<PAGE>
PROSPECTUS FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-53869
2,399,130 SHARES
[LOGO OF FLIR SYSTEMS]
COMMON STOCK
Of the 2,399,130 shares of Common Stock offered hereby, 1,638,630 shares are
being sold by the Company and 760,500 shares are being sold by a Selling
Shareholder. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholder. See "Principal and Selling Shareholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol FLIR. On June 29, 1998, the last reported sale price for the Common
Stock was $17.25 per share. See "Price Range of Common Stock."
------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $17.25 $0.90 $16.35 $16.35
- -------------------------------------------------------------------------------
Total(3)............. $41,384,992 $2,159,217 $26,791,600 $12,434,175
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $550,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 359,870 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $47,592,750,
$2,483,100 and $32,675,475, respectively.
------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be made
available for delivery on or about July 6, 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
PRUDENTIAL SECURITIES INCORPORATED
PACIFIC CREST SECURITIES INC.
June 30, 1998
<PAGE>
INSIDE FRONT COVER:
OUTSIDE GATEFOLD:
COMMERCIAL APPLICATIONS
AIRBORNE OBSERVATION AND BROADCAST
[PHOTO: HELICOPTER IN FLIGHT] TELEVISION NEWS HELICOPTER EQUIPPED WITH AN
ULTRAMEDIA BROADCAST CAMERA SYSTEM
{PHOTO: SMOKING BUILDING] DAYLIGHT BROADCAST NEWS IMAGE OF AN INDUSTRIAL FIRE
[PHOTO: BUILDING IN FLAMES] BROADCAST NEWS THERMAL IMAGE OF THE SAME
INDUSTRIAL FIRE
INSIDE GATEFOLD:
[TOP RIGHT] COMMERCIAL
[LEFT SIDE]
CONDITION MONITORING
[PHOTO: INFRARED IMAGE OF ELECTRICAL CONNECTION] CONDITION MONITORING OF
ELECTRICAL SYSTEMS
[PHOTO: INFRARED IMAGE OF ELECTRICAL UTILITY SUBSTATION] HOT CONNECTION ON AN
ELECTRICAL UTILITY SUBSTATION
[PHOTO: INFRARED IMAGE OF CHEMICAL DRYER] HOT SPOTS SHOW DETERIORATING
INSULATION IN A CHEMICAL DRYER
[RIGHT SIDE]
MANUFACTURING PROCESS CONTROL
[PHOTO: INFRARED IMAGE OF PLASTIC CONTAINERS] ON-LINE QUALITY ASSURANCE OF
PLASTIC CONTAINER MANUFACTURING
[PHOTO: INFRARED IMAGE OF RUBBER PELLETS] ON-LINE MONITORING FOR HEAT
DISTRIBUTION IN TIRE MANUFACTURING
{PHOTO: INFRARED IMAGE OF GLASS BOTTLES] ENSURING PROPER THERMAL PROFILES IN
GLASS MANUFACTURING
INSIDE GATEFOLD:
[TOP LEFT] APPLICATIONS
[LEFT SIDE]
RESEARCH AND DEVELOPMENT
[PHOTO: INFRARED IMAGE OF REAR WINDOW DEFROSTERS] THERMAL PROFILE EVALUATION
OF AUTOMOBILE WINDOW DEFROSTERS
[PHOTO: INFRARED IMAGE OF ELECTRONIC MICROCIRCUIT] MICROELECTRONICS FAILURE
ANALYSIS
[PHOTO: INFRARED IMAGE OF AUTOMOBILE SEAT HEATING COILS] ANALYSIS OF HEATING
COILS IN AN AUTOMOBILE SEAT
[RIGHT SIDE]
APPLICATION SOFTWARE
[PHOTO: COMPUTER SCREEN DISPLAY] WINDOWS(R)-BASED XCALIPER SOFTWARE SUPPORTS A
DIVERSE VARIETY OF MACHINE VISION APPLICATIONS
[PHOTO: COMPUTER SCREEN DISPLAY] POWERFUL WINDOWS(R)-BASED ANALYSIS AND REPORT
GENERATION SOFTWARE
[THREE PHOTOS: AGEMA 570 AND THERMOVISION] THE COMPANY'S COMPLETE LINE OF HAND
HELD THERMAL IMAGING CAMERAS INCLUDE THE AGEMA 570, THE INDUSTRY'S FIRST
UNCOOLED RADIOMETRIC THERMAL IMAGING CAMERA FOR CONDITION MONITORING, RESEARCH
AND DEVELOPMENT AND MANUFACTURING PROCESS CONTROL APPLICATIONS, AND THE
THERMOVISION, THE FIRST UNCOOLED RADIOMETRIC THERMAL IMAGING CAMERA FOR
MANUFACTURING PROCESS CONTROL AND MACHINE VISION APPLICATIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors."
THE COMPANY
FLIR Systems, Inc. (the "Company") is a world leader in the design,
manufacture and marketing of thermal imaging and broadcast camera systems for a
wide variety of applications in the commercial and government markets. The
Company's thermal imaging systems use advanced technologies that detect
infrared radiation, or heat, enabling the operator to measure minute
temperature differences and to see objects in daylight or total darkness and
through obscurants such as smoke, haze and most types of fog. The Company's
state-of-the-art products come in a variety of configurations such as handheld
or ground based systems, or can be mounted on ships, helicopters or fixed-wing
aircraft. The Company has also developed innovative new products utilizing
advanced "uncooled" thermal imaging technology, which allows for less
expensive, smaller, lighter, solid state systems that require less power to
operate.
The Company's business is organized around two principal markets, commercial
and government. The commercial market is comprised of a wide array of thermal
imaging applications including condition monitoring, research and development,
manufacturing process control and airborne observation and broadcast. The
government market is comprised of a broad range of thermal imaging applications
including search and rescue, federal drug interdiction, surveillance and
reconnaissance, navigation safety, border and maritime patrol, environmental
monitoring, and ground based security. Historically, a majority of the
Company's revenue has been derived primarily from government sales. However,
the Company is shifting its product mix in favor of commercial applications,
which accounted for 47.2% and 64.2%, respectively, of the Company's revenue for
the year ended December 31, 1997 and the three months ended March 31, 1998.
The Company's objective is to strengthen its position as a leading provider
of thermal imaging and broadcast camera systems by providing high value imaging
products with improved system capability and performance, while building upon
its price performance leadership and reputation for quality, service and
reliability. The Company's customer-focused approach to product development
enables it to better identify and understand customer applications and develop
products to meet new market opportunities. For example, the Company intends to
develop and aggressively market new products incorporating uncooled thermal
imaging technology for major markets where price performance benefits were
previously unavailable. In addition, the Company intends to expand its image
analysis software tools to further enhance the Company's competitive position
in the thermal imaging market, while providing products tailored to meet
individual customer requirements. The Company also intends to leverage its
extensive, worldwide, multi-channel sales and marketing network to further
penetrate existing markets and reach undeveloped markets around the world.
The Company has grown and intends to continue to grow internally as well as
through the acquisition of complementary businesses, product lines or
technologies. For example, in December 1997 the Company acquired AGEMA Infrared
Systems AB, a Swedish corporation, and certain of its affiliates ("AGEMA").
AGEMA is the world leader in the design, manufacture and marketing of handheld
infrared cameras for detecting and measuring temperature differences for a wide
variety of commercial and research applications. This acquisition increased the
Company's worldwide commercial thermal imaging market share, enabled the
Company to expand its product development efforts through the elimination of
duplicative research and development programs, created an extensive
international sales and marketing organization and allowed the Company to more
efficiently focus its manufacturing operations. The Company believes that
selective acquisitions will continue to provide an opportunity to broaden its
technology and product offerings, expand its market presence and enter into new
markets.
The Company was incorporated in Oregon in 1978 and maintains its executive
offices at 16505 S.W. 72nd Avenue, Portland, Oregon 97224. Its telephone number
is 503-684-3731. AGEMA and ThermoVision are registered trademarks of the
Company, and the Company believes that all of its product names are trademarks
of the Company. This Prospectus also includes names and marks of companies
other than the Company.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,638,630 shares
Common Stock offered by the Selling 760,500 shares
Shareholder.................................
Common Stock to be outstanding after the 11,513,795 shares (1)
Offering....................................
Use of proceeds.............................. For the repayment of certain
indebtedness, including
indebtedness to a related party.
Nasdaq National Market Symbol................ FLIR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue:
Government............. $31,051 $35,805 $33,575 $42,958 $ 48,483 $ 8,403 $ 9,914
Commercial............. 9,082 13,172 16,550 23,059 43,288 7,418 17,785
------- ------- ------- ------- -------- ------- -------
Total revenue......... 40,133 48,977 50,125 66,017 91,771 15,821 27,699
Gross profit............ 21,030 25,164 27,401 35,602 33,264 (2) 8,292 15,199
Earnings (loss) from
operations............. 3,628 5,223 4,959 7,118 (41,551)(2) 429 1,097
Net earnings (loss)..... $ 3,191 $ 5,186 $ 3,867 $ 5,092 $(30,588)(2) $ 91 $ 290
Net earnings (loss) per
share (3)..............
Basic.................. $ 0.70 $ 1.01 $ 0.74 $ 0.95 $ (5.23) $ 0.02 $ 0.03
Diluted................ $ 0.66 $ 0.95 $ 0.70 $ 0.91 $ (5.23)(2) $ 0.02 $ 0.03
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $ 25,892 $ 52,134
Total assets........................................... 150,979 150,979
Short-term debt, including payable to related party.... 42,164 15,922
Long-term debt, excluding current portion.............. 1,537 1,537
Shareholders' equity................................... 75,716 101,958
</TABLE>
- --------------------
(1) Based upon shares outstanding on March 31, 1998. Excludes (i) 1,313,832
shares of Common Stock reserved for issuance upon exercise of stock options
outstanding as of March 31, 1998 at a weighted average exercise price of
$13.16, and (ii) 2,187,741 shares of Common Stock reserved for future
issuance under the Company's stock plans. See Notes 12 and 13 of Notes to
the Consolidated Financial Statements.
(2) In connection with the acquisition of AGEMA, which was effective on
December 1, 1997, the Company recorded a one-time charge of $52.5 million.
The write-off consisted of $36.4 million of in-process research and
development and acquisition-related costs, which were included as a
separate line in operating expenses, and $16.1 million of inventories due
to the creation of duplicative product lines, which was included in cost of
goods sold. Excluding the one-time charge, net earnings and earnings per
diluted share for the year ended December 31, 1997, would have been $6.9
million or $1.10 per diluted share.
(3) See Note 1 of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net earnings
(loss) per share.
(4) Adjusted to give effect to the receipt of the estimated net proceeds from
the sale of 1,638,630 shares of Common Stock offered by the Company hereby
at the public offering price of $17.25 per share. See "Use of Proceeds" and
"Capitalization."
--------------------
Except as otherwise noted, all information in this Prospectus (i) gives
effect to the acquisition of AGEMA on December 1, 1997 and (ii) assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." Unless
the context otherwise requires, all references to the "Company" herein include
the Company and its subsidiaries, including AGEMA.
4
<PAGE>
RISK FACTORS
This Prospectus, including the information incorporated by reference herein,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are
based on current expectations, estimates and projections about the Company's
business, management's beliefs and assumptions made by management. Words such
as "expects," "anticipates," "intends," "plans," "believes," "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 section, in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this
Prospectus, as well as by general industry and market conditions and growth
rates, and general domestic and international economic conditions. The
following risk factors should be considered carefully in addition to the other
information in this Prospectus before purchasing the shares of Common Stock
offered hereby.
Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
results have in the past varied significantly and may vary significantly in
the future as a result of a number of factors, including the timing of
significant orders from and shipments to customers, the timing and market
acceptance of new products or technological advances by the Company or its
competitors, the Company's success in developing, introducing and shipping new
products, the mix of distribution channels through which the Company's
products are sold, changes in pricing policies by the Company or its
competitors, the timing and amount of any inventory write downs, the ability
of the Company to obtain sufficient supplies of sole or limited source
components for the Company's products, foreign currency fluctuations, costs
associated with the acquisition of other businesses, product lines or
technologies, the ability of the Company to integrate acquired businesses,
product lines or technologies and general economic conditions, both
domestically and internationally. The Company also experiences fluctuations in
orders and sales due to seasonal fluctuations and customer sales cycles.
Revenue in the fourth quarter of each year generally has been significantly
higher than any other quarter in that year, and the first, and in some cases,
the second quarter of the following year, due to the seasonal pattern of
contracting by the U.S. and certain foreign governments, the frequent
requirement by international customers to take delivery of equipment prior to
the end of December due to funding considerations, and the tendency of
commercial enterprises to fully utilize yearly capital budgets prior to
expiration. In addition, a significant portion of the Company's quarterly
sales have historically occurred in the last month of each quarter, with sales
frequently concentrated in the last week or days of the quarter. Such events
are likely to continue to result in substantial fluctuations in the Company's
quarterly results in the future. As a result of such quarterly fluctuations in
operating results, the Company believes that quarter-to-quarter comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
Development and Market Acceptance of New Products. The Company's future
success and growth will substantially depend upon the Company's ability to
continue to improve and market its existing products and to develop and
introduce new products and technologies to meet changing customer requirements
and to successfully serve broader industry segments. The Company's near-term
success will depend upon market acceptance of the Company's products
incorporating uncooled detector technology, particularly the recently
introduced AGEMA 570, which is expected to account for a substantial portion
of the Company's revenue. The Company's success will also depend upon market
acceptance of, and the Company's ability to deliver and support, the
UltraMedia-RS and the ULTRA 6000, each of which was introduced in 1997. The
Company is currently devoting significant resources toward the enhancement of
its existing products. There can be no assurance that the Company will
successfully complete the enhancement of these products in a timely fashion or
that the Company's current or future products will gain or maintain market
acceptance. Any failure to complete the enhancement of these products or the
failure of the Company's current or future products to gain or maintain market
acceptance could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products."
5
<PAGE>
Risks Associated with Technological Change. The thermal imaging industry is
characterized by rapid technological change and ongoing evolutionary
improvements, with new generations of thermal imaging products being
introduced periodically. Historically, the Company has derived substantially
all of its revenue from thermal imaging systems based on cooled detector
technology, and the Company expects that the sale of thermal imaging systems
based on this technology will continue to represent a significant portion of
the Company's revenue for the foreseeable future. The Company has recently
introduced the AGEMA 570 and the ThermoVision, which employ new uncooled
detector technology that enables the Company to produce smaller, lighter,
solid state thermal imaging systems at a much lower cost. The Company intends
to devote significant resources to the development of other products
incorporating this new technology. The introduction of products incorporating
the new uncooled detector technology will require the Company to commit
significant resources to manage the transition from previous generation
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. Delays in
the introduction or shipment of new or enhanced products, the inability of the
Company to timely develop and introduce such new products, the failure of such
products to gain significant market acceptance, problems associated with new
product transitions or the introduction or market acceptance of competing
technology that renders the technology used by the Company obsolete or less
desirable would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence Upon Suppliers; Product Delays. The Company relies on a number of
sole source and limited source suppliers to provide certain key components for
its products. In particular, the Company, through its subsidiary, AGEMA, has
entered into a supply contract with Lockheed Martin Corporation IR Imaging
Systems ("Lockheed Martin") for the supply of uncooled detectors for
integration into the AGEMA line of products. Lockheed Martin is currently the
only producer of uncooled detectors capable of being used in radiometric
applications that is manufacturing such detectors in volume. Subject to
certain exceptions, the contract provides AGEMA with the exclusive right to
purchase uncooled detectors for use in the commercial thermography market and
a limited, nonexclusive right to purchase uncooled detectors for use in the
government market. Under the contract, AGEMA has the corresponding obligation
to purchase uncooled detectors solely from Lockheed Martin. Currently, the
AGEMA 570 and the ThermoVision are the only products of the Company that use
uncooled detectors supplied by Lockheed Martin. However, the Company intends
in the future to use uncooled detectors supplied by Lockheed Martin in other
handheld products or ground based security products, such as the AGEMA 1000.
While the contract provides for the delivery of a fixed number of uncooled
detectors on a monthly basis, the delivery schedule may be increased or
decreased by AGEMA within certain limits. Based on current and anticipated
production levels and supply requirements, the Company expects that the
contract will continue through the fourth quarter of 1999 or the first quarter
of 2000.
The Company has in the past, and may in the future, experience delays in
receiving adequate supplies of sole and limited source components. If Lockheed
Martin or any other significant sole or limited source supplier were to become
unable or unwilling to continue to provide critical components in required
volumes, the Company's ability to manufacture products incorporating such
components would be disrupted unless the Company could identify and qualify
acceptable replacement components or redesign such products with different
components. No assurance can be given that additional sources would be
available to the Company or that product redesign would be feasible on a
timely basis or at acceptable costs. Specifically, no assurance can be given
that, upon expiration of the current supply contract with Lockheed Martin, the
Company will be able to successfully negotiate a new contract with Lockheed
Martin for the supply of uncooled detectors on an exclusive basis or at all,
or that the Company will be able to identify another source of uncooled
detectors. A significant amount of the Company's revenue is expected to be
derived from the sale of the AGEMA 570. Accordingly, any failure of the
Company to renew the contract or identify another source of uncooled detectors
would have a material adverse effect on the Company's business, financial
condition and results of operations. Further, any extended interruption in the
supply of sole or limited source components would have a material adverse
effect on the Company's business, financial condition and results of
operations.
6
<PAGE>
Competition. Competition in the market for thermal imaging equipment is
significant. The Company believes that the principal competitive factors in
its market are performance, cost, customer service, product reputation and
effective marketing and sales efforts. In addition, the Company believes that
the speed with which companies can identify new applications for thermal
imaging, develop products to meet those needs and supply commercial quantities
to the market are important competitive factors. Many 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. 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. To remain competitive, the Company must
continue to invest in and focus upon research and development and product
innovation. There can be no assurance that the Company will be successful in
such efforts. No assurance can be given that the Company will be able to
compete effectively in the future. See "Business--Competition."
Dependence Upon Key Personnel. The Company's success depends in part upon
the continued service of its senior management. The Company's success is also
dependent upon its ability to attract and retain qualified technical and sales
personnel. Significant competition exists for such personnel and there can be
no assurance that the Company can retain its key technical and sales personnel
or that it will be able to attract, assimilate and retain such other highly
qualified technical and sales personnel as may be required in the future.
There can be no assurance that employees will not leave the Company and
subsequently compete against the Company. The Company does not maintain key
man life insurance on any of its employees. If the Company is unable to
attract and retain key personnel, its business, financial condition and
results of operations could be adversely affected. See "Management."
Risks of Government Business. A substantial portion of the Company's revenue
is derived from sales to agencies of the U.S. Government. For the year ended
December 31, 1997, no sales to a single agency of the U.S. Government
accounted for more than 10% of the Company's revenue, but aggregate sales to
the U.S. Government and its agencies accounted for 21% of the Company's
revenue. Although the agencies of the U.S. Government to which the Company
sells its products may change from year to year, the Company's business will
continue to be substantially dependent upon purchases by the U.S. Government.
The Company's sales to the U.S. or foreign governments could be adversely
impacted by governmental spending cuts, general budgetary constraints, and
complex and competitive governmental procurement processes. While most of the
Company's sales are not made for defense applications, reductions in the
defense budgets of the U.S. and foreign governments could adversely affect the
ability of these customers to buy the Company's products for both public
safety and defense applications. Moreover, a significant reduction in
purchases of thermal imaging systems for defense applications could result in
certain of the Company's competitors committing more attention and resources
to non-defense applications, thereby exposing the Company to greater
competitive pressures in its primary markets. Further, the competitive bid
process for many governmental contracts may result in sales with lower gross
margins, which may adversely affect gross profit percentages. A significant
decline in the Company's sales to U.S. or foreign governments for any reason
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Collection of Accounts Receivable. The Company generally experiences high
receivables due to long payment cycles for U.S. Government and international
sales and long payment terms for certain customers. In addition, because of
the high unit prices of the Company's products, receivables due from
individual customers may be substantial at any given time and the
uncollectibility of a single large receivable could adversely impact the
Company's liquidity. The Company's receivables levels relative to its cash
from operations may result from time to time in liquidity deficiencies, which
may necessitate increased levels of financing by the Company. The Company's
accounts receivable at March 31, 1998 amounted to $47.6 million. Although the
Company has established reserves for uncollectable accounts, if such reserves
prove to be inadequate because of the uncollectibility of one or more large
receivables, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
<PAGE>
Customer Concentration. Although the Company does not typically have
continuing customers (other than the U.S. Government in the aggregate) whose
purchases constitute more than 10% of annual revenue, the Company may from
time to time have purchase commitments from customers which, if completed
within a given year, would constitute more than 10% of revenue in that year.
The loss of any such customer or the failure of any such customer to complete
such purchases could have a material adverse effect on the Company's business,
financial condition and results of operations.
International Sales and Operations. Sales to customers outside of the United
States accounted for approximately 46%, 32% and 47% of the Company's revenue
in 1995, 1996 and 1997, respectively, and approximately 46% of the Company's
revenue for the three months ended March 31, 1998. The Company anticipates
that international sales will continue to account for a significant portion of
revenue, particularly as a result of the AGEMA acquisition. Historically,
currency fluctuations have had little impact on revenue realization. However,
since the Company seeks to reduce its exposure to currency fluctuations by
denominating the majority of its international sales in U.S. dollars, a
decrease in the value of foreign currencies relative to the U.S. dollar could
make the Company's products less price-competitive. With the recent
acquisition of AGEMA contributing a significant volume of sales denominated in
foreign currencies, the Company has increased exposure to foreign exchange
fluctuations and changing dynamics of foreign competitiveness based on
variations in the value of the U.S. dollar relative to other currencies. The
Company typically experiences longer payment cycles on its international
sales, which can have an adverse impact upon the Company's liquidity. In
addition, a substantial portion of the Company's operations are conducted
outside the United States, particularly in Sweden. International sales and
operations may be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, political and economic instability, trade restrictions, labor
union activities, changes in tariffs and taxes, difficulties in staffing and
managing international operations, and general economic conditions. No
assurance can be given that these factors will not have a material adverse
effect on the Company's future international sales and operations and,
consequently, on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Management of Growth. The Company's rapid growth has placed, and is expected
to continue to place, a significant strain on the Company's managerial,
operational, financial and other resources. As of March 31, 1998, the Company
had grown to 650 employees. The Company expects that continued hiring of new
personnel will be required to support its business. The Company's future
success will depend, in part, upon its ability to manage its growth
effectively, which will require that the Company continue to implement and
improve its operational, administrative and financial and accounting systems
and controls and to expand, train and manage its employee base. The Company
has begun installation of a new Company-wide enterprise resource planning
hardware and software system. However, no assurance can be given that the
Company's systems, procedures or controls will be adequate to support the
Company's operations or that the Company's management will be able to achieve
the rapid execution necessary to exploit the markets for the Company's
products. If the Company is unable to manage growth effectively, the Company's
business, financial condition and results of operations may be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated with Recent Acquisition; Potential Future Acquisitions. In
December 1997, the Company completed the acquisition of AGEMA, the operations
of which are conducted principally in Sweden. The integration of acquired
businesses, product lines and technologies is typically difficult, time
consuming and subject to a number of inherent risks. The integration of
product lines (including AGEMA's) requires the coordination of the research
and development, manufacturing, sales, marketing and service efforts between
the Company and the acquired businesses. The diversion of the attention of
management and any difficulties encountered in the transition process could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the process of assimilating and
managing acquisitions can cause the interruption of, or a loss of momentum in,
the existing activities of the Company's business,
8
<PAGE>
which could have a material adverse effect on the Company's business,
financial condition and results of operations. In the case of the AGEMA
acquisition, the difficulties of assimilation may be increased by the need to
coordinate geographically separate organizations, integrate personnel with
disparate business backgrounds and languages and combine two different
corporate cultures. Because the AGEMA acquisition occurred so recently, the
Company has had limited experience managing the operations of AGEMA. Future
acquisitions by the Company may result in the diversion of management's
attention from the day-to-day operations of the Company's business and may
include numerous other risks, including difficulties in the integration of the
operations, products and personnel of the acquired businesses. Future
acquisitions by the Company have the potential to result in dilutive issuances
of equity securities, the incurrence of debt and amortization expenses related
to goodwill and other intangible assets. While there are currently no such
acquisitions planned or being negotiated, Company management frequently
evaluates the strategic opportunities available to it and may in the near or
long term pursue acquisitions of complementary businesses, product lines or
technologies. See "Business--Strategy." As a result of the foregoing, no
assurance can be given that the Company will realize the anticipated benefits
of any acquisition or that any such acquisition will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence on Proprietary Technology. The Company's ability to compete
successfully and achieve future revenue growth will depend in part on its
ability to protect its proprietary technology and operate without infringing
the rights of others. The Company relies on a combination of patent, trademark
and trade secret laws, confidentiality agreements and contractual provisions
to protect its proprietary rights. However, the Company believes that its
historical success has been primarily a function of other competitive
advantages such as the skill and experience of its employees, its worldwide,
multichannel sales, distribution and servicing network and its name
recognition and quality products. Although the Company currently holds United
States patents covering certain aspects of its technologies, there can be no
assurance that the Company will obtain additional patents or trademarks on its
technology, products and trade names or that its patents or trademarks will be
sufficiently broad to protect the Company's proprietary rights and will not be
challenged or circumvented by competitors. Likewise, there can be no assurance
that measures that the Company takes to protect its proprietary rights will be
adequate to deter their misappropriation or disclosure. Any failure by the
Company to meaningfully protect its intellectual property could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, because intellectual property does not
necessarily represent a barrier to entry into the thermal imaging industry,
there can be no assurance that the Company will be able to maintain its
competitive advantage or that competitors will not develop capabilities equal
or superior to that of the Company.
Concentration of Ownership. Following the offering, Spectra-Physics AB, the
former parent company of AGEMA, and its affiliates ("Spectra") will
beneficially own approximately 36% of the outstanding shares of Common Stock.
In addition, three members of the Company's Board of Directors are designees
of Spectra. The Company is obligated to use its reasonable best efforts to
cause the number of Spectra designees on the Company's Board to be maintained
at three so long as Spectra owns 30% or more of the outstanding shares of
Common Stock. The number of Spectra designees on the Company's Board will be
reduced if Spectra's ownership of Common Stock is reduced below that level. By
virtue of its stock ownership position and Board representation, Spectra and
its affiliates will be able to significantly influence the direction and
policies of the Company, the election of the Company's Board of Directors and
the outcome of any other matter requiring shareholder approval, including any
merger, consolidation, sale of substantially all of the assets of the Company
or other change of control transaction. There is no cumulative voting in the
election of directors. See "Principal and Selling Shareholders."
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have outstanding 11,513,795 shares of Common Stock, of which
7,129,346 shares will be freely tradeable without restriction. Approximately
222,449 shares will become eligible for sale in the public market beginning 90
days after the date of this Prospectus upon expiration of resale restrictions
contained in agreements between the holders of the shares and the
Underwriters. In addition, the 4,162,000 shares of Common Stock owned by
Spectra will
9
<PAGE>
become eligible for sale in the public market on December 2, 1998, the date
when resale restrictions contained in an agreement between Spectra and the
Underwriters expire and such shares become eligible for sale pursuant to Rule
144 under the Securities Act. Spectra also has certain registration rights
that will allow it to cause the Company to register for resale all or a
portion of the Common Stock owned by it at any time after December 1, 1998.
The Company has reserved 3,501,573 shares of Common Stock for issuance
pursuant to the Company's stock option plans. Of this amount, 1,313,832 shares
were subject to outstanding options as of March 31, 1998. Future sales of a
substantial number of shares of Common Stock in the public market or the
prospect of such sales could adversely affect the market price for the Common
Stock. See "Underwriting."
Product Defects; Product Liability. In the event that any of the Company's
products prove defective, the Company may be required to redesign or recall
products or pay damages. While the Company has not had a recall to date, a
redesign or recall could cause the Company to incur significant expenses,
disrupt sales and adversely affect the reputation of the Company and its
products, any one or a combination of which could have a material adverse
affect on the Company's business, financial condition and results of
operations. The manufacturing and marketing of the Company's products involve
an inherent risk of product liability. The Company has not experienced any
product liability claims, but no assurance can be given that it will not
experience such claims in the future. Although the Company maintains product
liability insurance, there can be no assurance that such coverage will be
adequate or that such coverage will continue to be available on terms
acceptable to the Company.
Anti-Takeover Provisions. Certain provisions of the Company's Articles of
Incorporation and Bylaws and the Oregon Business Corporation Act (the "OBCA")
will have the effect of making it more difficult for a third-party to acquire,
or discouraging a third-party from attempting to acquire, control of the
Company through either a tender offer or a proxy contest for the election of
directors. The Company's Articles of Incorporation contain provisions that (i)
classify the Board of Directors into three classes, each of which serves for a
three-year term with one class elected each year, (ii) provide that directors
may be removed by shareholders only for cause and only upon the vote of 75% of
the outstanding shares of Common Stock, and (iii) permit the Board of
Directors to issue Preferred Stock in one or more series and to fix the number
of shares constituting any such series, the voting powers and all other rights
and preferences of any such series, without any further vote or action by the
shareholders of the Company. These provisions, together with certain
provisions of the OBCA, may have the effect of lengthening the time required
for a person to acquire control of the Company through a proxy contest or the
election of a majority of the Board of Directors and may deter any potential
unfriendly offers or other efforts to obtain control of the Company, thereby
depriving the Company's shareholders of opportunities to realize a premium for
their Common Stock and could make removal of incumbent directors more
difficult.
Possible Volatility of Stock Price. The market price of the Common Stock
could be subject to significant fluctuations in response to variations in
quarterly operating results and other factors, including, for example, new
product announcements or changes in product prices by the Company or its
competitors, technological innovations and military or government budget
developments in the United States and other countries. Due to the foregoing
and other factors, it is possible that in future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock would likely be
adversely affected. In addition, the stock market, which has recently been at
or near historic highs, has experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated to
the operating performance of such companies. In the past, following periods of
volatility in the market price of a company's securities, security class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st Century dates from 20th Century dates. As a result, computer systems and
software used
10
<PAGE>
by many companies, including customers and suppliers of the Company, may need
to be upgraded to comply with such "Year 2000" requirements. The internal
manufacturing systems acquired by the Company in connection with its
acquisition of AGEMA are not Year 2000 compliant. The Company has begun
installation of new enterprise software and hardware that will correct this
deficiency. However, there can be no assurance that the solution will be
adequately implemented in a timely manner or that the implementation process
will not adversely affect the Company's business, financial condition and
results of operations. The Company is also taking steps to confirm that the
systems of its suppliers are Year 2000 compliant and to determine whether the
failure of such compliance would have a material adverse effect on the
Company's business, financial condition and results of operations. Failure to
provide Year 2000 compliant business solutions to the Company's customers
could also have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company believes that
the purchasing patterns of customers and potential customers may be affected
by Year 2000 issues as companies expend significant resources to correct or
patch their current software systems for Year 2000 compliance. These
expenditures may result in a reduction in funds available to purchase products
and services such as those offered by the Company, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,638,630 shares of
Common Stock offered by the Company hereby at the public offering price of
$17.25 per share are estimated to be $26,241,600 ($32,125,475, if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds from this offering: (i) to repay in full a payable to
a related party, which had an outstanding balance of $5,031,000 at March 31,
1998, and (ii) to repay outstanding indebtedness under one of the Company's
lines of credit (the "Line of Credit") incurred to finance the Company's
working capital, which had an outstanding balance of $28,525,000 at March 31,
1998, bears interest at a rate of 7.4% and is up for renewal on August 1,
1998. The payable to a related party, which represents indebtedness of AGEMA
to Spectra that was assumed by the Company in connection with the Company's
acquisition of AGEMA, bears interest at a rate of 5.95% and is due in full on
June 30, 1998. Pending the application of the net proceeds as described above,
the net proceeds from this offering will be invested in short-term interest-
bearing, investment grade securities. The Company will not receive any part of
the proceeds from the sale of shares by the Selling Shareholder.
The repayment of currently outstanding indebtedness will generate additional
borrowing capacity which may be used by the Company for strategic acquisitions
of other businesses, product lines and technologies that are complementary to
those of the Company. No such acquisitions are planned or being negotiated as
of the date of this Prospectus, and no portion of the net proceeds or
additional borrowing capacity has been allocated for any specific acquisition.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol FLIR. The following table sets forth, for the periods indicated, the
high and low sale price for the Company's Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year Ended December 31, 1996
First Quarter............................................. $14.38 $10.00
Second Quarter............................................ 16.25 10.50
Third Quarter............................................. 15.25 11.75
Fourth Quarter............................................ 14.50 12.75
Year Ended December 31, 1997
First Quarter............................................. 17.75 13.25
Second Quarter............................................ 17.75 14.75
Third Quarter............................................. 22.00 15.75
Fourth Quarter............................................ 22.00 17.50
Year Ending December 31, 1998
First Quarter............................................. 20.63 16.75
Second Quarter (through 6/29/98).......................... 21.75 17.25
</TABLE>
On June 29, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $17.25 per share. As of March 31, 1998, there were
approximately 400 holders of record of the Common Stock and 9,875,165 shares
outstanding.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects that it will retain its future earnings for use
in the operation and expansion of its business and does not anticipate
declaring or paying any cash dividends in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual short-term debt and capitalization
of the Company at March 31, 1998 and as adjusted to give effect to the receipt
of the estimated net proceeds from the sale of the 1,638,630 shares of Common
Stock offered by the Company hereby at the public offering price of $17.25 per
share. This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including payable to related party...... $ 42,164 $ 15,922
======== ========
Long-term debt........................................... 1,537 1,537
-------- --------
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued.......................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 9,875,165 shares issued and outstanding;
11,513,795 shares issued and outstanding, as adjusted
(1)................................................... 99 115
Additional paid-in capital............................. 99,129 125,355
Accumulated deficit.................................... (22,041) (22,041)
Cumulative foreign translation adjustment.............. (1,471) (1,471)
-------- --------
Total shareholders' equity........................... 75,716 101,958
-------- --------
Total capitalization................................ $ 77,253 $103,495
======== ========
</TABLE>
- ---------------------
(1) Excludes (i) 1,313,832 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of March 31, 1998 at a weighted
average exercise price of $13.16, and (ii) 2,187,741 shares of Common
Stock reserved for future issuance under the Company's stock plans. See
Notes 12 and 13 of Notes to the Consolidated Financial Statements.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere herein. The consolidated statement of operations data for
the years ended December 31, 1995, 1996 and 1997 and the consolidated balance
sheet data as of December 31, 1996 and 1997 are derived from the consolidated
financial statements of the Company, which financial statements have been
audited by Price Waterhouse LLP, independent accountants, and are included
elsewhere in this Prospectus. The consolidated statement of operations data
for years ended December 31, 1993 and 1994 and the consolidated balance sheet
data as of December 31, 1993, 1994 and 1995 are derived from financial
statements of the Company audited by Price Waterhouse LLP that are not
included herein. The balance sheet data as of March 31, 1998 and the statement
of operations data for the three months ended March 31, 1997 and 1998 are
derived from unaudited financial statements included elsewhere herein. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue:
Government............. $31,051 $35,805 $33,575 $42,958 $ 48,483 $ 8,403 $ 9,914
Commercial............. 9,082 13,172 16,550 23,059 43,288 7,418 17,785
------- ------- ------- ------- -------- ------- --------
Total revenue.......... 40,133 48,977 50,125 66,017 91,771 15,821 27,699
Cost of goods sold...... 19,103 23,813 22,724 30,415 58,507 (1) 7,529 12,500
------- ------- ------- ------- -------- ------- --------
Gross profit........... 21,030 25,164 27,401 35,602 33,264 8,292 15,199
Operating expenses:
Research and
development........... 7,044 7,588 7,786 9,485 11,814 2,776 5,284
Selling and other
operating costs....... 10,358 12,353 14,656 18,999 26,551 5,087 8,818
Combination costs...... -- -- -- -- 36,450 (1) -- --
------- ------- ------- ------- -------- ------- --------
Total operating
expenses.............. 17,402 19,941 22,442 28,484 74,815 7,863 14,102
Earnings (loss) from op-
erations............... 3,628 5,223 4,959 7,118 (41,551)(1) 429 1,097
Interest income......... 138 705 226 44 182 6 286
Interest expense and
other.................. (170) (172) (795) (819) (2,103) (312) (972)
------- ------- ------- ------- -------- ------- --------
Earnings (loss) before
income taxes........... 3,596 5,756 4,390 6,343 (43,472) 123 411
Income tax provision
(benefit).............. 405 570 523 1,251 (12,884) 32 121
------- ------- ------- ------- -------- ------- --------
Net earnings (loss)..... $ 3,191 $ 5,186 $ 3,867 $ 5,092 $(30,588)(1) $ 91 $ 290
======= ======= ======= ======= ======== ======= ========
Net earnings (loss) per
share(2):
Basic.................. $ 0.70 $ 1.01 $ 0.74 $ 0.95 $ (5.23) $ 0.02 $ 0.03
======= ======= ======= ======= ======== ======= ========
Diluted................ $ 0.66 $ 0.95 $ 0.70 $ 0.91 $ (5.23) $ 0.02 $ 0.03
======= ======= ======= ======= ======== ======= ========
Weighted average shares
outstanding(2):
Basic.................. 4,537 5,149 5,246 5,361 5,843 5,424 9,799
======= ======= ======= ======= ======== ======= ========
Diluted................ 4,828 5,436 5,523 5,624 5,843 5,748 10,222
======= ======= ======= ======= ======== ======= ========
<CAPTION>
DECEMBER 31,
-------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $31,610 $35,573 $37,884 $44,190 $ 26,567 $ 25,892
Total assets............ 40,385 49,269 56,918 75,104 153,857 150,979
Short-term debt,
including payable to
related parties........ 642 761 2,764 7,870 38,059 42,164
Long-term debt,
excluding current
portion................ 1,167 1,209 1,175 5,173 1,679 1,537
Total shareholders'
equity................. 33,046 39,162 43,470 49,971 75,189 75,716
</TABLE>
- ---------------------
(1) In connection with the acquisition of AGEMA, which was effective on
December 1, 1997, the Company recorded a one-time charge of $52.5 million.
The write-off consisted of $36.4 million of in-process research and
development and acquisition-related costs, which were included as a
separate line in operating expenses, and $16.1 million of inventories due
to the creation of duplicative product lines, which was included in cost
of goods sold.
(2) See Note 1 of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net earnings
(loss) per share.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
FLIR Systems, Inc., founded in 1978, is a world leader in the design,
manufacture and marketing of thermal imaging and broadcast camera systems for
a wide variety of commercial and government applications, including condition
monitoring, research and development, manufacturing process control, airborne
observation and broadcast, search and rescue, federal drug interdiction,
surveillance and reconnaissance, navigation safety, border and maritime
patrol, environmental monitoring and ground based security.
The Company's business is organized around two principal markets, commercial
and government. Historically, a majority of the Company's revenue has been
derived primarily from government sales, which accounted for 52.8% and 35.8%,
respectively, of the Company's revenue for the year ended December 31, 1997
and the three months ended March 31, 1998. However, the Company is shifting
its product mix in favor of commercial applications, which accounted for 47.2%
and 64.2%, respectively, of the Company's revenue for the year ended December
31, 1997 and the three months ended March 31, 1998. The Company seeks to
enhance its state-of-the-art products within existing commercial and
government markets, as well as develop products for new market opportunities
that use advanced thermal imaging technology such as new uncooled detector
technology that operates at room temperature, allowing for less expensive,
smaller, lighter systems, requiring less power to operate. Additionally, the
Company has developed higher margin software analysis tools that enhance the
capability and customization of the Company's products. As hardware prices
decline, the sophistication of image analysis software and the incremental
functionality provided by such analysis tools are expected to become a more
critical component of customers' purchasing decisions.
Effective December 1, 1997, the Company acquired AGEMA, headquartered in
Stockholm, Sweden, the world leader in the design, manufacture and marketing
of handheld infrared cameras for detecting and measuring temperature
differences for a wide variety of commercial and research applications. This
acquisition increased the Company's worldwide commercial thermal imaging
market share, enabled the Company to expand its product development efforts
through the elimination of duplicative research and development programs,
created an extensive international sales and marketing organization and
allowed the Company to more efficiently focus its manufacturing operations.
AGEMA reported revenue of $52.4 million for the year ended December 31, 1997.
However, as the acquisition was accounted for as a purchase, the Company's
Consolidated Statement of Operations only include AGEMA's results for the
month of December 1997.
The acquisition was accomplished through the issuance of 4,162,000 shares of
Common Stock, valued at $54.1 million, to Spectra, AGEMA's parent company, in
exchange for all the outstanding shares of AGEMA stock. In conjunction with
the acquisition, during the quarter ended December 31, 1997, the Company
recognized a one-time charge of $52.5 million. The write-off consisted of
$36.4 million of in-process research and development and acquisition-related
costs, which were included as a separate line item in operating expenses, and
$16.1 million of inventories due to the creation of duplicative product lines,
which were included in cost of goods sold. In addition, the Company expects to
amortize a total of approximately $17.7
16
<PAGE>
million in intangible assets over periods ranging from 15 to 17 years. The
Company has divided production responsibilities between its primary
facilities, with handheld and ground based products manufactured in Stockholm
and government and airborne observation and broadcast products manufactured in
Portland.
Sales to customers outside of the United States accounted for approximately
46%, 32% and 47% of the Company's revenue in 1995, 1996 and 1997,
respectively, and approximately 46% of the Company's revenue for the three
months ended March 31, 1998. The Company anticipates that international sales
will continue to account for a significant portion of revenue, particularly as
a result of the AGEMA acquisition. Historically, currency fluctuations have
had little impact on revenue realization. However, since the Company seeks to
reduce its exposure to currency fluctuations by denominating the majority of
its international sales in U.S. dollars, a decrease in the value of foreign
currencies relative to the U.S. dollar could make the Company's products less
price-competitive. With the recent acquisition of AGEMA contributing a
significant volume of sales denominated in foreign currencies, the Company has
increased exposure to foreign exchange fluctuations and changing dynamics of
foreign competitiveness based on variations in the value of the U.S. dollar
relative to other currencies. The Company typically experiences longer payment
cycles on its international sales, which can have an adverse impact upon the
Company's liquidity. In addition, a substantial portion of the Company's
operations are conducted outside the United States, particularly in Sweden.
International sales and operations may be subject to risks such as the
imposition of governmental controls, export license requirements, restrictions
on the export of critical technology, political and economic instability,
trade restrictions, labor union activities, changes in tariffs and taxes,
difficulties in staffing and managing international operations, and general
economic conditions.
The Company experiences fluctuations in orders and sales due to seasonal
fluctuations and customer sales cycles. Revenue in the fourth quarter of each
year generally has been significantly higher than any other quarter in that
year and the first, and in some cases, the second quarter of the following
year, due to the seasonal pattern of contracting by the U.S. and certain
foreign governments, the frequent requirement by international customers to
take delivery of equipment prior to the end of December due to funding
considerations, and the tendency of commercial enterprises to fully utilize
yearly capital budgets prior to expiration. In addition, a significant portion
of the Company's quarterly sales have historically occurred in the last month
of each quarter, with sales frequently concentrated in the last week or days
of the quarter. Such events are likely to continue to result in substantial
fluctuations in quarterly results in the future. As a result of such quarterly
fluctuations in operating results, the Company believes that quarter-to-
quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated statement of operations data expressed as a percentage of
revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- -------------
1995 1996 1997 1997 1998
------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Government............................. 67.0% 65.1% 52.8% 53.1% 35.8%
Commercial............................. 33.0 34.9 47.2 46.9 64.2
------ ------ -------- ------ ------
Total revenue......................... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold...................... 45.3 46.1 63.8 (1) 47.6 45.1
------ ------ -------- ------ ------
Gross profit.......................... 54.7 53.9 36.2 (1) 52.4 54.9
Operating expenses:
Research and development............... 15.5 14.4 12.9 17.5 19.1
Selling and other operating costs...... 29.3 28.8 28.9 32.2 31.8
Combination costs...................... -- -- 39.7 -- --
------ ------ -------- ------ ------
Total operating expenses.............. 44.8 43.2 81.5 49.7 50.9
Earnings (loss) from operations....... 9.9 10.7 (45.3) (1) 2.7 4.0
Interest income......................... 0.5 0.1 0.2 -- 1.0
Interest expense and other.............. (1.6) (1.2) (2.3) (1.9) (3.5)
------ ------ -------- ------ ------
Earnings (loss) before income taxes... 8.8 9.6 (47.4) 0.8 1.5
Income tax provision (benefit).......... 1.0 1.9 (14.0) 0.2 0.4
------ ------ -------- ------ ------
Net earnings (loss)..................... 7.8% 7.7% (33.4)%(1) 0.6% 1.1%
====== ====== ======== ====== ======
</TABLE>
- ---------------------
(1) Excluding the one-time charge of $52.5 million in connection with the
acquisition of AGEMA, cost of goods sold, gross profit, earnings (loss)
from operations and net earnings (loss) in 1997 would have been 46.2%,
53.8%, 12.0% and 7.5%, respectively.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. The Company's revenue for the three months ended March 31, 1998
increased 75.1%, from $15.8 million in the first quarter of 1997 to $27.7
million in the first quarter of 1998. Commercial revenue continued to show
significant growth increasing 139.8% from $7.4 million in the first quarter of
1997 to $17.8 million in the first quarter of 1998. The inclusion of revenue
from AGEMA and increased sales of airborne observation and broadcast systems
were the principal contributors to the growth in commercial revenue. Revenue
from the sale of systems to the government market increased 18.0%, from $8.4
million in the first quarter of 1997 to $9.9 million in the first quarter of
1998. This growth was primarily due to the inclusion of revenue from the sales
of the AGEMA 1000, a ground based surveillance infrared imager.
As a result of the acquisition of AGEMA in December of 1997, sales of the
Company's commercial products accounted for the majority of the Company's
total revenue. As a percentage of total revenue for the quarter ended March
31, 1998, revenue from the sale of imaging systems to the government market
constituted 35.8% and revenue from the sale of commercial imaging systems
constituted 64.2%, compared to 53.1% for the government market and 46.9% for
the commercial market for the first quarter of 1997.
18
<PAGE>
Revenue from sales outside the United States increased as a percentage of
total revenue from approximately 34.2% to approximately 45.8% for the quarters
ended March 31, 1997 and 1998, respectively. This increase was principally due
to increased deliveries of commercial products in Europe as a result of the
AGEMA acquisition.
Gross profit. Gross profit as a percentage of revenue increased slightly
from 52.4% in the first quarter of 1997 to 54.9% in the first quarter of 1998.
The increase in gross profit as a percentage of revenue was principally
attributable to the higher proportion of total revenue derived from the sale
of commercial products which, as a result of the favorable cost structure of
the AGEMA commercial products, now generally exceed those margins experienced
from the sale of imaging systems to the government market.
Research and development. Research and development expense as a percentage
of revenue increased from 17.5% to 19.1% for the three months ended March 31,
1997 and 1998, respectively. In absolute dollar terms, research and
development expense increased from $2.8 million in the first quarter of 1997
to $5.3 million in the first quarter of 1998, primarily due to the inclusion
of research and development expenses of AGEMA, increased engineering efforts
related to the introduction of the ULTRA 6000 as well as on-going product
development and product enhancement efforts. The overall level of research and
development expense reflects the continued emphasis on product development and
new product introductions. Due to the timing of revenue during the year,
research and development expense as a percentage of revenue is typically
higher in the first quarter than on a full year basis.
Selling and other operating costs. Selling and other operating costs as a
percentage of revenue decreased slightly from 32.2% in the first quarter of
1997 to 31.8% in the first quarter of 1998. In absolute dollar terms, selling
and other operating costs increased from $5.1 million to $8.8 million for the
quarters ended March 31, 1997 and 1998, respectively. The increase in absolute
dollar terms was due to the inclusion of AGEMA's operations, costs associated
with increased revenue during the quarter (primarily commissions), costs
related to increased personnel and the inclusion of amortization of the
patents and the excess of the purchase price over net assets acquired related
to the acquisition of AGEMA. Such amortization amounted to $288,000 for the
quarter ended March 31, 1998.
Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations,
transaction gains and losses and miscellaneous bank charges. The increase from
$312,000 in the first quarter of 1997 to $972,000 for the quarter ended March
31, 1998 was primarily due to increased short-term debt as a result of
increased working capital needs during the quarter.
Income taxes. The provision for income taxes for the quarter ended March 31,
1998 resulted in an effective tax rate of 29.4% compared to 26.0% for the
quarter ended March 31, 1997. The increase in the effective tax rate was
primarily due to limitations on the timing and recognition of the Company's
net operating loss carryforwards and tax credits. The effective tax rate
remained substantially below statutory rates due to utilization of net
operating loss carryforwards, various tax credits and benefits from the
favorable tax treatment of international revenue.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenue. Revenue increased 39.0%, from $66.0 million in 1996 to $91.8
million in 1997. Revenue from the sale of thermal imaging systems to the
government market increased 12.9%, from $43.0 million in 1996 to $48.5 million
in 1997. This increase was primarily attributable to continued robust sales of
the SAFIRE thermal imaging system and increased deliveries to international
customers, which typically have a higher sales price than domestic orders.
Additionally, revenue from the sale of products manufactured by the Company's
United Kingdom subsidiary increased during 1997. Commercial revenue increased
87.7%, from $23.1 million in 1996 to $43.3 million in 1997. This improvement
was principally attributable to increased sales of the UltraMedia, the
Company's airborne camera system for the airborne observation and broadcast
market segment, which aggregated $12.2 million in 1997 compared to $6.3
million in 1996, further production and
19
<PAGE>
deliveries of the Company's handheld imaging systems, which aggregated $10.9
million in 1997 compared to $4.7 million in 1996, higher international sales,
and the one month contribution from AGEMA's operations which aggregated $9.4
million.
Revenue increased 31.7%, from $50.1 million in 1995 to $66.0 million in
1996. Revenue in 1996 from the sale of thermal imaging systems to the
government market increased 27.9%, from $33.6 million in 1995 to $43.0 million
in 1996. This increase was primarily due to increased sales of the SAFIRE
thermal imaging system, principally to the U.S. Marine Corps and the U.S. Air
Force. Commercial revenue increased 39.3%, from $16.6 million in 1995 to $23.1
million in 1996. This improvement was principally attributable to the
inclusion of revenue from sales of the Company's airborne observation and
broadcast products, primarily the UltraMedia which was introduced in April
1996.
The Company has continued to benefit from its significant investment in
developing worldwide sales and distribution channels. The majority of the
Company's revenue outside the United States is from Europe. International
revenue increased from $21.2 million in 1996 to $43.3 million in 1997 and
accounted for approximately 47.2% of the Company's revenue in 1997, an
increase from the 32.0% experienced in 1996 and the 46.0% experienced in 1995.
The increase in absolute dollars and as a percentage of revenue in 1997 was
primarily due to increased shipments under the terms of existing international
contracts, decreased shipments to U.S. government customers, principally the
U.S. Marine Corps, and the inclusion of one month of AGEMA revenue which was
primarily international.
Gross profit. As a percentage of revenue, gross profit decreased from 53.9%
in 1996 to 36.2% in 1997, primarily due to the $16.1 million write-off of
duplicative inventories related to the AGEMA acquisition which were included
in cost of goods sold in 1997. Exclusive of this write-off, gross margin
remained relatively consistent at 53.8% for 1997 compared to 53.9% in 1996.
The gross margin remained relatively consistent due to an increase in higher
margin international sales and a decrease in sales to the U.S. Government
which aggregated $19.0 million in 1997 compared to $26.5 million in 1996 and
which typically have lower margins than other sales to the government market.
This increase was mitigated by the increased proportion of sales of certain of
the Company's commercial products which had slightly lower margins than
government products. Gross profit decreased as a percentage of revenue from
54.7% in 1995 to 53.9% in 1996, primarily due to the lower percentage of
higher margin international sales in 1996 and increased sales to the U.S.
Government.
Research and development. Research and development expense increased 24.6%,
from $9.5 million in 1996 to $11.8 million in 1997, and increased 21.8%, from
$7.8 million in 1995 to $9.5 million in 1996. As a percentage of revenue,
research and development expense decreased from 14.4% in 1996 to 12.9% in 1997
and decreased from 15.5% in 1995 to 14.4% in 1996. The increase in research
and development expense, in absolute dollar terms, was attributable to
increased research and development activities related to the introduction of
the UltraMedia-RS, the ULTRA 6000 and the Tracer, as well as to on-going
product enhancements. Further impacting research and development expense was
the reclassification of development costs directly associated with engineering
revenue as cost of goods sold rather than research and development expenses.
Such costs amounted to $800,000, $200,000 and $425,000 in 1997, 1996 and 1995,
respectively. Without these reclassifications, research and development
expense as a percentage of revenue would have been 13.7%, 14.7% and 16.4% in
1997, 1996 and 1995, respectively, reflecting the fact that a large percentage
of research and development expense is fixed in nature.
Selling and other operating costs. Selling and other operating costs
increased 39.7%, from $19.0 million in 1996 to $26.6 million in 1997, and
increased 29.6%, from $14.7 million in 1995 to $19.0 million in 1996. Selling
and other operating costs as a percentage of revenue remained relatively
consistent at 28.8% in 1996 and 28.9% in 1997, and decreased slightly from
29.3% in 1995 to 28.8% in 1996. This increase, in absolute dollar terms, was
primarily due to costs associated with increased revenue, particularly the
increase in international sales, expenses related to the expanded operations
of the Company's United Kingdom facility and to increased personnel. Further,
the Company has continued to expand and strengthen the direct sales and
marketing staff.
20
<PAGE>
Interest expense and other. 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 $819,000 in 1996 to
$2.1 million in 1997 was primarily due to increased short-term and long-term
debt as a result of increased working capital needs discussed below. The
increase from $795,000 in 1995 ($195,000 exclusive of the one-time costs
associated with the acquisition of Optimas Corporation ("Optimas," now known
as FSI Automation, Inc.) to $819,000 in 1996 was due to the one-time costs
associated with the acquisition of Optimas. Such acquisition expenses
aggregated approximately $600,000.
Income taxes. The Company's effective income tax rates for 1997, 1996 and
1995 were 29.6%, 19.7% and 11.9%, 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. Additionally, the Company recognized a net deferred tax asset of
$14.7 million, $400,000 and $950,000 in 1997, 1996 and 1995, respectively,
under the recognition criteria of Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes." The $14.7 million deferred
tax asset recognized in 1997 relates primarily to the $52.5 million write-off
in conjunction with the AGEMA acquisition. The current portion of income tax
expense consists of state, federal and foreign income taxes, as the
utilization of net operating loss carryforwards and existing tax credits was
limited.
At December 31, 1997, the Company had net operating loss carryforwards
aggregating $9.3 million, which expire in the years 2005 through 2012.
Utilization of the Company's acquired net operating loss carryforwards from
Optimas 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 $1.3 million which
expire in the years 1999 through 2012.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data for the nine quarters ended March 31, 1998, as well as such
data expressed as a percentage of the Company's total revenue for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Government............. $ 6,479 $ 9,991 $11,913 $14,575 $ 8,403 $10,976 $12,946 $ 16,158 $ 9,914
Commercial............. 4,757 5,138 6,025 7,139 7,418 8,963 10,969 15,938 17,785
------- ------- ------- ------- ------- ------- ------- -------- -------
Total revenue.......... 11,236 15,129 17,938 21,714 15,821 19,939 23,915 32,096 27,699
Cost of goods sold...... 5,244 7,386 8,312 9,473 7,529 8,995 11,130 30,853 (1) 12,500
------- ------- ------- ------- ------- ------- ------- -------- -------
Gross profit........... 5,992 7,743 9,626 12,241 8,292 10,944 12,785 1,243 15,199
Operating expenses:
Research and
development........... 2,117 2,166 2,272 2,930 2,776 2,569 3,187 3,282 5,284
Selling and other
operating costs....... 3,736 4,039 4,390 6,834 5,087 5,872 5,930 9,662 8,818
Combination costs...... -- -- -- -- -- -- -- 36,450 (1) --
------- ------- ------- ------- ------- ------- ------- -------- -------
Total operating
expenses.............. 5,853 6,205 6,662 9,764 7,863 8,441 9,117 49,394 14,102
Earnings (loss) from
operations............. 139 1,538 2,964 2,477 429 2,503 3,668 (48,151)(1) 1,097
Interest income......... 29 -- 8 7 6 14 32 130 286
Interest expense and
other.................. (96) (129) (259) (335) (312) (560) (533) (698) (972)
------- ------- ------- ------- ------- ------- ------- -------- -------
Earnings (loss) before
income taxes........... 72 1,409 2,713 2,149 123 1,957 3,167 (48,719) 411
Income tax provision
(benefit).............. 16 303 592 340 32 507 730 (14,153) 121
------- ------- ------- ------- ------- ------- ------- -------- -------
Net earnings (loss)..... $ 56 $ 1,106 $ 2,121 $ 1,809 $ 91 $ 1,450 $ 2,437 $(34,566)(1) $ 290
======= ======= ======= ======= ======= ======= ======= ======== =======
Net earnings (loss) per
share:
Basic.................. $ 0.01 $ 0.21 $ 0.40 $ 0.34 $ 0.02 $ 0.26 $ 0.44 $ (4.96) $ 0.03
======= ======= ======= ======= ======= ======= ======= ======== =======
Diluted................ $ 0.01 $ 0.20 $ 0.38 $ 0.32 $ 0.02 $ 0.25 $ 0.41 $ (4.96)(1) $ 0.03
======= ======= ======= ======= ======= ======= ======= ======== =======
Weighted average shares
outstanding:
Basic.................. 5,299 5,325 5,336 5,379 5,424 5,489 5,542 6,969 9,799
======= ======= ======= ======= ======= ======= ======= ======== =======
Diluted................ 5,515 5,602 5,620 5,657 5,748 5,842 5,980 6,969 10,222
======= ======= ======= ======= ======= ======= ======= ======== =======
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Government............. 57.7% 66.0% 66.4% 67.1% 53.1% 55.0% 54.1% 50.3% 35.8%
Commercial............. 42.3 34.0 33.6 32.9 46.9 45.0 45.9 49.7 64.2
------- ------- ------- ------- ------- ------- ------- -------- -------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold...... 46.7 48.8 46.3 43.6 47.6 45.1 46.5 96.1 (1) 45.1
------- ------- ------- ------- ------- ------- ------- -------- -------
Gross profit........... 53.3 51.2 53.7 56.4 52.4 54.9 53.5 3.9 54.9
Operating expenses:
Research and
development........... 18.8 14.3 12.7 13.5 17.5 12.9 13.3 10.2 19.1
Selling and other
operating costs....... 33.3 26.7 24.5 31.5 32.2 29.4 24.8 30.1 31.8
Combination costs...... -- -- -- -- -- -- -- 113.6 (1) --
------- ------- ------- ------- ------- ------- ------- -------- -------
Total operating
expenses.............. 52.1 41.0 37.2 45.0 49.7 42.3 38.1 153.9 50.9
Earnings (loss) from
operations............. 1.2 10.2 16.5 11.4 2.7 12.6 15.4 (150.0)(1) 4.0
Interest income......... 0.3 -- -- -- -- -- 0.1 0.4 1.0
Interest expense and
other.................. (0.9) (0.9) (1.4) (1.5) (1.9) (2.8) (2.2) (2.2) (3.5)
------- ------- ------- ------- ------- ------- ------- -------- -------
Earnings (loss) before
income taxes........... 0.6 9.3 15.1 9.9 0.8 9.8 13.3 (151.8) 1.5
Income tax provision
(benefit).............. 0.1 2.0 3.3 1.6 0.2 2.5 3.1 (44.1) 0.4
------- ------- ------- ------- ------- ------- ------- -------- -------
Net earnings (loss)..... 0.5% 7.3% 11.8% 8.3% 0.6% 7.3% 10.2% (107.7)% 1.1%
======= ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
- ---------------------
(1) In connection with the acquisition of AGEMA, which was effective December
1, 1997, the Company recorded a one-time charge of $52.5 million. The
write-off consisted of $36.4 million of in-process research and
development and acquisition-related costs, which were included as a
separate line in operating expenses, and $16.1 million of inventories due
to the creation of duplicative product lines, which was included in cost
of goods sold. Excluding the one-time charge, net earnings and earnings
per diluted share for the quarter ended December 31, 1997, would have been
$2.9 million or $0.39 per diluted share.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had notes payable net of cash on hand of
$26.7 million compared with $20.7 million at December 31, 1997. The increase
in notes payable during the three months ended March 31, 1998, was principally
caused by increased inventories and payment of accrued payroll and other
liabilities, primarily incentive bonuses to employees and commissions to
representatives.
Accounts receivable decreased from $55.5 million at December 31, 1997 to
$47.6 million at March 31, 1998. The decrease in receivables was primarily due
to the increased percentage of total receivables that represent sales to
commercial customers which typically have a shorter collection cycle than
sales to government customers.
Inventories increased from $34.7 million at December 31, 1997 to $38.5
million at March 31, 1998. The increase in inventories was primarily
attributable to the higher volume production requirements for the AGEMA 570
and AGEMA 1000 products.
The Company's investing activities have consisted primarily of the
expenditures for fixed assets, which totaled $2.7 million compared to $1.4
million for the quarters ended March 31, 1998 and 1997, respectively. The
Company has budgeted approximately $3.0 million related to the replacement of
the Company's enterprise resource planning system to integrate worldwide
operations and address Year 2000 compliance issues.
The Company has available a $30.0 million line of credit which bears
interest at IBOR plus 1.75% (7.4% at March 31, 1998) secured by all the
Company's assets. The Company also has a note payable to the same bank which
aggregated $4.3 million at March 31, 1998 and is payable in monthly
installments of $123,000 at an interest rate of 7.4%. The loan agreement
governing the line of credit and note payable requires the Company to maintain
certain financial ratios and restricts the Company from taking certain
significant actions, including incurring additional debt or making
acquisitions, without the consent of the bank. The line of credit is up for
renewal and the note payable is due on August 1, 1998. Additionally, the
Company, through one of its subsidiaries, has a 40,000,000 Swedish Krona
(approximately $5.0 million) line of credit which bore interest at 4.7% at
March 31, 1998. At March 31, 1998, the Company had $32.2 million outstanding
under the lines of credit.
The use of cash by operating activities in the first quarter is consistent
with prior years and is primarily due to the increases in inventories and the
decrease in accrued liabilities discussed above. The Company believes that its
existing cash and available credit facilities and proceeds from this offering
together with continuing efforts to expedite the collection of accounts
receivable and management of inventory levels will be sufficient to meet its
cash requirements for the foreseeable future.
23
<PAGE>
BUSINESS
The Company is a world leader in the design, manufacture and marketing of
thermal imaging and broadcast camera systems for a wide variety of
applications in the commercial and government markets. The Company's thermal
imaging systems use advanced infrared technologies that detect infrared
radiation, or heat, enabling the operator to measure minute temperature
differences and to see objects in daylight or total darkness and through
obscurants such as smoke, haze and most types of fog. The Company's products
can also incorporate visible light cameras, proprietary image analysis
software and gyrostabilized gimbal technology. The Company's products come in
a variety of configurations such as handheld or ground based systems, or can
be mounted on ships, helicopters or fixed-wing aircraft. The Company's
products provide state-of-the-art imaging technology coupled with competitive
price performance characteristics for existing commercial and government
applications including condition monitoring, research and development,
manufacturing process control, airborne observation and broadcast, search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environmental monitoring and ground based
security. The Company has also developed innovative new products utilizing
advanced uncooled thermal imaging technology, which allows for less expensive,
smaller, lighter, solid state systems that require less power to operate. In
addition, the Company's product configurations and image analysis software
tools increase the Company's ability to provide products tailored to meet
individual customer requirements.
INDUSTRY OVERVIEW
BACKGROUND
Infrared radiation is 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 processed and formatted into a video signal
and displayed on a monitor. These systems are distinguished from one another
by their capability to detect and resolve infrared radiation, the clarity of
the image displayed, detection range, system reliability, acquisition cost and
adaptability to a variety of customer requirements. Thermal imaging systems,
unlike night vision goggles, enable the operator to see objects in total
darkness and through obscurants such as smoke, haze and most types of fog.
Advanced thermal imaging systems can also detect and measure minute
temperature differences, a critical tool for a variety of applications.
Early applications of thermal imaging technology primarily involved the use
of expensive high-resolution systems in military combat applications such as
weapons targeting, where performance factors were far more important in the
procurement decision than system acquisition cost. A simpler form of the
technology was also employed in limited commercial applications such as
detection of heat loss from buildings or houses, where system price was more
important than sophisticated performance. Consequently, a large group of
potential users in both the commercial and government markets did not use
thermal imaging technology since available systems either failed to meet their
performance requirements or were too expensive.
An infrared detector, which absorbs infrared radiation and converts it into
an electronic signal, is a primary component of thermal imaging systems. Until
recently, thermal imaging systems incorporated infrared detectors which needed
to be cooled to near absolute zero in order to operate. The cryogenic
"coolers" needed for such detectors are expensive components that require
greater power consumption and add to the weight, size and overall complexity
of the system. Thermal imaging systems that use new "uncooled" detector
technology do not require these cooling components but instead operate at room
temperature. This feature allows for less expensive, smaller, lighter, solid
state systems requiring less power to operate, which in turn are expected to
increase the demand for such systems in existing market segments and create
demand in new market segments, such as fire fighting and machine vision (a new
manufacturing process control application incorporating real-time, fully
automated process control solutions). Despite the advantages of uncooled
technology, cooled systems should continue to play a significant role in the
government markets due to their longer range performance capabilities.
Additionally, as hardware prices decline, the sophistication of image analysis
software and the incremental functionality provided by such analysis tools are
expected to become a more critical component of customers' purchasing
decisions.
24
<PAGE>
MARKETS
Applications for thermal imaging technology are found in both the commercial
and government markets, as described below.
COMMERCIAL MARKET. The commercial market is comprised of a broad range of
thermal imaging applications including condition monitoring, research and
development, manufacturing process control and airborne observation and
broadcast. This market has evolved from the use of simple heat sensing devices
to sophisticated radiometric (temperature measuring) instruments that use a
variety of accessories and extensive image analysis software. The increasing
emphasis on improving manufacturing productivity and product quality,
underscored by the growing importance of quality assurance programs such as
International Standards Organization (ISO) 9000 and the increasing complexity
of manufacturing processes, has expanded the commercial market. The
introduction of uncooled thermal imaging technology has created opportunities
to further penetrate existing markets as well as to create demand in new
markets that can benefit from the enhanced price and performance
characteristics of such technology. The growth of the commercial market has
also been driven by increased demand resulting from improvements in hardware
functionality, enhanced image analysis software performance and declining
hardware prices.
The commercial market is comprised of the following market segments:
Condition Monitoring. Thermal imaging systems are used in condition
monitoring applications to improve productivity by detecting the location of
equipment faults so they can be corrected before leading to catastrophic
failures or major equipment damage, thereby enabling companies to
significantly reduce operating expenses by lowering repair costs and reducing
downtime. Additionally, improved functionality of image analysis software,
longer battery operation and simplicity of system operation are critical
factors for these applications. Specific condition monitoring applications
include locating and repairing defective power transmission components or
electrical connections, predicting the end of life of bearings in rotating
machinery, evaluating the integrity or amount of insulation in a building or
container and locating roof leaks and related damage.
Research and Development. Thermal imaging, due to its non-destructive
analysis capability, is a useful tool in a wide variety of research and
development applications. 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, in
the development of diesel engines using ceramic-coated pistons to determine
proper adhesion of the ceramic to the metal piston and in the design of rubber
tires to evaluate uniform heat distribution. Research and development
applications typically require very high performance systems with extensive
software capabilities and tools to analyze the thermal image.
Manufacturing Process Control. The ability to determine whether a
manufacturing process will produce acceptable results at the earliest point in
the production cycle is critical to quality assurance and cost reduction.
Thermal imaging and image analysis allow for the monitoring and control of
heat, which is used in virtually all industrial processes. Similarly, thermal
imaging systems can identify moisture and contaminants and help identify the
thickness of material as well as the integrity of the bonding of composite
materials. Thermal imaging applications for manufacturing process control are
varied and extensive, including monitoring the quality of metal, plastic and
glass cast parts, which are highly dependent upon the temperature distribution
in the mold, monitoring the quality of paper, which is dependent upon proper
and even moisture distribution during the drying process, and monitoring the
quality of products such as rubber gloves, which can be thermally examined to
locate abnormally warm or cool spots, indicating non-uniform thickness that
may result in a quality defect.
Airborne Observation and Broadcast. The use of airborne observation and
broadcast systems is becoming a standard tool for television stations and
broadcast networks. This technology is also used by law enforcement agencies
around the world for surveillance, suspect search and apprehension and officer
support. This market segment typically requires either very high performance
daylight cameras or dual imaging systems with both visible light and thermal
imaging capabilities, in addition to state-of-the-art stabilization, the
ability
25
<PAGE>
to provide jitter-free images from great distances, and the ability to
downlink the information from the aircraft to the production studio or command
center on a real-time basis. The Company expects that this market segment will
continue to grow as more television stations and broadcast networks use
helicopters and other aircraft to provide real-time reporting of news and
sporting events. Furthermore, such applications should increase as system size
and weight continue to decline, enabling the use of such systems on small and
weight restricted helicopters. In addition, law enforcement agencies have
established thermal imaging as a primary support tool and should continue to
take advantage of system price performance improvements.
New Commercial Market Opportunities. In addition to existing market
segments, new market segments for thermal imaging are developing due to the
availability, cost effectiveness and enhanced performance characteristics of
uncooled thermal imaging technology. Machine vision and fire fighting are
near-term market opportunities, while landing guidance, maritime navigation,
security and handheld law enforcement support represent future growth
opportunities. As system prices decline, uncooled thermal imaging technology
will provide cost effective solutions for a wide variety of new commercial
applications.
GOVERNMENT MARKET. The government market is comprised of a broad range of
thermal imaging applications including search and rescue, federal drug
interdiction, surveillance and reconnaissance, navigation safety, border and
maritime patrol, environmental monitoring, and ground based security. Although
the majority of government applications require the use of cooled technology,
uncooled thermal imaging systems can be used for ground based security,
handheld observation and mine detection applications. Customers in the
government market demand competitively priced systems that can be mounted on a
variety of helicopters, fixed-wing aircraft and ships, operate in different
climatic conditions and perform a variety of tasks requiring high image
resolution quality and substantial image stabilization.
The government market is comprised of the following market segments:
Search and Rescue. Thermal imaging systems are used in traditional search
and rescue missions to rescue individuals in danger or distress on boats or in
vehicles, to provide offshore oil platform safety and to provide emergency or
disaster response support for missing persons or accident victims.
Federal Drug Interdiction. Thermal imaging systems enable government
agencies to expand their drug interdiction and support activities by allowing
greater surveillance and detection capabilities.
Surveillance and Reconnaissance. Thermal imaging systems are used in
surveillance and reconnaissance applications for the precise positioning of
objects from substantial distances and for enhanced situation awareness,
particularly at night or in conditions of reduced or obscured visibility.
Navigation Safety. Thermal imaging systems are used in navigation safety
applications to improve missions by enabling crews piloting helicopters,
fixed-wing aircraft and ships, to see terrain and objects and to detect and
avoid obstacles at night and in conditions when visibility is limited due to
smoke, haze or fog.
Border and Maritime Patrol. Thermal imaging systems are used in airborne
operations for border and maritime surveillance, particularly at night, to
maintain the territorial integrity of borders and coastal waters, to monitor
national fishing boundaries and to prevent smuggling.
Environmental Monitoring. Thermal imaging systems are used in environmental
monitoring applications including forest fire detection and suppression, oil
spill detection and monitoring and wildlife management.
Ground Based Security. Thermal imaging systems are used for ground based
surveillance and perimeter security of government and military installations,
particularly at night.
COMPANY STRATEGY
The Company's objective is to strengthen its position as the leading
provider of thermal imaging hardware and software to the commercial and
government markets. Key elements of the Company's strategy to achieve this
objective include:
Drive Demand Through Price Performance Leadership. The Company is committed
to providing high value imaging products with improved system capability and
performance. The Company is rapidly
26
<PAGE>
incorporating new uncooled thermal imaging technology in its products, which
enables the Company to provide smaller, lighter, solid state systems at a much
lower cost. The Company intends to expand market share by aggressively
marketing the performance advantages of its recently introduced products that
incorporate this uncooled thermal imaging technology and by focusing its
development efforts on new products utilizing such technology.
Expand Penetration in Core Markets. The Company is a global market leader
that provides a complete range of thermal imaging systems, image analysis
software and visible light camera systems for the commercial and government
markets and intends to continue to expand its market share in both markets.
The Company intends to continue introducing and providing cost effective
systems that utilize state-of-the-art technology while building upon its
reputation for quality, service and reliability to further penetrate its core
markets. In addition, the Company's extensive installed customer base provides
upgrade opportunities through technology and product advances.
Target New Market Applications. The Company intends to develop and
aggressively market new products incorporating uncooled thermal imaging
technology for major markets where price performance benefits were previously
unavailable. By maintaining a customer-focused approach to its product
development efforts, the Company is able to better identify and understand
broad customer applications and develop products to meet these new market
opportunities. For example, the Company is currently seeking to apply its
technology to fire fighting and machine vision applications. In the future,
the Company intends to develop systems for landing guidance, maritime
navigation and mine detection.
Leverage Global Sales and Marketing Organization. The Company, with eight
strategic locations, has developed an extensive, worldwide, multi-channel
sales and marketing network consisting of direct sales staff and independent
representatives and distributors in over 50 countries. The Company believes
its experience in the complexities associated with the sales and marketing of
its products to distinct government and commercial markets through multiple
channels around the world provides it with a competitive advantage. The
Company's expertise includes an understanding of export regulations,
establishing and operating sales and service centers throughout the world, and
successfully understanding and addressing cultural differences. The Company
also provides comprehensive training to its sales force, representatives,
distributors and customers about its technology and the operation of its
products. The Company intends to expand its international sales and marketing
network to further penetrate existing markets and reach undeveloped markets
around the world.
Expand Software Applications. The Company intends to continue to increase
the software content of its products as image analysis and application
specific software become an increasingly important capability and competitive
distinction among thermal imaging products. For example, with the expanded
application of thermal imaging technology in machine vision and manufacturing
process control applications, the Company believes it will be well positioned
to take advantage of its pattern recognition and gauging image analysis
software to solve critical customer problems in commercial applications such
as automobile manufacturing, electronics design and food processing.
Pursue Strategic Acquisitions. The Company frequently evaluates strategic
acquisition opportunities that could enhance the Company's existing product
offerings or provide an avenue for developing new complementary businesses,
product lines or technologies. The Company has grown and intends to continue
to grow internally as well as through the acquisition of complementary
businesses, product lines or technologies. For example, in December 1997, the
Company acquired AGEMA, the world leader in the design, manufacture and
marketing of handheld infrared cameras that detect and measure temperature
differences for a wide variety of commercial and research applications. This
acquisition increased the Company's worldwide commercial thermal imaging
market share, enabled the Company to enhance its product development efforts
through the elimination of duplicative research and development programs,
created an extensive international sales and marketing organization and
allowed the Company to more efficiently focus its manufacturing operations.
The Company believes that selective acquisitions will continue to provide the
Company with opportunities to broaden its technology and product offerings,
expand its market presence and enter into new markets.
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<PAGE>
TECHNOLOGY
The Company uses its expertise in diverse technologies and engineering
capabilities to develop and produce sophisticated thermal imaging systems. The
following table graphically describes the engineering disciplines and
manufacturing processes that are integrated by the Company to produce cost-
effective products and shorten the product development cycle.
[Table with boxes showing engineering disciplines and manufacturing processes]
System Design and Radiometry. The Company believes that its extensive system
integration experience allows it to effectively combine a wide variety of
engineering disciplines necessary to design and manufacture thermal imaging
systems. The Company also possesses the specialized system design knowledge
required to produce thermal imaging systems that can accurately measure
temperature, which is a critical tool for many commercial applications.
Software Development. The Company utilizes both internal and external sources
to develop the software capabilities necessary to simplify complex thermal
imaging systems. The Company has developed Windows-based image analysis
software applications that solve a variety of manufacturing process and quality
control problems. The Company also has the expertise necessary to develop
embedded software control systems, communications software and testing programs
for its thermal imaging systems.
Optical Design and Fabrication. The Company designs and manufactures many of
the sophisticated optics that are required to gather and transmit detected
thermal images with minimum distortion, allowing it to significantly shorten
the product development cycle and avoid costs and delays associated with
reliance on third-party optics sources.
Electronic Design. The Company designs signal processing circuits that
interface directly with the detector arrays to convert detected infrared
radiation into electronic signals and designs the electronic image processing
that is necessary to convert the electronic signals into standard video format.
Advances in microprocessors, electric miniaturization and image processing have
made significant contributions to the performance and utility of the Company's
thermal imaging systems.
Mechanical Engineering. The Company's design and production of thermal
imaging systems involves highly sophisticated mechanical engineering
techniques. It is critical that the design and assembly of the supporting
structures for system components such as detector arrays, coolers, scanners and
optics meet high-precision mechanical tolerances.
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Similarly, the gyrostabilized gimbal assembly for the SAFIRE, Star SAFIRE,
ULTRA 6000, UltraMedia, and UltraMedia-RS requires expertise in electro-
mechanical control, gyroscopes and specialized stabilization controls.
PRODUCTS
The Company serves the commercial and government thermal imaging markets
with a variety of state-of-the-art products. Of the Company's commercial
products, handheld products typically range in price from approximately
$30,000 to $80,000, software image analysis products are typically priced at
approximately $5,000 and airborne observation and broadcast products typically
range in price from approximately $180,000 to $350,000. The Company's
government products typically range in price from approximately $80,000 to
$500,000. The Company's principal products are listed in the table below and
described in greater detail in the following pages.
COMMERCIAL PRODUCTS
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
PRODUCT NAME DESCRIPTION AND APPLICATION
- ------------------------------------------------------------------------------------
<S> <C>
ThermoVision Uncooled radiometric camera used for manufacturing process control
and machine vision applications
- ------------------------------------------------------------------------------------
AGEMA 570 Handheld uncooled radiometric camera used for condition monitoring,
research and development and manufacturing process control
applications
- ------------------------------------------------------------------------------------
Tracer Windows-based real-time Pentium digital recording system used for
research and development and manufacturing process control
applications
- ------------------------------------------------------------------------------------
AGEMA 550 Handheld radiometric camera used for condition monitoring and
manufacturing process control applications
- ------------------------------------------------------------------------------------
AGEMA 900 Handheld radiometric camera used for research and development
applications
- ------------------------------------------------------------------------------------
Xcaliper High precision software product used for certain manufacturing
process control and machine vision applications
- ------------------------------------------------------------------------------------
IRwin Report Windows-based software package used for review, analysis and
processing of captured images
- ------------------------------------------------------------------------------------
ULTRA 6000 High resolution thermal imaging system with a color video camera
system used for search and rescue, federal drug interdiction,
surveillance and reconnaissance, navigation safety, border and
maritime patrol, and environmental monitoring applications
- ------------------------------------------------------------------------------------
UltraMedia-RS Compact high resolution gyrostabilized broadcast camera system used
for real-time news and sports coverage applications
- ------------------------------------------------------------------------------------
UltraMedia High resolution gyrostabilized broadcast camera system used for
real-time news and sports coverage and for surveillance and
reconnaisance, federal drug interdiction and border and maritime
patrol applications
- -------------------------------------------------------------------------------
GOVERNMENT PRODUCTS
- -------------------------------------------------------------------------------
<CAPTION>
PRODUCT NAME DESCRIPTION AND APPLICATION
- ------------------------------------------------------------------------------------
<S> <C>
Star SAFIRE* Focal plane array, high resolution thermal imaging system used for
search and rescue, surveillance and reconnaissance, navigation
safety, border and maritime patrol and environmental monitoring
applications
- ------------------------------------------------------------------------------------
SAFIRE High resolution thermal imaging system used for search and rescue,
surveillance and reconnaissance, navigation safety, border and
maritime patrol and environmental monitoring applications
- ------------------------------------------------------------------------------------
AGEMA 1000 Fixed or tripod mounted thermal imaging system used for ground
based security
</TABLE>
- -------------------------------------------------------------------------------
* First shipment made in June of 1998.
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<PAGE>
COMMERCIAL PRODUCTS. The Company offers a range of state-of-the-art thermal
imaging products for a variety of applications including condition monitoring,
research and development, and manufacturing process control, in addition to
airborne observation and broadcast. The Company has penetrated the commercial
market by developing customized products with increased flexibility and
features, in addition to software analysis tools.
The Company's handheld commercial thermal imaging systems incorporate a
thermal imaging detector housed in a compact self-contained unit, a video
display or viewfinder, an embedded processor and various image analysis
software packages. A viewfinder much like that of a home video camera is a
standard feature in most models. The thermal image can also be displayed on an
independent video display. The systems also include a PC-based processor that
allows accurate measurement of minute temperature differences and extensive
real-time analysis and post-processing of the acquired image. Most of the
Company's airborne and observation broadcast camera systems incorporate
industry standard visible light broadcast cameras rather than thermal imaging
cameras. The Company also manufactures dual imaging systems, including both
visible light and thermal imaging cameras. The product is typically mounted to
an aircraft, primarily a helicopter, and operated by the use of a hand
controller, which remotely directs the stabilized turret. The broadcast camera
inside the turret provides the video output that is then either recorded on a
video recorder or downlinked to a production studio for live broadcast.
ThermoVision. The ThermoVision, introduced in early 1998, is an uncooled
thermal imaging camera for manufacturing process control and machine vision
applications. Operating as a remote controlled "smart" sensor in supervised
operation or integrated into a complete control system, the ThermoVision
transmits data on a continuous real-time basis at 60 frames per second. Using
built-in intelligence, the ThermoVision can process multiple areas of
interest, trigger alarms or transmit control data. A variety of flexible,
high-speed and reliable digital cable, fiber-optic and wireless transmission
media allow for flexible system integration with controllers, computers and
vision systems. Examples of ThermoVision applications include monitoring the
manufacture of metal, plastic or glass cast parts and automatically making
necessary adjustments in the manufacturing line on a real-time basis to ensure
consistent product quality.
AGEMA 570. The AGEMA 570, introduced in December 1997, was developed to meet
the need for a high performance lightweight cost-effective portable thermal
imager and is the world's first commercially available handheld radiometric
thermal imaging system incorporating state-of-the-art uncooled detector
technology, solid state in electronic design with instant-on performance. The
detector used in the AGEMA 570 provides for accurate temperature measurement
of objects from -20(degrees)C to +2000(degrees)C. The imager is enclosed in a
single lightweight package weighing less than five pounds which facilitates
one-hand, point and shoot operation. Image optimization is automatic and menu
and data displays appear in any of 14 languages. The AGEMA 570 has
applications across all commercial radiometric market segments. Examples of
AGEMA 570 applications include locating and repairing defective power
transmission components or electrical connections, predicting the end of life
of bearings in rotating machinery, evaluating the integrity or amount of
insulation in a building or container and locating roof leaks and related
damage.
Tracer. The Tracer, 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-based PC. The Tracer
combines a high-resolution thermal imaging camera, such as the AGEMA 550 and
570, with a Pentium PC, digital recording system and Windows-based image
analysis software for research and development applications such as in laser
design to determine the power distribution of the beam or in the development
of diesel engines using ceramic-coated pistons to determine proper adhesion of
the ceramic to the metal piston.
AGEMA 550. The AGEMA 550, introduced by AGEMA in the fourth quarter of 1996,
is a handheld infrared camera developed for condition monitoring applications.
The AGEMA 550 uses a stirling cooled PtSi focal plane array and, in its
standard version, is calibrated for temperature measurements of up to
1500(degrees)C. The AGEMA 550 has built-in digital recording and is available
with various lenses, for different fields of views,
30
<PAGE>
as well as filters and other accessories. Examples of AGEMA 550 applications
include monitoring the quality of products such as paper, which depends upon
proper and even moisture distribution during the drying process, and rubber
gloves, which can be thermally examined to locate abnormally warm or cool
spots, indicating nonuniform thickness that may result in a quality defect.
AGEMA 900. The AGEMA 900, first introduced by AGEMA in 1992, is a high
resolution, handheld thermal imaging system available in both short and long
wave versions. The AGEMA 900, with its wide range of lenses, filters and other
accessories is ideally suited for research and development applications such
as evaluating the uniformity of heat distribution in the design of rubber
tires.
Xcaliper. Xcaliper image analysis 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. It also contains pattern
recognition software algorithms, which can perform high speed part orientation
and inspection tasks, such as the evaluation of laser printer test sheets to
ensure the precise alignment of thousands of tiny dots of ink and the
minimization of ink scatter.
IRwin Report. IRwin Report software, the latest release of which was
introduced by AGEMA in 1996, allows for review, analysis and processing of
captured images and data. IRwin software is a Windows-based program that is
easy to use and affordable. IRwin software is typically packaged with the
AGEMA 550 and 570, though it is capable of operating with data gathered from
other imaging products as well.
ULTRA 6000. The ULTRA 6000, first introduced in the third quarter of 1997,
is a compact, lightweight, 5-axis gyrostabilized high performance dual imaging
system that combines advanced focal plane array thermal imaging technology
with a visible light color camera to provide stable, high resolution imaging
capability. The ULTRA 6000 standard features include user-selected fields of
view, electronic zoom, freeze frame, and up to 15:1 magnification with the
visible light camera. These images can be recorded directly to videotape or
transmitted live to ground centers using an optional microwave downlink.
Examples of ULTRA 6000 applications include the detection and apprehension of
suspects, and the monitoring of vehicle chases by law enforcement agencies.
UltraMedia-RS. The UltraMedia-RS, 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 allows small and weight restricted
aircraft to gather high quality video footage from long distances, delivering
a maximum of 40:1 magnification.
UltraMedia. The UltraMedia, introduced in the first quarter of 1996, is a
compact daylight broadcast system that delivers a maximum of 72:1
magnification in a lightweight, 5-axis gyrostabilized package that is ideally
suited for airborne broadcast teams. It was developed to meet the needs of
television stations and entertainment networks to cover live news and sporting
events. The UltraMedia is also used by law enforcement agencies around the
world for surveillance, suspect search and apprehension, and officer support.
GOVERNMENT PRODUCTS. The Company offers a range of state-of-the-art products
to government agencies. To meet the needs of these customers, the Company
provides a range of products consisting of a thermal imaging system enclosed
in a gyrostabilized gimbal which is typically mounted to an aircraft or ship.
A thermal imaging system for the government market typically consists of a
turret, an electronics module, a hand control unit and a video display
monitor. The infrared sensor incorporates the most critical system components
including a detector assembly, closed cycle cooler, scanner (depending on
detector technology utilized), optics and electronics. The hand control unit
is used to remotely direct the turret.
Star SAFIRE. The Company's newest product for the government market, with
first deliveries expected in June 1998, is the Star SAFIRE, a 3-axis
gyrostabilized, 360(degrees) field of view thermal imaging system
incorporating third generation focal plane array detector technology. Using
three fields of view, the system
31
<PAGE>
provides extended detection range capability and visually advanced imagery.
The system permits multiple optical payloads in addition to the infrared
detector, including a TV camera with a zoom lens for daylight operations,
laser rangefinder, laser illuminator or laser designator. Examples of Star
SAFIRE applications include the detection of vehicles, ships or planes
transporting illegal narcotics, and search and rescue for individuals in
danger or distress.
SAFIRE. The SAFIRE system, first introduced in the second quarter of 1992,
is a digital system with an advanced detector design that provides a range of
features designed to satisfy the most demanding government and military
customer requirements. The unit's 3-axis gyrostabilized gimbal configuration
has been certified to operate at airspeeds in excess of 400 knots, ensuring
that the SAFIRE can operate and produce, a stable, high resolution image when
mounted on most aircraft designed for subsonic operations. The SAFIRE has a
digital microprocessor, which permits optional features such as autotracking,
autoscanning, laser illumination, laser rangefinder, use of a TV camera,
navigation interfaces, digital image filters and freeze frame. Examples of
SAFIRE applications include navigation assistance at night and in adverse
weather for medical evacuation helicopters and border patrol.
AGEMA 1000. The ground-based AGEMA 1000, first introduced by AGEMA in 1992,
is a fixed or tripod mounted thermal imaging system that can detect small
objects up to several kilometers away under extreme environmental conditions,
day or night. Highly reliable and ready for 24-hour operation, these compact
and versatile thermal imaging systems switch dual lenses at a touch of a
button, optimize images automatically and offer remote control software. The
AGEMA 1000 can also be integrated into a gimbal for airborne applications.
Examples of AGEMA 1000 applications include perimeter security of military
bases and sensitive government installations or buildings.
32
<PAGE>
CUSTOMERS
The primary customers for the Company's products include domestic and foreign
government agencies, OEMs, commercial manufacturers, research and development
facilities, universities, utility companies, television stations and broadcast
networks and various commercial enterprises. The following table lists by
application a sample of customers and OEMs that have purchased one or more of
the Company's systems, either directly or through one of the Company's OEM
customers or other third parties within the past three years.
COMMERCIAL CUSTOMERS
- --------------------------------------------------------------------------------
CONDITION MONITORING
Amoco Corporation E.I. Dupont de Nemours PEMEX (Mexico)
British Petroleum Co., and Co. (Dupont) U.S. Steel
P.L.C. Ford Motor Company
Consolidated Edison, Marathon Oil Co.
Inc.
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT
Alenia Aerospazio Hercules Aerospace Motorola, Inc.
(Italy) Company National Renewable
AT&T Laboratories Homelite Inc. Energy Laboratory
General Motors Intel Corporation Sandia Laboratory
Corporation
- --------------------------------------------------------------------------------
MANUFACTURING PROCESS CONTROL
Digital Equipment Hewlett Packard Intel Corporation
Corporation Company Silicon Graphics, Inc.
Dupont Hughes Aircraft
Company
- --------------------------------------------------------------------------------
AIRBORNE OBSERVATION AND BROADCAST
WCVB-TV (Ch. 5), WCBS-TV (Ch. 2), New Fort Worth Police
Boston York Department
WHDH-TV (Ch. 7), KATU-TV (Ch. 2), Japanese National
Boston Portland, OR Police Agency
TV Globo, Brazil KOIN-TV (Ch. 6), Los Angeles County
WGN-TV (Ch. 9), Portland, OR Sheriff
Chicago KGW-TV (Ch. 8), Maryland State Police
KCOP-TV (Ch. 13), Los Portland, OR New York City Police
Angeles KGO-TV (Ch. 7), San Sao Paolo Police
KMEX-TV (Ch.34), Los Francisco Texas Department of
Angeles KPIX-TV (Ch. 5), San Public Safety
KNBC-TV, (Ch. 4), Los Francisco
Angeles KRON-TV (Ch. 4), San
WABC-TV (Ch.7), New Francisco
York KING-TV (Ch. 5),
WNYW-TV (Ch. 5), New Seattle
York KOMO-TV (Ch. 4),
Seattle
GOVERNMENT CUSTOMERS
- --------------------------------------------------------------------------------
SEARCH AND RESCUE
Bristow Helicopter Irish Coast Guard Royal Norwegian Air
(U.K.) Japanese Maritime Force
Helikopter Services Safety Agency U.S. Air Force Reserve
(Norway)
- --------------------------------------------------------------------------------
FEDERAL DRUG INTERDICTION
Bell Helicopter U.S. Army National U.S. Park Police
McDonnell Douglas Guard
Helicopter Company
U.S. Drug Enforcement
Agency
- --------------------------------------------------------------------------------
SURVEILLANCE AND RECONNAISSANCE
Canadian Department of Raytheon Company U.S. Navy
National Defense Sikorsky Aircraft
Danish Air Force Corp.
- --------------------------------------------------------------------------------
NAVIGATION SAFETY
U.S. Army U.S. Marine Corps
- --------------------------------------------------------------------------------
BORDER AND MARITIME PATROL
Augusta S.P.A. (Italy) Royal Danish Navy U.S. Customs
Raytheon Company U.S. Border Patrol
- --------------------------------------------------------------------------------
ENVIRONMENTAL MONITORING
Atlantic Richfield U.S. Coast Guard U.S. Department of
Company Energy
- --------------------------------------------------------------------------------
GROUND BASED SECURITY
U.S. Air Force White Sands Missile
Range
33
<PAGE>
SALES, DISTRIBUTION AND CUSTOMER SERVICE
As a result of the combination with AGEMA, the Company believes that its
sales and marketing organization is the largest in the industry and
effectively covers the world with its combination of direct sales, independent
representatives and distributors, application engineers and service centers.
The process of selling and marketing the Company's products involves extensive
product promotion, technical selling and after-sales support. The Company's
commercial and government products are highly technical and have distinct
characteristics and functionality. The Company's sales and service personnel
undergo a comprehensive training program to educate them as to the technical
aspects of the products as well as familiarize them with individual customer
requirements. The Company's ongoing training programs are continuously updated
for changes in technology and competition.
The Company has distinct sales channels for commercial, airborne observation
and broadcast and government customers. The Company sells its commercial
thermal imaging products worldwide through a direct sales staff of more than
70 people and a network of 90 distributors (many with multiple offices) and
representatives, each with an exclusive right to sell the Company's products
in a defined geographic area. This network is managed by 15 regional sales
managers employed by the Company. The Company sells its airborne observation
and broadcast products through a seven person direct sales staff. The Company
sells its government products in the United States through a 23 person direct
sales staff, and internationally, through a nine person direct sales staff and
50 independent representatives and distributors covering all major markets
worldwide. The Company has a technical and customer support staff comprised of
21 people in the United States and Europe who provide application development,
technical training, operational assistance, installation design and support,
and software assistance to direct and indirect sales personnel as well as to
customers. Additionally, the Company maintains service facilities at its
factories in Portland, Oregon, Stockholm, Sweden and West Malling, U.K. and at
its subsidiaries in Secaucus, New Jersey, Frankfurt, Germany, Toronto, Canada,
Paris, France and Milan, Italy. Each of the Company's service facilities has
the capability to perform the complex calibrations required to service
commercial thermal imaging systems. The Company employs 32 people worldwide in
its service organizations. The Company also maintains limited service
capability in three additional foreign locations under the direction of its
independent representatives or distributors. Product marketing by the Company
involves Internet promotion, advertising, direct mail, press tours, technical
articles for publications and participation in approximately 100 trade shows
per year.
BACKLOG
The Company believes that backlog should not be considered indicative of
revenue for any future periods because the Company's sales to commercial
customers are generally made pursuant to purchase orders rather than long term
contracts and, accordingly, the backlog at any given time is for immediate
shipments. In addition, the backlog for the government business is heavily
dependent upon the timing of receipt of government contracts which may have
multiple year delivery schedules. Furthermore, delivery schedules are
frequently revised to accommodate changes in customer needs. Although orders
received by the Company are generally subject to cancellation, in the case of
most orders included in backlog, the customer is obligated to pay certain
costs and/or penalties for cancellation.
The Company's backlog as of March 31, 1997 and March 31, 1998 was $16.5
million and $24.7 million, respectively. Backlog includes units for which a
customer has specified delivery within 12 months. Furthermore, backlog at
March 31, 1997 does not include the backlog of AGEMA, as the acquisition of
AGEMA was not effective until December 1, 1997.
MANUFACTURING
The Company manufactures many of the critical components of its products,
including gimbals, optics, certain detectors and high speed motors, allowing
the Company to minimize lead times, facilitate prompt delivery of its
products, control costs and ensure that these components satisfy its quality
standards. The
34
<PAGE>
Company purchases other parts pre-assembled, including detectors, coolers,
circuit boards, cables and wiring harnesses. The Company purchases certain
components from sole or limited source suppliers. In particular, the Company,
through its subsidiary, AGEMA, has entered into a supply contract with
Lockheed Martin for the supply of uncooled detectors for integration into the
AGEMA line of products. Lockheed Martin is currently the only producer of
uncooled detectors capable of being used in radiometric applications that is
manufacturing such detectors in volume. Subject to certain exceptions, the
contract provides AGEMA with the exclusive right to purchase uncooled
detectors for use in the commercial thermography market and a limited,
nonexclusive right to purchase uncooled detectors for use in the government
market. Under the contract, AGEMA has the corresponding obligation to purchase
uncooled detectors solely from Lockheed Martin. Currently, the AGEMA 570 and
the ThermoVision are the only products of the Company that use uncooled
detectors supplied by Lockheed Martin. However, the Company intends in the
future to use uncooled detectors supplied by Lockheed Martin in other handheld
products or ground based security products, such as the AGEMA 1000. While the
contract provides for the delivery of a fixed number of uncooled detectors on
a monthly basis, the delivery schedule may be increased or decreased by AGEMA
within certain limits. Based on current and anticipated production levels and
supply requirements, the Company expects that the contract will continue
through the fourth quarter of 1999 or the first quarter of 2000.
The Company has in the past, and may in the future, experience delays in
receiving adequate supplies of sole and limited source components. If Lockheed
Martin or any other significant sole or limited source supplier were to become
unable or unwilling to continue to provide critical components in required
volumes, the Company's ability to manufacture products incorporating such
components would be disrupted unless the Company could identify and qualify
acceptable replacement components or redesign such products with different
components. No assurance can be given that additional sources would be
available to the Company or that product redesign would be feasible on a
timely basis or at acceptable costs. Specifically, no assurance can be given
that, upon expiration of the current supply contract with Lockheed Martin, the
Company will be able to successfully negotiate a new contract with Lockheed
Martin for the supply of uncooled detectors on an exclusive basis or at all,
or that the Company will be able to identify another source of uncooled
detectors. A significant amount of the Company's revenue is expected to be
derived from the sale of the AGEMA 570. Accordingly, any failure of the
Company to renew the contract or identify another source of uncooled detectors
would have a material adverse effect on the Company's business, financial
condition and results of operations. Further, any extended interruption in the
supply of sole or limited source components would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's manufacturing operations are, from time to time, audited by
certain of its OEM customers, which include several major aircraft
manufacturers, and have been certified as meeting their quality standards. The
Company's facilities in Stockholm, Sweden and West Malling, U.K. are ISO 9000
certified.
COMPETITION
Competition in the market for thermal imaging equipment is significant. The
Company believes that the principal competitive factors in its market are
performance, cost, customer service, product reputation and effective
marketing and sales efforts. In addition, the Company believes that the speed
with which companies can identify new applications for thermal imaging,
develop products to meet those needs and supply commercial quantities to the
market are important competitive factors. The Company's competitors are
different in each market segment. In the commercial market, the Company's
principal competitors are Inframetrics, Inc., Raytheon Company, Cincinnati
Electronics Corp., Nippon Avionics Co., Ltd., Wescam Ltd. and Media
Cybernetics Image Analysis. In the government market, the Company competes
with Inframetrics, General Electric Company, p.l.c., Wescam Ltd., Lockheed
Martin Corp., The Boeing Company, Daimler-Benz Aerospace AG and Thompson-CSF.
Many 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 government funds.
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
35
<PAGE>
addressed by the Company. To remain competitive, the Company must continue to
invest in and focus upon research and development and product innovation.
There can be no assurance that the Company will be successful in such efforts.
No assurance can be given that the Company will be able to compete effectively
in the future.
PROPRIETARY RIGHTS
The Company's ability to compete successfully and achieve future revenue
growth will depend in part on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, trademark and trade secret laws,
confidentiality agreements and contractual provisions to protect its
proprietary rights. However, the Company believes that its historical success
has been primarily a function of other competitive advantages such as the
skill and experience of its employees, its worldwide, multichannel sales,
distribution and servicing network and its name recognition and quality
products. Although the Company currently holds United States patents covering
certain aspects of its technologies, there can be no assurance that the
Company will obtain additional patents or trademarks on its technology,
products and trade names or that its patents or trademarks will be
sufficiently broad to protect the Company's proprietary rights and will not be
challenged or circumvented by competitors. Likewise, there can be no assurance
that measures that the Company takes to protect its proprietary rights will be
adequate to deter their misappropriation or disclosure. Any failure by the
Company to meaningfully protect its intellectual property could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, because intellectual property does not
necessarily represent a barrier to entry into the thermal imaging industry,
there can be no assurance that the Company will be able to maintain its
competitive advantage or that competitors will not develop capabilities equal
or superior to that of the Company.
EMPLOYEES
As of March 31, 1998, the Company had 650 employees of whom 72 were in
administration, 184 were in engineering, 10 were in quality assurance, 198
were in manufacturing, assembly and testing and 186 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 in the United States is represented by a union or other
bargaining group. Employees in Sweden and Italy are represented by unions. The
Company believes its relationships with its employees and unions are good.
PROPERTIES
The Company leases its facilities under various operating leases that expire
in 1998 through 2003. The leases require fixed monthly payments over their
terms. The Company believes that it will be able to extend any lease expiring
in 1998 on commercially acceptable terms or find suitable replacement
facilities. The following summarizes the primary facilities leased by the
Company:
<TABLE>
<CAPTION>
LEASE
LOCATION EXPIRATION DATE SQUARE FEET
-------- --------------- -----------
<S> <C> <C>
Portland, Oregon.............................. 2000 85,000
Stockholm, Sweden............................. 2001 63,000
West Malling, United Kingdom.................. 2000 12,500
Bothell, Washington........................... 2000 9,600
Secaucus, New Jersey.......................... 2003 8,000
Leighton Buzzard, United Kingdom.............. 1999 4,500
Toronto, Canada............................... 1998 4,200
Paris, France................................. 1998 2,900
Frankfurt, Germany............................ 1998 2,200
Milan, Italy.................................. 1998 2,200
</TABLE>
36
<PAGE>
LEGAL PROCEEDINGS
In the normal course of business, the Company is from time to time involved
in certain litigation. In August 1996, the Equal Employment Opportunity
Commission and a former employee of AGEMA filed an action against a subsidiary
of AGEMA and the former president of such subsidiary in United States District
Court for the District of New Jersey alleging that the former president
sexually harassed the employee and other female employees while he was
president. The complaint seeks monetary damages under federal and state laws.
On May 6, 1998, the court granted the defendants' motion to dismiss the state
law claims on the grounds that they are time-barred. While AGEMA is vigorously
defending against the action, there can be no assurance that this defense will
be successful. In connection with the acquisition of AGEMA, Spectra agreed to
indemnify the Company for all liabilities related to this litigation in excess
of $90,000. The Company is not currently the subject of or a party to any
other material legal proceedings.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert P. Daltry........ 54 Chairman of the Board of Directors and Chief Executive Officer
Leif Bergstrom.......... 59 Vice Chairman of the Board of Directors
J. Kenneth Stringer
III.................... 45 President, Chief Operating Officer and Director
Arne Almerfors.......... 52 Executive Vice President
James A. Fitzhenry...... 43 Vice President, General Counsel and Secretary
Dr. J. Richard Kerr..... 60 Vice President, Advanced Technology Business Development
William N. Martin....... 42 Vice President, Sales
Steven R. Palmquist..... 47 Vice President, Operations
J. Mark Samper.......... 37 Vice President, Finance and Chief Financial Officer
David Smith............. 38 Vice President, International Sales
Patrick L. Edsell....... 49 Director
John C. Hart............ 64 Director
Egon Linderoth.......... 61 Director
W. Allen Reed........... 50 Director
Lars Spongberg.......... 53 Director
Ronald L. Turner........ 51 Director
</TABLE>
Robert P. Daltry joined the Company in 1987 as President and Chief Executive
Officer and a member of the Board of Directors. He was elected Chairman of the
Board of Directors in April 1993. From 1984 to 1987, Mr. Daltry was employed
by Lear Siegler, Inc., an aerospace company, where he served as Vice President
of Marketing for the Instrument and Avionics Systems Division. From 1981 to
1984, Mr. Daltry served as Regional Manager for Singer-Kearfott, an aerospace
company. Mr. Daltry holds a B.A. in Accounting from Grove City College and is
a graduate of the U.S. Army Command and General Staff College.
Leif Bergstrom joined the Company in December 1997 in connection with the
Company's acquisition of AGEMA, and currently serves as Vice Chairman of the
Board. Prior to the acquisition of AGEMA, from 1995 to 1997, Mr. Bergstrom
served as President of the Industrial Measurement Group of Spectra-Physics AB,
the former parent company of AGEMA. From 1984 to 1995, he was President and
Chief Executive Officer of AGEMA. Mr. Bergstrom currently serves on the Boards
of Directors of Nobel Elektronik AB, BLH Electronics, Inc. and the Institute
for Optical Research. Mr. Bergstrom received a M.Sc. in Electronic Engineering
from The Royal Institute of Technology in Stockholm and received an MBA from
the Stockholm School of Economics.
J. Kenneth Stringer III joined the Company in 1984 as Vice President of
Finance and Chief Financial Officer and was appointed Executive Vice President
in 1990. Mr. Stringer was elected to the Board of Directors in April 1993. In
April 1995, Mr. Stringer was appointed President and Chief Operating Officer.
Prior to joining the Company, Mr. Stringer spent six years with Evans Products
Company, Portland, Oregon, as Director of Financial Reporting. Mr. Stringer
received his B.S. degree from the University of Oregon.
Arne Almerfors joined the Company in December 1997 in connection with the
Company's acquisition of AGEMA, and currently serves as Executive Vice
President. From 1995 to 1997, Mr. Almerfors was President and Chief Executive
Officer AGEMA. He also served as President and Chief Executive Officer of CE
Johansson AB, a manufacturer of coordinate measuring devices, from 1989 to
1995. Mr. Almerfors received a Masters in Political Science in addition to
post graduate courses in corporate finance and accounting from the University
of Stockholm.
38
<PAGE>
James A. Fitzhenry joined the Company in 1993 as Corporate Counsel and
Director of Administration, and was appointed Vice President of Corporate
Operations, General Counsel and Secretary in 1995. From 1990 to 1993, Mr.
Fitzhenry served in the White House during the Bush Administration in the
Office of Policy Development and the Office of Cabinet Affairs. Previously, he
served as legal counsel and legislative director to Senator Mark O. Hatfield
(R-Ore.) and practiced law in Portland, Oregon. Mr. Fitzhenry received his
B.A. from the University of Oregon and received his J.D. and Masters of
Management degrees from Willamette University.
Dr. J. Richard Kerr joined the Company in 1987 as Vice President for
Engineering and Product Development. In 1995, Dr. Kerr was appointed Vice
President of Advanced Development. Previously he acted as a consultant with
several venture capital firms and start-up high technology businesses for four
years. He was Vice President for Marketing of Flight Dynamics, an aviation
electronics company, from 1979 to 1984. Dr. Kerr also served as President,
Vice President and Professor of the Oregon Graduate Center. Dr. Kerr received
his Ph.D., M.S. and B.S. in Electrical Engineering from Stanford University.
William N. Martin joined the Company in 1994 as Director of Sales and was
appointed Vice President, Sales for the Company in 1995. Prior to joining the
Company, Mr. Martin was employed by AGEMA Infrared Systems, Inc., where he
initially served as Western Regional Sales Manager and then National Sales
Manager. Prior to joining AGEMA, Mr. Martin served as Regional Manager for
Hughes Aircraft Company. Mr. Martin who is an instrument multi-engine
commercial pilot, attended Wichita State University, majoring in speech and
communications.
Steven R. Palmquist joined the Company in January of 1997 as Vice President
of Engineering and was named Vice President of Operations in January 1998.
Since 1988, Mr. Palmquist has held several management positions with
Tektronix, Inc., including Product Definition and Development Manager,
Business Unit Manager for the Color Printer Division, and Vice President of
Engineering. From 1983 to 1988 he was the founder, President and Chief
Executive Officer of Integrated Measurement Systems, Inc. Mr. Palmquist
received a B.S. in Electrical Engineering from Washington State University and
a M.S. in Electrical Engineering from the University of Illinois.
J. Mark Samper joined the Company in 1990 as Corporate Controller and was
appointed Vice President of Finance and Chief Financial Officer in March 1995.
Prior to joining the Company, Mr. Samper spent six years with Price Waterhouse
where he served as an Audit Manager. Mr. Samper received his B.S. degree from
Oregon State University, with a major in accounting. He is a Certified Public
Accountant.
David Smith joined the Company in December of 1997 in connection with the
Company's acquisition of AGEMA and currently serves as Vice President of
International Sales. Since 1996, Mr. Smith has served as President of AGEMA
Infrared Systems, Inc., the U.S. subsidiary of AGEMA. From 1993 to 1996, Mr.
Smith served as the UK Sales Director for AGEMA Infrared Systems, Ltd., the
British subsidiary of AGEMA. Mr. Smith received his national diploma from
Wetford Technical College, England and his engineering degree from the
Hatfield Polytechnical Institute, England.
Patrick L. Edsell was elected to the Board of Directors in December 1997 in
connection with the Company's acquisition of AGEMA. Mr. Edsell is currently
Chairman of the Board, President and Chief Executive Officer of Spectra-
Physics Lasers, Inc., formerly a U.S. subsidiary of Spectra-Physics AB, and
has served in that capacity since 1990. Mr. Edsell also served as Vice
President of Finance and Chief Financial Officer of Spectra-Physics AB from
1984 to 1991. A graduate of the U.S. Air Force Academy with a B.S. in
Economics, Mr. Edsell received an M.A. in Economics from Ohio State University
and an MBA from the University of New Mexico.
John C. Hart has served as a Director of the Company since February 1987 and
as Chairman of the Board of Directors from 1987 to April 1993. From 1982 until
his retirement in 1993, Mr. Hart served as Vice President of Finance,
Treasurer and a member of the Board of Directors of Louisiana-Pacific
Corporation.
39
<PAGE>
Egon Linderoth was elected to the Board of Directors in December 1997 in
connection with the Company's acquisition of AGEMA. Mr. Linderoth is President
of Ostermans Aero AB, an aerospace company in Sweden. Prior to joining
Ostermans, Mr. Linderoth served as President and Chief Executive Officer of
Celsius Industries AB from 1995 to 1996, and President and Chief Executive
Officer of Bofors AB from 1992 to 1995. Mr. Linderoth currently serves on the
Board of Directors of Spectra-Physics AB, the Swedish Industrial Development
Fund, Faufoss AS, Karlskoga Invest AB and is a member of the Swedish Royal
Academy of War Science. Mr. Linderoth received his Baccalaureate in 1958 and
an MBA from the Stockholm School of Economics.
W. Allen Reed has served as a Director of the Company since April 1992. Mr.
Reed is President of General Motors Investment Management Corporation. From
1991 to 1994, Mr. Reed was Vice President and Treasurer of GM Hughes
Electronics Corporation and Hughes Aircraft Company ("Hughes"). From 1984 to
1991, Mr. Reed was President of the Hughes Investment Management Company, a
wholly-owned subsidiary of Hughes. Mr. Reed serves on the Boards of Directors
of General Motors Acceptance Corporation, GMACI Holdings, Inc., Taubman
Centers, Inc. and WEBS Fund, Inc. Mr. Reed also serves as Chairman of the
Investment Advisory Committee for the Howard Hughes Medical Institute and is
Vice Chairman of the Committee on Investment of Employee Benefit Assets
(CIEBA) of the Financial Executives Institute (FEI). Mr. Reed received his BAA
degree from the Auburn University School of Engineering and an MBA from the
Georgia State University School of Business. He also holds the designation of
Chartered Financial Analyst.
Lars Spongberg was elected to the Board of Directors in December 1997 in
connection with the Company's acquisition of AGEMA. Since 1996, Mr. Spongberg
has served as President of Spectra-Physics AB, the former parent company of
AGEMA, and a member of its Board of Directors since April 1997. From 1995 to
1996, he was Senior Vice President of Autoliv AB, an automotive parts
manufacturer, and was previously President of Svenska Handelsbaken, a
commercial bank, from 1993 to 1995.
Ronald L. Turner was elected to the Board of Directors in 1993. In April
1998, Mr. Turner was named President and Chief Operating Officer of Ceridian
Corporation. He served as Executive Vice President of Ceridian Corporation
from April 1997 to April 1998. From 1993 to 1995, Mr. Turner served as
President and Chief Executive Officer of Computing Devices International, an
aerospace company, which is a division of Ceridian Corporation. From 1987 to
1993, Mr. Turner was President and Chief Executive Officer of GEC-Marconi
Electronic Systems Corporation, a defense electronics company. Prior to 1987,
Mr. Turner worked for Martin Marietta Corporation for 14 years in a variety of
executive positions. Mr. Turner serves on the Board of Directors of BTG, Inc.,
is Chairman of the Government Electronics and Information Association and on
the Board of Directors and Executive Committee of the Electronics Industry
Association. He is a past President and a member of the Board of Governors of
the Massachusetts Institute of Technology Society of Sloan Fellows as well as
a past member of the Board of Directors of Aerospace Industries Association,
Inc. and the American Electronics Association.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 31, 1998 as to (i) each person known
by the Company to own beneficially more than five percent of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) the Company's
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company, (iv) all officers and directors of the Company as a
group and (v) the Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
----------------------- SHARES BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------- ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Spectra-Physics AB................. 4,162,000 42.2% -- 4,162,000 36.1%
Sturgaten 32
Box S226, S-102 45
Stockholm, Sweden
Hughes Electronics Corp.(2)........ 760,500 7.7 760,500 -- --
200 North Sepulveda Blvd.
El Segundo, CA 90245
Fidelity Investments(3)............ 700,200 7.1 -- 700,200 6.1
82 Devonshire Street
Boston, MA 02109
Leif Bergstrom..................... 3,000 * -- 3,000 *
Robert P. Daltry................... 253,128 2.5 -- 253,128 2.2
Patrick L. Edsell(4)............... 6,000 * -- 6,000 *
John C. Hart....................... 33,000 * -- 33,000 *
Egon Linderoth(5).................. 6,000 * -- 6,000 *
W. Allen Reed(6)................... 33,000 * -- 33,000 *
Lars Spongberg(7).................. 6,000 * -- 6,000 *
J. Kenneth Stringer III............ 140,010 1.4 -- 140,010 1.2
Ronald L. Turner................... 33,000 * -- 33,000 *
James A. Fitzhenry................. 9,499 * -- 9,499 *
William N. Martin.................. 10,000 * -- 10,000 *
Steven R. Palmquist................ 10,000 * -- 10,000 *
Directors and Executive Officers as
a group (16 persons)(8)............ 588,331 5.7% -- 588,331 5.0%
</TABLE>
- ---------------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option. Applicable
percentage of ownership is based on 9,875,165 shares of Common Stock
outstanding as of March 31, 1998. Beneficial ownership is determined in
accordance with rules of the Securities and Exchange Commission, and
includes voting power and investment power with respect to shares. Shares
issuable upon the exercise of outstanding stock options that are currently
exercisable or become exercisable within 60 days from March 31, 1998 are
considered outstanding for the purpose of calculating the percentage of
Common Stock owned by such person, but not for the purpose of calculating
the percentage of Common Stock owned by any other person. The number of
shares that are issuable upon the exercise of options that are currently
exercisable or exercisable within 60 days of March 31, 1998 is as follows:
Mr. Daltry--129,000; Mr. Hart--33,000; Mr. Reed--33,000; Mr. Stringer--
77,850; Mr. Turner--33,000; Mr. Bergstrom--0; Mr. Edsell--6,000; Mr.
Linderoth--6,000; Mr. Spongberg--6,000; Mr. Martin--1,667; Mr. Fitzhenry--
1,666; Mr. Palmquist--5,000; and all officers and directors as a group--
366,682.
(2) This information as to beneficial ownership is based on a Schedule 13G
filed by General Motors Corporation ("GM"), Hughes Electronics Corporation
("HEC") and Hughes Aircraft Company ("Hughes") with the Securities and
Exchange Commission on February 7, 1994. During that time,
41
<PAGE>
Hughes was a wholly owned subsidiary of HEC, which is a wholly owned
subsidiary of GM. HEC has its principal executive offices located at 200 No.
Sepulveda Boulevard, El Segundo, California 90245 and GM has its principal
executive offices located at 100 Renaissance Center, Detroit, Michigan
48243. The Schedule 13G states that as of December 31, 1993 Hughes was the
beneficial owner of 760,500 shares of Common Stock as to which it had sole
voting and dispositive power and that GM and HEC had shared voting and
dispositive power with respect to such shares. On January 2, 1996, Hughes
changed its name to HE Holdings, Inc. ("HEH"). On December 16, 1997, HEH,
HEC and GM entered into a Master Separation Agreement ("MSA") whereby HEH
spun off as an independent publicly owned company comprised of the HEC
Defense Business, and pursuant to which Raytheon Company ("Raytheon")
combined with HEH through the merger of Raytheon with and into HEH, and then
changed its name to Raytheon Company. As a part of the MSA, HEH (now
Raytheon Company) transferred beneficial ownership of 760,500 shares of
Common Stock to HEC.
(3) This information as to beneficial ownership is based on a Schedule 13G
filed by Fidelity Investments with the Securities and Exchange Commission
on February 10, 1998. The Schedule 13G states that as of December 31,
1997, Fidelity Investments was the beneficial owner of 700,200 shares of
Common Stock as to which it had sole dispositive power, including 169,000
shares of Common Stock as to which it had sole voting power. On May 8,
1998, Fidelity Investments filed a Schedule 13G with the Securities and
Exchange Commission reporting that as of April 30, 1998, it was the
beneficial owner of 635,300 shares of Common Stock as to which it had sole
dispositive power, including 164,100 shares of Common Stock as to which it
had sole voting power.
(4) Mr. Edsell is President of Spectra-Physics Lasers, Inc., formerly a U.S.
subsidiary of Spectra-Physics AB, and serves on the Company's Board of
Directors as a designee of Spectra-Physics AB. Mr. Edsell disclaims
beneficial ownership of the 4,162,000 shares of Common Stock beneficially
owned by Spectra-Physics AB.
(5) Mr. Linderoth serves on the Company's Board of Directors as a designee of
Spectra-Physics AB. Mr. Linderoth disclaims beneficial ownership of the
4,162,000 shares of Common Stock beneficially owned by Spectra-Physics AB.
(6) Mr. Reed is President of General Motors Investment Management Corporation.
Mr. Reed disclaims beneficial ownership of the 760,500 shares of Common
Stock beneficially owned by HEC.
(7) Mr. Spongberg is President of Spectra-Physics AB and serves on the
Company's Board of Directors as a designee of Spectra-Physics AB. Mr.
Spongberg disclaims beneficial ownership of the 4,162,000 shares of Common
Stock beneficially owned by Spectra-Physics AB.
(8) Does not include the 4,162,000 shares of Common Stock beneficially owned
by Spectra-Physics AB, as to which all directors and executive officers
disclaim beneficial ownership. The addresses of the directors and
executive officers are c/o the Company, 16505 S.W. 72nd Avenue, Portland,
Oregon 97224.
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, BancAmerica Robertson Stephens, Prudential Securities
Incorporated and Pacific Crest Securities Inc. (the "Underwiters") have
severally agreed to purchase from the Company and the Selling Shareholder the
following respective numbers of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC........................................... 1,145,000
BancAmerica Robertson Stephens.................................. 572,500
Prudential Securities Incorporated.............................. 572,500
Pacific Crest Securities Inc.................................... 109,130
---------
Total........................................................... 2,399,130
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and the Selling
Shareholder, their counsel and the independent auditors. The nature of the
Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $.52
per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $.10 per share to certain other dealers. After the
offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 359,870
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table bears to the total number of shares of Common Stock offered
hereby. The Company will be obligated, pursuant to the option, to sell such
shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, the Selling Shareholder, and the executive officers and
directors and certain employees of the Company have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for or
any rights to purchase or acquire Common Stock, or enter into any swap or
similar arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of Common Stock, whether any such transaction
43
<PAGE>
described above is to be settled by delivery of such Common Stock or such
other securities, in cash or otherwise, during the 90 day period following the
date of this Prospectus, other than (a) the sale by the Company and the
Selling Shareholder of the shares of Common Stock to be purchased by the
Underwriters pursuant to the Underwriting Agreement, (b) the grant by the
Company of options to purchase shares of Common Stock pursuant to the
Company's stock option plans, as in effect on the date of this Prospectus, in
amounts and upon terms consistent with the Company's past practice and (c) the
issuance by the Company of shares of Common Stock upon exercise of options
granted pursuant to the Company's stock option plans as outstanding on the
date of this Prospectus. Spectra has agreed to the same restrictions for the
period following the date of this Prospectus through December 1, 1998.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Common Stock during the "cooling off" period
immediately preceding the commencement of sales in this offering. The
Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not
connected with the offering and that its net purchases on any one trading day
not exceed prescribed limits. Pursuant to these exemptions, certain
Underwriters, selling group members (if any) or their respective affiliates
intend to engage in passive market making in the Common Stock during the
"cooling off" period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids or effecting syndicate
covering transactions. A stabilizing bid means the placing of any bid or
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Common Stock. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the
offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
Bank of America, an affiliate of BancAmerica Robertson Stephens, makes
available to the Company a $30.0 million line of credit that had an
outstanding balance of approximately $28.5 million at March 31, 1998 and a
term loan that had an outstanding balance of approximately $4.3 million at
March 31, 1998. The Company intends to use the majority of the net proceeds
from the offering to pay down the amount outstanding under the line of credit.
EXPERTS
The Consolidated Financial Statements of FLIR Systems, Inc. as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. The AGEMA
financial statements incorporated in this Prospectus by reference to the
Company's definitive proxy statement dated November 10, 1997, have been so
incorporated in reliance on the report of Ohrlings Coopers & Lybrand AB,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Ater Wynne Hewitt Dodson & Skerritt, LLP, Portland,
Oregon. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco,
California.
44
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company can
be inspected and copied at the public reference facilities of the Commission
located at Room 1024, Judiciary Plaza, at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048, and Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission, at 450 Fifth Street, Judiciary Plaza, N.W., Washington, D.C. 20549
at prescribed rates. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The address of the site is http://www.sec.gov. The Company's
Common Stock is quoted on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can also be inspected
at the National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20002.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement,
including all exhibits thereto, may be obtained from the Commission's
principal office in Washington, D.C. upon payment of the fees prescribed by
the Commission, or may be examined without charge at the offices of the
Commission described above.
INFORMATION INCORPORATED BY REFERENCE
The following documents, or portions thereof, previously filed by the
Company with the Commission pursuant to the Exchange Act are incorporated
herein by reference in this Prospectus: (i) Annual Report on Form 10-K for the
year ended December 31, 1997; (ii) Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998; (iii) Amendment to Quarterly Report on Form 10-
Q/A for the quarter ended March 31, 1998; (iv) the description of the
Company's Common Stock contained in its Registration Statement on Form 8-A
which became effective on June 18, 1993; and (v) pages 26 to 32 and F-22 to F-
43 of the Proxy Statement dated November 10, 1997 filed on November 12, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of securities contemplated hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof
from the date of filing of such documents.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any and all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference therein). Requests for such copies should be
directed to: Investor Relations, FLIR Systems, Inc., 16505 S.W. 72nd Avenue,
Portland, Oregon 97224, telephone number (503) 684-3731.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
45
<PAGE>
FLIR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
STATEMENT ----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants.................. F-2
Consolidated Statement of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31, 1997 and 1998
........................................................................ F-3
Consolidated Balance Sheet as of December 31, 1996 and 1997 and March 31,
1998.................................................................... F-4
Consolidated Statement of Shareholders' Equity for the Years Ended Decem-
ber 31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1998... F-5
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Three Months Ended March 31, 1997 and 1998.. F-6
Notes to the Consolidated Financial Statements........................... F-7
</TABLE>
F-1
<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 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, 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 a 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
March 9, 1998
F-2
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Government...................... $33,575 $42,958 $ 48,483 $ 8,403 $ 9,914
Commercial...................... 16,550 23,059 43,288 7,418 17,785
------- ------- -------- ------- -------
Total revenue................ 50,125 66,017 91,771 15,821 27,699
Cost of goods sold............... 22,724 30,415 58,507 7,529 12,500
Research and development......... 7,786 9,485 11,814 2,776 5,284
Selling and other operating
costs........................... 14,656 18,999 26,551 5,087 8,818
Combination costs................ -- -- 36,450 -- --
------- ------- -------- ------- -------
45,166 58,899 133,322 15,392 26,602
Earnings (loss) from opera-
tions........................ 4,959 7,118 (41,551) 429 1,097
Interest income.................. 226 44 182 6 286
Interest expense and other....... (795) (819) (2,103) (312) (972)
------- ------- -------- ------- -------
Earnings (loss) before income
taxes........................ 4,390 6,343 (43,472) 123 411
Income tax provision (benefit)... 523 1,251 (12,884) 32 121
------- ------- -------- ------- -------
Net earnings (loss).............. $ 3,867 $ 5,092 $(30,588) $ 91 $ 290
======= ======= ======== ======= =======
Net earnings (loss) per share:
Basic........................... $ 0.74 $ 0.95 $ (5.23) $ 0.02 $ 0.03
======= ======= ======== ======= =======
Diluted......................... $ 0.70 $ 0.91 $ (5.23) $ 0.02 $ 0.03
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 775 $ 5,884 $ 5,425
Accounts receivable, net....................... 28,311 55,463 47,567
Inventories.................................... 33,513 34,724 38,542
Prepaid expenses............................... 1,551 3,516 4,129
------- -------- --------
Total current assets........................ 64,150 99,587 95,663
Property and equipment, net..................... 7,137 18,423 19,712
Software development costs, net................. 799 1,043 1,131
Deferred income taxes, net...................... 2,200 16,873 16,880
Intangible assets, net.......................... -- 14,013 13,760
Other assets.................................... 818 3,918 3,833
------- -------- --------
$75,104 $153,857 $150,979
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.................................. $ 6,365 $ 26,558 $ 32,157
Accounts payable............................... 7,628 15,493 14,653
Accounts payable to related parties............ 128 6,228 5,031
Accrued payroll and other liabilities.......... 3,389 19,105 12,112
Accrued income taxes........................... 1,073 363 842
Current portion of long-term debt.............. 1,377 5,273 4,976
------- -------- --------
Total current liabilities................... 19,960 73,020 69,771
Long-term debt.................................. 5,173 1,679 1,537
Pension liability............................... -- 3,969 3,955
Commitments and contingencies................... -- -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000
shares authorized; no shares issued at Decem-
ber 31, 1996, 1997 and March 31, 1998......... -- -- --
Common stock, $0.01 par value, 30,000,000
shares authorized, 5,387,483, 9,756,458 and
9,875,165 shares issued at December 31, 1996,
1997 and March 31, 1998, respectively......... 54 98 99
Additional paid-in capital..................... 41,833 97,684 99,129
Retained earnings (accumulated deficit)........ 8,257 (22,331) (22,041)
Cumulative foreign translation adjustment...... (173) (262) (1,471)
------- -------- --------
Total shareholders' equity.................... 49,971 75,189 75,716
------- -------- --------
$75,104 $153,857 $150,979
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<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,
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
Net loss for the year.. -- -- -- -- -- (30,588) -- (30,588)
Common stock options
exercised............. -- -- 206,975 2 1,460 -- -- 1,462
Common stock issued for
acquisitions.......... -- -- 4,162,000 42 54,064 -- -- 54,106
Income tax benefit from
stock options
exercised............. -- -- -- -- 327 -- -- 327
Foreign translation
adjustment............ -- -- -- -- -- -- (89) (89)
---------- --------- ---------- --------- ------- -------- ------- --------
Balance, December 31,
1997................... -- -- 9,756,458 98 97,684 (22,331) (262) 75,189
Net earnings for the
period................ -- -- -- -- -- 290 -- 290
Common stock options
exercised............. -- -- 61,207 1 474 -- -- 475
Common shares issued
pursuant to stock
option plans.......... -- -- 57,500 -- 971 -- -- 971
Foreign translation
adjustment............ -- -- -- -- -- -- (1,209) (1,209)
---------- --------- ---------- --------- ------- -------- ------- --------
Balance, March 31, 1998
(unaudited)............ -- $ -- 9,875,165 $ 99 $99,129 $(22,041) $(1,471) $ 75,716
========== ========= ========== ========= ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash (used) provided by operating
activities:
Net earnings (loss)............. $ 3,867 $ 5,092 $(30,588) $ 91 $ 290
Income charges not affecting
cash:
In-process research and devel-
opment write-off.............. -- -- 33,600 -- --
Depreciation................... 1,854 1,972 2,689 559 1,291
Amortization................... 506 481 680 139 514
Disposal and write-offs of
property and equipment........ 104 239 333 35 24
Deferred income taxes.......... (950) (400) (13,796) -- (7)
Changes in certain working
capital components, net of
effects of acquisition:
(Increase) decrease in accounts
receivable..................... (3,847) (3,413) (18,210) (4,637) 7,896
(Increase) decrease in invento-
ries........................... (6,762) (9,847) 8,966 (469) (3,818)
(Increase) decrease in prepaid
expenses....................... (106) (1,112) (35) 95 (613)
Decrease (increase) in other as-
sets........................... 109 (329) 609 (7) 32
Increase (decrease) in accounts
payable........................ 1,843 2,151 4,981 361 (840)
(Decrease) increase in accounts
payable to related parties..... (51) (145) 976 464 (1,197)
(Decrease) increase in accrued
payroll and other liabilities.. (604) (58) 4,446 (743) (6,993)
Increase (decrease) in accrued
income taxes................... 133 488 (767) 28 479
------- ------- -------- ------- -------
Cash used by operating activi-
ties............................ (3,904) (4,881) (6,116) (4,084) (2,942)
------- ------- -------- ------- -------
Cash used by investing activi-
ties:
Additions to property and
equipment..................... (2,987) (5,526) (10,843) (1,386) (2,708)
Net cash acquired from AGEMA... -- -- 805 -- --
Software development costs..... (599) (630) (703) (181) (192)
------- ------- -------- ------- -------
Cash used by investing activi-
ties............................ (3,586) (6,156) (10,741) (1,567) (2,900)
------- ------- -------- ------- -------
Cash provided by financing activ-
ities:
Net increase in notes payable.. 2,056 4,309 19,971 4,990 5,599
Proceeds from long-term debt... 572 5,817 995 -- --
Repayments of long-term debt
including current portion..... (608) (877) (593) (323) (439)
Reduction of pension liabili-
ty............................ -- -- (107) -- (14)
Common stock issued............ 77 -- -- -- --
Proceeds from exercise of stock
options and shares issued
pursuant to incentive stock
option plans, including tax
benefit....................... 364 1,582 1,789 480 1,446
------- ------- -------- ------- -------
Cash provided by financing activ-
ities........................... 2,461 10,831 22,055 5,147 6,592
------- ------- -------- ------- -------
Effect of exchange rate changes
on cash......................... -- (173) (89) (5) (1,209)
------- ------- -------- ------- -------
Net (decrease) increase in cash.. (5,029) (379) 5,109 (509) (459)
Cash and cash equivalents, begin-
ning of period.................. 6,183 1,154 775 775 5,884
------- ------- -------- ------- -------
Cash and cash equivalents, end of
period.......................... $ 1,154 $ 775 $ 5,884 $ 266 $ 5,425
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
The Company is a world leader in the design, manufacture and marketing of
thermal imaging and broadcast camera systems for a wide variety of
applications in the commercial and government markets. The Company's thermal
imaging systems use advanced infrared technologies that detect infrared
radiation, or heat, enabling the operator to measure minute temperature
differences and to see objects in daylight or total darkness and through
obscurants such as smoke, haze and most types of fog. The Company's products
can also incorporate visible light cameras, proprietary image analysis
software and gyrostabilized gimbal technology. The Company's products come in
a variety of configurations such as handheld or ground based systems, or can
be mounted on ships, helicopters or fixed-wing aircraft. The Company's
products provide state-of-the-art imaging technology coupled with competitive
price performance characteristics for existing commercial and government
applications including condition monitoring, research and development,
manufacturing process control, airborne observation and broadcast, search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environmental monitoring and ground based
security. The Company has also developed innovative new products utilizing
advanced uncooled thermal imaging technology, which allows for less expensive,
smaller, lighter, solid state systems that require less power to operate. In
addition, the Company's product configurations and image analysis software
tools increase the Company's ability to provide products tailored to meet
individual customer requirements.
The accompanying consolidated financial statements as of and for the three
months ended March 31, 1997 and 1998 are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these statements have been
prepared on the same basis as the audited consolidated financial statements
and include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the consolidated financial position and
results of operations for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto for the year ended
December 31, 1997.
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 revenue
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.
Foreign currency translation
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at the rates of exchange
at the balance sheet date. Income and expense items are translated at the
average monthly rates of exchange. The resultant translation adjustments are
included in the cumulative foreign translation adjustment,
F-7
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a separate component of shareholders' equity. Gains and losses from foreign
currency transactions of these subsidiaries are included in net earnings.
Cash and cash equivalents
The Company considers short-term investments which are highly liquid,
readily convertible into cash and have 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. At December 31, 1997, the Company
did not hold any short-term investments.
Inventories
Inventories are stated at the lower of average cost or market.
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 ten years.
Repairs and maintenance are charged to operations as incurred.
Software development costs
The Company capitalizes software development costs when a project reaches
technological feasibility and ceases capitalization once 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 Standards 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. In 1997, the
Company adopted Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
The following table sets forth the reconciliation of the denominator
utilized in the computation of basic and diluted earnings (loss) per share (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of common shares
outstanding................................ 5,246 5,361 5,843 5,424 9,799
Assumed exercise of stock options net of
shares assumed reacquired under the
treasury stock method...................... 277 263 -- 324 423
----- ----- ----- ------- --------
Diluted shares outstanding.................. 5,523 5,624 5,843 5,748 10,222
===== ===== ===== ======= ========
</TABLE>
The effect of stock options in 1997 of 388,000 shares was excluded for
purposes of diluted earnings per share since the effect would have been anti-
dilutive.
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.
F-8
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of cash flows
Cash paid for interest and income taxes amounted to the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------ -------------
1995 1996 1997 1997 1998
------ ---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest..................................... $ 133 $782 $1,508 $ 262 $ 883
Taxes........................................ 1,340 763 1,549 4 148
</TABLE>
The non-cash portion of the AGEMA acquisition was excluded from the
statement of cash flows. (See Note 17).
Fair value of financial assets and liabilities
The Company estimates the fair value of its monetary assets and liabilities
based upon comparison of such assets and liabilities to the current market
values 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 approximates fair value as of December 31, 1997, 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 $16,000 in excess
of its recorded value at December 31, 1997.
Stock-based compensation
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", effective January 1, 1996. SFAS 123 allows companies to choose
whether to account for stock-based compensation under the method prescribed in
Accounting Principles Board Opinion No. 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 13).
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 diversifying 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 revenue and expenses during the
reporting period. Significant estimates and judgments made by management of
the Company include matters such as collectibility of accounts receivable,
realizability of inventories and recoverability of capitalized software and
deferred tax assets. Actual results could differ from those estimates.
F-9
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recent accounting pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131 (SFAS 131), "Disclosure about
Segments of an Enterprise and Related Information." This requires certain
additional disclosures about the Company's operations and historical
operations. The Company plans to adopt SFAS 131 in 1998, however, management
believes that the impact of adoption will not have a significant effect on the
Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company has adopted this standard as of
January 1, 1998. Total comprehensive income consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1997 1998
---- -------
(UNAUDITED)
<S> <C> <C>
Net Income...................................................... $91 $ 290
Cumulative foreign translation adjustment....................... (5) (1,209)
--- -------
Total comprehensive income (loss)............................... $86 $ (919)
=== =======
</TABLE>
The cumulative foreign translation adjustment represents the Company's only
other comprehensive income item. Cumulative foreign translation adjustment
represents unrealized gains/losses in the translation of the financial
statements of the Company's subsidiaries in accordance with SFAS No. 52,
"Foreign Currency Translation." The Company has no intention of liquidating
the assets of the foreign subsidiaries in the foreseeable future.
NOTE 2--OTHER OPERATING COSTS:
Selling and other operating costs consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Representative commissions.............. $ 2,390 $ 1,587 $ 3,371 $ 478 $1,375
Allowance for doubtful accounts......... 55 1,260 839 -- 11
Other selling, general and administra-
tive expenses.......................... 12,211 16,152 22,341 4,609 7,432
------- ------- ------- ------ ------
$14,656 $18,999 $26,551 $5,087 $8,818
======= ======= ======= ====== ======
</TABLE>
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
and 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.
F-10
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal......................................... $ 1,210 $ 1,361 $ 377
State........................................... 263 290 --
Foreign......................................... -- -- 538
------- ------- ---------
1,473 1,651 915
------- ------- ---------
Deferred tax (benefit) expense:
Federal......................................... (146) 675 (16,566)
State........................................... (15) 144 (1,817)
Foreign......................................... -- -- 478
------- ------- ---------
(161) 819 (17,905)
------- ------- ---------
(Decrease) increase in valuation allowance........ (789) (1,219) 4,106
------- ------- ---------
Total provision (benefit)......................... $ 523 $ 1,251 $ (12,884)
======= ======= =========
</TABLE>
Deferred tax assets are composed of the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Allowance for doubtful accounts............................... $ 679 $ 759
Warranty reserve.............................................. 347 392
Inventory basis differences................................... 665 2,841
Accrued liabilities........................................... 324 1,841
Acquired in-process research and development.................. -- 12,768
Depreciation.................................................. 75 (196)
Software development costs.................................... (325) (396)
Net operating loss carryforwards.............................. 1,870 3,358
Credit carryforwards.......................................... 771 1,334
Other......................................................... 577 1,061
------- -------
Gross deferred tax asset...................................... 4,983 23,762
Deferred tax asset valuation allowance........................ (2,783) (6,889)
------- -------
$ 2,200 $16,873
======= =======
</TABLE>
F-11
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(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,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax rate........................... 34.0% 34.0% (34.0)%
Increase (decrease) in rates resulting from:
State taxes.......................................... 6.0 4.5 (4.2)
Utilization of net operating loss carryforwards...... (15.0) -- --
Foreign sales corporation benefit.................... (7.6) (3.2) (2.7)
Utilization of research and development credits...... (0.8) (11.3) --
(Decrease) increase in valuation allowance........... (21.6) (6.3) 9.5
Alternative minimum tax.............................. 16.1 -- --
Other................................................ 0.8 2.0 1.8
----- ----- -----
Effective tax rate................................... 11.9% 19.7% (29.6)%
===== ===== =====
</TABLE>
As of December 31, 1997, the Company's net operating loss carryforwards
aggregated $9,267,000 and expire in the years 2005 through 2012. Utilization
of the Company's acquired net operating loss carryforwards from Optimas is
limited to future earnings of Optimas and are 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 $1,334,000 at December 31, 1997,
which expire in the years 1999 through 2012.
NOTE 4--ACCOUNTS RECEIVABLE:
Accounts receivable are net of an allowance for doubtful accounts of
$1,671,000 and $2,483,000 at December 31, 1996 and 1997, respectively.
NOTE 5--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw material and subassemblies............. $23,855 $26,631 $27,427
Work-in-progress........................... 8,171 9,995 10,688
Finished goods............................. 1,494 894 3,198
------- ------- -------
33,520 37,520 41,313
Less--progress payments received from cus-
tomers.................................... (7) (2,796) (2,771)
------- ------- -------
$33,513 $34,724 $38,542
======= ======= =======
</TABLE>
F-12
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment...................... $ 8,445 $20,099 $ 22,124
Office equipment and other................... 5,382 7,632 8,136
------- ------- --------
13,827 27,731 30,260
Less--accumulated depreciation............... (6,690) (9,308) (10,548)
------- ------- --------
$ 7,137 $18,423 $ 19,712
======= ======= ========
</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
$3,674,000 and $1,939,000, respectively, at December 31, 1997.
NOTE 7--SOFTWARE DEVELOPMENT COSTS:
Software development costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software development costs.................... $1,533 $ 2,236 $ 2,428
Less--accumulated amortization................ (734) (1,193) (1,297)
------ ------- -------
$ 799 $ 1,043 $ 1,131
====== ======= =======
</TABLE>
Amortization of capitalized software costs aggregated $393,000, $300,000 and
$459,000, for the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 8--NOTES PAYABLE:
The Company has a $30,000,000 line of credit bearing interest at the IBOR
plus 1.75% (7.75% and 7.38% at December 31, 1997 and March 31, 1998,
respectively) secured by all assets of the Company. This line of credit is up
for renewal on August 1, 1998. Additionally, the Company, through one of its
subsidiaries, has a 40,000,000 Swedish Krona (approximately $5,001,000) line
of credit at 4.70% at December 31, 1997 and March 31, 1998. At December 31,
1996, 1997 and March 31, 1998, the Company had $6,365,000, $26,558,000 and
$32,157,000, respectively, outstanding against these lines.
F-13
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--LONG-TERM DEBT:
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable--patent.......................... $ 294 $ 206 $ 206
Note payable to bank; 7.38% interest rate.
Payable in monthly installments of $123, due
August 1, 1998, secured by all assets of the
Company...................................... 4,663 4,609 4,324
Capital leases................................ 1,593 2,137 1,983
------ ------ ------
6,550 6,952 6,513
Less--current portion......................... (1,377) (5,273) (4,976)
------ ------ ------
$5,173 $1,679 $1,537
====== ====== ======
</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 assuming an average increase of 5% per
year. Payments of $112,000, $115,000 and $116,000, were made in the years
ended December 31, 1995, 1996 and 1997, 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--PENSION PLANS:
As a result of the AGEMA acquisition (See Note 17), the Company now offers
most of its employees outside the United States participation in defined
benefit pension plans.
A summary of the components of the net periodic pension expense for the
defined benefit plan for employees in Sweden was as follows (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Service costs benefit earned during December 1997.................... $--
Interest cost on projected benefit obligation........................ 17
Amortization of actuarial gain....................................... --
Amortization of remaining transition obligation...................... (3)
---
Net pension costs.................................................... $14
===
</TABLE>
A summary of the funded status of the pension plan in Sweden and the net
pension liability is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Accumulated vested benefit obligations........................ $3,421
------
Projected benefit obligation.................................. 3,421
Plan assets at fair value..................................... --
------
Projected benefit obligation in excess of plan assets......... 3,421
Unrecognized actuarial gain................................... 90
Unrecognized transition obligation............................ 458
------
Pension liability............................................. $3,969
======
</TABLE>
F-14
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assumptions used for the defined benefit pension plans were as follows:
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Weighted average discount rate....................................... 6.00%
Rates of increase in compensation levels............................. 3.00%
Inflation rate....................................................... 2.00%
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company leases its primary facilities under various operating leases
which expire in 1998 through 2003. Total rent expense for the years ended
December 31, 1995, 1996 and 1997 amounted to $871,000, $1,471,000 and
$1,940,000, respectively.
Minimum rental payments required under all non-cancelable leases for
equipment and facilities at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998.................................................... $ 732 $2,520
1999.................................................... 610 2,302
2000.................................................... 499 1,937
2001.................................................... 427 892
2002.................................................... 197 37
------ ------
Total minimum lease payments............................ 2,465 $7,688
======
Less amount representing interest....................... (328)
------
Present value of lease payments......................... $2,137
======
</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 for employees
within the United States 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 $0, $533,000 and
$511,000, for the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 12--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 and 1997 aggregated
100,000 and 115,000 shares, respectively. Of the shares granted, 33,330 and
115,000 shares were earned in 1996 and 1997, respectively, 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 amounts of $398,000 and $1,747,000 was
recorded in 1996 and 1997, respectively, and is included in selling and other
operating costs. At December 31, 1997 and March 31, 1998, there were 215,000
shares available for future awards.
F-15
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--STOCK OPTIONS:
The Company has elected to account for its stock based compensation under
APB 25; however, as required by SFAS 123, the Company has computed for pro
forma disclosure purposes the value of options granted during 1995, 1996 and
1997 using the Black-Scholes option pricing model. The weighted average
assumptions used for stock option grants for 1995, 1996 and 1997 were a risk-
free interest rate of 7.7%, 5.2% and 6.0%, respectively, an expected dividend
yield of 0%, 0% and 0%, respectively, an expected life of three years, and an
expected volatility of 23.9%, 22.7% and 40.2%, 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, 1996 and 1997, the total value of the
options granted was computed to be $1,200,000, $819,000 and $1,879,000,
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 pro forma net earnings and pro forma net earnings per share
would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Net earnings (loss) -- as reported............. $ 3,867 $ 5,092 $ (30,588)
Net earnings (loss) -- pro forma............... $ 3,578 $ 4,593 $ (31,353)
Earnings (loss) per share:
Basic -- as reported....................... $ 0.74 $ 0.95 $ (5.23)
Diluted -- as reported..................... $ 0.70 $ 0.91 $ (5.23)
Earnings (loss) per share:
Basic -- pro forma......................... $ 0.68 $ 0.86 $ (5.37)
Diluted -- pro forma....................... $ 0.65 $ 0.82 $ (5.37)
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosure for
1995, 1996 and 1997 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.
F-16
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(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, 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
Granted.......................................... 361,500 15.38
Exercised........................................ (206,975) 7.97
Terminated....................................... (92,378) 11.41
--------- ------
Balance at December 31, 1997..................... 1,123,173 11.96
Granted.......................................... 288,500 16.97
Exercised........................................ (61,207) 7.76
Terminated....................................... (36,634) 12.94
--------- ------
Balance at March 31, 1998 (unaudited)............ 1,313,832 $13.16
========= ======
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and the remaining contractual lives at
December 31, 1997 by group of similar price and grant dates:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
EXERCISE PRICE RANGE SHARES PRICE LIFE
-------------------------------------------- --------- -------- -----------
<S> <C> <C> <C>
$1.63-$5.23........................... 145,349 $ 4.76 3.3
$9.13-$13.75.......................... 799,824 12.07 7.7
$14.00-$20.63......................... 178,000 17.31 9.2
--------- ------ ---
1,123,173 $11.96 7.4
========= ====== ===
</TABLE>
Options exercisable at December 31, 1997, totaled 565,547 shares at a
weighted average exercise price of $10.10. Options available for grant at
December 31, 1997 totaled 1,021,322 shares.
NOTE 14 -- 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 aggregated $650,000. In April 1995, the Company was awarded an
additional $900,000 under this contract for the second phase of the
development. Revenue from this contract aggregated $896,000, $416,000 and $0
during the years ended December 31, 1995, 1996 and 1997, respectively, and are
included in revenue.
F-17
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs associated with this contract aggregated $425,000, $200,000 and $0 in
1995, 1996 and 1997, respectively, and are included in cost of goods sold.
Outstanding billings at December 31, 1996 and 1997 aggregated $35,000 and $0,
respectively, and were included in accounts receivable.
NOTE 15--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, 1995,
1996 and 1997, the Company purchased parts aggregating $1,320,000, $1,670,000
and $2,243,000, respectively, from Hughes and its subsidiaries. As of December
31, 1996 and 1997, the Company owed Hughes $128,000 and $1,243,000,
respectively. Sales of the Company's products to Hughes and its affiliates
amounted to $320,000, $103,000 and $34,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
As a result of the AGEMA acquisition (see Note 17), Spectra-Physics AB and
subsidiaries ("Spectra") are related parties as a result of Spectra's stock
interest in the Company. At December 31, 1997 and March 31, 1998, the Company
owed Spectra $4,985,000 and $5,031,000, respectively, which is payable in full
on June 30, 1998.
NOTE 16--EXPORT SALES AND MAJOR CUSTOMERS:
Export sales and sales to major customers are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- ---------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States........................... $27,062 $44,865 $48,462 $10,411 $15,007
Europe.................................. 15,872 14,883 24,008 4,339 9,597
Other foreign........................... 7,191 6,269 19,301 1,071 3,095
------- ------- ------- ------- -------
$50,125 $66,017 $91,771 $15,821 $27,699
======= ======= ======= ======= =======
Major Customers:
U.S. Government........................ $15,686 $26,469 $18,983 $ 3,928 $ 4,162
======= ======= ======= ======= =======
</TABLE>
NOTE 17--AGEMA ACQUISITION:
Effective December 1, 1997, the Company acquired all of the outstanding
shares of AGEMA Infrared Systems AB, a corporation organized under the laws of
Sweden, AGEMA Infrared Systems Limited, a corporation organized under the laws
of the United Kingdom, AGEMA Infrared Systems Ltd., a corporation organized
under the laws of Canada and AGEMA Infrared Systems, Inc., a Delaware
corporation ("AGEMA") in exchange for 4,162,000 shares of the Company's common
stock with a value of $54,106,000. An additional $1,559,000 of direct
acquisition costs were also incurred and included in the purchase price. AGEMA
designs, manufactures and markets handheld infrared imaging systems for the
commercial market. The results of AGEMA's operations have been combined with
those of the Company since the date of acquisition.
F-18
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net assets
acquired based upon their estimated fair values as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 1,
1997
-----------
<S> <C>
Current assets................................................. $23,413
Property and equipment......................................... 3,590
Other long-term assets......................................... 1,599
In-process research and development............................ 33,600
Intangibles.................................................... 3,600
Excess of purchase price over net assets acquired.............. 14,092
Current liabilities............................................ (20,153)
Long-term liabilities.......................................... (4,076)
-------
$55,665
=======
</TABLE>
The excess of purchase price over net assets acquired is being amortized on
a straight-line basis over 15 years. Amortization of such excess of purchase
price over the net assets acquired aggregated $79,000 for 1997 and is included
in selling and other operating costs.
The consolidated, unaudited results of operations, on a pro forma basis, are
presented as though the acquisition of AGEMA had occurred on January 1, 1996,
excluding one-time charges for acquired in-process research and development,
acquisition related costs and duplicative inventories (in thousands, except
per share data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue....................................................... $114,418 $134,825
Net earnings.................................................. 1,888 7,122
Earnings per share:
Basic....................................................... $ 0.20 $ 0.74
Diluted..................................................... $ 0.19 $ 0.71
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense of the excess of purchase price over net assets acquired and other
intangible assets. They do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in
effect on January 1, 1996, or of future results of operations of the
consolidated entities.
For the purposes of this pro-forma presentation, amounts were translated at
an average rate of 6.71 and 7.60 Swedish Krona to the U.S. dollar for 1996 and
1997, respectively.
In conjunction with the acquisition, during the quarter ended December 31,
1997, the Company recognized a one-time charge of $52,549,000. The write-off
consisted of $36,450,000 of acquired in-process research and development and
acquisition-related costs, which were included as a separate line in operating
expenses, and $16,099,000 of inventories due to the creation of duplicative
product lines, which was included in cost of goods sold.
F-19
<PAGE>
GOVERNMENT APPLICATIONS
INSIDE BACK COVER:
[PHOTO: HELICOPTER IN FLIGHT] U.S. MARINE CORP. UH-IN "HUEY" EQUIPPED WITH A
SAFIRE THERMAL IMAGING SYSTEM
[PHOTO: INFRARED IMAGE OF RAPPELLING SOLDIERS] GROUND BASED THERMAL IMAGE OF A
MILITARY SPECIAL OPERATIONS TRAINING EXERCISE
[PHOTO: INFRARED IMAGE OF AUTOMOBILE ARREST SCENE] AIRBORNE THERMAL IMAGING
SYSTEMS ASSIST IN A VARIETY OF GOVERNMENT APPLICATIONS, INCLUDING DRUG
INTERDICTION, SURVEILLANCE AND RECONNAISSANCE
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 12
Price Range of Common Stock............................................. 13
Dividend Policy......................................................... 13
Capitalization.......................................................... 14
Selected Consolidated Financial Data.................................... 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................................. 16
Business................................................................ 24
Management.............................................................. 38
Principal and Selling Shareholders...................................... 41
Underwriting............................................................ 43
Experts................................................................. 44
Legal Matters........................................................... 44
Available Information................................................... 45
Information Incorporated by Reference................................... 45
Index to Consolidated Financial Statements.............................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,399,130 SHARES
[LOGO OF FLIR APPEARS HERE]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
PRUDENTIAL SECURITIES INCORPORATED
PACIFIC CREST SECURITIES INC.
JUNE 30, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
