<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDING DECEMBER 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
-----------------
-----------------
Commission file number - 0-21918
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)
----------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class of Stock Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock, $0.01 par value NASDAQ
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X . NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or amendment to this Form 10-K [X]
As of March 3, 1997, the aggregate market value of the shares of voting stock of
the Registrant held by non-affiliates was $81,664,225
As of March 3, 1997, there were 5,432,963 shares of the Registrant's common
stock, $0.01, par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the FLIR Systems, Inc.'s Proxy Statement
for the 1997 Annual Shareholders' Meeting Part III
================================================================================
<PAGE>
FLIR Systems, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item on Form 10-K
PART I
<S> <C> <C>
Item 1 Business................................................................ 1
Item 2 Properties.............................................................. 10
Item 3 Legal Proceedings....................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders..................... 10
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters.... 10
Item 6 Selected Financial Data................................................. 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 12
Item 8 Financial Statements and Supplementary Data............................. 17
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 33
PART III
Item 10 Directors and Executive Officers of the Registrant...................... 33
Item 11 Executive Compensation.................................................. 33
Item 12 Security Ownership of Certain Beneficial Owners and Management.......... 33
Item 13 Certain Relationships and Related Transactions.......................... 33
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 33
SIGNATURES................................................................................... 35
FINANCIAL STATEMENT SCHEDULES................................................................ 36
</TABLE>
<PAGE>
PART I
Item 1. Business.
---------
General
FLIR Systems, Inc. ("the Company" or "FSI"), founded in 1978, designs,
manufactures and markets imaging systems, image analysis software and broadcast
quality surveillance systems worldwide for a wide variety of applications in the
government and commercial markets. Thermal imaging systems detect infrared
radiation or heat, which is emitted directly by all objects and materials,
enabling the user to see objects in total darkness, adverse weather, and through
obscurants such as smoke and haze. FSI's night vision products for the
government market are used in such diverse applications as public safety (law
enforcement and drug interdiction support, search and rescue, border and
maritime patrol, and environmental protection) and defense (surveillance,
reconnaissance and navigational assistance).
Thermal imaging systems can also detect and measure temperature
differences, which is important in a variety of industrial and commercial
applications including predictive and preventative maintenance, manufacturing
process control and monitoring, non-destructive testing and evaluation, and
research and development. FSI's business has also expanded into the larger
imaging and machine vision markets. Two FSI subsidiaries, Broadcast and
Surveillance Systems, Ltd. ("BSS"), located just outside London, England, and
Optimas Corporation, located in the Seattle, Washington area, play an important
part in that expansion. BSS designs, manufactures and markets day and night
imaging systems designed for the non-military and commercial broadcast markets.
Optimas specializes in the development of computer software products that enable
image analysis across a full range of applications for the industrial,
biomedical and research markets.
In April 1996, the Company entered into the commercial broadcast market
with the introduction of two products, the ULTRA 4000 and the UltraMedia. The
ULTRA 4000 is a fully stabilized airborne camera system that couples a high-
resolution infrared camera with an industry-standard broadcast camera for 24-
hour-a-day news coverage. The UltraMedia is a broadcast-quality imaging system
that delivers clear, crisp and jitter-free daylight images.
The Company's Government customers include local law enforcement agencies,
instrumentalities of the U.S. Government, foreign governments and various
aircraft manufacturers and resellers. Customers for the Company's Commercial
products include various manufacturers, resellers, research and development
facilities, universities, biomedical research facilities, utility companies,
motion picture and entertainment companies and various commercial enterprises.
Forward-looking Statements
This business discussion and other sections of this Annual Report 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 "expect," "anticipates," "intends," "plans,"
"believes," "seeks," "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 certain 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 business section, as well as those discussed
elsewhere in this Annual Report and from time to time in the Company's other
Securities and Exchange Commission filings 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.
Industry Background
Infrared radiation is essentially light that is not visible because its
wavelength is too long to be detected by the human eye. Unlike visible light,
infrared radiation is emitted directly by all objects and materials. Thermal
imaging systems are used to detect infrared radiation and convert it into an
electronic signal, which is then formatted into a video scene and displayed on a
monitor. Thermal imaging systems enable the operator to see objects in total
darkness and through obscurants such as smoke, haze and many forms of fog.
Unlike other night vision devices, such as night vision goggles, a thermal
imaging system does not require any visible light to operate. Thermal imaging
systems can also detect and measure temperature differences, which is important
in a variety of industrial applications.
1
<PAGE>
Early applications of thermal imaging primarily involved the use of very
expensive high-resolution systems in military combat applications such as
weapons targeting, where performance factors were far more important in the
procurement decision than the system acquisition cost. A basic form of the
technology was also employed in limited industrial applications such as
detection of heat loss from buildings, where system price was more important
than sophisticated performance. Consequently, a large group of potential users
in both the public safety sector and commercial markets did not use thermal
imagers, since available systems either failed to meet their performance
requirements or were too expensive. The Company was among the first to bridge
the gap between high-cost, high-performance and low-cost, low-performance
systems by developing thermal imaging products with a combination of price and
performance suited to the needs of a broad range of customers in the night
vision market. In addition, commercial applications and markets began to expand
as thermal imaging companies developed products with enhanced performance
characteristics.
The Company expects continued growth in the thermal imaging markets due
primarily to the general improvements in the price and performance
characteristics of imaging systems for the government and commercial markets.
The Company believes the primary factors that will contribute to the growth in
the government market are the increasing use of thermal imaging in public safety
applications worldwide, the increasing emphasis of governments on public safety
roles and the transition of defense procurement policies worldwide to favor
cost-effective commercially developed technology. The Company believes that the
use of thermal imaging and broadcast systems in commercial applications will
increase, and the commercial imaging market will expand significantly, as high-
performance industrial systems become more affordable and industrial customers
better understand the improvements in quality and productivity that can be
gained by the use of these systems and the related image analysis software. The
Company's commercial products and image analysis software capabilities are
designed to take advantage of these opportunities.
2
<PAGE>
Markets for the Company's Products
Government products
The worldwide government market consists of two segments: public safety and
defense. The Company is a leader in the public safety segment, which is rapidly
expanding but represents a small percentage of the total government market. The
Company also sells its products for selected applications in the defense
segment.
Public Safety
The Company is a worldwide leader in the emerging public safety market,
which consists of products sold for a variety of uses in law enforcement and
drug interdiction, search and rescue, border and maritime patrol, and
environmental protection. The Company has been instrumental in the development
of this market worldwide, with systems operating in over 47 countries. During
the last three years, the Company has sold into this market over 400 systems
with a dollar value in excess of $112 million. While no consistent data is
available as to the size of this market, the Company believes this represents
only a small percentage of the existing and potential global market.
Customers in the public safety market demand systems that are both
affordable and capable of performing a variety of tasks requiring high
resolution and image quality. The Company's products are well positioned to meet
these customers' requirements for performance and affordability. Additionally,
the Company's broad product range is well suited to the principal customer
groups in the public safety market, each of which require different product
configurations. The Company's products meet customer needs for systems that can
be mounted on a variety of aircraft and ships, operate in different climatic
conditions and accommodate changes in methods of operations. Installations for
the Company's systems have been certified by the Federal Aviation Administration
and equivalent authorities in foreign countries for most of the aircraft used in
the market.
Law Enforcement and Drug Interdiction: Thermal imaging systems enable law
enforcement agencies to expand their capabilities in activities ranging from
routine patrol and surveillance to suspect apprehension and drug interdiction.
There is a trend in law enforcement toward the use of aircraft, which have
advantages over traditional ground operations in these activities. Airborne
enforcement has historically been limited by an inability to perform effectively
at night or under conditions of limited visibility -- precisely the conditions
under which significant criminal activity occurs. By providing night vision
capability, thermal imaging systems significantly enhance the performance
capabilities of airborne law enforcement.
The Company believes that law enforcement is an emerging market for its
systems and that a relatively small percentage of law enforcement aircraft
worldwide are presently equipped with thermal imaging systems. As various law
enforcement agencies have gained familiarity with the uses and capabilities of
these systems, the Company has expanded the applications for its products to
meet the needs of a broader customer base. Over the past three years, demand for
the Company's products has continued to be strong as a result of their effective
use by customers in law enforcement and drug interdiction activities worldwide.
Law enforcement agencies are beginning to recognize the utility of thermal
imaging systems in ground operations, an application in which cost, portability
and image quality are key customer requirements. The Company has addressed
these requirements with its Prism Camera. See "Products".
Search and Rescue: Search and rescue operations include the traditional
mission of rescuing boats and vehicles in distress, offshore oil platform safety
and emergency response support for missing persons or accident victims. These
operations are routinely conducted in most nations by military, governmental, or
local entities in both coastal waters and inland areas. The range of the
Company's customers in this market has expanded from initial coast guard sales
to include military agencies, private contractors, oil companies and emergency
response teams. The Company believes that this market will continue to grow,
primarily due to the evolving need to maintain search and rescue capability on a
24-hour basis and under adverse weather conditions.
3
<PAGE>
Border and Maritime Patrol: As the frequency of regional disputes
throughout the world increases and concern over the effects of illegal
immigration grows in most countries, the importance of border surveillance,
particularly night time surveillance, has increased. The Company was among the
first to demonstrate the effectiveness of thermal imaging systems for airborne
operations in this market. Maritime patrol activities are performed by military
or governmental agencies charged with maintaining the territorial integrity of
coastal waters, monitoring national fishing boundaries and preventing smuggling.
Environmental Protection: With the growing worldwide emphasis on
protection of natural resources, the Company expects the market for its systems
in environmental protection activities to expand. The Company's thermal imaging
systems have been effectively used in forest fire detection and extinguishment,
oil spill detection and monitoring, and wildlife management. Potential
additional applications include monitoring toxic waste sites, identifying
sources of environmental contamination, and gas leak detection. In many cases,
proper detection cannot be accomplished without thermal imaging. For example,
heavy smoke inhibits the application of flame retardant while fighting forest
fires; thermal imaging systems see through smoke and allow accurate airdrops of
both retardant and water. The Company has successfully begun to market its
systems for environmental protection applications in the United States and
Canada, but this market is in its infancy and is expected to grow as users
become increasingly aware of the applications and utility of thermal imaging
systems.
Defense
The defense market for thermal imagers, which consists primarily of
sophisticated weapon systems, has historically constituted the largest segment
of the market for night vision products. While the Company has purposely
limited its participation in this market segment, due to the changing nature of
defense priorities, the Company has begun to develop relationships with prime
defense contractors that require cost-effective thermal sensors for inclusion in
their systems.
In addition to the traditional weapons systems applications, thermal imaging
systems are increasingly being employed by the military for surveillance,
reconnaissance, and navigation assistance as part of a larger trend toward
expansion of night operations capability. As a result, night vision systems
have been identified as a critical component of a more technology-based
military. The Company believes that these trends will provide selected ongoing
growth opportunities for the Company in the defense market.
Commercial Products
The ability of thermal imaging systems to detect heat and measure
temperature differences make them useful in a broad range of industrial
applications. For example, thermal imaging systems can be used to observe the
performance of heating and cooling devices, monitor the performance of
electronic components or the movement of electrical current, detect water or
moisture, identify leaks, locate bonding defects, detect cracks and voids in an
object and determine surface uniformity. The Company believes that the
increasing emphasis on improving manufacturing productivity and product quality,
underscored by the growing importance of programs such as International
Standards Organization (ISO) 9000 and the increasing complexity of high
technology products and processes, creates an opportunity for a significant
expansion of the industrial market. This market typically requires very high
performance systems with extensive analytical software. The Company believes
that growth of the commercial market will be further enhanced as thermal imaging
systems achieve higher performance, the capabilities and benefits of thermal
imaging are understood by a growing number of potential customers, the image
analysis software capabilities continue to improve and systems become more
affordable and easy to use.
The Company believes that its imaging systems and related software products
will enable it to continue to capture market share and significantly expand
applications in six principal areas: predictive and preventive maintenance, non-
destructive testing and evaluation, research and development, manufacturing
process control and monitoring as well as expand into the much larger machine
vision market, commercial broadcast and image analysis.
4
<PAGE>
Predictive and Preventive Maintenance ("PPM"): Thermal imaging systems
improve productivity by allowing the location and detection of equipment faults
so they can be corrected before they lead to catastrophic failure or major
equipment damage. This allows companies to significantly reduce operating
expenses by lowering repair costs and reducing downtime. PPM is currently the
largest segment of the industrial market.
Specific PPM applications are numerous. Utility companies utilize the
Company's thermal imaging products to locate and repair defective power
transmission components thereby significantly improving service reliability by
reducing annual power outages per customer. The bearings of rotating machinery
will operate at an increasingly warmer temperature as the end of their useful
life approaches; thermal imaging surveys can predict the bearing's end of life,
allowing planned maintenance to be performed before experiencing a plant shut-
down or severe machinery damage. Thermal imaging is used to evaluate the
integrity and amount of insulation in a building or container, providing
substantial energy cost savings. Thermal imaging allows roof leaks and
associated specific damaged areas to be located and repaired, avoiding the major
expense of replacing the entire roof.
Non-Destructive Testing and Evaluation ("NDT"): Non-destructive testing and
evaluation is a market classification adopted by a broad group of users of
various technologies for specialized testing. NDT in a broad sense applies to
all testing and evaluation that is non-destructive in nature and is utilized in
all industrial thermal imaging market segments. More specifically, the
designation applies to a segment that focuses on the testing of composite
materials or of products using composite materials. This is a relatively new
thermal imaging market and has experienced strong growth. Many different types
of products must be inspected to ensure they are properly constructed, meet
acceptable quality standards, or have not been damaged. For many applications,
technologies such as ultrasound and x-ray have not proven to be effective.
Thermal imaging has proven to be non-destructive, effective, quick and
affordable and is increasingly being used for this type of inspection.
Thermal imaging can be used to evaluate, monitor and test composite
material in this process. For example, when two composite materials are bonded
together, thermal imaging, unlike visual inspection, can be used to determine
the quality of the bond. A similar inspection technique is used to inspect
composite materials for damage after sustaining an impact. Additionally, during
the production of solar cells, thermal imaging is used to verify the integrity
of the bond between the various composition layers -- a factor critical to the
cell's performance. Due to pressure and temperature differences experienced by
an aircraft, water will collect in the internal honeycomb structure or
insulation if there is a leak in the aircraft's outer skin; such leaks can be
located through the use of thermal imaging.
Research and Development: Thermal imaging, due to its non-destructive
analysis capability, is a new tool for use in research from automobiles to
electronics. This market typically requires very high performance systems with
extensive capabilities and tools to analyze the thermal image. The Company
believes that this segment of the commercial market will grow as system
resolution and image analysis capabilities increase.
Because many component and product designs involve the use or control of
heat, thermal imaging can be effectively used in the research and design of the
component or product. For example, thermal imaging is used in laser design to
determine the power distribution of the beam. Once the laser is in production,
thermal imaging is used as a process and product specification monitoring
system. In addition, thermal imaging is used in development of diesel engines
using ceramic coated pistons to determine proper adhesion of the ceramic to the
metal piston. During the design of a rubber tire, uniform heat distribution can
be evaluated using thermal imaging.
Manufacturing Process Control and Monitoring: The ability to determine
that a manufacturing process will produce unacceptable results at the earliest
point in the production cycle is critical to quality improvement and cost
reduction. Thermal imaging and image analysis allows for the monitoring and
control of heat, which is used in most industrial processes. Depending on the
process, too much, too little, or uneven heat can result in a defective product.
The Company believes that, as all phases of the manufacturing process become
increasingly competitive and quality standards increase, the use of thermal
imaging and image analysis software in these applications will grow.
5
<PAGE>
Potential thermal imaging applications for process monitoring are varied and
extensive. For example, the quality of metal, plastic and glass cast parts is
highly dependent upon the temperature distribution in the mold. The quality of
paper is dependent upon proper and even moisture distribution during the drying
process. Thermal imaging is used to monitor temperature and moisture
distribution in these manufacturing processes. In addition, many products, such
as rubber gloves, can be thermally examined to locate abnormally warm or cool
spots, indicating non-uniform thickness which may result in a quality defect.
Commercial broadcast: The use of stabilized broadcast and thermal imaging
systems is becoming a standard feature in today's news gathering markets. This
market typically requires very high performance systems with extensive
capabilities including state-of-the-art stabilization, the ability to provide
jitter-free images from great distances and the ability to downlink the
information on a real-time basis. The Company believes that this segment of the
market will grow as more and more TV stations acquire helicopters to provide
reat-time reporting of news events and as system size and weight continue to
decline which enable the use of such systems on small and weight restricted
helicopters.
Image Analysis: The acquisition of Optimas, in early 1996, has enabled the
Company to greatly expand its image analysis capabilities. Image analysis is the
extraction of specific quantitative information in an objective, repeatable
fashion in order that such data can be more meaningfully employed or understood
and used to make informed and better decisions. Image analysis incorporates
image processing (improving or otherwise modifying of the visual appearance of
an image), but goes further to incorporate the identification of features of
interest, extracting the desired measurements of those features and then making
such measurements available for productive use.
Uses of image analysis software may include monitoring and controlling
industrial processes, improving product quality, enhancing medical analysis or
otherwise enabling or enhancing critical decision-making processes. For example,
in the manufacture of laser and ink jet printers, the precise alignment of
thousands of tiny dots of ink and a minimization of scatter or excess ink spots
in printing are critical quality concerns. Printer manufacturers examine a test
sheet from each printer using the Company's image analysis software. The
software can rapidly examine a digital scan of those pages and provide analysis
of whether the printer is functioning within tolerances.
Products
The following is a listing of the Company's main products and a brief
description of such products:
Series 2000. The Series 2000(TM), first introduced in 1983, is a real-time
analog TV-compatible thermal imaging system for use in applications such as
military surveillance, narcotics interdiction, crime fighting, search and rescue
and environmental protection.
SAFIRE. The SAFIRE(TM), first introduced in the second quarter of 1992, is
a high-resolution digital thermal imaging system featuring gyro stabilization
and image processing. SAFIRE systems are currently fielded by all branches of
the U.S. military and are manufactured to meet the rigors of diverse missions
from airborne and naval surveillance to search and rescue.
ULTRA 3000. The ULTRA 3000(TM), first introduced in the fourth quarter of
1994, is one of the smallest and lightest airborne thermal imaging systems
available on the market today. A variety of system features and options make the
ULTRA 3000 a truly versatile thermal imaging system for use in day and night
surveillance, search and rescue, and environmental protection.
Prism SP. The Prism SP(TM), first introduced in the second quarter of
1994, is a high resolution, battery powered, handheld infrared camera. The Prism
SP combines compact size, high quality imaging and temperature measurement
capabilities which make it ideal for a broad range of industrial applications,
including predictive and preventative maintenance, research and development,
process control, and other types of non-destructive evaluation.
6
<PAGE>
Prism DS. The Prism DS(TM), which was introduced in the first quarter of
1995, is a high-resolution, battery powered, handheld infrared camera with the
added capabilities of digital storage and image processing. The Prism DS
features an on-board 486 microprocessor which enables digital capture of images
onto Windows(TM) based PC cards. The Prism DS is ideally suited for industrial
applications where post analysis in the area of predictive and preventative
maintenance, research and development, process control, and other types of non-
destructive evaluation are crucial.
Tracer. The Tracer(TM), introduced in the first quarter of 1997, is the
first industrial imaging system capable of recording and analyzing long thermal
event sequences at real-time frame rates on a Windows(TM) based PC. Tracer
combines a high-resolution thermal imaging camera with a Pentium(R) PC, digital
recording system, and Windows-based analysis software.
SeekIR. The SeekIR(TM), introduced in the third quarter of 1996, is a
handheld infrared camera system that uses "uncooled" detector technology.
Silent operation, "instant on" imaging, compact size, portability and a long-
life battery make the SeekIR a strong tool for gathering evidence and conducting
"night vision" surveillance or monitoring.
ULTRA 4000. The ULTRA 4000(TM), introduced in the third quarter of 1994,
is a fully stabilized aerial camera system that couples a high-resolution
infrared camera for low light or no light situations with an industry-standard
broadcast camera for daylight coverage. The ULTRA 4000 provides the capability
for long range airborne surveillance and broadcast video transmission in law
enforcement, news gathering, and similar applications.
UltraMedia. The UltraMedia(TM), introduced in the first quarter of 1996,
is a compact daylight broadcast system that delivers a maximum of 72:1
magnification in a lightweight, low-profile package which is ideally suited for
airborne broadcast teams. The UltraMedia breaks new ground by giving airborne
broadcast teams hardware that delivers high-resolution images without high
payload concerns.
UltraMedia RS. The UltraMedia RS(TM), introduced in the first quarter of
1997, combines many of the features of the larger UltraMedia system in a compact
35 pound configuration. The UltraMedia RS provides small and weight restricted
aircraft the ability to gather high quality video footage from long distances.
AnalyzIR. AnalyzIR(TM) Software, introduced in the second quarter of 1995,
allows for review, analysis and processing of captured images and data. AnalyzIR
software is a Windows based program which provides for an ease of use and
affordability that is unmatched in the industry. AnalyzIR software is typically
packaged with the Prism systems, though it is capable of operating with data
gathered from other imaging modalities as well.
OPTIMAS. OPTIMAS(TM) software, introduced in the first quarter of 1989,
is a Windows based application designed to meet the needs of the advanced
scientific and engineering markets. The OPTIMAS software package includes
custom user interface tools which enable both novice and highly skilled users to
efficiently and effectively solve their image analysis problems.
Xcaliper. Xcaliper(TM) software, introduced in the second quarter of 1995,
is a high precision software product addressing certain industrial machine
vision tasks such as gauging, part-presence or absence, edge detection and part
alignment. Xcaliper software combines high speed with easy development using
Visual Basic programming.
Sentinel. Sentinel(TM) software, introduced in the fourth quarter of 1995,
is an image pattern and industrial OCR software application using neural
network-based technology to perform fast pattern recognition on personal
computers. Applications include form reading, package label identification, part
orientation and inspection. Sentinel software employs a simple drag and drop
interface to train patterns and build applications.
7
<PAGE>
Library. Library(TM) software, introduced in the fourth quarter of 1995,
is a flexible, multi-user image database with internal image management
capabilities. Library software provides support for network and removable media
and seamless links to OPTIMAS for one step archiving of images from OPTIMAS.
Images can be retrieved and batch-analyzed using internal search features and
automated field updates of analysis results. Library software utilizes a drag
and drop interface to enable custom database and report development.
Customers
The primary customers for the Company's products include instrumentalities
of domestic and foreign governments, original equipment manufacturers,
commercial manufacturers, research and development facilities, universities,
utility companies, news gathering agencies and various commercial enterprises.
A substantial portion of the Company's revenues is derived from sales to
agencies and instrumentalities of the U.S. Government, which aggregated more
than 10% of the Company's revenues in each of the last three years. For the year
ended December 31, 1996, such sales represented 40.1% of the Company's total
revenue. Of this amount approximately $22.8 million, or 34.5% of the Company's
1996 revenues, consisted of sales to the U.S. Marine Corps of additional SAFIRE
systems for their fleet of UH-1N "Huey" helicopters. With the exception of the
continuing sales to agencies and instrumentalities of the U.S. Government, the
Company does not typically have continuing customers whose purchases constitute
more than 10% of revenues on a year to year basis. At any given time, however,
the Company may have purchase commitments from customers which, if completed,
would constitute more than 10% of revenues in any given year. The failure of any
such customer to complete such purchases or the loss of the agencies and
instrumentalities of the U.S. Government as a customer could have a material
adverse effect on the Company's business, financial position and results of
operations.
Sales, Distribution and Customer Service
The Company markets its night vision products for the government market in
the United States directly through a 17-person direct sales staff, and
internationally through 12 independent representatives covering all major
markets worldwide.
The Company sells its commercial products worldwide through a 24-person
direct sales staff and a network of 35 distributors and representatives, each
with an exclusive right to sell the Company's products in a defined geographic
area. All distributors and representatives report to one of five regional sales
managers employed by the Company. The Company sells its software products
primarily through 56 authorized dealers, 30 of whom are located within the U.S.
and Canada. Many of these dealers, particularly internationally, maintain their
own network of subsidiary agents.
In support of both direct and distribution sales activities, the Company
has a technical support group that provides installation, technical training and
repair services. The Company maintains service facilities at its factory in
Portland, Oregon and at its subsidiaries in the United Kingdom and Seattle,
Washington. The Company also maintains limited service capability in three
foreign locations under the direction of its independent representatives.
Manufacturing
The Company manufactures most critical components of its products, including
detectors, optics and high speed motors. This allows the Company to minimize
lead times, facilitate prompt delivery of its products, control costs and ensure
that these components satisfy its quality standards. The Company purchases
other parts pre-assembled, including coolers, circuit boards, cables and wiring
harnesses. The interruption of certain sources of supply or the failure of
suppliers of key components to adapt their products to the Company's changing
technological requirements could disrupt the Company's ability to manufacture
products or cause the Company to incur costs associated with the development of
alternative sources, either of which could have an adverse effect on the
Company's business, financial condition and financial results of operations.
The Company has experienced delays in production due to its inability to timely
obtain a necessary component from third-party supplier. No assurance can be
given that similar delays will not be experienced in the future.
8
<PAGE>
Certain critical components, such as detectors and optical systems, are made
with special minerals, compounds or materials. The Company believes that all
such materials are readily available and will continue to be available in the
foreseeable future at costs that are not prohibitive or that would materially
affect the Company's ability to manufacture such components.
The Company's manufacturing operations have been audited by its OEM
customers, which include several major aircraft manufacturers, and were
certified as meeting their quality standards. In addition, the Company has been
certified for inclusion of its products in government systems after government
audits of its manufacturing facilities.
Competition
The Company's competitors are different in each market segment. In the
public safety market, the Company competes with a variety of companies on a
limited basis. For example, the Company competes with Agema Infrared Systems and
Inframetrics in the law enforcement segment and GEC and Wescan Ltd. in other
public safety segments. In the commercial markets, the Company's principal
competitors are Agema, Inframetrics and Avio and Wescam Ltd. in the commercial
broadcast markets. In the technical image analysis software market, the Company
competes with Media Cybernectics and Noesis Vision, and to a lesser extent Data
Translation, Jandel Scientific and Matrox Electronics Systems. In the industrial
machine vision imaging markets, the Company competes with Adept, Allen-Bradley
Company, Cognex and Robotic Vision Systems. Competition in the defense market is
more intense, and includes companies such as Lockheed Martin, Boeing, Thompson,
GEC and Thorn EMI. As the markets for the Company's products expand, the Company
expects that additional competition will emerge and that existing competitors
may commit more resources to the markets addressed by the Company. Most of the
Company's competitors have substantially greater financial, technical and
marketing resources than the Company. In addition, the Company's products
compete indirectly with numerous other products, such as image intensifiers and
low-light cameras, for limited military and governmental funds.
The Company believes that the principal competitive factors in its market
are performance, cost, customer service, product reputation, and effectiveness
of marketing and sales efforts. In addition, the Company believes that the speed
with which companies can identify applications for thermal imaging, develop
products to meet those needs and supply commercial quantities to the market are
important competitive factors. The Company believes that it competes favorably
with respect to each of these factors.
Proprietary Rights
The Company relies on intellectual property rights to protect its
proprietary technology. The Company enters into confidentiality agreements with
its employees and consultants and limits access to and distribution of its
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of its technology or independent third-party development of
competing technologies.
9
<PAGE>
Employees
As of December 31, 1996, the Company had 363 employees of whom 43 were in
administration, 127 were in engineering, 5 were in quality assurance, 108 were
in manufacturing, assembly and testing and 80 were in marketing and sales. The
Company has been successful in attracting and retaining highly skilled
technical, marketing and management personnel to date. None of the Company's
employees are represented by a union or other bargaining group. The Company
believes its relationship with its employees is good.
Item 2. Properties.
-----------
The Company leases approximately 85,000 square feet of office, manufacturing,
and laboratory space in Portland, Oregon, under a lease which expires in 2000.
The lease calls for fixed monthly payments over its term. The Company also
leases approximately 12,500 square feet of office and manufacturing space in the
United Kingdom, under a lease that expires in 2000 and leases approximately 9600
square feet of office and manufacturing space in Bothell, Washington, under a
lease that expires in 2000.
Item 3. Legal Proceedings.
------------------
In the normal course of business, the Company is and has been involved in
certain litigation, however, the Company is not the subject of or a party to any
material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of the security holders during the fourth
quarter of the year covered by this report.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
-----------------------------------------------------------------
Matters.
--------
The common stock of FLIR Systems, Inc. has been traded on the Nasdaq National
Market System since June 22, 1993, under the symbol FLIR. The following table
sets forth, for the quarters indicated, the high and low sales price for Common
Stock reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
1996 1995
--------------------------------
High Low High Low
--------------------------------
<S> <C> <C> <C> <C>
First Quarter.... 14.38 10.00 16.75 12.50
Second Quarter... 16.25 10.50 15.25 12.44
Third Quarter.... 15.25 11.75 14.50 12.25
Fourth Quarter... 14.50 12.75 13.50 12.25
</TABLE>
At December 31, 1996, there were approximately 350 holders of record of the
Company's common stock and 5,387,483 shares outstanding. The Company has never
paid cash dividends on its common stock. The Company intends to retain earnings
for use in its business and, therefore, does not anticipate paying cash
dividends in the foreseeable future.
During 1996, the Company sold securities without registration under the
Securities Act of 1933, as amended (the ' Securities Act") upon the exersice of
certain stock options granted under the Company's 1984 stock incentive plan. An
aggregate of the 14,526 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
prommulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3(b) of the Securities Act.
10
<PAGE>
Item 6. Selected Financial Data.
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
------------ ----------- ----------- ------------ ---------
(In thousands, except per share data)
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Revenues:
Government.......................... $42,958 $33,575 $35,805 $31,051 $25,761
Industrial imaging systems.......... 23,059 16,550 13,172 9,082 6,789
------------ ----------- ----------- ------------ ---------
Total revenues..................... 66,017 50,125 48,977 40,133 32,550
Cost of goods sold................... 30,415 22,724 23,813 19,103 15,648
------------ ----------- ----------- ------------ ---------
Gross profit....................... 35,602 27,401 25,164 21,030 16,902
Operating expenses:
Research and development............ 9,485 7,786 7,588 7,044 5,304
Selling and other operating costs... 17,739 14,601 11,903 10,332 8,910
Allowance for doubtful accounts..... 1,260 55 450 26 443
------------ ----------- ----------- ------------ ---------
Total operating costs.............. 28,484 22,442 19,941 17,402 14,657
Earnings from operations.......... 7,118 4,959 5,223 3,628 2,245
Interest income...................... 44 226 705 138 5
Interest expense and other........... (819) (795) (172) (170) (205)
------------ ----------- ----------- ------------ ---------
Earnings before income taxes...... 6,343 4,390 5,756 3,596 2,045
Provision for income taxes........... 1,251 523 570 405 265
------------ ----------- ----------- ------------ ---------
Net earnings......................... $ 5,092 $ 3,867 $ 5,186 $ 3,191 $ 1,780
============ =========== =========== ============ =========
Net earnings per share............... $ 0.91 $ 0.70 $ 0.95 $ 0.66 $ 0.42
============ =========== =========== ============ =========
Weighted average number of
common shares and equivalents
outstanding......................... 5,624 5,523 5,436 4,828 4,233
============ =========== =========== ============ =========
Balance Sheet Data:
Working capital...................... $44,190 $37,884 $35,573 $31,610 $18,233
Total assets......................... 75,104 56,918 49,269 40,385 26,391
Long-term debt, excluding
current portion..................... 5,173 1,175 1,209 1,167 1,099
Total shareholders' equity........... $49,971 $43,470 $39,162 $33,046 $19,909
</TABLE>
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and ResultS
-----------------------------------------------------------------------
of Operations.
-------------
Overview
FLIR Systems, Inc. ("FSI" or the "Company"), founded in 1978, designs,
manufactures, and markets imaging systems worldwide for a wide variety of
applications in the government and commercial markets. Thermal imaging systems
detect the infrared radiation, or heat, emitted directly by all objects and
materials and enable the operator to see objects in total darkness, in adverse
weather conditions and through obscurants such as smoke and haze. Government
applications include public safety (law enforcement and drug interdiction,
search and rescue, border patrol and maritime patrol, and environmental
protection) and defense (surveillance, reconnaissance and navigation
assistance). Commercial applications include commercial broadcast imaging,
predictive and preventive maintenance, non-destructive testing and evaluation,
research and development, manufacturing process control and monitoring, and
machine vision and image analysis.
The Company was profitable in the year ended December 31, 1988 and has reported
profitable results for each succeeding year. In June 1993, the Company
completed an initial public offering of its stock, which is traded on the Nasdaq
National Market System.
In January 1996, the Company continued to expand the market potential for the
growing commercial product line as well as government products by acquiring
Optimas Corporation ("Optimas") in Seattle, Washington. Optimas specializes in
the development of image analysis software for a wide range of applications for
the industrial, biomedical, research and machine vision markets.
In April 1996, the Company entered into the commercial broadcast market with the
introduction of two products, the ULTRA 4000 and the UltraMedia. The ULTRA 4000
is a fully stabilized airborne camera system that couples a high-resolution
infrared camera with an industry-standard broadcast camera for 24-hour-a-day
news coverage. The UltraMedia is a broadcast-quality imaging system that
delivers clear, crisp and jitter-free daylight images.
During 1996, the Company continued the significant investment in the
infrastructure of the Company. This included significant investments
in expanding the operations of both of the Company's subsidiaries, Broadcast and
Surveillance Systems, Ltd. ("BSS") and Optimas; continued emphasis on corrective
action related to production issues with the Prism product line; restructuring
the marketing channels to a more direct sales force from a predominately
representative-based network; and the continued investment in research and
development related to new products and enhancement of existing products. The
Company is now beginning to benefit from this investment as evidenced by the
introduction of the two new aerial broadcast products in 1996, profitable
operations of BSS, the continued enhancement to existing products, and in early
1997, the introduction of the extremely lightweight UltraMedia-RS and the
Tracer, the first industrial imager capable of recording and analyzing long
sequences of thermal activity on a real-time basis.
12
<PAGE>
Results of Operations
The following table sets forth for the indicated periods certain items as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Revenues:
Government.......................... 65.1% 67.0% 73.1%
Commercial imaging systems.......... 34.9 33.0 26.9
-------- -------- ------
Total revenues..................... 100.0 100.0 100.0
Cost of goods sold................... 46.1 45.3 48.6
-------- -------- ------
Gross profit....................... 53.9 54.7 51.4
Operating expenses:
Research and development............ 14.4 15.5 15.5
Selling and other operating costs... 26.9 29.2 24.3
Allowance for doubtful accounts..... 1.9 0.1 0.9
-------- -------- ------
Total operating expenses........... 43.2 44.8 40.7
Earnings from operations.......... 10.7 9.9 10.7
Interest income...................... 0.1 0.5 1.4
Interest expense and other........... (1.2) (1.6) (0.3)
-------- -------- ------
Earnings before income taxes...... 9.6 8.8 11.8
Provision for income taxes........... 1.9 1.0 1.2
-------- -------- ------
Net earnings......................... 7.7% 7.8% 10.6%
======== ======== ======
</TABLE>
Years ended December 31, 1996, 1995 and 1994
Overall. The Company's revenues increased 31.7%, from $50.1 million
in 1995 to $66.0 million in 1996. Net earnings increased 31.7%, from $3.9
million (or $0.70 per share) in 1995 to $5.1 million (or $0.91 per share) in
1996. The increase in overall revenue and net income was primarily due to the
inclusion of revenue from the sale of the Company's two aerial broadcast
products, the ULTRA 4000 and the UltraMedia, for the broadcast market, as well
as to increased deliveries of SAFIRE night vision system to the Federal
Government, particularly to the U.S. Marine Corps and the U.S. Air Force.
Further, the increase in revenue and net income was due to the fact that 1995
government revenues were constrained due to delays in the finalization of
several international and domestic contracts and the inclusion, in 1995, of the
significant one-time transaction costs associated with the Optimas acquisition.
These increases were sufficient to offset several items that had a dilutive
impact on 1996 net earnings including the $1.2 million fourth quarter increase
in the allowance for doubtful accounts related to one long-outstanding
international receivable, the increase in interest expense related to increased
short and long-term borrowings and the increase in the effective tax rate.
During 1995, the Company's overall revenues increased 2.3%, from $49.0 million
in 1994 to $50.1 million in 1995. Net earnings decreased 25.4%, from $5.2
million (or $0.95 per share) in 1994 to $3.9 million (or $0.70 per share) in
1995. The slight increase in overall revenues, despite the decline in revenues
experienced by the Company's government division, was primarily due to increased
sales of the Prism family of products, principally the Prism DS and increased
sales at BSS. The decline in net earnings was primarily due to the significant
one-time costs associated with the Optimas acquisition, and the reduction in
interest income earned on cash balances.
13
<PAGE>
Revenues. Revenues from the sale of government systems increased 27.9%,
from $33.6 million in 1995 to $43.0 million in 1996. This increase was primarily
attributable to increased sales of the SAFIRE night vision system from $23.9
million in 1995 to $29.9 million in 1996, principally to the U.S. Government,
particularly the U.S. Marine Corps and the U.S. Air Force. Additionally,
revenues from the sale of BSS products increased during 1996. Commercial imaging
systems revenues increased 39.3%, from $16.6 million in 1995 to $23.1 million in
1996. This improvement was principally attributable to the inclusion of revenues
from sales of the Company's two aerial broadcast products, the UltraMedia and
the ULTRA 4000, which were introduced in the first quarter of 1996 and
aggregated $10.4 million in 1996. This increase was partially offset by reduced
sales of the Prism Family of products due to supplier-related production
constraints experienced in 1996. The Company continues to make improvements in
its production capacity for the Prism products by working with existing
suppliers to improve performance and also by identifying alternative sources of
detector components that utilize a different electronic design. The Company is
now producing prism cameras that utilize these new components and the Company is
now is the process of ramping up production utilizing both existing and new
supplier components. While the results of this effort have been positive, the
Prism revenues for 1996 reflect that full production had not been achieved.
Revenues in 1995 from the sale of government systems decreased 6.2%, from $35.8
million in 1994 to $33.6 million in 1995. This slight decrease was primarily due
to delays in the finalization of several international and domestic contracts,
which resulted in revenues from these contracts being postponed from the latter
half of 1995 into 1996 and 1997. Revenues from the sale of commercial imaging
systems increased 25.6%, from $13.2 million in 1994 to $16.6 million in 1995.
This improvement was principally attributable to increased sales of the Prism
family of products, particularly the Prism DS, which was introduced in the first
quarter of 1995. Sales of the Prism family of products aggregated $7.8 million
in 1995 compared with $5.2 million in 1994.
The Company has continued to benefit from its significant investment to develop
worldwide sales and distribution channels. The majority of the Company's
revenue outside the United States was from Europe. However, during 1996,
international revenues decreased slightly from $23.1 million in 1995 to $21.2
million in 1996. Sales outside the United States accounted for approximately
32.0% of the Company's revenue in 1996. This represents a decrease from the
46.0% experienced in 1995 and the 42.3% experienced in 1994. The decrease, in
1996, in absolute dollars and as a percentage of revenue was primarily due to
increased shipments under the terms of existing domestic contracts, primarily to
the U.S. Marine Corps. The Company anticipates that revenues from international
sales as a percentage of total revenue will continue to comprise a significant
percentage of revenues but may vary modestly from year to year.
Gross profit. As a percentage of revenue, gross profit decreased
slightly from 54.7% in 1995 to 53.9% in 1996. This decrease was primarily due to
the decrease in higher margin international sales and the increase in sales to
the U.S. Government which aggregated $26.5 million in 1996 compared to $15.7
million in 1995. The decrease was mitigated by the increased sales of the
Company's commercial broadcast products, which typically have a slightly higher
margin than other commercial products, and to higher margin software sales from
Optimas.
Gross profit increased as a percentage of revenue from 51.4% in 1994 to 54.7% in
1995, primarily due to the higher percentage of higher margin international
sales in 1995.
Gross profit percentages are affected by a variety of factors, including the mix
of domestic and international government and commercial imaging sales, the more
competitive nature of the commercial imaging market, and the impact of
competitive bids for significant government contracts.
14
<PAGE>
Research and development. Research and development expense increased 21.8%,
from $7.8 million in 1995 to $9.5 million in 1996, and increased 2.6%, from $7.6
million in 1994 to $7.8 million in 1995. As a percentage of revenue, research
and development expense decreased from 15.5% in 1995 to 14.4% in 1996 and
remained consistent at 15.5% for 1995 and 1994. The increase in research and
development expense, in absolute dollar terms, was attributable to increased
research and development activities related to introduction of the UltraMedia,
ULTRA 4000, UltraMedia-RS and the Tracer, as well as to on-going product
enhancements. Research and development expense was also impacted by the
classification of development costs directly associated with engineering
revenues as cost of goods sold rather than research and development expenses.
Such costs amounted to $200,000, $425,000 and $306,000 in 1996, 1995 and 1994,
respectively. Without these reclassifications, research and development expense
as a percentage of revenue would have been 14.7%, 16.4% and 16.1% in 1996, 1995
and 1994 respectively, reflecting the fact that a large percentage of research
and development expense is fixed in nature.
The general trend in research and development expense reflects the Company's
continuing emphasis on product development and new product introductions. The
Company expects that research and development expenses will continue to increase
in absolute dollars but, as the Company's revenues increase and given the large
percentage of research and development expense that is fixed in nature, such
expenses should continue to decline as a percentage of revenue.
Selling and other operating costs. Selling and other operating costs
increased 21.5%, from $14.6 million in 1995 to $17.7 million in 1996 and
increased 22.7%, from $11.9 million in 1994 to $14.6 million in 1995, primarily
due to costs associated with increased revenues, expenses related to the
expanded operations of BSS and Optimas, and to increased personnel. Further, the
Company has continued to expand and strengthen the direct sales and marketing
staffs at both FSI and Optimas. Selling and other operating costs decreased as a
percentage of revenue from 29.2% in 1995 to 26.9% in 1996, and increased from
24.3% in 1994 to 29.2% in 1995. The Company expects that selling and other
operating costs will continue to grow in absolute terms in 1997 as a result of
further planned increases in sales and marketing personnel and anticipated
increased marketing efforts and related expenses.
Allowance for doubtful accounts. In 1996, the Company increased the reserve
for doubtful accounts by $1.3 million, primarily related to the possible
uncollectibility of a receivable from an international customer located in
Genoa, Italy. The Company had previously established a partial reserve for the
possible uncollectibility of this receivable but determined that the continued
delays in the restructuring of the company by the Italian Government
necessitated a one-hundred-percent reserve.
Interest income and Interest expense and other. Interest income consists
of amounts earned on cash balances and short-term investments. The decrease from
$705,000 in 1994 to $226,000 in 1995 and to $44,000 in 1996 reflects the decline
in cash balances during 1995 and 1996 due to increased working capital needs,
primarily inventories and accounts receivable as well as expanded operations of
BSS and Optimas. Additionally, 1994 interest income reflects the inclusion of
interest on certain long-term receivables.
Interest expense and other includes costs related to short-term and long-term
debt, capital lease obligations and miscellaneous bank charges and expenses.
The increase from $795,000 in 1995 ($195,000 exclusive of the one-time costs
associated with the acquisition of Optimas) to $819,000 in 1996 was primarily
due to increased short-term and long-term debt as a result of increased working
capital needs discussed above. The increase from $172,000 in 1994 to $795,000
in 1995 was due to the one-time costs associated with the acquisition of
Optimas, which aggregated approximately $600,000.
Income taxes. The Company's effective income tax rates for 1996, 1995 and
1994 were 19.7%, 11.9% and 9.9%, respectively. The effective tax rates were
substantially below the statutory rate as the Company was able to realize the
benefits of a portion of its net operating loss carryforwards and existing tax
credits. The Company recognized a net deferred tax benefit of $400,000, $950,000
and $850,000 in 1996, 1995 and 1994, respectively, under the recognition
criteria of Statement of Financial Accounting standard no. 109 (SFAS 109),
"Accounting for Income Taxes." The current portion of income tax expense
consists of state and federal income taxes, as the utilization of net operating
loss carryforwards and existing tax credits was limited. As a result of the
Company's initial public offering in 1993, the Company experienced a cumulative
change in ownership of more than 50% within a three-year period, which resulted
in the imposition of a limitation on the utilization of net operating losses and
existing tax credits of $2.6 million per year.
15
<PAGE>
At December 31, 1996, the Company had utilized all its net operating loss
carryforwards, however, in connection with the acquisition of Optimas, the
Company acquired net operating loss carryforwards aggregating $5.5 million which
expire in the years 1997 through 2010. Utilization of these carryforwards is
limited to future earnings of Optimas and further limited to approximately
$350,000 per year, as Optimas experienced a cumulative change in ownership of
more than 50% within a three-year period. Additionally, the Company has various
tax credits available aggregating $771,000 which expire in the years 1999
through 2011.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and cash equivalents on hand of
$775,000 compared with $1.2 million at December 31, 1995. Additionally, at
December 31, 1996, the Company had $6.4 million drawn on its line of credit.
Working capital increased to $44.2 million at December 31, 1996, from $37.9
million at December 31, 1995. The decrease in cash balances and increased
working capital was primarily due to the increases in inventories and accounts
receivable discussed below, as well as to the cash required for the expanded
operations of BSS and Optimas.
At December 31, 1996, the Company had $28.3 million in accounts receivable
outstanding compared to $24.9 million at December 31, 1995. The increase in
accounts receivable was primarily due to the 31.7% increase in
revenue. Days sales outstanding declined from 181 days at December 31, 1995 to
157 days at December 31, 1996. The Company generally experiences long
collection cycles due to a variety of factors, including payment terms required
by foreign governmental customers, as well as payment terms for companies that
integrate the Company's products into aircraft for sale to ultimate users. The
Company believes that days sales outstanding will continue to decline as revenue
increases and the commercial imaging systems revenue, which generally has a
short collection cycle, continues to become a larger percentage of overall
revenue.
At December 31, 1996, the Company had inventories on hand aggregating $33.5
million compared to $23.7 million at December 31, 1995. The increase in the
inventory level was principally due to the build up of components due to the
production constraints related to the Prism DS, an increase in components
related to anticipated deliveries of SAFIRE systems to the U.S. Government and
international customers, and an increase in inventories to support deliveries of
new products including the UltraMedia, UltraMedia-RS, the Tracer and the
Company's new uncooled product, the SeekIR. Additionally, inventory levels at
BSS continue to increase in anticipation of future deliveries under existing
contracts. Because of the extremely long lead times for many of the most
expensive components, it is necessary to have inventory on hand to meet required
delivery schedules of existing contracts. The Company maintains levels of
inventory sufficient to satisfy backlog which the Company considers to be firm,
and to respond to short-term delivery requirements for a majority of its
products. Management believes that the Company's ability to provide prompt
deliveries give it a competitive advantage for certain sales. It is expected
that current inventory levels will be maintained or decrease slightly as the
production constraints related to the Prism DS are resolved.
The Company has available a $10.0 million line of credit which bears interest at
the prime rate, is collateralized by all receivables and inventories and
requires the Company to maintain working capital in excess of $40.0 million and
net tangible worth of $40.0 million. At December 31, 1996, the Company had a
balance of $6.4 million drawn on this line of credit compared to a $2.1 million
balance on this line at December 31, 1995.
The Company believes that its existing cash, cash generated from operations, and
available credit facilities together with scheduled payments on existing
receivable balances will be sufficient to meet its cash requirements for the
foreseeable future.
16
<PAGE>
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report 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 "expect," "anticipates," "intends," "plans," "believes," "seeks,"
"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 certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially form 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 elsewhere in this Annual
Report and from time to time in the Company's other Securities and Exchange
Commission filings 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.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
This item includes the following financial information:
<TABLE>
<CAPTION>
Statement Page
- --------------------------------------------------------------------------- ----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants.................... 18
Consolidated Statement of Operations for the Years Ended December 31,
1996, 1995 and 1994....................................................... 19
Consolidated Balance Sheet as of December 31, 1996 and 1995................ 20
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.......................................... 21
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994........................................... 22
Notes to the Consolidated Financial Statements............................. 23
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of FLIR Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows present fairly, in all material respects, the financial position of FLIR
Systems, Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
February 25, 1997
18
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
--------- ----------- ---------
Revenues:
<S> <C> <C> <C>
Government............................ $42,958 $33,575 $35,805
Commercial imaging systems............ 23,059 16,550 13,172
--------- ----------- ---------
66,017 50,125 48,977
Cost of goods sold...................... 30,415 22,724 23,813
Research and development................ 9,485 7,786 7,588
Selling and other operating costs....... 17,739 14,601 11,903
Allowance for doubtful accounts......... 1,260 55 450
--------- ----------- ---------
58,899 45,166 43,754
Earnings from operations............ 7,118 4,959 5,223
Interest income......................... 44 226 705
Interest expense and other.............. (819) (795) (172)
--------- ----------- ---------
Earnings before income taxes........ 6,343 4,390 5,756
Provision for income taxes.............. 1,251 523 570
--------- ----------- ---------
Net earnings............................ $ 5,092 $ 3,867 $ 5,186
========= =========== =========
Net earnings per share.................. $ 0.91 $ 0.70 $ 0.95
========= =========== =========
Weighted average number of common shares
and equivalents outstanding.......... 5,624 5,523 5,436
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)
<TABLE>
<CAPTION>
ASSETS
December 31,
--------------------
1996 1995
--------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 775 $ 1,154
Accounts receivable................................................. 28,311 24,898
Inventories......................................................... 33,513 23,666
Prepaid expenses.................................................... 1,551 439
--------- ----------
Total current assets.............................................. 64,150 50,157
Property and equipment............................................... 7,137 4,003
Software development costs........................................... 799 469
Deferred income taxes................................................ 2,200 1,800
Other assets......................................................... 818 489
--------- ----------
$75,104 $56,918
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................... $ 6,365 $ 2,056
Accounts payable.................................................... 7,628 5,477
Accounts payable to related parties................................. 128 273
Accrued payroll and other liabilities............................... 1,907 1,631
Accrued warranty reserve............................................ 936 893
Accrued commissions................................................. 546 923
Accrued income taxes................................................ 1,073 585
Current portion of long-term debt................................... 1,377 435
--------- ----------
Total current liabilities......................................... 19,960 12,273
Long-term debt....................................................... 5,173 1,175
Commitments and contingencies....................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at December 31, 1996 or 1995...................... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
5,387,483 and 5,283,365 shares issued at December 31, 1996 and
1995, respectively................................................ 54 53
Additional paid-in capital.......................................... 41,833 40,252
Retained earnings................................................... 8,257 3,165
Cumulative foreign translation adjustment........................... (173) --
--------- ----------
Total shareholders' equity........................................ 49,971 43,470
--------- ----------
$75,104 $56,918
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock Additional Retained Foreign
----------------------- ----------------------- Paid-in Earnings Translation
Shares Amount Shares Amount Capital (Deficit) Adjustment Total
---------- --------- ---------- ---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0.01 $0.01
Authorized........................ 10,000,000 par value 30,000,000 par value
========== ========= ========== =========
Balance December 31, 1993......... -- $ -- 4,964,668 $ 50 $38,884 $(5,888) $ -- $33,046
Net earnings for the year........ -- -- -- -- -- 5,186 5,186
Common stock options exercised... -- -- 176,152 2 491 -- -- 493
Common shares issued............. -- -- 46,984 -- 437 -- -- 437
---------- --------- ---------- ---------- -------- -------- --------- -------
Balance December 31, 1994......... -- -- 5,187,804 52 39,812 (702) -- 39,162
Net earnings for the year........ -- -- -- -- -- 3,867 -- 3,867
Common stock options exercised... -- -- 79,275 1 363 -- -- 364
Common shares issued............. -- -- 16,286 -- 77 -- -- 77
---------- --------- ---------- ---------- -------- -------- ---------- -------
Balance December 31, 1995......... -- -- 5,283,365 53 40,252 3,165 -- 43,470
Net earnings for the year........ -- -- -- -- -- 5,092 -- 5,092
Common stock options exercised... -- -- 70,788 1 587 -- -- 588
Common shares issued pursuant to
stock option plans.............. -- -- 33,330 -- 398 -- -- 398
Income tax benefit from stock
options exercised............... -- -- -- -- 596 -- -- 596
Foreign translation adjustment... -- -- -- -- -- -- (173) (173)
---------- --------- ---------- ---------- -------- -------- ---------- -------
Balance December 31, 1996......... -- $ -- 5,387,483 $ 54 $41,833 $ 8,257 $(173) $49,971
========== ========= ========== ========== ======== ======== ========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Cash (used) provided by operations:
Net earnings........................................................... $ 5,092 $ 3,867 $ 5,186
Income charges not affecting cash:
Depreciation.......................................................... 1,972 1,854 1,532
Amortization.......................................................... 481 506 198
Disposal and write-offs of property and equipment..................... 239 104 110
Deferred income taxes................................................. (400) (950) (850)
Changes in certain working capital components:
Increase in accounts receivable....................................... (3,413) (3,847) (12,573)
Increase in inventories............................................... (9,847) (6,762) (2,353)
(Increase) decrease in prepaid expenses............................... (1,112) (106) 53
(Increase) decrease in other assets................................... (329) 109 (514)
Increase in accounts payable.......................................... 2,151 1,843 1,147
(Decrease) increase in accounts payable to related parties............ (145) (51) 119
Increase (decrease) in accrued payroll and other liabilities.......... 276 (647) 371
Increase in accrued warranty reserve.................................. 43 73 191
(Decrease) increase in accrued commissions............................ (377) (30) 346
Increase in accrued income taxes...................................... 488 133 452
------- ------- --------
Cash (used) by operations............................................... (4,881) (3,904) (6,585)
------- ------- --------
Cash used by investing activities:
Additions to property and equipment.................................... (5,526) (2,987) (2,367)
Software development costs............................................. (630) (599) (304)
------- ------- --------
Cash used by investing activities....................................... (6,156) (3,586) (2,671)
------- ------- --------
Cash provided by financing activities:
Net increase in notes payable.......................................... 4,309 2,056 --
Proceeds from long-term debt........................................... 5,817 572 572
Repayments of long-term debt including current portion................. (877) (608) (430)
Common stock issued.................................................... -- 77 437
Proceeds from exercise of stock options and shares issued
pursuant to incentive stock option plans, including
tax benefit........................................................... 1,582 364 493
------- ------- --------
Cash provided by financing activities................................... 10,831 2,461 1,072
------- ------- --------
Effect of exchange rate changes on cash................................. (173) -- --
------- ------- --------
Net decrease in cash.................................................... (379) (5,029) (8,184)
Cash and cash equivalents, beginning of year............................ 1,154 6,183 14,367
------- ------- --------
Cash and cash equivalents, end of year.................................. $ 775 $ 1,154 $ 6,183
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------------------
The Company designs, manufactures, and markets imaging systems worldwide for a
wide variety of applications in the government and commercial markets. Thermal
imaging systems detect the infrared radiation, or heat, emitted directly by all
objects and materials and enable the operator to see objects in total darkness,
in adverse weather conditions and through obscurants such as smoke and haze.
Government applications include public safety (law enforcement and drug
interdiction, search and rescue, border patrol and maritime patrol, and
environmental protection) and defense (surveillance, reconnaissance and
navigation assistance). Commercial applications include commercial broadcast
imaging, predictive and preventive maintenance, non-destructive testing and
evaluation, research and development, manufacturing process control and
monitoring, and machine vision and image analysis.
Principles of consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Recognition of revenues
- -----------------------
Revenue is recognized when products are shipped or when services are performed,
except for certain long-term contracts, which are recorded on the percentage-of-
completion method. The percentage-of-completion method is used for research and
development contracts and for production contracts that require significant
amounts of initial engineering and development costs. The percentage-of-
completion is determined by relating the actual costs incurred to date to the
total costs to complete the respective contract.
Cash and cash equivalents
- -------------------------
The Company considers short term investments which are highly liquid, readily
convertible into cash and having original maturities of less than three months
to be cash equivalents for purposes of the statement of cash flows. The
Company generally invests its excess cash in investment grade, short-term
commercial paper which is held to maturity. In 1994, the Company adopted
Statement of Financial Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The adoption did not have a
material effect on the financial statements. At December 31, 1996, the Company
did not hold any short term investments.
Inventories
- -----------
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method to determine cost.
Property and equipment
- ----------------------
Property and equipment are stated at cost and are depreciated using a straight-
line methodology over their estimated useful lives. Such lives range from two
to five years.
Repairs and maintenance are charged to operations as incurred.
23
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------------------
Software development costs
- --------------------------
The Company capitalizes software development costs when a project reaches
technological feasibility and ceases when the related product is ready for
release. Research and development costs related to software development that
has not reached technological feasibility are expensed as incurred. Software
development costs are amortized at the greater of (a) the ratio of number of
units shipped to the current and anticipated future units to be shipped or (b)
the straight-line method over the remaining estimated economic life of the
product. Generally, the estimated economic life is three years.
Income taxes
- ------------
The Company utilizes the liability method as set forth in Statement of Financial
Accounting Standard No. 109 (SFAS 109), "Accounting for Income Taxes" (see Note
3).
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.
Reclassifications
- -----------------
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.
Statement of Cash Flows
- -----------------------
Cash paid for interest and income taxes amounted to the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Cash paid for:
Interest...................... $782 $ 133 $ 90
Taxes......................... $763 $1,340 $604
</TABLE>
Fair value of financial assets and liabilities
- ----------------------------------------------
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and liabilities
compared to the current market rates of interest for instruments of a similar
nature and degree of risk. The Company estimates that the recorded value of all
of its monetary assets and liabilities approximate fair value as of December 31,
1996, except for the patent note described in Note 9. Interest has been
imputed on the patent note at 14% which exceeds the current market rate for this
type of note. Therefore, the fair value of this note is estimated to be
approximately $30,000 in excess of its recorded value at December 31, 1996.
24
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------------------
Stock-based compensation
- ------------------------
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards Number 123 (SFAS 123) "Accounting for Stock-Based
Compensation", effective January 1, 1996. SFAS 123 was issued by the Financial
Accounting Standards Board in October 1995, and allows companies to choose
whether to account for stock-based compensation under the current method as
prescribed in Accounting Principles Board Opinion Number 25 (APB 25) or use the
fair value method described in SFAS 123. The Company elected to continue to
follow the provisions of APB 25 (See Note 12).
Concentration of credit risk
- ----------------------------
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. Concentration of credit
risk with respect to trade receivables is limited because a relatively large
number of geographically diverse customers make up the Company's customer base,
thus spreading the trade credit risk. The Company controls credit risk through
credit approvals, credit limits and monitoring procedures. The Company performs
in-depth credit evaluations for all new customers and requires letters of
credit, bank guarantees and advanced payments, if deemed necessary.
Certain risks and uncertainties
- -------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE 2 - OTHER OPERATING COSTS:
- -------------------------------
Selling and other operating costs consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
-------- ---------- ---------
<S> <C> <C> <C>
Representative commissions.................. $ 1,587 $ 2,390 $ 1,669
Other selling, general and
administrative expenses................... 16,152 12,211 10,234
-------- ---------- ---------
$17,739 $14,601 $11,903
======== ========== =========
</TABLE>
25
<PAGE>
NOTE 3 - INCOME TAXES:
- ----------------------
SFAS 109 requires the Company to recognize deferred tax liabilities and assets
for the expected future tax consequences of events and basis differences that
have been recognized in the Company's financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amount and the tax basis
of assets and liabilities using the enacted tax rates in effect in the years in
which the differences are expected to reverse.
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
-------- ---------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $ 1,361 $ 1,210 $ 1,097
State............................................. 290 263 323
-------- ---------- ---------
1,651 1,473 1,420
-------- ---------- ---------
Deferred tax expense (benefit):
Federal........................................... 675 (146) 600
State............................................. 144 (15) (49)
-------- ---------- ---------
819 (161) 551
-------- ---------- ---------
(Decrease) in valuation allowance.................... (1,219) (789) (1,401)
-------- ---------- ---------
Total provision...................................... $ 1,251 $ 523 $ 570
======== ========== =========
</TABLE>
Deferred tax assets are comprised of the following components (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- ---------
<S> <C> <C>
Allowance for doubtful accounts................................... $ 679 $ 300
Warranty reserve.................................................. 347 327
Inventory basis differences....................................... 665 521
Vacation accrual.................................................. 324 251
Depreciation...................................................... 75 223
Software development costs........................................ (325) (159)
Net operating loss carryforwards.................................. 1,870 1,870
Credit carryforwards.............................................. 771 2,253
Other............................................................. 577 216
-------- ---------
Gross deferred tax asset.......................................... 4,983 5,802
Deferred tax asset valuation allowance............................ (2,783) (4,002)
-------- ---------
$ 2,200 $ 1,800
======== =========
</TABLE>
26
<PAGE>
NOTE 3 - INCOME TAXES - (Continued):
- ------------------------------------
The provision for income taxes differs from the amount of tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Statutory federal tax rate................................... 34.0% 34.0% 34.0%
Increase (decrease) in rates resulting from:
State taxes.................................................. 4.5 6.0 5.6
Utilization of net operating loss carryforwards.............. -- (15.0) (15.5)
Foreign sales corporation benefit............................ (3.2) (7.6) (5.2)
Utilization of research and development credits.............. (11.3) (0.8) (5.2)
Recognition of deferred tax asset............................ (6.3) (21.6) (14.8)
Alternative minimum tax...................................... -- 16.1 7.4
Other........................................................ 2.0 0.8 3.6
-------- -------- ---------
Effective tax rate........................................... 19.7% 11.9% 9.9%
======== ======== =========
</TABLE>
As of December 31, 1996, the Company's acquired net operating loss carryforwards
aggregating $5,500,000 expire in the years 1997 through 2010. Utilization of
these carryforwards is limited to future earnings of Optimas and further limited
to approximately $350,000 per year, as Optimas has experienced a cumulative
change in ownership of more than 50% within a three-year period. In addition,
the Company has various tax credits available aggregating $771,000 at December
31, 1996, which expire in the years 1999 through 2011.
NOTE 4 - ACCOUNTS RECEIVABLE:
- -----------------------------
Accounts receivable are net of an allowance for doubtful accounts of $1,671,000
and $743,000 at December 31, 1996 and 1995, respectively.
NOTE 5 - INVENTORIES:
- ---------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw material and subassemblies...................... $23,855 $16,151
Work-in-progress.................................... 8,171 6,057
Finished goods...................................... 1,494 1,580
---------- ----------
33,520 23,788
Less progress payments received from customers...... (7) (122)
---------- ----------
$33,513 $23,666
========== ==========
</TABLE>
27
<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT:
- --------------------------------
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Machinery and equipment............... $ 8,445 $ 6,276
Office equipment and other............ 5,382 3,366
--------- ---------
13,827 9,642
Less - accumulated depreciation....... (6,690) (5,639)
--------- ---------
$ 7,137 $ 4,003
========= =========
</TABLE>
Property and equipment include the cost of equipment held by the Company under
capital lease agreements. Such cost and related accumulated depreciation
aggregated $2,724,000 and $1,336,000, respectively, at December 31, 1996, and
$2,419,000 and $1,377,000, respectively, at December 31, 1995.
NOTE 7 - SOFTWARE DEVELOPMENT COSTS:
- ------------------------------------
Software development costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Software development costs............ $1,533 $ 903
Less accumulated amortization........ (734) (434)
------- -------
$ 799 $ 469
======= =======
</TABLE>
Amortization of capitalized software costs aggregated $300,000, $393,000 and
$41,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 8 - NOTES PAYABLE:
- -----------------------
The Company has a $10.0 million line of credit bearing interest at the prime
rate (8.25% at December 31, 1996), collateralized by all receivables and
inventories and it requires the Company to maintain working capital in excess of
$40.0 million and net tangible worth of $40.0 million. Additionally, the
Company, through one of its subsidiaries, has a $250,000 line of credit at prime
plus 2.0% (10.25% at December 31, 1996), secured by all the inventories,
furniture and equipment of the subsidiary. At December 31, 1996 and 1995, the
Company had $6,365,000 and $2,056,000, respectively, outstanding against these
lines.
28
<PAGE>
NOTE 9 - LONG-TERM DEBT:
- ------------------------
Long-term debt at December 31 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- ---------
<S> <C> <C>
Note payable patent..................................... $ 294 $ 365
Note payable to bank; 8.77% interest rate. Payable in
monthly installments of $104 due July 30, 2001,
secured by inventories, furniture and equipment........ 4,663 --
Notes payable to bank; prime plus 2.5% (11.25% at
December 31, 1995)..................................... -- 13
Note payable to bank; Prime plus 2.5%, with
11.5% minimum interest rate............................ -- 65
Capital leases........................................... 1,593 1,167
--------- --------
6,550 1,610
Less - current portion................................... (1,377) (435)
--------- --------
$ 5,173 $1,175
========= ========
</TABLE>
The patent note calls for annual payments through 1999 of $70,000 plus an
adjustment for changes in the Consumer Price Index. Because the note did not
include a stated interest rate, interest has been imputed at a rate of 14%. The
Consumer Price Index was estimated at an average increase of 5% per year.
Payments of $115,000, $112,000 and $108,000 were made in the years ended
December 31, 1996, 1995 and 1994, respectively. The related patent was
capitalized based on the present value, at inception, of the patent note of
$683,000. The patent was fully amortized as of December 31, 1990.
NOTE 10 - COMMITMENTS:
- ----------------------
The Company leases its primary facilities under operating leases expiring in
1997-2000. Total rent expense for the years ended December 31, 1996, 1995 and
1994, amounted to $1,417,000, $871,000 and $838,000, respectively.
Minimum rental payments required under all non-cancelable leases for equipment
and facilities at December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ----------
<S> <C> <C>
1997..................................... $ 552 $ 730
1998..................................... 496 748
1999..................................... 374 755
2000..................................... 264 566
2001..................................... 191 --
-------- ----------
Total minimum lease payments................ 1,877 $2,799
==========
Less amount representing interest........... (284)
--------
Present value of lease payments............. $1,593
========
</TABLE>
The Company has a 401(k) Savings and Retirement Plan (the "Plan") to provide for
voluntary salary deferral contributions on a pre-tax basis in accordance with
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan allows
for contributions by the Company. The Company recorded matching contributions of
$533,000, $0 and $355,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
29
<PAGE>
NOTE 11 - CAPITAL STOCK:
- ------------------------
In 1996, the Company increased the number of shares of common stock reserved for
future issuance pursuant to its incentive stock plans to 2,769,400. Under the
plans, restricted stock, incentive stock options or non-qualified stock options
may be granted to employees, consultants or non-employee directors of the
Company with an exercise price of not less than the fair market value of the
stock on the date of grant. Options granted pursuant to the plans expire ten
years from date of grant and the plan terminates in 2003.
Under the 1992 incentive stock plan, 430,000 shares of common stock were
reserved for restricted stock awards. Shares awarded are earned ratably over the
term of the restricted stock agreement, based upon achievement of specified
performance goals. Shares granted in 1996 aggregated 100,000 shares. Of the
shares granted, 33,330 shares were earned in 1996 based upon achievement of
specified performance goals. Shares granted which are not issued lapse and cease
to be subject to the award. Compensation expense, related to these awards, in
the amount of $398,000 was recorded in 1996 and is included in Selling and other
operating costs. At December 31, 1996, there were 330,000 shares available for
future awards.
NOTE 12 - STOCK OPTIONS:
- ------------------------
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25; however, as required by SFAS 123,
the Company has computed for pro-forma disclosure purposes the value of options
granted during 1995 and 1996 using the Black-Scholes option pricing model. The
weighted average assumptions used for stock option grants for 1995 and 1996 were
a risk free interest rate of 7.7% and 5.2%, respectively, an expected dividend
yield of 0% and 0%, respectively, an expected life of 3 years and 3 years,
respectively, and an expected volatility of 23.9% and 22.7%, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For
the years ended December 31, 1995 and 1996, the total value of the options
granted was computed to be $1,200,000 and $819,000, respectively, which would be
amortized on a straight line basis over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's net earnings and pro-forma net earnings per share would have been
reported as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
------------------------
<S> <C> <C>
Net earnings--as reported $5,092 $3,867
Net earnings--pro-forma $4,593 $3,578
Earnings per share--as reported $ 0.91 $ 0.70
Earnings per share--pro-forma $ 0.82 $ 0.65
</TABLE>
The effects of applying SFAS 123 for providing pro-forma disclosure for 1995 and
1996 are not likely to be representative of the effects on reported net earnings
and earnings per share for future years since options vest over several years
and additional awards may be made.
30
<PAGE>
NOTE 12 STOCK OPTIONS (Continued):
- ------------------------------------
The table below summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------ --------------
<S> <C> <C>
Balance at December 31, 1993 751,599 $ 5.80
Granted 46,500 12.88
Exercised (176,152) 2.80
Terminated (10,534) 8.66
------------ --------------
Balance at December 31, 1994 611,413 7.16
Granted 361,500 12.76
Exercised (79,275) 5.85
Terminated (65,067) 11.25
------------ --------------
Balance at December 31, 1995 828,571 9.41
Granted 331,000 11.07
Exercised (70,788) 8.41
Terminated (27,757) 11.56
------------ --------------
Balance at December 31, 1996 1,061,026 $ 9.94
============ ==============
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and the remaining contractual lives by group of
similar price and grant dates:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Number of Weighted Contractual
Exercise Price Range Shares Average Price Life
-------------------- -------- ------------- -----------
<S> <C> <C> <C>
$1.63 - $5.23 221,736 $ 4.07 3.8
$9.50 - $14.75 839,290 $11.48 8.3
--------- ------ ---
1,061,026 $ 9.94 7.3
========= ====== ===
</TABLE>
Options exercisable at December 31, 1996 totaled 569,177 shares at a weighted
average exercise price of $8.49. Options available for grant at December 31,
1996 totaled 2,439,985 shares.
NOTE 13 - LONG TERM CONTRACTS:
- ------------------------------
During 1994, the Company entered into a long-term research and development
contract with a consortium of companies to develop an Autonomous Landing
Guidance System for commercial and military aircraft as part of the U.S.
Government's Technology Reinvestment Program. The Company's portion of this
contract aggregates $650,000. In April 1995, the Company was awarded an
additional $900,000 under this contract for the second phase of the development.
Revenues from this contract aggregated $416,000, $896,000 and $300,000 during
the years ended December 31, 1996, 1995 and 1994, respectively, and are included
in revenues. Costs associated with this contract aggregated $200,000, $425,000
and $173,000 in 1996, 1995 and 1994, respectively and are included in cost of
goods sold. Outstanding billings at December 31, 1996 and 1995 aggregated
$35,000 and $786,000, respectively and are included in accounts receivable.
31
<PAGE>
NOTE 14 - RELATED PARTY TRANSACTIONS:
- -------------------------------------
The Company and Hughes Aircraft Company are related parties resulting from
Hughes' stock interest in the Company. The Company purchases inventory parts
from Hughes and its subsidiaries. During the years ended December 31, 1996,
1995 and 1994, the Company purchased parts aggregating $1,670,000, $1,320,000
and $2,300,000, respectively, from Hughes and its subsidiaries. As of December
31, 1996 and 1995, the Company owed Hughes $128,000 and $265,000, respectively.
Sales of the Company's products to Hughes and its affiliates amounted to
$103,000, $320,000 and $90,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Also, included in accounts payable to related parties at December 31, 1995 is a
note payable to a shareholder aggregating $8,000 payable on demand at a stated
interest rate of 12.0%.
NOTE 15 - EXPORT SALES AND MAJOR CUSTOMERS:
- -------------------------------------------
Export sales and sales to major customers are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
-------- ----------- --------
<S> <C> <C> <C>
United States..................... $44,865 $27,062 $28,244
Europe............................ 14,883 15,872 13,103
Other foreign..................... 6,269 7,191 7,630
-------- ----------- --------
$66,017 $50,125 $48,977
======== =========== ========
Major Customers:
U.S. Government................. 26,469 15,686 14,937
Danish Ministry of Defense...... 620 1,837 5,264
McDonnell Douglas Corporation... -- 13 2,759
</TABLE>
32
<PAGE>
Item 9. Changes in and Disagreement with Accountants on Accounting and
--------------------------------------------------------------
Financial Disclosures.
---------------------
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
Information with respect to directors and executive officers of the Company is
included under "Election of Directors," "Management -- Executive Officers" and
"Section 16 Reports" in the Company's definitive proxy statement dated March 31,
1997, for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 11. Executive Compensation.
-----------------------
Information with respect to executive compensation is included under "Executive
Compensation" in the Company's definitive proxy statement, dated March 31, 1997,
for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners and
management is included under "Stock Owned by Management and Principal
Shareholders" in the Company's definitive proxy statement dated March 31, 1997,
for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The Company and Hughes Aircraft Company are related parties resulting from
Hughes' stock interest in the Company. The Company purchases inventory parts
from Hughes and its subsidiaries. During the years ended December 31, 1996,
1995 and 1994, the Company purchased parts aggregating $1,670,000, $1,320,000
and $2,300,000, respectively, from Hughes and its subsidiaries. As of December
31, 1996 and 1995, the Company owed Hughes $128,000 and $265,000, respectively.
Sales of the Company's products to Hughes and its affiliates amounted to
$103,000, $320,000 and $90,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Additionally included in accounts payable to related parties at December 31,
1995 is a note payable to a shareholder aggregating $8,000 payable on demand at
a stated interest rate of 12.0%.
PART IV
Item 14. Exhibits, Financial Statements and Schedules.
---------------------------------------------
(a)(1) Financial Statements
The financial statements are included in Item 8 above.
33
<PAGE>
(a)(2) Financial Statement Schedules
The following schedule is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedule
No other schedules are included because the required information is
inapplicable, not required or are presented in the financial statements or the
related notes thereto.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1 Second Restated Articles of Incorporation of the Company Systems,
Inc. (incorporated by reference to Exhibit 3.1, File No. 33-62582)
3.2 First Restated Bylaws of the Company Systems, Inc. (incorporated by reference to
Exhibit 3.2, File No. 33-62582)
10.1 Form of Indemnity Agreement between the Company Systems, Inc. and each member of
its Board of Directors (incorporated by reference to Exhibit 10.1, File No. 33-62582)
10.2 1984 Incentive Stock Option Plan and Amendments (incorporated by reference to
Exhibit 10.2, File No. 33-62582)
10.3 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.3, File No.
33-62582)
10.4 1993 Stock Option Plan for Non-employee Directors (incorporated by reference to
Exhibit 10.4, File No. 33-62582)
10.5 Description of Management Bonus Plan (incorporated by reference to Exhibit 10.5, File
No. 33-62582)
10.6 Lease Dated February 11, 1985, as amended, by and among the Company Systems, Inc.
and Pacific Realty Association, L.P. (incorporated by reference to Exhibit 10.6, File No.
33-62582)
10.7 Amendments to the Lease dated February 11, 1985, by and among the Company
Systems, Inc. and Pacific Realty Association, L.P.
10.8 Terms of Credit Line with United States National Bank of Oregon, including Promissory
Note Dated June 26, 1996
11.0 Statement re: computation of net earnings per share
21.0 Subsidiaries of FLIR Systems, Inc.
23.0 Consent of Price Waterhouse LLP
27.0 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-k were filed during the last quarter of the year ended
December 31, 1996.
(c) See (a)(3) above.
(d) See (a)(2) above.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March
1997.
THE FLIR SYSTEMS, INC.
(Registrant)
By /s/ J. Mark Samper
----------------------
J. Mark Samper
Vice President of Finance and Chief Financial
Officer (Principal Accounting and Financial
Officer and Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on March 31, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Chairman of the Board of Directors and Chief
/s/ ROBERT P. DALTRY Executive Officer (Principal Executive Officer)
- ----------------------------
Robert P. Daltry
/s/ J. KENNETH STRINGER III Director, President and Chief Operating Officer
- ----------------------------
J. Kenneth Stringer III
Vice President of Finance and Chief Financial
Officer (Principal Accounting and Financial
/s/ J. MARK SAMPER Officer)
- ----------------------------
J. Mark Samper
/s/ JOHN C. HART Director
- ----------------------------
John C. Hart
/s/ GEORGE PORTER Director
- ----------------------------
George Porter
/s/ W. ALLEN REED Director
- ----------------------------
W. Allen Reed
/s/ RONALD L. TURNER Director
- ----------------------------
Ronald L. Turner
</TABLE>
35
<PAGE>
SCHEDULE II
FLIR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------- ----------- ------------------------- ------------- -------------
Additions
-------------------------
Charged
Balance at Charges to To other Write-offs Balance
Beginning Costs and Accounts Net of At the End
Of the Year Expense Described Recoveries Of the Year
----------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for Doubtful Accounts $ 743 $ 1,260 $0 $(332) $1,671
=========== ============= =========== ============= =============
Allowance for Deferred Tax Assets $4,002 $(1,219) $0 $ 0 $2,783
=========== ============= =========== ============= =============
Year ended December 31, 1995
Allowance for Doubtful Accounts $ 800 $ 55 $0 $(112) $ 743
=========== ============= =========== ============= =============
Allowance for Deferred Tax Assets $4,791 $ (789) $0 $ 0 $4,002
=========== ============= =========== ============= =============
Year ended December 31, 1994
Allowance for Doubtful Accounts $ 425 $ 450 $0 $ (75) $ 800
=========== ============= =========== ============= =============
Allowance for Deferred Tax Assets $6,192 $(1,401) $0 $ 0 $4,791
=========== ============= =========== ============= =============
</TABLE>
36
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
FLIR Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 25, 1997 appearing on page 18 on this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Portland, Oregon
February 25, 1997
37
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1 Second Restated Articles of Incorporation of the Company Systems,
Inc. (incorporated by reference to Exhibit 3.1, File No. 33-62582)
3.2 First Restated Bylaws of the Company Systems, Inc. (incorporated by reference to
Exhibit 3.2, File No. 33-62582)
10.1 Form of Indemnity Agreement between the Company Systems, Inc. and each member of
its Board of Directors (incorporated by reference to Exhibit 10.1, File No. 33-62582)
10.2 1984 Incentive Stock Option Plan and Amendments (incorporated by reference to
Exhibit 10.2, File No. 33-62582)
10.3 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.3, File No.
33-62582)
10.4 1993 Stock Option Plan for Non-employee Directors (incorporated by reference to
Exhibit 10.4, File No. 33-62582)
10.5 Description of Management Bonus Plan (incorporated by reference to Exhibit 10.5, File
No. 33-62582)
10.6 Lease Dated February 11, 1985, as amended, by and among the Company Systems, Inc.
and Pacific Realty Association, L.P. (incorporated by reference to Exhibit 10.6, File No.
33-62582)
10.7 Amendments to the Lease dated February 11, 1985, by and among the Company
Systems, Inc. and Pacific Realty Association, L.P.
10.8 Terms of Credit Line with United States National Bank of Oregon, including Promissory
Note Dated June 30, 1996
11.0 Statement re: computation of net earnings per share
21.0 Subsidiaries of FLIR Systems, Inc.
23.0 Consent of Price Waterhouse LLP
27.0 Financial Data Schedule
</TABLE>
38
<PAGE>
Exhibit 10.7
LEASE AMENDMENT
DATED: April 15, 1996
BETWEEN: PACIFIC REALTY ASSOCIATES, LP.,
a Delaware limited partnership LANDLORD
AND: FLIR SYSTEMS, INC.,
an Oregon corporation TENANT
By written Lease dated February 11, 1985, Tenant Leased from Landlord
approximately 20,118 square feet of office, production and storage space located
in Building F, PacTrust Business Center, 16505 S.W. 72nd Avenue, Portland,
Oregon 97224. By Lease Amendment dated May 19, 1986, the lease was amended and
the term extended. By Lease Amendment dated March 6, 1989, Tenant Leased an
additional approximately 24,650 square feet of warehouse and office space and
the term of the Lease was extended. By Lease Amendment dated February 28, 1990,
the lease was amended. By Lease Amendment dated July 31, 1990, Tenant Leased an
additional approximately 2,656 square feet of office and storage space. By Lease
Amendment dated August 29,1991, the Lease was amended. Tenant's Leased area
within Building F now totals approximately 47,424 square feet of office,
production, warehouse and storage space. By Lease Amendment dated June 24,1992,
Tenant Leased an additional approximately 5,400 square feet of office and
warehouse space located in Building D PacTrust Business Center, 16195 S.W. 72nd
Avenue, Portland, Oregon 97224. By Lease Amendment dated January 21,1993, Tenant
Leased an additional approximately 3,850 square feet of warehouse and office
space in Building D and the term of the Lease was extended. By Lease Amendment
dated August 26, 1993, Tenant Leased an additional approximately 6,590 square
feet of warehouse and office space in Building D and the Lease was amended. By
Lease Amendment dated November 22, 1993, the Lease was amended. By Lease
Amendment dated September 5, 1995, Tenant Leased an additional approximately
9,160 square feet of office and warehouse space in Building D and the Lease was
amended and extended. Tenant's Leased area within Building D now totals
approximately 25,000 square feet of office space. Tenant's Leased area within
Buildings F and D totals approximately 72,424 square feet of office, production,
warehouse and storage space ("hereinafter referred to as the Premises"). Such
documents are hereinafter jointly referred to as "the Lease". The Lease expires
September 30, 2000.
Tenant now wishes Landlord to amortize the cost of additional improvements
constructed within the Premises.
NOW, THEREFORE, the parties agree as follows:
1. Landlord has constructed additional improvements within Building D totaling
$22,635.71. Said amount shall be amortized over 53 months at 11 percent
interest, resulting in a rental increase of $541.00 per month commencing May
1,1996 and continuing through September 30, 2000.
2. Landlord shall construct additional improvements within Building F totaling
$79,893.00. Said amount shall be amortized over 53 months at 11 percent interest
resulting in a rental increase of $1,910.00 per month commencing May 1,1996 and
continuing through September 30, 2000.
<PAGE>
3. Base rent for Buildings F and D shall be according to the following revised
schedule
<TABLE>
<CAPTION>
Base Rent per
Month
Period Building F Bldg. F Tls F Add'l Building D Building D D Add'l Sec.Sys* Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/1/96-3/31/98 36,188 1,840 1,910 18,221 1,162 541 978 60,840
4/1/98-3/31/99 38,270 1,840 1,910 18,221 1,162 541 978 62,922
4/1/99-9/30/00 38,893 1,217 1,910 19,101 282 541 978 62,922
</TABLE>
*Amortization of $45,000.00 security system at interest rate of 11 percent
per annum.
4. Except as expressly modified hereby, all terms of the Lease shall remain in
full force and effect and shall continue through the existing term.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day and
year first written above.
PACIFIC REALTY ASSOCIATES, LP., FLIR SYSTEMS, INC.,
an Oregon corporation an Oregon corporation
By PacTrust Realty, Inc.,
Its General Partner
By /s/ David G. Hicks By /s/ James A. Fitzhenry
------------------------ -----------------------------
David G. Hicks James A. Fitzhenry
Vice President Vice President and General
Counsel
<PAGE>
Exhibit 10.8
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, IBOR)
$ 7,500,000.00 Date: June 26, 1996
Flir Systems. Inc. ("Borrower")
UNITED STATES NATIONAL BANK OF OREGON ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
X revolving line of credit. No Advances shall be made which create a maximum
amount outstanding at any one time which exceeds the maximum amount shown in
Section 2, However, Advances hereunder may be borrowed, repaid and
reborrowed, and the aggregate Advances loaned hereunder from time to time
may exceed such maximum amount.
non-revolving line of credit. Each Advance made from time to time hereunder
shall reduce the maximum amount available shown in Section 2. Advances
loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances outstanding
under this note ("Principal Balance") at one time shall not exceed 7,500,000.00
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at Oregon Corporate Banking the Principal Balance of this note, with
interest thereon at the rate(s) specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to the
provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; provided, however, that once
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall constitute Borrower's irrevocable
request for an Advance hereunder at the rate option specified in such notice.
The rate options are the Prime Borrowing Rate and the IBOR Borrowing Rate. each
as defined herein.
(a) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to Lender's
prime rate plus 0.00% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested disbursement
date and principal amount of the Advance, and that Borrower has chosen the Prime
Borrowing Rate option.
(iii) Prepayments of all or any part of the Principal Balance bearing
interest at the Prime Borrowing Rate may be made at any time without penalty.
Upon prepayment of any such principal amount, Borrower also must pay all accrued
interest thereon to the date of prepayment.
(iv) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the IBOR Borrowing Rate is in effect.
(b) The IBOR Borrowing Rate.
(i) The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that
<PAGE>
commercial banks in Portland, Oregon or New York City are authorized or
required by law to close.
"IBOR Amount" means each principal amount for which Borrower
chooses to have the IBOR Borrowing Rate apply for any specified IBOR Interest
Period.
"IBOR Interest Period" means as to any IBOR Amount, a period of
1.2.3 or 6 months commencing on the date the IBOR Borrowing Rate becomes
applicable thereto; provided, however, that: (A) no IBOR Interest Period shall
be selected which would extend beyond expiry (B) no IBOR Interest Period shall
extend beyond the date of any principal payment required under Section 6 of this
note, unless the sum of the principal amounts bearing interest at the Prime
Borrowing Rate, plus IBOR Amounts with IBOR Interest Periods ending on or before
the scheduled date of such principal payment, plus principal amounts remaining
unborrowed under a line of credit, equals or exceeds the amount of such
principal payment: (C) any IBOR Interest Period which would otherwise expire on
a day which is not a Business Day, shall be extended to the next succeeding
Business Day, unless the result of such extension would be to extend such IBOR
Interest Period into another calendar month, in which event the IBOR Interest
Period shall end on the immediately preceding Business Day; and (D) any IBOR
Interest Period that begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar month
at the end of such IBOR Interest Period) shall end on the last Business Day of a
calendar month.
(ii) The IBOR Borrowing Rate is Lender's IBOR Rate plus 2.50 % per
annum. Lender's IBOR Rate for any IBOR Interest Period is the rate per annum
(computed on the basis of a 360-day year and the actual number of days elapsed)
equal to the arithmetic average (rounded upward to the nearest 1/16 of 1%) of
the rates per annum determined by Lender as of the times specified in Section
4(b)(iii) on the date two (2) Business Days prior to the first day of such IBOR
Interest Period as the rates offered to Lender by three Eurodollar money market
dealers in such Eurodollar market as may be selected by Lender for U.S. dollar
deposits to be delivered on the first day of such IBOR Interest Period for the
number of months therein; provided, however, that Lender's IBOR Rate shall be
adjusted to take into account the maximum reserves required to be maintained for
Eurocurrency liabilities by banks during each such IBOR Interest Period as
specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
(iii) Borrower may obtain IBOR Borrowing Rate quotes from Lender between
5:00 a.m. and 12:00 noon (Portland, Oregon time) on any Business Day. Any IBOR
Borrowing Rate quoted (A) before 10:00 a.m. shall be based on Lender's IBOR Rate
determined as of approximately 8:00 a.m. on such day, and Borrower may request
an Advance at such rate only by giving Lender notice in accordance with Section
4(b)(iv) before 10:00 a.m. on such day; and (B) between 10:00 a.m. and 12:00
noon shall be based on Lender's IBOR Rate determined as of approximately 10:00
a.m. on such day, and Borrower may request an Advance at such rate only by
giving Lender notice in accordance with Section 4(b)(iv) not later than 12:00
noon on such day.
(iv) Whenever Borrower desires to use the IBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) between 8:00 a.m. and 12:00 noon (Portland,
Oregon time) two (2) Business Days in advance of the desired effective date of
such rate. Any oral notice shall be given by, and any written notice or
confirmation of an oral notice shall be signed by, the person(s) authorized in
Section 15 of this note, and shall specify the requested effective date of the
rate, IBOR Interest Period and IBOR Amount, and whether Borrower is requesting a
new Advance at the IBOR Borrowing Rate under a line of credit, conversion of any
portion of the Principal Balance bearing interest at the Prime Borrowing Rate to
an IBOR Amount, or a new IBOR Interest Period for an outstanding IBOR Amount.
Notwithstanding any other term of this note, Borrower may elect the IBOR
Borrowing Rate in the minimum principal amount of $ 500,000,00 and in integral
multiples of $500,000.00; provided, however, that no more than n/a separate IBOR
Interest Periods may be in effect at any one time.
(v) Borrower may not prepay all or any part of any IBOR Amount(s).
(vi) If at any time Lender's IBOR Rate is unascertainable or
unavailable to Lender or if IBOR Rate loans become unlawful, the option to
select the IBOR Borrowing Rate shall terminate immediately. If the IBOR
Borrowing Rate is then in effect, (A) it shall terminate automatically with
respect to all IBOR Amounts (i) on the last day of each then applicable IBOR
Interest Period, if Lender may lawfully continue to maintain such loans, or (ii)
immediately if Lender may not lawfully continue to maintain such loans through
such day, and (B) subject to Section 11, the Prime Borrowing Rate automatically
shall become effective as to such amounts upon such termination.
(vii) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of payments
to Lender with respect to any loans bearing interest based on Lender's IBOR
Rate, or (ii) shall impose or modify any reserve, insurance, special deposit, or
similar requirements against assets of, deposits with or for the account of, or
credit extended by Lender or its Eurodollar lending office, or impose on Lender
or its
<PAGE>
Eurodollar lending office any other condition affecting any such loans, and (B)
the result of any of the foregoing is (i) to increase the cost to Lender of
making or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office. Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(b)(vii),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all IBOR Amounts, together with any additional amounts payable under
Section 4(b)(viii). Subject to Section 11, upon Borrower's paying such accrued
interest and additional costs, the Prime Borrowing Rate immediately shall be
effective with respect to the unpaid principal balance of such IBOR Amounts.
(viii) Upon any termination of any IBOR Borrowing Rate (including but not
limited to conversion to another rate) or payment of all or any portion of any
IBOR Amount on a date other than the last day of the then applicable IBOR
Interest Period, including without limitation (A) acceleration under Section 11
or (B) repayment in response to a notice under Section 4(b)(vii), Borrower shall
pay to Lender on demand such amount as Lender reasonably determines (determined
as though 100% of the applicable IBOR Amount had been funded in the applicable
Eurodollar market) is equivalent to all direct or indirect losses, expenses,
liabilities, or reductions in yield to Lender resulting therefrom, whether
incurred in connection with liquidation or reemployment of funds or otherwise.
(ix) If Borrower chooses the IBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the applicable Eurodollar market. Lender's determination
of the IBOR Borrowing Rate and any such taxes or charges shall be conclusive in
the absence of manifest error.
(x) Notwithstanding any other term of this note, Borrower may not
select the IBOR Borrowing Rate if an event of default hereunder has occurred and
is continuing.
(xi) Nothing contained in this note, including without limitation the
determination of any IBOR Interest Period or Lender's quotation of any IBOR
Borrowing Rate, shall be construed to prejudice Lenders right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360~day year and applied to the
actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
X on demand.
on demand, or if no demand, on
on
subject to Section 7, in installments of
each, plus accrued interest
each including accrued interest
beginning on and on the same day of each thereafter until
when the entire Principal Balance plus interest thereon shall
be due and payable.
(b) Interest.
(i) Interest on all amounts bearing interest at the Prime Borrowing
Rate shall be paid:
X on the 30th day of July and on the same day of each month
thereafter prior to maturity and at maturity.
at maturity.
at the time each principal installment is due and at
maturity.
(ii) Interest on all IBOR Borrowing Rate Amounts shall be paid:
X on the last day of the applicable IBOR Interest Period, and
if such IBOR Interest Period is longer than three months, on
the last day of each three month period occurring during such
IBOR Interest Period, and at maturity.
on the day of and on the same day of each thereafter prior to
maturity and at maturity.
at maturity.
at the time each principal installment is due and at
maturity.
<PAGE>
7. CHANGE IN PAYMENT AMOUNT. If the interest rate on this note is subject to
change in accordance with Section 4, the holder of this note may, from time to
time, in holder's sole discretion, increase or decrease the amount of each of
the installments remaining unpaid at the time of each change in rate to an
amount holder in its sole discretion deems necessary to continue amortizing the
Principal Balance at the same rate established by the installment amounts
specified in Section 6(a), whether or not a "balloon" payment may also be due
upon maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under this
Section 7, Borrower understands that, as a result of increases in the rate of
interest in accordance with Section 4, the final payment due, whether or not a
"balloon" payment, shall include the entire Principal Balance and interest
thereon then outstanding, and may be substantially more than the installment
specified in Section 6.
8. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.
9. PAYMENT BY AUTOMATIC CHARGE.
Please automatically deduct the amount of all principal and interest
payments from account number n/a . If there are insufficient funds in the
account to pay the automatic deduction in full, Lender may allow the account to
become overdrawn, or Lender may reverse the automatic deduction. Borrower will
pay all the fees on the account which result from the automatic deductions,
including any overdraft/NSF charges. If for any reason Lender does not charge
the account for a payment, or if an automatic payment is reversed, the payment
is still due according to this note. If the account is a Money Market Account,
the number of withdrawals from that account is limited as set out in the
agreement. Lender may cancel the automatic deduction at any time in its
discretion.
LHH951 1 7.dol 6/26/96
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic charge.
10. LENDERS PRIME RATE. Lender's prime rate is the rate of interest which
Lender from time to time establishes as its prime rate and is not, for example,
the lowest rate of interest which Lender collects from any borrower or class of
borrowers. When Lenders prime rate is applicable under Section 4(a) or 11(b),
the interest rate hereunder shall be adjusted without notice effective on the
day Lender's prime rate changes, but in no event shall the rate of interest be
higher than allowed by law.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due. (ii) Borrower
fails to perform or comply with any term, covenant or obligation in this note or
any agreement related to this note, or in any other agreement or loan Borrower
has with Lender. (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrowers property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents. (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrowers behalf is false or misleading in any material respect. (v) Borrower
becomes insolvent, a receiver is appointed for any part of Borrowers property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrowers accounts with Lender. (vii) Any of the events described in
this default section occurs with respect to any guarantor of this note or any
guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted not
to be, in full force and effect. (viii) Lender in good faith deems itself
insecure. If this note is payable on demand, the inclusion of specific events of
default shall not prejudice Lender's right to require payment on demand or to
decline to make any requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable, without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest is 19 or
more
<PAGE>
days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall,
at any time, be conclusive evidence of the unpaid Principal Balance and interest
owing on this note. Notwithstanding any other provisions of this note, in the
event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is
a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to.
provisions relating to defaults, rights of cure, default rate of interest,
installment payments. late charges, periodic review of Borrowers financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the request
of Borrower (if an individual), any of the undersigned (if Borrower consists of
more than one individual), any person or persons authorized in subsection (b) of
this Section 15, and any person or persons otherwise authorized to execute and
deliver promissory notes to Lender on behalf of Borrower.
(b) Borrower hereby authorizes any of the following individuals to request
Advances and to select interest rate options:
unless Lender is otherwise instructed in writing.
(c) All Advances made pursuant to this Section 15 shall be disbursed by
deposit directly to Borrowers account number n/a at branch of Lender, or by
cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to Section 15, and Borrower
assumes all risks of the validity and authorization of such requests. In
consideration of Lender agreeing, at its sole discretion, to make Advances upon
such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrowers credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrowers financial condition and business
operations that Lender requests. This information may include but is not limited
to, financial statements, tax returns, lists of assets and liabilities, agings
of receivables and payable, inventory schedules, budgets and forecasts. If upon
review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holders records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all. Notice may be given
either before or reasonably soon after the effective date of the change.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or
otherwise, waives diligence, demand, presentment for payment, notice of non-
payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lenders rights or Borrower's obligations hereunder,
Lender may deal in
<PAGE>
any manner with any person who at any time is liable for, or provides any real
or personal property collateral for, any indebtedness of Borrower to Lender,
including the indebtedness evidenced by this note. Without limiting the
foregoing, Lender may, in its sole discretion: (a) make secured or unsecured
loans to Borrower and agree to any number of waivers, modifications, extensions
and renewals of any length of such loans, including the loan evidenced by this
note; (b) impair, release (with or without substitution of new collateral), fail
to perfect a security interest in, fail to preserve the value of, fail to
dispose of in accordance with applicable law, any collateral provided by any
person: (C) sue, fail to sue, agree not to sue. release, and settle or
compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers
are joint and several and are binding upon any marital community of which any of
the undersigned are members. Holder's rights and remedies under this note shall
be cumulative.
21. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is void
if the Loan, at the time of the proposed submission to arbitration, is secured
by real property located outside of Oregon or Washington, or if the effect of
the arbitration procedure (as opposed to any Claims of Borrower) would be to
materially impair Lenders ability to realize on any collateral securing the
Loan.
(b) If arbitration occurs and each party/s Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Oregon State Bar members in good standing. All arbitration hearings will
be held in Portland, Oregon. In addition to all other powers, the arbitrator(s)
shall have the exclusive right to determine all issues of arbitrability.
Judgment on any arbitration award may be entered in any court with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-
judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
22. GOVERNING LAW.
This note shall be governed by and construed and enforced in accordance with the
laws of the State of Oregon without regard to conflicts of law principles;
provided, however, that to the extent that Lender has greater rights or remedies
under Federal law, this provision shall not be deemed to deprive Lender of such
rights and remedies as may be available under Federal law.
23. DISCLOSURE.
BY OREGON STATUTE(ORS 41.580). THE FOLLOWING DISCLOSURE IS REQUIRED:
Under Oregon law. most agreements. promises and commitments made by Lenders
after October 3.1989 concerning loans and other credit extensions which are not
for personal. family or household purposes or secured solely by the Borrower's
residence must be in writing. express consideration and be signed by the Lender
to be enforceable.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF
THIS DOCUMENT.
Flir Systems. Inc.
Borrower Name
(Corporation, Partnership or other Entity) Signature of Individual Borrower
By Title Signature of Individual Borrower
By Title Signature of Individual Borrower
<PAGE>
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: UNITED STATES NATIONAL BANK OF OREGON
By:
Title:
Date:
<PAGE>
U.S. BANK
COMMERCIAL SECURITY AGREEMENT
Principal Loan Date Maturity Loan No Call Collateral Account Office Initials
O6 26 1996 19 380 3021313582 59488
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: Flir Systems, Inc. Lender: UNITED STATES NATIONAL BANK OF OREGON
16505 SW 72nd Avenue Corporate Banking Division
Portland, OR 97224 PL-7 Oregon Commercial Loan Servicing
555 S. W. Oak
Portland, OR 97204
THIS COMMERCIAL SECURITY AGREEMENT Is entered Into between Fur Systems, Inc.
(referred to below as "Grantor"); and UNITED STATES NATIONAL BANK OF OREGON
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest In the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated In this Agreement with respect
to the Collateral, In addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
All accounts, chattel paper, general Intangibles, inventory and
equipment, together with the following specifically described
property.' all machinery now owned or acquired later
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising,
and wherever located:
(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in
this Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or
other disposition of any of the property described in this
Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described
in this Collateralsection, whether in the form of a writing,
photograph, microfilm, microfiche, or electronicmedia, together
with all of Grantor's right, title, and interest in and to all
computersoftware required to utilize, create, maintain, and
process any such records or data onelectronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means FIir Systems, Inc., its successors and
assigns
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In
<PAGE>
addition, the word "Indebtedness" includes all other obligations, debts
and liabilities, plus interest thereon, of Grantor, or any one or more of
them, to Lender, as well as all claims by Lender against Grantor, or any
one or more of them, whether existing now or later; whether they are
voluntary or involuntary, due or not due, direct or indirect, absolute or
contingent, liquidated or unliquidated; whether Grantor may be liable
individually or jointly with others; whether Grantor may be obligated as
guarantor, surety, accommodation party or otherwise; whether recovery upon
such indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such indebtedness may be or hereafter may become
otherwise unenforceable.
Lender. The word "Lender" means UNITED STATES NATIONAL BANK OF OREGON, its
successors and assigns.
Note. The word "Note means the Promissory note from Borrower to Lender
dated June 26, 1996 in the original amount of $7,500,000.00, and
promissory note dated June 26, 1996 in the original amount of
$5,000,000.00, together with all renewals of, extensions of, modifications
of, refinancings of, consolidations of and substitutions for the Note or
Credit Agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Organization. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Oregon. Grantor
has its chief executive office at 16505 SW 72nd Avenue, Portland, OR 97224.
Grantor will notify Lender of any change in the location of Grantor's chief
executive office.
Authorization. The execution, delivery, and performance of this Agreement by
Grantor have been duly authorized by all necessary action by Grantor and do not
conflict with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or any
agreement or other instrument binding upon Grantor or (b) any law, governmental
regulation, court decree, or order applicable to Grantor.
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's security interest in the Collateral. Upon request of
Lender, Grantor will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Grantor will note Lender's interest upon any
and all chattel paper if not delivered to Lender for possession by Lender.
Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue the
security interest granted in this Agreement. Lender may at any time, and without
further authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as a
financing statement. Grantor will reimburse Lender for all expenses for the
perfection and the continuation of the perfection of Lender's security interest
in the Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of Grantor.
This is a continuing Security Agreement and will continue in effect even though
all or any part of the Indebtedness is paid In full and even though for a period
of time Grantor may not be indebted to Lender.
No Violation. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws do not prohibit any term or
condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, the Collateral is enforceable in
accordance with its terms, is genuine, and complies with applicable laws
concerning form, content and manner of preparation and execution, and all
persons appearing to be obligated on the Collateral have authority and capacity
to contract and are in fact obligated as they appear to be on the Collateral. At
the time any account becomes subject to a security interest in favor of Lender,
the account shall be a good and valid
06-26-1996 COMMERCIAL SECURITY AGREEMENT
Loan No (Continued)
<PAGE>
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for services
theretofore performed by Grantor with or for the account debtor; there shall be
no setoffs or counterclaims against any such account; and no agreement under
which any deductions or discounts may be claimed shall have been made with the
account debtor except those disclosed to Lender in writing.
Location of the Collateral. Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d) all
other properties where Collateral is or may be located. Except in the ordinary
course of its business, Grantor shall not remove the Collateral from its
existing locations without the prior written consent of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent the
Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
Oregon, without the prior written consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not sell,
offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor
is not in default under this Agreement, Grantor may sell inventory, but only in
the ordinary course of its business and only to buyers who qualify as a buyer in
the ordinary course of business. A sale in the ordinary course of Grantor's
business does not include a transfer in partial or total satisfaction of a debt
or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest, encumbrance,
or charge, other than the security interest provided for in this Agreement,
without the prior written consent of Lender. This includes security interests
even if junior in right to the security interests granted under this Agreement.
Unless waived by Lender, all proceeds from any disposition of the Collateral
(for whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall not
constitute consent by Lender to any sale or other disposition. Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and encumbrances
except for the lien of this Agreement. No financing statement covering any of
the Collateral is on file in any public office other than those which reflect
the security interest created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's rights in the Collateral
against the claims and demands of all other persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles, Grantor
shall deliver to Lender schedules of such Collateral, including such information
as Lender may require, including without limitation names and addresses of
account debtors and agings of accounts and general intangibles. Insofar as the
Collateral consists of inventory and equipment, Grantor shall deliver to Lender,
as often as Lender shall require, such lists, descriptions, and designations of
such Collateral as Lender may require to identify the nature, extent, and
location of such Collateral. Such information shall be submitted for Grantor and
each of its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all tangible
Collateral in good condition and repair. Grantor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral. Lender
and its designated representatives and agents shall have the right at all
reasonable times to examine, inspect, and audit the Collateral wherever located.
Grantor shall immediately notify Lender of all cases involving the return,
rejection, repossession, loss or damage of or to any Collateral; of any request
for credit or adjustment or of any other dispute arising with respect to the
Collateral; and generally of all happenings and events affecting the Collateral
or the value or the amount of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this Agreement, upon
any promissory note or notes evidencing the Indebtedness, or upon any of the
other Related Documents. Grantor may withhold any such payment or may elect to
contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's interest in
the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days, Grantor
shall deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs or other charges that could
accrue as a result of foreclosure or sale of the Collateral. In any contest
Grantor shall defend itself and Lender and shall satisfy any final adverse
judgment before enforcement against the Collateral.
<PAGE>
Grantor shall name Lender as an additional obligee under any surety bond
furnished in the contest proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly with
all laws, ordinances, rules and regulations of all governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral. Grantor may contest in good faith any such law, ordinance
or regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral, in Lender's
opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral never
has been, and never will be so long as this Agreement remains a lien on the
Collateral, used for the generation, manufacture, storage, transportation,
treatment, disposal, release or threatened release of any hazardous waste or
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of
1986, Pub. L. No. 99499 ("SARA"), the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules,
or regulations adopted pursuant to any of the foregoing or intended to protect
human health or the environment ("Environmental Laws"). The terms "hazardous
waste" and "hazardous substance" shall also include, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and substances.
Grantor hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Grantor becomes liable for cleanup or
other costs under any Environmental Laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement, or as a result of a violation of any
Environmental Laws. This obligation to indemnify shall survive the payment of
the Indebtedness and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at least
ten (10) days' prior written notice to Lender and not including any disclaimer
of the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default pf
Grantor or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If
Grantor at any time fails to obtain or maintain any insurance as required under
this Agreement, Lender may (but shall not be obligated to) obtain such insurance
as Lender deems appropriate, including if it so chooses "single interest
insurance," which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of any
loss or damage to the Collateral. Lender may make proof of loss if Grantor fails
to do so within fifteen (15) days of the casualty. All proceeds of any insurance
on the Collateral, including accrued proceeds thereon, shall be held by Lender
as part of the Collateral. If Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost
of repair or restoration. If Lender does not consent to repair or replacement of
the Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds
which have not been disbursed within six (6) months after their receipt and
which Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender reserves
for payment of insurance premiums, which reserves shall be created by monthly
payments from Grantor of a sum estimated by Lender to be sufficient to produce,
at least fifteen (15) days before the premium due date, amounts at least equal
to the insurance premiums to be paid. If fifteen (15) days before payment is
due, the reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a general
deposit and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by Grantor as
they become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance premiums
required to be paid by Grantor. The responsibility for the payment of premiums
shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as Lender
may reasonably request including the following: (a) the name of the insurer; (b)
the risks insured; (c) the amount of the policy; (d) the property insured; (e)
the then current value on the basis of which insurance has been obtained and the
manner of determining that value; and (f) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not m6re often than
annually) have an independent appraiser satisfactory to Lender determine, as
applicable, the cash value replacement cost of the Collateral.
<PAGE>
06-26-1996 COMMERCIAL SECURITY AGREEMENT
Loan No (Continued)
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts and above in the paragraph
titled 'Transactions Involving Collateral" , Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. Until
otherwise notified by Lender, Grantor may collect any of the Collateral
consisting of accounts. At any time and even though no Event of Default exists,
Lender may exercise its rights to collect the accounts and to notify account
debtors to make payments directly to Lender for application to the Indebtedness.
If Lender at any time has possession of any Collateral, whether before or after
an Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due
on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Grantor's
deposit accounts with Lender. However, this Event of Default shall not
apply if there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of
<PAGE>
any of the Indebtedness or such Guarantor dies or becomes incompetent.
Lender, at its option, may, but shall not be required to, permit the
Guarantor's estate to assume unconditionally the obligations arising under
the guaranty in a manner satisfactory to Lender, and, in doing so, cure
the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of
the same provision of this Agreement, it may be cured (and no Event of
Default will have occurred) if Grantor, after Lender sends written notice
demanding cure of such default, (a) cures the default within fifteen (15)
days; or (b), if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion
to be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Oregon Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
Sell the Collateral. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made unless Grantor has signed, after an Event of Default occurs, a
statement renouncing or modifying Grantor's right to notification of sale.
The requirements of reasonable notice shall be met if such notice is given
at least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness
secured by this Agreement and shall be payable on demand, with interest at
the Note rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver shall become part of the Indebtedness
secured by this Agreement and shall be payable on demand, with interest at
the Note rate from date of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether
or not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or
storage of any Collateral. To facilitate collection, Lender may notify
account debtors and obligors on any Collateral to make payments directly
to Lender.
Obtain Deficiency. It Lender chooses to sell any or all of the Collateral,
Lender may obtain a
<PAGE>
judgment against Grantor for any deficiency remaining on the Indebtedness
due to Lender after application of all amounts received from the exercise
of the rights provided in this Agreement. Grantor shall be liable for a
deficiency even if the transaction described in this subsection is a sale
of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
06-26-1996 COMMERCIAL SECURITY AGREEMENT
Loan No (Continued)
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender in the State of Oregon. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of
Multnomah County, State of Oregon. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon.
Expenses. Grantor agrees to pay upon demand all of Lender's costs and
expenses, including legal expenses, incurred in connection with the
enforcement of this Agreement. Lender may pay someone else to help enforce
this Agreement, and Grantor shall pay the costs and expenses of such
enforcement. Costs and expenses include Lender's legal expenses whether or
not there is a lawsuit, including legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Grantor, notice to any Grantor will constitute notice to all Grantors.
For notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued
in payment for the Collateral; (c) to settle or compromise any and all
claims arising under the Collateral, and, in the place and stead of
Grantor, to execute and deliver its release and settlement for the claim;
and (d) to file any claim or claims or to take any action or institute or
take part in any proceedings, either in its own name or in the name of
Grantor, or otherwise, which in the discretion of Lender may seem to be
necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be
irrevocable and shall remain in full force and effect until
<PAGE>
renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender's rights or of any of Grantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withheld in the sole discretion of Lender.
Waiver of Co obligor's Rights. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would otherwise
have by virtue of payment of the Indebtedness or any part thereof,
specifically including but not limited to all rights of indemnity,
contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR
AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26,1996.
GRANTOR:
FLIR Systems, Inc.
X
Authorized Officer
BAN K (R)
PROMISSORY NOTE
Principal Loan Date Maturity LoanNoCallCollateralAccount Officer Initials
$5,000,000.0006 26 199605 31 2002 46 380 3021313582 59488
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: Flir Systems, Inc. Lender: UNITED STATES NATIONAL BANK OF OREGON
16506 SW 72nd Avenue Corporate Banking Division
Portland, OR 97224 PL-7 Oregon Commercial Loan Servicing
565 S. W. Oak
Portland, OR 97204
<PAGE>
Principal Amount: $5,000,000.00 Date of Note: June 26,1996
PROMISE TO PAY. Fur Systems, Inc. ("Borrower") promises to pay to UNITED STATES
NATIONAL BANK OF OREGON ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Five Million & 001100 Dollars
($5,000,000.00), together with Interest on the unpaid principal balance from
June 26, 1996, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in tine Index,
Borrower will pay this loan on demand, or if no demand is made, in accordance
with the following payment schedule:
11 consecutive monthly interest payments, beginning July 31, 1996, with
interest calculated on the unpaid principal balances at an Interest rate
of 0.00 percentage points over the Index described below; 59 consecutive
monthly principal and interest payments of $103,547.07 each, beginning
June 30, 1997, with interest calculated on the unpaid principal balances
at an interest rate of 8.770% per annum; and 1 principal and Interest
payment of $103,546.87 on May 31, 2002, with Interest calculated on the
unpaid principal balances at an interest rate of 8.770% per annum. This
estimated final payment Is based on the assumption that all payments will
be made exactly as scheduled; the actual final payment will be for all
principal and accrued Interest not yet paid, together with any other
unpaid amounts under this Note.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Lender's Prime Rate. This
is the rate of interest which Lender from time to time establishes as its Prime
Rate and is not, for example, the lowest rate of interest which Lender collects
from any borrower or class of borrowers (the "Index"). The interest rate shall
be adjusted without notice effective on the day Lender's prime rate changes.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each Day. The Index
currently Is 8.250% per annum. The interest rate or rates to be applied to the
unpaid principal balance of this Note will be the rate or rates set forth above
in the "Payment" section. Whenever increases occur in the interest rate, Lender,
at its option, may do one or more of the following: (a) increase Borrower's
payments to ensure Borrower's loan will pay oft by its original final maturity
date, (b) increase Borrower's payments to cover accruing interest, (c) increase
the number of Borrower's payments, and (d) continue Borrower's payments at the
same amount and increase Borrower's final payment.
PREPAYMENT. Except for the foregoing, Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation
to continue to make payments under the payment schedule. Rather, they will
reduce the principal balance due and may result in Borrower making fewer
payments.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(a) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note
<PAGE>
and all accrued unpaid interest immediately due, without notice, and then
Borrower will pay that amount. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the variable interest rate on this Note by 5.000 percentage points. The
interest rate will not exceed the maximum rate permitted by applicable law.
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law. This Note has
been delivered to Lender and accepted by Lender in the Stale of Oregon. If there
is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Multnomah County, the State of Oregon Subject to
the provisions on arbitration, this Note shall be governed by and construed in
accordance with the laws of the State of Oregon.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether Individual, joint, or class in nature,
arising from this Note or otherwise, Including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; foreclosing by notice and sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to Article
g of the Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness of any act, or exercise of any
right, concerning any collateral securing this Note, including any claim to
rescind, reform, or otherwise modify any agreement relating to the collateral
securing this Note, shall also be arbitrated, provided however that no
arbitrator shall have the right or the power to enjoin or restrain any act of
any party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
INITIAL ADVANCE PERIOD. Advances under this Note may be requested orally by
Borrower or by an authorized person until May 31, 1997. Once the total amount of
principal has been advanced, Borrower is not entitled to further loan advances.
Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. Borrower
agrees to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person, or (b) credited to any of Borrower's
accounts with Lender, regardless of the fact that persons other than those
authorized to borrow have authority to draw against the accounts. The unpaid
principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor
<PAGE>
06-26-1996 PROMISSORY NOTE
Loan No (Continued)
is in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to the Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower..
LATE CHARGE. If a payment is 19 days or more past due, Borrower will be charged
a late charge of 5% of the delinquent payment.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral: or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
UNDER OREGON LAW MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US
(LENDER) AFTER OCTOBER 3,1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS
WHICH ARE NOT FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY
BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE
SIGNED BY US TO BE ENFORCEABLE.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTE.
BORROWER..
Flir Systems, Inc.
x
Authorized Officer
LENDER:
UNITED STATES NATIONAL BANK OF OREGON
By
Authorized Officer
<PAGE>
EXHIBIT 11.0
FLIR SYSTEMS, INC.
COMPUTATION OF NET EARNINGS PER SHARE
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Net earnings............................ $5,092 $3,867 $5,186
======= ======== =======
Weighted average number of common
shares outstanding..................... 5,361 5,246 5,149
Assumed exercise of stock options net
of share assumed reacquired under the
treasury stock method.................. 263 277 287
------- -------- -------
5,624 5,523 5,436
======= ======== =======
Earnings per share...................... $ 0.91 $ 0.70 $ 0.95
======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 21.0
Subsidiaries of FLIR Systems, Inc.
- ----------------------------------
. FSI International, Inc., a Barbados Corporation
. Hoeger Optical Co., Inc., a California Corporation
. Broadcast & Surveillance Systems, Ltd., a United Kingdom Corporation
. Optimas Corporation, a Washington Corporation
<PAGE>
EXHIBIT 23.0
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-82676, 33-82194 and 33-95248) of FLIR Systems,
Inc. of our report dated February 25, 1997, which appears on page 18 of this
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule which appears on page 37 of this Form 10-K.
PRICE WATERHOUSE LLP
Portland, Oregon
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 775
<SECURITIES> 0
<RECEIVABLES> 29,982
<ALLOWANCES> 1,671
<INVENTORY> 33,513
<CURRENT-ASSETS> 64,150
<PP&E> 13,827
<DEPRECIATION> 6,690
<TOTAL-ASSETS> 75,104
<CURRENT-LIABILITIES> 19,960
<BONDS> 5,173
0
0
<COMMON> 54
<OTHER-SE> 49,917
<TOTAL-LIABILITY-AND-EQUITY> 49,971
<SALES> 66,017
<TOTAL-REVENUES> 66,017
<CGS> 30,415
<TOTAL-COSTS> 30,415
<OTHER-EXPENSES> 27,224
<LOSS-PROVISION> 1,260
<INTEREST-EXPENSE> 775
<INCOME-PRETAX> 6,343
<INCOME-TAX> 1,251
<INCOME-CONTINUING> 5,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,092
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0
</TABLE>
