-----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, GMgnpLvioc7uHTZIF0plzlteL51g89jVA5HO4qY77UK835i51r5HW76cGmcB4h3J Fc73AI4JLChChjSAYLn+YQ== 0001032210-99-001233.txt : 19990817 0001032210-99-001233.hdr.sgml : 19990817 ACCESSION NUMBER: 0001032210-99-001233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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 SEC ACT: SEC FILE NUMBER: 000-21918 FILM NUMBER: 99689897 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 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-Q __________________ (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 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 . No X . ----- ----- At June 30, 1999, there were 14,256,996 shares of the Registrant's common stock, $0.01, par value, outstanding. 1 FLIR Systems, Inc. INDEX
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Operations -- Three Months and Six Months Ended June 30, 1999 and 1998............. 3 Consolidated Balance Sheet -- June 30, 1999 and December 31, 1998....................................... 4 Consolidated Statement of Cash Flows -- Six Months Ended June 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..................... 10 PART II. OTHER INFORMATION Item 2. Changes in Securities................................... 15 Item 4. Submission of Matters to a Vote of Shareholders......... 15 Item 6. Exhibits and Reports on Form 8-K........................ 15 Signatures.............................................. 16
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 Six Months Ended June 30, June 30, ---------------------------------- ---------------------------------- 1999 1998 1999 1998 --------------- --------------- --------------- --------------- (restated Note 6) (restated Note 6) Revenue: Commercial........................... $28,652 $33,604 $ 56,288 $61,647 Government........................... 13,550 15,793 20,352 27,854 --------------- --------------- --------------- --------------- Total revenue...................... 42,202 49,397 76,640 89,501 Cost of goods sold..................... 16,702 22,199 50,056 41,801 Research and development............... 6,836 7,025 13,813 13,518 Selling and other operating costs...... 13,437 14,516 28,294 27,487 Combination costs...................... -- -- 6,110 -- --------------- --------------- --------------- --------------- 36,975 43,740 98,273 82,806 Earnings (loss) from operations...... 5,227 5,657 (21,633) 6,695 Interest income........................ -- 102 18 465 Interest expense and other............. (1,039) (1,198) (2,265) (2,673) --------------- --------------- --------------- --------------- Earnings (loss) before income taxes.. 4,188 4,561 (23,880) 4,487 Provision (benefit) for income taxes... 1,343 1,128 (7,642) 1,249 --------------- --------------- --------------- --------------- Net earnings (loss).................... $ 2,845 $ 3,433 $(16,238) $ 3,238 =============== =============== =============== =============== Net earnings (loss) per share Basic................................ $0.20 $0.29 $ (1.15) $ 0.27 =============== =============== =============== =============== Diluted.............................. $0.20 $0.27 $ (1.15) $ 0.26 =============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements. 3 FLIR SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share amounts)
ASSETS June 30, December 31, 1999 1998 ------------------- -------------------- (unaudited) (restated Note 6) Current assets: Cash and cash equivalents.................................... $ 5,436 $ 4,793 Accounts receivable, net..................................... 68,705 91,202 Inventories.................................................. 76,171 70,312 Prepaid expenses............................................. 9,759 6,061 Deferred income taxes........................................ 6,776 6,776 ------------------- -------------------- Total current assets....................................... 166,847 179,144 Property and equipment, net.................................... 27,189 26,775 Software development costs, net................................ 367 488 Deferred income taxes, net..................................... 16,940 9,749 Intangible assets, net......................................... 15,396 15,936 Other assets................................................... 3,559 3,897 ------------------- -------------------- $230,298 $235,989 =================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable................................................ $ 68,158 $ 39,958 Accounts payable............................................. 31,860 24,031 Accrued payroll and other liabilities........................ 11,685 16,189 Accrued income taxes......................................... 2,947 3,893 Current portion of long-term debt............................ 791 2,680 ------------------- -------------------- Total current liabilities.................................. 115,441 86,751 Long-term debt................................................. 798 19,296 Pension liability.............................................. 3,833 3,960 Commitments and contingencies.................................. -- -- Shareholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued at June 30, 1999, and December 31, 1998....................................... -- -- Common stock, $0.01 par value, 30,000,000 shares authorized, 14,256,996 and 14,133,403 shares issued at June 30, 1999, and December 31, 1998, respectively......................... 142 141 Additional paid-in capital................................... 142,388 142,169 Accumulated deficit.......................................... (30,493) (14,255) Cumulative foreign translation adjustment.................... (1,811) (2,073) ------------------- -------------------- Total shareholders' equity................................. 110,226 125,982 ------------------- -------------------- $230,298 $235,989 =================== ====================
The accompanying notes are an integral part of these financial statements. 4 FLIR SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ---------------------------------------------- 1999 1998 -------------------- -------------------- (restated Note 6) Cash used by operations: Net (loss) earnings............................................ $(16,238) $ 3,238 Income charges not affecting cash: Depreciation................................................. 3,453 2,936 Amortization................................................. 1,175 1,443 Disposals and write-offs of property and equipment........... 471 165 Deferred income taxes........................................ (7,191) 146 Changes in certain assets and liabilities: Decrease (increase) in accounts receivable................... 22,497 (1,457) Increase in inventories...................................... (5,859) (7,246) (Increase) decrease in prepaid expenses...................... (3,698) 202 Decrease in other assets..................................... 230 133 Increase in accounts payable................................. 7,829 2,614 Decrease in accounts payable to related parties.............. -- (1,198) Decrease in accrued payroll and other liabilities............ (4,504) (13,272) (Decrease) increase in accrued income taxes.................. (946) 807 -------------------- -------------------- Cash used by operating activities.............................. (2,781) (11,489) -------------------- -------------------- Cash used by investing activities: Additions to property and equipment............................ (4,744) (6,838) Software development costs..................................... -- (239) -------------------- -------------------- Cash used by investing activities................................ (4,744) (7,077) -------------------- -------------------- Cash provided by financing activities: Net increase in notes payable.................................. 28,200 14,152 Proceeds from long term debt................................... -- 567 Repayment of long term debt including current portion.......... (20,387) (896) (Decrease) increase in pension liability....................... (127) 25 Proceeds from exercise of stock options........................ 220 1,145 Common stock issued pursuant to stock option plans............. -- 969 -------------------- -------------------- Cash provided by financing activities.......................... 7,906 15,962 -------------------- -------------------- Effect of exchange rate changes on cash.......................... 262 (821) -------------------- -------------------- Net increase (decrease) in cash and cash equivalents............. 643 (3,425) Cash and cash equivalents, beginning of period................... 4,793 7,545 -------------------- -------------------- Cash and cash equivalents, end of period......................... $ 5,436 $ 4,120 ==================== ====================
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 6 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 with the current year's presentation. These reclassifications had no impact on previously reported results of operations or shareholders' equity. NOTE 2 -- REVENUE RECOGNITION: Revenue on commercial sales is generally recognized upon shipment. Government sales often require significant integration with other aircraft components and related revenue is generally recognized when products are shipped from the Company's facilities and realization is reasonably assured. Adjustments in estimates, which can affect both revenues and earnings, are made in the period in which the information necessary to make the adjustment becomes available. Provisions for estimated losses on sales or related receivables are recorded when identified. NOTE 3 -- 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 No. 128, "Earnings per Share." 6 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 Six Months Ended June June 30, 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding................................. 14,197 12,021 14,163 11,964 Assumed exercise of stock options net of shares assumed reacquired under the treasury stock method................................ 274 592 -- 603 ----------- ----------- ----------- ----------- Diluted shares outstanding..................... 14,471 12,613 14,163 12,567 =========== =========== =========== ===========
The effect of stock options for the six months ended June 30, 1999, which aggregated 340,000 shares have been excluded for purposes of diluted earnings per share since the effect would have been anti-dilutive. NOTE 4 -- INVENTORIES: Inventories consist of the following (in thousands):
June 30, December 31, 1999 1998 ------------------- ------------------- Raw material and subassemblies..................... $41,805 $36,315 Work-in-progress................................... 18,165 12,527 Finished goods..................................... 17,615 22,330 ------------------- ------------------- 77,585 71,172 Less - progress payments received from Customers......................................... (1,414) (860) ------------------- ------------------- $76,171 $70,312 =================== ===================
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY: Changes in Shareholders' Equity consist of the following (in thousands):
Additional Accumulated Other Total Preferred Common Paid-in Accumulated Comprehensive Comprehensive Stock Stock Capital Deficit Income Total Loss --------- -------- ---------- ----------- ----------------- --------- ---------------- Balance, December 31, 1998.......... $ -- $141 $142,169 $(14,255) $(2,073) $125,982 Common stock options exercised...... -- 1 219 -- -- 220 Net loss for the six month period... -- -- -- (16,238) -- (16,238) $(16,238) Foreign translation adjustment...... -- -- -- -- 262 262 262 --------- -------- ---------- ----------- ----------------- --------- ---------------- Balance, June 30, 1999.............. $ -- $142 $142,388 $(30,493) $(1,811) $110,226 ========= ======== ========== =========== ================= ========= Comprehensive loss, six months ended June 30, 1999................ $(15,976) ================
7 Cumulative foreign translation adjustment represents the Company's only other comprehensive income item. Cumulative foreign 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 6 -- 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"). 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 are 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 $24.3 million consisting of the following (in thousands):
Description: Original Incurred through Remaining Estimate June 30, 1999 Balance - ---------------------------------------------- ---------------- -------------------- ---------------- Reserve for duplicative inventories........... $18,150 $ -- $18,150 Transaction related costs..................... 3,110 2,288 822 Costs to exit activities...................... 3,000 1,695 1,305 ---------------- -------------------- ---------------- Total $24,260 $3,983 $20,277 ================ ==================== ================
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. 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. 8 The following reconciles revenue and net earnings previously reported to the restated information presented in the consolidated financial statements:
1998 ----------------------------------------- Three Months Six Months Ended June 30, Ended June 30, ------------------- ------------------- Revenue: Previously reported................................. $35,072 $62,771 Inframetrics........................................ 14,325 26,730 ------------------- ------------------- Restated............................................ $49,397 $89,501 =================== =================== Net earnings: Previously reported................................. $ 2,755 $ 3,045 Inframetrics........................................ 678 193 ------------------- ------------------- Restated............................................ $ 3,433 $ 3,238 =================== ===================
NOTE 7: - 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):
Six Months Ended June 30, ----------------------------------------------------------------- 1999 1998 ------------------------------- ------------------------------- Revenue Gross Profit Revenue Gross Profit -------------- -------------- -------------- -------------- Commercial......... $56,288 $20,880 $61,647 $31,728 Government......... 20,352 5,704 27,854 15,972 -------------- -------------- -------------- -------------- Total.............. $76,640 $26,584 $89,501 $47,700 ============== ============== ============== ==============
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):
June 30, December 31, 1999 1998 ---------------- ------------------ United States.................................... $19,314 $18,577 Europe........................................... 7,875 8,198 ---------------- ------------------ $27,189 $26,775 ================ ==================
9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: General. As a result of the merger with Inframetrics which was accounted for as a pooling of interests (See Note 6), 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 June 30, 1999 decreased 14.6%, from $49.4 million in the second quarter of 1998 to $42.2 million in the second quarter of 1999. Commercial revenue decreased 14.7% from $33.6 million in the second quarter of 1998 to $28.7 million in the second quarter of 1999. The decrease in commercial revenue was primarily due to uncertainty in the Company's customer base as a result of the March 30, 1999 merger with Inframetrics. Management believes that many orders that would have been placed in the early portion of the second quarter of 1999 were delayed until the surviving product lines were identified. Based on improved order rates experienced in the latter part of the second quarter, management believes such concerns have been resolved. Revenue from the sale of systems to government customers decreased 14.2% to $13.6 million in the second quarter of 1999 compared with $15.8 million in the second quarter of 1998. The decline in government revenue was primarily due to continued uncertainties in the early portion of the second quarter caused by the NATO campaign in Kosovo. As funding uncertainties were resolved, the order rates for the latter part of the quarter improved. Revenue for the six months ended June 30, 1999 decreased 14.4%, from $89.5 million in the first half of 1998 to $76.6 million in the first half of 1999. Commercial revenue for the six months ended June 30, 1999 decreased 8.7% from $61.6 million in the first half of 1998 to $56.3 million in first half 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 Department of Justice. This delay created uncertainty in the Company's customer base and management believes that many orders that would have been placed in the first six months of 1999 were delayed until the merger was completed and the surviving product lines were identified. Revenues from the sale of systems to government customers for the six months ended June 30, 1999 totaled $20.4 million, a decrease of 27% from the $27.9 million in revenue generated in the first half of 1998. The significant decline in government revenue was primarily due to 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 second quarter of 1999 decreased slightly to 67.9% as compared to 68.0% in the second quarter of 1998. For the six months ended June 30, 1999, commercial revenue increased to 73.4% of total revenue, as compared to 68.9% for the first six months of 1998. 10 Revenue from sales outside the United States decreased as a percentage of total revenue from approximately 42.3% to approximately 34.7% for the quarters ended June 30, 1998 and 1999, respectively. The decrease in the percentage of international sales was primarily due to significant deliveries to the U.S. Government. For the first half of 1999, revenue from sales outside the United States constituted 33.1% of total revenue, as compared to 38% for the first half 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 55.1% in the second quarter of 1998 to 60.4% in the second 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 obtained 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 53.3% to 34.7% for the six month periods ended June 30, 1998 and 1999, respectively. The primary reason for this significant decline was the inclusion in cost of goods sold for the six month period ended June 30, 1999 of a one-time charge of $18.2 million related to duplicate inventories and products which 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 53.3% to 58.4% for the six months ended June 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. The increase in gross profit as a percentage of revenue was mitigated in part by an increase in shipments to instrumentalities of the U.S. Government which typically have lower margins than those of other customers in the government market and aggregated $9.5 million in the first half of 1999 compared to $8.0 million in the first half of 1998. Research and development. Research and development expense for the quarter decreased 2.7%, from $7.0 million for the second quarter of 1998 to $6.8 million for the second quarter of 1999. As a percentage of revenue, research and development expense increased from 14.2% to 16.2% for the three months ended June 30, 1998 and 1999. In absolute dollar terms, the decrease in research and development expense was primarily due to cost control efforts and efficiencies realized as a result of the Inframetrics transaction. Research and development expense increased 2.2% for the six months ended June 30, 1999, from $13.5 million in the first half of 1998 to $13.8 million in the first half of 1999. As a percentage of revenue, research and development expense increased from 15.1% to 18.0% for the six months ended June 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 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. Due to the timing of revenue during the year, research and development expense as a percentage of revenue is typically higher in the first quarter than on a full year basis. 11 Selling and other operating costs. Selling and other operating costs for the quarter decreased 7.4%, from $14.5 million for the second quarter of 1998 to $13.4 million for the second quarter of 1999. As a percentage of revenue, selling and other operating costs increased from 29.4% to 31.8% for the three months ended June 30, 1998 and 1999, respectively. The decrease in absolute dollar terms was primarily due to management's cost control efforts. Selling and other operating costs increased 2.9% for the six months ended June 30, 1999, from $27.5 million in the first half of 1998 to $28.3 million in the first half of 1999. As a percentage of revenue, selling and other operating costs increased from 30.7% to 36.9% for the six months ended June 30, 1998 and 1999, respectively. The increase in absolute dollar terms was due to the costs related to increased personnel as part of the continued shift from a primarily representative based sales force to a more direct sales force and increased personnel required for new markets, primarily the fire-fighting market. This increase was partially mitigated by management's cost control efforts. 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 1999. 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 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 $24.3 million. The charge consisted of $18.2 million of inventories due to the creation of duplicative product lines, which is included in cost of goods sold, and $6.1 of transaction related costs, which are included in combination costs, a separate line in operating costs. These charges and related reserves are more fully discussed in Note 6 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 decrease from $1.2 million for the second quarter of 1998 to $1.0 million for the second quarter of 1999, and the decrease from $2.7 million in the first half of 1998 to $2.3 in the first half of 1999 were primarily due to lower interest rates and favorable exchange gains. Income taxes. The provision for income taxes for the three and six months ended June 30, 1999 resulted in an effective tax rate of 32.0% compared to 24.7% for the second quarter of 1998 and 27.8% for the six months ended June 30, 1998. The increase in the effective tax rate was primarily due to limitations on the timing and recognition of the Company's net operating loss carryforwards and tax credits. The effective tax rate remained substantially below statutory rates due to utilization of net operating loss carryforwards, various tax credits, and benefits from the favorable tax treatment of international revenue. Liquidity and Capital Resources At June 30, 1999, the Company had short term borrowings net of cash on hand of $62.7 million compared to $60.9 million at March 31, 1999 and compared to $35.2 million at December 31, 1998. The increase in short-term borrowings during the six months ended June 30, 1999, was principally caused by the repayment of Inframetrics' existing long-term debt which aggregated $19.3 million at December 31, 1998 and continued high levels of inventories. 12 At June 30, 1999, the Company had inventories on hand of $76.2 million compared to $70.3 million at December 31, 1998. The primary reason for the increase is the build-up of component inventory in anticipation of shipments to government customers during the last six months of 1999 and build-up of component inventory for FireFLIR systems in anticipation of deliveries of this new product. At June 30, 1999, the Company had accounts receivable in the amount of $68.7 million compared to $91.2 million at December 31, 1998. The decrease in the level of accounts receivable was primarily due to decreased shipments during the first six months of 1999. Also contributing to the decrease was the greater percentage of total receivables that represent sales to commercial customers which typically have a shorter collection cycle than sales to government customers. Days sales outstanding decreased from 213 at March 31, 1999 to 150 at June 30, 1999. The Company's investing activities have consisted primarily of expenditures for fixed assets, which totaled $4.7 million and $6.8 million for the six months ended June 30, 1999 and 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 $5.5 million to date. The Company has available a $70.0 million line of credit which bears interest at LIBOR plus 1.5% (6.68% at June 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 4.7% at June 30, 1999. At June 30, 1999, the Company had $68.2 million outstanding on these lines. 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 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 Company currently does not hedge any interest rate exposure. 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 13 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 is currently conducting 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 are being 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 is evaluating Year 2000 compliance on products from its suppliers and partners. Both internal and external resources are being employed 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 developed 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. 14 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 4,800 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 4. Submission of Matters to a Vote of Shareholders The Company's annual shareholders' meeting was held on Tuesday, June 2, 1999, at which the following actions were taken by a vote of the shareholders: 1. The following persons were re-elected to the Board of Directors by the votes and for the terms indicated:
Vote ------------------------------------- Withhold Term Director For Authority Ending - --------------------------------- ----------------- ----------------- ----------------- Robert P. Daltry 11,718,325 1,181,085 2002 John C. Hart 11,717,810 1,181,600 2002
2. By a vote of 10,483,700 to 2,216,306 (with 182,364 abstentions and 17,037 Broker Non-Votes), the proposal to approve the 1999 employee stock purchase plan was approved. 3. By a vote of 12,877,931 to 15,829 (with 5,650 abstentions), the Company's selection of PricewaterhouseCoopers LLP as the Company's independent auditors for the year ending December 31, 1999 was ratified. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 4.1 Rights agreement dated as of June 2, 1999 between the Company and ChaseMellon Shareholder Services, LLC as Rights agreement (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on June 11, 1999). 10.1 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 30, 1999). 10.2 Form of Agreement Amending Executive Employment Agreement dated as of January 30, 1999 amending Executive Employment Agreement of Robert P. Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J. Mark Samper, William N. Martin, Arne Almerfors and David Smith. 15 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule for year ended December 31, 1998 27.3 Restated Financial Data Schedule for year ended December 31, 1997 (b) During the three months ended June 30, 1999, the Company filed the following reports on Form 8-K 1. The Company filed a current report on Form 8-K, dated April 14, 1999, reporting under Item 2 the completion of the merger with Inframetrics, Inc. 2. The Company filed a current report on Form 8-K, dated April 23, 1999, reporting under Item 5, that the Company issued a press release announcing the Company's expectation as to revenue and earnings for the quarter ended March 31, 1999. 3. The Company filed a current report on Form 8-K, dated June 3, 1999, reporting under Item 5, results of operations for the one month ended April 30, 1999 representing 30 days of combined operations of the Company and Inframetrics, Inc. 4. The Company filed a current report on Form 8-K/A, dated June 14, 1999, reporting under Item 7, the audited financial statements of Inframetrics, Inc. and pro-forma combining financial statements of the Company and inframetrics, Inc. as required by the Merger with Inframetrics. 5. The Company filed a current report on Form 8-K, dated June 14, 1999, reporting under item 5, the adoption by the Board of Directors of a Shareholders Rights Plan. 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 August 12, 1999 /s/ J. Mark Samper ------------------------- ------------------ J. Mark Samper Vice President of Finance and Chief Financial Officer (Principal Accounting and Financial Officer and Duly Authorized Officer) 16 EX-10.2 2 AGREEMENT AMENDING EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.2 AGREEMENT AMENDING EXECUTIVE EMPLOYMENT AGREEMENT This Agreement Amending Executive Employment Agreement ("Amendment") is entered into this 20th day of January, 1999 by and between _______________ ("Executive") and FLIR SYSTEMS, INC. ("FSI"). A. Each of Executive and FSI are parties to a certain Executive Employment Agreement dated May 5, 1997, as amended by written agreement on December 2, 1997 ("Employment Agreement"). B. FSI and Executive wish to extend the term of the Employment Agreement until December 31, 2001. C. FSI's largest shareholder, Spectra Physics AB ("Spectra"), has recommended to its shareholders that it accept a cash tender offer from Thermo Instruments, Inc. ("Thermo") for all of the outstanding shares of Spectra (the "Transaction"). Should the Transaction be successfully concluded, Thermo will have acquired at least 90% of the outstanding shares of Spectra and, as a result, will also have acquired the shares of FSI currently owned by Spectra. D. The consummation of the Transaction contemplated by Thermo and Spectra constitutes a "Change of Control" as that term is defined in the Employment Agreement. E. Under the terms of the Employment Agreement, the occurrence of a "Change of Control" gives rise to certain rights and entitlements of the Executive. F. The parties to this Amendment intend and desire to amend the terms of the Employment Agreement to provide that the consummation of the Transaction contemplated by Thermo and Spectra does not constitute a Change of Control under the terms of the Employment Agreement; provided, however, that the effectiveness of which amendment shall be subject to certain limitations related to the ownership of FSI stock as more fully set forth below. NOW THEREFORE, for valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Amendment to Section 2.3. Section 2.3 of the Employment Agreement shall be amended to strike out the date "December 31, 1999" in each place it occurs and insert in lieu thereof the date of "December 31, 2001." 2. Amendment to Article VI. Article VI of the Employment Agreement shall be amended to add the following Section 6.7: 6.7 Thermo Transaction. Notwithstanding anything to the contrary contained in this Article VI, the consummation of the transaction contemplated by Spectra Physics, AB and Thermo Industries, Inc shall not constitute a "Change of Control" for purposes of Article VI. 3. Effectiveness of Amendment. Notwithstanding anything to the contrary contained herein, the amendment to the Employment Agreement set out in Section 2 of this Amendment shall be null and void and of no effect at such time following the consummation of the Transaction that: (1) Thermo acquires any additional shares of FSI Common Stock beyond that which they had acquired immediately upon the consummation of the Transaction, or (2) Thermo asserts any 17 rights to representation on the FSI Board of Directors. 4. Other Terms of Agreement Unmodified. Except as expressly modified herein or by that written amendment dated December 2, 1997, all terms and provisions of the Employment Agreement shall remain unmodified and in full force and effect. IN WHITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first written above. EXECUTIVE FLIR SYSTEMS, INC. By: /s/ J. Kenneth Stringer, III ---------------------------- Title: President 18 EX-27.1 3 CURRENT FINANCIAL DATA SCHEDULE
5 0000354908 FLIR SYSTEMS, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 5,436 0 71,176 (2,471) 76,171 166,847 60,222 (33,033) 230,928 115,441 798 0 0 142 110,084 230,298 76,640 76,640 50,056 50,056 48,217 0 2,247 (23,880) (7,642) (16,238) 0 0 0 (16,238) (1.15) (1.15)
EX-27.2 4 RESTATED FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/1998
5 0000354908 FLIR SYSTEMS, INC. 1,000 U.S. DOLLARS 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998 1 1 1 1 6,327 4,120 4,471 4,793 0 0 0 0 59,483 71,139 88,843 94,418 (2,600) (2,683) (2,644) (3,216) 54,881 56,260 56,913 70,312 127,171 137,159 156,462 177,283 47,483 51,040 53,969 56,467 (25,496) (26,950) (28,542) (29,692) 181,412 192,608 213,078 235,989 80,716 87,673 70,126 86,751 0 0 0 0 0 0 0 0 0 0 0 0 120 120 140 141 75,869 80,366 118,456 125,841 181,412 192,608 213,078 235,989 40,104 89,501 145,514 208,622 40,104 89,501 145,514 208,622 19,602 41,801 68,506 95,239 19,602 41,801 68,506 95,239 19,464 41,005 61,428 85,891 0 0 0 0 1,475 2,673 3,538 5,199 (74) 4,487 12,757 22,931 121 1,249 3,788 6,155 (195) 3,238 8,969 16,776 0 0 0 0 0 0 0 0 0 0 0 0 (195) 3,238 8,969 16,776 (.02) .27 .68 1.29 (.02) .25 .65 1.24
EX-27.3 5 RESTATED FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/1997
5 0000354908 FLIR SYSTEMS, INC. 1,000 U.S. DOLLARS 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-30-1997 JUN-30-1997 SEP-30-1997 DEC-30-1997 1 1 1 1 780 2,865 4,124 7,545 0 0 0 0 46,556 48,643 57,183 69,638 (1,769) (1,780) (1,643) (2,639) 45,953 46,102 46,375 49,014 93,110 97,088 107,484 134,062 23,965 25,529 27,856 44,607 (14,226) (14,771) (15,736) (24,072) 108,396 113,429 125,194 185,278 33,700 36,743 45,316 84,720 0 0 0 0 0 0 0 0 0 0 0 0 76 76 77 119 50,037 52,112 55,094 75,836 108,396 113,429 125,194 185,278 29,036 60,982 97,867 144,934 29,036 60,982 97,867 144,934 14,950 30,443 48,495 86,835 14,950 30,443 48,495 86,835 12,653 25,819 39,602 95,282 0 0 0 0 632 1,527 2,392 4,093 847 3,301 7,616 (40,736) 666 1,339 2,804 (11,548) 181 1,962 4,812 (29,188) 0 0 0 0 0 0 0 0 0 0 0 0 181 1,962 4,812 (29,188) .02 .25 .62 (3.67) .02 .24 .58 (3.58)
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