-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AB2HpB879ARypyRxq++/5dnBZf1xbIRElPCMuL6v5a4OAf7sG02dfhudci7AwYWC x6afxndU0KV15mjWltnoBA== 0001032210-00-000882.txt : 20000504 0001032210-00-000882.hdr.sgml : 20000504 ACCESSION NUMBER: 0001032210-00-000882 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLIR SYSTEMS INC CENTRAL INDEX KEY: 0000354908 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 930708501 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-21918 FILM NUMBER: 618490 BUSINESS ADDRESS: STREET 1: 16505 SW 72ND AVE CITY: PORTLAND STATE: OR ZIP: 97224 BUSINESS PHONE: 5036843731 MAIL ADDRESS: STREET 1: 16505 SW 72ND AVENUE CITY: PORTLAND STATE: OR ZIP: 97224 10-Q/A 1 AMENDMENT #2 TO 10-Q FOR PERIOD ENDED 09/30/1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-Q/A ________ AMENDMENT NO. 2__________ (Mark one) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______________ to _________________ Commission file number 0-21918 FLIR Systems, Inc. (Exact name of Registrant as specified in its charter) Oregon 93-0708501 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16505 S.W. 72nd Avenue, Portland, Oregon 97224 (Address of principal executive offices) (Zip Code) (503) 684-3731 (Registrant's telephone number, including area code) __________________ 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 ____. ----- At September 30, 1999, there were 14,347,766 shares of the Registrant's common stock, $0.01, par value, outstanding. 1 This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, as filed by the Registrant on May November 15, 1999, and is being filed to reflect the restatement of the Registrant's condensed consolidated financial statements (the "Restatement."). The Restatement reflects corrections of accounting for certain costs and allowances that were either not accrued or not recorded correctly during the appropriate periods and modification of the Registrant's historical revenue recognition policy for certain transactions. A discussion of the Restatement and a summary of the effects of the Restatement are presented in Note 2 to the Condensed Consolidated Financial Statements. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Operations -- Three Months and Nine Months Ended September 30, 1999 and 1998......... 3 Consolidated Balance Sheet - September 30, 1999 and December 31, 1998......................................... 4 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1999 and 1998......................... 5 Notes to the Consolidated Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 PART II. OTHER INFORMATION Item 2. Changes in Securities..................................... 18 Item 6. Exhibits and Reports on Form 8-K.......................... 18 Signatures................................................ 19
2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements FLIR SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (Restated) (Restated) (Restated) (Restated) Revenue: Commercial............................ $ 35,624 $ 37,627 $ 90,855 $ 99,274 Government............................ 17,515 18,386 47,421 46,240 -------- -------- --------- --------- Total revenue..................... 53,139 56,013 138,276 145,514 Cost of goods sold........................ 23,370 26,705 83,768 68,506 Research and development.................. 6,354 6,334 20,167 19,852 Selling and other operating costs......... 13,966 14,089 43,884 41,576 Combination costs......................... 524 -- 5,152 -- -------- -------- --------- --------- 44,214 47,128 152,971 129,934 Earnings (loss) from operations........ 8,925 8,885 (14,695) 15,580 Interest income........................... -- 250 18 715 Interest expense and other................ (1,576) (865) (3,579) (3,538) -------- -------- --------- --------- Earnings (loss) before income taxes.... 7,349 8,270 (18,256) 12,757 Provision for income taxes................ 1,170 2,539 1,537 3,788 -------- -------- --------- --------- Net earnings (loss)....................... $ 6,179 $ 5,731 $ (19,793) $ 8,969 ======== ======== ========= ========= Net earnings (loss) per share Basic................................ $ 0.43 $ 0.41 $ (1.39) $ 0.71 ======== ======== ========= ========= Diluted.............................. $ 0.43 $ 0.40 $ (1.39) $ 0.68 ======== ======== ========= =========
The accompanying notes are an integral part of these financial statements. 3 FLIR SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share and per share amounts)
ASSETS September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (Restated) (Restated) Current assets: Cash and cash equivalents....................................... $ 4,140 $ 4,793 Accounts receivable, net........................................ 69,231 84,442 Inventories..................................................... 68,258 71,416 Prepaid expenses................................................ 7,895 6,061 Deferred income taxes........................................... 6,776 6,776 --------- --------- Total current assets........................................ 156,300 173,488 Property and equipment, net......................................... 28,229 26,775 Software development costs, net..................................... 282 488 Deferred income taxes, net.......................................... 16,940 15,927 Intangible assets, net.............................................. 15,105 15,936 Other assets........................................................ 3,578 3,897 --------- --------- $ 220,434 $ 236,511 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable................................................... $ 68,317 $ 39,958 Accounts payable................................................ 24,236 24,031 Accrued payroll and other liabilities........................... 17,954 26,580 Accrued income taxes............................................ 5,070 3,893 Current portion of long-term debt............................... 1,239 2,680 --------- --------- Total current liabilities................................... 116,816 97,142 Long-term debt...................................................... 1,702 19,296 Pension liability................................................... 4,007 3,960 Commitments and contingencies....................................... -- -- Shareholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued at September 30, 1999, and December 31, 1998............................................. -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 14,347,766 and 14,133,403 shares issued at September 30, 1999, and December 31, 1998, respectively..................... 144 141 Additional paid-in capital...................................... 142,980 142,169 Accumulated deficit............................................. (43,917) (24,124) Accumulated other comprehensive loss............................ (1,298) (2,073) --------- --------- Total shareholders' equity.................................. 97,909 116,113 --------- --------- $ 220,434 $ 236,511 ========= =========
The accompanying notes are an integral part of these financial statements. 4 FLIR SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------------ 1999 1998 ----------- ----------- (Restated) (Restated) Cash used by operations: Net (loss) earnings.................................................... $ (19,793) $ 8,969 Income charges not affecting cash: Depreciation....................................................... 4,854 4,599 Amortization....................................................... 2,041 1,934 Disposals and write-offs of property and equipment................. 471 265 Deferred income taxes.............................................. (1,013) (6) Changes in certain assets and liabilities: Decrease (increase) in accounts receivable......................... 15,211 (19,200) Decrease (increase) in inventories................................. 3,158 (7,899) Increase in prepaid expenses....................................... (1,834) (354) Decrease in other assets........................................... 157 103 Increase (decrease) in accounts payable............................ 205 (5,969) Decrease in accounts payable to related parties.................... -- (6,228) Decrease in accrued payroll and other liabilities.................. (8,626) (13,252) Increase in accrued income taxes................................... 1,177 1,880 ---------- ----------- Cash used by operating activities...................................... (3,992) (35,158) ---------- ----------- Cash used by investing activities: Additions to property and equipment.................................... (7,621) (10,077) Software development costs............................................. -- (239) ---------- ----------- Cash used by investing activities.......................................... (7,621) (10,316) ---------- ----------- Cash provided by financing activities: Net increase in notes payable.......................................... 28,359 13,072 Proceeds from long term debt........................................... 1,538 1,217 Repayment of long term debt including current portion.................. (20,573) (5,684) Increase in pension liability.......................................... 47 123 Proceeds from exercise of stock options................................ 814 1,273 Common stock issued.................................................... -- 32,676 Cost of common stock issued............................................ -- (551) Common stock issued pursuant to stock option plans..................... -- 971 ---------- ----------- Cash provided by financing activities.................................. 10,185 43,097 ---------- ----------- Effect of exchange rate changes on cash.................................... 775 (697) ---------- ----------- Net decrease in cash and cash equivalents.................................. (653) (3,074) Cash and cash equivalents, beginning of period............................. 4,793 7,545 ---------- ----------- Cash and cash equivalents, end of period................................... $ 4,140 $ 4,471 ========== ===========
The accompanying notes are an integral part of these financial statements. 5 FLIR SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 -- BASIS OF PRESENTATION: The accompanying consolidated financial statements of FLIR Systems, Inc. (the "Company") are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods. See Note 2 regarding the restatement of the Company's financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 1998. The accompanying financial statements include the accounts of FLIR Systems, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. The results of the interim period are not necessarily indicative of the results for the entire year. Certain reclassifications have been made to prior years' data to conform to the current year's presentation. These reclassifications had no impact on previously reported results of operations or shareholders' equity. NOTE 2 -- RESTATEMENT: In March 2000 the Company determined that it was necessary to revise its 1998 financial statements and its interim 1999 financial statements. The restatement was required because of incorrect consolidation of the Company's subsidiary information, inaccurate inventory valuation, insufficient accruals of commission expense and the inadequate accumulation and misclassification of certain subsidiary costs. As a result of these matters, certain costs and allowances were either not accrued or not recorded correctly during the appropriate periods. In addition, in December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarifies certain conditions to be met in order to recognize revenue. In April 2000, in connection with the audit of the Company's financial statements and in light of the focus on revenue recognition issues resulting from the issuance of SAB 101, the Company re-examined its historical application of generally accepted accounting principles relating to revenue recognition and the terms underlying certain transactions where title and the risks of ownership had transferred to the buyer, but physical delivery to the buyer had not occurred (bill and hold transactions). As a result of this review, the Company modified its historical revenue recognition policy with respect to those bill and hold transactions. In view of the cumulative effect of the unrecorded adjustments for costs and allowances, and the bill and hold revenue matters, the Company restated its retained earnings for 1997 as a result of the revenue recognition matters, its annual and fourth quarter consolidated financial statements for 1998 and its quarterly consolidated financial statements for the first three quarters of 1999. 6 The financial statements and related notes set forth in this Form 10-Q/A reflect all such restatements, including changes to the tax provision for all periods presented. A summary of the impact of the restatements for the three and nine month periods ended September 30, 1999 and as of September 30, 1999 and December 31, 1998 follows (in millions except per share amounts): Results of Operations - ---------------------
Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 ------------------------------------------------- Previously As Previously As Reported Restated Reported Restated Revenue: Commercial $36,191 $35,624 $ 92,479 $ 90,855 Government 18,515 17,515 38,867 47,421 ------- ------- -------- -------- 54,706 53,139 131,346 138,276 Cost of goods sold 20,971 23,370 71,027 83,768 Research and development 6,354 6,354 20,167 20,167 Selling and other operating costs 13,241 13,966 41,535 43,884 Combination cost -- 524 6,110 5,152 ------- ------- -------- -------- 40,566 44,214 138,839 152,971 Earnings (loss) from operations 14,140 8,925 (7,493) (14,695) Interest income -- -- 18 18 Interest expense and other (1,576) (1,576) (3,841) (3,579) ------- ------- -------- -------- Earnings (loss) before income taxes 12,564 7,349 (11,316) (18,256) Provision (benefit) for income taxes 4,020 1,170 (3,622) 1,537 ------- ------- -------- -------- Net earnings (loss) $ 8,544 $ 6,179 $ (7,694) $(19,793) ======= ======= ======== ======== Net earnings (loss) per share: Basic $ 0.60 $ 0.43 $ (0.54) $ (1.39) ======= ======= ======== ======== Diluted $ 0.59 $ 0.43 $ (0.54) $ (1.39) ======= ======= ======== ========
7 Financial Position - ------------------
----------------------------------------------------------------------- September 30, 1999 December 31, 1998 ------------------------------ --------------------------------- Previously As Previously As Reported Restated Reported Restated ------------ ----------- ------------- ------------ Accounts receivable, net $ 77,755 $ 69,231 $ 91,202 $ 84,442 Inventories 75,119 68,258 70,312 71,416 Prepaid expenses 7,418 7,895 6,061 6,061 Total current assets 171,208 156,300 179,144 173,488 Property and equipment, net 28,429 28,229 26,775 26,775 Deferred income taxes, net 16,940 16,940 9,749 15,927 Total Assets 235,542 220,434 235,989 236,511 Accrued payroll and other liabilities 10,974 17,954 16,189 26,580 Accrued income taxes 6,089 5,070 3,893 3,893 Total current liabilities 109,956 116,816 86,751 97,142 Accumulated deficit 21,949 43,917 14,255 24,124 Total shareholders' equity 119,877 97,909 125,982 116,113
In addition, the financial information presented for 1998 has been restated for the merger with Inframetrics, Inc., which was accounted for as a pooling of interest. See Note 7. NOTE 3 -- REVENUE RECOGNITION: Revenue is recognized upon shipment of product to the end customer. Revenues from development contracts are recognized on a percentage of completion basis. Provisions for estimated losses on sales or related receivables are recorded when identified. NOTE 4 -- NET EARNINGS PER SHARE: Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the periods, computed using the treasury stock method for stock options. In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The following table sets forth the reconciliation of the denominator utilized in the computation of basic and diluted earnings per share (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ------- ------- ------- ------- Weighted average number of common shares outstanding................................. 14,311 13,862 14,213 12,604 Assumed exercise of stock options net of shares assumed reacquired under the treasury stock method....................... 212 407 -- 537 ------- ------- ------- ------- Diluted shares outstanding..................... 14,523 14,269 14,213 13,141 ======= ======= ======= =======
8 The effect of stock options aggregating 297,000 shares have been excluded for purposes of diluted earnings per share for the nine months ended September 30, 1999, since the effect would have been anti-dilutive. NOTE 5 -- INVENTORIES: Inventories consist of the following (in thousands):
September 30, December 31, 1999 1998 ------------- ------------ (Restated) (Restated) Raw material and subassemblies.......... $ 36,098 $ 37,419 Work-in-progress........................ 17,175 12,527 Finished goods.......................... 16,797 22,330 -------- -------- 70,070 72,276 Less - progress payments received from Customers....................... (1,812) (860) -------- -------- $ 68,258 $ 71,416 ======== ========
NOTE 6 -- CHANGES IN SHAREHOLDERS' EQUITY: Changes in Shareholders' Equity consist of the following (in thousands):
Accumulated Additional Other Total Preferred Common Paid-in Accumulated Comprehensive Comprehensive Stock Stock Capital Deficit Income Total Loss --------- -------- ---------- ----------- ------------- --------- ------------- Balance, December 31, 1998.............. $ -- $ 141 $ 142,169 $ (24,124) $ (2,073) $ 116,113 Common stock options exercised.......... -- 3 811 -- -- 814 Net loss for the nine month period...... -- -- -- (19,793) -- (19,793) $ (19,793) Translation adjustment.................. -- -- -- -- 775 775 775 ----- ----- --------- --------- -------- --------- --------- Balance, September 30, 1999............. $ -- $ 144 $ 142,980 $ (43,917) $ (1,298) $ 97,909 ===== ===== ========= ========= ======== ========= Comprehensive loss, nine months ended September 30, 1999............... $ (19,018) =========
Translation adjustment represents the Company's only other comprehensive income item. Translation adjustment represents unrealized gains/losses in the translation of the financial statements of the Company's subsidiaries in accordance with SFAS No. 52, "Foreign Currency Translation." The Company has no intention of liquidating the assets of the foreign subsidiaries in the foreseeable future. NOTE 7 -- INFRAMETRICS MERGER: Pursuant to the terms of the Agreement and Plan of Merger (the "Merger Agreement") dated as of March 19, 1999 by and among the Company, Irabu Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), Inframetrics, Inc., a Delaware corporation ("Inframetrics") and the stockholders of Inframetrics, Merger Sub was merged with and into Inframetrics effective as of March 30, 1999 (the "Effective Time"). 9 The shares of capital stock of Inframetrics outstanding immediately prior to the Effective Time were converted into and exchanged for a total of 2,107,552 shares of the Company's common stock (including 210,755 shares of the Company's common stock to be held in escrow to secure the indemnification obligations of the stockholders of Inframetrics until September 26, 1999). In addition, all options to purchase Inframetrics common stock that were outstanding immediately prior to the effective time were assumed by the Company. As of the Effective Time of the merger, a total of 192,439 shares of the Company's common stock were issuable upon the exercise of the stock options assumed by the Company in the Merger. The transaction was accounted for as a pooling of interests and, therefore, financial statements for all periods presented have been restated to reflect combined operations and financial position for all such periods. Such restatement had no effect on previously reported separate results of operations or shareholders' equity. In conjunction with the merger, on March 31, 1999, the Company recognized a one- time charge of $23.8 million consisting of a reserve for duplicative inventories of $20.1 million, transaction related costs of $3.2 million and cost to exit activities of $0.5 million. During the six months ended September 30, 1999 the Company recorded additional charges totaling $1.5 million for transaction related costs and cost to exit activities. The inventory reserve relates to duplicative product lines created by the merger and is included in cost of goods sold. The Company intends to write-off and dispose of the related inventories throughout 1999. As of September 30, 1999 the Company had written-off and disposed of inventories totaling $2.7 million. The transaction related costs consisted of investment advisor fees, legal and accounting fees and other direct transaction costs. Such costs are included in combination costs, a separate line item in operating expenses. The cost to exit activities amount relates to estimated shut down costs related to duplicative facilities in the United Kingdom, Germany and France. The related reserve is recorded in accrued payroll and other liabilities on the balance sheet. Preliminary shutdown plans have been identified and activities related to the shutdown of these facilities has begun. It is expected that the shutdown of these facilitates will be completed by December 31, 1999. Such costs are also included in combination costs. As of September 30, 1999 the Company has paid $4.5 million of the transaction related costs and cost to exit activities. The following reconciles revenue and net earnings previously reported to the restated information presented in the consolidated financial statements:
1998 ------------------------------- Three Months Nine Months Ended Ended September 30, September 30, ------------- ------------- Revenue: Previously reported............... $ 41,261 $ 104,032 Inframetrics...................... 14,752 41,482 -------- --------- Restated.......................... $ 56,013 $ 145,514 ======== ========= Net earnings: Previously reported............... $ 5,227 $ 8,272 Inframetrics...................... 504 697 -------- --------- Restated.......................... $ 5,731 $ 8,969 ======== =========
10 NOTE 8 -- SEGMENT INFORMATION: The Company has determined its operating segments to be the commercial and government market segments. The commercial segment comprises thermal imaging applications including condition monitoring, research and development, manufacturing process control and airborne observation and broadcast. The government segment comprises thermal imaging applications including search and rescue, federal drug interdiction, surveillance and reconnaissance, navigation safety, border and maritime patrol, environment monitoring, and ground-based security. The accounting policies of the each segment are the same. The Company evaluates performance based upon revenue and gross profit for each segment and does not evaluate segment performance on any other income measurement. Operating segment information including revenue and gross profit are as follows (in thousands):
Nine Months Ended September 30, ---------------------------------------------- 1999 1998 --------------------- --------------------- Gross Gross Revenue Profit Revenue Profit Commercial............ $ 90,855 $ 38,718 $ 99,274 $ 52,615 Government............ 47,421 15,790 46,240 24,393 --------- -------- --------- -------- Total................. $ 138,276 $ 54,508 $ 145,514 $ 77,008 ========= ======== ========= ========
All longed-lived assets are generally located in the United States with the exception of property and equipment. Property and equipment is located in the following geographic areas (in thousands):
September 30, December 31, 1999 1998 ------------- ------------ United States.................... $ 23,127 $ 18,577 Europe........................... 5,102 8,198 -------- -------- $ 28,229 $ 26,775 ======== ========
11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: Restatement of financial statements. In March 2000 the Company determined that it was necessary to revise its 1998 financial statements and its interim 1999 financial statements. The restatement was required because of incorrect consolidation of the Company's subsidiary information, inaccurate inventory valuation, insufficient accruals of commission expense and the inadequate accumulation and misclassification of certain subsidiary costs. As a result of these matters, certain costs and allowances were either not accrued or not recorded correctly during the appropriate periods. In addition, in December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarifies certain conditions to be met in order to recognize revenue. In April 2000, in connection with the audit of the Company's financial statements and in light of the focus on revenue recognition issues resulting from the issuance of SAB 101, the Company re-examined its historical application of generally accepted accounting principles relating to revenue recognition and the terms underlying certain transactions where title and the risks of ownership had transferred to the buyer, but physical delivery to the buyer had not occurred (bill and hold transactions). As a result of this review, the Company modified its historical revenue recognition policy with respect to those bill and hold transactions. In view of the cumulative effect of the unrecorded adjustments for costs and allowances, and the bill and hold revenue matters, the Company restated its retained earnings for 1997 as a result of the revenue recognition matters, its annual and fourth quarter consolidated financial statements for 1998 and its quarterly consolidated financial statements for the first three quarters of 1999. The financial statements and related notes set forth in this Form 10-Q/A reflect all such restatements, including changes to the tax provision for all periods presented. In addition, as a result of the merger with Inframetrics which was accounted for as a pooling of interests (See Note 7), the financial statements and all amounts included in this Management's Discussion and Analysis of Financial Condition and Results of Operations for all periods presented have been restated to reflect combined operations and financial position for all such periods. Such restatements had no effect on previously reported separate results of operations or shareholders' equity. Revenue. The Company's revenue for the three months ended September 30, 1999 decreased 5.2%, from $56.0 million in the third quarter of 1998 to $53.1 million in the third quarter of 1999. Commercial revenue decreased 5.3% from $37.6 million in the third quarter of 1998 to $35.6 million in the third quarter of 1999. The decrease in commercial revenue was primarily due to declines in the commercial broadcast and airborne law enforcement markets as a result of the cyclical nature of the commercial broadcast market and a pronounced shift in focus on capital expenditures away from capital goods and toward expenditures to ensure Year 2000 compliance. Revenue from the sale of systems to government customers decreased 4.9% to $17.5 million in the third quarter of 1999 compared with $18.4 million in the third quarter of 1998. The revenue for the quarter was impacted due to supply constraints on cooled detectors for the MilCam products. The Company has experienced a significant increase in demand for cooled detectors used in the MilCam and the Mark III products and the Company continues to work with its suppliers to increase production to meet the demand. 12 Revenue for the nine months ended September 30, 1999 decreased 4.9%, from $145.5 million in the first nine months of 1998 to $138.3 million in the first nine months of 1999. Commercial revenue for the nine months ended September 30, 1999 decreased 8.5% from $99.3 million in the first nine months of 1998 to $90.9 million in first nine months of 1999. The decrease in commercial revenue was primarily due to disruptions encountered in the distribution channel as a result of the four-month delay in consummating the merger with Inframetrics caused by the delayed approval of the transaction from the Federal Trade Commission and the Department of Justice and to decreased sales to commercial broadcasters and law enforcement agencies. This delay created uncertainty in the Company's customer base and management believes that many orders that would have been placed earlier in 1999 were delayed until the merger was completed and the surviving product lines were identified. While this delay impacted the first two quarters of 1999, management believes that market has recovered as evidenced by increased thermography orders. Revenues from the sale of systems to government customers for the nine months ended September 30, 1999 totaled $47.4 million, an increase of 2.6% from the $46.2 million in revenue generated in the first nine months of 1998. The increase in government revenue was due to higher deliveries of the SAFIRE family of airborne products, particularly the StarSAFIRE system that began shipments. The impact of increased deliveries of these products on government revenues was offset somewhat by issues encountered primarily in the first quarter and the early portion of the second quarter by agencies of the U.S. Government and other NATO countries in obtaining release of 1999 procurement funds due to the funding uncertainties caused by the NATO campaign in Kosovo, and the continued depressed economic conditions in several international markets. The Company's commercial products continued to account for the majority of the Company's total revenue. As a percentage of total revenue, commercial revenue for the third quarter of 1999 decreased slightly to 67.0% as compared to 67.2% in the third quarter of 1998. For the nine months ended September 30, 1999, commercial revenue declined to 65.7% of total revenue, as compared to 68.2% for the first nine months of 1998. Revenue from sales outside the United States increased as a percentage of total revenue from approximately 34.7% to approximately 37.1% for the quarters ended September 30, 1998 and 1999, respectively. The increase in the percentage of international sales was primarily due to increased deliveries of thermography products in Europe and increased deliveries on existing international government contracts. For the first nine months of 1999, revenue from sales outside the United States constituted 41.0% of total revenue, as compared to 36.8% for the first nine months of 1998. While the percentage of revenue from international sales will continue to fluctuate from quarter to quarter due to the timing of shipments under international and domestic government contracts, management anticipates that revenue from international sales as a percentage of total revenue will continue to comprise a significant percentage of revenue. Gross profit. As a percentage of revenue, gross profit increased from 52.3% in the third quarter of 1998 to 56.0% in the third quarter of 1999. The increase in gross profit as a percentage of revenue was principally attributable to the higher proportion of commercial revenue generated from uncooled commercial products, which, as a result of the favorable cost structure of the uncooled commercial products and through manufacturing cost control efforts, exceed those margins experienced from the sale of cooled commercial products. As a percentage of revenue, gross profit decreased from 52.9% to 39.4% for the nine-month periods ended September 30, 1998 and 1999, respectively. The primary reason for this significant decline was the inclusion in cost of goods sold for the nine month period ended September 30, 1999 of a one-time charge of $20.1 million related to duplicate inventories and products which 13 were determined to have reached the end of life, both created by overlapping product lines as a result of the merger with Inframetrics. Without this charge, gross profit as a percentage of revenue would have increased from 52.9% to 54.0% for the nine months ended September 30, 1998 and 1999, respectively. This increase in gross profit as a percentage of revenue was principally attributable to the higher proportion of total revenue derived from the sale of commercial products which, as a result of the favorable cost structure of the uncooled commercial products, now generally exceed those margins experienced from the sale of cooled imaging products and imaging systems to the government market. Research and development. Research and development expense for the quarter increased slightly, from $6.3 million for the third quarter of 1998 to $6.4 million for the third quarter of 1999. As a percentage of revenue, research and development expense increased from 11.3% to 12.0% for the three months ended September 30, 1998 and 1999. In absolute dollar terms, the relatively consistent level of research and development expense reflects the continued emphasis on product development offset by continued cost control efforts and efficiencies realized as a result of the Inframetrics transaction. Research and development expense increased 1.6% for the nine months ended September 30, 1999, from $19.9 million in the first nine months of 1998 to $20.2 million in the first nine months of 1999. As a percentage of revenue, research and development expense increased from 13.6% to 14.6% for the nine months ended September 30, 1998 and 1999, respectively. In absolute dollar terms, the increase in research and development expense was primarily due to engineering efforts related to the introduction of new products including the FireFLIR, UltraMedia LE, Maritime FLIR and UltraMedia III, as well as on-going new product development and existing product enhancements. This increase was mitigated by increased cost control efforts and efficiencies realized as a result of the Inframetrics transaction. The overall level of research and development expense reflects the continued emphasis on product development and new product introductions. Selling and other operating costs. Selling and other operating costs for the quarter decreased slightly, from $14.1 million for the third quarter of 1998 to $14.0 million for the third quarter of 1999. As a percentage of revenue, selling and other operating costs increased from 25.2% to 26.3% for the three months ended September 30, 1998 and 1999, respectively. Selling and other operating costs increased 5.5% for the nine months ended September 30, 1999, from $41.6 million in the first nine months of 1998 to $43.9 million in the first nine months of 1999. As a percentage of revenue, selling and other operating costs increased from 28.6% to 31.7% for the nine months ended September 30, 1998 and 1999, respectively. The increase in absolute dollar terms resulted from expense increases due to anticipated higher volumes of business and increased commission expense. Selling and other operating costs are expected to continue to increase in absolute dollar terms, however, as a percentage of revenue they are expected to decline throughout the rest of the year. Inframetrics Merger. Effective March 30, 1999, the Company completed its merger with Inframetrics, Inc., a privately held infrared imaging company headquartered in Billerica, Massachusetts, by issuing approximately 2.3 million shares of the Company's common stock (including approximately 192,000 shares reserved for issuance upon the exercise of outstanding options) for all the outstanding stock of Inframetrics. Additionally, the Company assumed and paid off approximately $24 million of Inframetrics, Inc.'s short- and long-term debt. In conjunction with the merger, during the quarter ended March 31, 1999, the Company recorded a one-time charge of $23.8 million. The charge consisted of a $20.1 million inventory reserve due to the creation of duplicative product lines, which is included in cost of goods sold, and $3.7 14 million of transaction related costs, which are included in combination costs, a separate line in operating expenses. During the six months ended September 30, 1999 the Company incurred additional charges of $1.5 million for transaction related costs and costs to exit activities. These charges and related reserves are more fully discussed in Note 7 to the consolidated financial statements. Interest expense and other. Interest expense and other includes costs related to short-term and long-term debt, capital lease obligations, foreign currency transaction gains and losses and miscellaneous bank charges. The increase from $865,000 for the third quarter of 1998 to $1.6 million for the third quarter of 1999, and the increase from $3.5 million in the first nine months of 1998 to $3.6 in the first nine months of 1999 was primarily due to higher interest rates and increased debt levels to support working capital needs. Income taxes. The provision for income taxes for the three and nine months ended September 30, 1999 resulted in an effective tax rate of 15.9% compared to 30.7% for the third quarter of 1998. The effective tax rate remained below statutory rates due to utilization of net operating loss carryforwards, various tax credits, and benefits from the favorable tax treatment of international revenue. For the nine months ended September 30, 1999, the Company recorded an income tax provision of $1.5 million despite having a pre-tax loss of $18.3 million. The lack of tax benefit in the first nine months of 1999 was primarily due to the fact that certain foreign subsidiaries had taxable income while the combined entities had a net loss. For the nine months ended September 30, 1998 the Company's effective tax rate was 29.7%. Liquidity and Capital Resources At September 30, 1999, the Company had short-term borrowings net of cash on hand of $64.2 million compared to $62.7 million at June 30, 1999 and compared to $35.2 million at December 31, 1998. The increase in short-term borrowings during the nine months ended September 30, 1999, was principally caused by the repayment of Inframetrics' existing long-term debt that aggregated $18.3 million at December 31, 1998 and the continued high levels of inventories and receivables. At September 30, 1999, the Company had inventories on hand of $68.3 million compared to $71.4 million at December 31, 1998. Despite a $20.1 million inventory reserve recorded in the first quarter of this year for duplicative product lines created by the merger with Inframetrics, inventories have declined only $3.1 million due to the build-up of component inventory in anticipation of shipments to government customers during the last quarter of 1999, which typically is the largest revenue quarter of the year and build-up of component inventories for FireFLIR and Maritime FLIR systems in anticipation of deliveries of these new products. The level of inventory decreased $3.7 million from the June 30, 1999 balance of $72.0 million. This decrease, in a quarter in which the Company normally experiences an increase in inventory in anticipation of the volume of shipment in the fourth quarter, reflects the results of management's continued efforts to increase inventory turns. At September 30, 1999, the Company had accounts receivable in the amount of $69.2 million compared to $84.4 million at December 31, 1998. The decrease in the level of accounts receivable was primarily due to decreased shipments during the first nine months of 1999. Days sales outstanding increased from 129 at June 30, 1999 to 137 at September 30, 1999. The Company's investing activities have consisted primarily of expenditures for fixed assets, which totaled $7.6 million and $10.1 million for the nine months ended September 30, 1999 and 15 1998, respectively. The Company has budgeted for approximately $7.0 million related to the replacement of the Company's Enterprise Resource Planning (ERP) system to address Year 2000 and other issues and has expended approximately $6.1 million through September 30, 1999. The Company has available a $70.0 million line of credit which bears interest at LIBOR plus 1.5% (6.8% at September 30, 1999) secured by all the Company's assets. Additionally, the Company, through one of its subsidiaries, has a 40,000,000 Swedish Krone (approximately $4.7 million) line of credit at 5.1% at September 30, 1999. At September 30, 1999, the Company had $68.3 million outstanding on these lines. The Company is currently negotiating an increase to the $70.0 million line of credit to $100.0 million. The new operating line is expected to be effective in early December. The Company believes that its existing cash and available credit facilities, financing available from other sources and continuing efforts to expedite the collection of accounts receivable and management of inventory levels will be sufficient to meet its cash requirements for the foreseeable future. Quantitative and Qualitative Disclosure about Market Risk The Company's exposure to market risk for changes in interest rates relates primarily to its short-term and long-term debt obligations. The Company currently hedges interest rate exposure through the use of long-term interest rate swaps. The Company believes that its net income or cash flow exposure relating to rate changes for short-term and long-term debt obligations are immaterial. Interest expense is affected by the general level of U.S. interest rates and/or LIBOR. The foreign subsidiaries of the Company generally use their local currency as the functional currency. The Company does not currently enter into any foreign exchange forward contracts to hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. To date, such exposure has been immaterial. The Company does maintain small cash balances denominated in currencies other than the U.S. Dollar. If foreign exchange rates were to weaken against the U.S. Dollar, the Company believes that the fair value of these foreign currency amounts would decline by an immaterial amount. Impact of the Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company or its significant suppliers or customers fail to make necessary modifications, conversions and contingency plans on a timely basis, the Year 2000 issue could have a material adverse effect on the Company's business, operations, cash flows and financial conditions. The Year 2000 issue affects the Company's internal systems as well as any of the Company's products that include date-sensitive software. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 issue. The Company identified that the internal manufacturing system acquired by the Company in connection with the acquisition of AGEMA is not Year 2000 compliant, and has completed the installation of a new enterprise resource planning system, both hardware and software, to correct this deficiency. The Company's existing product lines have been tested and reviewed to ensure Year 2000 compliance and the Company's products under development are being designed to be Year 2000 compliant. Additionally, the Company has evaluated Year 2000 compliance on products from its suppliers and partners. Both internal and external resources are being employed 16 to identify, correct or reprogram, and test the systems for Year 2000 compliance. The total cost of the project is estimated to be approximately $7.0 million and is being funded through existing cash resources. A contingency plan has not been finalized for dealing with the most reasonably likely worst-case scenario, as such scenario has not yet been clearly identified. The Company currently plans to complete such analysis and contingency planning by December 31, 1999. There can be no assurance, however, that the systems or products of other companies on which the Company's systems also rely will be timely converted or that any such failure to convert by a vendor, customer or another company would not have an adverse effect on the Company's systems. Additionally, we cannot completely ensure that the Company's computer systems and software products do not contain undetected problems associated with Year 2000 Compliance. Such problems, should they occur, may result in adverse effects on future operating results. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the Company's business, management's beliefs, and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as those discussed from time to time in the Company's Securities and Exchange Commission fillings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report. If the Company does update or correct one or more forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. 17 PART II. OTHER INFORMATION Item 2. Changes in Securities During the quarter, the Company sold securities without registration under the Securities Act of 1933, as amended (the "Securities Act") upon the exercise of certain stock options granted under the Company's 1984 Stock Incentive Plan. An aggregate of 11,600 shares of Common Stock were issued at exercise prices ranging from $1.625 to $5.225. These transactions were effected in reliance upon the exemption from registration under the Securities Act provided by Rule 701 promulgated by the Securities and Exchange Commission pursuant to authority granted under Section 3 (b) of the Securities Act. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 Contract for the Supply of Uncooled Imaging Modules, dated August 8, 1999. (1) 27.1 Restated Financial Data Schedule _________ (1) Filed with and incorporated by reference to the Registrant's Amendment to Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1999 filed on December 2, 1999. Portions of this Exhibit have been omitted pursuant to a request for confidential treatment under 17 C.F.R. (S) 240.24b-2. (b) During the three months ended September 30, 1999, the Company did not file any reports on Form 8-K. 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLIR SYSTEMS, INC. Date May 3, 2000 /s/ Stephen M. Bailey ------------------ ----------------------- Stephen M. Bailey Sr. Vice President, Finance and Chief Financial Officer (Principal Accounting and Financial Officer and Duly Authorized Officer) 19 EX-27.1 2 RESTATED FINANCIAL DATA SCHEDULE
5 0000354908 FLIR SYSTEMS, INC. 1,000 U.S. DOLLARS 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 1 1 4,410 4,410 0 0 72,289 72,289 (3,058) (3,058) 68,258 68,258 156,300 156,300 66,633 66,633 (38,404) (33,404) 220,434 220,434 116,816 116,816 1,702 1,702 0 0 0 0 144 144 97,765 97,765 220,434 220,434 53,139 138,276 53,139 138,276 23,370 83,768 23,370 83,768 20,844 69,203 389 389 1,576 3,823 7,349 (18,256) 1,170 1,537 6,179 (19,793) 0 0 0 0 0 0 6,179 (19,793) 0.43 (1.39) 0.43 (1.39)
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