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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDING DECEMBER 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission file number - 0-21918
FLIR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-0708501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16505 S.W. 72ND AVENUE, PORTLAND, OREGON 97224
(Address of principal executive offices) (Zip Code)
(503) 684-3731
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class of Stock Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock, $0.01 par value NASDAQ
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X . NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or amendment to this Form 10-K [ ]
As of March 6, 1998, the aggregate market value of the shares of voting stock of
the Registrant held by non-affiliates was $189,138,843
As of March 6, 1998, there were 9,857,399 shares of the Registrant's common
stock, $0.01, par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the FLIR Systems, Inc.'s Proxy Statement for the 1998 Annual Shareholders' Meeting Part III
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FLIR SYSTEMS, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
ITEM ON FORM 10-K
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PAGE
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PART I
Item 1 Business........................................................................ 1
Item 2 Properties...................................................................... 10
Item 3 Legal Proceedings............................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders............................. 10
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters............ 11
Item 6 Selected Financial Data......................................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 13
Item 8 Financial Statements and Supplementary Data..................................... 18
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 37
PART III
Item 10 Directors and Executive Officers of the Registrant.............................. 37
Item 11 Executive Compensation.......................................................... 37
Item 12 Security Ownership of Certain Beneficial Owners and Management.................. 37
Item 13 Certain Relationships and Related Transactions.................................. 37
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 37
SIGNATURES................................................................................. 40
FINANCIAL STATEMENT SCHEDULES.............................................................. 41
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PART I
ITEM 1. BUSINESS
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GENERAL
FLIR Systems, Inc. ("FSI" or the "Company"), founded in 1978, designs,
manufactures, and markets thermal imaging and broadcast camera systems worldwide
for a wide variety of applications in the commercial and government markets.
Thermal imaging systems detect infrared radiation, or heat, emitted directly by
all objects and materials and enable the operator to see objects in total
darkness, in adverse weather conditions and through obscurants such as smoke and
haze. Government applications include public safety (law enforcement and drug
interdiction, search and rescue, border patrol and maritime patrol, and
environmental protection) and defense (surveillance, reconnaissance and
navigation assistance). Commercial applications include electronic news-
gathering, non-destructive testing and evaluation, research and development,
manufacturing process control, condition monitoring and image analysis.
The Company was profitable in the year ended December 31, 1988 and has
reported profitable results for each succeeding year except for 1997 in which
the Company reported a loss of $30.6 million due to a one-time $52.5 million
acquisition-related write-off. In June 1993, the Company completed an initial
public offering of its stock, which is traded on the Nasdaq National Market
System under the symbol "FLIR".
In December 1997, the Company continued to expand the market potential for
the growing commercial market as well as the government market by acquiring
AGEMA Infrared Systems AB, a corporation organized under the laws of Sweden
("AGEMA Sweden"); AGEMA Infrared Systems Limited, a corporation organized under
the laws of the United Kingdom ("AGEMA UK"); AGEMA Infrared Systems Ltd., a
corporation organized under the laws of Canada ("AGEMA Canada"); and AGEMA
Infrared Systems, Inc., a Delaware corporation ("AGEMA USA") (collectively
"AGEMA" or the "AGEMA entities"). AGEMA is a world leaders in the design,
manufacture and marketing of handheld infrared cameras for detecting and mapping
temperature differences and for non-contact temperature measurements for a wide
variety of industrial and research applications. AGEMA's principal executive
offices are located just outside Stockholm, Sweden. AGEMA Sweden has three
subsidiaries which operate sales and service offices in France, Germany and
Italy. Additionally, AGEMA Canada, AGEMA UK and AGEMA USA own and operate
sales and service offices in Canada, Great Britain, and the United States,
respectively.
The acquisition, which was effective December 1, 1997, was accomplished
through the issuance of 4,162,000 shares of the Company's common stock to
AGEMA's parent company, Spectra-Physics AB, also headquartered in Stockholm, in
exchange for all the outstanding shares of AGEMA stock. The transaction was
accounted for as a purchase and, accordingly, the results of operations of the
AGEMA entities for the period from December 1, 1997 through December 31, 1997
are included in the consolidated results of operations.
The acquisition significantly diversifies the Company's product offerings
by adding AGEMA's well-regarded commercial handheld thermal imaging products to
the Company's government and commercial product lines. The acquisition will
allow the Company to reduce production costs by focusing commercial handheld
product manufacturing at AGEMA's facilities in Stockholm and government and
commercial broadcast product manufacturing at the Company's facilities in
Portland. The combined entity will benefit from combining AGEMA's product
design, packaging and thermographic experience with the Company's image analysis
software and stabilized gimbal experience. Finally, the two organizations have
highly complementary sales and marketing capabilities and advanced development
programs, including the next generation of low cost, "uncooled" infrared
technologies.
The year ended December 31, 1997, was also highlighted by new product
introductions, including the introduction of the extremely lightweight
UltraMedia-RS(TM), a compact camera system that gives small and weight-
restricted aircraft the ability to gather high-quality video from long
distances; the Tracer(TM), the first industrial imager capable of recording and
analyzing long sequences of thermal activity on a real-time basis; the ULTRA
6000(TM), a gyrostabilized dual sensor system that combines state-of-the-art
infrared technology and a color video camera to deliver high resolution images
under extreme conditions, day or night; and the AGEMA 570(TM), the worlds first
handheld uncooled radiometric thermal imaging system.
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FORWARD-LOOKING STATEMENTS
This business discussion and other sections of this Annual Report contain
forward-looking statements within the meaning of the Securities Litigation
Reform Act of 1995 that are based on current expectations, estimates and
projections about the Company's business, management's beliefs and assumptions
made by management. Words such as "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 business section, as well as those discussed
elsewhere in this Annual Report and from time to time in the Company's other
Securities and Exchange Commission filings and reports. In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic and international economic conditions.
YEAR 2000 ISSUES
As the year 2000 approaches, the Company recognizes the need to ensure its
operations and products will not be adversely impacted by Year 2000 software
issues. The Company is addressing this via the use of both internal and
external resources to conduct a comprehensive review of its computer systems and
code internal to the Company products. The Company expects to complete the
project on a timely basis to assure the availability and integrity of its
financial system and the reliability of its operational systems by the end of
1999. Such work has not had and is not anticipated to have a material effect on
the consolidated financial position of the Company.
INDUSTRY BACKGROUND
Infrared radiation is essentially light that is not visible because its
wavelength is too long to be detected by the human eye. Unlike visible light,
infrared radiation is emitted directly by all objects and materials. Thermal
imaging systems are used to detect infrared radiation and convert it into an
electronic signal, which is then formatted into a video scene and displayed on a
monitor. Thermal imaging systems enable the operator to see objects in total
darkness and through obscurants such as smoke, haze and many forms of fog.
Unlike other night vision devices, such as night vision goggles, a thermal
imaging system does not require any visible light to operate. Thermal imaging
systems can also detect and measure temperature differences, which is important
in a variety of industrial applications.
Early applications of thermal imaging primarily involved the use of very
expensive high-resolution systems in military combat applications such as
weapons targeting, where performance factors were far more important in the
procurement decision than the system acquisition cost. A basic form of the
technology was also employed in limited industrial applications such as
detection of heat loss from buildings, where system price was more important
than sophisticated performance. Consequently, a large group of potential users
in both the public safety sector and commercial markets did not use thermal
imagers, since available systems either failed to meet their performance
requirements or were too expensive. The Company was among the first to bridge
the gap between high-cost, high-performance and low-cost, low-performance
systems by developing thermal imaging products with a combination of price and
performance suited to the needs of a broad range of customers in the government
market. In addition, commercial applications and markets began to expand as
thermal imaging companies developed products with enhanced performance
characteristics.
The Company expects continued growth in the thermal imaging markets due
primarily to the general improvements in the price and performance
characteristics of imaging systems for the government and commercial markets.
The Company believes the primary factors that will contribute to the growth in
the government market are the increasing use of thermal imaging in public safety
applications worldwide, the increasing emphasis of governments on public safety
roles and the transition of defense procurement policies worldwide to favor
cost-effective commercially developed technology. The Company believes that the
use of thermal imaging and broadcast systems in commercial applications will
increase, and the commercial imaging market will expand significantly, as high-
performance industrial systems become more affordable, primarily due to the
introduction of the uncooled technology, and industrial customers better
understanding the improvements in quality and productivity that can be gained by
the use of these systems and the related image analysis software. The
Company's commercial products and image analysis software capabilities are
designed to take advantage of these opportunities.
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MARKETS FOR THE COMPANY'S PRODUCTS
GOVERNMENT PRODUCTS
The worldwide government market consists of two segments: public safety and
defense. The Company is a leader in the public safety segment, which is rapidly
expanding but represents a small percentage of the total government market. The
Company also sells its products for selected applications in the defense
segment.
Public Safety
The Company is a worldwide leader in the emerging public safety market, which
consists of products sold for a variety of uses in law enforcement and drug
interdiction, search and rescue, border and maritime patrol, environmental
protection and ground based surveillance and security. The Company has been
instrumental in the development of this market worldwide, with systems operating
in over 50 countries. During the last three years, the Company has sold into
this market over 500 systems with a dollar value in excess of $125 million.
While no consistent data is available as to the size of this market, the Company
believes this represents only a small percentage of the existing and potential
global market.
Customers in the public safety market demand systems that are both affordable
and capable of performing a variety of tasks requiring high resolution and image
quality. The Company's products are well positioned to meet these customers'
requirements for performance and affordability. Additionally, the Company's
broad product range is well suited to the principal customer groups in the
public safety market, each of which require different product configurations.
The Company's products meet customer needs for systems that can be mounted on a
variety of aircraft and ships, operate in different climatic conditions and
accommodate changes in methods of operations. Installations for the Company's
systems have been certified by the Federal Aviation Administration and
equivalent authorities in foreign countries for most of the aircraft used in the
market.
Law Enforcement and Drug Interdiction: Thermal imaging systems enable law
enforcement agencies to expand their capabilities in activities ranging from
routine patrol and surveillance to suspect apprehension and drug interdiction.
There is a trend in law enforcement toward the use of aircraft, which have
advantages over traditional ground operations in these activities. Airborne
enforcement has historically been limited by an inability to perform effectively
at night or under conditions of limited visibility -- precisely the conditions
under which significant criminal activity occurs. By providing night vision
capability, thermal imaging systems significantly enhance the performance
capabilities of airborne law enforcement.
The Company believes that law enforcement is an emerging market for its
systems and that a relatively small percentage of law enforcement aircraft
worldwide are presently equipped with thermal imaging systems. As various law
enforcement agencies have gained familiarity with the uses and capabilities of
these systems, the Company has expanded the applications for its products to
meet the needs of a broader customer base. Over the past three years, demand for
the Company's products has continued to be strong as a result of their effective
use by customers in law enforcement and drug interdiction activities worldwide.
Law enforcement agencies are beginning to recognize the utility of thermal
imaging systems in ground operations, an application in which cost, portability
and image quality are key customer requirements. The Company has addressed
these requirements with its line of handheld infrared cameras. See "Products."
Search and Rescue: Search and rescue operations include the traditional
mission of rescuing boats and vehicles in distress, offshore oil platform safety
and emergency response support for missing persons or accident victims. These
operations are routinely conducted in most nations by military, governmental, or
local entities in both coastal waters and inland areas. The range of the
Company's customers in this market has expanded from initial coast guard sales
to include military agencies, private contractors, oil companies and emergency
response teams. The Company believes that this market will continue to grow,
primarily due to the evolving need to maintain search and rescue capability on a
24-hour basis and under adverse weather conditions.
Border and Maritime Patrol: As the frequency of regional disputes throughout
the world increases and concern over the effects of illegal immigration grows in
most countries, the importance of border surveillance, particularly night time
surveillance, has increased. The Company was among the first to demonstrate
the effectiveness of thermal imaging systems for airborne operations in this
market. Maritime patrol activities are performed by military or governmental
agencies charged with maintaining the territorial integrity of coastal waters,
monitoring national fishing boundaries and preventing smuggling.
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Environmental Protection: With the growing worldwide emphasis on the
protection of natural resources, the Company expects the market for its systems
in environmental protection activities to expand. The Company's thermal imaging
systems have been effectively used in forest fire detection and extinguishment,
oil spill detection and monitoring, and wildlife management. Potential
additional applications include monitoring toxic waste sites, identifying
sources of environmental contamination, and gas leak detection. In many cases,
proper detection cannot be accomplished without thermal imaging. For example,
heavy smoke inhibits the application of flame retardant while fighting forest
fires; thermal imaging systems see through smoke and allow accurate airdrops of
both retardant and water. The Company has successfully begun to market its
systems for environmental protection applications in the United States and
Canada, but this market is in its infancy and is expected to grow as users
become increasingly aware of the applications and utility of thermal imaging
systems.
Ground Based Security. As the concern over security of military bases and
other sensitive installations throughout the world increases, the importance of
ground-based surveillance and security, particularly at night, has increased.
The Company was one of the first to provide a cost effective solution to this
problem with the introduction of the AGEMA 1000(TM) in 1992. The Company
believes that with the introduction of the uncooled technology and the resultant
reduction in acquisition costs, the ground based surveillance and security
market will expand significantly.
Defense
The defense market for thermal imaging systems, which consists primarily of
sophisticated weapon systems, has historically constituted the largest segment
of the market for night vision products. While the Company has purposely
limited its participation in this market segment, due to the changing nature of
defense priorities, the Company has begun to develop relationships with prime
defense contractors that require cost-effective thermal imaging sensors for
inclusion in their systems.
In addition to the traditional weapons systems applications, thermal imaging
systems are increasingly being employed by the military for surveillance,
reconnaissance, and navigation assistance as part of a larger trend toward
expansion of night operations capability. As a result, night vision systems
have been identified as a critical component of a more technology-based
military. The Company believes that these trends will provide selected ongoing
growth opportunities for the Company in the defense market.
COMMERCIAL PRODUCTS
The ability of thermal imaging systems to detect heat and measure temperature
differences make them useful in a broad range of industrial applications. For
example, thermal imaging systems can be used to observe the performance of
heating and cooling devices, monitor the performance of electronic components or
the movement of electrical current, detect water or moisture, identify leaks,
locate bonding defects, detect cracks and voids in an object and determine
surface uniformity. The Company believes that the increasing emphasis on
improving manufacturing productivity and product quality, underscored by the
growing importance of programs such as International Standards Organization
(ISO) 9000 and the increasing complexity of high technology products and
processes, creates an opportunity for a significant expansion of the industrial
market. This market typically requires very high performance systems with
extensive analytical software. The Company believes that growth of the
commercial market will be further enhanced as thermal imaging systems achieve
higher performance, the capabilities and benefits of thermal imaging are
understood by a growing number of potential customers, the image analysis
software capabilities continue to improve and systems become more affordable and
easy to use.
The Company believes that its imaging systems and related software products
will enable it to continue to capture market share and significantly expand
applications in six principal areas: electronic news-gathering, non-destructive
testing and evaluation, research and development, manufacturing process control,
condition monitoring and image analysis.
Electronic news-gathering: The use of stabilized broadcast and thermal
imaging systems is becoming a standard feature in today's news gathering
markets. This market typically requires very high performance systems with
extensive capabilities including state-of-the-art stabilization, the ability to
provide jitter-free images from great distances and the ability to downlink the
information on a real-time basis. The Company believes that this segment of the
market will grow as a greater number of TV stations acquire helicopters to
provide real-time reporting of news events and as system size and weight
continue to decline which enable the use of such systems on small and weight
restricted helicopters.
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Non-Destructive Testing and Evaluation ("NDT"): Non-destructive testing and
evaluation is a market classification adopted by a broad group of users of
various technologies for specialized testing. NDT in a broad sense applies to
all testing and evaluation that is non-destructive in nature and is utilized in
all industrial thermal imaging market segments. More specifically, the
designation applies to a segment that focuses on the testing of composite
materials or of products using composite materials. This is a relatively new
thermal imaging market and has experienced strong growth. Many different types
of products must be inspected to ensure they are properly constructed, meet
acceptable quality standards, or have not been damaged. For many applications,
technologies such as ultrasound and x-ray have not proven to be effective.
Thermal imaging has proven to be non-destructive, effective, quick and
affordable and is increasingly being used for this type of inspection.
Thermal imaging systems can also be used to evaluate, monitor and test
composite material. For example, when two composite materials are bonded
together, thermal imaging, unlike visual inspection, can be used to determine
the quality of the bond. A similar inspection technique is used to inspect
composite materials for damage after sustaining an impact. Additionally, during
the production of solar cells, thermal imaging is used to verify the integrity
of the bond between the various composition layers -- a factor critical to the
cell's performance. For example, due to pressure and temperature differences
experienced by an aircraft, water will collect in the internal honeycomb
structure or insulation if there is a leak in the aircraft's outer skin; such
leaks can be located through the use of thermal imaging.
Research and Development: Thermal imaging, due to its non-destructive
analysis capability, is a new tool for use in research from automobiles to
electronics. This market typically requires very high performance systems with
extensive software capabilities and tools to analyze the thermal image. The
Company believes that this segment of the commercial market will grow as system
resolution and image analysis capabilities increase.
Because many component and product designs involve the use or control of heat,
thermal imaging can be effectively used in the research and design of the
component or product. For example, thermal imaging is used in laser design to
determine the power distribution of the beam. Once the laser is in production,
thermal imaging is used as a process and product specification monitoring
system. In addition, thermal imaging is used in development of diesel engines
using ceramic coated pistons to determine proper adhesion of the ceramic to the
metal piston. During the design of a rubber tire, uniform heat distribution can
be evaluated using thermal imaging.
Manufacturing Process Control: The ability to determine that a manufacturing
process will produce unacceptable results at the earliest point in the
production cycle is critical to quality improvement and cost reduction. Thermal
imaging and image analysis allows for the monitoring and control of heat, which
is used in most industrial processes. Depending on the process, too much, too
little, or uneven heat can result in a defective product. The Company believes
that, as all phases of the manufacturing process become increasingly competitive
and quality standards increase, the use of thermal imaging and image analysis
software in these applications will grow.
Potential thermal imaging applications for process monitoring are varied and
extensive. For example, the quality of metal, plastic and glass cast parts is
highly dependent upon the temperature distribution in the mold. The quality of
paper is dependent upon proper and even moisture distribution during the drying
process. Thermal imaging is used to monitor temperature and moisture
distribution in these manufacturing processes. In addition, many products, such
as rubber gloves, can be thermally examined to locate abnormally warm or cool
spots, indicating non-uniform thickness which may result in a quality defect.
Condition Monitoring: Thermal imaging systems improve productivity by
determining the location and detection of equipment faults so they can be
corrected before they lead to catastrophic failure or major equipment damage.
This allows companies to significantly reduce operating expenses by lowering
repair costs and reducing downtime. Condition monitoring is currently the
largest segment of the industrial market.
Specific condition monitoring applications are numerous. Utility companies
utilize the Company's thermal imaging products to locate and repair defective
power transmission components thereby significantly improving service
reliability by reducing annual power outages per customer. The bearings of
rotating machinery will operate at an increasingly warmer temperature as the end
of their useful life approaches; thermal imaging surveys can predict the
bearing's end of life, allowing planned maintenance to be performed before
experiencing a plant shut-down or severe machinery damage. Thermal imaging is
used to evaluate the integrity and amount of insulation in a building or
container, providing substantial energy cost savings. Thermal imaging allows
roof leaks and associated specific damaged areas to be located and repaired,
avoiding the major expense of replacing the entire roof.
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Image Analysis: The acquisition of Optimas in early 1996, (Optimas is now
know as FSI Automation, Inc.) coupled with the image analysis capability that
the acquisition of AGEMA brought to the Company, has enabled the Company to
greatly expand its image analysis capabilities. Image analysis is the extraction
of specific quantitative information in an objective, repeatable fashion in
order that such data can be more meaningfully employed or understood and used to
make informed and better decisions. Image analysis incorporates image processing
(improving or otherwise modifying the visual appearance of an image), but goes
further to incorporate the identification of features of interest, extracting
the desired measurements of those features and then making such measurements
available for productive use.
Uses of image analysis software may include monitoring and controlling
industrial processes, improving product quality, enhancing medical analysis or
otherwise enabling or enhancing critical decision-making processes. For example,
in the manufacture of laser and ink jet printers, the precise alignment of
thousands of tiny dots of ink and a minimization of scatter or excess ink spots
in printing are critical quality concerns. Printer manufacturers examine a test
sheet from each printer using the Company's image analysis software. The
software can rapidly examine a digital scan of those pages and provide analysis
of whether the printer is functioning within tolerances.
PRODUCTS
The following is a listing of the Company's main products and a brief
description of such products:
Series 2000. The Series 2000(TM), first introduced in 1983, is a real-time
analog TV-compatible thermal imaging system for use in applications such as
military surveillance, narcotics interdiction, crime fighting, search and rescue
and environmental protection.
SAFIRE. The SAFIRE(TM), first introduced in the second quarter of 1992, is a
high-resolution digital thermal imaging system featuring gyro stabilization and
image processing. SAFIRE systems are currently fielded by all branches of the
U.S. military and are manufactured to meet the rigors of diverse missions from
airborne and naval surveillance to search and rescue.
ULTRA 4000. The ULTRA 4000(TM), introduced in the third quarter of 1994, is a
fully stabilized aerial camera system that couples a high-resolution infrared
camera for low light or no light situations with an industry-standard broadcast
camera for daylight coverage. The ULTRA 4000 provides the capability for long
range airborne surveillance and broadcast video transmission in law enforcement,
news gathering, and similar applications.
ULTRA 6000. The ULTRA 6000(TM), introduced in the third quarter of 1997,
combines state-of-the-art infrared technology and a color video camera in a
single compact system to deliver high-resolution images under extreme
conditions, day or night.
UltraMedia. The UltraMedia(TM), introduced in the first quarter of 1996, is a
compact daylight broadcast system that delivers a maximum of 72:1 magnification
in a lightweight, low-profile package which is ideally suited for airborne
broadcast teams. The UltraMedia breaks new ground by giving airborne broadcast
teams hardware that delivers high-resolution images without high payload
concerns.
UltraMedia RS. The UltraMedia RS(TM), introduced in the first quarter of 1997,
combines many of the features of the larger UltraMedia system in a compact 35
pound configuration. The UltraMedia RS provides small and weight restricted
aircraft the ability to gather high quality video footage from long distances.
AGEMA 1000. The ground-based AGEMA 1000(TM) series, first introduced in 1992,
is a fixed or tripod mounted thermal imaging system which 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.
AGEMA 900. The AGEMA 900(TM), first introduced 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 the research and development market.
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AGMEA 550. The AGEMA 550(TM), introduced in the fourth quarter of 1996, is a
handheld infrared camera developed for the condition monitoring market. The
AGEMA 550 uses a stirling cooled PtSi focal plane array and, in its standard
version is calibrated for temperature measurements up to 1500 degrees C. The
AGEMA 550 has built-in digital recording. The AGEMA 550 is available with
various lenses, for different fields of views, as well as filters and other
accessories.
AGEMA 570. The AGEMA 570(TM), first introduced in the fourth quarter of 1997,
is the world's first uncooled imaging radiometer. The AGEMA 570 provides
lightweight (less than 5 lb.), instant-on convenience while delivering
exceptional temperature measurement accuracy of objects from -20 degrees C to
+2000 degrees C. Intelligent controls facilitate one-hand, point and shoot
operation of this self contained system. Image optimization is automatic and
menu and data displays appear in any of 14 languages.
ThermoVision. The ThermoVision(TM), introduced in early 1998, is an uncooled
infrared camera for the manufacturing process control market. Operating as a
remotely 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 a second. Using built-in intelligence, ThermoVision can
process multiple area 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.
Thermoprofile 6. The Thermoprofile(TM) 6, is a line scanner developed
originally to monitor the temperature on the surface of a rotating cement kiln.
The line scanning technology has now expanded into other applications in the
manufacturing process control market including hot and cold rolling steel mills,
float glass manufacturing and metals refining.
Tracer. The Tracer(TM), introduced in the first quarter of 1997, is the first
industrial imaging system capable of recording and analyzing long thermal event
sequences at real-time frame rates on a Windows based PC. Tracer combines a
high-resolution thermal imaging camera with a Pentium PC, digital recording
system, and Windows-based analysis software.
IRwin Report. IRwin(TM) Software allows for review, analysis and processing
of captured images and data. IRwin software is a Windows based program which
provides for an ease of use and affordability that is unmatched in the industry.
IRwin software is typically packaged with the AGEMA 500 series systems, though
it is capable of operating with data gathered from other imaging modalities as
well.
OPTIMAS. OPTIMAS(TM) software is a Windows based application designed to meet
the needs of the advanced scientific and engineering markets. The OPTIMAS
software package includes custom user interface tools which enable both novice
and highly skilled users to efficiently and effectively solve their image
analysis problems.
Xcaliper. Xcaliper(TM) software, introduced in the second quarter of 1995, is
a high precision software product addressing certain industrial machine vision
tasks such as gauging, part-presence or absence, edge detection and part
alignment. Xcaliper software combines high speed with easy development using
Visual Basic programming.
Sentinel. Sentinel(TM) software, introduced in the fourth quarter of 1995, is
an image pattern and industrial OCR software application using neural network-
based technology to perform fast pattern recognition on personal computers.
Applications include form reading, package label identification, part
orientation and inspection. Sentinel software employs a simple drag and drop
interface to train patterns and build applications.
Library. Library(TM) software, introduced in the fourth quarter of 1995, is a
flexible, multi-user image database with internal image management capabilities.
Library software provides support for network and removable media and seamless
links to OPTIMAS for one step archiving of images from OPTIMAS. Images can be
retrieved and batch-analyzed using internal search features and automated field
updates of analysis results. Library software utilizes a drag and drop interface
to enable custom database and report development.
7
<PAGE>
CUSTOMERS
The primary customers for the Company's products include instrumentalities of
domestic and foreign governments, original equipment manufacturers, commercial
manufacturers, research and development facilities, universities, utility
companies, news-gathering agencies and various commercial enterprises.
A substantial portion of the Company's revenues is derived from sales to
agencies and instrumentalities of the U.S. Government, which aggregated more
than 10% of the Company's revenues in each of the last three years. For the
year ended December 31, 1997, such sales represented 20.7% of the Company's
total revenue. With the exception of the continuing sales to agencies and
instrumentalities of the U.S. Government, the Company does not typically have
continuing customers whose purchases constitute more than 10% of revenues on a
year to year basis. At any given time, however, the Company may have purchase
commitments from customers which, if completed, would constitute more than 10%
of revenues in any given year. The failure of any such customer to complete
such purchases or the loss of the agencies and instrumentalities of the U.S.
Government as a customer could have a material adverse effect on the Company's
business, financial position and results of operations.
SALES, DISTRIBUTION AND CUSTOMER SERVICE
The Company markets its night vision products for the government market in the
United States directly through a 12-person direct sales staff, and
internationally through 50 independent representatives covering all major
markets worldwide.
The Company sells its commercial products worldwide through a 40-person direct
sales staff and a network of 90 distributors and representatives, each with an
exclusive right to sell the Company's products in a defined geographic area.
All distributors and representatives report to one of 15 regional sales managers
employed by the Company. The Company sells its software products primarily
through 35 authorized dealers, 15 of whom are located within the U.S. and
Canada. Many of these dealers, particularly internationally, maintain their own
network of subsidiary agents.
In support of both direct and distribution sales activities, the Company has a
technical support group that provides installation, technical training and
repair services. The Company maintains service facilities at its factories in
Portland, Oregon, Sweden and the United Kingdom and at its subsidiaries in
Seattle, Washington, Secaucus, New Jersey, Germany, Canada, France and Italy.
The Company also maintains limited service capability in three foreign locations
under the direction of its independent representatives.
8
<PAGE>
MANUFACTURING
The Company manufactures most critical components of its products, including
detectors, optics and high speed motors. This allows the Company to minimize
lead times, facilitate prompt delivery of its products, control costs and ensure
that these components satisfy its quality standards. The Company purchases
other parts pre-assembled, including coolers, circuit boards, cables and wiring
harnesses. The interruption of certain sources of supply or the failure of
suppliers of key components to adapt their products to the Company's changing
technological requirements could disrupt the Company's ability to manufacture
products or cause the Company to incur costs associated with the development of
alternative sources, either of which could have an adverse effect on the
Company's business, financial position, and financial results of operations.
The Company has experienced delays in production due to its inability to timely
obtain a necessary component from third-party supplier. No assurance can be
given that similar delays will not be experienced in the future.
Certain critical components, such as detectors and optical systems, are made
with special minerals, compounds or materials. The Company believes that all
such materials are readily available and will continue to be available in the
foreseeable future at costs that are not prohibitive or that would materially
affect the Company's ability to manufacture such components.
The Company's manufacturing operations have been audited by its OEM customers,
which include several major aircraft manufacturers, and were certified as
meeting their quality standards. In addition, the Company has been certified
for inclusion of its products in government systems after government audits of
its manufacturing facilities.
COMPETITION
The Company's competitors are different in each market segment. In the public
safety market, the Company competes with a variety of companies on a limited
basis. For example, the Company competes with Inframetrics in the law
enforcement segment and GEC and Wescam Ltd. in other public safety segments. In
the commercial markets, the Company's principal competitors are Inframetrics and
Avio and Wescam Ltd. in the electronic news-gathering market. In the image
analysis market, the Company competes with Media Cybernectics and Noesis Vision,
and to a lesser extent Data Translation, Jandel Scientific and Matrox
Electronics Systems. In the manufacturing process control market, the Company
competes with Adept, Allen-Bradley Company, Cognex and Robotic Vision Systems.
Competition in the defense market is more intense, and includes companies such
as Lockheed Martin, Boeing, Thompson, GEC, and Thorn EMI. As the markets for the
Company's products expand, the Company expects that additional competition will
emerge and that existing competitors may commit more resources to the markets
addressed by the Company. Most of the Company's competitors have substantially
greater financial, technical and marketing resources than the Company. In
addition, the Company's products compete indirectly with numerous other
products, such as image intensifiers and low-light cameras, for limited military
and governmental funds.
The Company believes that the principal competitive factors in its market are
performance, cost, customer service, product reputation, and effectiveness of
marketing and sales efforts. In addition, the Company believes that the speed
with which companies can identify applications for thermal imaging, develop
products to meet those needs and supply commercial quantities to the market are
important competitive factors. The Company believes that it competes favorably
with respect to each of these factors.
PROPRIETARY RIGHTS
The Company relies on intellectual property rights to protect its proprietary
technology. The Company enters into confidentiality agreements with its
employees and consultants and limits access to and distribution of its
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of its technology or independent third-party development of
competing technologies.
9
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had 652 employees of whom 66 were in
administration, 189 were in engineering, 8 were in quality assurance, 195 were
in manufacturing, assembly and testing and 194 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 are represented by a union or other bargaining
group. Employees in Sweden and Italy are represented by a Union. The Company
believes its relationship with its employees and the Unions are good.
ITEM 2. PROPERTIES.
----------
The Company leases its facilities under various operating leases which expire in
1998 through 2003. The lease calls for fixed monthly payments over its term.
The following summarized the primary facilities leased by the Company:
<TABLE>
<CAPTION>
Lease Expiration
Location Date Square Feet
- ------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
FLIR Systems, Inc. - Portland, Oregon 2000 85,000
FLIR Systems AB - Danderyd, Sweden 2001 63,000
FSI Automation, Inc. - Bothell, Washington 2000 9,600
FLIR Systems International Ltd. - West Malling, United Kingdom 2000 12,500
FLIR Systems Ltd. - Ontario, Canada 1998 4,200
FLIR Systems S.A.R.L. - France 1998 2,900
FLIR Systems GmbH - Germany 1998 2,200
FLIR Systems Limited - Leighton Buzzard, United Kingdom 1999 4,500
FLIR Systems s.r.l. - Italy 1998 2,200
FLIR Systems, Inc. - Secaucus, New Jersey 2003 8,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
-----------------
In the normal course of business, the Company is and has been involved in
certain litigation, however, the Company is not the subject of or a party to any
material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
On December 1, 1997, a special meeting of Shareholders of the Company was held
to vote upon the issuance of a total of 4,162,000 shares of the Company's common
stock in exchange for all the outstanding share of capital 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. At such meeting the
shareholders approved the issuance by a vote of 3,501,830 for and 11,849 against
with 4,175 abstentions. Information regarding this transaction is contained in
the Company's definitive proxy statement dated November 10, 1997, for a special
Meeting of Shareholders and is incorporated herein by reference.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
-----------------------------------------------------------------
MATTERS.
-------
The common stock of FLIR Systems, Inc. has been traded on the Nasdaq National
Market System since June 22, 1993, under the symbol "FLIR". The following table
sets forth, for the quarters indicated, the high and low sales price for Common
Stock reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- --------------------------------------
HIGH LOW HIGH LOW
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
First Quarter........... 17.75 13.25 14.38 10.00
Second Quarter.......... 17.75 14.75 16.25 10.50
Third Quarter........... 22.00 15.75 15.25 11.75
Fourth Quarter.......... 22.00 17.50 14.50 12.75
</TABLE>
At December 31, 1997, there were approximately 400 holders of record of the
Company's common stock and 9,756,458 shares outstanding. The Company has never
paid cash dividends on its common stock. The Company intends to retain earnings
for use in its business and, therefore, does not anticipate paying cash
dividends in the foreseeable future.
During 1996, the Company sold securities without registration under the
Securities Act of 1933, as amended (the "Securities Act") upon the exercise of
certain stock options granted under the Company's 1984 Stock Incentive Plan. An
aggregate of 76,367 shares of Common Stock were issued at exercise prices
ranging from $1.625 to $5.225. These transactions were effected in reliance
upon the exemption from registration under the Securities Act provided by Rule
701 promulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3(b) of the Securities Act.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
Government........................... $ 48,483 $42,958 $33,575 $35,805 $31,051
Commercial........................... 43,288 23,059 16,550 13,172 9,082
-------------- -------------- -------------- -------------- --------------
Total revenue....................... 91,771 66,017 50,125 48,977 40,133
Cost of goods sold.................... 58,507 * 30,415 22,724 23,813 19,103
-------------- -------------- -------------- -------------- --------------
Gross profit........................ 33,264 35,602 27,401 25,164 21,030
Operating expenses:
Research and development............. 11,814 9,485 7,786 7,588 7,044
Selling and other operating costs.... 26,551 18,999 14,656 12,353 10,358
Combination costs.................... 36,450 * -- -- -- --
-------------- -------------- -------------- -------------- --------------
Total operating costs............... 74,815 28,484 22,442 19,941 17,402
(Loss) earnings from operations.... (41,551) 7,118 4,959 5,223 3,628
Interest income....................... 182 44 226 705 138
Interest expense and other............ (2,103) (819) (795) (172) (170)
-------------- -------------- -------------- -------------- --------------
(Loss) earnings before income taxes (43,472) 6,343 4,390 5,756 3,596
Income tax (benefit) provision........ (12,884) 1,251 523 570 405
-------------- -------------- -------------- -------------- --------------
Net (loss) earnings................... $(30,588) $ 5,092 $ 3,867 $ 5,186 $ 3,191
============== ============== ============== ============== ==============
Net (loss) earnings per share:
Basic............................ $(5.23) $0.95 $0.74 $1.01 $0.69
============== ============== ============== ============== ==============
Diluted.......................... $(5.23) $0.91 $0.70 $0.95 $0.66
============== ============== ============== ============== ==============
BALANCE SHEET DATA:
Working capital....................... $ 26,567 $44,190 $37,884 $35,573 $31,610
Total assets.......................... 153,857 75,104 56,918 49,269 40,385
Long-term debt, excluding
current portion...................... 1,679 5,173 1,175 1,209 1,167
Total shareholders' equity............ $ 75,189 $49,971 $43,470 $39,162 $33,046
</TABLE>
* - In connection with the acquisition of AGMEA Infrared Systems AB, 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 are included
as a separate line in operating expenses, and $16.1 million of inventories
due to the creation of duplicative product lines, which is included in cost
of goods sold.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
OVERVIEW
FLIR Systems, Inc. ("FSI" or the "Company"), founded in 1978, designs,
manufactures, and markets thermal imaging and broadcast camera systems worldwide
for a wide variety of applications in the commercial and government markets.
Thermal imaging systems detect infrared radiation, or heat, emitted directly by
all objects and materials and enable the operator to see objects in total
darkness, in adverse weather conditions and through obscurants such as smoke and
haze. Government applications include public safety (law enforcement and drug
interdiction, search and rescue, border patrol and maritime patrol, and
environmental protection) and defense (surveillance, reconnaissance and
navigation assistance). Commercial applications include electronic news-
gathering, non-destructive testing and evaluation, research and development,
manufacturing process control, condition monitoring and image analysis.
The Company was profitable in the year ended December 31, 1988 and has reported
profitable results for each succeeding year except for 1997 in which the Company
reported a loss of $30.6 million due to the inclusion of a one-time $52.5
million acquisition related write-off. In June 1993, the Company completed an
initial public offering of its stock, which is traded on the Nasdaq National
Market System under the symbol "FLIR".
In December 1997, the Company continued to expand the market potential for the
growing commercial market as well as the government market by acquiring AGEMA
Infrared Systems AB, a corporation organized under the laws of Sweden ("AGEMA
Sweden"); AGEMA Infrared Systems Limited, a corporation organized under the laws
of the United Kingdom ("AGEMA UK"); AGEMA Infrared Systems Ltd., a corporation
organized under the laws of Canada ("AGEMA Canada"); and AGEMA Infrared Systems,
Inc., a Delaware corporation ("AGEMA USA") (collectively "AGEMA" or the "AGEMA
entities"). AGEMA is one the world leaders in the design, manufacture and
marketing of handheld infrared cameras for detecting and mapping temperature
differences and for non-contact temperature measurements for a wide variety of
industrial and research applications. AGEMA's principal executive offices are
located just outside Stockholm, Sweden. AGEMA Sweden has three subsidiaries
which operate sales and service offices in France, Germany and Italy.
Additionally, AGEMA Canada, AGEMA UK and AGEMA USA own and operate sales and
service offices in Canada, Great Britain, and the United States, respectively.
The acquisition, which was effective on December 1, 1997, was accomplished
through the issuance of 4,162,000 shares of the Company's common stock to
AGEMA's parent company, Spectra-Physics AB, also headquartered in Stockholm, in
exchange for all the outstanding shares of AGEMA stock. The transaction was
accounted for as a purchase and, accordingly, the results of operations of the
AGEMA entities for the period from December 1, 1997 through December 31, 1997
are included in the consolidated results of operations.
The acquisition significantly diversifies the Company's product offerings by
adding AGEMA's well-regarded commercial handheld thermal imaging products to the
Company government and commercial product lines. The acquisition will allow the
Company to reduce production costs by focusing commercial handheld product
manufacturing at AGEMA's facilities in Stockholm and government and commercial
broadcast product manufacturing in the Company's facilities at Portland. The
combined entity will benefit from combining AGEMA's product design, packaging
and thermographic experience with the Company's image analysis software and
stabilized gimbal experience. Finally, the two organizations have highly
complementary sales and marketing capabilities and advanced development
programs, including the next generation of low cost, "uncooled" infrared
technologies.
The year ended December 31, 1997, was also highlighted by new product
introductions, including the introduction of the extremely lightweight
UltraMedia-RS(TM), a compact camera system that gives small and weight-
restricted aircraft the ability to gather high-quality video from long
distances; the Tracer(TM), the first industrial imager capable of recording and
analyzing long sequences of thermal activity on a real-time basis; the ULTRA
6000(TM), a gyrostabilized dual sensor system that combines state-of-the-art
infrared technology and a color video camera to deliver high resolution images
under extreme conditions, day or night; and the AGEMA 570(TM), the worlds first
handheld uncooled radiometric thermal imaging system.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the indicated periods certain items as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue:
Government....................................... 52.8 % 65.1% 67.0%
Commercial....................................... 47.2 34.9 33.0
----------------- ----------------- -----------------
Total revenue................................... 100.0 100.0 100.0
Cost of goods sold................................ 63.8 46.1 45.3
----------------- ----------------- -----------------
Gross profit.................................... 36.2 53.9 54.7
Operating expenses:
Research and development......................... 12.9 14.4 15.5
Selling and other operating costs................ 28.9 28.8 29.3
Combination costs................................ 39.7 -- --
----------------- ----------------- -----------------
Total operating expenses........................ 81.5 43.2 44.8
(Loss) earnings from operations................ (45.3) 10.7 9.9
Interest income................................... 0.2 0.1 0.5
Interest expense and other........................ (2.3) (1.2) (1.6)
----------------- ----------------- -----------------
(Loss) earnings before income taxes............ (47.4) 9.6 8.8
Income tax (benefit) provision.................... (14.0) 1.9 1.0
----------------- ----------------- -----------------
Net (loss) earnings............................... (33.4)% 7.7% 7.8%
================= ================= =================
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERALL. The Company's revenue increased 39.0%, from $66.0 million
in 1996 to $91.8 million in 1997. Net earnings, before non-recurring charges
associated with the AGEMA acquisition, increased 34.6%, from $5.1 million (or
$0.91 per diluted share) in 1996 to $6.9 million (or $1.10 per diluted share) in
1997. After recording the one-time, charge of $52.5 million for costs associated
with the AGEMA acquisition, the net loss for 1997 was $30.6 million (or $5.23
per diluted share). The increase in overall revenue and net income, prior to
acquisition related write-offs, was primarily due to the continued sales growth
of the UltraMedia(TM) for the electronic news-gathering market, continued strong
sales of the SAFIRE(TM) night vision system for the government market, continued
production and deliveries of handheld thermal imaging systems, higher
international sales and a partial-month of contribution from AGEMA operations.
These increases were offset in part by an increase in interest expense related
to increased short and long-term borrowings, an increase in the effective tax
rate and an increase in shares outstanding due to the AGEMA acquisition.
During 1996, the Company's overall revenue increased 31.7%, from $50.1 million
in 1995 to $66.0 million in 1996. Net earnings increased 31.7%, from $3.9
million (or $0.70 per diluted share) in 1995 to $5.1 million (or $0.91 per
diluted share) in 1996. The increase in overall revenue and net income was
primarily due to the inclusion of revenue from the sale of the Company's
commercial broadcast products, principally the UltraMedia(TM) which was
introduced in April 1996, as well as to increased deliveries of the SAFIRE(TM)
night vision system to the federal government, particularly to the U.S. Marine
Corps and the U.S. Air Force. Further, the increase in revenue and net income
was due to the fact that 1995 government revenue was constrained due to delays
in the finalization of several international and domestic contracts and the
inclusion, in 1995, of the significant one-time transaction costs associated
with the acquisition of Optimas Corporation ("Optimas") in early 1996.
14
<PAGE>
REVENUE. Revenue from the sale of night vision 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(TM) night vision 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(TM), the
Company's airborne camera system for the electronic news-gathering market, which
aggregated $12.2 million in 1997 compared to $6.3 million in 1996; further
production and 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 partial-month contribution from AGEMA's operations
which aggregated $9.4 million.
Revenue in 1996 from the sale of night vision 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(TM) night vision
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 commercial broadcast products, primarily the
UltraMedia(TM) 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. This
represents 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 a partial
month of AGEMA revenue which are primarily international. The Company
anticipates that revenue from international sales as a percentage of total
revenue will continue to comprise a significant percentage of revenue but may
vary modestly from year to year.
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 was
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
typically have lower margins than other sales to the government market. This
increase was mitigated by the increased proportion of sales of the Company's
commercial products which typically have 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.
Gross profit percentages are affected by a variety of factors, including the mix
of domestic and international government and commercial sales, the more
competitive nature of the commercial market and the impact of competitive bids
for significant government contracts.
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(TM), the ULTRA 6000(TM) and the Tracer(TM), 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 be 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.
15
<PAGE>
The general trend in research and development expense reflects the Company's
continuing emphasis on product development and new product introductions. With
the acquisition of AGEMA, the engineering efforts for handheld thermographic
products will be concentrated at AGEMA's Stockholm facility and the engineering
efforts for government products and airborne broadcast cameras will be
concentrated at the Company's facilities in Portland. The Company expects that
research and development expense, in absolute dollars, will increase in 1998 as
a result of the inclusion of a full year of AGEMA operations. However, as the
Company's revenues increase, and given the large percentage of research and
development expense that is fixed in nature, such expenses should continue to
decline slightly as a percentage of revenue.
SELLING AND OTHER OPERATING COSTS. Selling and other operating costs
increased 39.7% in 1997 compared to 1996 and increased 29.6% in 1996 compared to
1995, 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. 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. The Company expects that selling and other
operating costs will continue to grow in absolute dollar terms in 1998 as a
result of the inclusion of a full year of AGEMA operations, further planned
sales force increases and anticipated increased marketing efforts and related
expenses.
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) 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 1998 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.
AGEMA ACQUISITION
Effective December 1, 1997, the Company acquired all of the outstanding shares
of AGEMA in exchange for 4,162,000 shares of the Company's common stock with a
value of $54.1 million and an additional $1.6 million of direct acquisition
costs. 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.
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 are included as a separate line in operating
expenses, and $16.1 million of inventories due to the creation of duplicative
product lines, which is included in cost of goods sold.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents on hand of $5.9
million compared with $775,000 at December 31, 1996. Additionally, at December
31, 1997, the Company had $26.6 million drawn on its lines of credit. Working
capital decreased to $26.6 million at December 31, 1997, from $44.2 million at
December 31, 1996. The decrease in working capital was primarily due to the
increased utilization of the lines of credit due to increases in accounts
receivable discussed below, increase in liabilities assumed related to the AGEMA
acquisition and cash required for the expanded operations.
At December 31, 1997, the Company had $55.5 million in accounts receivable
outstanding compared to $28.3 million at December 31, 1996. The increase in
accounts receivable was primarily due to the addition of receivables related to
AGEMA operations and the 39.0% increase in revenue. Days sales outstanding
increased from 157 days at December 31, 1996 to 221 days at December 31, 1997.
This increase was primarily a result of the acquisition of AGEMA, as the Company
acquired all the receivables of AGEMA but has only included its operations from
December 1, 1997, through December 31, 1997. Had the Company included the
operations of AGEMA for all of 1997, days sales outstanding would have decreased
to 150 days. The Company generally experiences long collection cycles due to a
variety of factors, including payment terms required by foreign governmental
customers as well as payment terms for companies that integrate the Company's
products into aircraft for sale to ultimate users. The Company believes that
with the inclusion of AGEMA's operations and ongoing collection efforts, days
sales outstanding will continue to decline as revenue increases and as
commercial revenue, which generally have a shorter collection cycle, continues
to become a larger percentage of overall revenue.
At December 31, 1997, the Company had inventories on hand aggregating $34.7
million compared to $33.5 million at December 31, 1996. The slight increase in
the inventory level was principally due to the inclusion of inventory of AGEMA,
an increase in components related to anticipated deliveries of SAFIRE(TM)
systems to the U.S. Government and international customers, and an increase in
inventories to support deliveries of new products including the UltraMedia(TM),
the UltraMedia RS(TM) and the Tracer(TM). These increases were somewhat offset
as a result of the $16.1 million write-off of duplicative inventories discussed
above. Additionally, inventory levels at the Company's United Kingdom
manufacturing operation continue to increase in anticipation of future
deliveries under existing contracts. Because of the extremely long lead times
for many of the Company's most expensive components, it is necessary to have
inventory on hand to meet the required delivery schedule. The Company maintains
levels of inventory sufficient to satisfy backlog which the Company considers to
be firm and to respond to short term delivery requirements for a majority of its
products. Management believes its ability to provide prompt deliveries gives
the Company a competitive advantage for certain sales. It is expected that the
current inventory levels will be maintained or decrease slightly.
The Company has available approximately $35.1 million in lines of credit which
bear interest at rates from 4.70% to 7.75% and are collateralized by all assets
of the Company. At December 31, 1997, the Company had a balance of $26.6
million drawn on these lines of credit compared to a $6.4 million balance on
these lines at December 31, 1996.
The Company believes that its existing cash, cash generated from operations, and
available credit facilities together with scheduled collections on existing
receivable balances will be sufficient to meet its cash requirements for the
foreseeable future.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements within the meaning of the Securities Litigation Reform Act of 1995
that are based on current expectations, estimates and projections about the
Company's business, management's beliefs and assumptions made by management.
Words such as "expect," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
that are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited to, those
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as
17
<PAGE>
those discussed elsewhere in this Annual Report and from time to time in the
Company's other Securities and Exchange Commission filings and reports. In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic and international economic
conditions.
YEAR 2000 ISSUES
As the year 2000 approaches, the Company recognizes the need to ensure its
operations and products will not be adversely impacted by Year 2000 software
issues. The Company is addressing this via the use of both internal and
external resources to conduct a comprehensive review of its computer systems and
code internal to the Company products. The Company expects to complete the
project on a timely basis to assure the availability and integrity of its
financial system and the reliability of its operational systems by the end of
1999. Such work has not had and is not anticipated to have a material effect on
the consolidated financial position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
This item includes the following financial information:
<TABLE>
<CAPTION>
STATEMENT Page
- -------------------------------------------------------------------------------------------- ------------
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants..................................... 19
Consolidated Statement of Operations for the Years Ended December 31, 1997, 1996 and 1995.. 20
Consolidated Balance Sheet as of December 31, 1997 and 1996................................. 21
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995......................................................... 22
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995... 23
Notes to the Consolidated Financial Statements.............................................. 24
Quarterly Financial Data (Unaudited)........................................................ 36
</TABLE>
18
<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, 1997 and 1996, 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
19
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Government..................................... $ 48,483 $42,958 $33,575
Commercial..................................... 43,288 23,059 16,550
--------------- --------------- ---------------
Total revenue.............................. 91,771 66,017 50,125
Cost of goods sold............................... 58,507 30,415 22,724
Research and development......................... 11,814 9,485 7,786
Selling and other operating costs................ 26,551 18,999 14,656
Combination costs................................ 36,450 -- --
--------------- --------------- ---------------
133,322 58,899 45,166
(Loss) earnings from operations.............. (41,551) 7,118 4,959
Interest income.................................. 182 44 226
Interest expense and other....................... (2,103) (819) (795)
--------------- --------------- ---------------
(Loss) earnings before income taxes.......... (43,472) 6,343 4,390
Income tax (benefit) provision................... (12,884) 1,251 523
--------------- --------------- ---------------
Net (loss) earnings.............................. $(30,588) $ 5,092 $ 3,867
=============== =============== ===============
Net (loss) earnings per share:
Basic......................................... $ (5.23) $ 0.95 $ 0.74
=============== =============== ===============
Diluted....................................... $ (5.23) $ 0.91 $ 0.70
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)
<TABLE>
<CAPTION>
ASSETS
December 31,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 5,884 $ 775
Accounts receivable, net.................................................... 55,463 28,311
Inventories................................................................. 34,724 33,513
Prepaid expenses............................................................ 3,516 1,551
--------------- ---------------
Total current assets...................................................... 99,587 64,150
Property and equipment, net.................................................. 18,423 7,137
Software development costs, net.............................................. 1,043 799
Deferred income taxes, net................................................... 16,873 2,200
Intangible assets, net....................................................... 14,013 --
Other assets................................................................. 3,918 818
--------------- ---------------
$153,857 $75,104
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................................... $ 26,558 $ 6,365
Accounts payable............................................................ 15,493 7,628
Accounts payable to related parties......................................... 6,228 128
Accrued payroll and other liabilities....................................... 19,105 3,389
Accrued income taxes........................................................ 363 1,073
Current portion of long-term debt........................................... 5,273 1,377
--------------- ---------------
Total current liabilities................................................. 73,020 19,960
Long-term debt............................................................... 1,679 5,173
Pension liability............................................................ 3,969 --
Commitments and contingencies............................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at December 31, 1997 or 1996............................. -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
9,756,458 and 5,387,483 shares issued at December 31, 1997 and 1996,
respectively.............................................................. 98 54
Additional paid-in capital.................................................. 97,684 41,833
(Accumulated deficit) retained earnings..................................... (22,331) 8,257
Cumulative foreign translation adjustment................................... (262) (173)
--------------- ---------------
Total shareholders' equity................................................ 75,189 49,971
--------------- ---------------
$153,857 $75,104
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------- ---------------------------
Shares Amount Shares Amount
--------------- ------------ ---------- --------------
<S> <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
Net earnings for the year........ -- -- -- --
Common stock options exercised... -- -- 79,275 1
Common shares issued............. -- -- 16,286 --
--------------- ------------ ---------- --------------
Balance, December 31, 1995.......... -- -- 5,283,365 53
Net earnings for the year........ -- -- -- --
Common stock options exercised... -- -- 70,788 1
Common shares issued pursuant to
stock option plans.......... -- -- 33,330 --
Income tax benefit from stock
options exercised........... -- -- -- --
Foreign translation adjustment... -- -- -- --
--------------- ------------ ---------- --------------
Balance, December 31, 1996.......... -- -- 5,387,483 54
Net loss for the year............ -- -- -- --
Common stock options excised..... -- -- 206,975 2
Common stock issued for
acquisitions................ -- -- 4,162,000 42
Income tax benefit from stock
options exercised............ -- -- -- --
Foreign translation adjustment... -- -- -- --
--------------- ------------ ---------- --------------
Balance, December 31, 1997.......... -- $ -- 9,756,458 $ 98
=============== ============ ========== ==============
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Additional Retained Foreign
Paid-in Earnings Translation
Capital (Deficit) Adjustment Total
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Authorized..........................
Balance, December 31, 1994.......... $39,812 $ (702) $ -- $ 39,162
Net earnings for the year........ -- 3,867 -- 3,867
Common stock options exercised... 363 -- -- 364
Common shares issued............. 77 -- -- 77
----------- ----------- ------------ ----------
Balance, December 31, 1995.......... 40,252 3,165 -- 43,470
Net earnings for the year........ -- 5,092 -- 5,092
Common stock options exercised... 587 -- -- 588
Common shares issued pursuant to
stock option plans.......... 398 -- -- 398
Income tax benefit from stock
options exercised........... 596 -- -- 596
Foreign translation adjustment... -- -- (173) (173)
----------- ----------- ------------ ----------
Balance, December 31, 1996.......... 41,833 8,257 (173) 49,971
Net loss for the year............ -- (30,588) -- (30,588)
Common stock options excised..... 1,460 -- -- 1,462
Common stock issued for
acquisitions................ 54,064 -- -- 54,106
Income tax benefit from stock
options exercised............ 327 -- -- 327
Foreign translation adjustment... -- -- (89) (89)
----------- ----------- ------------ ----------
Balance, December 31, 1997.......... $97,684 $(22,331) $(262) $75,189
=========== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash (used) provided by operating activities:
Net (loss) earnings........................................... $(30,588) $ 5,092 $ 3,867
Income charges not affecting cash:
In-process research and development write-off................ 33,600 -- --
Depreciation................................................. 2,689 1,972 1,854
Amortization................................................. 680 481 506
Disposal and write-offs of property and equipment............ 333 239 104
Deferred income taxes........................................ (13,796) (400) (950)
Changes in certain working capital components, net of effects
of acquisition:
Increase in accounts receivable.............................. (18,210) (3,413) (3,847)
Decrease (increase) in inventories........................... 8,966 (9,847) (6,762)
Increase in prepaid expenses................................. (35) (1,112) (106)
Decrease (increase) in other assets.......................... 609 (329) 109
Increase in accounts payable................................. 4,981 2,151 1,843
Increase (decrease) in accounts payable to related parties... 976 (145) (51)
Increase (decrease) in accrued payroll and other liabilities. 4,446 (58) (604)
(Decrease) increase in accrued income taxes.................. (767) 488 133
-------------- -------------- --------------
Cash used by operating activities.............................. (6,116) (4,881) (3,904)
-------------- -------------- --------------
Cash used by investing activities:
Additions to property and equipment........................... (10,843) (5,526) (2,987)
Net cash acquired from Agema.................................. 805 -- --
Software development costs.................................... (703) (630) (599)
-------------- -------------- --------------
Cash used by investing activities.............................. (10,741) (6,156) (3,586)
-------------- -------------- --------------
Cash provided by financing activities:
Net increase in notes payable................................. 19,971 4,309 2,056
Proceeds from long-term debt.................................. 995 5,817 572
Repayments of long-term debt including current portion........ (593) (877) (608)
Common stock issued........................................... -- -- 77
Reduction of pension liability................................ (107) -- --
Proceeds from exercise of stock options and shares issued
pursuant to incentive stock option plans, including
tax benefit................................................. 1,789 1,582 364
-------------- -------------- --------------
Cash provided by financing activities.......................... 22,055 10,831 2,461
-------------- -------------- --------------
Effect of exchange rate changes on cash........................ (89) (173) --
-------------- -------------- --------------
Net increase (decrease) in cash................................ 5,109 (379) (5,029)
Cash and cash equivalents, beginning of year................... 775 1,154 6,183
-------------- -------------- --------------
Cash and cash equivalents, end of year......................... $ 5,884 $ 775 $ 1,154
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------------------
The Company designs, manufactures, and markets thermal imaging and broadcast
camera systems worldwide for a wide variety of applications in the government
and commercial markets. Thermal imaging systems detect infrared radiation, or
heat, emitted directly by all objects and materials and enable the operator to
see objects in total darkness, in adverse weather conditions and through
obscurants such as smoke and haze. Government applications include public
safety (law enforcement and drug interdiction, search and rescue, border patrol
and maritime patrol, and environmental protection) and defense (surveillance,
reconnaissance and navigation assistance). Commercial applications include
electronic news-gathering, non-destructive testing and evaluation, research and
development, manufacturing process control, condition monitoring and image
analysis.
Principles of consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Recognition of 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, 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.
24
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------------------
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 (loss) earnings per share (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding......................................... 5,843 5,361 5,246
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method........................................ -- 263 277
--------------- --------------- ---------------
Diluted shares outstanding............................. 5,843 5,624 5,523
=============== =============== ===============
</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.
25
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------------------
Statement of cash flows
- -----------------------
Cash paid for interest and income taxes amounted to the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash paid for:
Interest..................................... $1,508 $ 782 $ 133
Taxes........................................ $1,549 $ 763 $1,340
</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.
26
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------------------------------
Recent accounting pronouncements
- --------------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting of Comprehensive Income."
Additionally in 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments
of an Enterprise and Related Information." Both these items require certain
additional disclosures about the Company's operations and historical operations.
The Company plans to adopt SFAS 130 and 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.
NOTE 2 - OTHER OPERATING COSTS:
- ------------------------------
Selling and other operating costs consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Representative commissions............................ $ 3,371 $ 1,587 $ 2,390
Allowance for doubtful accounts....................... 839 1,260 55
Other selling, general and administrative expenses.... 22,341 16,152 12,211
--------------- --------------- ---------------
$26,551 $18,999 $14,656
=============== =============== ===============
</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.
The (benefit) provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
Current tax expense:
Federal............................................ $ 377 $ 1,361 $1,210
State.............................................. -- 290 263
Foreign............................................ 538 -- --
--------------- ---------------- ---------------
915 1,651 1,473
--------------- ---------------- ---------------
Deferred tax (benefit) expense:
Federal............................................ (16,566) 675 (146)
State.............................................. (1,817) 144 (15
Foreign............................................ 478 -- --
--------------- ---------------- ---------------
(17,905) 819 (161)
--------------- ---------------- ---------------
Increase (decrease) in valuation allowance............ 4,106 (1,219) (789)
--------------- ---------------- ---------------
Total (benefit) provision............................. $(12,884) $ 1,251 $ 523
=============== ================ ===============
</TABLE>
27
<PAGE>
NOTE 3 - INCOME TAXES - (Continued):
- ------------------------------------
Deferred tax assets are composed of the following components (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
Allowance for doubtful accounts................................... $ 759 $ 679
Warranty reserve.................................................. 392 347
Inventory basis differences....................................... 2,841 665
Accrued liabilities............................................... 1,841 324
Acquired in-process research and development...................... 12,768 --
Depreciation...................................................... (196) 75
Software development costs........................................ (396) (325)
Net operating loss carryforwards.................................. 3,358 1,870
Credit carryforwards.............................................. 1,334 771
Other............................................................. 1,061 577
------------------ -------------------
Gross deferred tax asset.......................................... 23,762 4,983
Deferred tax asset valuation allowance............................ (6,889) (2,783)
------------------ -------------------
$16,873 $ 2,200
================== ===================
</TABLE>
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,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal tax rate............................ (34.0)% 34.0% 34.0%
Increase (decrease) in rates resulting from:
State taxes........................................... (4.2) 4.5 6.0
Utilization of net operating loss carryforwards....... -- -- (15.0)
Foreign sales corporation benefit..................... (2.7) (3.2) (7.6)
Utilization of research and development credits....... -- (11.3) (0.8)
Increase in valuation allowance....................... 9.5 (6.3) (21.6)
Alternative minimum tax............................... -- -- 16.1
Other................................................. 1.8 2.0 0.8
--------------- --------------- ---------------
Effective tax rate.................................... (29.6)% 19.7% 11.9%
=============== =============== ===============
</TABLE>
As of December 31, 1997, the Company's net operating loss carryforwards
aggregated $9,267,000 and expire in the years 1998 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 $2,483,000
and $1,671,000 at December 31, 1997 and 1996, respectively.
28
<PAGE>
NOTE 5 - INVENTORIES:
- --------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Raw material and subassemblies................................. $26,631 $23,855
Work-in-progress............................................... 9,995 8,171
Finished goods................................................. 894 1,494
----------------- -----------------
37,520 33,520
Less - progress payments received from customers............... (2,796) (7)
----------------- -----------------
$34,724 $33,513
================= =================
</TABLE>
NOTE 6 - PROPERTY AND EQUIPMENT:
- --------------------------------
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Land and building.............................................. $ 464 $ --
Machinery and equipment........................................ 24,859 8,445
Office equipment and other..................................... 9,672 5,382
----------------- -----------------
34,995 13,827
Less - accumulated depreciation................................ (16,572) (6,690)
----------------- -----------------
$18,423 $ 7,137
================= =================
</TABLE>
Property and equipment include the cost of equipment held by the Company under
capital lease agreements. Such cost and related accumulated depreciation
aggregated $3,674,000 and $1,939,000, respectively, at December 31, 1997, and
$2,724,000 and $1,336,000, respectively, at December 31, 1996.
NOTE 7 - SOFTWARE DEVELOPMENT COSTS:
- ------------------------------------
Software development costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Software development costs..................................... $ 2,236 $1,533
Less - accumulated amortization................................ (1,193) (734)
----------------- -----------------
$ 1,043 $ 799
================= =================
</TABLE>
Amortization of capitalized software costs aggregated $459,000, $300,000 and
$393,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
29
<PAGE>
NOTE 8 - NOTES PAYABLE:
- ----------------------
The Company has a $30,000,000 line of credit bearing interest at the IBOR plus
1.75% (7.75% at December 31, 1997) secured by all assets of the Company.
Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kroner (approximately $5,040,000) line of credit at 4.70% at December
31, 1997. At December 31, 1997 and 1996, the Company had $26,558,000 and
$6,365,000, respectively, outstanding against these lines.
NOTE 9 - LONG-TERM DEBT:
- -----------------------
Long-term debt at December 31 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Note payable - patent.......................................... $ 206 $ 294
Note payable to bank; 7.75% interest rate. Payable in
monthly installments of $123, due June 1, 1998,
secured by all assets of the Company......................... 4,609 4,663
Capital leases................................................. 2,137 1,593
----------------- -----------------
6,952 6,550
Less - current portion......................................... (5,273) (1,377)
----------------- -----------------
$ 1,679 $ 5,173
================= =================
</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 $116,000, $115,000 and $112,000 were made in the years ended
December 31, 1997, 1996 and 1995, 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 the 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 for December 1997.......................... $ --
Interest cost on projected benefit obligation........................... 17
Amortization of actuarial gain.......................................... --
Amortization of remaining transition obligation......................... (3)
-----------------
Net pension costs....................................................... $ 14
=================
</TABLE>
30
<PAGE>
NOTE 10 PENSION PLANS (Continued):
- -----------------------------------
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>
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, 1997, 1996 and 1995 amounted to $1,940,000, $1,471,000 and $871,000,
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 $511,000, $533,000 and $0 for the
years ended December 31, 1997, 1996 and 1995, respectively.
31
<PAGE>
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 1997 and 1996 aggregated 115,000 and
100,000 shares, respectively. Of the shares granted, 115,000 and 33,330 shares
were earned in 1997 and 1996, 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 $1,747,000 and $398,000 was recorded in 1997 and 1996, respectively,
and is included in selling and other operating costs. At December 31, 1997,
there were 215,000 shares available for future awards.
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 1997, 1996 and 1995
using the Black-Scholes option pricing model. The weighted average assumptions
used for stock option grants for 1997, 1996 and 1995 were a risk-free interest
rate of 6.0%, 5.2% and 7.7%, respectively, an expected dividend yield of 0%, 0%
and 0%, respectively, an expected life of three years, and an expected
volatility of 40.2%, 22.7% and 23.9%, 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, 1997, 1996 and 1995, the total value of the options
granted was computed to be $1,879,000, $819,000 and $1,200,000, respectively,
which would be amortized on a straight-line basis over the vesting period of the
options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's net earnings and pro forma net earnings per share would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net (loss) earnings - as reported................... $(30,588) $5,092 $3,867
Net (loss) earnings - pro forma..................... $(31,353) $4,593 $3,578
(Loss) earnings per share:
Basic - as reported............................ $ (5.23) $ 0.95 $ 0.74
Diluted - as reported.......................... $ (5.23) $ 0.91 $ 0.70
(Loss) earnings per share:
Basic - pro forma.............................. $ (5.37) $ 0.86 $ 0.68
Diluted - pro forma............................ $ (5.37) $ 0.82 $ 0.65
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosure for 1997,
1996 and 1995 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.
32
<PAGE>
NOTE 13 STOCK OPTIONS (Continued):
- -----------------------------------
The table below summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------------- ----------------------
<S> <C> <C>
Balance at December 31, 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
====================== ======================
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and the remaining contractual lives by group of
similar price and grant dates:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Remaining
Exercise Price Range Number of Shares Exercise Price Contractual 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 $0, $416,000 and $896,000 during the years
ended December 31, 1997, 1996 and 1995, respectively, and are included in
revenue. Costs associated with this contract aggregated $0, $200,000 and
$425,000 in 1997, 1996 and 1995, respectively, and are included in cost of goods
sold. Outstanding billings at December 31, 1997 and 1996 aggregated $0 and
$35,000, respectively, and were included in accounts receivable.
33
<PAGE>
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, 1997,
1996 and 1995, the Company purchased parts aggregating $2,243,000, $1,670,000
and $1,320,000, respectively, from Hughes and its subsidiaries. As of December
31, 1997 and 1996, the Company owed Hughes $1,243,000 and $128,000,
respectively. Sales of the Company's products to Hughes and its affiliates
amounted to $34,000, $103,000 and $320,000 for the years ended December 31,
1997, 1996 and 1995, 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, the Company owed Spectra
$4,985,000 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 December 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
United States......................................... $48,462 $44,865 $27,062
Europe................................................ 24,008 14,883 15,872
Other foreign......................................... 19,301 6,269 7,191
--------------- --------------- ---------------
$91,771 $66,017 $50,125
=============== =============== ===============
Major Customers:
U.S. Government..................................... $18,983 $26,469 $15,686
=============== =============== ===============
</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 prices. 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.
34
<PAGE>
NOTE 17 AGEMA ACQUISITION- (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>
1997 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
Revenue................................................. $134,825 $114,418
Net earnings............................................ $ 7,122 $ 1,888
Earnings per share:
Basic................................................ $ 0.74 $ 0.20
Diluted.............................................. $ 0.71 $ 0.19
</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 7.60 and 6.71 Swedish Kroner to the U.S. dollar for 1997 and
1996, 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 are included as a separate line in operating expenses, and
$16,099,000 of inventories due to the creation of duplicative product lines,
which is included in cost of goods sold.
35
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
FLIR Systems, Inc.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
1997
- --------------------------------------
Revenue:
Government.......................... $ 8,403 $10,976 $12,946 $ 16,158 $ 48,483
Commercial.......................... 7,418 8,963 10,969 15,938 43,288
-------------- -------------- -------------- --------------- ---------------
Total revenue..................... 15,821 19,939 23,915 32,096 91,771
Gross profit.......................... 8,292 10,944 12,785 1,243 33,264
Net (loss) earnings................... 91 1,450 2,437 (34,566) (30,588)
Net (loss) earnings per share:
Basic.............................. $ 0.02 $ 0.26 $ 0.44 $ (4.96) $ (5.23)*
Diluted............................ $ 0.02 $ 0.25 $ 0.41 $ (4.96) $ (5.23)*
1996
- --------------------------------------
Revenue:
Government.......................... $ 6,479 $ 9,991 $11,913 $ 14,575 $ 42,958
Commercial.......................... 4,757 5,138 6,025 7,139 23,059
-------------- -------------- -------------- --------------- ---------------
Total revenue..................... 11,236 15,129 17,938 21,714 66,017
Gross profit.......................... 5,992 7,743 9,626 12,241 35,602
Net earnings.......................... 56 1,106 2,121 1,809 5,092
Net earnings per share:
Basic.............................. $ 0.01 $ 0.21 $ 0.39 $ 0.34 $ 0.95
Diluted............................ $ 0.01 $ 0.20 $ 0.38 $ 0.32 $ 0.91
</TABLE>
- --------------------
* - The sum of the quarterly (loss) earnings per share does not the equal annual
loss per share as a result of the computation of quarterly versus annual
average shares outstanding primarily related to the shares issued on
December 1, 1997, related to the Agema acquisition.
SIGNIFICANT FOURTH QUARTER ADJUSTMENT:
- --------------------------------------
During the quarter ended December 31, 1997, the Company increased the reserve
for doubtful accounts by $800,000 primarily related to commercial customers in
Southeast Asia.
Additionally, during the quarter ended December 31, 1997, the Company recorded a
one-time charge of $52.5 million associated with the acquisition of AGEMA which
was effective December 1, 1997. The write-off consisted of $36.4 million of in-
process research and development and merger-related costs, which are included as
a separate line in operating expense, and $16.1 million of inventories due to
the creation of duplicative product lines, which is included in cost of goods
sold.
36
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------
FINANCIAL DISCLOSURES.
---------------------
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
Information with respect to directors and executive officers of the Company is
included under "Election of Directors," "Management -- Executive Officers" and
"Section 16 Reports" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
Information with respect to executive compensation is included under "Executive
Compensation" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners and
management is included under "Stock Owned by Management and Principal
Shareholders" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The Company purchases inventory parts from Hughes and its subsidiaries. During
the years ended December 31, 1997, 1996 and 1995, the Company purchased parts
aggregating $2,243,000, $1,670,000 and $1,320,000, respectively, from Hughes and
its subsidiaries. As of December 31, 1997 and 1996, the Company owed Hughes
$1,243,000 and $128,000, respectively. Sales of the Company's products to
Hughes and its affiliates amounted to $34,000, $103,000 and $320,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
As a result of the AGEMA acquisition, Spectra-Physics AB and subsidiaries
("Spectra") are related parties as a result of Spectra's stock interest in the
Company. At December 31, 1997, the Company owed Spectra $4,985,000 which is
payable in full on June 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
--------------------------------------------
(a)(1) FINANCIAL STATEMENTS
The financial statements are included in Item 8 above.
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following schedule is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedule
37
<PAGE>
No other schedules are included because the required information is
inapplicable, not required or are presented in the financial statements or the
related notes thereto.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1 Second Restated Articles of Incorporation of FLIR Systems, Inc. (incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-1 (File No. 33-62582))
3.2 First Restated Bylaws of FLIR Systems, Inc. (incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-1 (File No. 33-62582))
10.1 Form of Indemnity Agreement between FLIR Systems, Inc. and each member of its
Board of Directors (incorporated by reference to Exhibit 10.1 to Registration Statement
on Form S-1 (File No. 33-62582))
10.2 1984 Incentive Stock Option Plan and Amendments (incorporated by reference to Exhibit
10.2 to Registration Statement on Form S-1 (File No. 33-62582))
10.3 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (File No. 33-62582))
10.4 1993 Stock Option Plan for Non-employee Directors (incorporated by reference to Exhibit
10.4 to Registration Statement on Form S-1 (File No. 33-62582))
10.5 Description of Management Bonus Plan (incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 (File No. 33-62582))
10.6 Lease Dated February 11, 1985, as amended, by and among FLIR Systems, Inc. and
Pacific Realty Association, L.P. (incorporated by reference to Exhibit 10.6 to
Registration Statement on Form S-1 (File No. 33-62582))
10.7 Form of Registration Rights Agreement dated as of May 12, 1993 by and among FLIR
Systems, Inc., Louisiana Pacific Venture Corp. and Hughes Aircraft Company
(incorporated by reference to Exhibit 10.8 to Registration on Form S-1
(File No. 33-62582))
10.8 Amendments to the Lease dated February 11, 1985, by and among FLIR Systems, Inc.
and Pacific Realty Association, L.P.
10.9 Business Loan Agreement with Bank of America NT & SA
10.10 Amendment No. 2 to Business Loan Agreement with Bank of America NT & SA
10.11 Security Agreement with Bank of America NT & SA
10.12 Combination Agreement, Dated October 6, 1997, Among FLIR Systems, Inc., Spectra-Physics
AB, Spectra-Physics Holding S.A., Spectra-Physics Holdings GmbH, Spectra-Physics
Holdings PLC, and Pharos Holdings, Inc. (incorporated by reference to Exhibit 2.0 to
Current Report on Form 8-K filed on October 24, 1997)
10.13 Form of Executive Employment Agreement dated as of May 5, 1997 (Robert P. Daltry and
J. Kenneth Stringer III) (incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on October 24, 1997)
10.14 Form of Executive Employment Agreement dated as of May 5, 1997 (James A. Fitzhenry,
J. Mark Samper, William N. Martin and Steven R. Palmquist) (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K filed on October 24, 1997)
10.15 Form of Agreement Amending Executive Employment Agreement dated as of December 1, 1997
for Robert P. Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J. Mark Samper,
William N. Martin and Steven R. Palmquist (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed on December 15, 1997)
10.16 Registration Rights Agreement dated as of December 1, 1997 by and among FLIR Systems,
Inc., Spectra-Physics AB, Spectra Physics Holdings PLC and Pharos Holdings
(incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on
December 15, 1997)
10.17 Amendment to Registration Rights Agreement dated as of December 1, 1997 by and among
FLIR Systems, Inc. and HE Holdings (formerly Hughes Aircraft Company) (incorporated
by reference to Exhibit 10.3 to Current Report on Form 8-K filed on December 15, 1997)
21.0 Subsidiaries of FLIR Systems, Inc.
23.0 Consent of Price Waterhouse LLP
27.0 Financial Data Schedule
</TABLE>
38
<PAGE>
(b) During the quarter ended December 31, 1997, the Company filed two Current
Reports on Form 8-K including the following:
1) On October 24, 1997, the Company filed a Current Report on Form 8-K
reporting that the Company had entered into a Combination agreement
dated October 6, 1997 with Spectra-Physics AB, Spectra-Physics Holdings
S.A., Spectra-Physics Holdings GmbH, Spectra-Physics Holding plc, and
Pharos Holdings, Inc. The Combination Agreement provided for the
acquisition by the Company of all the outstanding shares of capital
stock 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 AGMEA Infrared
Systems, Inc., a Delaware corporation in exchange for a total of
4,162,000 shares of the Company's common stock.
2) On December 15, 1997, the Company filed a Current Report on Form 8-K
reporting the completion of the acquisition of AGEMA Infrared Systems
AB, AGEMA Infrared Systems Limited, AGEMA Infrared Systems, Ltd. and
AGEMA Infrared Systems, Inc. The Form 8-K stated that all financial
statements required to be filed were included in the Company's Proxy
Statement dated November 10, 1997 as filed with the Securities and
Exchange Commission on November 12, 1997.
(c) See (a)(3) above.
(d) See (a)(2) above.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March
1998.
THE FLIR SYSTEMS, INC.
(Registrant)
By /s/ J. Mark Samper
----------------------------------------------
J. Mark Samper
Vice President of Finance and Chief Financial
Officer (Principal Accounting and Financial
Officer and Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on March 31, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Chairman of the Board of Directors and
Chief Executive Officer (Principal
/s/ ROBERT P. DALTRY Executive Officer)
- ---------------------------------------
Robert P. Daltry
/s/ LEIF BERGSTROM Vice Chairman
- ---------------------------------------
Leif Bergstrom
Director, President and Chief
/s/ J. KENNETH STRINGER III Operating Officer
- ---------------------------------------
J. Kenneth Stringer III
Vice President of Finance and Chief
Financial Officer (Principal
/s/ J. MARK SAMPER Accounting and Financial Officer)
- ---------------------------------------
J. Mark Samper
/s/ PATRICK L. EDSELL Director
- ---------------------------------------
Patrick L. Edsell
/s/ JOHN C. HART Director
- ---------------------------------------
John C. Hart
/s/ EGON LINDEROTH Director
- ---------------------------------------
Egon Linderoth
/s/ W. ALLEN REED Director
- ---------------------------------------
W. Allen Reed
/s/ LARS SPONGBERG Director
- ---------------------------------------
Lars Spongberg
/s/ RONALD L. TURNER Director
- ---------------------------------------
Ronald L. Turner
</TABLE>
40
<PAGE>
SCHEDULE II
FLIR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- -------------- -------------------------------- -------------- --------------
Additions
--------------------------------
Charged
Balance at Charges to To Other Write-offs Balance
Beginning Costs and Accounts Net of at the End
of the Year Expense Described Recoveries Of the Year
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for Doubtful Accounts $1,671 $ 839 $434 $ (461) $2,483
============== ============== ============== ============== ==============
Allowance for Deferred Tax Assets $2,783 $ 4,106 $0 $ 0 $6,889
============== ============== ============== ============== ==============
Year ended December 31, 1996
Allowance for Doubtful Accounts $ 743 $ 1,260 $0 $(332) $1,671
============== ============== ============== ============== ==============
Allowance for Deferred Tax Assets $4,002 $(1,219) $0 $ 0 $2,783
============== ============== ============== ============== ==============
Year ended December 31, 1995
Allowance for Doubtful Accounts $ 800 $ 55 $0 $(112) $ 743
============== ============== ============== ============== ==============
Allowance for Deferred Tax Assets $4,791 $ (789) $0 $ 0 $4,002
============== ============== ============== ============== ==============
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
FLIR Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 9, 1998 appearing on page 19 on this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14 (a) of this Form 10-
K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Portland, Oregon
March 9, 1998
42
<PAGE>
EXHIBIT 10.8
LEASE AMENDMENT
DATED: January 28, 1997
BETWEEN: PACIFIC REALTY ASSOCIATES, LP.,
a Delaware limited partnership LANDLORD
AND: FLIR SYSTEMS, INC.,
an Oregon corporation TENANT
By written Lease dated February 11, 1985, Tenant Leased from Landlord
approximately 20,118 square feet of office, production and storage space located
in Building F, PacTrust Business Center, 16505 S.W. 72nd Avenue, Portland,
Oregon 97224. By Lease Amendment dated May 19, 1986, the lease was amended and
the term extended. By Lease Amendment dated March 6, 1989, Tenant Leased an
additional approximately 24,650 square feet of warehouse and office space and
the term of the Lease was extended. By Lease Amendment dated February 28, 1990,
the lease was amended. By Lease Amendment dated July 31, 1990, Tenant Leased an
additional approximately 2,656 square feet of office and storage space. By Lease
Amendment dated August 29,1991, the Lease was amended. Tenant's Leased area
within Building F now totals approximately 47,424 square feet of office,
production, warehouse and storage space. By Lease Amendment dated June 24,1992,
Tenant Leased an additional approximately 5,400 square feet of office and
warehouse space located in Building D PacTrust Business Center, 16195 S.W. 72nd
Avenue, Portland, Oregon 97224. By Lease Amendment dated January 21,1993, Tenant
leased an additional approximately 3,850 square feet of warehouse and office
space in Building D and the term of the Lease was extended. By Lease Amendment
dated August 26, 1993, Tenant leased an additional approximately 6,590 square
feet of warehouse and office space in Building D and the Lease was amended. By
Lease Amendment dated November 22, 1993, the Lease was amended. By Lease
Amendment dated September 5, 1995, Tenant leased an additional approximately
9,160 square feet of office and warehouse space in Building D and the Lease was
amended and extended. Tenant's Leased area within Building D now totals
approximately 25,000 square feet of office space. Tenant's Leased area within
Buildings F and D totals approximately 72,424 square feet of office, production,
warehouse and storage space ("hereinafter referred to as the Premises"). By
Lease Amendment dated April 15, 1996, the Lease was amended. Such documents are
hereinafter jointly referred to as "the Lease". The Lease expires September 30,
2000.
Tenant now wishes to lease an additional approximately 12,415 square feet of
offices and warehouse space located in Building E, PacTrust Business Center,
16280 S.W. Upper Boones Ferry Road, Portland, Oregon 97224 (herein referred to
as the "Seventh Additional Space") and as further described on The attached
Exhibits A and B.
NOW, THEREFORE, the parties agree as follows:
1. The Seventh Additional Space shall become subject to the terms of the Lease
upon occupancy by Tenant, which is estimated to by March 1, 1997. Tenant's
total leased area shall increase from 72,424 square feet of office,
production, warehouse and storage space to 84,839 square feet of office,
production, warehouse and storage space. Tenant may occupy the Seventh
Additional Space prior to such commencement date on a rent-free basis and
compliance with all terms of the Lease.
<PAGE>
2. Base rent shall be according to the following schedule:
<TABLE>
<CAPTION>
Period 7th Add'l Sp Premises Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
March 1,1997 through March 31, 1998 $9,932.00 $60,840.00 $70,772.00
April 1, 1998 through September 30, 2000 $9,932.00 $62,922.00 $72,854.00
</TABLE>
3. Landlord shall, at its sole cost and expense, service and make any
necessary repairs to the heating, ventilation and air conditioning ("HVAC")
system. Landlord shall grant Tenant a one year warranty for the HVAC
system, provided that Tenant contracts with a reputable service contractor
to provide proper maintenance for the system. Such warranty shall be in
effect for one year from March 1, 1997.
4. A tenant improvement allowance of $5.00 per square foot (hereinafter
referred to as "The Allowance") has been provided. A final space plan will
be completed upon which Landlord and Tenant agree. If landlord cannot
construct the required improvements within the $5.00 per square foot
allowance, Tenant agrees to pay to Landlord the amount by which this cost
exceeds the Allowance, adjusted by any reductions or increases in costs
initiated by Tenant after a final plan and specifications have been signed
off by both parties with such amounts to be paid upon occupancy. If the
tenant improvements, including tenant-initiated adjustments, are less the
Allowance, Landlord shall credit Tenant a like amount in the from of a
moving allowance payable upon occupancy of the Premises or by providing
Tenant with a like amount in the form of free base rent.
5. Notwithstanding the foregoing, the Premises shall be taken by Tenant in
"as-is" condition with existing improvements configured generally as shown
in the attached Exhibit B.
6. Except as expressly modified hereby, all terms of the Lease shall remain in
full force and effect and shall continue through the existing term.
IN WITNESS WHEREOF, the parties hereto have executed this agreement on the
respective dates set opposite their signature below, but this Agreement on
behalf of such parties shall be deemed to have been as of the day first written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, LP.,
A Delaware limited partnership
By PacTrust Realty, Inc.,
A Delaware corporation,
Its General Partner
By /s/ David G. Hicks Date: 1-29-97
--------------------- -------
David G. Hicks
Vice President
TENANT:
FLIR SYSTEMS, INC.,
A Oregon corporation
By /s/ James A. Fitzhenry Date: 1-29-97
-------------------------- -------
James A. Fitzhenry
Vice President and General Counsel
<PAGE>
EXHIBIT 10.9
BANK OF AMERICA NT & SA BUSINESS LOAN AGREEMENT
This Agreement dated as of August 2, 1997 is between Bank of America NT & SA
(the "Bank") and FLIR Systems, Inc. (the "Borrower").
1. FACILITY NO.1: LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No.1 Commitment") is Twenty Five Million Dollars ($25000,000).
(b) This is a revolving line of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit to exceed the Facility No.1 Commitment.
1.2 AVAILABILITY PERIOD.
The line of credit is available between the date of this Agreement and June 1,
1998 (the "Facility No.1 Expiration Date") unless the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by Bank as its Reference Rate. The Reference Rate is set based on
various factors, including Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing
some loans. The Bank may price loans to its customers at, above, or below
the Reference Rate. Any change in the Reference Rate shall take effect at
the opening of business on the day specified in the public announcement of a
change in the Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on October 1,1997, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Facility No.1 Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than the Facility No.1 Expiration Date.
(d) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote installment of principal due
under this Agreement.
<PAGE>
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower. Each
interest rate is a rate per year. Interest will be paid on the first day of
every month and on the last day of each interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
1.6 FIXED RATE. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the Fixed Rate, subject to the
following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the Borrower
agree will apply to the portion during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be no shorter than 30 days and no longer than one year.
(c) Each Fixed Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(d) The Borrower may not elect a Fixed Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Fixed Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the certificate of deposit market for
a period starting on the date on which it was prepaid and ending on
the last day of the interest period for such portion.
1.7 OFFSHORE RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate plus
1.75 percentage points.
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) The interest period during which the Offshore Rate will be in effect
will be no shorter than 30 days and no longer than 180 days. The last day of
the interest period will be determined by the Bank using the practices of
the offshore dollar inter-bank market.
(b) Each Offshore Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000) for interest periods of 30 days or
longer.
(c) The "Offshore Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts in
the calculation will be determined by the Bank as of the first day of the
interest period.)
<PAGE>
Offshore Rate = Grand Cayman Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's Grand Cayman
Branch, Grand Cayman, British West Indies, would offer U.S. dollar
deposits for the applicable interest period to other major banks in
the offshore dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in the Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will be expressed as
a decimal, and will include, but not be limited to, marginal,
emergency, supplemental, special, and other reserve percentages.
(d) The Borrower may not elect an Offshore Rate with respect to any portion
of the principal balance of the line of credit which is scheduled to be
repaid before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Offshore Rate will not be converted to a different
rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the offshore dollar market
for a period starting on the date on which it was prepaid and ending
on the last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an Offshore
Rate portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of an Offshore Rate portion are not available in
the offshore Dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate portion.
1.8 LIBOR RATE. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the LIBOR Rate plus 1.75
percentage points.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will be
30 to 180 days. The last day of the interest period will be determined by
the Bank using the practices of the London inter-bank market.
<PAGE>
(b) Each LIBOR Rate portion will be an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The Borrower shall irrevocably request a LIBOR Rate portion no later than
9:00 a. m. San Francisco time three (3) banking days before the
commencement of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
LIBOR Rate = London Rate
-------------------------
(1.00-Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the nearest
1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the London inter-bank market
at approximately 11:00a.m. London time two (2) banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by the
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in the Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The percentage
will be expressed as a decimal, and will include, but not be limited
to, marginal, emergency, supplemental, special, and other reserve
percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(f) Any portion of the principal balance of the line of credit already
bearing interest at the LIBOR Rate will not be converted to a different rate
during its interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the London inter-bank market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(h) The Bank will have no obligation to accept an election for LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a LIBOR Rate portion are not available in the
London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
portion.
<PAGE>
2. FACILITY NO.2: LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Facility No.2 Commitment") is Five Million Dollars ($5,000,000).
(b) This is a non-revolving line of credit with a term repayment option. Any
amount borrowed, even if repaid before the end of the availability period,
permanently reduces the remaining available line of credit.
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit to exceed the Facility No.2 Commitment.
2.2 AVAILABILITY PERIOD.
The line of credit is available between the date of this Agreement and June 1,
1998 (the "Facility No.2 Expiration Date") unless the Borrower is in default.
2.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Reference Rate.
2.4 REPAYMENT TERMS.
(a) The Borrower will repay principal and interest beginning September 1,
1997 in 9 successive equal installments which would fully amortize the
outstanding principal balance over 48 months. On June 1, 1998 the Borrower
will repay the remaining principal balance plus any interest then due. Each
installment, when paid, will be applied first to the payment of interest
accrued. The amount of interest due, and the portion of each installment
which is applied to interest, will change from time to time if there are
changes in the Interest Rate. The balance, if any, of each installment will
be applied to the repayment of principal. If the accrued interest owing
exceeds the amount of any installment, the Borrower will pay the excess in
addition to the installment. The excess accrued interest will be paid on the
due date of the installment.
2.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period and during the term repayment period)
bear interest at the rate(s) described below during an interest period agreed to
by the Bank and the Borrower. Each interest rate is a rate per year. Interest
will be paid on the first day of every month and on the last day of each
interest period. At the end of any interest period, the interest rate will
revert to the rate based on the Reference Rate, unless the Borrower has
designated another optional interest rate for the portion.
2.6 FIXED RATE. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the Fixed Rate, subject to the
following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the Borrower
agree will apply to the portion during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be no shorter than 30 days and no longer than one year.
<PAGE>
(c) Each Fixed Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(d) The Borrower may not elect a Fixed Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Fixed Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the certificate of deposit
market for a period starting on the date on which it was prepaid and
ending on the last day of the interest period for such portion.
2.7 OFFSHORE RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate plus
1.75 percentage points.
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) The interest period during which the Offshore Rate will be in effect
will be no shorter than 30 days and no longer than 180 days. The last day of
the interest period will be determined by the Bank using the practices of
the offshore dollar inter-bank market.
(b) Each Offshore Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000) for interest periods of 30 days or
longer.
(c) The "Offshore Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts in
the calculation will be determined by the Bank as of the first day of the
interest period.)
Offshore Rate = Grand Cayman Rate
--------------------------
(1.00- Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's Grand Cayman
Branch, Grand Cayman, British West Indies, would offer U.S. dollar
deposits for the applicable interest period to other major banks in
the offshore dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in the Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will be expressed as
a decimal, and will include, but not be limited to, marginal,
emergency, supplemental, special, and other reserve percentages.
<PAGE>
(d) The Borrower may not elect an Offshore Rate with respect to any portion
of the principal balance of the line of credit which is scheduled to be
repaid before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already
bearing interest at the Offshore Rate will not be converted to a different
rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to the
amount (if any) by which
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the offshore dollar market
for a period starting on the date on which it was prepaid and ending
on the last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an Offshore
Rate portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of an Offshore Rate portion are not available in
the offshore Dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate portion.
2.8. LIBOR RATE. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the LIBOR Rate plus 1.75
percentage points.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be 30 to 180 days. The last day of the interest period will be determined by
the Bank using the practices of the London inter-bank market.
(b) Each LIBOR Rate portion will be an amount not less than Five Hundred
Thousand Dollars ($500,000).
(c) The Borrower shall irrevocably request a LIBOR Rate portion no later
than 9:00 a. m. San Francisco time three (3) banking days before the
commencement of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts in
the calculation will be determined by the Bank as of the first day of the
interest period.)
LIBOR Rate = London Rate
--------------------------
(1.00- Reserve Percentage)
<PAGE>
Where,
(i) "London Rate" means the interest rate (rounded upward to the nearest
1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the London inter-bank market
at approximately 11:00a.m. London time two (2) banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by the
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in the Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The percentage
will be expressed as a decimal, and will include, but not be limited
to, marginal, emergency, supplemental, special, and other reserve
percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(f) Any portion of the principal balance of the line of credit already
bearing interest at the LIBOR Rate will not be converted to a different rate
during its interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the London inter-bank market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(h) The Bank will have no obligation to accept an election for LIBOR Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a LIBOR Rate portion are not available in the
London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
portion.
3. FEES AND EXPENSES
3.1 LOAN FEE. The Borrower agrees to pay a loan fee of Thirty Seven
Thousand Five Hundred Dollars ($37,500) equal to 0.125% of the Facility No.1
and Facility No.2 Commitments due upon execution of this Agreement.
3.2 EXPENSES.
(a) The Borrower agrees to immediately repay the Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees, and documentation fees.
<PAGE>
(b) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by
this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
4. COLLATERAL
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower. In addition, all personal property
collateral securing this Agreement shall also secure all other present and
future obligations of the Borrower to the Bank (excluding any consumer credit
covered by the Federal Truth in Lending law, unless the Borrower has otherwise
agreed in writing). All personal property collateral securing any other present
or future obligations of the Borrower to the Bank shall also secure this
Agreement.
(a) Machinery and equipment.
(b) Inventory.
(c) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
5.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or
for the designation of optional interest rates given by the individual
signer(s) of this Agreement or a person or persons authorized by the
signer(s) of this Agreement.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 28018-00865, or such other accounts with the Bank
as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) for, from and against all liability, loss, and costs
in connection with any act resulting from telephone instructions it
reasonably believes are made by a signer of this Agreement or a person
authorized by a signer. This indemnity and excuse will survive this
Agreement's termination.
<PAGE>
5.4 DIRECT DEBIT (PRE-BILLING)
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 28018-00865 (the "Designated Account") on the date each
payment of principal and interest and any fees from the Borrower becomes due
(the "Due Date"). If the Due Date is not a banking day, the Designated
Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no new
extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in the
applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount of principal due and interest accrued
(collectively, the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of any
such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank
will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the
debit will be reversed.
5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in Oregon and banks are open for business in California. For amounts bearing
interest at an offshore rate (if any), a banking day is a day other than a
Saturday or a Sunday on which the Bank is open for business in Oregon and the
Bank is dealing in offshore dollars. All payments and disbursements which would
be due on a day which is not a banking day will be due on the next banking day.
All payments received on a day which is not a banking day will be applied to the
credit on the next banking day.
5.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to
the Bank. If any government authority imposes any taxes or charges on any
payments made by the Borrower, the Borrower will pay the taxes or charges. Upon
request by the Bank, the Borrower will confirm that it has paid the taxes by
giving the Bank official tax receipts (or notarized copies) within 30 days after
the due date. However, the Borrower will not pay the Bank's net income taxes.
5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency. The costs and losses will be allocated to
the loan in a manner determined by the Bank, using any reasonable method. The
costs include the following:
(a) any reserve or deposit requirements; and
<PAGE>
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used.
5.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Reference Rate. This may result in compounding
of interest.
5.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 2.00 percentage points
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any event of default.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
6.2 SECURITY AGREEMENTS. Signed original security agreements, financing
statements and fixture filings (together with collateral in which the Bank
requires a possessory security interest), which the Bank requires.
6.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.4 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
6.5 OTHER ITEMS. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
7.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
<PAGE>
7.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in existence and in good standing, and, where required, in
compliance with fictitious name statutes.
7.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
7.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank, including the Borrower's financial statement
dated as of June 30, 1997, is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the assets or the financial condition of the
Borrower.
7.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
7.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
7.9 PERMITS, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged without conflict with the rights
of others.
7.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year, except as have been
disclosed in writing to the Bank.
7.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
7.13 ERISA PLANS.
(a) The Borrower has fulfilled its obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA
(b) No reportable event has occurred under Section 4043(b) of ERISA for which
the PBGC requires 30 day notice.
(c) No action by the Borrower to terminate or withdraw from any Plan has been
taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA
<PAGE>
(d) No proceeding has been commenced with respect to a Plan under Section 4042
of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended
from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension Benefit
Guaranty Corporation under Title IV of ERISA
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 USE OF PROCEEDS.
(a) To use the proceeds of Facility No.1 only for working capital.
(b) To use the proceeds of Facility No.2 only for refinancing existing U.S.
National Bank debt.
8.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the Bank. The statements
shall be prepared on a consolidated basis. This annual financial statement
to be accompanied by the Borrower's fiscal year end compliance certificate.
(b) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
balance sheet and income statement forecast including capital expenditure
budget.
(c) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated basis.
(d) Within 45 days of the period's end of the first through third accounting
periods, the Borrower's quarterly compliance certificate.
8.3 MINIMUM FIXED CHARGE COVERAGE. To maintain quarterly on a consolidated
basis a minimum fixed charge coverage of at least 1.75:1.0
Minimum Fixed Charge Coverage is defined as the sum of EBIT (Earnings Before
Interest and Taxes) plus Rents (or Lease Payments) divided by the sum of
Interest plus Rents (or Lease Payments).
8.4 MAXIMUM FUNDED DEBT TO TOTAL CAPITALIZATION. To maintain quarterly on a
consolidated basis a maximum Funded Debt to Total Capitalization of no more than
45%.
<PAGE>
"Funded Debt" defined as the sum of all Bank Debt plus Capital Leases plus Other
Long Term Debt.
"Total Capitalization" is defined as the sum of Funded Debt plus Consolidated
Net Worth.
8.5 MINIMUM NET WORTH. To maintain quarterly on a consolidated basis a minimum
net worth equal to Forty Five Million Dollars ($45,000,000) as of fiscal year
end December 31, 1996, plus 30% of future net income.
8.6 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts or lease obligations (other than those to the Bank and its affiliates), or
become liable for the debts of others without the Bank's written consent. This
does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts and lease obligations for business purposes in relation
only to additional purchase money security interests allowed in Paragraph
8.7(d).
8.7 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank and its
affiliates.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
(d) Additional purchase money security interests in personal or real property
acquired after the date of this Agreement if the aggregate principal amount
of debts secured by such liens does not exceed 5% of Consolidated Net Worth
at any one time.
8.8 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower.
(b) any substantial dispute between the Borrower and any government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's financial condition or
operations.
(e) any change in the Borrower's name, address or legal structure.
8.9 BOOKS AND RECORDS. To maintain adequate books and records.
8.10 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
<PAGE>
8.11 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations and orders of any government body with authority over
the Borrower's business.
8.12 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
8.13 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
8.14 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.15 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
8.16 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor of
the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the Bank
a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
8.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value, or
enter into any sale and leaseback agreement covering any of its fixed or
capital assets.
8.18 NEGATIVE PLEDGE. Not to sell, refinance or allow liens on the Borrower's
unencumbered assets.
8.19 MERGER. Borrower to remain successor and/or parent to any merger.
8.20 ERISA PLANS. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of ERISA for
which the PBGC requires 30 day notice.
<PAGE>
(b) Any action by the Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of ERISA
(c) Any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA
(d) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank for, from, and against
any loss or liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrower's property or
operations or property leased to the Borrower. The indemnity includes but is not
limited to attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. For these purposes, the term "hazardous
substances" means any substance which is or becomes designated as "hazardous" or
"toxic" under any federal, state or local law, or any petroleum products,
including crude oil and any product derived directly or indirectly from, or any
fraction or distillate of, crude oil. This indemnity will survive repayment of
the Borrower's obligations to the Bank.
10. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If a bankruptcy petition is filed with
respect to the Borrower, the entire debt outstanding under this Agreement will
automatically become due immediately.
10.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
10.2 NON-COMPLIANCE. The Borrower fails to meet the conditions of, or fails to
perform any obligation under:
(a) this Agreement,
(b) any other agreement made in connection with this loan, or
(c) any other agreement the Borrower has with the Bank or any affiliate of the
Bank.
10.3 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower has obtained from anyone else or which the Borrower has
guaranteed.
10.4 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this loan.
10.5 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
10.6 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy
petition is filed against the Borrower, or the Borrower makes a general
assignment for the benefit of creditors.
<PAGE>
10.7 RECEIVERS. A receiver or similar official is appointed for the Borrower's
business, or the business is terminated.
10.8 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage.
10.9 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower; or the Borrower enters into any settlement agreements with respect to
any litigation or arbitration, in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage.
10.10 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's financial condition or
ability to repay.
10.11 DEFAULT UNDER GUARANTY OR SUBORDINATION AGREEMENT. Any guaranty,
subordination agreement, security agreement, deed of trust, or other document
required by this Agreement is violated or no longer in effect.
10.12 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's financial condition, properties or prospects, or ability to repay the
loan.
10.13 ERISA PLANS. The occurrence of any one or more of the following events
with respect to the Borrower, provided such event or events could reasonably be
expected, in the judgment of the Bank, to subject the Borrower to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
the Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of the Bank likely to result in the termination of such
Plan for purposes of Title IV of ERISA
(b) Any Plan termination (or commencement of proceedings to terminate a Plan)
or the Borrower's full or partial withdrawal from a Plan.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
11.2 OREGON LAW. This Agreement is governed by Oregon law.
11.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
11.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications
of this Agreement);
<PAGE>
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by Oregon law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) a provisional or interim remedy; and/or
(B) additional or supplementary remedies.
(h) The pursuit of or a successful action for provisional, interim, additional
or supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including the
suing party, to submit the controversy or claim to arbitration if the other
party contests the lawsuit.
(i) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
11.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
<PAGE>
11.6 COSTS. If the Bank incurs any expenses in connection with enforcing this
Agreement or administering this Agreement (including in connection with
extending, amending, renewing or modifying this Agreement), or if the Bank takes
collection action under this Agreement, it is entitled to costs and reasonable
attorneys' fees, including any allocated costs of in-house counsel.
11.7 ATTORNEYS' FEES. In the event of a lawsuit or arbitration proceeding, the
prevailing party is entitled to recover costs and reasonable attorneys' fees
(including any allocated costs of in-house counsel) incurred in connection with
the lawsuit or arbitration proceeding, as determined by the court or arbitrator
(and not by a jury). Such costs and attorneys' fees shall include, without
limitation, those incurred on any appeal, as determined by the appellate court,
and any anticipated costs and attorneys' fees to pursue or collect any
judgement.
11.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
11.9 EXCHANGE OF INFORMATION. The Borrower agrees that the Bank may exchange
financial information about the Borrower with Bank America Corporation
affiliates and other related entities.
11.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
11.11 HEADINGS. ARTICLE AND PARAGRAPH headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
11.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
11.13 WRITTEN AGREEMENTS. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND
COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989. CONCERNING LOANS AND OTHER
CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR
SECURED SOLELV BV THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS
CONSIDERATION AND BE SIGNED BY THAT BANK TO BE ENFORCEABLE.
<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
Bank of America NT & SA FLIR SYSTEMS, INC.
X /s/ Marie-Lou A. Godinez X /s/ J. Mark Samper
------------------------ ----------------------------------
By: Marie-Lou A.Godinez By: J. Mark Samper
Title: Vice President Title: Vice President-Finance and C.F.O.
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE BORROWER
ARE TO BE SENT: ARE TO BE SENT:
Oregon Commercial Banking #2090 16505 S.W. 72nd Avenue
P.O. Box 6400 Portland, OR 97224
Portland, OR 97228
<PAGE>
EXHIBIT 10.10
BANK OF AMERICA AMENDMENT TO DOCUMENTS
AMENDMENT NO.2 TO BUSINESS LOAN
AGREEMENT
This Amendment No.2 (the "Amendment") dated as of December 3,1997, is between
Bank of America NT & SA (the "Bank") and FLIR Systems, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of August 21, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
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1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In Subparagraph 1.1(a) of the Agreement, the amount "Thirty Million
Dollars ($30,000,000)" is substituted for the amount "Twenty Five
Million Three Hundred Thousand Dollars ($25,300,000)".
2.2 In Paragraph 1.9 of the Agreement, the amount "Three Million Dollars
($3,000,000)" is substituted for the amount "Three Hundred Thousand
Dollars ($300,000)".
3. Conditions. This Amendment will be effective when the Bank receives the
following items, in form and content acceptable to the Bank:
3.1 The Borrower agrees to pay a Six Thousand Two Hundred Fifty Dollars
($6,250) fee, or .125% of the increase in the Facility No.1
Commitment amount, due upon execution of this Amendment.
4. Effect of Amendment. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA FLIR SYSTEMS, INC.
X /s/ Robert Countryman X /S/ J. Mark Samper
------------------------ ----------------------------------
By: Robert Countryman By: J. Mark Samper
Title: Vice President Title: Vice President-Finance and C.F.O.
<PAGE>
EXHIBIT 10.11
SECURITY AGREEMENT
BANK OF AMERICA NT & SA (RECEIVABLES, INVENTORY' AND EQUIPMENT)
1. THE SECURITY. The undersigned FLIR Systems, Inc. ("Borrower") hereby
assigns and grants to Bank of America NT & SA ("Bank") a security interest in
the following described property ("Collateral"):
A. All of the following, whether now owned or hereafter acquired by
Borrower: accounts, contract rights, chattel paper, instruments,
deposit accounts and general intangibles.
B. All inventory now owned or hereafter acquired by Borrower.
C. All machinery, furniture and other equipment of every type now owned or
hereafter acquired by Borrower (including, but not limited to, the
equipment described in the attached Equipment Description, if any).
D. All negotiable and nonnegotiable documents of title now owned or
hereafter acquired by Borrower covering any of the above-described
property.
E. All rights under contracts of insurance now owned or hereafter acquired
by Borrower covering any of the above-described property.
F. All proceeds now owned or hereafter acquired by Borrower of any of the
above-described property.
G. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not
limited to any computer-readable memory and any computer hardware or
software necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS. The Collateral secures and will secure all Indebtedness
of Borrower to Bank. For the purposes of this Agreement, "Indebtedness" means
all loans and advances made by Bank to Borrower and all other obligations and
liabilities of Borrower to Bank, whether now existing or hereafter incurred or
created, whether voluntary or involuntary, whether due or not due, whether
absolute or contingent, or whether incurred directly or acquired by Bank by
assignment or otherwise. Unless Borrower shall have otherwise agreed in writing,
Indebtedness, for the purposes of this Agreement, shall not include "consumer
credit" subject to the disclosure requirements of the Federal Truth in Lending
Act or any regulations promulgated thereunder.
3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless
compliance is waived by Bank in writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and
Records.
B. Borrower has notified Bank in writing of, and will notify Bank in
writing prior to any change in, the locations of (i) Borrower's place
of business or Borrower's chief executive office if Borrower has more
than one place of business, and (ii) any Collateral, including the
Books and Records.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such insurance
shall require losses to be paid on a replacement cost basis, be issued
by insurance companies acceptable to Bank and include a loss payable
endorsement in favor of Bank in a form acceptable to Bank.
E. Borrower has not granted and will not grant any security interest in
any of the Collateral except to Bank, and will keep the Collateral free
of all liens, claims, security interests and encumbrances of any kind
or nature except the security interest of Bank.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of; or remove from Borrower's place of business (i) any
inventory except in the ordinary course of business as heretofore
conducted by Borrower, or (ii) any other Collateral except with the
prior written consent of Bank.
G. Borrower will promptly notify Bank in writing of any event which
affects the value of the Collateral, the ability of Borrower or Bank to
dispose of the Collateral, or the rights and remedies of Bank in
relation thereto, including, but not limited to, the levy of any legal
process against any Collateral and the adoption of any marketing order,
arrangement or procedure affecting the Collateral, whether governmental
or otherwise.
H. If any Collateral is or becomes the subject of any registration
certificate or negotiable document of title, including any warehouse
receipt or bill of lading, Borrower shall immediately deliver such
document to Bank.
<PAGE>
I. Borrower will not attach any Collateral to any real property or fixture
in a manner which might cause such Collateral to become a part thereof
unless Borrower first obtains the written consent of any owner, holder
of any lien on the real property or fixture, or other person having an
interest in such property to the removal by Bank of the Collateral from
such real property or fixture. Such written consent shall be in form
and substance acceptable to Bank and shall provide that Bank has no
liability to such owner, holder of any lien, or any other person.
J. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
4. ADDITONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its
option at any time, whether or not Borrower is in default:
A. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver daily
such collections and proceeds to Bank in kind.
B. Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other
matters affecting the Collateral.
C. Examine the Collateral, including the Books and Records, and make
copies of or extracts from the Books and Records, and for such purposes
enter at any reasonable time upon the property where any Collateral or
any Books and Records are located.
D. Require Borrower to deliver to Bank any instruments or chattel paper.
E. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any
inventory.
F. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
G. Require Borrower to direct all account debtors to forward all payments
and proceeds of the Collateral to a post office box under Bank's
exclusive control.
H. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse or
sign Borrower's name on all checks, drafts, collections, receipts and
other documents, and to take possession of and open the mail addressed
to Borrower and remove therefrom any payments and proceeds of the
Collateral.
5. DEFAULTS. Any one or more of the following shall be a default hereunder:
A. Borrower fails to pay any Indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation under
this Agreement, or under any other obligation of Borrower to Bank.
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any Indebtedness.
D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its
debts as they become due, fails in business, makes a general assignment
for the benefit of creditors, dies or commences any case, proceeding or
other action under any bankruptcy or other law for the relief of, or
relating to, debtors.
E. Any case, proceeding or other action is commenced against Borrower or
any guarantor of any Indebtedness under any bankruptcy or other law for
the relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any
Collateral.
G. Any financial statements, certificates, schedules or other information
now or hereafter furnished by Borrower to Bank proves false or
incorrect in any material respect.
6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do
any one or more of the following:
A. Declare any Indebtedness immediately due and payable, without notice or
demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of
Borrower maintained with Bank by applying such account to the
Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by Bank.
<PAGE>
E. Enter upon the property where any Collateral, including any Books and
Records, are located and take possession of such Collateral and such
Books and Records, and use such property (including any buildings and
facilities) and any of Borrower's equipment, if Bank deems such use
necessary or advisable in order to take possession of, hold, preserve,
process, assemble, prepare for sale or lease, market for sale or lease,
sell or lease, or otherwise dispose of, any Collateral.
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to
Borrower.
G. Use or transfer any of Borrower's rights and interests in any
Intellectual Property now owned or hereafter acquired by Borrower, if
Bank deems such use or transfer necessary or advisable in order to take
possession of, hold, preserve, process, assemble, prepare for sale or
lease, market for sale or lease, sell or lease, or otherwise dispose
of; any Collateral. Borrower agrees that any such use or transfer shall
he without any additional consideration to Borrower. As used in this
paragraph, "Intellectual Property" includes, but is not limited to, all
trade secrets, computer software, service marks, trademarks, trade
names, trade styles, copyrights, patents, applications for any of the
foregoing, customer lists, working drawings, instructional manuals, and
rights in processes for technical manufacturing, packaging and
labelling, in which Borrower has any right or interest, whether by
ownership, license, contract or otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to
take possession of the Collateral.
L. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, and Borrower hereby irrevocably constitutes
and appoints Bank as Borrower's attorney-in-fact to perform all acts
and execute all documents in connection therewith.
7. MISCELLANEOUS.
A. Any waiver, express or implied, of any provision hereunder and any
delay or failure by Bank to enforce any provision shall not preclude
Bank from enforcing any such provision thereafter.
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with this
Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with
this Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the laws
of the State of Oregon, to the jurisdiction of which the parties hereto
submit.
E. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law. Any
single or partial exercise of any right or remedy shall not preclude
the further exercise thereof or the exercise of any other right or
remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by Bank to enforce this Agreement or to
protect the security interest of Bank in the Collateral, or to take
possession of; hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of; any Collateral, Borrower agrees to pay immediately the
costs and expenses thereof, together with reasonable attorney's fees
and allocated costs for in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate
property shall be liable for payment of the Indebtedness if such
Borrower is personally liable for the Indebtedness.
Dated: August 21, 1997 Borrower:
FLIR Systems, Inc.
Bank of America NT & SA An Oregon Corporation
X /s/ Marie-Lou A. Godinez /s/ J. Mark Samper
------------------------------ ------------------
Marie-Lou A. Godinez, Vice President J. Mark Samper, Vice President-Finance
and C.F.O.
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF FLIR SYSTEMS, INC.
- ----------------------------------
. FSI International, Inc., a Barbados Corporation
. Hoeger Optical Co., Inc., a California Corporation
. FLIR Systems International Ltd., a United Kingdom Corporation
. FSI Automation, Inc., a Washington Corporation
. FLIR Systems AB, a Swedish Corporation
. FLIR Systems Limited., a United Kingdom Corporation
. FLIR Systems Ltd., a Canadian Corporation
. FLIR Systems Secaucus, a Delaware Corporation
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-82676, 33-82194 and 33-95248) of FLIR Systems,
Inc. of our report dated March 9, 1998, which appears on page 19 of this Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule which appears on page 42 of this Form 10-K.
PRICE WATERHOUSE LLP
Portland, Oregon
March 31, 1998
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