-----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, E/NXTBSQPiKdNvJ429OPGMCNahhA0lrJjW7ZNPrOwgPB7vCz3DUDvQk8kUqZUB+F Z4jnSs/mX0BzCO24ph2kIQ== 0001032210-99-001626.txt : 19991117 0001032210-99-001626.hdr.sgml : 19991117 ACCESSION NUMBER: 0001032210-99-001626 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754291 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 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 _____. No __X__. At September 30, 1999, there were 14,347,766 shares of the Registrant's common stock, $0.01, par value, outstanding. FLIR Systems, Inc. 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..................... 11 PART II. OTHER INFORMATION Item 2. Changes in Securities................................... 16 Item 6. Exhibits and Reports on Form 8-K........................ 16 Signatures.............................................. 17
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- Note 6) (restated -Note 6) Revenue: Commercial......................... $36,191 $37,627 $92,479 $99,274 Government......................... 18,515 18,386 38,867 46,240 --------------- --------------- --------------- --------------- Total revenue.................. 54,706 56,013 131,346 145,514 Cost of goods sold..................... 20,971 26,705 71,027 68,506 Research and development............... 6,354 6,334 20,167 19,852 Selling and other operating costs...... 13,241 14,089 41,535 41,576 Combination costs...................... -- -- 6,110 -- --------------- --------------- --------------- --------------- 40,566 47,128 138,839 129,934 Earnings (loss) from operations.... 14,140 8,885 (7,493) 15,580 Interest income........................ -- 250 18 715 Interest expense and other............. (1,576) (865) (3,841) (3,538) --------------- --------------- --------------- --------------- Earnings (loss) before income taxes 12,564 8,270 (11,316) 12,757 Provision (benefit) for income taxes... 4,020 2,539 (3,622) 3,788 --------------- --------------- --------------- --------------- Net earnings (loss).................... $ 8,544 $ 5,731 $ (7,694) $ 8,969 =============== =============== =============== =============== Net earnings (loss) per share Basic.............................. $ 0.60 $ 0.41 $ (0.54) $ 0.71 =============== =============== =============== =============== Diluted............................ $ 0.59 $ 0.40 $ (0.54) $ 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 - Note 6) Current assets: Cash and cash equivalents.................................. $ 4,140 $ 4,793 Accounts receivable, net................................... 77,755 91,202 Inventories................................................ 75,119 70,312 Prepaid expenses........................................... 7,418 6,061 Deferred income taxes...................................... 6,776 6,776 ------------------- -------------------- Total current assets................................... 171,208 179,144 Property and equipment, net.................................... 28,429 26,775 Software development costs, net................................ 282 488 Deferred income taxes, net..................................... 16,940 9,749 Intangible assets, net......................................... 15,105 15,936 Other assets................................................... 3,578 3,897 ------------------- -------------------- $235,542 $235,989 =================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable.............................................. $ 68,317 $ 39,958 Accounts payable........................................... 23,337 24,031 Accrued payroll and other liabilities...................... 10,974 16,189 Accrued income taxes....................................... 6,089 3,893 Current portion of long-term debt.......................... 1,239 2,680 ------------------- -------------------- Total current liabilities.............................. 109,956 86,751 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........................................ (21,949) (14,255) Accumulated other comprehensive loss....................... (1,298) (2,073) ------------------- -------------------- Total shareholders' equity............................. 119,877 125,982 ------------------- -------------------- $235,542 $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)
Nine Months Ended September 30, ---------------------------------------------- 1999 1998 -------------------- -------------------- (restated-Note 6) Cash used by operations: Net (loss) earnings.......................................... $ (7,694) $ 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.................................... (7,191) (6) Changes in certain assets and liabilities: Decrease (increase) in accounts receivable............... 13,447 (19,200) Increase in inventories.................................. (4,807) (7,899) Increase in prepaid expenses............................. (1,357) (354) Decrease in other assets................................. 157 103 Decrease in accounts payable............................. (694) (5,969) Decrease in accounts payable to related parties.......... -- (6,228) Decrease in accrued payroll and other liabilities........ (5,215) (13,252) Increase in accrued income taxes......................... 2,196 1,880 -------------------- -------------------- Cash used by operating activities............................ (3,792) (35,158) -------------------- -------------------- Cash used by investing activities: Additions to property and equipment.......................... (7,821) (10,077) Software development costs................................... -- (239) -------------------- -------------------- Cash used by investing activities................................ (7,821) (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 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 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 ============ ============ =========== ============
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 4 -- INVENTORIES: Inventories consist of the following (in thousands):
September 30, December 31, 1999 1998 ------------------- ------------------- Raw material and subassemblies..................... $43,687 $36,315 Work-in-progress................................... 17,175 12,527 Finished goods..................................... 16,069 22,330 ------------------- ------------------- 76,931 71,172 Less - progress payments received from Customers............................. (1,812) (860) ------------------- ------------------- $75,119 $70,312 =================== ===================
NOTE 5 -- 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 $(14,255) $(2,073) $125,982 Common stock options exercised........... -- 3 811 -- -- 814 Net loss for the nine month period....... -- -- -- (7,694) -- (7,694) $(7,694) Translation adjustment................... -- -- -- -- 775 775 775 ------- ---- -------- -------- ------- -------- ------- Balance, September 30, 1999.............. $ -- $144 $142,980 $(21,949) $(1,298) $119,877 ======= ==== ======== ======== ======= ======== Comprehensive loss, nine months ended September 30, 1999...................... $(6,919) =======
7 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 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 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 $24.3 million consisting of the following (in thousands):
Incurred through Original September 30, Remaining Description: Estimate 1999 Balance - ---------------------------------------------- -------------- ----------------- ---------------- Reserve for duplicative inventories........... $18,150 $2,694 $15,456 Transaction related costs..................... 3,110 2,638 472 Costs to exit activities...................... 3,000 2,583 417 -------------- ----------------- ---------------- Total $24,260 $7,915 $16,345 ============== ================= ================
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 8 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. 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 =================== ===================
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):
Nine Months Ended September 30, ----------------------------------------------------------------- 1999 1998 ------------------------------- ------------------------------- Gross Gross Revenue Profit Revenue Profit -------------- -------------- -------------- -------------- Commercial......... $ 92,479 $40,307 $ 99,274 $52,615 Government......... 38,867 20,012 46,240 24,393 -------------- -------------- -------------- -------------- Total.............. $131,346 $60,319 $145,514 $77,008 ============== ============== ============== ==============
9 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.................................. $23,327 $18,577 Europe......................................... 5,102 8,198 ----------------- ------------------ $28,429 $26,775 ================= ==================
10 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 September 30, 1999 decreased 2.3%, from $56.0 million in the third quarter of 1998 to $54.7 million in the third quarter of 1999. Commercial revenue decreased 3.8% from $37.6 million in the third quarter of 1998 to $36.2 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 increased slightly to $18.5 million in the third quarter of 1999 compared with $18.4 million in the third quarter of 1998. The relatively consistent government revenue was primarily due to continued strong sales of the Company's Star SAFIRE/TM/ product. The revenue for the quarter was impacted due to supply constraints on cooled detectors for the MilCam/TM/ products. The Company has experienced a significant increase in demand for cooled detectors used in the MilCam and the Mark III/TM/ products and the Company continues to work with its suppliers to increase production to meet the demand. Revenue for the nine months ended September 30, 1999 decreased 9.7%, from $145.5 million in the first nine months of 1998 to $131.3 million in the first nine months of 1999. Commercial revenue for the nine months ended September 30, 1999 decreased 6.8% from $99.3 million in the first nine months of 1998 to $92.5 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 $38.9 million, a decrease of 15.9% from the $46.2 million in revenue generated in the first nine months of 1998. The significant decline in government revenue was 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. 11 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 66.2% as compared to 67.2% in the third quarter of 1998. For the nine months ended September 30, 1999, commercial revenue increased to 70.4% 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 40.0% 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 36.0% 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 61.7% 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 45.9% 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 $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 52.9% to 59.7% 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. 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 $22.4 million in the first nine months of 1999 compared to $18.6 million in the first nine months of 1998. 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 11.6% 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. 12 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 15.4% 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/TM/, UltraMedia LE/TM/, Maritime FLIR and UltraMedia III/TM/, 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 6.0%, from $14.1 million for the third quarter of 1998 to $13.2 million for the third quarter of 1999. As a percentage of revenue, selling and other operating costs decreased from 25.2% to 24.2% for the three months ended September 30, 1998 and 1999, respectively. The decrease in absolute dollar terms was primarily due to management's cost control efforts and efficiencies realized as a result of the Inframetrics transaction. Selling and other operating costs decreased slightly for the nine months ended September 30, 1999, from $41.6 million in the first nine months of 1998 to $41.5 million in the first nine months of 1999. As a percentage of revenue, selling and other operating costs increased from 28.6% to 31.6% for the nine months ended September 30, 1998 and 1999, respectively. The relatively consistent level 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 mitigated by management's cost control efforts and efficiencies realized as a result of the Inframetrics transaction. 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 $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 expenses. 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 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 $3.8 in the first nine months of 1999 was primarily due to higher interest rates and increased debt levels to support working capital needs. 13 Income taxes. The provision for income taxes for the three and nine months ended September 30, 1999 resulted in an effective tax rate of 32.0% compared to 30.7% for the third quarter of 1998 and 29.7% for the nine months ended September 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 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 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 which 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 $75.1 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 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 $1.1 million from the June 30, 1999 balance of $76.2 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 $77.8 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 nine 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 150 at June 30, 1999 to 122 at September 30, 1999. The Company's investing activities have consisted primarily of expenditures for fixed assets, which totaled $7.8 million and $10.1 million for the nine months ended September 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 $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. 14 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 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. 15 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. 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* 27.1 Financial Data Schedule *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. 16 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 November 15, 1999 /s/ J. Mark Samper ---------------------------- ------------------- J. Mark Samper Sr. Vice President, Finance and Chief Financial Officer (Principal Accounting and Financial Officer and Duly Authorized Officer) 17 EX-10.1 2 CONTRACT FOR SUPPLY OF UNCOOLED IMAGING MODULES EXHIBIT 10.1 CONTRACT FOR THE SUPPLY OF UNCOOLED IMAGING MODULES between FLIR Systems AB Rinkebyvagen 19 Danderyd Sweden and Lockheed Martin Corporation IR Imaging Systems 2 Forbes Road Lexington, Massachusetts 02421-7306 United States of America The bracketed portions of this contract marked with double asterisk [**] have been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. (S)240.24b-2. 1 CONTRACT FOR THE SUPPLY OF UNCOOLED MICROBLOMETER MODULES This is a Contract ("The Contract") by and between FLIR Systems AB, (hereinafter called the "Buyer"), having a place of business at Rinkebyvagen 19, Danderyd, Sweden, and Lockheed Martin Corporation, IR Imaging Systems (hereinafter called the "Seller"), having a place of business at 2 Forbes Road, Lexington, MA 02421- 7306, United States of America. The Buyer and the Seller may be collectively referred to herein as the "Parties", and each may be referred to herein as a "Party". WHEREAS, the Buyer and the Seller have previously entered into contracts for the manufacture and sale of [**] Uncooled Imaging Modules; and WHEREAS, the Buyer seeks to purchase additional quantities of Uncooled Imaging Modules for the purpose of application to products of the Buyer, NOW, THEREFORE, the Buyer and the Seller agree as follows: The Seller shall sell, and the Buyer shall purchase Uncooled Imaging Modules, in accordance with the Terms and Conditions herein set forth. The Contract is executed in duplicate originals, of which one shall remain with the Buyer and the other with the Seller. The Contract shall become effective as of the later date set forth hereunder. IN WITNESS WHEREOF, the Buyer and the Seller have caused this contract to be executed by their duly authorized representatives as of the day and year last written below. Lockheed Martin Corporation FLIR Systems AB IR Imaging Systems by /s/ Jill Wittels by /s/ Arne Almerfors _____________________________ _____________________________ Title VP GM Title Managing Director __________________________ __________________________ Date 08/18/99 Date 08/18/99 ___________________________ ____________________________ In consideration of the exclusivity granted by the Seller to FLIR Systems AB hereunder, and in further consideration of the mutual benefits to be derived from the performance of this Contract, FLIR Systems, Inc., as parent corporation of FLIR Systems AB, hereby agrees to be bound by the provisions of Article 3, EXCLUSIVITY, hereof. by /s/ J. Kenneth Stringer III _____________________________ Title President __________________________ Date 8/18/99 ____________________________ [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 2 CONTRACT INDEX ITEM PAGE COVER. 1 SIGNATURE PAGE. 2 CONTRACT INDEX. 3 TERMS AND CONDITIONS. PREAMBLE. 4 Article 1 DEFINITIONS. 4 Article 2 DELIVERABLE ITEMS AND PRICES, OPTION, 4 ACCEPTANCE TESTING; DELIVERY SCHEDULE, JUST-IN-TIME SCHEDULING, SHIPMENT AND TRANSFER OF TITLE; SELLER'S INVOICES AND BUYER'S PAYMENTS; NO SET OFF. Article 3. EXCLUSIVITY. 7 Article 4. EXPORT LICENSES. 9 Article 5. EXCUSABLE DELAYS. 9 Article 6. WARRANTY. 10 Article 7. LIQUIDATED DAMAGES. 11 Article 8. LIMITATION OF LIABILITY. 11 Article 9. NOTICES. 12 Article 10. ASSIGNMENT. 12 Article 11. COMPLIANCE WITH U.S.A. LAW. 13 Article 12. CONFIDENTIALITY. 13 Article 13. ADVERTISING. 13 Article 14. LAW. 13 Article 15. ARBITRATION. 13 Article 16 TERMINATION AND CANCELLATION. 14 Article 17. LANGUAGE. 14 Article 18 CONFIGURATION MANAGEMENT; BUYER'S PARTICIPATION IN PRODUCTION AND INSPECTION SYSTEM AUDITS; RELEASE OF INFORMATION. 14 Article 19. GENERAL. 15 EXHIBIT A UNCOOLED IMAGING MODULE SPECIFICATION DOCUMENT NO. 21100225. EXHIBIT B ACCEPTANCE TEST PROCEDURE DOCUMENT NO. 21100224. EXHIBIT C CONTRACT DELIVERY SCHEDULE. 3 TERMS AND CONDITIONS PREAMBLE The Contract consists of the Cover Page, the Signature Page and the Index, plus the Terms and Conditions in the Articles hereinafter set forth. If any supporting data such as a Statement of Work, a work performance schedule, specifications, drawings or other such documents are applicable to The Contract, they are provided herein as the Exhibits identified in the Index. Conflicts, if any, among the following parts of The Contract shall be resolved by taking them in this order of precedence: (i) the Terms and Conditions; and (ii) the Exhibits. Article 1 DEFINITIONS. 1.1 The Buyer as used herein shall mean FLIR Systems AB. 1.2 The Seller as used herein shall mean Lockheed Martin Corporation, IR Imaging Systems, an unincorporated Division of Lockheed Martin Corporation. 1.3 GROUND BASED SECURITY SYSTEMS as used herein shall mean the Buyer's imaging cameras or observation systems which are permanently mounted on or at a fixed or semi-fixed location (such as a pole, tripod, gate, building or tower), the purpose of which cameras or systems is to detect intrusion or to otherwise protect or provide security for the facility at which the equipment is located. 1.4 THERMOGRAPHY as used herein shall mean the use of thermal imaging systems to determine the radiometric temperature of items and portions of items in an imaged scene without direct physical contact to those items. Such information, often displayed as a picture or pseudo-color picture, is used in a wide variety of industrial applications. 1.5 FIREFIGHTING MARKET as used herein shall comprise all industrial, municipal, State, Provincial and National Government (but not military) entities engaged in fire fighting, fire prevention, fire suppression and remediation operations in which the equipment is man-portable and is designed to perform at external case temperatures exceeding 70 degrees Centigrade. Article 2 DELIVERABLE ITEMS AND PRICES, OPTION, ACCEPTANCE TESTING; DELIVERY SCHEDULE, JUST-IN-TIME SCHEDULING, SHIPMENT AND TRANSFER OF TITLE; Seller's Invoices and Buyer's Payments; No set off. 2.1 Deliverable Items, Prices and Option 2.1.1 The items to be delivered hereunder are identified in Table 2.1-1, below. TABLE 2.1-1 Deliverable Items
Item Qty/UM Description Unit Price Extended Price 1 lot Non-recurring Engineering -- [**] 2 [**] ea. Uncooled Imaging Modules*, as follows: 2 A less than Spec. Level A [**] less than or equal or equal to [**] to [**] ea. 2 B greater than Spec. Level B [**] greater than or equal or equal to [**] to [**] ea. 2 C less than Spec. Level C [**] less than or equal or equal to [**] to [**] ea.
Table 2.1-1 is continued on the next page. [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2 4 Table 2.1-1, continued
Option per para. 2.1.2 - ---------------------- 3 [**] ea. Uncooled Imaging Modules*, as follows: 3 A less than Spec. Level A [**] less than or equal or equal to [**] to [**] ea. 3 B greater than Spec. Level B [**] greater than or equal or equal to [**] to [**] ea. 3 C less than Spec. Level C [**] less than or equal or equal to [**] to [**] ea.
* As described in the "Uncooled Imaging Module Specification, Document No. 21100225", Exhibit A, hereto. The maximum number of NTSC only units over any three months period will be 20 per cent; the maximum number of PAL only units over any three months period will be 20 per cent. All U. S. A. taxes are included in the prices in Table 2.1-1. All taxes, duties, fees or assessments of any nature levied against the Seller by any governmental authority except the U. S. A. in connection with The Contract shall be the responsibility of the Buyer, and shall be paid by the Buyer directly to the governmental authority concerned. Prices do not include freight and insurance charges associated with transportation beyond the FCA point, which shall be paid by the Buyer. 2.1.2 Option. The Buyer shall have the option, exercisable by no later than the close of the Seller's business day on 30 September 1999, to increase the quantity of Uncooled Imaging Modules to be delivered hereunder, by [**] units. Should the Buyer exercise this Option, deliveries thereunder shall commence in the month following the last scheduled delivery and at the same rate of delivery shown for the final month of The Contract Delivery Schedule. 2.2 Acceptance Testing Prior to delivery of the Uncooled Imaging Modules hereunder, the Seller shall perform on each unit Acceptance Tests described in the document "Uncooled Imaging Module Acceptance Test Procedure, Document No. 21100224", Exhibit B hereto, and each unit shall be required to pass the test. The tests may be witnessed on a non-interference basis by designated employees of the Buyer. Whether or not so witnessed, the tests shall be considered as the final acceptance tests on the units, and the Seller shall prepare, certify and deliver with the units, copies of the test data. The Seller when requested by the Buyer, shall provide approximate dates for scheduled acceptance testing of units, and shall coordinate with the Buyer any visits for the purpose of witnessing tests. 2.3 Delivery Schedule; Just-in-Time Scheduling; Shipment and Transfer of Title. 2.3.1 Delivery Schedule. The Seller shall deliver the Items hereunder to the Buyer in accordance with the Contract Delivery Schedule, Exhibit C hereto. 2.3.2 Just-in-Time Scheduling. The Buyer may elect to decrease the quantity of units to be delivered in any month by up to 25% of the scheduled units, down to a minimum of [**] units per month. In the event of any such change, The Contract Delivery Schedule shall be changed accordingly, but in no event will the final contract delivery be extended by more than six months from the originally scheduled delivery. Any such decrease in quantity/schedule shall require three months written notice in advance. Having so decreased the quantity of units to be delivered in any month, the Buyer may elect, thereafter, to increase the revised quantity by up to 25% of the scheduled units, up to a maximum of the delivery quantity scheduled for that month in the original Contract Delivery Schedule, and the [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2 5 Contract Delivery Schedule shall be changed accordingly. Any such increase in quantity/schedule shall require three months written notice in advance. 2.3.3 Shipment and Transfer of Title. All Shipments by the Seller hereunder shall be made FCA Logan International Airport, Boston, Massachusetts, U.S.A., in accordance with the definition and provisions of the term "FCA" set forth in INCOTERMS, except that the Buyer shall be responsible hereunder to obtain all necessary export licenses. Title to the Uncooled Imaging Modules deliverable hereunder shall pass to the Buyer at the FCA point, i. e., on delivery to the carrier at Logan International Airport, Boston, Massachusetts, U.S.A. 2.4 Seller's Invoices and Buyer's Payments. 2.4.1 Seller's Invoices. 2.4.1.1 Invoices for nre. The Seller shall submit pro forma invoices to the Buyer for the Buyer's payment of the Non-Recurring Engineering (NRE) identified in Table 2.1-1 hereof as follows: Payment Number 1 To be paid 10 days after execution of Contract [**] Payment Number 2 To be paid 10 days after delivery of the first unit [**]
These payments shall be made by wire transfer to the account address in paragraph 2.4.2, below. 2.4.1.2 Invoices for Module Deliveries. The Seller shall submit invoices to the Buyer upon shipment of the items listed in Table 2.1-1 hereof, in the amount determined by multiplying the Unit Price by the number of Units shipped. The Seller shall calculate any amounts due to the Buyer pursuant to Article 7, "Liquidated Damages", hereof, on a quarterly basis and issue a credit to the Buyer, if due. The Buyer shall pay to the Seller the amount of each Seller's invoice within 60 days of the date of the invoice. 2.4.1.3 Address for Invoice Submission The Seller shall transmit this invoice to the address set forth below: (i) by telefax on the date of the invoice; and (ii) by mail or express delivery service on the date of the invoice or on the next business day thereafter The package shall contain an original and three copies of the invoice and any attachments required hereunder. FLIR Systems AB Box 3, S-182 11 Danderyd Sweden Attention: Mrs. Evy Akerman Accounting Department. Telephone: 46 8 753 25 18 FAX: 46 8 753 07 17 2.4.2 Buyer's Payments. . The Buyer shall make payment to the Seller by wire transfer of U. S. Dollars to the account set forth below. Citibank, 399 Park Avenue, New York, NY 10043 Citibank Routing: ABA# 021000089 Lockheed Martin Corporation IR Imaging Systems Account Number 40709866 [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2 6 2.5 No Set-off. The Buyer shall not set off any amount owed by the Seller or any of its affiliated companies to the Buyer against any amount owed by the Buyer to the Seller under The Contract. Article 3 EXCLUSIVITY 3.1 During the period of delivery of the Uncooled Imaging Modules ordered hereunder, the Buyer shall have limited exclusivity in the commercial marketplace, as defined in this Article 3, with respect to the marketing of Infrared Thermal Imaging Systems containing Uncooled Imaging Modules therein. 3.2 The Seller agrees not to provide or to deliver uncooled microbolometer technology or Uncooled Imaging Modules or uncooled microbolometer detector arrays or any information similar thereto [** .5 page omitted] [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 7 [** .5 page omitted] 3.3 Notwithstanding the above, the Seller shall have the right to deliver Uncooled Imaging Modules or uncooled microbolometer technology or uncooled microbolometer detector arrays or any information similar thereto or to cooperate with any company in connection with any military or space program 3.4 In addition, the Buyer shall have exclusivity which shall be limited to the industrial/commercial marketplace for THERMOGRAPHY. 3.5 The Buyer shall have the non-exclusive right to sell to all other markets, except that The Buyer shall have no right to and shall not, without the prior written consent of the Seller, sell products which include the Seller's Uncooled Imaging Modules where the end user is the U.S. Government and/or non-U.S. military customers. [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 8 3.6 Notwithstanding paragraph 3.5 above, The Buyer shall have the non-exclusive right to sell [**] to any customer; provided that should the Buyer sell [**] that include Seller's UNCOOLED IMAGING MODULES for [**]. Buyer shall pay Seller a royalty of $[**] for each such unit sold. 3.7 The Buyer shall not, without the prior written consent of the Seller, sell or otherwise provide to any person or organization UNCOOLED IMAGING MODULES which are not part of a camera or system of the Buyer, except for repair or replacement. 3.8 Except for [**], the Buyer agrees not to enter into cooperative development or place an order with, or to take deliveries of uncooled infrared focal plane arrays from any source; provided that if the Seller becomes delinquent in deliveries by a cumulative total of at least [**] units and remains so delinquent for a period of at least three months, the Buyer may thereafter place and order with another potential source of uncooled infrared focal planes. If the Buyer orders a quantity of [**] units or more from any such second source, the mutual exclusivity provisions of this Article 3 will thereupon be no longer in effect. Should the Buyer place an order with another potential source of uncooled infrared focal planes, or acquire any quantity of uncooled infrared focal planes from such other source, the Buyer shall inform the Seller in writing of such activity. 3.9 The Buyer will not sell products which include Uncooled Imaging Modules for any of the following fields of use (which are excluded from the License Agreement between the Seller and [**]): . [**] provided that if the Buyer is able to negotiate a sublicense with, or otherwise obtain permission from, [**], the Buyer may sell products containing Uncooled Imaging Modules for the [**] field of use. The exclusion does not include applications [**] such as surveillance, search and rescue etc. . [**] The use is undefined but it contemplates an installation in [**]. . [**] Article 4 EXPORT LICENSES The Buyer is advised that the Uncooled Imaging Modules deliverable under The Contract are controlled in Category XII U. S. Munitions List in the International Traffic in Arms Regulations (ITAR). As such, the export of the deliverable items hereunder requires approval from the United States Government. The Buyer shall obtain or cause to be obtained all necessary export approvals from the U.S. Government. In addition, the Buyer shall, with respect to exports from Sweden of products containing Seller's Uncooled Imaging Modules (MODULES) treat such re-exports in a manner that is in full compliance with applicable U. S. laws and regulations. Article 5 EXCUSABLE DELAYS The Seller shall not be liable for delays in delivery due to causes beyond the Seller's control and without the Seller's fault or negligence, including, but not limited to: acts of God; natural disasters, fire, floods, explosions or earthquakes; epidemics or quarantine restrictions; serious accidents; any [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 9 act of civil or military authority; war, insurrection or riot; and labor disputes; providing that in such cases the Seller exercises due diligence in promptly notifying the Buyer in writing of any known or anticipated delay, and recommences the performance of its obligation on cessation of the delay. Whatever the cause of any known or anticipated delay, the Seller shall be responsible for informing the Buyer of the reason therefor, and when the Seller expects to proceed with its obligations. In the event of any such delay, the date of delivery or performance hereunder shall be extended by a period equal to the time loss by reason of such delay. In the event the Seller's production is curtailed for any of the above reasons, the Seller may allocate its production among its various customers in a commercially fair and reasonable manner. Article 6 WARRANTY 6.1 The Seller warrants that Uncooled Imaging Modules (hereinafter, the "goods") delivered under The Contract shall be free from defects in material and workmanship under normal use and service, for a period of 15 months after delivery of the goods to the FCA point. 6.2 The Seller warrants that goods delivered under The Contract shall be in conformity with the "Uncooled Imaging Module Specification, Document No. 21100225, Exhibit A, hereto, for a period of 90 days after delivery of the goods to the FCA point, except as follows: (a) The vacuum life shall be warranted for a period of five years from the day of delivery of any item, provided that no warranty of vacuum life shall apply unless the module is operated in an environment that has an ambient temperature of [**] or less and/or is stored at a temperature between the minimum storage temperature and [**]. (b) The UIM performance under normal use and service shall be such that for [**] months after delivery there shall be no more than [**] new unsubstituted nonoperable pixels (NOP). A nonoperable pixel is defined as one that produces a signal that differs by more than [**] from the median of the signal from each of its [**] nearest neighboring pixels when imaging an object having a temperature of [**] and operating in an ambient environment with a temperature of [**]. 6.3 If, during the warranty periods of paragraphs 6.1. and 6.2 hereof, (i) the Seller is notified promptly in writing upon delivery of any defect described therein in the goods, including a detailed description of such defect; (ii) such goods are returned to the Seller transportation prepaid; and (iii) the Seller's examination of such goods discloses to the Seller's satisfaction that such goods are defective and such defects are not caused by accident, abuse, misuse, neglect, alteration, improper installation, repair or alteration by someone other than the Seller, improper testing, or use contrary to any instructions issued by the Seller, then within eight weeks after the arrival of the returned defective goods at the Seller's plant the Seller shall (at its sole option) either repair or replace such goods. The Seller shall return any goods repaired or replaced under this warranty to the Buyer transportation prepaid. Prior to any return of goods by the Buyer pursuant to this Article, the Buyer shall afford the Seller the opportunity to inspect such goods at the Buyer's location. In any event, the Seller shall issue a Return Material Authorization to the Buyer prior to any return of goods to the Seller by the Buyer. 6.4 With respect to the time of notice of a defect, the following special provisions shall apply: (a) If a defect is discovered during the first 90 days of the initial warranty period, and if the Buyer has not delivered the item in question, incorporated into the Buyer's product, to a [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 10 customer of the Buyer, the Buyer and the Seller shall proceed as in paragraph 6.3, above. If a warranted defect is confirmed and the item is repaired or replaced under the warranty, the item returned by the Seller to the Buyer shall bear the warranty for an new initial period in accordance with paragraph 6.1 or 6.2, as applicable. (b) If a defect under paragraph 6.1 is discovered after the first 90 days of the initial warranty period, or if the Buyer has delivered a defective item, incorporated into the Buyer's product, to a customer of the Buyer, the Buyer and the Seller shall proceed as in paragraph 6.3, above. If a warranted defect is confirmed and the item is repaired or replaced under the warranty, the warranty period for the item shall be extended by the amount of time between the Buyer's notice of defect and the Seller's return of the item to the Buyer at the FCA point. 6.5 The foregoing warranty constitutes the Seller's exclusive liability, and the exclusive remedy of the Buyer, for any breach of any warranty or other nonconformity of the goods covered by The Contract. 6.6 THIS WARRANTY IS EXCLUSIVE, AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WHICH ARE HEREBY EXPRESSLY DISCLAIMED. Article 7 LIQUIDATED DAMAGES. The Seller guarantees delivery of the Uncooled Imaging Modules in accordance with the Contract Delivery Schedule set forth in Exhibit C hereto. It is agreed by the parties that if actual damages arise by reason of the Seller's delay in delivery, such damages would be difficult to determine accurately. Therefore, the Seller agrees that in the event that the delivery of any Uncooled Imaging Module is delayed for more than one full calendar week beyond a grace period of three (3) weeks after such guaranteed delivery time for other than excusable causes as defined in Article 5, "Excusable Delays" hereof, the Seller shall pay to the Buyer as fixed, agreed and liquidated damages for each additional full calendar week beyond said grace period in making delivery, one-half of one percent (0.5%) of the Contract Unit price of the delayed Uncooled Imaging Module per full calendar week of delay, and the Seller shall be liable for the amount thereof; PROVIDED, that the Seller's liability under this Article is limited to four percent (4.0%) of the Contract Unit price of the delayed Uncooled Imaging Module causing the actual damages. Seller's payment of liquidated damages, as herein provided, shall be the Buyer's sole remedy for delays due to causes for which the Seller is responsible under this Contract. Article 8 LIMITATION OF LIABILITY 8.1 The total liability of the Seller for any and all claims, whether in contract, warranty, tort or otherwise, arising out of, connected with or resulting from the performance or non-performance of The Contract, or from the manufacture, sale, delivery, resale, repair, replacement or use of any product or the furnishing of any service, shall not exceed the price allocable to the product or service that gives rise to the claim. This total cumulative liability limitation specifically applies to, but is not limited to, those liabilities of the Seller that may arise from claims under the provisions of Article 6 of The Contract entitled "Warranty" and Article 7 of The Contract entitled, "Liquidated Damages" Except as to title, any such liability shall terminate upon expiration of the warranty period for the last warranted Item delivered hereunder. 11 8.2 IN NO EVENT SHALL THE SELLER BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE SELLER'S PERFORMANCE OR FAILURE TO PERFORM UNDER THE CONTRACT, OR THE FURNISHING, PERFORMANCE, OR USE OF ANY GOODS OR SERVICES SOLD PURSUANT HERETO, WHETHER DUE TO A BREACH OF CONTRACT, BREACH OF WARRANTY, THE NEGLIGENCE OF THE SELLER, OR OTHERWISE. Article 9 NOTICES 9.1 Any notice, request, or correspondence of either the Buyer or the Seller to the other with reference to The Contract shall be in the English language. 9.2 Buyer's address for notices from the Seller shall be as follows: FLIR Systems AB Box 3, S-182 11 Danderyd Sweden Attention: Mr. Arne Almerfors Managing Director Telephone: 46 8 753 25 10 FAX: 46 8 753 07 17 9.3 Seller's address for notices from the Buyer shall be as follows: Lockheed Martin Corporation IR Imaging Systems 2 Forbes Road Lexington, MA 02421-7306 Attention: Mr. John J. Ainley International Contracts Manager, M/S 340 Telephone: 781-863-3767 FAX: 781-863-4193 Article 10 ASSIGNMENT 10.1 Neither the Buyer nor the Seller may assign its rights under The Contract without the prior written consent of the other, and any purported assignment without such consent shall have no force or effect. Such consent shall not be unreasonably withheld. 10.2 Such consent shall not be required in the case where the assignment is to be made to a successor-in-interest to that part of the business of the assignor that includes The Contract, provided that the successor-in-interest agrees to be bound by the obligations hereunder of the assignor. Article 11 COMPLIANCE WITH U. S. A. LAW The parties' performance under The Contract shall comply with the federal, state and local laws and regulations of the U. S. A. 12 Article 12 CONFIDENTIALITY The Buyer and the Seller agree that The Contract and performance hereunder will be kept confidential and will be dealt with in accordance with each party's usual procedures relating to proprietary information. No publicity will be released by either the Buyer or the Seller without the prior written consent of the other. Article 13 ADVERTISING Neither the Buyer nor the Seller shall make use of the other's name for publicity purposes, and neither shall use any information or news contained in or connected with The Contract unless the other has given its written consent. Article 14 LAW The Contract shall be governed by the laws of the Commonwealth of Massachusetts and of the United States of America as to all matters of interpretation, performance and remedies insofar as such law is existent and can or will be applied in the jurisdiction in which either the Buyer or the Seller may seek adjudication of any such matter. Article 15 ARBITRATION In the event that disputes arise under the terms of The Contract on which there is continuing disagreement for more than thirty (30) days, either the Buyer or the Seller may elect by a thirty (30) days Notice in writing, to submit the matter to Arbitration. If the dispute is not settled within said thirty (30) day period of such Notice, the following shall apply to such Arbitration which shall be the exclusive mechanism for resolution of disputes hereunder should the Buyer and the Seller be unable amicably to resolve such disputes. (a) The Arbitration shall be conducted in Boston, Massachusetts. (b) The Arbitration shall be conducted under the Rules of Conciliation and Arbitration of the American Arbitration Association. (c) The costs of the Arbitration shall be distributed equally between the Buyer and the Seller, and each shall otherwise bear its own additional or other expenses and fees. (d) The Decision of the Arbitration Tribunal shall be binding on the Buyer and the Seller, and such Decision shall be enforceable in any Court having jurisdiction of the party against whom any such decision or award is granted. Article 16 TERMINATION AND CANCELLATION 16.1 The Contract may be terminated, as hereinafter provided, by either party for material breach or default of the terms or conditions hereof. In the event of such termination a sixty-day Notice in writing setting forth the breach or default shall be provided; however, should the party receiving the Notice correct said breach or default complained of during said sixty-day period, then the Notice shall be considered null and void as if the same had not been sent. 13 16.2 The Contract shall be automatically canceled in the event of bankruptcy, voluntary or involuntary winding up, the appointment of a receiver of the assets or business, making of an assignment for the benefit of creditors, or the termination of the operation of the business of either the Buyer or the Seller. 16.3 In the event of termination or cancellation of The Contract for any reason, the obligations of the Buyer and the Seller to comply with the terms and conditions of The Contract shall continue up to the effective date of such termination. 16.4 Termination or cancellation of The Contract shall not affect obligations of confidentially assumed hereunder by either the Buyer or the Seller. Article 17 LANGUAGE The English Language shall be used in all communications between the Seller and the Buyer relating to The Contract. Article 18 CONFIGURATION MANAGEMENT; BUYER'S PARTICIPATION IN PRODUCTION AND INSPECTION SYSTEM AUDITS; RELEASE OF INFORMATION. 18.1 Configuration Management The Seller shall maintain a configuration management system for control of changes in the Uncooled Imaging Module. Subject to paragraph 18.3, below, the Seller shall provide copies of all Engineering Change Orders (ECOs) to the Buyer as they are approved by the Seller's Configuration Review Board (CRB). The Seller shall forward minor changes (class II ECO's) to the Buyer in the Seller's format for the Buyer's information. The Seller shall forward major changes (class I ECO's) to the Buyer for approval. The Seller shall classify class I ECO's as "Routine" or "Urgent". "Routine" ECOs shall be within 60 calendar days of the date sent. If the Buyer fails to respond within this time, the Seller may assume the Buyer's approval. For "Urgent" ECOs, the disposition time limit shall be 20 calendar days. The Seller shall at its option prepare and submit proposals for equitable adjustment of the contract price, delivery and other terms for any ECO activity arising from Buyer-initiated changes, including those due to the needs of the Buyer's vendors. The Seller shall include rough-order-of-magnitude estimates of price impact with the initial technical proposals, and follow with formal price proposals if the Buyer decides to go forward. 18.2 Buyer's Participation in Production and Inspection System Audits. The Buyer may, during the period of performance of The Contract, participate in inspections and conduct on-site audits of the Seller's procedures that govern the production and inspection thereunder. The Buyer shall make arrangements with the Seller in advance of such participation and conduct of audits. The activities shall be conducted on a non-interference basis at reasonable and mutually accepted times and intervals. The Seller should provide sufficient details concerning status of work in progress and vendor material deliveries for the Buyer to determine the integrity of the Contract Delivery Schedule. The Seller shall provide suitable office arrangements for one on-site resident Buyer representative. If the representative is a foreign national, special restrictions on access will apply. 14 18.3 Release of Information. The Seller shall not, in connection with the activities identified in this Article, be required to divulge information about its Uncooled Imaging Module for which U. S. Government regulations require an Export License. Article 19 GENERAL 19.1 The headings and titles to and within the Articles of The Contract are inserted for convenience only and shall not be deemed a part hereof or affect the construction or interpretation of any provision hereof. 19.2 No cancellation, modification, amendment, deletion, addition or other change in The Contract or any provision hereof or waiver of any right or remedy herein provided, shall be effective for any purpose unless specifically set forth in writing and signed by the Buyer and the Seller. No waiver of any right or remedy in respect of any occurrence or event on one occasion shall be deemed a waiver of such right or remedy in respect of such occurrence or event on any other occasion. 19.3 The Buyer may use its standard purchase order forms in the administration of The Contract. The Buyer and the Seller agree that such use is only for the administrative convenience of the Buyer and that no provisions on the face or reverse of such forms or the Buyer's attachments thereto shall have any effect on The Contract or the subject matter of the purchase order except as required to identify The Contract and the purchase order. 19.4 The Contract contains the entire agreement between the Parties concerning production and delivery of Uncooled Imaging Modules in the quantities described herein, and supersedes any previous understanding, commitment or agreement, oral or written, with respect thereto. 15 EXHIBIT A UNCOOLED IMAGING MODULE SPECIFICATION, DOCUMENT No. 21100225 [** Technical specifications document of 8 pages has been omitted] [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 16 EXHIBIT B UNCOOLED IMAGING MODULE ACCEPTANCE TEST PROCEDURE, DOCUMENT No. 21100224 [** Technical specification and testing procedures document of 6 pages has been omitted] [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 25 EXHIBIT C CONTRACT DELIVERY SCHEDULE Month Quantity MAY-2000 [**] JUN-2000 [**] JUL-2000 [**] AUG-2000 [**] SEP-2000 [**] OCT-2000 [**] NOV-2000 [**] DEC-2000 [**] JAN-2001 [**] FEB-2001 [**] MAR-2001 [**] APR-2001 [**] MAY-2001 [**] JUN-2001 [**] (SCHEDULE FOR ORIGINAL CONTRACT; AMEND AS NECESSARY DURING PERIOD OF PERFORMANCE) [**] Information omitted pursuant to 17 C.F.R. (S)240.24b-2. 32 Lockheed Martin Corporation IR Imaging Systems 2 Forbes Road, Lexington MA 02421-7306 LOCKHEED MARTIN [LOGO] 1 October 1999 FLIR Systems AB Rinkebyvagen 19 Box 3, S-182 11 Danderyd, Sweden Attention: Mr. Arne Almerfors Subject: Correction of Option Exercise Date in "SIM110" Production Contract. Dear Mr. Almerfors: Lockheed Martin requests your concurrence in making a correction to the Option exercise date that is stated erroneously on page 5, paragraph 2.1.2 of the "SIM110" Production Contract that was signed on 18 August 1999. The exercise date should be changed to read "30 September, 2000", instead of "30 September, 1999". If you agree, please countersign this letter below to record the change and return it to me. The mutually signed letter will serve as an administrative change to the Contract, and retained in our respective files. Telefax copies will suffice. I look forward to your response. If you have any questions on this agreement, please call me at 781-863-3767. My telefax number is 781-863-4193, and my Internet address is john.ainley@lmco.com. --------------------- Very truly yours, John Ainley Concurrence: For: Lockheed Martin Corporation For: FLIR Systems AB IR Imaging Systems /s/ John Ainley /s/ Arne Almerfors John Ainley Arne Almerfors International Contract Manager Managing Director EX-27.1 3 FINANCIAL DATA SCHEDULE
5 0000354908 FLIR SYSTEMS, INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 4,140 0 80,813 (3,058) 75,119 171,208 66,833 (38,404) 235,542 109,956 1,702 0 0 144 119,733 235,542 131,346 131,346 71,027 71,027 67,423 389 3,823 (11,316) (3,622) (7,694) 0 0 0 (7,694) (0.54) (0.54)
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