<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
------------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
Commission file number 0-21918
FLIR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-0708501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16505 S.W. 72ND AVENUE, PORTLAND, OREGON 97224
(Address of principal executive offices) (Zip Code)
(503) 684-3731
(Registrant's telephone number, including area code)
------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes____. No __X__.
At March 31, 1999, there were 14,139,237 shares of the Registrant's common
stock, $0.01, par value, outstanding.
1
<PAGE>
FLIR SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
Ended March 31, 1999 and 1998 ......................... 3
Consolidated Balance Sheet -- March 31, 1999 and
December 31, 1998 ..................................... 4
Consolidated Statement of Cash Flows -- Three Months
Ended March 31, 1999 and 1998 ......................... 5
Notes to the Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities ................................. 15
Item 6. Exhibits and Current Reports on Form 8-K .............. 15
Signatures ............................................ 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
----------------- ------------------
(restated - Note
6)
<S> <C> <C>
Revenue:
Commercial ........................................................ $ 27,636 $ 28,043
Government ........................................................ 6,802 12,061
---------- ----------
34,438 40,104
Cost of goods sold .................................................... 33,354 19,602
Research and development .............................................. 6,977 6,493
Selling and other operating costs ..................................... 14,857 12,971
Combination costs ..................................................... 6,110 --
---------- ----------
61,298 39,066
(Loss) earnings from operations ............................... (26,860) 1,038
Interest income ....................................................... 18 363
Interest expense and other ............................................ (1,226) (1,475)
---------- ----------
Loss before income taxes ...................................... (28,068) (74)
(Benefit) provision for income taxes .................................. (8,985) 121
---------- ----------
Net loss .............................................................. $(19,083) $ (195)
========== ==========
Net loss per share:
Basic .............................................................. $ (1.35) $ (0.02)
========== ==========
Diluted ............................................................ $ (1.35) $ (0.02)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
----------------- ------------------
(restated - Note
6)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 6,937 $ 4,793
Accounts receivable, net ...................................... 69,936 91,202
Inventories ................................................... 66,020 70,312
Prepaid expenses .............................................. 5,074 6,061
Deferred income taxes.......................................... 4,915 4,915
------------ ------------
Total current assets ...................................... 152,882 177,283
Property and equipment, net ....................................... 26,907 26,775
Software development costs, net ................................... 466 488
Deferred income taxes, net ........................................ 18,800 11,610
Intangible assets, net ............................................ 15,651 15,936
Other assets ...................................................... 3,918 3,897
------------ ------------
$ 218,624 $ 235,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................. $ 67,865 $ 39,958
Accounts payable .............................................. 19,807 24,031
Accrued payroll and other liabilities ......................... 15,781 16,189
Accrued income taxes .......................................... 1,703 3,893
Current portion of long-term debt ............................. 1,911 2,680
------------ ------------
Total current liabilities ................................. 107,067 86,751
Long-term debt .................................................... 882 19,296
Pension liability ................................................. 3,932 3,960
Commitments and contingencies ..................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at March 31, 1999, and
December 31, 1998 ........................................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,139,237 and 14,133,404 shares issued at
March 31, 1999, and December 31, 1998, respectively ......... 141 141
Additional paid-in capital .................................... 142,622 142,554
Accumulated deficit ........................................... (33,723) (14,640)
Accumulated other comprehensive loss .......................... (2,297) (2,073)
------------ ------------
Total shareholders' equity ................................ 106,743 125,982
------------ ------------
$ 218,624 $ 235,989
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1999 1998
----------------- ------------------
(restated - Note 6)
<S> <C> <C>
Cash used by operations:
Net loss .......................................................... $ (19,083) $ (195)
Income charges not affecting cash:
Depreciation .................................................. 1,427 1,474
Amortization .................................................. 464 514
Disposals and write-offs of property and equipment ............ 25 24
Deferred income taxes ......................................... (7,190) 146
Changes in certain working capital components:
Decrease in accounts receivable ............................... 21,266 10,116
Decrease (increase) in inventories ........................... 4,292 (5,867)
Decrease (increase) in prepaid expenses ....................... 987 (555)
(Increase) decrease in other assets ........................... (74) 42
Decrease in accounts payable .................................. (4,224) (1,147)
Decrease in accounts payable to related parties ............... -- (1,197)
Decrease in accrued payroll and other liabilities ............. (408) (8,548)
(Decrease) increase in accrued income taxes ................... (2,190) (76)
----------------- ------------------
Cash used by operating activities ................................. (4,708) (5,269)
----------------- ------------------
Cash used by investing activities:
Additions to property and equipment ............................... (1,688) (3,054)
Software development costs ........................................ -- (192)
----------------- ------------------
Cash used by investing activities ................................. (1,688) (3,246)
----------------- ------------------
Cash provided by financing activities:
Net increase in notes payable...................................... 27,907 6,828
Proceeds from long-term debt ...................................... -- 692
Repayment of long-term debt including current portion ............. (19,183) (439)
Reduction of pension liability .................................... (28) (14)
Proceeds from exercise of stock options ........................... 68 475
Common stock issued pursuant to stock option plans................. -- 970
----------------- ------------------
Cash provided by financing activities ............................. 8,764 8,512
----------------- ------------------
Effect of exchange rate changes on cash ............................... (224) (1,215)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents .................. 2,144 (1,218)
Cash and cash equivalents, beginning of period ........................ 4,793 7,545
----------------- ------------------
Cash and cash equivalents, end of period .............................. $ 6,937 $ 6,327
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The accompanying consolidated financial statements of FLIR Systems, Inc. (the
"Company") are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the consolidated financial position and results of operations
for the interim periods. See Note 6 regarding the restatement of the Company's
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto for the year ended December 31, 1998.
The accompanying financial statements include the accounts of FLIR Systems, Inc.
and its subsidiaries. All intercompany accounts and transactions have been
eliminated. The results of the interim period are not necessarily indicative of
the results for the entire year.
Certain reclassifications have been made to prior years' data to conform with
the current year's presentation. These reclassifications had no impact on
previously reported results of operations or shareholders' equity.
NOTE 2 -- REVENUE RECOGNITION:
Revenue on commercial sales is generally recognized upon shipment. Government
sales often require significant integration with other aircraft components and
related revenue is generally recognized when products are shipped from the
Company's facilities and realization is reasonably assured. Adjustments in
estimates, which can affect both revenues and earnings, are made in the period
in which the information necessary to make the adjustment becomes available.
Provisions for estimated losses on sales or related receivables are recorded
when identified.
NOTE 3 -- NET EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods, computed
using the treasury stock method for stock options. In 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
6
<PAGE>
The following table sets forth the reconciliation of the denominator utilized in
the computation of basic and diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Weighted average number of common shares
outstanding ...................................... 14,136 11,907
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method ..................................... -- --
-------------- --------------
Diluted shares outstanding .......................... 14,136 11,907
============== ==============
</TABLE>
The effect of stock options for the three months ended March 31, 1999 and 1998,
which aggregated 597,000 and 615,000, respectively, has been excluded for
purposes of diluted earnings per share since the effect would have been
anti-dilutive.
NOTE 4 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------ -----------------
<S> <C> <C>
Raw material and subassemblies ......................... $ 27,311 $ 36,315
Work-in-progress ....................................... 15,002 12,527
Finished goods ......................................... 24,019 22,330
------------------ -----------------
66,332 71,172
Less - progress payments received from
customers ................................. (312) (860)
------------------ -----------------
$ 66,020 $ 70,312
================== =================
</TABLE>
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Comprehensive
Stock Stock Capital Deficit Income Total Loss
--------- ------- ---------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.......... $ -- $ 141 $142,554 $ (14,640) $ (2,073) $ 125,982
Common stock options exercised...... -- -- 68 -- -- 68
Net loss for the three month period. -- -- -- (19,083) -- (19,083) (19,083)
Foreign translation adjustment...... -- -- -- -- (224) (224) (224)
--------- ------- ---------- ----------- ------------- --------- ------------
Balance, March 31, 1999............. $ -- $ 141 $142,622 $ (33,723) $ (2,297) $ 106,743
========= ======= ========== =========== ============= =========
Comprehensive loss, three
months ended March 31, 1999 ........ $ (19,307)
============
</TABLE>
7
<PAGE>
Cumulative foreign translation adjustment represents the Company's only other
comprehensive income item. Cumulative foreign translation adjustment represents
unrealized gains/losses in the translation of the financial statements of the
Company's subsidiaries in accordance with SFAS No. 52, "Foreign Currency
Translation." The Company has no intention of liquidating the assets of the
foreign subsidiaries in the foreseeable future.
NOTE 6 - INFRAMETRICS MERGER:
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of March 19, 1999 by and among the Company, IRABU
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
the Company ("Merger Sub"), Inframetrics, Inc., a Delaware corporation
("Inframetrics") and the stockholders of Inframetrics, Merger Sub was merged
with and into Inframetrics effective as of March 30, 1999 (the "Effective
Time").
The shares of capital stock of Inframetrics outstanding immediately prior to the
effective time were converted into and exchanged for a total of 2,107,552 shares
of the Company's common stock (including 210,755 shares of the Company's common
stock to be held in escrow to secure the indemnification obligations of the
stockholders of Inframetrics until September 26, 1999). In addition, all options
to purchase Inframetrics common stock that were outstanding immediately prior to
the effective time were assumed by the Company. A total of 192,439 shares of the
Company's common stock are issuable upon the exercise of the stock options
assumed by the Company in the Merger.
The transaction was accounted for as a pooling of interests and, therefore,
financial statements for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatements had no effect on previously reported separate results of operations
or shareholders' equity.
In conjunction with the merger, on March 31, 1999, the Company recognized a one-
time charge of $24.3 million consisting of the following (in thousands):
<TABLE>
<CAPTION>
Description: Amount
--------------------------------------------------------- --------
<S> <C>
Reserve for duplicative inventories ..................... $ 18,150
Transaction related costs ............................... 3,110
Cost to exit activities ................................. 3,000
--------
Total $ 24,260
========
</TABLE>
The inventory reserve relates to duplicative product lines created by the merger
and is included in cost of goods sold. The Company intends to write-off and
dispose of the related inventories throughout 1999. The transaction related
costs consisted of investment advisor fees, legal and accounting fees and other
direct transaction costs. Such costs are included in combination costs, a
separate line item in operating expenses. The cost to exit activities amount
relates to estimated shut down costs related to duplicative facilities in the
United Kingdom, Germany and France. The related reserve is recorded in accrued
payroll and other liabilities on the balance sheet. Preliminary shutdown plans
have been identified and activities related to the shutdown of these facilities
has begun. It is expected that the shutdown of these facilitates will be
completed by December 31, 1999. Such costs are also included in combination
costs.
8
<PAGE>
Consolidated results of operations for the three months ended March 31, 1999 of
the Company and Inframetrics on a stand-alone basis, excluding one time charges
for duplicative inventories created as a result of overlapping product lines,
reserve for shutdown of duplicate sales offices and other direct transaction
costs are as follows (in thousands):
<TABLE>
<CAPTION>
FLIR Inframetrics
---------- ------------
<S> <C> <C>
Revenue ........................... $ 20,788 $ 13,650
========== ========
Net (loss) earnings .............. $ (2,764) $ 177
========== ========
</TABLE>
NOTE 7: - SEGMENT INFORMATION:
The Company has determined its operating segments to be the commercial and
government market segments. The commercial segment comprises thermal imaging
applications including condition monitoring, research and development,
manufacturing process control and airborne observation and broadcast. The
government segment comprises thermal imaging applications including search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environment monitoring, and ground-based
security.
The accounting policies of each segment are the same. The Company evaluates
performance based upon revenue and gross profit for each segment and does not
evaluate segment performance on any other income measurement.
Operating segment information including revenue and gross profit are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Gross Gross
Revenue Profit Revenue Profit
------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Commercial .............. $ 27,636 $ 4,423 $ 28,043 $ 13,974
Government .............. 6,802 (3,339) 12,061 6,528
------------ ---------------- -------------- ---------------
Total ................... $ 34,438 $ 1,084 $ 40,104 $ 20,502
============ ================ ============== ===============
</TABLE>
All longed-lived assets are generally located in the United States with the
exception of property and equipment. Property and equipment is located in the
following geographic areas (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
United States ........................................... $ 19,632 $ 18,577
Europe .................................................. 7,275 8,198
-------------- --------------
$ 26,907 $ 26,775
============== ==============
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
General. As a result of the merger with Inframetrics which was accounted for
as a pooling of interests (See Note 6), the financial statements and all amounts
included in this Management's Discussion and Analysis of Financial Condition and
Results of Operations for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatements had no effect on previously reported separate results of operations
or shareholders' equity.
Revenue. The Company's revenue for the three months ended March 31, 1999
decreased 14.1%, from $40.1 million in the first quarter of 1998 to $34.4
million in the first quarter of 1999. Commercial revenue decreased 1.5% from
$28.0 million in the first quarter of 1998 to $27.6 million in the first quarter
of 1999. The slight decrease in commercial revenue was primarily due to
disruptions encountered in the distribution channel as a result of the four
month delay in consummating the merger with Inframetrics caused by the delayed
approval of the transaction from the Department of Justice. This delay created
uncertainty in the Company's customer base and management believes that many
orders that would have been placed in the first quarter of 1999 were delayed
until the merger was completed and the surviving product lines were identified.
Revenue from the sale of systems to the government market decreased 43.6%, from
$12.1 million in the first quarter of 1998 to $6.8 million in the first quarter
of 1999. The significant decline in government revenue was primarily due to
issues encountered by agencies of the U.S. Government and other NATO countries
in obtaining release of 1999 procurement funds due to the funding uncertainties
caused by the NATO campaign in Kosovo, and the continued depressed economic
conditions in several international markets.
The Company's commercial products continued to account for the majority of the
Company's total revenue. As a percentage of total revenue for the quarter ended
March 31, 1999, revenue from the sale of imaging systems to the commercial
market constituted 80.2% and revenue from the sale of government imaging systems
constituted 19.8%, compared to 70.0% for the commercial market and 30.0% for the
government market for the first quarter of 1998.
Revenue from sales outside the United States decreased slightly as a percentage
of total revenue from approximately 32.7% to approximately 31.3% for the
quarters ended March 31, 1998 and 1999, respectively
Gross profit. As a percentage of revenue, gross profit decreased from 51.1% in
the first quarter of 1998 to 3.1% in the first quarter of 1999. The primary
reason for this significant decline was the inclusion in cost of goods sold for
the three months ended March 31, 1999 of a one-time charge of $18.2 million
related to duplicate inventories and products which were determined to have
reached the end of life, both created by overlapping product lines as a result
of the merger with Inframetrics. Without this charge, gross profit as a
percentage of revenue increased from 51.1% to 55.9% for the quarters ended March
31, 1998 and 1999, respectively. This increase in gross profit as a percentage
of revenue was principally attributable to the higher proportion of total
revenue derived from the sale of commercial products which, as a result of the
favorable cost structure of the uncooled commercial products, now generally
exceed those margins experienced from the sale of imaging systems to the
government market.
10
<PAGE>
Research and development. Research and development expense as a percentage of
revenue increased from 16.2% to 20.3% for the three months ended March 31, 1998
and 1999, respectively. In absolute dollar terms, research and development
expense increased from $6.5 million in the first quarter of 1998 to $7.0 million
in the first quarter of 1999, primarily due to the increased engineering efforts
related to the introduction of new products including the FireFLIR, UltraMedia
LE and UltraMedia III, as well as on-going new product development and existing
product enhancements. The overall level of research and development expense
reflects the continued emphasis on product development and new product
introductions. Due to the timing of revenue during the year, research and
development expense as a percentage of revenue is typically higher in the first
quarter than on a full year basis.
Selling and other operating costs. Selling and other operating costs as a
percentage of revenue increased from 32.3% in the first quarter of 1998 to 43.1%
in the first quarter of 1999. In absolute dollar terms, selling and other
operating costs increased from $13.0 million to $14.9 million for the quarters
ended March 31, 1998 and 1999, respectively. The increase in absolute dollar
terms was due to the costs related to increased personnel as part of the
continued shift from a primarily representative based sales force to a more
direct sales force and increased personnel required for new markets, primarily
the fire-fighting market. Selling and other operating costs are expected to
continue to increase in absolute dollar terms, however, as a percentage of
revenue they are expected to decline throughout 1999.
Inframetrics Merger. Effective March 30, 1999, the Company completed
its merger with Inframetrics, Inc., a privately held infrared imaging company
headquartered in Billerica, Massachusetts, by issuing approximately 2.3 million
shares of the Company's common stock (including approximately 192,000 shares
reserved for exercise of outstanding options) for all the outstanding stock of
Inframetrics. Additionally, the Company assumed and paid off approximately $24
million of Inframetrics, Inc.'s short- and long-term debt.
In conjunction with the merger, during the quarter ended March 31, 1999, the
Company recorded a one-time charge of $24.3 million. The charge consisted of
$18.2 million of inventories due to the creation of duplicative product lines,
which is included in cost of goods sold, and $6.1 of transaction related costs,
which are included in combination costs, a separate line in operating costs.
These charges and related reserves are more fully discussed in Note 6 to the
consolidated financial statements.
Interest expense and other. Interest expense and other includes costs related
to short-term and long-term debt, capital lease obligations, translation gains
and losses and miscellaneous bank charges. The decrease from $1.5 in the first
quarter of 1998 to $1.2 for the quarter ended March 31, 1999 was primarily due
to the reduced interest rates experienced and slightly reduced debt levels
during the quarter as a result of the reduction in accounts receivable.
Income taxes. The provision for income taxes for the quarter ended March 31,
1999 resulted in an effective tax rate of 32.0% compared to 163.5% experienced
in first quarter of 1998. The decrease in the effective tax rate from the first
quarter of 1998 and the large effective tax rate in the first quarter of 1998
was primarily due to the fact that certain foreign subsidiaries had taxable
income while the combined entities had a net loss. The impact of this was
exaggerated by the relatively small pre-tax loss for the three months ended
March 31, 1998. The effective tax rate remained below statutory rates due to
utilization of net operating loss carryforwards, various tax credits, and
benefits from the favorable tax treatment of international revenue.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had short-term borrowings net of cash on hand of
$60.9 million compared with $35.2 million at December 31, 1998. The increase in
short-term borrowings during the three months ended March 31, 1999, was
principally caused by the repayment of Inframetrics' existing long-term debt
which aggregated $19.3 million at December 31, 1998, continued high levels of
finished goods inventories (before the effects of the non cash write-off of
inventories) and payment of accounts payable and accrued payroll and other
liabilities primarily incentive bonuses and commissions to representatives and
distributors.
Accounts receivable decreased from $91.2 million at December 31, 1998 to $69.9
million at March 31, 1999. The decrease in receivables was primarily due to the
greater percentage of total receivables that represent sales to commercial
customers which typically have a shorter collection cycle than sales to
government customers.
Inventories decreased from $70.3 million at December 31, 1998 to $66.0 million
at March 31, 1999. Although inventories decreased during the quarter, this
decrease reflects the recording of an $18.2 million inventory reserve for
duplicative product lines created by the merger with Inframetrics. Without this
write-off, inventories would have increased caused by the build-up of finished
goods in anticipation of shipments to government customers that were delayed in
the first quarter, build-up of inventory for FireFLIR systems in anticipation of
deliveries of this new product and build up of finished goods in anticipation of
sales of products during the balance of 1999 as part of the Company's plan to
reduce component inventories.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $1.6 million and $2.9 million for the quarters ended
March 31, 1999 and 1998, respectively. The Company has commitments for
approximately $6.5 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 issues and has
expended approximately $4.5 million to date.
The Company has available a $70.0 million line of credit which bears interest at
LIBOR plus 1.50% (6.4% at March 31, 1999) secured by all the Company's assets
and expires in June 2000. Additionally, the Company, through one of its
subsidiaries, has a 40,000,000 Swedish Krone (approximately $4.9 million) line
of credit at 4.7% at March 31, 1999. At March 31, 1999, the Company had $67.9
million outstanding on these lines.
The use of cash by operating activities in the first quarter is consistent with
prior years and is primarily due to decreased profitability, the increase in
inventories and the decrease in accrued liabilities discussed above. The Company
believes that its existing cash and available credit facilities, financing
available from other sources and continuing efforts to expedite the collection
of accounts receivable and management of inventory levels will be sufficient to
meet its cash requirements for the foreseeable future.
QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The Company believes
that its net income or cash flow exposure relating to rate changes for
short-term and long-term debt obligations are immaterial. Interest expense is
affected by the general level of U.S. interest rates and/or LIBOR. The Company
currently does not hedge any interest rate exposure.
The foreign subsidiaries of the Company generally use their local currency as
the functional currency. The Company does not currently enter into any foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. To
date, such exposure has been immaterial. The Company does maintain cash balances
denominated in currencies other than the U.S. Dollar. If foreign exchange rates
were to weaken against the U.S. Dollar, the Company believes that the fair value
of these foreign currency amounts would decline by an immaterial amount.
12
<PAGE>
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company or its significant suppliers
or customers fail to make necessary modifications, conversions and contingency
plans on a timely basis, the Year 2000 issue could have a material adverse
effect on the Company's business, operations, cash flows and financial
conditions.
The Year 2000 issue affects the Company's internal systems as well as any of the
Company's products that include date-sensitive software. The Company is
currently conducting a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue. The Company
identified that the internal manufacturing system acquired by the Company in
connection with the acquisition of AGEMA is not Year 2000 compliant, and has
completed the installation of a new enterprise resource planning system, both
hardware and software, to correct this deficiency. The Company's existing
product lines are being tested and reviewed to ensure Year 2000 compliance, and
the Company's products under development are being designed to be Year 2000
compliant. Additionally, the Company is evaluating Year 2000 compliance on
products from its suppliers and partners. Both internal and external resources
are being employed to identify, correct or reprogram, and test the systems for
Year 2000 compliance. The total cost of the project is estimated to be
approximately $6.5 million and is being funded through existing cash resources.
A contingency plan has not been developed for dealing with the most reasonably
likely worst-case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be timely converted or
that any such failure to convert by a vendor, customer or another company would
not have an adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's computer systems and software products do
not contain undetected problems associated with Year 2000 Compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections about the Company's business, management's beliefs,
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "sees," "estimates" and variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements due to numerous
factors, including, but not limited to, those discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as those discussed from time to time in the Company's Securities and
Exchange Commission fillings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions. Such forward-looking statements
speak only as of the date on which they are made and the Company does not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date of this report. If the Company does
update or correct one or more forward-looking statement, investors and others
should not conclude that the Company will make additional updates or corrections
with respect thereto or with respect to other forward-looking statements.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter, the Company sold securities without registration under the
Securities Act of 1933, as amended (the "Securities Act") upon the exercise of
certain stock options granted under the Company's 1984 Stock Incentive Plan. An
aggregate of 1,000 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.
On March 30, 1999, in connection with the Company's merger with Inframetrics,
the Company issued 2,107,552 shares of the Common Stock to the shareholders' of
Inframetrics in exchange for all of the outstanding capital stock of
Inframetrics. This transaction was effected in reliance upon the exemption from
registration under the Securities Act provided by Regulation D under the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
--------------- --------------------------------------------------
2.1 Merger Agreement dated as of March 19, 1999 by
and among FLIR Systems, Inc., Inframetrics,
Inc., Irabu Acquisition Corporation and the
Shareholders of Inframetrics, Inc. (Incorporated
by reference to Current Report on Form 8-K filed on
April 14, 1999)
10.1 Shareholders Agreement dated as of March 19, 1999
by and among FLIR Systems, Inc., Inframetrics, Inc.,
and the Shareholders of Inframetrics, Inc.
(Incorporated by reference to Current Report on Form
8-K filed on April 14, 1999)
27.1 Financial Data Schedule for the three months end
March 31, 1999
(b) No reports on Form 8-K were filed during the three months ended March 31,
1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLIR SYSTEMS, INC.
Date May 14, 1999 /s/ J. Mark Samper
--------------------------- ---------------------------------
J. Mark Samper
Vice President of Finance and
Chief Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
16
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