071 12,619 10,018
General and administrative 10,970 7,589 5,727 5,260 4,793
Amortization of intangibles 1,542 2,336 2,266 2,240 855
--------- --------- --------- --------- ---------
Total operating expenses 74,644 57,059 43,223 33,472 27,213
--------- --------- --------- --------- ---------
Operating income (loss) (1,768) 14,680 13,210 9,701 6,374
Equity in affiliates, interest & other (366) 1,721 983 (555) (4,302)
Income tax (provision) benefit 670 (5,250) (3,930) (3,110) (815)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (1,464) 11,151 10,263 6,036 1,257
Loss from discontinued operations
and effect of accounting change, net - - - - (1,408)
--------- --------- --------- --------- ---------
Net income (loss) $ (1,464) $ 11,151 $ 10,263 $ 6,036 $ (151)
========= ========= ========= ========= =========
PER SHARE DATA
Income (loss) from continuing operations $ (.11) $ .81 $ .80 $ .59 $ .13
Loss from discontinued operations and
effect of accounting change, net (.15)
Net income (loss) $ (.11) $ .81 $ .80 $ .59 $ (.02)
Weighted average shares outstanding 13,297 13,775 12,851 10,234 9,464
BALANCE SHEET DATA
Working capital $ 26,239 $ 64,536 $ 63,357 $ 43,784 $ 4,813
Total assets 187,421 149,718 122,333 102,076 66,068
Total debt 39,591 5,668 391 1,284 11,446
Shareholders' equity 114,222 111,273 97,477 73,735 37,242
All amounts have been restated to give effect to a pooling of interests
consummated in March 1996. See Note 6 of Notes to Consolidated Financial
Statements.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Information" and the Company's
Consolidated Financial Statements and Notes thereto.
OVERVIEW
Itron is a leading global provider to the utility industry of data
acquisition and wireless communications solutions for collecting, communicating
and analyzing electric, gas and water usage. The Company designs, develops,
manufactures, markets, installs and services hardware, software and integrated
systems for utilities to obtain, analyze and use meter information. The
Company's product lines include AMR systems, EMR systems, and specialized
software applications. The Company both sells its products and provides
outsourcing services.
The Company's AMR solutions involve the use of radio and, in some
instances, telephone technology, to collect meter data. The Company's
radio-based AMR solutions include Off-Site AMR, Mobile AMR and Fixed Network AMR
technology reading options. Off-Site AMR utilizes a radio device attached to an
Itron handheld computer that interrogates meters equipped with radio meter
modules from up to 800 feet away. Mobile AMR uses a transceiver mounted in a
vehicle to collect data from meters equipped with radio meter modules. Fixed
Network AMR collects and transmits meter information via radio components that
are mounted in a variety of fixed locations. Outsourcing services encompass the
installation, operation and maintenance of an AMR system to provide meter
information to a utility for billing and management purposes. Outsourcing
contracts typically cover long timeframes, such as 15 years. The Company
recognizes revenues and expenses relating to outsourcing contracts using
long-term contract accounting. The Company's Off-Site AMR systems product line
includes ruggedized handheld computers to record visually obtained meter data,
and supporting products and services.
In March 1996, the Company merged with UTS, the leading provider in the
United States of software systems for metering data acquisition and analysis for
the large commercial and industrial customers of electric and gas utilities. The
merger has been accounted for as a pooling of interests, and all prior period
amounts have been restated to give effect to the combined financial position and
operating results of Itron and UTS.
The Company derives substantially all of its revenues from sales of its
products and services to the utility industry. 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 as
a result of mergers and acquisitions in the utility industry and changes or
potential changes to the federal and state regulatory frameworks within which
the electric utility industry operates.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of revenues, and the year-to-year
percentage change.
PERCENTAGE OF TOTAL REVENUES
---------------------------- PERCENTAGE CHANGE
YEAR ENDED DECEMBER 31, -----------------
---------------------------- 1995 1996
1994 1995 1996 OVER 1994 OVER 1995
--------- ------ -------- --------- ---------
Revenues:
AMR systems ............... 52% 62% 75% 54% 32%
Handheld systems .......... 48% 38% 25% 0% (26)
--- --- ---
Total revenues .......... 100% 100% 100% 28% 10%
Gross profit ................. 45% 44% 41% 27% 2%
Operating expenses:
Sales and marketing ....... 14% 12% 16% 17% 44%
Product development ....... 14% 17% 19% 50% 23%
General and administrative 4% 5% 6% 33% 45%
Amortization of intangibles 2% 1% 1% 3% (34)
--- --- ---
Total operating expenses 34% 35% 42% 32% 31%
Operating income ............. 11% 9% (1) 11 (112)
Revenues. Total revenues increased $16.2 million, or 10%, to $177.6
million in 1996 compared to $161.3 million in 1995. AMR systems revenues
increased $32.1 million, or 32%, in 1996 over the prior year due to higher
shipped volumes of AMR meter modules. The increased shipped volume resulted from
the addition of 88 new AMR customers in 1996, as well as accelerated
installation schedules for a significant customer, PSCo. PSCo accounted for 30%
of AMR revenues (or 22% of total revenues) in 1996 compared to 22% of AMR
revenues (or 14% of total revenues) in 1995. Excluding shipments for outsourcing
contracts, the Company shipped 2.1 million AMR meter modules in 1996 compared to
1.5 million the previous year. Average selling prices in 1996 for AMR meter
modules declined from 1995 due to changes in product mix, OEM sales and volume
discounting. AMR system revenues increased $35.4 million, or 54%, in 1995 over
1994. Shipments of AMR meter modules in 1995 increased more than 50% over 1994
due to an increase of 79 new AMR customers and significant shipments to PSCo.
During 1996, the Company had ten multi-year sales contracts (excluding
outsourcing contracts) to supply AMR systems to utilities at specified prices.
Revenues related to multi-year sales contracts represented 44% of AMR revenues
in 1996 compared to 56% in 1995 and 66% in 1994. These contracts are subject to
cancellation and rescheduling. Any delay or cancellation of such contracts could
materially adversely affect the Company's revenues in the future.
The Company currently has three outsourcing contracts. The largest of
these is a Fixed Network AMR installation and the other two utilize Mobile AMR
solutions. Revenues from these contracts were insignificant in 1995 and 1996 and
are included as a component of AMR system revenues. The Company believes that
outsourcing revenues in 1997 will represent a larger share of total revenues.
See "Certain Risk Factors--Dependence on the Installation, Operations and
Maintenance of AMR Systems Pursuant to Outsourcing Contracts."
The Company believes that AMR revenues will continue to grow in the
future. However, this growth depends upon the timing and resolution of mergers
and acquisitions in the utility industry, industry regulatory reform issues in
the United States, development of international markets and other factors. See
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32
"Description of Business--Overview of Current Environment in the Utility
Industry" and "Certain Risk Factors--Dependence on Utility Industry; Uncertainty
Resulting From Mergers and Acquisitions and Regulatory Reform."
Handheld systems revenues for 1996 declined $15.9 million, or 26%, from
1995 due to large system sales to two Japanese utilities in 1995, which
represented over 23% of total handheld system sales. Handheld systems revenues
of approximately $61.0 million remained relatively stable from 1994 to 1995.
International revenues, which consist primarily of handheld systems, represented
only 8% of total revenues in 1996 compared to 17% of total revenues in the
previous year. The Company believes that revenues for handheld systems will
continue to decline as a percentage of total revenues. Future handheld systems
revenues are expected to be generated primarily from upgrade and replacement
business domestically, and from further penetration into international markets.
International revenues have historically been uneven from period to period and
the Company expects that this pattern will continue in the future.
Gross Profit. Gross profit in 1996 declined to 41% of revenues from 44%
of revenues in 1995 primarily due to excess manufacturing capacity added during
1996, as well as a change in product mix. Manufacturing capacity was added in
anticipation of an increase in demand for the Company's AMR products in excess
of what was realized. Gross profit in the future may be affected by the terms of
outsourcing arrangements entered into by the Company and by the risks inherent
in cost estimation under the long-term method of contract accounting. In
particular, the Company expects that gross profit during the first half of 1997
will be reduced due to a higher proportion of revenues from outsourcing. Gross
profit remained level at 44% to 45% of revenues in 1995 and 1994.
Operating Expenses. Sales and marketing expenses for 1996 of $28.8
million increased both in total and as a percentage of revenues to 16% in 1996
from 12% in 1995. The year-to-year growth is primarily due to expansion of
technical sales and implementation staff for Fixed Networks. Also driving the
increase was the reorganization of the Company's sales and marketing staff,
including the functions performed by the Genesis Services division. Sales and
marketing expenses in 1995 increased $2.9 million, or 17%, from 1994, but
decreased as a percentage of revenues to 12% in 1995 from 14% in 1994. The
higher expenses in 1995 resulted from enhanced marketing efforts for the
Company's AMR business. The Company expects sales and marketing expenses in 1997
to remain at levels comparable to 1996.
Product development expenses increased $6.2 million in 1996, or 23%,
over 1995 and increased as a percentage of revenues from 17% to 19%. Product
development expenses increased $9.0 million in 1995, or 50% over 1994, and
increased as a percentage of revenues from 14% to 17%. The higher spending in
1995 and 1996 was due to accelerated development of Fixed Network AMR products
such as network management software, applications software, cell control units,
network integration and testing, development of water and international meter
modules and continued cost reduction programs. In addition, in 1996 the Company
incurred $2.1 million in one-time charges for materials related to the redesign
of the cell control unit and a new handheld computer. The Company expects that
the increased level of development expenses in 1996 will continue but will begin
to gradually decrease as a percentage of revenue over the long term.
General and administrative expenses increased $3.4 million, or 45%,
from 1995 to 1996 but remained fairly stable as a percentage of revenues at 6%
compared to 5% in 1995. The 1996 increase was related to operating and
maintenance expenses associated with expanded facilities, executive staff
additions and third quarter severance charges related to a 5% reduction in the
Company's workforce. General and administrative expenses increased $1.9 million,
or 33%, from 1994 to 1995 due to investments in the Company's corporate training
and development efforts combined with filling the newly created position of
Chief Operating Officer in late 1995.
Page 30
33
Interest and Other. Gross interest expense for 1996 was $1.4 million
and was the result of borrowings under the Company's revolving line of credit.
Interest on long-term mortgages also contributed to the expense. The Company's
capitalized interest expense of $533,000 in 1996 primarily related to
outsourcing. Net interest income for 1995 was $878,000 more than for 1994 due to
a higher level of investments during the year. Average investments in 1995 were
approximately $20.0 million higher than in 1994 as a result of continued
positive cash flows from operations and remaining cash from the Company's two
public stock offerings.
Income Taxes. The income tax benefit for 1996 was 31% of the pre-tax
loss. This effective rate was lower because foreign operating losses for which
no tax benefit has been recorded and a cash-to-accrual accounting adjustment
related to the merger with UTS. The reported effective income tax rate for 1995
and 1994 was 32% and 28%, respectively, which is lower than the pro forma rate
because UTS was taxed as an S corporation prior to the merger. The pro forma
effective income tax rate for 1995 and 1994 was calculated using the Company's
effective tax rate for each year. The Company's effective income tax rate may
vary from year to year because of fluctuations in foreign operating results,
changes in tax jurisdictions in which the Company operates, and changes in tax
legislation.
FINANCIAL CONDITION
During the first three quarters of 1996, the Company made large
investments in inventory. Cash used by operating activities in the first three
quarters of 1996 was $7.9 million, $3.1 million and $12.6 million. In contrast,
in the fourth quarter operating activities provided cash of $6.8 million as
investments in inventory were curtailed. In the fourth quarter of 1996, the
Company revised its production schedules from "build to expectation" to "build
to order," which is expected to improve inventory turnover in the future.
During the first three quarters of 1996, the Company also substantially
increased its manufacturing capacity. Quarterly acquisitions of property, plant
and equipment declined from $7.6 million, $7.9 million and $9.5 million in the
first, second and third quarters, respectively, to $2.5 million in the fourth
quarter of 1996 as the Company completed its manufacturing expansion.
Additionally, investments in outsourcing equipment increased from $827,000 in
the first quarter of 1996 to $10.9 million in the fourth quarter.
Working capital at December 31, 1996 was $26.2 million compared to
$64.5 million at December 31, 1995. The significant decline in 1996 was caused
by investments in manufacturing capacity and outsourcing equipment, which were
funded by cash and bank borrowings. Bank borrowings at December 31, 1996 were
$33.1 million compared to cash and short-term investments of $31.5 million at
December 31, 1995. In January 1997, the Company expanded its revolving line of
credit from $50 million to $75 million through its expiration on May 31, 1997.
Net operating activities consumed $16.9 million in cash in 1996
compared with providing $11.2 million in cash in 1995 and $15.6 million in 1994.
Most of the 1996 cash consumption was driven by growth in inventories, which
were built in anticipation of Fixed Network AMR customer orders in excess of
what was realized and for delivery under outsourcing arrangements. The decreased
cash generated from operations in 1995 compared to 1994 was also primarily due
to increased accounts receivable and inventories. In 1995, the Company
intentionally built its inventory of AMR meter modules in order to meet
projected demand levels and transition to a new AMR meter module manufacturing
line in the first half of 1996.
Investing activities, excluding changes in short-term investments,
consumed $49.9 million of cash in 1996 compared to $23.1 million and $11.1
million in 1995 and 1994, respectively. Additions to
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34
production capacity accounted for approximately $20.0 million of $27.5 million
in full-year 1996 capital additions. The Company substantially completed its
capacity expansion program in the fourth quarter of 1996. Current production
capacity is about 4.5 million AMR meter modules annually on a two-shift basis.
The Company believes its AMR meter module capacity is sufficient for 1997.
Capital acquisitions in 1997 are expected to be approximately one-half of the
1996 level. Equipment used in outsourcing contracts required $17.3 million in
cash in 1996. The Company expects to use a similar amount for outsourcing in
1997. Other investing activities in 1996 consisted of the acquisition of Fixed
Network AMR patents and technologies. Capital asset additions were $16.6 million
in 1995 and included the purchase of new surface mount lines for each of the
Company's manufacturing locations and $2.4 million for the purchase of the
Company's manufacturing and headquarters facility in Spokane.
Financing activities for 1996 provided $37.5 million in cash and
consisted principally of borrowings under the bank line of credit agreement as
well as funds received from the exercise of employee stock options and the
related tax benefit. Net cash provided by financing activities in 1995 was $1.7
million compared to $12.1 million in 1994. Financing activities during 1995
consisted of cash proceeds of $1.4 million from the exercise by the underwriters
of an over-allotment option of 75,000 shares related to a public stock offering
by the Company in December 1994 and $2.3 million from the exercise of employee
stock options and the related tax benefit. The Company received net proceeds of
$10.9 million in 1994 from the follow-on public stock offering.
The Company believes its existing cash, together with renewal of its
credit facility at its current level, will be adequate to fund its operations
for the remainder of 1997. While the Company expects the credit facility to be
renewed in the ordinary course, there can be no assurance that it will be
renewed, or will be renewed on terms acceptable to the Company or at sufficient
levels. The Company expects to finance future outsourcing contracts by means of
project financing.
The Company is actively considering long-term financing alternatives,
which may take the form of debt, equity-linked securities, common stock or a
combination of the foregoing. The Company expects that it will complete one of
these financings during the first half of 1997.
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35
CERTAIN FORWARD-LOOKING STATEMENTS
When included in this Annual Report on Form 10-K, the words "expects,"
"intends," "anticipates," "plans," "projects" and "estimates," and analogous or
similar expressions are intended to identify forward-looking statements. Such
statements, which include. but are not limited to, statements contained in
"Business, " "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Risk Factors," 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, delays or difficulties in introducing new products, increased
competition and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change on the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page 33
36
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Reports.......................................................... 35
Consolidated Balance Sheets as of December 31, 1996 and 1995........................... 37
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996.................................................................... 38
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 1996....................................................... 39
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996.................................................................... 40
Notes to Consolidated Financial Statements............................................. 41
Page 34
37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Itron, Inc.
Spokane, Washington
We have audited the accompanying consolidated balance sheets of Itron, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements give retroactive effect to the merger of the
Company and Utility Translation Systems, Inc. (UTS), which has been accounted
for as a pooling of interests as described in Note 6 to the consolidated
financial statements. We did not audit the balance sheet of UTS as of December
31, 1995, or the related statements of operations, shareholders' equity, and
cash flows of UTS for the years ended December 31, 1995 and 1994, which
statements reflect total assets of $2,694,610 as of December 31, 1995, and total
revenues of $5,984,589 and $5,255,379 for the years ended December 31, 1995 and
1994, respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for UTS for 1995 and 1994, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Itron, Inc. and subsidiaries at December 31, 1996 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
February 7, 1997
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38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Utility Translation Systems, Inc.
We have audited the balance sheet of Utility Translation Systems, Inc. as of
December 31, 1995 and the related statements of income, shareholders' equity and
cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Utility Translation Systems,
Inc. at December 31, 1995 and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1994 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
February 28, 1996 except for Note 8
as to which the date is March 25, 1996
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39
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 2,243 $ 6,473
Short-term investments.............................................. -- 25,074
Accounts receivable, net............................................ 44,376 38,015
Inventories......................................................... 33,837 18,065
Deferred income tax benefit, net.................................... 4,171 4,531
Other............................................................... 6,116 1,388
-------- --------
Total current assets........................................ 90,743 93,546
-------- --------
Property, plant and equipment, net.................................... 71,349 34,137
Intangible assets, net................................................ 22,328 20,230
Other................................................................. 3,001 1,805
-------- --------
Total assets................................................ $187,421 $149,718
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit................................................. $ 33,062 $ --
Accounts payable and accrued expenses............................... 20,671 16,290
Wages and benefits payable.......................................... 4,004 4,514
Deferred revenue.................................................... 6,767 8,206
-------- --------
Total current liabilities................................... 64,504 29,010
-------- --------
Notes payable......................................................... 6,440 5,600
Warranty and other obligations........................................ 2,255 2,160
Deferred income taxes, net............................................ -- 1,675
-------- --------
Total liabilities........................................... 73,199 38,445
-------- --------
Commitments (Note 7).................................................. -- --
Shareholders' equity:
Common stock, no par value, 75 million shares authorized, 13,387,042
and 13,157,263 shares issued and outstanding..................... 98,686 94,108
Warrants............................................................ 338 338
Other............................................................... (107) (142)
Retained earnings................................................... 15,305 16,969
-------- --------
Total shareholders' equity.................................. 114,222 111,273
-------- --------
Total liabilities and shareholders' equity.................. $187,421 $149,718
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
Revenues....................................................... $177,584 $161,335 $125,914
Cost of revenues............................................... 104,708 89,596 69,481
-------- -------- --------
Gross profit................................................... 72,876 71,739 56,433
Operating expenses:
Sales and marketing.......................................... 28,847 20,054 17,159
Product development.......................................... 33,285 27,080 18,071
General and administrative................................... 10,970 7,589 5,727
Amortization of intangibles.................................. 1,542 2,336 2,266
-------- -------- --------
Total operating expenses............................. 74,644 57,059 43,223
-------- -------- --------
Operating income (loss)........................................ (1,768) 14,680 13,210
Interest and other, net........................................ (366) 1,721 983
-------- -------- --------
Income (loss) before income taxes.............................. (2,134) 16,401 14,193
Income tax (provision) benefit................................. 670 (5,250) (3,930)
-------- -------- --------
Net income (loss).............................................. $ (1,464) $ 11,151 $ 10,263
======== ======== ========
Net income (loss) per common share............................. $ (.11) $ .81 $ .80
Weighted average shares outstanding............................ 13,297 13,775 12,851
The accompanying notes are an integral part of these consolidated financial
statements.
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41
ITRON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK RETAINED
----------------- EARNINGS
SHARES AMOUNT WARRANTS OTHER (DEFICIT)
------- ------- -------- ------- ---------
Balances at December 31, 1993.................... 11,672 $75,894 $ 798 $(1,768) $ (1,188)
Net income..................................... -- -- -- -- 10,263
Stock issues:
Public offering............................. 304 5,097 -- -- --
Options exercised and related tax
benefits.................................. 388 3,735 -- -- --
Employee savings plan....................... 10 185 -- -- --
Proceeds from note receivable.................. -- -- -- 983 --
Warrants exercised............................. 536 5,275 (460) -- --
Dividends paid................................. -- -- -- -- (1,607)
Unrealized loss on investments................. -- -- -- (78) --
Foreign currency translation................... -- -- -- 348 --
------- ------- -------- ------- ---------
Balances at December 31, 1994.................... 12,910 90,186 338 (515) 7,468
------- ------- -------- ------- ---------
Net income..................................... -- -- -- -- 11,151
Stock issues:
Public offering............................. 75 1,351 -- -- --
Options exercised and related tax
benefits.................................. 161 2,291 -- -- --
Employee savings plan....................... 11 280 -- --
Dividends paid................................. -- -- -- -- (1,650)
Unrealized gain on investments................. -- -- -- 236 --
Foreign currency translation................... -- -- -- 137 --
------- ------- -------- ------- ---------
Balances at December 31, 1995.................... 13,157 94,108 338 (142) 16,969
------- ------- -------- ------- ---------
Net loss....................................... -- -- -- -- (1,464)
Stock issues:
Options exercised and related tax
benefits.................................. 199 3,480 -- -- --
Employee savings plan....................... 23 670 -- -- --
Employee stock purchase plan................ 8 428 -- -- --
Dividends paid................................. -- -- -- -- (200)
Unrealized loss on investments................. -- -- -- (158) --
Foreign currency translation................... -- -- -- 193 --
------- ------- -------- ------- ---------
Balances at December 31, 1996.................... 13,387 $98,686 $ 338 $ (107) $ 15,305
======= ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss)............................................... $ (1,464) $ 11,151 $ 10,263
Noncash charges (credits) to income:
Depreciation and amortization................................. 10,522 8,370 6,929
Deferred income tax provision (benefit)....................... (1,545) 758 880
Changes in operating accounts, net of acquisitions:
Accounts receivable........................................... (6,361) (9,659) (3,557)
Inventories................................................... (15,772) (5,509) 3,445
Accounts payable and accrued expenses......................... 4,381 3,935 (1,255)
Deferred revenue.............................................. (1,439) 857 (2,312)
Other, net.................................................... (5,184) 1,323 1,239
-------- -------- --------
Cash provided (used) by operating activities.................... (16,862) 11,226 15,632
INVESTING ACTIVITIES
Change in short-term investments, net........................... 25,074 5,614 (17,869)
Acquisition of property, plant and equipment.................... (27,500) (16,584) (7,327)
Equipment used in outsourcing................................... (17,254) (2,396) --
Acquisitions and investment in affiliates....................... (4,728) (3,808) --
Capitalized software............................................ -- (62) (3,144)
Other, net...................................................... (441) (221) (634)
-------- -------- --------
Cash used by investing activities............................... (24,849) (17,457) (28,974)
FINANCING ACTIVITIES
Change in bank line of credit, net.............................. 33,062 -- --
Issuance of common stock........................................ 4,578 3,642 13,647
Proceeds from employee note receivable.......................... -- -- 983
Dividends paid.................................................. (200) (1,650) (1,607)
Other, net...................................................... 41 (288) (954)
-------- -------- --------
Cash provided by financing activities........................... 37,481 1,704 12,069
-------- -------- --------
Decrease in cash and cash equivalents........................... (4,230) (4,527) (1,273)
Cash and cash equivalents at beginning of period................ 6,473 11,000 12,273
-------- -------- --------
Cash and cash equivalents at end of period...................... $ 2,243 $ 6,473 $ 11,000
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Itron, Inc. (the "Company") is a leading global provider to the utility
industry of data acquisition and wireless communications solutions for
collecting, communicating and analyzing electric, gas and water usage. The
Company designs, develops, manufactures, markets, installs and services
hardware, software and integrated systems for handheld computer-based electronic
meter reading (EMR), automatic meter reading (AMR) and other measurement
systems.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Itron, Inc.
and its wholly owned subsidiaries. As described in Note 6, on March 25, 1996,
Utility Translation Systems, Inc. (UTS), which was acquired in a
pooling-of-interests transaction, became a wholly owned subsidiary of the
Company. These consolidated financial statements reflect the combined financial
position and operating results of the Company and UTS for all periods presented.
All significant intercompany transactions and balances are eliminated.
Investments in affiliates are accounted for using the equity method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
recorded at cost, which approximates fair value.
SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as available-for-sale
and are recorded at market value. Investments are accounted for on a trade date
basis and market value is based upon quoted market prices for each security.
Realized gains and losses are determined on a security by security basis (the
specific identification method). Unrealized holding gains and losses, net of any
tax effect, are recorded as a component of shareholders' equity (see Note 2).
INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Cost includes raw materials and labor, plus applied overhead.
Service inventories consist primarily of subassemblies and components necessary
to support service operations.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives of three to seven years, or over the term of the
applicable capital lease, if shorter, using the straight-line method. Equipment
used in outsourcing contracts is depreciated using the straight-line method over
the shorter of the useful life or the term of the contract, generally 15 years.
Plant is depreciated over 30 years using the straight-line method. The carrying
value of property, plant and equipment is reviewed on a regular basis for
impairment. The Company capitalizes interest as a component of the cost of
property, plant and equipment constructed for its own use in outsourcing
contracts. In 1996, total interest expense was $1.4 million, of which $533,000
was capitalized. There was no interest capitalized in 1995 or 1994.
INTANGIBLE ASSETS
Goodwill represents the excess cost of acquired businesses over the fair
value of their net assets and is amortized using the straight-line method over
periods ranging from three to twenty years. Patents, distribution and product
rights are amortized using the straight-line method over their remaining lives
of three to seventeen years. Capitalized software includes costs incurred
subsequent to the establishment of technological feasibility of
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the related product and is amortized using the straight-line method for a period
not to exceed five years. Management regularly reviews the carrying value of
intangible assets for impairment.
WARRANTY
The Company offers standard warranty terms on its product sales. Provision
for estimated warranty costs is recorded at the time of sale and periodically
adjusted to reflect actual experience. The noncurrent warranty reserve covers
future expected costs of the testing and replacement of radio meter modules.
Warranty expense was $3.1 million in 1996, $1.8 million in 1995 and $836,000 in
1994.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. These deferred taxes are measured by the
provisions of currently enacted tax laws. Management believes that it is more
likely than not that the Company will generate sufficient taxable income to
allow the realization of the net deferred tax asset.
FOREIGN EXCHANGE
The consolidated financial statements are prepared in U.S. dollars. Assets
and liabilities of foreign subsidiaries are denominated in foreign currencies
and are translated into U.S. dollars at the exchange rates in effect on the
balance sheet date. Revenues, costs and expenses for these subsidiaries are
translated using an average rate. Translation adjustments resulting from this
process are a component of shareholders' equity.
REVENUE RECOGNITION
Revenues from hardware sales and software licenses are generally recognized
upon shipment. For large custom systems and outsourcing contracts, revenue is
recognized using the cost-to-cost, percentage of completion, long-term contract
method of accounting. Contract costs include direct labor and other costs
related to contract performance such as materials, repairs and depreciation
costs. Service revenues are recognized ratably over the periods covered by the
service contracts, or as the services are performed. Revenues for shipments or
services not yet billed are included in accounts receivable or other noncurrent
assets depending on the expected period of collection. Deferred revenue is
recorded upon billing for products or services which have not yet been provided.
NET INCOME PER COMMON SHARE
Primary net income per common share is computed based on the weighted
average number of common equivalent shares outstanding during the period as
adjusted for the stock issued in the merger with UTS, as described in Note 6,
and after consideration of the dilutive effect, if any, of the common stock
equivalents using the treasury stock method. Common equivalent shares include
shares issuable upon exercise of stock options and warrants. The number of
shares used in the computation was 13,297,000 in 1996, 13,775,000 in 1995 and
12,851,000 in 1994. Fully diluted net income per share was $.80 and $.79 in 1995
and 1994, respectively. Shares used in the fully diluted computation were
13,932,000 and 12,933,000 in 1995 and 1994, respectively. Fully diluted net
income per share was not presented for the year ended December 31, 1996 because
common stock equivalents are excluded from the calculation in the year of a
loss.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
Page 42
45
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS FAIR VALUE
The carrying value of cash and cash equivalents reflected in the balance
sheet at December 31, 1996 reasonably approximates the fair value of such
instruments. Based on the rates currently available to the Company for loans
with similar terms and maturities, the Company believes that the fair value of
the notes payable reasonably approximates their carrying values at December 31,
1996.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
NOTE 2: SHORT-TERM INVESTMENTS
Short-term investments at December 31, 1995 consist of investment-grade,
tax-exempt state and municipal notes and bonds. The Company had no short-term
investments at December 31, 1996. Information related to such investments
follows (in thousands):
AT DECEMBER 31,
-----------------
1996 1995
------- -------
Market value....................................................... $ -- $25,074
Cost............................................................... -- 24,916
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- -------
Unrealized holding gains........................................... $ -- $ 159
Unrealized holding losses.......................................... -- (1)
Realized gains..................................................... 117 59
Realized losses.................................................... (11) 130
Proceeds from the sale of investment securities for the year ended December
31, 1996 were $24.5 million.
NOTE 3: BALANCE SHEET COMPONENTS
ACCOUNTS RECEIVABLE (IN THOUSANDS):
AT DECEMBER 31,
-----------------
1996 1995
------- -------
Trade (net of allowance for doubtful accounts of $752 and $509).... $30,764 $28,847
Unbilled revenue................................................... 13,612 9,168
------- -------
Total receivables.................................................. $44,376 $38,015
======= =======
Other noncurrent assets at December 31, 1996 includes $1.2 million of
unbilled revenue related to long-term contracts. This amount is expected to be
billed in 1997 and 1998.
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES (IN THOUSANDS):
AT DECEMBER 31,
----------------------
1996 1995
--------- --------
Material....................................................... $ 22,687 $ 9,594
Work in process................................................ 1,570 555
Finished goods................................................. 9,047 7,433
-------- -------
Total manufacturing inventories................................ 33,304 17,582
Service inventories............................................ 533 483
-------- -------
Total inventories.............................................. $ 33,837 $ 18,065
======== =======
PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS):
AT DECEMBER 31,
----------------------
1996 1995
--------- --------
Machinery and equipment........................................ $ 37,715 $ 21,101
Equipment used in outsourcing.................................. 19,650 2,396
Computers and purchased software............................... 21,535 19,233
Buildings, furniture and improvements.......................... 20,345 14,015
Land........................................................... 2,078 1,659
-------- --------
Total cost..................................................... 101,323 58,404
Accumulated depreciation....................................... (29,974) (24,267)
-------- --------
Property, plant and equipment, net............................. $ 71,349 $ 34,137
======== ========
INTANGIBLE ASSETS (IN THOUSANDS):
AT DECEMBER 31,
----------------------
1996 1995
--------- --------
Goodwill....................................................... $ 16,991 $ 17,854
Capitalized software........................................... 6,370 6,370
Distribution and product rights................................ 1,475 1,800
Patents........................................................ 4,860 1,750
Other.......................................................... -- 1,400
------- -------
Total cost..................................................... 29,696 29,174
Accumulated amortization....................................... (7,368) (8,944)
------- -------
Intangible assets, net......................................... $ 22,328 $ 20,230
======= =======
NOTE 4: STATEMENT OF CASH FLOWS DATA
Supplemental disclosure of cash flow information (in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ----
Income taxes paid............................................ $1,418 $3,076 $971
Interest paid................................................ 1,172 197 101
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: NOTES PAYABLE
LINE OF CREDIT AGREEMENT
The Company may borrow up to $75 million under the terms of an unsecured
revolving credit agreement which expires May 31, 1997. Interest rates depend on
the form of borrowing and vary based on published rates. As of December 31,
1996, the weighted average interest rate was approximately 6.8%. A commitment
fee is required on the unused portion of available credit. The agreement
contains covenants that require the Company to maintain certain minimum
liquidity, liability and tangible net worth measures.
LONG-TERM NOTES PAYABLE
Long-term debt consists of the following (in thousands):
AT DECEMBER 31,
---------------
1996 1995
------ ------
Secured note payable to a shareholder with interest only payments of
7 1/2% until August 1, 1998 and then principal and interest
payments of 9% until maturity on August 1, 2015.................... $5,600 $5,600
Secured note payable to a shareholder with interest only payments of
7 1/2% until June 1, 1999 and then principal and interest payments
equal to 8 1/2% until maturity on June 1, 2019..................... 840 --
------ ------
Total long-term notes payable................................... $6,440 $5,600
====== ======
The Company incurred the above notes in conjunction with the purchase of
the Company's headquarters and additional manufacturing space in Spokane,
Washington. Principal payments due under these notes are $12,000 in 1998,
$48,000 in 1999, $61,000 in 2000, $66,000 in 2001 and $6.3 million thereafter.
There are no principal payments due under these notes in 1997.
NOTE 6: ACQUISITIONS
UTILITY TRANSLATION SYSTEMS (UTS)
On March 25, 1996, the Company merged with UTS, a provider of software and
support services that translates, communicates and analyzes energy consumption
data. The Company issued 971,427 shares of its unregistered Common Stock to the
shareholders of UTS in exchange for all of the UTS outstanding shares. The
merger has been accounted for as a pooling of interests and is treated as a
tax-free exchange. Under the pooling-of-interests method of accounting, all
prior periods have been restated to include the financial position and results
of operations of UTS.
The following summarizes the effects of the merger on amounts previously
reported by the Company prior to the transaction for the periods presented.
COMPANY UTS COMBINED
-------- ------ --------
Quarter Ended March 31, 1996
Revenues............................................... $ 46,575 $1,477 $ 48,052
Net income............................................. 2,712 316 3,028
Year Ended December 31, 1995
Revenues............................................... $155,350 $5,985 $161,335
Net income............................................. 10,087 1,064 11,151
Year Ended December 31, 1994
Revenues............................................... $120,659 $5,255 $125,914
Net income............................................. 7,961 2,302 10,263
Page 45
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
METSCAN
In September 1995, the Company purchased the net assets of Metscan, Inc., a
manufacturer of telephone-based data collection technology. Of the $4.6 million
purchase price, $3.8 million was paid in cash at closing, with a $735,000
holdback pending settlement of potential warranty or other claims as of December
31, 1995. As of December 31, 1996 the Company had allocated the entire amount of
the holdback against such warranties and claims. Approximately $2.3 million of
the purchase price was allocated to tangible assets and the remaining $2.3
million to intangible assets which are being amortized over five years. The
acquisition was accounted for as a purchase.
NOTE 7: COMMITMENTS
The Company has noncancelable operating leases for office, production and
storage space expiring at various dates through June 2008. Future minimum
payments required under operating leases at December 31, 1996 are $1.9 million
in 1997, $1.4 million in 1998, $1.3 million in 1999, $1.2 million in 2000,
$569,000 in 2001 and $2.2 million thereafter.
Total rent expense under noncancelable operating leases is as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
Year Ended December 31,
Related parties............................................ $ 7 $ 430 $ 789
Unrelated parties.......................................... 1,505 1,396 1,296
------ ------ ------
Total...................................................... $1,512 $1,826 $2,085
====== ====== ======
In order to maintain certain distribution rights, the Company has agreed to
purchase minimum quantities of components from various suppliers. Minimum
purchase requirements under these agreements are approximately $5.0 million in
1997, $6.9 million in 1998, $5.2 million in 1999, $2.3 million in 2000 and $2.7
million in 2001. These commitments are not in excess of anticipated
requirements.
NOTE 8: SHAREHOLDERS' EQUITY
WARRANTS
At December 31, 1996 and 1995, the Company had outstanding warrants to
purchase 375,000 shares of common stock at $11.63 per share. The warrants were
granted at various dates beginning September 1990 through June 1992 at prices no
less than fair market value on the date of grant and expire in June 1997 through
June 2000.
OTHER SHAREHOLDERS' EQUITY
Other shareholders' equity is as follows (in thousands):
AT DECEMBER 31,
---------------
1996 1995
----- -----
Unrealized gain on short-term investments........................... $ -- $ 158
Foreign currency translation adjustment............................. (107) (300)
----- -----
Other shareholders' equity.......................................... $(107) $(142)
===== =====
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: STOCK-BASED COMPENSATION PLANS
At December 31, 1996, the Company had two option plans, which are described
below. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock options plans.
The following table summarizes information about stock options outstanding
at December 31, 1996 (options in thousands):
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OF OPTIONS REMAINING AVERAGE OF OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
-------------------------------------- ----------- ----------- -------- ----------- --------
$ 2.91........................ 41 2 $ 2.91 41 $ 2.91
2.91 - 6.20........................ 36 3 5.97 36 5.97
7.75........................ 39 4 7.75 39 7.75
7.75 - 13.00........................ 33 5 11.24 33 11.24
13.00 - 13.50........................ 182 6 13.02 182 13.02
17.00 - 21.25........................ 169 7 17.86 107 17.85
20.63 - 27.00........................ 263 8 25.40 118 25.06
51.19 - 58.75........................ 19 9 55.95 12 58.75
15.63 - 17.75........................ 570 10 17.71 0 0
----- ---
Total................................ 1,352 8 $17.92 568 $15.75
===== ===
1989 RESTATED STOCK OPTION PLAN
Under the Company's 1989 Restated Stock Option Plan, options to purchase
shares of common stock have been granted to directors and employees at prices no
less than the fair market value on the date of grant. Options outstanding under
the plan become fully exercisable within three or four years from the date
granted and terminate ten years from the date granted. Qualified and
nonqualified options are exercisable at prices ranging from $2.91 to $51.19 per
share. The price ranges of options exercised were $2.91 to $24.50 in 1996, $2.91
to $17.88 in 1995 and $1.12 to $13.50 in 1994. At December 31, 1996, there were
1,435,222 shares of unissued common stock reserved for issuance under the plan,
of which options for the purchase of 167,785 shares were available for future
grants. Numbers of shares under the plan are as follows (shares in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
WGTD. AVG. WGTD. AVG. WGTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------- ------ ---------- ------ ----------
Beginning balance.................. 1,038 $17.36 864 $11.52 1,055 $ 7.55
Granted............................ 1,016 31.34 412 25.47 215 17.90
Exercised.......................... (152) 11.56 (159) 8.50 (387) 4.11
Canceled........................... (635) 41.38 (79) 13.64 (19) 14.33
----- ----- -----
Ending balance..................... 1,267 17.24 1,038 17.36 864 11.52
===== ===== =====
Options exercisable................ 483 411 421
1992 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
The Company's 1992 Stock Option Plan for Nonemployee Directors provides for
the annual grant of nonqualified options to purchase 2,000 shares of common
stock to nonemployee directors of the Company at an
Page 47
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price that is not less than the fair market value per share at the date
of grant. Outstanding options granted under the plan are exercisable at prices
ranging from $13.50 to $58.75 per share. The options granted are fully vested
and immediately exercisable. At December 31, 1996, there were 153,000 shares of
unissued common stock reserved for issuance under the plan, of which options for
the purchase of 68,000 shares were available for future grant. Numbers of shares
under the plan are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
WGTD. AVG. WGTD. AVG. WGTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ---------- ------ ---------- ------ ----------
Beginning balance.................. 87 $22.92 19 $16.47 6 $13.50
Granted............................ 12 58.75 70 24.50 14 17.54
Exercised.......................... (14) 21.96 (2) 17.00 (1) 13.50
--- --- ---
Ending balance..................... 85 28.14 87 22.92 19 16.47
=== === ===
Options exercisable................ 85 87 19
Had compensation costs for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method prescribed in Statement of Financial
Accounting Standards No. 123, the Company's net income and earnings per share
would have been reduced to the proforma amounts indicated below (in thousands
except per share data):
AT DECEMBER 31,
-------------------
1996 1995
------- -------
Net Income (loss)
As Reported.................................................... $(1,464) $11,151
Proforma....................................................... (7,763) 8,232
Earnings Per Share
As Reported.................................................... $ (.11) $ .81
Proforma....................................................... (.58) .60
The weighted average fair value of options granted during the year was
$18.64. The fair value of each option granted during 1995 and 1996 is estimated
on the date of grant using the Black-Scholes option-pricing model using the
following assumptions:
1996 1995
---- ----
Dividend yield......................................................... 0% 0%
Expected volatility.................................................... 55% 44%
Risk-free interest rate................................................ 6.2% 6.4%
Expected life (years).................................................. 6.0 4.8
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, the Company is authorized
to issue up to 80,000 shares of common stock to its eligible employees who have
completed three months of service, work more than 20 hours each week and are
employed more than five months in any calendar year. Employees who own 5% or
more of the Company's Common Stock are not eligible to participate in the plan.
Under the terms of the plan, eligible employees can choose payroll deductions
each year of up to 10% of their regular cash compensation. Such deductions are
applied toward the discounted purchase price of the Company's Common Stock. The
purchase price of the Common Stock is 85% of the fair market value of the stock
as defined in the plan. Approximately 25% of eligible employees have
participated in the plan since its inception on July 1, 1996. Under the plan,
the Company sold 8,331 shares to employees in 1996.
Page 48
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS
The Company has an employee incentive savings plan in which substantially
all employees are eligible to participate. Employees may contribute on a
tax-deferred basis up to 15% of their salary, 50% of which, subject to certain
limitations, is matched by the Company by issuance of common stock. Prior to
1996, the Company matched 25% of employee contributions with issuance of common
stock. The expense for the Company's matching contribution was $798,000 in 1996,
$310,000 in 1995 and $221,000 in 1994. The Company does not offer postemployment
or postretirement benefits.
NOTE 11: INCOME TAXES
A reconciliation of income taxes at the expected tax rate of 35% to the
consolidated effective tax for continuing operations is as follows (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Expected federal income tax............................... $ (747) $ 5,740 $ 4,968
State income taxes........................................ (19) 533 505
Goodwill amortization..................................... 309 349 341
Exempt interest........................................... (152) (593) (187)
Tax credits............................................... (762) (433) (544)
Foreign operations........................................ 59 (234) (497)
UTS acquisition........................................... 376 (372) (925)
Meals and entertainment................................... 243 132 100
Other, net................................................ 23 128 169
----- ------ ------
Provision (benefit) for income taxes...................... $ (670) $ 5,250 $ 3,930
===== ====== ======
The domestic and foreign components of income from continuing operations
before taxes were (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Domestic................................................... $ 1,525 $15,507 $12,142
Foreign.................................................... (3,659) 894 2,051
------- ------- -------
Income (loss) before income taxes.......................... $(2,134) $16,401 $14,193
======= ======= =======
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Current
Federal................................................. $ 678 $ 4,104 $ 3,040
State and local......................................... 197 388 10
----- ------ ------
Total current........................................... 875 4,492 3,050
----- ------ ------
Deferred
Federal................................................. (844) 1,033 909
State and local......................................... 130 (275) (29)
Foreign................................................. (831) -- --
----- ------ ------
Total deferred.......................................... (1,545) 758 880
----- ------ ------
Total provision (benefit) for income taxes................ $ (670) $ 5,250 $ 3,930
===== ====== ======
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for deferred income taxes are (in
thousands):
AT DECEMBER 31,
----------------------
1996 1995 1994
------- ---- -----
Tax credits and loss carryforwards............................. $(1,440) $370 $(707)
Accrued expenses............................................... (865) (442) (116)
Acquisitions................................................... 375 -- --
Depreciation and amortization.................................. 981 (289) 1,038
Inventory...................................................... (1,270) (257) 671
Long-term contracts............................................ 712 1,384 --
Other, net..................................................... (38) (8) (6)
------- ---- -----
Total deferred income taxes............................... $(1,545) $758 $ 880
======= ==== =====
At December 31, 1996, deferred income taxes consisted of the following (in
thousands):
CURRENT:
---------------------------
Tax credits and loss
carryforwards............ $ 12
Accrued expenses........... 2,283
Acquisitions............... (74)
Inventory.................. 1,957
Long-term contracts........ (119)
Other, net................. 112
------
Total current......... $4,171
======
NONCURRENT:
---------------------------
Tax credits and loss
carryforwards............ $4,597
Accrued expenses........... 884
Acquisitions............... (301)
Depreciation and
amortization............. (2,973)
Long-term contracts........ (1,977)
------
Total noncurrent...... $ 230
======
Valuation allowances of $129,000 and $802,000 in 1996, and $35,000 and
$379,000 in 1995 were provided for capital loss carryforwards and foreign net
operating loss carryforwards, respectively, for which the Company may not
receive future benefits.
The Company has research and development tax credits available to offset
future income tax liabilities. The tax credits expire through 2011 as follows
(in thousands):
YEAR AMOUNT
----------------------------------------------------------------- ------
2003-2005........................................................ $ 54
2006-2008........................................................ 1,632
2009-2011........................................................ 1,541
The Company also has alternative minimum tax credits, totaling $324,000,
that are available to offset future tax liabilities.
Page 50
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: SEGMENT INFORMATION
Summarized information regarding the Company's domestic and international
operations is as follows (in thousands):
CONSOLIDATED
DOMESTIC INTERNATIONAL OPERATIONS
-------- ------------- ------------
Year ended December 31, 1996:
Revenue............................................... $162,494 $15,090 $177,584
Income (loss) from continuing operations before
taxes.............................................. 6,009 (8,143) (2,134)
Identifiable assets................................... 175,824 11,597 187,421
Year ended December 31, 1995:
Revenue............................................... $134,111 $27,224 $161,335
Income (loss) from continuing operations before
taxes.............................................. 18,020 (1,619) 16,401
Identifiable assets................................... 139,223 10,495 149,718
Year ended December 31, 1994:
Revenue............................................... $109,018 $16,896 $125,914
Income (loss) from continuing operations before
taxes.............................................. 16,490 (2,297) 14,193
Identifiable assets................................... 115,791 6,542 122,333
Domestic information includes the United States and Canada. Approximately
22% of 1996 and 14% of 1995 consolidated revenues relate to a contract with a
significant customer. International information includes wholly owned
subsidiaries located in the United Kingdom, France and Australia, as well as
sales to international distributors, which were $5.9 million in 1996, $15.7
million in 1995 and $3.3 million in 1994. International revenues include sales
to customers located in Europe, Australia, Japan, Latin America and the Middle
East.
NOTE 13: OTHER RELATED PARTY TRANSACTIONS
Certain of the Company's customers are also shareholders with more than 10%
ownership interest and/or hold positions on the Company's Board of Directors.
Revenue from such customers was $4.3 million in 1996, $2.1 million in 1995 and
$3.2 million in 1994. Accounts receivable from these customers were $541,000 and
$1.2 million at December 31, 1996 and 1995, respectively. Interest expense
related to a note payable to a shareholder was $456,000 in 1996 and $157,000 in
1995.
NOTE 14: DEVELOPMENT AGREEMENTS
The Company receives funding to develop certain products under joint
development agreements with several companies. Intellectual property rights to
such developed products remain with the Company. Funding received under these
agreements is netted against product development expenses. The agreements
provide for royalty payments by the Company if successful products are developed
and sold. Additionally, the Company is required to pay royalties on future sales
of products incorporating certain AMR technologies.
Funding received and royalty expense under these arrangements is as follows
(in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
Funding received................................ $ 143 $ 657 $1,100
Royalties paid.................................. 1,614 1,889 1,774
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ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: QUARTERLY RESULTS (UNAUDITED)
Quarterly results are as follows (in thousands, except per share data):
FOURTH THIRD SECOND FIRST
1996 QUARTER QUARTER(2) QUARTER QUARTER
---- ------- ---------- ------- -------
Statement of operations data:
Total revenues................................. $42,594 $ 38,743 $48,195 $48,052
Gross profit................................... 15,814 14,566 20,994 21,502
Net income (loss).............................. (2,301) (4,546) 2,355 3,028
Net income (loss) per share.................... (.17) (.34) .17 .21
Pro forma information:(1)
Net income (loss).............................. $ 2,918
Net income (loss) per share.................... .21
1995
----
Statement of operations data:
Total revenues.................................. $44,139 $39,931 $39,144 $38,121
Gross profit.................................... 20,084 17,958 16,892 16,805
Net income...................................... 2,918 2,145 2,825 3,263
Net income per share............................ .21 .16 .20 .24
Pro forma information:(1)
Net income...................................... $ 2,818 $ 2,295 $ 2,735 $ 2,913
Net income per share............................ .20 .17 .20 .21
- ---------------
(1) Prior to merging with the Company, UTS was treated as an S corporation under
the Internal Revenue Code of 1986, as amended. The income of an S
corporation is taxed directly to the shareholders and no federal or state
income taxes are paid by the company. Consequently, the combined results of
operations for the first quarter of 1996 and the full year 1995 exclude an
income tax provision on UTS' earnings. Pro forma information reflects a
provision for income taxes as if UTS was taxed as a C corporation using the
Company's effective tax rate.
(2) In the third quarter of 1996, the Company incurred $2.9 million in one-time
charges for the redesign of certain products and severance charges related
to a reduction in workforce.
Page 52
55
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Itron, Inc.
Spokane, Washington
We have audited the financial statements of Itron, Inc. as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
and have issued our report thereon dated February 7, 1997; such financial
statements and report are included herein. Our audit also included the financial
statement schedule of Itron, Inc. listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Seattle, Washington
February 7, 1997
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ITRON, INC.
SCHEDULE II:
VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
Additions Balance at end of period
------------------------------------------ --------------------------------------
Balance at Charged to Charged to
beginning costs and other
Description of period expenses accounts (1) Deductions Current Non current
----------- ---------- ---------- ------------ ---------- ------- -----------
YEAR ENDED DECEMBER 31, 1994:
Inventory obsolescence 2,954 1,459 3,048 1,365
Warranty 2,572 1,044 1,289 555 1,772
Allowance for doubtful accounts 256 611 565 302
YEAR ENDED DECEMBER 31, 1995:
Inventory obsolescence 1,365 2,121 1,623 1,863
Warranty 2,327 1,452 794 882 2,103
Allowance for doubtful accounts 302 327 78 198 509
YEAR ENDED DECEMBER 31, 1996:
Inventory obsolescence 1,863 5,722 3,454 4,131
Warranty 2,985 2,664 2,280 1,212 2,157
Allowance for doubtful accounts 509 550 307 752
- ----------------
(1) Additions charged to other accounts consist of reserves of acquired
businesses.
Page 54
57
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" appearing in the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
on April 29, 1997 (the "1997 Proxy Statement") sets forth certain information
with regard to the directors of the Registrant and is incorporated herein by
reference. Certain information with respect to persons who are or may be deemed
to be executive officers of the Registrant is set forth under the caption
"Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the 1997
Proxy Statement sets forth certain information (except for those sections
captioned "Compensation Committee Report on Executive Compensation" and
"Performance Graph", which are not incorporated by reference herein) with
respect to the compensation of management of the Registrant and is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" appearing in the 1997 Proxy Statement sets forth certain
information with respect to the ownership of the Registrant's Common Stock and
is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
appearing in the 1997 Proxy Statement sets forth certain information with
respect to the certain business relationships and transactions between the
Registrant and its directors and officers and is incorporated herein by
reference.
Page 55
58
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
2) LIST OF CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The consolidated financial statement schedules listed below of Itron, Inc. as of
and for the years ended December 31, 1996, 1995 and 1994 are included in this
Form 10-K.
Independent Auditors' Reports
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, not
applicable, or the required information is included in the consolidated
financial statements or the notes thereto.
Page 56
59
3) EXHIBITS:
Exhibit
Number Description of Exhibits
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit 3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of
its executive officers, together with schedule executive officers who
are parties thereto.* (D) (Exhibit 10.1)
10.2 Employment Agreement between the Registrant and Johnny M. Humphreys
dated February 9, 1987, First Addendum dated November 22, 1988 and
Second Addendum dated July 21, 1992 (A).* (Exhibit 10.2)
10.3 Form of Confidentiality Agreement normally entered into with employees.
(A) (Exhibit 10.7)
10.4 Amended and Restated Registration Rights Agreement among the Registrant
and certain holders of its securities dated March 25,1996.
10.5 1989 Restated Stock Option Plan. (C) (Exhibit 10.7) *
10.6 1992 Restated Stock Option Plan for Nonemployee Directors. (C)
(Exhibit 10.8) *
10.7 Executive Deferred Compensation Plan. (A) * (Exhibit 10.12)
10.8 Form of Class A Warrant Certificates for shares of Common Stock of the
Registrant dated from July 10, 1989 to March 5, 1992, together with
schedule of holders. (C) (Exhibit 10.12)
57
60
10.9 Form of Class AA Warrant Certificates for shares of Common Stock of the
Registrant dated June 30, 1992, together with schedule of holders. (C)
(Exhibit 10.13)
10.10 Form of Indemnification Agreements between the Registrant and certain
directors and officers. (D) (Exhibit 10.14)
10.11 Schedule of directors and officers who are parties to Indemnification
Agreements (see Exhibit 10.10 hereto) with the Registrant.
10.12 Employment Agreement between the Registrant and Carl Robert Aron dated
November 22, 1995. * (D) (Exhibit 10.15)
10.13 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (D) (Exhibit 10.16)
10.14 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24).
10.15 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. (DELTA)(D) (Exhibit 10.18)
10.16 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (D) (Exhibit 10.19)
10.17 Loan Agreement between Itron, Inc. and Washington Trust Bank dated July
1, 1996, as amended January 15, 1997.
11 Computation of Earnings per Share.
21.1 Subsidiaries of the registrant
27.1 Financial Data Schedule
(A) Incorporated by reference to designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration #33-49832),
as amended, filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the
Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the
Company's 1994 Annual Report on Form 10-K filed on March 30, 1995.
(D) Incorporated by reference to designated exhibit included in the
Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.
* Management contract or compensatory plan or arrangement.
(DELTA) Confidential treatment requested for a portion of this agreement.
4) REPORTS ON FORM 8-K:
A current report on Form 8-K, dated October 3, 1996, was filed during
the fourth quarter of 1996 to report the filing by the Company of a patent
infringement action in the District Court for the District of Minnesota. See
"Legal Proceedings."
58
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Spokane, State of Washington, on the 26th day of February, 1997.
ITRON, INC.
By /s/ DAVID G. REMINGTON
----------------------------------
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
below on the 26th day of February, 1997.
Signature Title
--------- -----
/s/ PAUL A. REDMOND
- ----------------------------------
Paul A. Redmond Chairman of the Board
/s/ JOHNNY M. HUMPHREYS
- ----------------------------------
Johnny M. Humphreys President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ DAVID G. REMINGTON Chief Financial Officer (Principal Financial and
- ---------------------------------- Accounting Officer)
David G. Remington
/s/ MICHAEL B. BRACY
- ----------------------------------
Michael B. Bracy Director
/s/ TED C. DEMERRITT
- ----------------------------------
Ted C. DeMerritt Director
/s/ JON E. ELIASSEN
- ----------------------------------
Jon E. Eliassen Director
/s/ MARY ANN PETERS
- ----------------------------------
Mary Ann Peters Director
/s/ W. HUNTER SIMPSON
- ----------------------------------
W. Hunter Simpson Director
59
62
/s/ GRAHAM M. WILSON
- ----------------------------------
Graham M. Wilson Director
/s/ STUART E. WHITE
- ----------------------------------
Stuart E. White Director
Page 60
63
Exhibit Index
Exhibit
Number Description of Exhibits Page
- ------ ----------------------- ----
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit 3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of
its executive officers, together with schedule executive officers who
are parties thereto.* (D) (Exhibit 10.1)
10.2 Employment Agreement between the Registrant and Johnny M. Humphreys
dated February 9, 1987, First Addendum dated November 22, 1988 and
Second Addendum dated July 21, 1992 (A).* (Exhibit 10.2)
10.3 Form of Confidentiality Agreement normally entered into with employees.
(A) (Exhibit 10.7)
10.4 Amended and Restated Registration Rights Agreement among the Registrant
and certain holders of its securities dated March 25, 1996.
10.5 1989 Restated Stock Option Plan. (C) (Exhibit 10.7) *
10.6 1992 Restated Stock Option Plan for Nonemployee Directors. (C)
(Exhibit 10.8) *
10.7 Executive Deferred Compensation Plan. (A) * (Exhibit 10.12)
10.8 Form of Class A Warrant Certificates for shares of Common Stock of the
Registrant dated from July 10, 1989 to March 5, 1992, together with
schedule of holders. (C) (Exhibit 10.12)
64
10.9 Form of Class AA Warrant Certificates for shares of Common Stock of the
Registrant dated June 30, 1992, together with schedule of holders. (C)
(Exhibit 10.13)
10.10 Form of Indemnification Agreement between the Registrant and certain
directors and officers. (D) (Exhibit 10.14)
10.11 Schedule of directors and officers who are parties to Indemnification
Agreements (see Exhibit 10.10 hereto) with the Registrant.
10.12 Employment Agreement between the Registrant and Carl Robert Aron dated
November 22, 1995. * (D) (Exhibit 10.15)
10.13 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (D) (Exhibit 10.16)
10.14 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24).
10.15 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. (DELTA)(D) (Exhibit 10.18)
10.16 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (D) (Exhibit 10.19)
10.17 Loan Agreement between Itron, Inc. and Washington Trust Bank dated July
1, 1996, as amended January 15, 1997.
11 Computation of Earnings per Share.
21.1 Subsidiaries of the registrant
27.1 Financial Data Schedule
(A) Incorporated by reference to designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration #33-49832),
as amended, filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the
Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the
Company's 1994 Annual Report on Form 10-K filed on March 30, 1995.
(D) Incorporated by reference to designated exhibit included in the
Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.
* Management contract or compensatory plan or arrangement.
(DELTA) Confidential treatment requested for a portion of this agreement.
1
EXHIBIT 10.4
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is entered into as of March 25, 1996, among Itron, Inc., a
Washington corporation (the "Company"), and the Holders (as defined below).
RECITALS
A. On February 28, 1992, the Company and certain of the Holders
entered into a Registration Rights Agreement consolidating into one agreement
various registration rights held by such Holders and extending certain
registration rights to NorAm Energy Corp. (formerly Arkla, Inc.) ("NorAm").
B. The Company is now entering into an Agreement and Plan of
Merger, dated as of the date hereof (the "UTS Merger Agreement"), with UTS
Acquisition Corporation and Utility Translation Systems, Inc. ("UTS"), pursuant
to which the Company will issue to Stuart Edward White, David Courtney Godwin
and John A. Smith, Jr. an aggregate of 971,427 shares of Common Stock, of which
up to 194,286 shares will have certain registration rights as set forth in this
Agreement.
C. The parties to this Agreement desire to consolidate into one
document their previous agreements, to delete references to persons whose
registration rights have been eliminated through sales of the Company's Common
Stock and to extend certain registration rights to the recipients of Common
Stock pursuant to the UTS Merger Agreement as set forth herein.
D. The parties to this Agreement hereby agree that this Agreement will
become effective on and be dated as of the date of the closing of the
transactions contemplated by the UTS Merger Agreement and will be of no force
and effect should such transactions not be consummated.
AGREEMENT
Now, therefore, for good and valuable consideration, the adequacy and
receipt of which is acknowledged, the parties hereto agree as follows:
SECTION 1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
-1-
2
(a) "Commission" shall mean the United States Securities and
Exchange Commission or any other United States federal agency at the time
administering the Securities Act.
(b) "Form S-3" shall mean Form S-3 issued by the Commission or
any substantially similar form then in effect.
(c) "Holder" shall mean any of the parties listed on Schedule
A hereto that hold outstanding Registrable Securities which have not been sold
to the public, or an assignee or transferee of registration rights from such
parties as permitted by Section 9.
(d) "Initiating Holders" shall have the meaning set forth in
subsection 2.1.1 except that when used in subsections 2.2, 2.4 and 2.5 with
respect to a Registration requested by Centra pursuant to subsection 2.1.2, it
shall mean Centra, when used in subsections 2.2, 2.4 and 2.5 with respect to a
Registration requested by NorAm pursuant to subsection 2.1.3, it shall mean
NorAm, and when used in subsections 2.4 and 2.5 with respect to a Registration
requested by the UTS Holders pursuant to subsection 2.1.4, it shall mean the UTS
Holders.
(e) "Register," "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (the "Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(f) "Registrable Securities" shall mean (i) all the Common
Stock of the Company issued upon conversion of any shares of the Company's
Series A Preferred Stock and Series B Preferred Stock; (ii) all the Common Stock
of the Company issued or issuable upon the exercise of that certain warrant,
dated June 15, 1988, issued pursuant to the Securities Purchase Agreement dated
June 15, 1988 with Inter-City Gas Corporation ("ICG"), as at any time amended,
by the Company to CHL Holdings, Inc., a subsidiary of ICG, and reissued on June
29, 1990 to ICG Utilities (Canada) Ltd. and on January 21, 1991 to Centra Gas
Inc., successors in interest to ICG ("Centra"), as at any time amended; (iii)
all the Common Stock of the Company issued or issuable upon the exercise of
warrants to purchase shares of the Company's Common Stock acquired from AMRplus
Partners, a Research and Development Limited Partnership (the "AMR Warrants");
(iv) all the Common Stock of the Company issued to NorAm pursuant to the terms
of the NorAm Merger Agreement; (v) the UTS Registrable Securities; and (vi) all
the Common Stock of the Company issued with respect to such shares by reason of
stock dividends, stock splits, or combinations, recapitalizations or other
similar corporate action.
(g) "Registration Expenses" shall mean all expenses incurred
by the Company in complying with Section 2 or Section 3, including, without
limitation, all federal and state registration, qualification, and filing fees,
printing expenses, fees and disbursements
-2-
3
of counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration.
(h) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(i) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities
pursuant to this Agreement.
(j) "UTS Holder" is defined as any of Stuart Edward White,
David Courtney Godwin and John A. Smith, Jr.
(k) "UTS Registrable Securities" shall mean (i) the 194,286
shares of Common Stock received by the UTS Holders pursuant to the UTS Merger
Agreement that are granted registration rights pursuant to this Agreement and
(ii) all the Common Stock of the Company issued with respect to such shares by
reason of stock dividends, stock splits, or combinations, recapitalizations or
other similar corporate action; provided, however, in any Registration, the UTS
Holders as a group shall be entitled only to sell that number of UTS Registrable
Securities equal to the maximum number of shares eligible to be sold pursuant to
the Registration, and, absent an agreement among the UTS Holders to the
contrary, each UTS Holder shall be entitled only to sell that number of UTS
Registrable Securities equal to such maximum number multiplied by a fraction
equal to the UTS Registrable Securities held by such UTS Holder divided by the
number of UTS Registrable Securities held by all UTS Holders at the time of the
filing of such Registration.
SECTION 2. DEMAND REGISTRATION
2.1 REQUEST FOR REGISTRATION ON FORMS OTHER THAN FORM S-3
2.1.1 GENERAL
Subject to the remainder of this Agreement, in the event that the
Company shall receive from Holders of Registrable Securities (the "Initiating
Holders") a written request that the Company effect any Registration with
respect to all or a part of the Registrable Securities on a form other than Form
S-3 for an offering of at least 20% of the then outstanding Registrable
Securities having a reasonably anticipated aggregate offering price to the
public equal to or greater than $3,000,000 (U.S.), the Company shall (i)
promptly give written notice of the proposed Registration to all other Holders
and shall (ii) as soon as practicable, use its diligent best efforts to effect
the prompt Registration of the Registrable Securities specified in such request,
together with any Registrable Securities of any Holder joining in such request
as are specified in a written request given within 20 days after delivery of
written notice from the Company. The Company shall not be obligated to take any
action to effect any such registration pursuant to this subsection 2.1.1 within
six months after the
-3-
4
effective date of a Registration initiated by the Company or, except as provided
in subsection 2.1.2, after the Company has effected two such Registrations
pursuant to this subsection 2.1.1 and such Registrations shall have been
declared effective (the "Demand Registrations").
2.1.2 CENTRA DEMAND REGISTRATION
If (a) the Company has effected the Demand Registrations pursuant to
subsection 2.1.1 and (b) Centra's participation in the Demand Registrations did
not result in a reduction in the number of shares of Registrable Securities that
the other Holders of Registrable Securities desired and were allowed to register
in the Demand Registrations, then Centra may notify the Company in writing that
it requests a Registration pursuant to this subsection 2.1.2; provided, however,
that in such Registration Centra must register Registrable Securities owned by
it having a reasonably anticipated aggregate offering price to the public equal
to or greater than $15,000,000 (U.S.), or, with respect to a Registration in
which Centra is registering all its Registrable Securities, $5,000,000 (U.S.).
Other Holders of Registrable Securities shall have the right to participate in
the Centra Registration hereunder only to the extent that such participation
does not preclude Centra from registering in such Registration the total number
of Registrable Securities Centra requests in such notification. After receiving
Centra's notice, the Company shall (i) promptly give written notice of the
proposed Registration to all other Holders stating the terms upon which such
Holders can participate in such Registration and (ii) as soon as practicable,
use its diligent best efforts to effect the prompt Registration of the
Registrable Securities specified in Centra's request, together with any
Registrable Securities (subject to the limitations of this subsection 2.1.2) of
any Holder joining in such request that are specified in a written request given
within 20 days after delivery of written notice from the Company. The Company
shall not be obligated pursuant to this subsection 2.1.2 to (a) take any action
to effect any Registration within six months after the effective date of a
Registration initiated by the Company or (b) effect more than one Registration.
2.1.3 NORAM DEMAND REGISTRATIONS
Any time during the period commencing six months after the
effective date of the Company's initial Registration and ending three years
after such effective date, NorAm may notify the Company in writing that it
requests a Registration pursuant to this subsection 2.1.3 to Register for sale
all of the Registrable Securities owned by it. Other Holders of Registrable
Securities shall have the right to participate in the NorAm Registration
hereunder only to the extent that such participation does not preclude NorAm
from registering in such Registration the total number of Registrable Securities
it requests in such notification. After receiving NorAm's notice, the Company
shall (i) promptly give written notice of the proposed Registration to all other
Holders stating the terms upon which such Holders can participate in such
Registration and (ii) as soon as practicable, use its diligent best efforts to
effect the prompt Registration of the Registrable Securities specified in
NorAm's request, together with any Registrable Securities (subject to the
limitations of this subsection 2.1.3) of
-4-
5
any Holder joining in such request that are specified in a written request given
within 20 days after delivery of written notice from the Company. The Company
shall not be obligated pursuant to this subsection 2.1.3 to effect more than one
Registration for NorAm unless NorAm is unable in such Registration to sell all
its Registrable Securities because of the advice of the Underwriter's
Representative (as defined in subsection 2.5.2) requiring a limitation of the
number of shares of Registrable Securities to be sold by NorAm. In such event,
NorAm shall be entitled to two additional Registrations to be effected according
to the terms of this subsection 2.1.3, exercisable at least nine months apart,
and for the Registration of Registrable Securities owned by NorAm having a
reasonably anticipated aggregate offering price to the public equal to or
greater than $5,000,000 (U.S.) or such lesser amount equal to the number of
shares of Registrable Securities as NorAm shall then own which cannot be sold by
NorAm in a transaction pursuant to Rule 144.
2.1.4 UTS DEMAND REGISTRATION
In the event that prior to the expiration of one year from the date of
this Agreement the Company does not effect a Registration triggering the rights
of the UTS Holders set forth in subsection 3.1.2, or in the event that the
Company effects such a Registration or Registrations and the UTS Holders request
participation and the extent of the UTS Holders' participation is reduced in
accordance with the terms of this Agreement to fewer than 97,143 shares of UTS
Registrable Securities, the UTS Holders shall be provided with a demand
registration right pursuant to this subsection 2.1.4 with respect to 97,143
shares of the UTS Registrable Securities minus any amount previously sold by the
UTS Holders in connection with any Registration or Registrations prior to the
time the demand right under this subsection 2.1.4 is exercised. In the event
that the Company shall receive, at any time between the date one year from date
of this Agreement and the date two years from date of this Agreement, a written
request from the UTS Holders that the Company effect a Registration with respect
to all or a part of the UTS Registrable Securities referenced in the preceding
sentence and having a reasonably anticipated aggregate offering price to the
public equal to or greater than $1,500,000 (U.S.), then the Company shall as
soon as practicable, use its diligent best efforts to effect the prompt
Registration of the UTS Registrable Securities specified in such request. The
Company will not be obligated pursuant to this subsection 2.1.4 to (a) take any
action to effect any Registration within six months after the effective date of
a Registration initiated by the Company or (b) effect more than one
Registration. If the Company shall furnish to the UTS Holders a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors of the Company, it would be detrimental to the Company
for any Registration requested under this subsection 2.1.4 to occur at the time
the request is received, the Company shall have the right, exercisable only
once, to defer the filing of a Registration Statement with respect to such
offering for a period of not more than 60 days from the delivery of the request
by the UTS Holders.
-5-
6
2.2 RIGHT OF DEFERRAL OF REGISTRATION ON FORM OTHER THAN
FORM S-3
If the Company shall furnish to all Holders who joined in the request a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company for any Registration requested under subsection 2.1 to occur at
the time the request is received, the Company shall have the right, exercisable
only once in each 12-month period, to defer the filing of a Registration
Statement with respect to such offering for a period of not more than 60 days
from delivery of the request of the Initiating Holders.
2.3 REQUEST FOR REGISTRATION ON FORM S-3
Subject to the remainder of this Agreement, in the event that the
Company receives from Holders a written request that the Company effect any
Registration on Form S-3 at a time when the Company is eligible to register
securities on Form S-3 for an offering by selling shareholders of Registrable
Securities where the aggregate proposed offering price to the public will be at
least $500,000 (U.S.), the Company will promptly give written notice of the
proposed Registration to all the Holders and will as soon as practicable use its
diligent best efforts to effect Registration of the Registrable Securities
specified in such request, together with all or such portion of the Registrable
Securities of any Holder joining in such request as are specified in a written
request delivered to the Company within 20 days after written notice from the
Company of the proposed Registration. There shall be no limit on the number of
occasions on which the Company shall be obligated to effect registration under
this subsection 2.3.
2.4 REGISTRATION OF OTHER SECURITIES IN DEMAND
REGISTRATION
Any Registration Statement filed pursuant to the request of the
Initiating Holders under this Section 2 may, subject to the provisions of
subsection 2.5 and Section 8, include other securities of the Company which are
held by persons who, by virtue of agreements with the Company, are entitled to
include their securities in such Registration.
2.5 UNDERWRITING IN DEMAND REGISTRATION
2.5.1 NOTICE OF UNDERWRITING
If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 2,
and the Company shall include such information in the written notice referred to
in subsection 2.1.1, 2.1.2, 2.1.3, 2.1.4 or 2.3. The right of any Holder to
Registration pursuant to this Section 2 shall be conditioned upon such Holder's
agreement to participate in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting.
-6-
7
2.5.2 SELECTION OF UNDERWRITER IN DEMAND
REGISTRATION
The Company shall (together with all holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
with the representative (the "Underwriter's Representative") of the underwriter
or underwriters selected for such underwriting jointly by a majority of the
Registrable Securities being registered by the Initiating Holders and the
Company; provided, however, that in the case of a registration pursuant to
subsection 2.1.3 in which NorAm is the Initiating Holder, the underwriter or
underwriters shall be selected by NorAm subject to the consent of the Company,
which consent shall not be unreasonably withheld.
2.5.3 INCLUSION OF OTHER HOLDERS IN
DEMAND REGISTRATION
If the officers or directors of the Company holding Common Stock other
than Registrable Securities request inclusion in such Registration, or if
holders of securities other than Registrable Securities request and are legally
entitled to inclusion in such Registration, the Initiating Holders shall, on
behalf of all Holders, offer to such officers or directors and such holders of
securities other than Registrable Securities that such securities other than
Registrable Securities be included in the underwriting and may condition such
offer on the acceptance by such persons of the terms of this Section 2.
2.5.4 MARKETING LIMITATION IN DEMAND
REGISTRATION
In the event the Underwriter's Representative advises the Initiating
Holders in writing that market factors require a limitation of the number of
shares to be underwritten, the Common Stock (other than Registrable Securities)
held by officers or directors of the Company, other than UTS Registrable
Securities held by Stuart Edward White,shall be excluded from such Registration
to the extent required by such limitation. If a limitation of the number of
shares is still required, the Initiating Holders shall so advise all holders of
securities which, pursuant to subsection 2.4, would otherwise be underwritten
pursuant to this subsection 2.5, and the number of shares of such securities
that may be included in the Registration and underwriting shall be allocated
among all holders thereof in proportion, as nearly as practicable, to the
respective amounts of securities held by such holders at the time of filing the
Registration Statement. If a limitation of the number of shares is still
required, the Initiating Holders shall so advise all Holders who have requested
to have their Registrable Securities included in the Registration, and the
number of Registrable Securities that may be included in the Registration shall
be allocated among all Holders thereof in proportion, as nearly as practicable,
to the respective amounts of Registrable Securities held by such Holders at the
time of filing the Registration Statement; provided, however, that in a
Registration pursuant to subsection 2.1.2, all Holders except Centra shall be
subject to such proportional reduction and the Registrable Securities of Centra
shall not be reduced unless
-7-
8
there shall be no other Holders participating in such Registration, in a
Registration pursuant to subsection 2.1.3, all Holders except NorAm shall be
subject to such proportional reduction and the Registrable Securities of NorAm
shall not be reduced unless there shall be no other Holders participating in
such Registration, and in a Registration pursuant to subsection 2.1.4, all
Holders except the UTS Holders shall be subject to such proportional reduction
and the Registrable Securities of the UTS Holders shall not be reduced unless
there shall be no other Holders participating in such Registration. No
Registrable Securities or other securities excluded from the underwriting by
reason of this subsection 2.5.4 shall be included in such Registration
Statement.
2.5.5 RIGHT OF WITHDRAWAL IN DEMAND
REGISTRATION
If any Holder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration,
disapproves of the terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, the underwriter, and the Initiating
Holders delivered at least one day before the effective date of the Registration
Statement. The securities so withdrawn shall also be withdrawn from the
Registration Statement.
2.5.6 INCLUSION OF THE COMPANY'S
SECURITIES IN DEMAND REGISTRATION
If the underwriter has not limited the number of Registrable Securities
or other securities to be underwritten, the Company may include securities for
its own account in such registration and underwriting if the underwriter so
agrees and if the number of Registrable Securities and other securities which
would otherwise have been included in such Registration and underwriting will
not thereby be limited.
2.6 BLUE SKY IN DEMAND REGISTRATION
In the event of any Registration pursuant to this Section 2, the
Company will exercise its best efforts to Register and qualify the securities
covered by the Registration Statement under such other securities or "blue sky"
laws of such jurisdictions as shall be requested by the Underwriter's
Representative and reasonably appropriate for the distribution of such
securities; provided, however, that (i) the Company shall not be required to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act, (ii) the
Company shall not be required to Register or qualify the securities covered by
the Registration Statement in any jurisdiction which requires, as a condition of
such Registration or qualification, escrow of securities of the Company held by
founders, officers, directors or employees of the Company, and (iii)
notwithstanding anything in this Agreement to the contrary, in the event any
jurisdiction in which the securities shall be qualified imposes a nonwaivable
requirement that expenses incurred in connection with the
-8-
9
qualification of the securities be borne by selling shareholders, such expenses
shall be payable pro rata by the selling shareholders.
2.7 EXCLUSION FROM DEMAND REGISTRATION
Notwithstanding any other provision of this Agreement to the contrary,
(i) Holders of securities that are Registrable Securities from the exercise of
AMR Warrants shall have no demand registration rights with respect to such
securities pursuant to this Section 2, but shall be entitled only to piggyback
registration rights as provided in Section 3, and such securities shall not be
counted as Registrable Securities for purposes of this Section 2, and (ii)
except for those demand rights specifically set forth in Section 2.1.4, UTS
Holders of UTS Registrable Securities shall have no demand registration rights
with respect to such securities pursuant to this Section 2 (including pursuant
to subsection 2.1.1 and subsection 2.3).
SECTION 3. PIGGYBACK REGISTRATION
3.1 NOTICE OF PIGGYBACK REGISTRATION AND INCLUSION OF
REGISTRABLE SECURITIES
3.1.1 GENERAL PIGGYBACK RIGHTS
Subject to the remainder of this Agreement and subsection 3.1.2 below,
in the event the Company decides to Register any of its Common Stock (either for
its own account or the account of a security holder or holders exercising their
respective demand registration rights) on a form that would be suitable for a
registration involving Registrable Securities, the Company will (i) promptly
give each Holder written notice thereof (which shall include a list of the
jurisdictions in which the Company then intends to attempt to qualify such
securities under the applicable "blue sky" or other state securities laws) and
(ii) include in such Registration (and any related qualification under state
securities or "blue sky" laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
delivered to the Company by any Holder within 20 days after delivery of such
written notice from the Company.
3.1.2 LIMITATION OF UTS PIGGYBACK RIGHTS
To the extent that the UTS Holders elect to participate in a
Registration referenced in subsection 3.1.1, the number of UTS Registrable
Securities for which the UTS Holders may request registration is limited by this
subsection 3.1.2. If the Registration referenced by subsection 3.1.1 is filed
prior to the expiration if one year from the date of this Agreement, the UTS
Holders may only request registration of a total of 97,143 shares of the UTS
Registrable Securities. If the Registration referenced in subsection 3.1.1 is
filed between the date one year from the date of this Agreement and the date two
years from the date of this Agreement, the UTS Holders may only request
registration for the greater of (i) 97,143 shares of the UTS Registrable
Securities and (ii) 194,286 shares of the UTS Registrable
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Securities minus any amount previously sold upon the exercise of registration
rights contained in subsection 2.1.4 or this subsection 3.1. The UTS Holders
shall not be provided the opportunity to participate in any Registration
effected (i) during the period prior to the issuance of financial statements
reporting 30 days' combined operations of UTS and the Company or (ii) after the
date two years from the date of this Agreement. In addition, the Company shall
have no obligation to register any Registrable Securities on behalf of the UTS
Holders pursuant to this subsection 3.1 unless such securities have a reasonably
anticipated aggregate offering price to the public equal to or greater than
$100,000 (U.S.).
3.2 UNDERWRITING IN PIGGYBACK REGISTRATION
3.2.1 NOTICE OF UNDERWRITING IN PIGGYBACK
REGISTRATION
If the Registration of which the Company gives notice is for a
Registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to subsection
3.1. In such event the right of any Holder to Registration shall be conditioned
upon such underwriting and the inclusion of such Holder's Registrable Securities
in such underwriting to the extent provided in this Section 3. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement with the
Underwriter's Representative for such offering.
3.2.2 MARKETING LIMITATION IN PIGGYBACK
REGISTRATION
In the event the Underwriter's Representative advises the Company that
market factors require a limitation of the number of shares to be underwritten,
the Underwriter's Representative may (subject to the allocation priority set
forth in subsection 3.2.3) exclude those Registrable Securities in excess of 10%
of the shares to be Registered.
3.2.3 ALLOCATION OF SHARES IN PIGGYBACK
REGISTRATION
In the event that the Underwriter's Representative limits the number of
shares to be included in a Registration pursuant to subsection 3.2.2, the number
of shares to be included in such Registration shall be allocated (subject to
subsection 3.2.2) in the following manner. The shares (other than Registrable
Securities) held by officers and directors of the Company, other than UTS
Registrable Securities held by Stuart Edward White,shall be excluded from such
registration and underwriting to the extent required by such limitation. If a
limitation on the number of shares is still required after such exclusion, the
number of shares that may be included in the Registration and underwriting shall
be allocated among all other holders thereof in proportion, as nearly as
practicable, to the respective amounts of securities
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(including Registrable Securities) which such holders, absent any such
limitation, would otherwise be entitled to include in such Registration.
3.2.4 WITHDRAWAL IN PIGGYBACK REGISTRATION
If any Holder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company and the underwriter
delivered at least one day prior to the effective date of the Registration
Statement. The Registrable Securities so withdrawn shall also be withdrawn from
the Registration Statement.
3.3 BLUE SKY IN PIGGYBACK REGISTRATION
In the event of any Registration of Registrable Securities pursuant to
this Section 3, the Company will exercise its best efforts to register and
qualify the securities covered by the Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as shall be requested by the
Underwriter's Representative and reasonably appropriate for the distribution of
such securities; provided, however, that (i) the Company shall not be required
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions and (ii) notwithstanding anything in this
Agreement to the contrary, in the event any jurisdiction in which the securities
shall be qualified imposes a nonwaivable requirement that expenses incurred in
connection with the qualification of the securities be borne by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
SECTION 4. EXPENSES OF REGISTRATION
All Registration Expenses incurred in connection with all Registrations
pursuant to Section 2 (other than a Registration on Form S-3 or a Registration
pursuant to subsection 2.1.4) and all Registrations pursuant to Section 3 shall
be borne by the Company. All Registration Expenses incurred in connection with
any registration, qualification, or compliance pursuant to a Registration on
Form S-3 or pursuant to a Registration pursuant to subsection 2.1.4 shall be
apportioned among the Company and the Holders of the securities so Registered on
the basis of the number of shares so Registered by the Company and such Holders.
All Selling Expenses shall be borne by the Holders of the securities Registered
pro rata on the basis of the number of shares Registered.
SECTION 5. REGISTRATION PROCEDURES
The Company will keep each Holder whose Registrable Securities are
included in any Registration pursuant to this Agreement advised as to the
initiation and completion of such Registration. At its expense the Company will:
(i) use its best efforts to keep such Registration effective for a period of 120
days or until the Holder or Holders have completed the distribution described in
the Registration Statement relating thereto, whichever first
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12
occurs; and (ii) furnish such number of prospectuses (including preliminary
prospectuses) and other documents as a Holder from time to time may reasonably
request.
SECTION 6. INFORMATION FURNISHED BY HOLDER
It shall be a condition precedent to the Company's obligations under
this Agreement that each Holder of Registrable Securities included in any
Registration furnish to the Company such information regarding such Holder and
the distribution proposed by such Holder or Holders as the Company may
reasonably request.
SECTION 7. INDEMNIFICATION
7.1 THE COMPANY'S INDEMNIFICATION OF HOLDERS
To the extent permitted by law, the Company will indemnify each Holder,
each of its officers, directors and constituent partners, each legal counsel and
independent accountant for such Holder, and each person controlling such Holder,
with respect to which qualification or compliance of Registrable Securities has
been effected pursuant to this Agreement, and each underwriter, if any, and each
person who controls any underwriter against all claims, losses, damages, and
liabilities (or actions in respect thereof) to the extent such claims, losses,
damages, or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document or upon any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of any rule or regulation promulgated under the
Securities Act applicable to the Company and relating to action or inaction
required of the Company in connection with any such Registration, qualification,
or compliance. The Company will reimburse each such Holder, each of its
officers, directors and constituent partners, legal counsel and independent
accountants, each such underwriter, and each person who controls any such Holder
or underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action; provided, however, that the indemnity contained in this
subsection 7.1 shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability, or action if settlement is effected without the consent
of the Company (which consent shall not unreasonably be withheld) and provided,
further, that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder, underwriter, legal counsel, independent accountant or
controlling person and stated to be for use in connection with the offering of
securities of the Company; provided, however, that the obligations of the
Company hereunder shall be limited to an amount equal to the proceeds of the
Registrable Securities sold in such Registration, qualification or compliance.
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13
7.2 HOLDER'S INDEMNIFICATION OF THE COMPANY
To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
Registration, qualification or compliance is being effected pursuant to this
Agreement, indemnify the Company, each of its directors and officers, each legal
counsel and independent accountant of the Company, each underwriter, if any, of
the Company's securities covered by such a Registration Statement, each person
who controls the Company or such underwriter within the meaning of the
Securities Act, and each other such Holder, each of its officers, directors, and
constituent partners and each person controlling such other Holder, against all
claims, losses, damages, and liabilities (or actions in respect thereof) to the
extent such claims, losses, damages or liabilities arise out of or are based
upon any untrue statement (or alleged untrue statement) of a material fact
contained in any such Registration Statement, prospectus, offering circular, or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, partners, persons, law and accounting firms, underwriters,
or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering circular,
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use in
connection with the offering of securities of the Company; provided, however,
that the obligations of such Holders hereunder shall be limited to an amount
equal to the proceeds to each such Holder of Registrable Securities sold in such
Registration, qualification or compliance.
7.3 INDEMNIFICATION PROCEDURE
Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof
and generally summarize such action. The indemnifying party shall have the right
to participate in and to assume the defense of such claim; provided, however,
that the indemnifying party shall be entitled to select counsel for the defense
of such claim with the approval of any parties entitled to indemnification,
which approval shall not be unreasonably withheld. In the event that the
indemnifying party elects to assume the defense of any such suit and retain such
counsel and if the indemnified party reasonably determines that a conflict
exists between the indemnifying party and the indemnified party in such defense,
the indemnifying party shall pay the reasonable fees and expenses of one
additional counsel with respect to each such suit retained by the indemnified
party selected by the indemnified party (which selection shall be made by a
majority in interest of the indemnifying Holders in the case of the Holders) and
reasonably satisfactory to
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14
the indemnifying party. The failure to notify an indemnifying party promptly of
the commencement of any such action, if prejudicial to the ability of the
indemnifying party to defend such action, shall relieve such indemnifying party
of any liability to the indemnified party under this Section 7, but the omission
so to notify the indemnifying party will not relieve such party of any liability
that such party may have to any indemnified party otherwise than under this
Section 7.
SECTION 8. LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER
SECURITIES
From and after the date of this Agreement, the Company shall not,
without the written consent of Holders of at least 66-2/3% of the Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company that such holder or prospective holder may require
the Company to initiate any Registration of any securities of the Company;
provided, however, that this Section 8 shall not limit the right of the Company
to enter into an agreement with any holder or prospective holder of any
securities of the Company that upon any registration of any of its securities,
the Company will include among the securities which it then registers securities
owned by such holder; and provided, further, that nothing in this Section 8 or
this Agreement shall prohibit or limit the right of a holder of Common Stock of
the Company to Register or sell its shares of Common Stock.
SECTION 9. TRANSFER AND TERMINATION OF REGISTRATION RIGHTS
The rights to cause the Company to Register securities granted by the
Company under this Agreement to the Holders may be assigned by them to a
transferee or assignee of any Registrable Securities not sold to the public;
provided, however, that (i) such transferee or assignee acquires record or
beneficial ownership of not less than 100,000 of the shares of Registrable
Securities, (ii) NorAm may not transfer or assign any rights under this
Agreement except in connection with the sale or transfer by NorAm of all
Registrable Securities issued to it if such sale or transfer is in compliance
with the restrictions on a sale or transfer set forth in the NorAm Merger
Agreement but only if such restrictions are applicable at the time of the sale
or transfer and (iii) the rights of the UTS Holders under this Agreement are not
transferable. Notwithstanding any other provision of this Agreement; the rights
of the Holders, other than the UTS Holders, to cause the Company to Register
Registrable Securities under this Agreement shall terminate in all respects ten
years after the date of the closing of the Company's first Registration. The
rights of the UTS Holders to cause the Company to Register UTS Registrable
Securities under this Agreement shall terminate in all respects two years from
the date of this Agreement.
SECTION 10. SUCCESSORS AND ASSIGNS
Subject to the limitations of Section 9, this Agreement shall bind and
inure to the benefit of the Company, the Holders and their respective successors
and assigns.
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15
SECTION 11. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior arrangements and
understandings with respect thereto.
SECTION 12. NOTICES
All notices, requests, consents and other communications hereunder to
any party shall be deemed to be sufficient if contained in a written instrument
delivered in person or duly sent by first class registered or certified mail,
postage prepaid, addressed to such party at the address set forth below, or such
other address as may hereafter be designated in writing by the addressee to the
addressor listing all parties:
(a) If to the Company:
Itron, Inc.
2818 N. Sullivan Rd.
P.O. Box 15288
Spokane, WA 99215
Attention: President
(b) If to the Holders, at their respective addresses set
forth on Schedule A hereto.
SECTION 13. CHANGES
The terms and provisions of this Agreement may not be modified or
amended, or any of the provisions hereof waived, temporarily or permanently,
except pursuant to the written consent of the Company and the Holders of 66-2/3%
of the Registrable Securities then outstanding. Notwithstanding the foregoing,
in no event may subsection 2.1.3 of this Agreement be amended without the
written consent of NorAm, nor may subsections 2.1.4, 1(j) and (k) and 3.1.2 of
this Agreement be amended without the written consent of the UTS Holders holding
a majority of the UTS Registrable Securities then outstanding. In addition, in
no event may the portions of subsections 1(d) and (f), 2.5.4, 2.7, 3.2.3, 4, 9
and 13 of this Agreement that specifically refer and relate to the UTS Holders,
and not all Holders, be amended without the written consent of the UTS Holders
holding a majority of the UTS Registrable Securities then outstanding.
SECTION 14. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
-15-
16
SECTION 15. HEADINGS
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
-16-
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SECTION 16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington.
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Registration Rights Agreement as of the date set forth above.
Company: ITRON, INC.
/s/ Johnny M. Humphreys
----------------------------------
Johnny M. Humphreys, President
Holders: NORAM ENERGY CORP.
By /s/ Michael B. Bracy
----------------------------------
Its Executive Vice President
BG HOLDINGS, INC.
By
----------------------------------
Its
-------------------------
CENTRA GAS INC.
By /s/ Graham M. Wilson
----------------------------------
Its
-------------------------
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KPL LIMITED PARTNERS, INC.
By
----------------------------------
Its
------------------------
SOUTHERN ELECTRIC plc
By
----------------------------------
Its
-------------------------
/s/ Stuart Edward White
----------------------------------
Stuart Edward White
/s/ David C. Godwin
----------------------------------
David C. Godwin
/s/ John A. Smith, Jr.
----------------------------------
John A. Smith, Jr.
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19
SCHEDULE A
NorAm Energy Corp.
Attn: Michael B. Bracy
P.O. Box 2628
Houston, TX 77252
BG Holdings, Inc.
Attn: Cynthia Masters
1100 Louisiana St., Suite 2500
Houston, Texas 77002
Centra Gas Inc.
Attn: Mr. Graham M. Wilson
Suite 3400, Park Place
666 Burrard St.
Vancouver, BC V6C 3M8, Canada
KPL Limited Partners, Inc.
c/o Astra Resources
Attn: Mr. Bob Cline
1021 Main Street, Suite 1270
Houston, TX 77002
Southern Electric plc
Attn: Mr. Stuart Broomfield
Littlewick Green, Maidenhead
Berkshire SL6 3QB
England
Stuart Edward White
1116 Silver Oaks Court
Raleigh, NC 27614
David C. Godwin
7016 North Ridge Drive
Raleigh, NC 27615
John A. Smith, Jr.
800 Lake Forest Drive
Raleigh, NC 27615
1
EXHIBIT 10.11
PARTIES TO INDEMNIFICATION AGREEMENTS
MariLyn R. Blair
Michael B. Bracy
Jemima G. Brennan
Jon E. Eliassen
Robert A. Frati
Richard G. Geiger
Johnny M. Humphreys
Klaus O. Huschke
Keith N. Hylton
Michael J. O'Callaghan
Larry A. Panattoni
Paul A. Redmond
Graham M. Wilson
Robert D. Neilson
Ted C. DeMerritt
Mary Ann Peters
Russell E. Vanos
Carl R. Aron
David G. Remington
Stuart Edward White
LeRoy W. Nosbaum
Douglas C. Ralphs
J. Michael Quinlivan
1
EXHIBIT 10.16
LOAN AGREEMENT
BETWEEN
ITRON, INC.,
AS BORROWER,
AND
BANK OF AMERICA NW, N.A.
AND
WASHINGTON TRUST BANK,
AS LENDERS,
AND
BANK OF AMERICA NW, N.A.,
AS AGENT.
DATED AS OF THE 1ST DAY OF JULY, 1996
2
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS............................... 1
1.1 Certain Defined Terms...................................... 1
1.2 Accounting Terms........................................... 8
ARTICLE 2
THE CREDIT................................ 8
2.1 The Revolving Credit....................................... 8
2.2 Manner of Borrowing........................................ 9
2.3 Repayment of Principal..................................... 10
2.4 Interest................................................... 10
2.5 Conversion/Continuation.................................... 10
2.6 Promissory Notes........................................... 11
2.7 Prepayment................................................. 11
2.8 Manner of Payments; Computations........................... 12
2.9 Fees....................................................... 13
2.10 Sharing of Payments, Etc................................... 13
ARTICLE 3
THE EFFECTIVE DATE; CONDITIONS PRECEDENT TO LENDING............ 13
3.1 Conditions Precedent to Effective Date..................... 13
3.2 Conditions to All Loans and to Refinancing................. 14
3.3 Effective Date Events...................................... 15
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BORROWER................ 15
4.1 Corporate Existence and Power.............................. 15
4.2 Corporate Authorization.................................... 15
4.3 Government Approvals, Etc.................................. 16
4.4 Binding Obligations, Etc................................... 16
4.5 Litigation................................................. 16
4.6 Financial Condition........................................ 16
4.7 Title and Liens............................................ 17
4.8 Taxes...................................................... 17
4.9 Other Agreements........................................... 17
4.10 Federal Reserve Regulations................................ 17
4.11 ERISA...................................................... 18
4.12 Subsidiaries............................................... 18
4.13 Representations as Whole................................... 19
ARTICLE 5
AFFIRMATIVE COVENANTS OF BORROWER...................... 19
5.1 Use of Proceeds............................................ 19
5.2 Preservation of Corporate Existence, Etc................... 19
5.3 Visitation Rights.......................................... 19
5.4 Keeping of Books and Records............................... 19
5.5 Maintenance of Property, Etc............................... 20
5.6 Compliance with Laws, Etc.................................. 20
5.7 Other Obligations.......................................... 20
5.8 Insurance.................................................. 20
5.9 Financial Information...................................... 20
5.10 Notification............................................... 22
5.11 Additional Payments; Additional Acts....................... 22
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3
5.12 Working Capital............................................ 22
5.13 Total Liabilities to Tangible Capital Ratio................ 23
ARTICLE 6
NEGATIVE COVENANTS OF BORROWER...................... 23
6.1 Liquidation, Merger, Sale of Assets........................ 23
6.2 Indebtedness, Guaranties, Etc.............................. 24
6.3 Liens...................................................... 24
6.4 Operations................................................. 24
6.5 Permissible Loans.......................................... 24
6.6 Contracts.................................................. 25
6.7 Securities................................................. 25
6.8 ERISA Compliance........................................... 25
6.9 Payments on Subordinated Debt; Prepayments
of Indebtedness.......................................... 25
ARTICLE 7
EVENTS OF DEFAULT............................. 26
7.1 Events of Default.......................................... 26
7.2 Consequences of Default.................................... 28
ARTICLE 8
AGENT.................................. 28
8.1 Authorization and Action................................... 28
8.2 Duties and Obligations..................................... 29
8.3 Dealings Between Agent and Borrower........................ 30
8.4 Lender Credit Decision..................................... 30
8.5 Indemnification............................................ 30
8.6 Successor Agent............................................ 30
ARTICLE 9
MISCELLANEOUS.............................. 31
9.1 No Waiver; Remedies Cumulative............................. 31
9.2 Governing Law.............................................. 31
9.3 Consent to Jurisdiction; Waiver of Immunities.............. 31
9.4 Notices.................................................... 31
9.5 Assignment................................................. 31
9.6 Severability............................................... 32
9.7 Conditions Not Fulfilled................................... 32
9.8 Entire Agreement; Amendment................................ 32
9.9 Conflicting Agreements..................................... 32
9.10 Oral Agreements............................................ 32
EXHIBITS:
Exhibit A -- Form of Notice of Borrowing
Exhibit B -- Form of Notice of Refinancing
Exhibit C -- Form of Revolving Note
Exhibit D -- List of Subsidiaries
Exhibit E -- Form of Subsidiary Guaranty
Exhibit 1 -- Prepayment Fee Calculation
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4
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is dated as of July 1, 1996,
between BANK OF AMERICA NW, N.A., doing business as Seafirst Bank, and
WASHINGTON TRUST BANK, as Lenders, BANK OF AMERICA NW, N.A., doing business as
Seafirst Bank, as agent for Lenders ("Agent"), and ITRON, INC., as Borrower,
and renews, restates, and replaces the Loan Agreement between the parties (Bank
of America NW, N.A. being the successor by name change to Seattle-First
National Bank effective March 1, 1996) dated April 30, 1992 (as subsequently
amended, the "Prior Loan Agreement"). For mutual consideration, Lenders,
Borrower, and Agent enter into this Agreement.
ARTICLE 1
DEFINITIONS
1.1 Certain Defined Terms. As used in this Agreement, the
following terms have the following meanings, which apply to both the singular
and plural forms of the terms defined:
"Agent" means Bank of America NW, N.A. in its capacity as
agent for Lenders.
"Applicable Interest Period" means, with respect to any
Loan, the period commencing on the date such Loan was made pursuant to Section
2.2 or converted or continued pursuant to Section 2.5 and ending:
(a) At the end of the Commitment Period in the case
of a Prime Rate Loan;
(b) 30, 90 or 180 days thereafter in the case of a
CD Loan as specified in the Notice of Borrowing or Notice of Refinancing given
by Borrower in respect of such Loan;
(c) one, two, three or six months thereafter in the
case of a LIBOR Loan as specified in the Notice of Borrowing or Notice of
Refinancing given by Borrower in respect of such Loan;
provided, however, that no Applicable Interest Period may end later than the
expiration of the Commitment Period.
"Applicable Interest Rate" means, for each Loan (or
portion of a Loan), the Prime Rate, the CD Rate, or the LIBOR Rate as
designated by Borrower and specified in the Notice of Borrowing or the Notice
of Refinancing given with respect to that Loan (or portion of a Loan) or as
otherwise determined pursuant to Section 2.5.
"Assessment Rate" for any Applicable Interest Period
shall mean for any date the minimum annual percentage rate
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5
established by the Federal Deposit Insurance Corporation (or any successor) for
the assessment due from members of the Bank Insurance Fund (or any successor)
in effect for the assessment period during which said day occurs based on
deposits maintained at such members' offices located in the United States.
"Available Commitment" has the meaning defined in Section
2.1.
"Borrower" means Itron, Inc., a Washington corporation,
and any Successor.
"Business Day" means a day, other than Saturday or
Sunday, on which banks are open for business in Seattle, Washington.
"CD Loan" means a Loan bearing interest at the CD Rate.
"CD Rate" means an interest rate per annum equal to the
sum of (a) the CD Spread and (b) the product arrived at by multiplying the
Fixed CD Rate in effect for the Applicable Interest Period by Statutory
Reserves in effect on the day as of which such Fixed CD Rate is determined for
any Applicable Interest Period, plus (c) the Assessment Rate in effect on the
day as of which such Fixed CD Rate is determined for any Applicable Interest
Period.
For purposes hereof, the term "CD Spread" shall be as set forth
below depending upon the ratio of Total Liabilities to Tangible Capital, which
ratio shall be determined by the most recently delivered quarterly financial
statements of Borrower. Any change in the ratio, as reflected in a newly-
delivered quarterly financial statement, causing the CD Spread to increase or
decrease, shall become effective retroactively to the first day of the quarter
following the quarter being reported on, and shall change the CD Spread on each
CD Loan outstanding, in addition to each CD Loan subsequently created:
Total Liabilities to Tangible Capital CD Spread
- --------------------------------------------------------------------------------
Greater than .50 to 1 1.125% per annum
- --------------------------------------------------------------------------------
Less than or equal to .50 to 1 1.000% per annum
- --------------------------------------------------------------------------------
For purposes hereof, the term "Fixed CD Rate" shall mean for any
Applicable Interest Period that per annum rate, calculated on the basis of
actual number of days elapsed over a year of 360 days, set forth as the rate in
effect as of the first day of the Applicable Interest Period for a period equal
to the Applicable Interest Period in the weekly statistical release H.15(519)
published by the Board of Governors of the Federal Reserve System under the
caption "CDs (Secondary Market)", or, if said rate is not published as of the
first day of the Applicable
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6
Interest Period, the rate for a period equal to the Applicable Interest Period
appearing as of said date under the caption "Certs of Deposit" on the display
designated as "Page 120" on the Telerate Service (or such other page as may
replace Page 120 on such service or, if none, such other available service
displaying a composite of rates offered for U.S. Dollar Certificates of Deposit
as reported by the Federal Reserve System). If there is no period equal to the
Applicable Interest Period on the display, the Fixed CD Rate shall be
determined by straight-line interpolation to the nearest month (or week or day
if expressed in weeks or days) corresponding to the Applicable Interest Period
between the two nearest neighboring periods on the display.
For purposes hereof, "Statutory Reserves" shall mean a fraction
(expressed as a decimal), the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of the maximum
reserve percentages (including, without limitation, any marginal, special,
emergency or supplemental reserves) expressed as a decimal established by the
Board of Governors of the Federal Reserve System and any other banking
authority to which Agent is subject for determining the reserve requirements of
Agent in respect of new negotiable time deposits in dollars of over $100,000
with maturities approximately equal to the Applicable Interest Period, such
reserve requirements including, without limitation, those imposed under
Regulation D of such Board of Governors. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in such percentage.
"Code" means the Internal Revenue Code of 1986, as
amended from time to time.
"Commitment" and "Commitment Period" have the meanings
defined in Section 2.
"Controlled Group" means all members of a controlled
group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with Borrower, are treated
as a single employer under Section 414(b) or 414(c) of the Code.
"Effective Date" means July 1, 1996.
"ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time.
"Event of Default" has the meaning defined in Section
7.1.
"Government Approval" means an approval, permit, license,
authorization, certificate, or consent of any Governmental Authority.
"Governmental Authority" means the government of the
United States or any State or any foreign country or any
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7
political subdivision of any thereof or any branch, department, agency,
instrumentality, court, tribunal or regulatory authority which constitutes a
part or exercises any sovereign power of any of the foregoing.
"Indebtedness" means for any person (i) all items of
indebtedness or liability (except capital, surplus, deferred credits and
reserves, as such) which would be included in determining total liabilities as
shown on the liability side of a balance sheet as of the date as of which
indebtedness is determined, (ii) indebtedness secured by any Lien, whether or
not such indebtedness shall have been assumed, (iii) any other indebtedness or
liability for borrowed money or for the deferred purchase price of property or
services for which such person is directly or contingently liable as obligor,
guarantor, or otherwise, or in respect of which such person otherwise assures a
creditor against loss, and (iv) any other obligations of such person under
leases which shall have been or should be recorded as capital leases.
"Lenders" mean Bank of America NW, N.A., doing business
as Seafirst Bank (in its separate capacity, "Seafirst") and Washington Trust
Bank, and any Successors.
"LIBOR Loan" means any portion of a Loan bearing interest
at the LIBOR Rate.
"LIBOR Rate" shall mean, with respect to any LIBOR Loan
for any Applicable Interest Period, an interest rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the sum of (a) the
LIBOR Spread and (b) the product of (i) the Euro-dollar Rate in effect for such
Applicable Interest Period and (ii) Euro-dollar Reserves in effect on the first
day of such Applicable Interest Period.
For purposes hereof, the term "LIBOR Spread" shall be as set forth
below depending upon the ratio of Total Liabilities to Tangible Capital, which
ratio shall be determined by the most recently delivered quarterly financial
statements of Borrower. Any change in the ratio, as reflected in a newly-
delivered quarterly financial statement, causing the LIBOR Spread to increase
or decrease, shall become effective retroactively to the first day of the
quarter following the quarter being reported on, and shall change the LIBOR
Spread on each LIBOR Loan outstanding, in addition to each LIBOR Loan
subsequently created:
Total Liabilities to Tangible Capital LIBOR Spread
- ------------------------------------------------------------------------------
Greater than .50 to 1 1.000% per annum
- ------------------------------------------------------------------------------
Less than or equal to .50 to 1 0.875% per annum
- ------------------------------------------------------------------------------
For purposes hereof, the term "Euro-dollar Rate" shall be determined
on the basis of the offered rate for deposits in U.S.
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8
Dollars for the Applicable Interest Period commencing on the first day of such
Applicable Interest Period (the "Reset Date") which appears on the display
designated as the "LIBO" page on the Reuter Monitor Money Rates Service (or
such other page as may replace the LIBO page on that service for the purpose of
displaying London interbank offered rates of major banks) as of 11:00 a.m.,
London time, on the day that is two Business Days preceding the Reset Date. If
at least two such offered rates appear on such Reuter's screen LIBO page, the
Euro-dollar Rate in respect of that Reset Date will be the arithmetic means of
such offered rates. If fewer than two offered rates appear, the Euro-dollar
Rate will be the British Bankers' Association interest settlement rate at 11:00
a.m., London time, on the day that is two Business Days preceding the Reset
Date, as reported on page 3750 of Telerate Systems, Inc. under the U.S. dollar
column. If no such rate is available, the Euro-dollar Rate will be determined
on the basis of the rates at which deposits in U.S. Dollars are offered by four
major banks (selected by Agent) in the London interbank market at approximately
11:00 a.m., London time, on the day that is two Business Days preceding the
Reset Date to prime banks in the London interbank market for the Applicable
Interest Period. Agent will request the principal London office of each of the
four banks to provide a quotation of its rate. The Euro-dollar Rate will be
the arithmetic means of the quotations.
For purposes hereof, the term "Euro-dollar Reserves" means a
fraction (expressed as a decimal), the numerator of which is the number one and
the denominator of which is the number one minus the aggregate of the maximum
reserve percentages (including, without limitation, any special, supplemental,
marginal or emergency reserves) expressed as a decimal established by the Board
of Governors of the Federal Reserve System and any other banking authority to
which Agent is subject, for Eurocurrency Liability (as defined in Regulation D
of such Board of Governors). Euro-dollar Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"Lien" means, for any person, any security interest,
pledge, mortgage, charge, assignment, hypothecation, encumbrance, attachment,
garnishment, execution or other voluntary or involuntary lien upon or affecting
the revenues of such person or any real or personal property in which such
person has or hereafter acquires any interest, except (i) liens for Taxes which
are not delinquent or which remain payable without penalty or the validity or
amount of which is being contested in good faith by appropriate proceedings
upon stay of execution of the enforcement thereof; (ii) liens imposed by law
(such as mechanics' liens) incurred in good faith in the ordinary course of
business which are not delinquent or which remain payable without penalty or
the validity or amount of which is being contested in good faith by appropriate
proceedings upon stay of execution of the enforcement thereof; and (iii)
deposits or pledges under workmen's compensation, unemployment insurance,
social security or other
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9
similar laws or made to secure the performance of bids, tenders, contracts
(except for repayment of borrowed money), or leases, or to secure statutory
obligations or surety or appeal bonds or to secure indemnity, performance or
other similar bonds given in the ordinary course of business.
"Loan" means a loan by Lenders to Borrower pursuant to
Article 2.
"Loan Documents" means this Agreement, the Notes, and all
amendments, modifications and renewals to those documents.
"Material Subsidiary" means any Subsidiary which, because
of its size or the nature of its business, is material to the business,
operations or financial condition of the enterprise comprised of Borrower and
its Subsidiaries taken as a whole. The Subsidiaries that are Material
Subsidiaries as of the Closing Date are described on Exhibit D.
"Note" and "Notes" have the meaning defined in Section
2.6.
"Notice of Borrowing" has the meaning defined in Section
2.2 and shall be in the form attached hereto as Exhibit A.
"Notice of Refinancing" has the meaning defined in
Section 2.5 and shall be in the form attached hereto as Exhibit B.
"Outsourcing Contracts" means contracts or arrangements
in which Borrower, either directly or through Subsidiaries, performs meter
reading and other services for a utility in return for a fixed amount over a
period of time, either directly or through joint ventures with utilities and
other industry participants.
"PBGC" means the Pension Benefit Guaranty Corporation or
any entity succeeding to any or all of its functions under ERISA.
"Pension Plan" or "Plan" shall mean, at any time, an
employee pension benefit plan which is covered by Title IV of ERISA or subject
to the minimum funding standards under Section 412 of the Internal Revenue Code
and is either (a) maintained by Borrower or any member of a Controlled Group
for employees of Borrower or any member of such Controlled Group, or (b)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
Borrower or any member of a Controlled Group is then making or accruing an
obligation to make contributions or has within the preceding 5 plan years made
contributions.
- 6 -
10
"Potential Event of Default" means an act, action or
event set forth in Article 7 which would constitute an Event of Default except
that the notice required by Article 7 has not been given or the cure period set
forth in Article 7 has not expired.
"Prime Rate" means an interest rate per annum equal to the
higher of:
(A) the publicly announced prime rate
charged on that day by Agent at its principal office
(which prime rate is a reference rate and not necessarily
the lowest rate of interest charged by Agent to its prime
customers), changing as such prime rate changes, or
(B) the sum of 1.50% plus the "Federal
Funds" rate, as quoted by Garvin Guybutler on page 5 of
Telerate on such day (or if said broker or Telerate shall
cease to quote or report the "Federal Funds" rate, the
"Federal Funds" rate shall be as quoted by another broker
and as reported on any other electronic or printed medium
selected by Agent), changing as such "Federal Funds" rate
changes.
"Prime Rate Loan" means a Loan bearing interest at the
Prime Rate.
"Pro Rata Share" means 86% as to Bank of America NW,
N.A., doing business as Seafirst Bank, and 14% as to Washington Trust Bank.
"Standby Commitment" has the meaning defined in Section
2.1.
"Subordinated Debt" means Indebtedness for borrowed money
of Borrower which shall have been subordinated to the Loans and other
obligations of Borrower under the Loan Documents, on terms and conditions which
provide, in form satisfactory to Agent, that no payments may be made by
Borrower in respect of such Indebtedness at any time when an Event of Default
or Potential Event of Default shall have occurred and be continuing.
"Subsidiary" means any corporation of which a majority
(by number of shares or by number of votes) of any class of outstanding capital
stock normally entitled to vote for the election of one or more directors
(regardless of any contingency which does or may suspend or dilute the voting
rights of such class) is at such time owned directly or indirectly by Borrower
or one or more subsidiaries.
"Successor" means, for any corporation or banking
association, any successor by merger or consolidation, or by acquisition of
substantially all of the assets of the predecessor.
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11
"Tangible Capital" has the meaning defined in Section
5.13.
"Total Liabilities" has the meaning defined in Section
5.13.
"Unfunded Vested Liabilities" means, with respect to any
Plan, at any time, the amount (if any) by which (a) the present value of all
vested nonforfeitable benefits under such Plan exceeds (b) the fair market
value of all Plan assets allocable to such benefits, all determined as of the
then most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of Borrower or any member of the
Controlled Group to the PBGC or the Plan under Title IV of ERISA.
1.2 Accounting Terms. Except as otherwise provided herein,
accounting terms not specifically defined shall be construed, and all
accounting procedures shall be performed, in accordance with generally accepted
United States accounting principles consistently applied.
ARTICLE 2
THE CREDIT
2.1 The Revolving Credit. Each Lender severally agrees on
the terms and conditions of this Agreement to make revolving loans to Borrower
(the "Loans") from time to time on Business Days during the period beginning on
the Effective Date and ending on May 31, 1997 (the "Commitment Period"),
provided that after giving effect to any such Loan the aggregate unpaid
principal amount of all such Loans made by such Lender shall not exceed at any
time such Lender's Pro Rata Share of the sum of the "Available Commitment" plus
the "Standby Commitment" as set forth below (the "Commitment"):
Time Period Available Commitment Standby Commitment
----------- -------------------- ------------------
Effective Date through 9/29/96 $20,000,000 $30,000,000
9/30/96 through 12/30/96 $30,000,000 $20,000,000
After 12/30/96 $50,000,000 $0
If at any time any portion of the Standby Commitment is used as a Loan, the
"Available Commitment" shall be permanently increased by, and the "Standby
Commitment" shall be permanently reduced by, the dollar amount of each such
Loan, for each time period specified above. The Loans described in this
Section 2.1 constitute a revolving credit and, subject to the terms and
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12
conditions hereof, within the amount and time specified Borrower may pay,
prepay and reborrow. Each Loan requested by Borrower under this Section 2.1
shall be in an amount (for both Lenders combined) of not less than $250,000 if
such Loan or advance is a Prime Rate Loan and not less than $500,000 if such
Loan is a CD Loan or a LIBOR Loan.
2.2 Manner of Borrowing. Borrower shall give Agent at least
same Business Day's written notice (by telecopy or otherwise) of each intended
borrowing of a Prime Rate Loan, and at least one (1) Business Day's written
notice (by telecopy or otherwise) of each intended borrowing of a CD Loan, and
at least two (2) Business Day's written notice (by telecopy or otherwise) of
each intended borrowing of a LIBOR Loan. Each such notice (herein a "Notice of
Borrowing") shall be in the form of Exhibit A and shall specify the date of the
intended borrowing, and the initial Applicable Interest Rate and Applicable
Interest Period selected by Borrower in respect of the anticipated Loan. Each
Notice of Borrowing shall be effective upon receipt, except that notices
received by Agent after 11:00 a.m., Seattle time, on a Business Day shall be
deemed to be received on the immediately succeeding Business Day. All such
notices shall be irrevocable and shall constitute a representation and warranty
by Borrower that as of the date of the notice the statements set forth in
Article 4 hereof are true and correct and that no Event of Default or Potential
Event of Default shall have occurred and be continuing. on receipt of such
Notice of Borrowing, Agent shall promptly (on the same day, if possible) notify
each Lender by telephone (confirmed promptly by telex or telecopy), telex or
telecopy of the information set forth in the Notice of Borrowing. Each Lender
shall before 2:00 p.m. Seattle time on the specified date of borrowing pay such
Lender's pro rata share of the requested borrowing in Seattle clearinghouse
funds to Agent at its Commercial Loan Service Center. Upon fulfillment to
Agent's satisfaction of the applicable conditions set forth in Article 3, and
after receipt by Agent of such funds, Agent will make such funds available to
Borrower. The initial Loan will be in an amount equal to or greater than the
amount necessary to repay all amounts then outstanding under the Prior Loan
Agreement and shall be used to repay all amounts then outstanding under the
Prior Loan Agreement. If the initial Loan is greater than the amount necessary
to repay all amounts then outstanding under the Prior Loan Agreement, the
excess amount after repayment shall be disbursed to the ordinary checking
account maintained by Borrower at Agent's Commercial Accounts Service Center.
All future Loans shall be disbursed to the ordinary checking account maintained
by Borrower at Agent's Commercial Accounts Service Center.
Each Lender may, at its option, fund its own Commitment hereunder
notwithstanding any default by the other Lender in advancing its Commitment.
In such event, Agent shall thereafter take such disproportionate funding into
account in allocating principal and interest repayments to Lenders. The
foregoing right of a Lender to advance funds in spite of the other Lender's
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default shall not prejudice or limit in any respect the rights of such Lender
or Borrower against the defaulting Lender.
2.3 Repayment of Principal. Borrower shall repay to Lender
the principal amount of the Loans on or before the last day of the Commitment
Period.
2.4 Interest.
(a) Borrower agrees to pay interest on the unpaid
principal amount of each Loan from the date of the Loan until the end of the
Commitment Period at the Applicable Interest Rate and thereafter at a rate
which is three (3) percentage points per annum above the Prime Rate (changing
as the Prime Rate changes). Accrued but unpaid interest on each Loan shall be
paid (i) as to Prime Rate Loans, on the first day of each calendar month for
the period ending on the last day of the preceding calendar month, and (ii) as
to CD Loans and LIBOR Loans, on the last day of the Applicable Interest Period
and, for Applicable Interest Periods longer than three months, also on the day
three months after the first day of the Applicable Interest Period.
Notwithstanding the foregoing, accrued interest on any Loan shall be payable on
demand after the occurrence of an Event of Default.
(b) In the event, and on each occasion, that Agent
shall have determined (which determination shall be conclusive and binding)
that the CD Rate or LIBOR Rate cannot be ascertained for any reason (including,
without limitation, the inability or failure of Agent to obtain sufficient bids
in accordance with the terms of the definition of the CD Rate or LIBOR Rate) or
Agent shall determine that due to a change in the financial markets not
specifically related to the unique funding capabilities of either Lender the CD
Rate or LIBOR Rate will not adequately and fairly reflect the cost to Lenders
of making or maintaining the principal amount of a CD Loan or LIBOR Loan during
the Applicable Interest Period for such CD Loan or LIBOR Loan, Lender shall, as
soon as practicable thereafter, give notice of such determination to Borrower
and any request for a CD Loan or LIBOR Loan pursuant to Section 2.2 or for
conversion to or continuation of a CD Loan or LIBOR Loan pursuant to Section
2.5 shall be deemed to be a request for a Prime Rate Loan.
2.5 Conversion/Continuation.
(a) Subject to the limitations as to amount and time
set forth in the definitions of "Applicable Interest Rate" and "Applicable
Interest Period," Borrower shall have the option (i) to convert all or a
portion of any LIBOR Loan, CD Loan, or Prime Loan to a Loan bearing interest at
a different permissible reference rate, or (ii) at the expiration of the
Applicable Interest Period for a CD Loan or a LIBOR Loan, to continue such Loan
as a CD Loan or LIBOR Loan for a new Applicable Interest Period; provided,
however, (x) no outstanding Loan may be continued as, or be converted into, a
CD Loan or a LIBOR Loan when any Potential Event of Default or Event of Default
has
- 10 -
14
occurred and is continuing and (y) a CD Loan or a LIBOR Loan may only be
converted at the conclusion of an Applicable Interest Period.
(b) At any time Borrower wishes to cause a
conversion or continuation of a Loan pursuant to Paragraph (a) above, Borrower
shall deliver (by telecopy or otherwise) a written notice of refinancing
(herein a "Notice of Refinancing") in the form of Exhibit B hereto to Agent no
later than 11:00 a.m., Seattle time, on a Business Day at least as far in
advance of such desired conversion or continuation as would be required if the
Loan as converted or continued were being originally made pursuant to Section
2.2. The Notice of Refinancing shall specify: (i) the proposed
conversion/continuation date (which shall be a Business Day), (ii) the amount
of the Loan to be converted/continued, (iii) the nature of the proposed
conversion or continuation, and (iv) in the case of a conversion to, or
continuation of, a CD Loan or a LIBOR Loan, the new Applicable Interest Period.
A Notice of Refinancing shall be irrevocable and Borrower shall be bound to
convert or continue in accordance therewith.
(c) In the event that at the conclusion of an
Applicable Interest Period for a CD Loan or a LIBOR Loan, Borrower has not
furnished a Notice of Refinancing complying with the terms of this Agreement
or, if at such time, Borrower is not entitled to convert a Loan to, or continue
it as, a CD Loan or a LIBOR Loan, such Loan shall as of the last day of the
expiring Applicable Interest Period be deemed to have been converted to a Prime
Rate Loan.
2.6 Promissory Notes. Borrower shall execute and deliver to
each Lender on or prior to the Effective Date, a promissory note (for each
Lender, the "Note", and, collectively, the "Notes") in the principal amount of
such Lender's commitment and otherwise substantially in the form of Exhibit C
hereto.
2.7 Prepayment.
(a) Any portion of the principal of a Loan may be
paid prior to its maturity (herein a "prepayment"). Any prepayment of
principal shall be accompanied by all accrued but unpaid interest on the
principal amount prepaid. Absent a designation by Borrower and in any event
during the continuance of an Event of Default, prepayments shall be applied to
such Loans as shall be designated by Agent, in its sole discretion.
(b) No fee shall be assessed in connection with the
prepayment of a Prime Rate Loan. If a CD Loan or a LIBOR Loan is paid prior to
the end of the Applicable Interest Period, Borrower shall pay a premium on the
date of such payment in an amount determined pursuant to Exhibit 1 hereto.
Such premiums shall apply in all circumstances where principal on a LIBOR Loan
or a CD Loan is paid prior to the end of the Applicable Interest
- 11 -
15
Period, regardless of whether such payment is voluntary or mandatory or the
result of Agent's collection efforts.
2.8 Manner of Payments; Computations.
(a) Borrower shall have on deposit on the day of any
scheduled payments hereunder sufficient funds in Borrower's Seafirst checking
account no. 67130-500 to make such scheduled payments of principal, interest
and/or fees on the Loans and Commitments as those amounts become due for
payment hereunder and under the related documents. Agent shall give Borrower
written notice of the expected amount of interest on CD Loans or LIBOR Loans at
least five Business Days prior to the date of each scheduled payment thereof,
but will give same-day fax notice of the expected amount of interest payments
on Prime Rate Loans. All scheduled payments of principal, interest and/or fees
due hereunder by Borrower to Lender shall be made by charging such amounts
against Borrower's aforesaid checking account after 11:00 a.m., Seattle time,
on the day on which such payments shall become due. All other amounts payable
hereunder by Borrower to Agent or Lenders shall be made by paying the same in
United States Dollars and in immediately available funds to Agent at its
Commercial Loan Service Center not later than 2:00 p.m., Seattle time, on the
date on which such payment shall become due.
(b) In addition to the scheduled payment withdrawal
authorization set out in paragraph (a) above, Borrower hereby authorizes Agent
and each Lender, if and to the extent any payment is not promptly made pursuant
to this Agreement or any Note and an Event of Default exists, to charge from
time to time against any or all of the accounts of Borrower with Agent or
Lenders any amount due hereunder or under any Note.
(c) All computations of fees and of Prime Rate Loan
interest shall be made on the basis of a year of 365 or 366 days and all
computations of interest on CD Loans and LIBOR Loans shall be made on the basis
of a year of 360 days, in either case, for the actual number of days (including
the first day but excluding the last day) occurring in the period for which
such interest or fees are payable.
(d) Whenever any payment hereunder or under any Note
shall be stated to be due or whenever the last day of any Applicable Interest
Period would otherwise occur on a day other than a Business Day, such payment
shall be made and the last day of such Applicable Interest Period shall occur
on the next succeeding Business Day and such extension of time shall in such
case be included in the computation of payment of interest or commitment fees,
as the case may be; provided, however, in the case of an interest payment due
at the end of an Applicable Interest Period on a LIBOR Loan, if such next
succeeding Business Day is the first Business Day of a calendar month, such
interest payment shall be made on the next preceding Business Day.
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2.9 Fees. Borrower agrees to pay to each Lender a commitment
fee computed quarterly in arrears, as follows, to be paid fifteen days after
the end of each quarter (and fifteen days after the expiration of the
Commitment Period, if such expiration should occur on a day other than the end
of a quarter):
(a) 0.18% per annum on the average daily unused
amount of such Lender's Pro Rata Share of the Available Commitment
during the preceding quarter; plus
(b) 0.10% per annum on the average daily unused
amount of such Lender's Pro Rata Share of the Standby Commitment
during the preceding quarter; plus
(c) 0.08% per annum of such Lender's Pro Rata Share
of the principal portion, if any, of the Standby Commitment which
converted to "Available Commitment" pursuant to the last paragraph
of Section 2.1, calculated retroactively for the 90 days preceding
the date upon which such portion of the Standby Commitment was
advanced as a Loan to Borrower (but calculated no farther backwards
than the Effective Date).
2.10 Sharing of Payments, Etc. If any Lender shall obtain any
payment from Borrower (whether voluntary or involuntary through the exercise of
any right of setoff or otherwise) in excess of its Pro Rata Share of all
payments due Lenders hereunder, such Lender shall hold such excess payment in
trust for Agent and shall forthwith remit the same to Agent for distribution to
Lenders in accordance with their Pro Rata Shares.
ARTICLE 3
THE EFFECTIVE DATE; CONDITIONS PRECEDENT TO LENDING
3.1 Conditions Precedent to Effective Date. In addition to
the conditions set forth in Sections 3.2 and 3.3, the obligation of Lenders to
make the initial Loan is subject to fulfillment of the following conditions on
or prior to the Effective Date:
(a) Loan Documents. Each Lender shall have received
all of the following Loan Documents, each duly executed and delivered by the
respective parties thereto, and satisfactory to each Lender in form and
substance:
(i) this Agreement;
(ii) the Notes; and
(iii) Certificate signed by the chief
executive officer, chief financial officer or other principal financial officer
of Borrower, certifying compliance as of the Effective Date with Sections
3.2(b) and (c) hereof.
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(b) Corporate Certificates. Agent shall have
received all of the following, each satisfactory to Lenders in form and
substance:
(i) Certified copies of the articles of
incorporation and bylaws of Borrower;
(ii) Certificate of good standing issued
by the Secretary of the State of Washington with respect to Borrower;
(iii) Certified copy of resolution
adopted by the board of directors of Borrower authorizing the execution,
delivery and performance by Borrower of this Agreement and the Notes;
(iv) Incumbency certificates describing
the office and identifying the specimen signatures of the individuals signing
the Loan Documents on behalf of Borrower.
(c) Other Information. Agent shall have received
such other statements, opinions, certificates, documents and information with
respect to the matters contemplated by this Agreement as it may reasonably
request.
3.2 Conditions to All Loans and to Refinancing. The
obligation of Lenders to fund any Loans hereunder, including the initial Loan
or to permit any refinancing pursuant to Section 2.5, is subject to fulfillment
of the following conditions:
(a) Notice of Borrowing or Refinancing. Agent shall
have received the Notice of Borrowing or Notice of Refinancing, as the case may
be, in respect of such Loan.
(b) No Default. At the date of the Loan or the
refinancing, no Potential Event of Default or Event of Default shall have
occurred and be continuing or will occur as a result of the making of the
Loans; and the representations of Borrower in Article 4 shall be true on and as
of such date with the same force and effect as if made on and as of such date.
(c) Compliance with Quarterly Financial Covenants.
At the end of the last calendar quarter preceding such Loan or refinancing,
Borrower and its consolidated Subsidiaries were in compliance with Sections
5.12 and 5.13 (applying such covenants as if the Loans being requested were
outstanding as of the end of such calendar quarter) and, since the end of such
calendar quarter, neither Borrower nor any consolidated Subsidiary has redeemed
any equity or repaid any Subordinated Debt which, if they had occurred
immediately prior to the end of the calendar quarter, would have resulted in a
violation of Sections 5.12 or 5.13 (if there had then been Loans outstanding).
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(d) Conditions to the Effective Date. All conditions
to the Effective Date shall have been satisfied.
3.3 Effective Date Events. On the Effective Date, subject to
satisfaction of the conditions set forth in Section 3.1 and 3.2, the following
events will occur:
(a) Return of Prior Notes. Upon satisfaction of
Section 3.3(b), Lenders shall mark the promissory notes that were issued under
the Prior Loan Agreement "CANCELLED" and shall return same to Borrower (the
"Prior Notes").
(b) Payment of Prior Loan Agreement Advances. All
accrued but unpaid interest and outstanding principal balances plus payment of
any accrued fees under the Prior Notes shall be paid in full.
(c) Termination of Prior Loan Agreement. The Prior
Loan Agreement and the Prior Notes shall be deemed terminated and shall be of
no further force or effect.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower represents and warrants to each Lender as follows:
4.1 Corporate Existence and Power. Borrower and each
Subsidiary are corporations duly incorporated, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation.
Borrower and each Subsidiary are duly qualified to do business in each other
jurisdiction where the nature of their respective activities or the ownership
of their respective properties requires such qualification, except to the
extent that failure to be so qualified does not have a material adverse effect
on the business, operations or financial condition of the enterprise comprised
of Borrower and its Subsidiaries taken as a whole. Borrower and each
Subsidiary have full corporate power, authority and legal right to carry on
their business as presently conducted, and to own and operate their properties
and assets. Borrower has full corporate power, authority and legal right to
execute, deliver and perform all Loan Documents to which it is a party.
4.2 Corporate Authorization. The execution, delivery and
performance by Borrower of the Loan Documents and any borrowing hereunder and
thereunder (i) have been duly authorized by all necessary corporate action of
Borrower, (ii) do not require any shareholder approval or the approval or
consent of any trustee or the holders of any Indebtedness of Borrower or any
subsidiary except such as have been obtained (certified copies thereof having
been delivered to Agent), (iii) do not contravene any law, regulation, rule or
order binding on Borrower or any subsidiary or its Articles of Incorporation or
Bylaws, and (iv)
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do not contravene the provisions of or constitute a default under any
indenture, mortgage, contract or other agreement or instrument to which
Borrower or any Subsidiary is a party or by which Borrower or any Subsidiary or
any of their properties may be bound or affected, except for a contravention or
default by a Subsidiary that would not have a material adverse effect on the
business, operations or financial condition of the enterprise comprised of
Borrower and its Subsidiaries taken as a whole.
4.3 Government Approvals, Etc. No Government Approval or
filing or registration with any Governmental Authority is required for the
making and performance by Borrower of any Loan Document to which it is a party
or in connection with any of the transactions contemplated hereby, except such
as have been heretofore obtained and are in full force and effect (certified
copies thereof having been delivered to Agent).
4.4 Binding Obligations, Etc. The Loan Documents have been
duly executed and delivered by Borrower, and constitute the legal, valid and
binding obligations of Borrower enforceable against Borrower in accordance with
their respective terms.
4.5 Litigation. There are no actions, proceedings,
investigations, or claims against or affecting Borrower or any Subsidiary now
pending before any court, arbitrator or Governmental Authority (nor to the
knowledge of Borrower has any thereof been threatened nor does any basis exist
therefor) which has a reasonable likelihood of being determined adversely to
Borrower or any Subsidiary and which, if so determined, would be likely to have
a material adverse effect on the business, operations or financial condition of
the enterprise comprised of Borrower and its Subsidiaries taken as a whole, or
to result in a judgment or order against Borrower or any Subsidiary (in excess
of insurance coverage) for more than $250,000 in any one case or $500,000 in
the aggregate, except as reflected in the financial statements referred to in
Section 4.6.
4.6 Financial Condition. The consolidated balance sheet of
Borrower and its consolidated Subsidiaries as at December 31, 1995, and the
related consolidated statements of income and cash flows of Borrower and its
consolidated Subsidiaries for the fiscal year then ended, copies of which have
been furnished to each Lender, fairly present the consolidated financial
condition of Borrower and its consolidated Subsidiaries as at such date and the
results of operations of Borrower and its consolidated Subsidiaries for the
period then ended, all in accordance with generally accepted accounting
principles consistently applied. Borrower and its consolidated Subsidiaries
did not have on such date any contingent liabilities for Taxes, unusual forward
or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except as referred to or reflected or provided for in
that balance sheet and in the notes to those financial statements. Since that
date, there has been no material adverse change in the business, operations or
financial
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20
condition of the enterprise comprised of Borrower and its Subsidiaries taken as
a whole.
4.7 Title and Liens. Borrower and its Material Subsidiaries
have good and marketable title to each of the properties and assets reflected
in the balance sheet referred to in Section 4.6 (except such as are held under
leases or have been since sold or otherwise disposed of in the ordinary course
of business). No assets or revenues of Borrower or its Material Subsidiaries
are subject to any Lien except as permitted under Section 6.3. All properties
of Borrower and its Subsidiaries and their use thereof comply with applicable
zoning and use restrictions and with applicable laws and regulations relating
to the environment, except for violations that do not have a material adverse
effect upon the business, operations or financial condition of the enterprise
comprised of Borrower and its Subsidiaries taken as a whole.
4.8 Taxes. Borrower and its Material Subsidiaries have filed
all tax returns and reports required of them, have paid all taxes which are due
and payable or as to which there is no good faith contest or dispute as to the
amount or validity of the assessment against Borrower and its Material
Subsidiaries, and have provided adequate reserves for payment of any tax whose
payment is being contested. All Subsidiaries that are not Material
Subsidiaries have filed all tax returns and reports required of them, have paid
all taxes which are due and payable or as to which there is no good faith
contest or dispute as to the amount or validity of the assessment, and have
provided adequate reserves for payment of any tax where payment is being
contested, except in respect of taxes in an aggregate amount equal to or less
than Ten Thousand Dollars ($10,000). The charges, accruals and reserves on the
books of Borrower and its Subsidiaries in respect of taxes for all fiscal
periods to date are accurate. There are no questions or disputes between
Borrower or any Subsidiary and any Governmental Authority with respect to any
taxes except as disclosed in the balance sheet referred to in Section 4.6 or
otherwise previously disclosed to both Lenders in writing.
4.9 Other Agreements. Neither Borrower nor any subsidiary is
in breach of or default under any material agreement to which it is a party or
which is binding on it or any of its assets, the breach of which agreement
would have a material adverse effect upon the business, operations or financial
condition of the enterprise comprised of Borrower and its Subsidiaries taken as
a whole.
4.10 Federal Reserve Regulations. Neither Borrower nor any
Subsidiary is engaged principally or as one of its important activities in the
business of extending credit for the purpose of purchasing or carrying any
margin stock (within the meaning of Federal Reserve Regulation U), and no part
of the proceeds of any Loan will be used to purchase or carry any such margin
stock or to extend credit to others for the purpose of purchasing or
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21
carrying any such margin stock or for any other purpose that violates the
applicable provisions of any Federal Reserve Regulation. Borrower will furnish
on request to Agent a statement conforming with the requirements of Regulation
U.
4.11 ERISA.
(a) The present value of all benefits vested under
all Pension Plans did not, as of the most recent valuation date of such Pension
Plans, exceed the value of the assets of the Pension Plans allocable to such
vested benefits by an amount which would represent a potential material
liability of Borrower and its Material Subsidiaries or affect materially the
ability of Borrower to perform its obligations under the Loan Documents.
(b) No Plan or trust created thereunder, or any
trustee or administrator thereof, has engaged in a "prohibited transaction" (as
such term is defined in Section 406 or Section 2003(a) of ERISA) which could
subject such Plan or any other Plan, any trust created thereunder, or any
trustee or administrator thereof, or any party dealing with any Plan or any
such trust to the tax or penalty on prohibited transactions imposed by Section
502 or Section 2003(a) of ERISA.
(c) No Pension Plan or trust created thereunder has
been terminated, and there have been no "reportable events" (as that term is
defined in Section 4043 of ERISA) since the effective date of ERISA.
(d) No Pension Plan or trust created thereunder has
incurred any "accumulated funding deficiency" (as such term is defined in
Section 302 of ERISA) whether or not waived, since the effective date of ERISA.
(e) Neither Borrower nor any Material Subsidiary is
now, nor has it been, a party to or had any employees who are covered by any
multi-employer pension or benefit plan.
(f) The required allocations and contributions to
Pension Plans will not violate Section 415 of the Internal Revenue Code.
4.12 Subsidiaries. In respect of Subsidiaries, Exhibit D to
this Agreement sets forth as of the date of this Agreement the authorized
capitalization of each Material Subsidiary, the number of shares of each class
of capital stock issued and outstanding of each Material Subsidiary, and the
number and percentage of outstanding shares of each such class of capital stock
owned by Borrower or by any Material Subsidiary, and describes the Material
Subsidiaries as of the Closing Date. Exhibit D sets forth the name and address
of each Subsidiary and the percentage of outstanding shares owned by Borrower.
Borrower will promptly notify Lender in writing of any change in the identity
of the Material Subsidiaries, which will be subject to Lenders' approval. The
outstanding shares of each Subsidiary have been
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duly authorized and validly issued and are fully paid and nonassessable.
Borrower and each Subsidiary owns beneficially and of record and has good title
to all the shares it is listed as owning on Exhibit D, free and clear of any
Lien.
4.13 Representations as a Whole. This Agreement, the
financial statements referred to in Section 4.6, and all other instruments,
documents, certificates and statements furnished to the Lender by Borrower,
taken as a whole, do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
contained herein or therein not misleading.
ARTICLE 5
AFFIRMATIVE COVENANTS OF BORROWER
So long as Lenders shall have any Commitment hereunder and until
payment in full of each Loan and Note and performance of all other obligations
of Borrower under the Loan Documents, Borrower agrees that all of the following
shall be done unless each Lender shall otherwise consent in writing:
5.1 Use of Proceeds. Borrower will use the proceeds of the
Loan exclusively for general corporate purposes subject to the provisions of
this Agreement.
5.2 Preservation of Corporate Existence, Etc. Borrower will
cause to be done all things necessary to preserve and maintain the corporate
existence, franchises and privileges of Borrower in Washington, and all other
Material Subsidiaries in their respective jurisdictions of incorporation.
Borrower will qualify, and thereafter remain qualified, and will cause each
Material Subsidiary to qualify and remain qualified as a foreign corporation in
each jurisdiction where such qualification is necessary or advisable in view of
Borrower's or such Material Subsidiary's business and operations or the
ownership of its properties.
5.3 Visitation Rights. At any reasonable time, and from time
to time, upon reasonable notice, Borrower will permit Lenders to examine and
make copies of and abstracts from the records and books of account of and to
visit the properties of Borrower and its Material Subsidiaries and to discuss
the affairs, finances and accounts of Borrower and its Material subsidiaries
with its chief executive officer, chief financial officer or other principal
financial officer, if any.
5.4 Keeping of Books and Records. Borrower will keep and
will cause its Subsidiaries to keep adequate records and books of account in
which complete entries will be made, in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of Borrower and its Subsidiaries.
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23
5.5 Maintenance of Property, Etc. Borrower will maintain and
preserve and will cause its Subsidiaries to maintain and preserve all of their
properties in good working order and condition, ordinary wear and tear
excepted, and Borrower will, and will cause its Subsidiaries to from time to
time make all needed repairs, renewals or replacements so that the efficiency
of such properties shall be fully maintained and preserved, provided that
Borrower shall not be required to comply with this Section 5.5 if failure to
comply would not be likely to have a material adverse effect on the business,
operations or financial condition of the enterprise comprised of Borrower and
its Subsidiaries taken as a whole.
5.6 Compliance with Laws, Etc. Borrower will comply and will
cause each Subsidiary to comply in all material respects with all laws,
regulations, rules, and orders of Governmental Authorities applicable to
Borrower and its subsidiaries or to their operations or property, except any
thereof whose validity is being contested in good faith by appropriate
proceedings upon stay of execution of the enforcement thereof.
5.7 Other Obligations. Borrower will and will cause each
Subsidiary to pay and discharge before the same shall become delinquent all
Indebtedness, all taxes and all other obligations for which Borrower or its
Subsidiaries are liable or to which their income or property is subject (except
to the extent that failure to pay such other obligations would not be likely to
have a material adverse effect upon the business, operations or financial
condition of the enterprise comprised of Borrower and its Subsidiaries taken as
a whole), and all claims for labor and materials or supplies which, if unpaid,
might become by law a lien upon assets of Borrower or its Subsidiaries, except
any thereof whose validity or amount is being contested in good faith by
Borrower or its Subsidiaries in appropriate proceedings with provision having
been made to the reasonable satisfaction of Agent for the payment thereof in
the event the contest is determined adversely to Borrower or its Subsidiaries.
5.8 Insurance. Borrower will keep and will cause its
Material Subsidiaries to keep in force upon all of their properties and
operations policies of insurance carried with responsible companies in such
amounts and covering all such risks as shall be customary in the industry and
reasonably satisfactory to Agent. Borrower will on request furnish to Agent
certificates of insurance or duplicate policies evidencing such coverage.
5.9 Financial Information. Borrower will deliver to Agent
and to each Lender:
(a) As soon as available and in any event within 100
days after the end of each fiscal year of Borrower, the consolidated balance
sheet of Borrower and its consolidated Subsidiaries as of the end of such
fiscal year, the related consolidated statements of income, the related
consolidated statements of cash flows, and the related consolidated statements
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of shareholders' equity of Borrower and its consolidated Subsidiaries for such
year, setting forth in comparative form the corresponding consolidated figures
for the appropriate periods in the preceding fiscal year, accompanied by an
audit report of the consolidated balance sheet, statements of income and cash
flows and statement of shareholders' equity of Borrower and its consolidated
Subsidiaries for such year by independent certified public accountants selected
by Borrower (which reports shall be prepared in accordance with generally
accepted accounting principles consistently applied and shall not be qualified
by reason of restricted or limited examination of any material portion of
Borrower's and the Subsidiaries' records and shall contain no disclaimer of
opinion or adverse opinion except such as Lenders in their sole discretion
determine to be immaterial);
(b) As soon as available and in any event within 50
days after the end of each of the first three fiscal quarters of Borrower each
fiscal year, the internally prepared unaudited consolidated balance sheet and
the related consolidated statements of income and cash flows of Borrower and
its consolidated Subsidiaries as of the end of such fiscal quarter (and for the
period from the beginning of the fiscal year to the end of such fiscal
quarter), setting forth in comparative form the corresponding consolidated
figures for the appropriate periods in the preceding fiscal year, accompanied
by a certificate of the chief executive officer, chief financial officer or
other principal financial officer of Borrower that such unaudited consolidated
balance sheet and statement of income and cash flows have been prepared in
accordance with generally accepted accounting principles consistently applied
and present fairly the financial position and the results of operations of
Borrower and its consolidated Subsidiaries as of the end of and for such fiscal
quarter and that since the fiscal year-end report referred to in clause (a)
there has been no material adverse change in the financial condition or
operations of Borrower and its consolidated Subsidiaries as shown on the
consolidated balance sheet as of said date;
(c) Within 100 days after the close of each fiscal
year of Borrower, and within 50 days after the end of each fiscal quarter, a
certificate signed by the chief executive officer, chief financial officer, or
other principal financial officer of Borrower stating that as of the close of
such fiscal year or fiscal quarter, as applicable, no Potential Event of
Default or Event of Default has occurred and is continuing;
(d) All other statements, reports and other
information as either Lender may reasonably request concerning the financial
condition and business affairs of Borrower and its subsidiaries; and
(e) As soon as required to be filed, all 10Ks, 10Qs,
8Ks, annual reports, quarterly reports, and other filings or submittals made to
shareholders or to the Securities and Exchange Commission.
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5.10 Notification. Promptly after learning thereof, Borrower
will notify Agent of (a) the details of any action, proceeding, investigation
or claim against or affecting Borrower or any Subsidiary instituted before any
court, arbitrator or Governmental Authority or, to Borrower's knowledge
threatened to be instituted, which, if determined adversely to Borrower or any
Subsidiary would be likely to have a material adverse effect on the business,
operations or financial condition of the enterprise comprised of Borrower and
its Subsidiaries taken as a whole or to result in a judgment or order against
Borrower or any Subsidiary (in excess of insurance coverage) for more than
$250,000 or, when combined with all other pending or threatened claims, more
than $500,000; (b) any substantial dispute between Borrower or any Subsidiary
and any Governmental Authority which, if determined adversely to Borrower or
any Subsidiary would be likely to have a material adverse effect on the
business, operations or financial condition of the enterprise comprised of
Borrower and its Subsidiaries taken as a whole; (c) any labor controversy which
has resulted in or, to Borrower's knowledge, threatens to result in a strike
which would materially affect the business operations of Borrower; (d) if
Borrower or any member of the Controlled Group gives or is required to give
notice to the PBGC of any "reportable event" (as defined in subsections (b)(1),
(2), (5) or (6) of Section 4043 of ERISA) with respect to any Plan (or the
Internal Revenue Service gives notice to the PBGC of any "reportable event" as
defined in subsection (c)(2) of Section 4043 of ERISA and Borrower obtains
knowledge thereof) which might constitute grounds for a termination of such
Plan under Title IV of ERISA, or knows that the plan administrator of any Plan
has given or is required to give notice of any such reportable event, a copy of
the notice of such reportable event given or required to be given to the PBGC;
and (e) the occurrence of any Potential Event of Default or Event of Default.
5.11 Additional Payments; Additional Acts. From time to time,
Borrower will (a) pay or reimburse Agent and Lenders on request for all
reasonable expenses, including legal fees, actually incurred by Agent or
Lenders in connection with the preparation of the Loan Documents or the making
of any Loan or the administration of the transactions described in the Loan
Documents or the enforcement by judicial proceedings or otherwise of any of the
rights of Lenders under the Loan Documents; (b) obtain and promptly furnish to
Agent evidence of all such Government Approvals as may be required to enable
Borrower to comply with its obligations under the Loan Documents; and (c)
execute and deliver all such instruments and perform all such other acts as
Agent may reasonably request to carry out the transactions contemplated by this
Agreement.
5.12 Working Capital. If there are Loans then outstanding,
Borrower and its consolidated Subsidiaries shall have, at the end of each
calendar month, a ratio of current assets to current liabilities of at least
1.25 to 1. For purposes of this section, (a) current assets shall not include
(i) any deferred assets other than prepaid items such as insurance,
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26
taxes, or other similar items or those deferred against a current contract, or
(ii) any accounts receivable, loans or other amounts due from corporations,
joint ventures, partnerships and other entities which are Subsidiaries or
otherwise affiliated with Borrower, other than accounts receivable generated
from the sale of Borrower's products in arm's length transactions with such
corporations, joint ventures, partnerships and other entities and occurring in
the ordinary course of Borrower's business, and (b) current liabilities shall
include all outstanding Loans, together with accrued but unpaid interest
thereon but shall not include any portion of Subordinated Debt.
5.13 Total Liabilities to Tangible Capital Ratio. If there
are Loans then outstanding, Borrower and its consolidated Subsidiaries shall
have, at the end of each calendar month, a ratio of Total Liabilities to
Tangible Capital of no more than 1.00 to 1, and a Tangible Capital of not less
than $90,000,000. "Total Liabilities" means all the liabilities of Borrower
and its consolidated Subsidiaries as reported on the consolidated balance sheet
of Borrower and such Subsidiaries under generally accepted accounting
principles, plus guaranties permitted under Section 6.2 (but excluding
performance bond obligations which are permitted under Section 6.2), minus
Subordinated Debt. "Tangible Capital" means the difference between (a) the sum
of (i) shareholders' equity in Borrower and its consolidated subsidiaries as of
such date of determination (such figure to reflect a deduction for all loans
and advances to Borrower's and its Subsidiaries' officers and employees for
purchase of Borrower's and its Subsidiaries' stock, as applicable), plus (ii)
to the extent not included in such shareholders' equity, Subordinated Debt and
(b) the sum of (i) all assets which should be classified as intangible assets,
such as goodwill, patents, trademarks, copyrights, franchises, unamortized debt
discount, research and development costs and deferred charges (unless deferred
against a current contract), (ii) capitalized software costs, and (iii) "other
assets" as presently reported on Borrower's balance sheet as non-current
assets, other than (i.e., excluding) long-term accounts receivable from utility
customers under Outsourcing Contracts.
ARTICLE 6
NEGATIVE COVENANTS OF BORROWER
So long as Lenders shall have any Commitment hereunder and until
payment in full of each Loan and Note and performance of all other obligations
of Borrower under the Loan Documents, Borrower agrees that none of the
following shall be done, unless each Lender shall otherwise consent in writing.
6.1 Liquidation, Merger, Sale of Assets. Borrower shall not,
and shall cause its Material Subsidiaries not to (a) liquidate or dissolve, (b)
enter into any material merger or consolidation except that any Material
subsidiary may merge or consolidate into any other Subsidiary or into Borrower,
nor (c)
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sell, lease, or dispose of such portion of their business or assets (excepting
sales of goods in the ordinary course of business) as constitutes in the
reasonable opinion of Agent a substantial portion thereof; provided, that,
notwithstanding this provision, Borrower shall be permitted to sell its
accounts receivable generated from Outsourcing Contracts.
6.2 Indebtedness, Guaranties, Etc. Borrower shall not, and
shall cause its Subsidiaries not to, create, incur, assume, permit to exist, or
otherwise become committed for any Indebtedness, nor assume, guaranty, endorse
or otherwise become directly or contingently liable for, nor obligated to
purchase, pay or provide funds for payment of, any obligation or Indebtedness
of any other person, except by endorsement of negotiable instruments for
deposit or collection or by similar transactions in the ordinary course of
business. Notwithstanding the foregoing, Borrower and its Subsidiaries may
incur long-term Indebtedness, Subordinated Debt, and nonrecourse indebtedness
without limit; may obtain performance bonds in an unlimited amount to support
its obligations and those of its Subsidiaries with regard to Outsourcing
Contracts; and shall in addition be permitted to incur and guaranty outstanding
Indebtedness not exceeding $15,000,000 in the aggregate (excluding performance
bond obligations), and Borrower and any Subsidiary may guaranty the
Indebtedness of one another.
6.3 Liens. Borrower shall not, and shall cause its Material
Subsidiaries not to, create, assume or suffer to exist any Lien except (i)
Liens in favor of Agent, (ii) a Lien to Pentzer Development Company in the
original principal amount of $5,600,000 to finance acquisition of Borrower's
corporate headquarters and manufacturing facility in Spokane, Washington, (iii)
Liens on fixed assets used in carrying out Outsourcing Contracts, (iv) Liens on
accounts receivable generated from Outsourcing Contracts, (v) Liens to secure
Indebtedness for the deferred price of property, but only if they are limited
to such property and its proceeds and do not exceed 80% of the fair market
value thereof (or,in the case of purchase money financing for personal
property, do not exceed 100% of the fair market value thereof), and (vi) other
Liens securing obligations not exceeding $3,000,000 in the aggregate.
6.4 Operations. Borrower shall not, and shall cause its
Material Subsidiaries not, to engage in any activity which is substantially
different from or unrelated to their present business activities nor
discontinue any portion of their present business activities which constitutes
a substantial portion thereof.
6.5 Permissible Loans. Borrower shall not make any loan or
advance to any Person other than (a) advances made in the ordinary course of
business; (b) loans to Subsidiaries, and to joint ventures of which Borrower is
a partner, not exceeding $15,000,000 in the aggregate; and (c) loans to
Subsidiaries in any amount if such Subsidiary provides to Lender prior to the
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disbursement of such loan a limited guaranty of the Obligations, in the form of
Exhibit E hereto, limited in principal amount to the principal amount of such
loan. Upon repayment to Borrower of any such Subsidiary loan, Lender shall,
upon request by Borrower, release such guaranty.
6.6 Contracts. Borrower shall not, and shall cause its
Material Subsidiaries not to, enter into any significant contracts or other
agreements except in the usual course of its business.
6.7 Securities. Borrower shall not, and shall cause its
Material Subsidiaries not to, issue, sell, or otherwise distribute any stock,
bond, note, or debenture or other security of Borrower and its Subsidiaries
except (i) common or preferred stock (or warrants or options therefor), (ii)
notes or other debt instruments evidencing Indebtedness permitted by this
Agreement, and (iii) securities of any Subsidiary that are issued to Borrower.
6.8 ERISA Compliance. Neither Borrower nor any Plan will:
(a) engage in any "prohibited transaction" (as such
term is defined in Section 406 or Section 2003(a) of ERISA);
(b) incur any "accumulated funding deficiency" (as
such term is defined in Section 302 of ERISA) whether or not waived;
(c) terminate any Pension Plan in a manner which
could result in the imposition of a Lien on any property of Borrower or any
member of the Controlled Group pursuant to Section 4068 of ERISA; or
(d) violate state or federal securities laws
applicable to any Plan which may result in material liability to Borrower or
any member of the Controlled Group.
6.9 Payments on Subordinated Debt; Prepayments of
Indebtedness. Borrower will not make any payments on Subordinated Debt or
prepayments of principal of any Indebtedness during any period when there are
loans outstanding and a Potential Event of Default or an Event of Default has
occurred and is continuing or would be caused by such act. Additionally,
Borrower shall not at any time when there are Loans outstanding, repay any
Subordinated Debt which, at the end of the preceding calendar quarter, was
necessary to Borrower's compliance with Section 5.13.
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ARTICLE 7
EVENTS OF DEFAULT
7.1 Events of Default. The occurrence of any of the
following events shall constitute an "Event of Default" hereunder:
(a) Payment Default. Borrower shall fail to pay,
within five (5) calendar days of when due, any amount of principal of or
interest on any Loan or Note or any commitment fees due hereunder or, within 30
days after notice from Agent, any other amount payable to Agent or Lenders
hereunder; or
(b) Breach of Warranty. Any representation or
warranty made by Borrower in any Loan Document shall prove to have been
incorrect in any material respect when made and shall prove to be material in
any respect when discovered; or
(c) Breach of Certain Covenants. Any provision of
Sections 5.2 or 6.1 shall not have been complied with; or
(d) Breach of Other Covenants. Any other covenant
or obligation of Borrower in any Loan Document, except Section 5.7 of this
Agreement to the extent Section 5.7 relates to delinquent Indebtedness, shall
not have been complied with and such failure shall remain unremedied for 30
days after written notice thereof shall have been given to Borrower by Agent;
provided that Lenders shall not unreasonably or arbitrarily withhold consent to
an extension of such period if corrective action is initiated within such
period and is being diligently pursued by Borrower; or
(e) Cross-default. Borrower or any Subsidiary shall
fail in respect of Indebtedness having an aggregate outstanding balance of
$500,000 (i) to pay when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) any such Indebtedness (except
any Loan) or any interest or premium thereon and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Indebtedness, or (ii) to perform any term or
covenant on its part to be performed under any agreement or instrument relating
to any such Indebtedness and required to be performed and such failure shall
continue after the applicable grace period, if any, specified in such agreement
or instrument, if the effect of such failure to perform is to accelerate or to
permit the acceleration of the maturity of such Indebtedness, or (iii) any such
Indebtedness shall be declared to be due and payable or required to be prepaid
(other than by regularly scheduled required prepayment) prior to the stated
maturity thereof; or
(f) Voluntary Bankruptcy, Etc. Borrower or any
Subsidiary shall: (1) file a petition seeking relief for itself under Title 11
of the United States Code, as now constituted or hereafter amended, or file an
answer consenting to, admitting the
- 26 -
30
material allegations of or otherwise not controverting, or fail timely to
controvert a petition filed against it seeking relief under Title 11 of the
United State Code, as now constituted or hereafter amended; or (2) file such
petition or answer with respect to relief under the provisions of any other now
existing or future applicable bankruptcy, insolvency, or other similar law of
the United States of America or any State thereof or of any other country or
jurisdiction providing for the reorganization, winding-up or liquidation of
corporations or an arrangement, composition, extension or adjustment with
creditors; or
(g) Involuntary Bankruptcy, Etc. An order for
relief shall be entered against Borrower or any Subsidiary under Title 11 of
the United States Code, as now constituted or hereafter amended, which order is
not stayed within 90 days; or upon the entry of an order, judgment or decree by
operation of law or by a court having jurisdiction in the premises which is not
stayed adjudging it a bankrupt or insolvent under, or ordering relief against
it under, or approving as properly filed a petition seeking relief against it
under the provisions of any other now existing or future applicable bankruptcy,
insolvency or other similar law of the United States of America or any State
thereof or of any other country or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or any arrangement,
composition, extension or adjustment with creditors,, or appointing a receiver,
liquidator, assignee, sequestrator, trustee or custodian of Borrower or any
Subsidiary or of any substantial part of its property, or ordering the
reorganization, winding-up or liquidation of its affairs, or upon the
expiration of 120 days after the filing of any involuntary petition against it
seeking any of the relief specified in Section 7.1(f) or this Section 7.1(g)
without the petition being dismissed prior to that time; or
(h) Insolvency, Etc. Borrower or any Subsidiary
shall (i) make a general assignment for the benefit of its creditors or (ii)
consent to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, or custodian of all or a substantial part of the property of
Borrower or any Subsidiary, or (iii) admit its insolvency or inability to pay
its debts generally as they become due, or (iv) fail generally to pay its debts
as they become due, or (v) take any action (or suffer any action to be taken by
its directors or shareholders) looking to the dissolution or liquidation of
Borrower or any Subsidiary; or
(i) Judgment. A final judgment or order for the
payment of money in excess of $250,000 shall be rendered against Borrower or
any Subsidiary and such judgment or order shall continue unsatisfied and in
effect for a period of 90 consecutive days without having been appealed and
stayed; or
(j) Condemnation. Such portion of the property of
Borrower or any Subsidiary as in the opinion of Agent constitutes a substantial
portion shall be condemned, seized or appropriated,
- 27 -
31
and such condemnation, seizure or appropriation shall be likely to have a
material adverse effect on the business, operations or financial condition of
the enterprise comprised of Borrower and its Subsidiaries taken as a whole; or
(k) Other Government Action. Any act of any
Governmental Authority shall (in the opinion of Agent) deprive Borrower or any
Subsidiary of any right, privilege or franchise, or restrict the exercise
thereof, the deprivation or restriction of which shall have a material adverse
effect on the business, operations or financial condition of the enterprise
comprised of Borrower and its Subsidiaries taken as a whole, and such act shall
not be revoked or rescinded within sixty (60) days after it shall have become
effective or within thirty (30) days after notice from Agent, whichever first
occurs; or
(l) ERISA. Borrower or any member of the Controlled
Group shall fail to pay when due an amount or amounts aggregating in excess of
$500,000 which it shall have become liable to pay to the PBGC or to a Plan
under Section 515 of ERISA or Title IV of ERISA; or notice of intent to
terminate a Plan or Plans (other than a multi-employer plan, as defined in
Section 4001(3) of ERISA), having aggregate unfunded vested liabilities in
excess of $500,000 shall be filed under Title IV of ERISA by Borrower, any
member of the Controlled Group, any plan administrator or any combination of
the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA
to terminate any such Plan or Plans.
7.2 Consequences of Default. If any Event of Default shall
occur and be continuing, then in any such case and at any time thereafter so
long as any such Event of Default shall be continuing, Agent will at the
request of both Lenders immediately terminate the Commitments and, if any Loan
shall have been made, Agent will at the request of both Lenders declare the
principal of and the interest on any Loan and any Note and all other sums
payable by Borrower hereunder or thereunder to be immediately due and payable,
whereupon the same shall become immediately due and payable without protest,
presentment, notice or demand, all of which Borrower expressly waives.
ARTICLE 8
AGENT
8.1 Authorization and Action. Each Lender hereby appoints
and authorizes Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Loan Documents as are delegated
to Agent by the terms hereof, together with such powers as are reasonably
incidental thereto. As to any matters not expressly provided for in this
Agreement, including enforcement or collection of the Notes, Agent shall not be
required to exercise any discretion or take any action, but shall be required
to act or to refrain from acting (and shall be fully protected in so acting or
refraining)
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32
upon the instructions of both Lenders, except that Agent shall not be required
to take any action which exposes Agent to personal liability or which is
contrary to this Agreement or applicable law. Each Lender and holder of a Note
shall execute and deliver such additional instruments, including powers of
attorney in favor of Agent, as may be required by applicable law to enable
Agent to exercise its powers hereunder.
8.2 Duties and Obligations.
(a) Neither Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or omitted
to be taken by it or any of them under or in connection with this Agreement
except for its or their own gross negligence or willful misconduct. Without
limiting the generality of the foregoing, Agent (i) may treat the payee of any
Note as the holder thereof until Agent receives written notice of the
assignment thereof signed by such payee and a written agreement of the assignee
that it is bound hereby as it would have been had it been an original party
hereto, in each case in form satisfactory to Agent; (ii) may consult with legal
counsel (including counsel for Borrower), independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
experts; (iii) makes no warranty or representation to any Lender and shall not
be responsible to any Lender for any statements, warranties or representations
made in or in connection with this Agreement or in any instrument or document
furnished pursuant hereto; (iv) shall not have any duty to ascertain or to
inquire as to the performance of any of the terms, covenants, or conditions of
this Agreement on the part of Borrower or as to the use of the proceeds of any
Loan or, unless the officers of Agent active in their capacity as officers of
Agent on Borrower's account have actual knowledge thereof or have been notified
in writing thereof by a Lender, the existence or possible existence of any
Potential Event of Default or any Event of Default; (v) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, effectiveness, or value of this Agreement or of
any instrument or document furnished pursuant hereto; and (vi) shall incur no
liability under or in respect to this Agreement by acting upon any notice,
consent, certificate or other instrument or writing (which may be by telegram,
telecopy, cable or telex) believed by it to be genuine and signed or sent by
the proper party or parties or by acting upon any representation or warranty of
Borrower deemed to be made hereunder;
(b) Agent will account to each Lender for its Pro
Rata Share of payments of principal, interest and commitment fees received by
Agent from Borrower and will remit to Lenders entitled thereto all of the
payments received hereunder from Borrower for the account of Lenders. Agent
will transmit to each Lender copies of documents received from Borrower or
others pursuant to the requirements of this Agreement.
- 29 -
33
8.3 Dealings Between Agent and Borrower. With respect to its
Commitment, the Loan made by it, and the Note issued to it, Agent shall have
the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not Agent, and the term "Lender" shall
unless otherwise expressly indicated include Agent in its individual capacity.
Agent may accept deposits from, lend money to, act and generally engage in any
kind of business with Borrower and any person which may do business with
Borrower, all as if Agent were not Agent hereunder and without any duty to
account therefor to Lenders.
8.4 Lender Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon Agent or any other Lender and
based upon such documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Lender
also acknowledges that it will, independently and without reliance upon Agent
or any other Lender and based upon such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement.
8.5 Indemnification. Lenders agree to indemnify Agent (to
the extent not reimbursed by Borrower) ratably according to their respective
Commitments from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against Agent in any way relating to or arising out of this Agreement
or any action taken or omitted by Agent under this Agreement, except any such
as result from Agent's gross negligence or willful misconduct. Without
limiting the foregoing, each Lender agrees to reimburse Agent promptly on
demand for its ratable share of any out-of-pocket expenses, including legal
fees, incurred by Agent in connection with the administration or enforcement of
or the preservation of any rights under this Agreement (to the extent that
Agent is not reimbursed for such expenses by Borrower).
8.6 Successor Agent. Agent may resign at any time by giving
written notice thereof to Lenders and Borrower and may be removed at any time
with or without cause by both Lenders. Upon any such resignation or removal,
Lenders shall have the right to appoint a successor Agent. If no successor
Agent shall have been so appointed by Lenders and shall have accepted such
appointment within thirty (30) days after the retiring Agents' giving of notice
of resignation or Lenders' removal of the retiring Agent, then the retiring
Agent may on behalf of Lenders, appoint a successor Agent, which shall be a
bank organized under the laws of the United States or of any state thereof, or
any affiliate of such bank, and having a combined capital and surplus of at
least Twenty-Five Million Dollars ($25,000,000). Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring
- 30 -
34
Agent, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement. After any retiring Agent's resignation or
removal hereunder as Agent, the provisions of this Article 8 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1 No Waiver; Remedies Cumulative. No failure by Agent or
any Lender to exercise, and no delay in exercising, any right, power or remedy
under this Agreement or any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or remedy under
any Loan Document preclude any other or further exercise thereof or the
exercise of any other right, power, or remedy. The exercise of any right,
power, or remedy shall in no event constitute a cure or waiver of any Event of
Default nor prejudice the right of Agent or any Lender in the exercise of any
right hereunder or thereunder, unless in the exercise of such right, all
obligations of Borrower under the Loan Documents are paid in full. The rights
and remedies provided herein and therein are cumulative and not exclusive of
any right or remedy provided by law.
9.2 Governing Law. This Agreement and any Note shall be
governed by and construed in accordance with the laws of the State of
Washington, U.S.A.
9.3 Consent to Jurisdiction; Waiver of Immunities. Borrower
hereby irrevocably submits to the jurisdiction of any state or federal court
sitting in Spokane, Spokane County, Washington, in any action or proceeding
brought to enforce or otherwise arising out of or relating any to Loan
Document. Nothing herein shall impair the right of Agent or any Lender to
bring any action or proceeding against Borrower or its property in the courts
of any other jurisdiction.
9.4 Notices. All notices and other communications provided
for in this Agreement shall be in writing or (unless otherwise specified) by
telex, telecopy or telegram and shall be mailed or sent or delivered to each
party at the address set forth under its name on the signature page hereof, or
at such other address as shall be designated by such party in a written notice
to each other party. Except as otherwise specified, all such notices and
communications if duly given or made shall be effective upon receipt.
9.5 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective Successors and
assigns, except that Borrower may not assign or otherwise transfer all or any
part of its rights or obligations hereunder without the prior written consent
of Lenders, and any
- 31 -
35
such assignment or transfer purported to be made without such consent shall be
ineffective.
9.6 Severability. Any provision of this Agreement or any
Note which is prohibited or unenforceable in any jurisdiction shall as to such
jurisdiction be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties waive any
provision of law which renders any provision hereof prohibited or unenforceable
in any respect.
9.7 Conditions Not Fulfilled. If the Commitment or any
portion thereof is not borrowed owing to nonfulfillment of any condition
precedent specified in Article 3, neither Borrower nor either Lender shall be
responsible to the others for any damage or loss by reason thereof, except that
Borrower shall in any event be liable to pay the fees, taxes, and expenses for
which it is obligated hereunder.
9.8 Entire Agreement; Amendment. This Agreement comprises
the entire agreement of the parties and may not be amended or modified except
by written agreement of Borrower, Agent and both Lenders. No provision of this
Agreement may be waived except in writing and then only in the specific
instance and for the specific purpose for which given.
9.9 Conflicting Agreements. In the event of any conflict
between the terms of this Agreement and the terms of any Note, the terms of
this Agreement shall govern.
9.10 Oral Agreements. Borrower is hereby given the following
notice:
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
- 32 -
36
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers or agents thereunto duly
authorized to be effective as of the date first above written.
BORROWER: ITRON, INC.
By
-----------------------------------
Title
--------------------------------
Address:
2818 N. Sullivan Road
Spokane, WA 99216
Attn: Treasurer
LENDERS: BANK OF AMERICA NW, N.A.
By
-----------------------------------
Title
--------------------------------
Address:
Northwest National Division
701 Fifth Avenue, 12th Floor
Seattle, WA 98104
Attn: David A. Dehlendorf
LENDERS: WASHINGTON TRUST BANK
By
-----------------------------------
Title
--------------------------------
Address:
West 717 Sprague
Spokane, WA 99204
Attn: David Hayward
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37
AGENT: BANK OF AMERICA NW, N.A.
By
-----------------------------------
Title
--------------------------------
Address:
Seafirst Agency Services
701 Fifth Avenue, 16th Floor
Seattle, WA 98104
Attn: Dora Brown
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38
EXHIBIT A
FORM OF NOTICE OF BORROWING
Pursuant to that certain Loan Agreement dated as of July 1, 1996,
(the "Loan Agreement") among Itron, Inc., as Borrower, Bank of America NW, N.A.
and Washington Trust Bank as Lenders, and Bank of America NW, N.A. as Agent,
Borrower requests to borrow on ___________________ _____ from Lenders on a pro
rata basis $___________________ as [Prime Rate] [CD] or [LIBOR] Loans. [The
Applicable Interest Period for such Loans is requested to be a
_____________________ period.]*
Borrower certifies that:
(i) the representations and warranties of Borrower
contained in the Loan Agreement are true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of the date hereof;
(ii) no Event of Default or Potential Event of
Default has occurred and is continuing under the Loan Agreement or will result
from the proposed borrowing; and
(iii) at the end of the last calendar quarter
preceding the Loan requested herein, Borrower was in compliance with Sections
5.12 and 5.13 of the Loan Agreement (applying such covenants as if the Loans
being requested were outstanding as of the end of such calendar quarter) and,
since the end of such calendar quarter, Borrower has not redeemed any equity or
repaid any Subordinated Debt which, if it had occurred immediately prior to the
end of the calendar quarter, would have resulted in a violation of Sections
5.12 or 5.13 (if there had then been Loans outstanding).
DATED as of _______________________.
ITRON, INC.
By
-----------------------------------
Title
--------------------------------
* Complete this sentence if the Loan is a CD Loan or a LIBOR Loan
39
EXHIBIT B
FORM OF NOTICE OF REFINANCING
Pursuant to that certain Loan Agreement dated as of July 1, 1996,
(the "Loan Agreement") among Itron, Inc., as Borrower, Bank of America NW, N.A.
and Washington Trust Bank as Lenders, and Bank of America NW, N.A. as Agent,
this represents Borrower's request to [complete either (a) or (b)]:
(a) convert $ ______________ in principal amount of Loans to
_____________________ Loans on __________________, 19____; or
(b) continue as _______________ Loans $___________ in
principal amount of presently outstanding ____________________ Loans with an
Applicable Interest Period ending on __________________, 19____.
The Applicable Interest Period for such converted or continued Loans is
requested to be a ___________________ period.]*
Borrower certifies that:
(i) the representations and warranties of Borrower
contained in the Loan Agreement are true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of the date hereof;
(ii) no Event of Default or Potential Event of
Default has occurred and is continuing under the Loan Agreement or will result
from the proposed borrowing; and
(iii) at the end of the last calendar quarter
preceding the conversion or continuation requested herein, Borrower was in
compliance with Sections 5.12 and 5.13 of the Loan Agreement (applying such
covenants as if the Loans being requested were outstanding as of the end of
such calendar quarter) and, since the end of such calendar quarter, Borrower
has not redeemed any equity or repaid any Subordinated Debt which, if it had
occurred immediately prior to the end of the calendar quarter, would have
resulted in a violation of Sections 5.12 or 5.13 (if there had then been Loans
outstanding).
DATED as of _______________________.
ITRON, INC.
By
------------------------------
Title
---------------------------
* Complete this sentence if the converted or continued Loan is to be a CD Loan
or a LIBOR Loan.
40
EXHIBIT C
FORM OF REVOLVING NOTE
$_______________________________ Date: July 1, 1996
Seattle, Washington
This REVOLVING NOTE ("Note") is made pursuant to and is subject to
the terms and conditions of that certain Loan Agreement dated as of July 1,
1996, (the "Loan Agreement") among Itron, Inc., as Borrower, Bank of America
NW, N.A. and Washington Trust Bank as Lenders, and Bank of America NW, N.A. as
Agent, for Lenders. Terms used herein that are not otherwise defined shall
have the respective meanings set forth in the Loan Agreement.
FOR VALUE RECEIVED, Borrower promises to pay to the order of
_____________________________________________________________ ("Lender") the
principal amount of each Loan made by Lender to Borrower as part of such
Lender's Commitment (each such loan or advance being hereinafter individually
referred to as a "Lender Loan" and collectively as the "Lender Loans") on the
date and in the manner set forth in the Loan Agreement.
Borrower also hereby promises to pay to the order of Lender interest
on the unpaid principal amount of each Lender Loan from the date of such Loan
until such principal amount is paid in full at such interest rates and at such
times as are specified in the Loan Agreement.
1. This Note evidences a revolving line of credit to
Borrower from Lender, and during the Commitment Period, Borrower may borrow
money from Lender in an aggregate principal amount not to exceed the sum of
__________________________ Dollars ($______________) subject to the terms and
conditions of the Loan Agreement. This Note is given to avoid execution of an
individual promissory note for each Lender Loan. Each Lender Loan (and each
conversion or continuation thereof pursuant to Section 2.5 of the Loan
Agreement), whether such Loan is a CD Loan, a Prime Rate Loan or a LIBOR Loan,
and, in the case of a CD Loan or a LIBOR Loan, the Applicable Interest Period
and all payments made on account of the principal of the Lender Loans shall be
recorded by Lender in its records; the failure to so record any such amount or
any error in so recording such amount shall not, however, limit or otherwise
affect the obligations of Borrower to repay the outstanding principal amount of
the Lender Loans together with all interest accruing thereon.
2. Each maker, surety, guarantor and endorser of this Note
expressly waives all notices, demands for payment, presentations for payment,
notices of intention to accelerate the maturity, protest and notice of protest
as to this Note.
Revolving Note
Page 1
41
3. Borrower promises to pay all costs and expenses,
including reasonable attorneys' fees, incurred in the collection and
enforcement of this Note.
4. This Note shall be governed by, and shall be construed
and enforced in accordance with the laws of the State of Washington.
5. This Note is one of the Notes described in the Loan
Agreement to which reference is hereby made for a more complete statement of
the terms and conditions under which the Lender Loans are made and are to be
repaid. The Loan Agreement contains, among other things, provisions for
acceleration of the maturity hereof upon the happening of certain stated events
and also for the terms and conditions of principal prepayments prior to the
maturity.
6. This Note is executed and delivered concurrently with the
execution of the Loan Agreement and is one of the promissory notes described in
Section 2.6 thereof.
ITRON, INC.
By
------------------------------
Title
---------------------------
Revolving Note
Page 2
42
Exhibit 1 -- PREPAYMENT FEES
If the principal balance of this note is prepaid in whole or in part,
whether by voluntary prepayment, operation of law, acceleration or otherwise, a
prepayment fee, in addition to any interest earned, will be immediately payable
to the holder of this note.
The amount of the prepayment fee depends on the following:
(1) The amount by which interest reference rates as defined below have changed
between the time the loan is prepaid and either a) the time the loan was
made for fixed rate loans, or b) the time the interest rate last changed
(repriced) for variable rate loans.
(2) A prepayment fee factor (see "Prepayment Fee Factor Schedule" on reverse).
(3) The amount of principal prepaid.
If the proceeds from a CD or time deposit pledged to secure the loan are used
to prepay the loan resulting in payment of an early withdrawal penalty for the
CD, a prepayment fee will not also be charged under the loan.
DEFINITION OF PREPAYMENT REFERENCE RATE FOR VARIABLE RATE LOANS
The "Prepayment Reference Rate" used to represent interest rate levels for
variable rate loans shall be the index rate used to determine the rate on this
loan having maturities equivalent to the remaining period to interest rate
change date (repricing) of this loan rounded upward to the nearest month. The
"Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at
the time of last repricing and a new Initial Prepayment Reference Rate shall be
assigned at each subsequent repricing. The "Final Prepayment Reference Rate"
shall be the Prepayment Reference Rate at the time of prepayment.
DEFINITION OF PREPAYMENT REFERENCE RATE FOR FIXED RATE LOANS
The "Prepayment Reference Rate" used to represent interest rate levels on fixed
rate loans shall be the bond equivalent yield of the average U.S. Treasury rate
having maturities equivalent to the remaining period to maturity of this loan
rounded upward to the nearest month. The "Initial Prepayment Reference Rate"
shall be the Prepayment Reference Rate at the time the loan was made. The
"Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at
time of prepayment.
The Prepayment Reference Rate shall be interpolated from the yields as
displayed on Page 119 of the Dow Jones Telerate Service (or such other page or
service as may replace that page or service for the purpose of displaying rates
comparable to said U.S. Treasury rates) on the day the loan was made (Initial
Prepayment Reference Rate) or the day of prepayment (Final Prepayment Reference
Rate).
An Initial Prepayment Reference Rate of N/A % has been assigned to
this loan to represent interest rate levels at origination.
CALCULATION OF PREPAYMENT FEE
If the Initial Prepayment Reference Rate is less than or equal to the Final
Prepayment Reference Rate, there is no prepayment fee.
If the Initial Prepayment Reference Rate is greater than the Final Prepayment
Reference Rate, the prepayment fee shall be equal to the difference between the
Initial and Final Prepayment Reference Rates (expressed as a decimal),
multiplied by the appropriate factor from the Prepayment Fee Factor Schedule,
multiplied by the principal amount of the loan being prepaid.
Form 51-6325: Page 1 of 2
43
EXAMPLE OF PREPAYMENT FEE CALCULATION
VARIABLE RATE LOAN: A non-amortizing 6-month LIBOR based loan with principal of
$250,000 is fully prepaid with 3 months remaining until next interest rate
change date (repricing). An Initial Prepayment Reference Rate of 7.0% was
assigned to the loan at last repricing. The Final Prepayment Reference Rate
(as determined by the 3-month LIBOR index) is 6.5%. Rates therefore have
dropped 0.5% since last repricing and a prepayment fee applies. A prepayment
fee factor of 0.31 is determined from Table 3 below and the prepayment fee is
computed as follows:
Prepayment Fee = (0.07 -- 0.065) x (0.31) x ($250,000) = $387.50
FIXED RATE LOAN: An amortizing loan with remaining principal of $250,000 is
fully prepaid with 24 months remaining until maturity. An Initial Prepayment
Reference Rate of 9.0% was assigned to the loan when the loan was made. The
Final Prepayment Reference Rate (as determined by the current 24-month U.S.
Treasury rate on Page 119 of Telerate) is 7.5%. Rates therefore have dropped
1.5% since the loan was made and a prepayment fee applies. A prepayment fee
factor of 1.3 is determined from Table 1 below and the prepayment fee is
computed as follows:
Prepayment Fee = (0.09 -- 0.075) x (1.3) x ($250,000) = $4,875
PREPAYMENT FEE FACTOR SCHEDULE
TABLE I: FULLY AMORTIZING LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
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0 3 6 9 12 24 36 48 60 84 120 240 360
- ----------------------------------------------------------------------------------------------------------------------------------
90-100% 0 .21 .36 .52 .67 1.3 1.9 2.5 3.1 4.3 5.9 10.3 13.1
60-89% 0 .24 .44 .63 .83 1.6 2.4 3.1 3.9 5.4 7.5 13.2 17.0
30-59% 0 .28 .53 .78 1.02 2.0 3.0 4.0 5.0 7.0 9.9 18.5 24,4
0-29% 0 .31 .63 .92 1.22 2.4 3.7 5.0 6.3 9.0 13.4 28.3 41.8
TABLE II: PARTIALLY AMORTIZING (BALLOON) LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
- ----------------------------------------------------------------------------------------------------------------------------
0 3 6 9 12 24 36 48 60 84 120 240 360
- ----------------------------------------------------------------------------------------------------------------------------
90-100% 0 .26 .49 .71 .94 1.8 2.7 3.4 4.2 5.6 7.4 11.6 14.0
60-89% 0 .30 .59 .86 1.15 2.2 3.3 4.3 5.3 7.1 9.4 15.0 18.1
30-59% 0 .31 .63 .95 1.27 2.6 3.9 5.3 6.6 9.1 12.6 21.2 26.2
0-29% 0 .31 .63 .95 1.27 2.6 4.0 5.4 7.0 10.2 15.7 33.4 46.0
TABLE III: NONAMORTIZING (INTEREST ONLY) LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
- ------------------------------------------------------------------------------------------------------------------------------
0 3 6 9 12 24 36 48 60 84 120 240 360
- ------------------------------------------------------------------------------------------------------------------------------
0-100% 0 .31 .61 .91 1.21 2.3 3.4 4.4 5.3 6.9 8.9 13.0 14.8
(1) For the remaining period to maturity/repricing between any two
maturities/repricings shown in the above schedules, interpolate between the
corresponding factors to the closest month.
The holder of this note is not required to actually reinvest the prepaid
principal in any U.S. Government Treasury Obligations, or otherwise prove its
actual loss, as a condition to receiving a prepayment fee as calculated above.
Form 51-6325: Page 2 of 2
44
FIRST AMENDMENT TO LOAN AGREEMENT
This Amendment amends that certain Loan Agreement dated July 1, 1996
("Agreement"), among Itron, Inc., as "Borrower," Bank of America NW, N.A.,
doing business as Seafirst Bank, and Washington Trust Bank as "Lenders," and
Bank of America NW, N.A., doing business as Seafirst Bank, as "Agent." All
terms defined in the Agreement shall have the same meaning when used in this
Amendment, except as may be otherwise provided in this Amendment. Bank of
America NW, N.A. has since merged into Bank of America National Trust and
Savings Association, but continues to do business in the state of Washington as
"Seafirst Bank." References to "Seafirst" or "Bank of America NW, N.A." in
this Amendment and in the Agreement shall mean Bank of America National Trust
and Savings Association, doing business as Seafirst Bank. For mutual
consideration, the parties agree as follows:
1. Lenders. The initial paragraph of the Agreement and the
definition of "Lenders" in Section 1.1 of the Agreement are both amended to
provide that "Lenders" shall be Seafirst, Washington Trust Bank, U.S. Bank of
Washington, National Association, and The Bank of Nova Scotia. References in
the Agreement to "both Lenders" shall be deemed references to "all Lenders."
2. Definitions. Section 1.1 of the Agreement is amended to
change the definition of "Pro Rata Share" to read as follows: "'Pro Rata
Share' means 57-1/3% as to Seafirst, 9-1/3% as to Washington Trust Bank,
16-2/3% as to U.S. Bank of Washington, National Association, and 16-2/3% as to
The Bank of Nova Scotia.
3. Prime Rate. Paragraph (A) of the definition of "Prime Rate"
in Section 1.1 of the Agreement is amended to read as follows:
"the rate of interest publicly announced from time to time by Agent in
San Francisco, California, as its "Reference Rate." The Reference Rate
is set based on various factors, including Agent's costs and desired
return, general economic conditions, and other factors, and is used as
a reference point for pricing some loans. Agent may price loans to
its customers at, above, or below the Reference Rate. Any change in
the Reference Rate shall take effect at the opening of business on the
day specified in the public announcement of a change in the Reference
Rate; or"
4. Available Commitment. Section 2.1 of the Agreement is amended
to change the amount "$50,000,000" in the bottom row of column two of the table
set forth therein to "$75,000,000."
5. Working Capital. The first sentence of Section 5.12 of the
Agreement is amended to read as follows: "If there are Loans then outstanding,
Borrower and its consolidated Subsidiaries shall have, at the end of each
fiscal quarter, a ratio of current assets to current liabilities of at least
1.25 to 1."
6. Capital Ratio. The first sentence of Section 5.13 of the
Agreement is amended to read as follows: "If there are Loans then outstanding,
Borrower and its consolidated Subsidiaries shall have, at the end of each
fiscal quarter, a ratio of Total Liabilities to Tangible Capital of no more
than 1.00 to 1, and a Tangible Capital of not less than $90,000,000."
7. Exhibits. The forms of Exhibits A, B, and C to the Agreement
shall be as shown in Exhibits A, B, and C, respectively, attached to this
Amendment.
8. Addition of Lenders. Upon execution of this Amendment,
Borrower shall pay a fee of $12,500 each to U.S. Bank of Washington, National
Association, and The Bank of Nova Scotia (the "New Lenders"); and the New
Lenders shall each fund to Agent their respective Pro Rata Share of all
outstanding Loans (with Agent to redistribute such funds to Lenders such that
each Lender shall have
- 1 -
45
funded its Pro Rata Share of all outstanding Loans). All outstanding LIBOR
Loans shall be deemed to have been prepaid on such date, and new LIBOR Loans
funded, with Applicable Interest Periods to be designated by Borrower to Agent
in writing. Lenders waive all prepayment fees with regard to the prepayment
described in this paragraph only.
9. Notices. Section 9.4 of the Agreement is amended to provide
that the address for each Lender shall be as set forth on the signature page of
the Agreement or of any amendment thereto.
10. Other Terms. Except as specifically amended by this
Amendment, all other terms, conditions, and definitions of the Agreement shall
remain in full force and effect.
DATED as of January 15, 1997.
BORROWER: AGENT:
ITRON, INC. SEAFIRST BANK
By By
----------------------------- -------------------------------
Title Title
-------------------------- ---------------------------
LENDERS:
SEAFIRST BANK WASHINGTON TRUST BANK
By By
----------------------------- -----------------------------
Title Title
-------------------------- -------------------------
U.S. BANK OF WASHINGTON, THE BANK OF NOVA SCOTIA
NATIONAL ASSOCIATION
By By
----------------------------- -----------------------------
Title Title
-------------------------- --------------------------
Address for Notices: Address for Notices:
1420 Fifth Avenue, Floor 11 888 S.W. Fifth Ave., Suite 750
Seattle, Washington 98101 Portland, Oregon 97204
Attention: Cathy Schalkle Attention: Sharon Bishop
- 2 -
46
EXHIBIT A
FORM OF NOTICE OF BORROWING
Pursuant to that certain Loan Agreement dated as of July 1, 1996 (the
"Loan Agreement"), among Itron, Inc., as Borrower, Seafirst Bank, Washington
Trust Bank, U.S. Bank of Washington, National Association, and The Bank of Nova
Scotia as Lenders, and Seafirst Bank as Agent, Borrower requests to borrow on
_________________________ from Lenders on a pro rata basis
$_________________________ as [Prime Rate] [CD] or [LIBOR] Loans. [The
Applicable Interest Period for such Loans is requested to be a
_____________________ period.]*
Borrower certifies that:
(i) the representations and warranties of Borrower
contained in the Loan Agreement are true, correct, and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of the date hereof;
(ii) no Event of Default or Potential Event of Default has
occurred and is continuing under the Loan Agreement or will result from the
proposed borrowing; and
(iii) at the end of the last calendar quarter preceding the
Loan requested herein, Borrower was in compliance with Sections 5.12 and 5.13
of the Loan Agreement (applying such covenants as if the Loans being requested
were outstanding as of the end of such calendar quarter) and, since the end of
such calendar quarter, Borrower has not redeemed any equity or repaid any
Subordinated Debt which, if it had occurred immediately prior to the end of the
calendar quarter, would have resulted in a violation of Sections 5.12 or 5.13
(if there had then been Loans outstanding).
DATED as of _______________________.
ITRON, INC.
By
---------------------------------
Title
-----------------------------
* Complete this sentence if the Loan is a CD Loan or a LIBOR Loan
47
EXHIBIT B
FORM OF NOTICE OF REFINANCING
Pursuant to that certain Loan Agreement dated as of July 1, 1996 (the
"Loan Agreement"), among Itron, Inc., as Borrower, Seafirst Bank, Washington
Trust Bank, U.S. Bank of Washington, National Association, and The Bank of Nova
Scotia as Lenders, and Seafirst Bank as Agent, this represents Borrower's
request to [complete either (a) or (b)]:
(a) convert $ ______________ in principal amount of Loans to
_____________________ Loans on __________________, 19____; or
(b) continue as _______________ Loans $________________ in
principal amount of presently outstanding ____________________ Loans with an
Applicable Interest Period ending on __________________, 19____.
The Applicable Interest Period for such converted or continued Loans is
requested to be a ___________________ period.]*
Borrower certifies that:
(i) the representations and warranties of Borrower
contained in the Loan Agreement are true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of the date hereof;
(ii) no Event of Default or Potential Event of Default has
occurred and is continuing under the Loan Agreement or will result from the
proposed borrowing; and
(iii) at the end of the last calendar quarter preceding the
conversion or continuation requested herein, Borrower was in compliance with
Sections 5.12 and 5.13 of the Loan Agreement (applying such covenants as if the
Loans being requested were outstanding as of the end of such calendar quarter)
and, since the end of such calendar quarter, Borrower has not redeemed any
equity or repaid any Subordinated Debt which, if it had occurred immediately
prior to the end of the calendar quarter, would have resulted in a violation of
Sections 5.12 or 5.13 (if there had then been Loans outstanding).
DATED as of _______________________.
ITRON, INC.
By
-----------------------------------
Title
-------------------------------
* Complete this sentence if the converted or continued Loan is to be a CD Loan
or a LIBOR Loan.
48
EXHIBIT C
FORM OF REVOLVING NOTE
$_______________________________ Date: January 15, 1997
Seattle, Washington
This REVOLVING NOTE ("Note") is made pursuant to and is subject to the
terms and conditions of that certain Loan Agreement dated as of July 1, 1996,
as subsequently amended (the "Loan Agreement"), among Itron, Inc., as Borrower,
Seafirst Bank, Washington Trust Bank, U.S. Bank of Washington, National
Association, and The Bank of Nova Scotia as Lenders, and Seafirst Bank as
Agent, for Lenders. Terms used herein that are not otherwise defined shall
have the respective meanings set forth in the Loan Agreement.
FOR VALUE RECEIVED, Borrower promises to pay to the order of
__________________________________________________________________________
("Lender") the principal amount of each Loan made by Lender to Borrower as part
of such Lender's Commitment (each such loan or advance being hereinafter
individually referred to as a "Lender Loan" and collectively as the "Lender
Loans") on the date and in the manner set forth in the Loan Agreement.
Borrower also hereby promises to pay to the order of Lender interest
on the unpaid principal amount of each Lender Loan from the date of such Loan
until such principal amount is paid in full at such interest rates and at such
times as are specified in the Loan Agreement.
1. This Note evidences a revolving line of credit to Borrower
from Lender, and during the Commitment Period, Borrower may borrow money from
Lender in an aggregate principal amount not to exceed the sum of
__________________________ Dollars ($______________) subject to the terms and
conditions of the Loan Agreement. This Note is given to avoid execution of an
individual promissory note for each Lender Loan. Each Lender Loan (and each
conversion or continuation thereof pursuant to Section 2.5 of the Loan
Agreement), whether such Loan is a CD Loan, a Prime Rate Loan or a LIBOR Loan,
and, in the case of a CD Loan or a LIBOR Loan, the Applicable Interest Period
and all payments made on account of the principal of the Lender Loans shall be
recorded by Lender in its records; the failure to so record any such amount or
any error in so recording such amount shall not, however, limit or otherwise
affect the obligations of Borrower to repay the outstanding principal amount of
the Lender Loans together with all interest accruing thereon.
2. Each maker, surety, guarantor and endorser of this Note
expressly waives all notices, demands for payment, presentations for payment,
notices of intention to accelerate the maturity, protest and notice of protest
as to this Note.
3. Borrower promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred in the collection and enforcement of this
Note.
4. This Note shall be governed by, and shall be construed and
enforced in accordance with the laws of the State of Washington.
5. This Note is one of the Notes described in the Loan Agreement
to which reference is hereby made for a more complete statement of the terms
and conditions under which the Lender Loans are made and are to be repaid. The
Loan Agreement contains, among other things, provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for the
terms and conditions of principal prepayments prior to the maturity.
Revolving Note
Page 1
49
6. This Note is executed and delivered concurrently with the
execution of the Loan Agreement and is one of the promissory notes described in
Section 2.6 thereof.
ITRON, INC.
By
----------------------------------
Title
------------------------------
Revolving Note
Page 2
50
Exhibit 1 -- PREPAYMENT FEES
If the principal balance of this note is prepaid in whole or in part,
whether by voluntary prepayment, operation of law, acceleration or otherwise, a
prepayment fee, in addition to any interest earned, will be immediately payable
to the holder of this note.
The amount of the prepayment fee depends on the following:
(1) The amount by which interest reference rates as defined below have changed
between the time the loan is prepaid and either a) the time the loan was
made for fixed rate loans, or b) the time the interest rate last changed
(repriced) for variable rate loans.
(2) A prepayment fee factor (see "Prepayment Fee Factor Schedule" on reverse).
(3) The amount of principal prepaid.
If the proceeds from a CD or time deposit pledged to secure the loan are used
to prepay the loan resulting in payment of an early withdrawal penalty for the
CD, a prepayment fee will not also be charged under the loan.
DEFINITION OF PREPAYMENT REFERENCE RATE FOR VARIABLE RATE LOANS
The "Prepayment Reference Rate" used to represent interest rate levels for
variable rate loans shall be the index rate used to determine the rate on this
loan having maturities equivalent to the remaining period to interest rate
change date (repricing) of this loan rounded upward to the nearest month. The
"Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at
the time of last repricing and a new Initial Prepayment Reference Rate shall be
assigned at each subsequent repricing. The "Final Prepayment Reference Rate"
shall be the Prepayment Reference Rate at the time of prepayment.
DEFINITION OF PREPAYMENT REFERENCE RATE FOR FIXED RATE LOANS
The "Prepayment Reference Rate" used to represent interest rate levels on fixed
rate loans shall be the bond equivalent yield of the average U.S. Treasury rate
having maturities equivalent to the remaining period to maturity of this loan
rounded upward to the nearest month. The "Initial Prepayment Reference Rate"
shall be the Prepayment Reference Rate at the time the loan was made. The
"Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at
time of prepayment.
The Prepayment Reference Rate shall be interpolated from the yields as
displayed on Page 119 of the Dow Jones Telerate Service (or such other page or
service as may replace that page or service for the purpose of displaying rates
comparable to said U.S. Treasury rates) on the day the loan was made (Initial
Prepayment Reference Rate) or the day of prepayment (Final Prepayment Reference
Rate).
An Initial Prepayment Reference Rate of N/A % has been assigned to
this loan to represent interest rate levels at origination.
CALCULATION OF PREPAYMENT FEE
If the Initial Prepayment Reference Rate is less than or equal to the Final
Prepayment Reference Rate, there is no prepayment fee.
If the Initial Prepayment Reference Rate is greater than the Final Prepayment
Reference Rate, the prepayment fee shall be equal to the difference between the
Initial and Final Prepayment Reference Rates (expressed as a decimal),
multiplied by the appropriate factor from the Prepayment Fee Factor Schedule,
multiplied by the principal amount of the loan being prepaid.
Form 51-6325: Page 1 of 2
51
EXAMPLE OF PREPAYMENT FEE CALCULATION
VARIABLE RATE LOAN: A non-amortizing 6-month LIBOR based loan with principal of
$250,000 is fully prepaid with 3 months remaining until next interest rate
change date (repricing). An Initial Prepayment Reference Rate of 7.0% was
assigned to the loan at last repricing. The Final Prepayment Reference Rate
(as determined by the 3-month LIBOR index) is 6.5%. Rates therefore have
dropped 0.5% since last repricing and a prepayment fee applies. A prepayment
fee factor of 0.31 is determined from Table 3 below and the prepayment fee is
computed as follows:
Prepayment Fee = (0.07 -- 0.065) x (0.31) x ($250,000) = $387.50
FIXED RATE LOAN: An amortizing loan with remaining principal of $250,000 is
fully prepaid with 24 months remaining until maturity. An Initial Prepayment
Reference Rate of 9.0% was assigned to the loan when the loan was made. The
Final Prepayment Reference Rate (as determined by the current 24-month U.S.
Treasury rate on Page 119 of Telerate) is 7.5%. Rates therefore have dropped
1.5% since the loan was made and a prepayment fee applies. A prepayment fee
factor of 1.3 is determined from Table 1 below and the prepayment fee is
computed as follows:
Prepayment Fee = (0.09 -- 0.075) x (1.3) x ($250,000) = $4,875
PREPAYMENT FEE FACTOR SCHEDULE
TABLE I: FULLY AMORTIZING LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
- -----------------------------------------------------------------------------------------------------------------------------------
0 3 6 9 12 24 36 48 60 84 120 240 360
- -----------------------------------------------------------------------------------------------------------------------------------
90-100% 0 .21 .36 .52 .67 1.3 1.9 2.5 3.1 4.3 5.9 10.3 13.1
60-89% 0 .24 .44 .63 .83 1.6 2.4 3.1 3.9 5.4 7.5 13.2 17.0
30-59% 0 .28 .53 .78 1.02 2.0 3.0 4.0 5.0 7.0 9.9 18.5 24,4
0-29% 0 .31 .63 .92 1.22 2.4 3.7 5.0 6.3 9.0 13.4 28.3 41.8
TABLE II: PARTIALLY AMORTIZING (BALLOON) LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
- -----------------------------------------------------------------------------------------------------------------------------
0 3 6 9 12 24 36 48 60 84 120 240 360
- -----------------------------------------------------------------------------------------------------------------------------
90-100% 0 .26 .49 .71 .94 1.8 2.7 3.4 4.2 5.6 7.4 11.6 14.0
60-89% 0 .30 .59 .86 1.15 2.2 3.3 4.3 5.3 7.1 9.4 15.0 18.1
30-59% 0 .31 .63 .95 1.27 2.6 3.9 5.3 6.6 9.1 12.6 21.2 26.2
0-29% 0 .31 .63 .95 1.27 2.6 4.0 5.4 7.0 10.2 15.7 33.4 46.0
TABLE III: NONAMORTIZING (INTEREST ONLY) LOANS
Proportion of Remaining Principal Amount
Being Prepaid Months Remaining To Maturity/Repricing(1)
- -----------------------------------------------------------------------------------------------------------------------------
0 3 6 9 12 24 36 48 60 84 120 240 360
- -----------------------------------------------------------------------------------------------------------------------------
0-100% 0 .31 .61 .91 1.21 2.3 3.4 4.4 5.3 6.9 8.9 13.0 14.8
1 For the remaining period to maturity/repricing between any two
maturities/repricings shown in the above schedules, interpolate between the
corresponding factors to the closest month.
The holder of this note is not required to actually reinvest the prepaid
principal in any U.S. Government Treasury Obligations, or otherwise prove its
actual loss, as a condition to receiving a prepayment fee as calculated above.
Form 51-6325: Page 2 of 2
1
ITRON, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
Year ended December 31,
-----------------------------
1994 1995 1996(1)
------- ------- -------
Weighted average number of common shares outstanding 11,959 13,094 13,297
Dilutive effect of outstanding common stock options and warrants at average market price 892 681 0
------- ------- -------
Weighted average shares outstanding based on average market price 12,851 13,775 13,297
======= ======= =======
Primary EPS based on average market price $ 0.80 $ 0.81 ($ 0.11)
1994 1995
------- -------
Weighted average number of common shares outstanding 11,959 13,094
Dilutive effect of outstanding common stock options and warrants at ending market price 974 838
------- -------
Weighted average shares outstanding based on ending market price 12,933 13,932
Fully Diluted EPS based on ending market price $ 0.79 $ 0.80
(1) The calculation of earnings per share for the year ended December 31, 1996 excludes
common stock equivalents because they are anti-dilutive in the year of a loss.
1
EXHIBIT 21.1
ITRON SUBSIDIARIES AND AFFILIATED COMPANIES
Itron, Inc. (Washington)
Corporate Headquarters
2818 N. Sullivan Rd.
Spokane, WA. 99216-1897
P.O. Box 15288 Spokane, WA. 99215-5288
Itron Canada, Ltd. (Canada)
160 Wilkinson Rd., #22
Brampton, ON. L6T 4Z4
Itron S.A. (France)
Immeuble Merblanc
1, rue du Port au Prince
38200 Vienne, Lyon, France
Itron Ltd. (England)
Kilnbrook House
Rose Kiln Lane
Reading, Berkshire RG2 0BY
United Kingdom
Itron Australisia Pty Ltd. (Australia)
BHP Building
Level 6, 55 Sussex Street
Sydney, NSW 2000 Australia
Utility Translation Systems, Inc. (North Carolina)
200 UTS Centre
5909 Falls of the Neuse Road
Raleigh, North Carolina, 27609
2
Itron Manufacturing, Inc.
2818 N. Sullivan Rd.
Spokane, WA. 99216-1897
P.O. Box 15288 Spokane, WA. 99215-5288
Itron Minnesota, Inc.
2401 North State Street
Waseca, MN 56093
-2-
5
1,000
YEAR
DEC-31-1996
JAN-01-1996
DEC-31-1996
2,243
0
45,128
(752)
33,837
90,743
101,323
(29,974)
187,421
64,504
0
0
0
98,686
231
187,421
177,584
177,584
104,708
104,708
74,644
0
(366)
(2,134)
670
(1,464)
0
0
0
(1,464)
(.11)
(.11)
