<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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to _________________
Commission file number 0-21918
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 June 30, 1999, there were 14,256,996 shares of the Registrant's common stock,
$0.01, par value, outstanding.
1
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FLIR Systems, Inc.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Six Months Ended June 30, 1999 and 1998............. 3
Consolidated Balance Sheet -- June 30, 1999 and
December 31, 1998....................................... 4
Consolidated Statement of Cash Flows -- Six Months
Ended June 30, 1999 and 1998............................ 5
Notes to the Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities................................... 15
Item 4. Submission of Matters to a Vote of Shareholders......... 15
Item 6. Exhibits and Reports on Form 8-K........................ 15
Signatures.............................................. 16
</TABLE>
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 Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(restated Note 6) (restated Note 6)
<S> <C> <C> <C> <C>
Revenue:
Commercial........................... $28,652 $33,604 $ 56,288 $61,647
Government........................... 13,550 15,793 20,352 27,854
--------------- --------------- --------------- ---------------
Total revenue...................... 42,202 49,397 76,640 89,501
Cost of goods sold..................... 16,702 22,199 50,056 41,801
Research and development............... 6,836 7,025 13,813 13,518
Selling and other operating costs...... 13,437 14,516 28,294 27,487
Combination costs...................... -- -- 6,110 --
--------------- --------------- --------------- ---------------
36,975 43,740 98,273 82,806
Earnings (loss) from operations...... 5,227 5,657 (21,633) 6,695
Interest income........................ -- 102 18 465
Interest expense and other............. (1,039) (1,198) (2,265) (2,673)
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes.. 4,188 4,561 (23,880) 4,487
Provision (benefit) for income taxes... 1,343 1,128 (7,642) 1,249
--------------- --------------- --------------- ---------------
Net earnings (loss).................... $ 2,845 $ 3,433 $(16,238) $ 3,238
=============== =============== =============== ===============
Net earnings (loss) per share
Basic................................ $0.20 $0.29 $ (1.15) $ 0.27
=============== =============== =============== ===============
Diluted.............................. $0.20 $0.27 $ (1.15) $ 0.26
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
------------------- --------------------
(unaudited) (restated Note 6)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 5,436 $ 4,793
Accounts receivable, net..................................... 68,705 91,202
Inventories.................................................. 76,171 70,312
Prepaid expenses............................................. 9,759 6,061
Deferred income taxes........................................ 6,776 6,776
------------------- --------------------
Total current assets....................................... 166,847 179,144
Property and equipment, net.................................... 27,189 26,775
Software development costs, net................................ 367 488
Deferred income taxes, net..................................... 16,940 9,749
Intangible assets, net......................................... 15,396 15,936
Other assets................................................... 3,559 3,897
------------------- --------------------
$230,298 $235,989
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable................................................ $ 68,158 $ 39,958
Accounts payable............................................. 31,860 24,031
Accrued payroll and other liabilities........................ 11,685 16,189
Accrued income taxes......................................... 2,947 3,893
Current portion of long-term debt............................ 791 2,680
------------------- --------------------
Total current liabilities.................................. 115,441 86,751
Long-term debt................................................. 798 19,296
Pension liability.............................................. 3,833 3,960
Commitments and contingencies.................................. -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at June 30, 1999,
and December 31, 1998....................................... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,256,996 and 14,133,403 shares issued at June 30, 1999,
and December 31, 1998, respectively......................... 142 141
Additional paid-in capital................................... 142,388 142,169
Accumulated deficit.......................................... (30,493) (14,255)
Cumulative foreign translation adjustment.................... (1,811) (2,073)
------------------- --------------------
Total shareholders' equity................................. 110,226 125,982
------------------- --------------------
$230,298 $235,989
=================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------
1999 1998
-------------------- --------------------
(restated Note 6)
<S> <C> <C>
Cash used by operations:
Net (loss) earnings............................................ $(16,238) $ 3,238
Income charges not affecting cash:
Depreciation................................................. 3,453 2,936
Amortization................................................. 1,175 1,443
Disposals and write-offs of property and equipment........... 471 165
Deferred income taxes........................................ (7,191) 146
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable................... 22,497 (1,457)
Increase in inventories...................................... (5,859) (7,246)
(Increase) decrease in prepaid expenses...................... (3,698) 202
Decrease in other assets..................................... 230 133
Increase in accounts payable................................. 7,829 2,614
Decrease in accounts payable to related parties.............. -- (1,198)
Decrease in accrued payroll and other liabilities............ (4,504) (13,272)
(Decrease) increase in accrued income taxes.................. (946) 807
-------------------- --------------------
Cash used by operating activities.............................. (2,781) (11,489)
-------------------- --------------------
Cash used by investing activities:
Additions to property and equipment............................ (4,744) (6,838)
Software development costs..................................... -- (239)
-------------------- --------------------
Cash used by investing activities................................ (4,744) (7,077)
-------------------- --------------------
Cash provided by financing activities:
Net increase in notes payable.................................. 28,200 14,152
Proceeds from long term debt................................... -- 567
Repayment of long term debt including current portion.......... (20,387) (896)
(Decrease) increase in pension liability....................... (127) 25
Proceeds from exercise of stock options........................ 220 1,145
Common stock issued pursuant to stock option plans............. -- 969
-------------------- --------------------
Cash provided by financing activities.......................... 7,906 15,962
-------------------- --------------------
Effect of exchange rate changes on cash.......................... 262 (821)
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents............. 643 (3,425)
Cash and cash equivalents, beginning of period................... 4,793 7,545
-------------------- --------------------
Cash and cash equivalents, end of period......................... $ 5,436 $ 4,120
==================== ====================
</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 Six Months Ended June
June 30, 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding................................. 14,197 12,021 14,163 11,964
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method................................ 274 592 -- 603
----------- ----------- ----------- -----------
Diluted shares outstanding..................... 14,471 12,613 14,163 12,567
=========== =========== =========== ===========
</TABLE>
The effect of stock options for the six months ended June 30, 1999, which
aggregated 340,000 shares have 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>
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Raw material and subassemblies..................... $41,805 $36,315
Work-in-progress................................... 18,165 12,527
Finished goods..................................... 17,615 22,330
------------------- -------------------
77,585 71,172
Less - progress payments received from
Customers......................................... (1,414) (860)
------------------- -------------------
$76,171 $70,312
=================== ===================
</TABLE>
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
<TABLE>
<CAPTION>
Additional Accumulated 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 $142,169 $(14,255) $(2,073) $125,982
Common stock options exercised...... -- 1 219 -- -- 220
Net loss for the six month period... -- -- -- (16,238) -- (16,238) $(16,238)
Foreign translation adjustment...... -- -- -- -- 262 262 262
--------- -------- ---------- ----------- ----------------- --------- ----------------
Balance, June 30, 1999.............. $ -- $142 $142,388 $(30,493) $(1,811) $110,226
========= ======== ========== =========== ================= =========
Comprehensive loss, six months
ended June 30, 1999................ $(15,976)
================
</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. As of the Effective Time of the
merger, 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
restatement had no effect on previously reported separate results of operations
or shareholders' equity.
In conjunction with the merger, on March 31, 1999, the Company recognized a one-
time charge of $24.3 million consisting of the following (in thousands):
<TABLE>
<CAPTION>
Description:
Original Incurred through Remaining
Estimate June 30, 1999 Balance
- ---------------------------------------------- ---------------- -------------------- ----------------
<S> <C> <C> <C>
Reserve for duplicative inventories........... $18,150 $ -- $18,150
Transaction related costs..................... 3,110 2,288 822
Costs to exit activities...................... 3,000 1,695 1,305
---------------- -------------------- ----------------
Total $24,260 $3,983 $20,277
================ ==================== ================
</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>
The following reconciles revenue and net earnings previously reported to the
restated information presented in the consolidated financial statements:
<TABLE>
<CAPTION>
1998
-----------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
<S> <C> <C>
Revenue:
Previously reported................................. $35,072 $62,771
Inframetrics........................................ 14,325 26,730
------------------- -------------------
Restated............................................ $49,397 $89,501
=================== ===================
Net earnings:
Previously reported................................. $ 2,755 $ 3,045
Inframetrics........................................ 678 193
------------------- -------------------
Restated............................................ $ 3,433 $ 3,238
=================== ===================
</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 the each segment are the same. The Company evaluates
performance based upon revenue and gross profit for each segment and does not
evaluate segment performance on any other income measurement.
Operating segment information including revenue and gross profit are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Revenue Gross Profit Revenue Gross Profit
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial......... $56,288 $20,880 $61,647 $31,728
Government......... 20,352 5,704 27,854 15,972
-------------- -------------- -------------- --------------
Total.............. $76,640 $26,584 $89,501 $47,700
============== ============== ============== ==============
</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>
June 30, December 31,
1999 1998
---------------- ------------------
<S> <C> <C>
United States.................................... $19,314 $18,577
Europe........................................... 7,875 8,198
---------------- ------------------
$27,189 $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 June 30, 1999
decreased 14.6%, from $49.4 million in the second quarter of 1998 to $42.2
million in the second quarter of 1999. Commercial revenue decreased 14.7% from
$33.6 million in the second quarter of 1998 to $28.7 million in the second
quarter of 1999. The decrease in commercial revenue was primarily due to
uncertainty in the Company's customer base as a result of the March 30, 1999
merger with Inframetrics. Management believes that many orders that would have
been placed in the early portion of the second quarter of 1999 were delayed
until the surviving product lines were identified. Based on improved order rates
experienced in the latter part of the second quarter, management believes such
concerns have been resolved. Revenue from the sale of systems to government
customers decreased 14.2% to $13.6 million in the second quarter of 1999
compared with $15.8 million in the second quarter of 1998. The decline in
government revenue was primarily due to continued uncertainties in the early
portion of the second quarter caused by the NATO campaign in Kosovo. As funding
uncertainties were resolved, the order rates for the latter part of the quarter
improved.
Revenue for the six months ended June 30, 1999 decreased 14.4%, from $89.5
million in the first half of 1998 to $76.6 million in the first half of 1999.
Commercial revenue for the six months ended June 30, 1999 decreased 8.7% from
$61.6 million in the first half of 1998 to $56.3 million in first half of 1999.
The decrease in commercial revenue was primarily due to disruptions encountered
in the distribution channel as a result of the four month delay in consummating
the merger with Inframetrics caused by the delayed approval of the transaction
from the 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 six months of 1999 were delayed until the merger was
completed and the surviving product lines were identified. Revenues from the
sale of systems to government customers for the six months ended June 30, 1999
totaled $20.4 million, a decrease of 27% from the $27.9 million in revenue
generated in the first half of 1998. The significant decline in government
revenue was primarily due to issues encountered primarily in the first quarter
and the early portion of the second quarter by agencies of the U.S. Government
and other NATO countries in obtaining release of 1999 procurement funds due to
the funding uncertainties caused by the NATO campaign in Kosovo, and the
continued depressed economic conditions in several international markets.
The Company's commercial products continued to account for the majority of the
Company's total revenue. As a percentage of total revenue, commercial revenue
for the second quarter of 1999 decreased slightly to 67.9% as compared to 68.0%
in the second quarter of 1998. For the six months ended June 30, 1999,
commercial revenue increased to 73.4% of total revenue, as compared to 68.9% for
the first six months of 1998.
10
<PAGE>
Revenue from sales outside the United States decreased as a percentage of total
revenue from approximately 42.3% to approximately 34.7% for the quarters ended
June 30, 1998 and 1999, respectively. The decrease in the percentage of
international sales was primarily due to significant deliveries to the U.S.
Government. For the first half of 1999, revenue from sales outside the United
States constituted 33.1% of total revenue, as compared to 38% for the first half
of 1998. While the percentage of revenue from international sales will continue
to fluctuate from quarter to quarter due to the timing of shipments under
international and domestic government contracts, management anticipates that
revenue from international sales as a percentage of total revenue will continue
to comprise a significant percentage of revenue.
Gross profit. As a percentage of revenue, gross profit increased from
55.1% in the second quarter of 1998 to 60.4% in the second quarter of 1999. The
increase in gross profit as a percentage of revenue was principally attributable
to the higher proportion of commercial revenue generated from uncooled
commercial products, which, as a result of the favorable cost structure obtained
through manufacturing cost control efforts, exceed those margins experienced
from the sale of cooled commercial products.
As a percentage of revenue, gross profit decreased from 53.3% to 34.7% for the
six month periods ended June 30, 1998 and 1999, respectively. The primary reason
for this significant decline was the inclusion in cost of goods sold for the six
month period ended June 30, 1999 of a one-time charge of $18.2 million related
to duplicate inventories and products which were determined to have reached the
end of life, both created by overlapping product lines as a result of the merger
with Inframetrics. Without this charge, gross profit as a percentage of revenue
would have increased from 53.3% to 58.4% for the six months ended June 30, 1998
and 1999, respectively. This increase in gross profit as a percentage of revenue
was principally attributable to the higher proportion of total revenue derived
from the sale of commercial products which, as a result of the favorable cost
structure of the uncooled commercial products, now generally exceed those
margins experienced from the sale of cooled imaging products and imaging systems
to the government market. The increase in gross profit as a percentage of
revenue was mitigated in part by an increase in shipments to instrumentalities
of the U.S. Government which typically have lower margins than those of other
customers in the government market and aggregated $9.5 million in the first half
of 1999 compared to $8.0 million in the first half of 1998.
Research and development. Research and development expense for the quarter
decreased 2.7%, from $7.0 million for the second quarter of 1998 to $6.8 million
for the second quarter of 1999. As a percentage of revenue, research and
development expense increased from 14.2% to 16.2% for the three months ended
June 30, 1998 and 1999. In absolute dollar terms, the decrease in research and
development expense was primarily due to cost control efforts and efficiencies
realized as a result of the Inframetrics transaction.
Research and development expense increased 2.2% for the six months ended June
30, 1999, from $13.5 million in the first half of 1998 to $13.8 million in the
first half of 1999. As a percentage of revenue, research and development expense
increased from 15.1% to 18.0% for the six months ended June 30, 1998 and 1999,
respectively. In absolute dollar terms, the increase in research and development
expense was primarily due to engineering efforts related to the introduction of
new products including the FireFLIR, UltraMedia LE and UltraMedia III, as well
as on-going new product development and existing product enhancements. This
increase was mitigated by increased cost control efforts and efficiencies
realized as a result of the Inframetrics transaction. The overall level of
research and development expense reflects the continued emphasis on product
development and new product introductions. 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.
11
<PAGE>
Selling and other operating costs. Selling and other operating costs for
the quarter decreased 7.4%, from $14.5 million for the second quarter of 1998 to
$13.4 million for the second quarter of 1999. As a percentage of revenue,
selling and other operating costs increased from 29.4% to 31.8% for the three
months ended June 30, 1998 and 1999, respectively. The decrease in absolute
dollar terms was primarily due to management's cost control efforts.
Selling and other operating costs increased 2.9% for the six months ended June
30, 1999, from $27.5 million in the first half of 1998 to $28.3 million in the
first half of 1999. As a percentage of revenue, selling and other operating
costs increased from 30.7% to 36.9% for the six months ended June 30, 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. This
increase was partially mitigated by management's cost control efforts. 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, foreign
currency transaction gains and losses and miscellaneous bank charges. The
decrease from $1.2 million for the second quarter of 1998 to $1.0 million for
the second quarter of 1999, and the decrease from $2.7 million in the first half
of 1998 to $2.3 in the first half of 1999 were primarily due to lower interest
rates and favorable exchange gains.
Income taxes. The provision for income taxes for the three and six months
ended June 30, 1999 resulted in an effective tax rate of 32.0% compared to 24.7%
for the second quarter of 1998 and 27.8% for the six months ended June 30, 1998.
The increase in the effective tax rate was primarily due to limitations on the
timing and recognition of the Company's net operating loss carryforwards and tax
credits. The effective tax rate remained substantially below statutory rates due
to utilization of net operating loss carryforwards, various tax credits, and
benefits from the favorable tax treatment of international revenue.
Liquidity and Capital Resources
At June 30, 1999, the Company had short term borrowings net of cash on hand of
$62.7 million compared to $60.9 million at March 31, 1999 and compared to $35.2
million at December 31, 1998. The increase in short-term borrowings during the
six months ended June 30, 1999, was principally caused by the repayment of
Inframetrics' existing long-term debt which aggregated $19.3 million at December
31, 1998 and continued high levels of inventories.
12
<PAGE>
At June 30, 1999, the Company had inventories on hand of $76.2 million compared
to $70.3 million at December 31, 1998. The primary reason for the increase is
the build-up of component inventory in anticipation of shipments to government
customers during the last six months of 1999 and build-up of component inventory
for FireFLIR systems in anticipation of deliveries of this new product.
At June 30, 1999, the Company had accounts receivable in the amount of $68.7
million compared to $91.2 million at December 31, 1998. The decrease in the
level of accounts receivable was primarily due to decreased shipments during the
first six months of 1999. Also contributing to the decrease was the greater
percentage of total receivables that represent sales to commercial customers
which typically have a shorter collection cycle than sales to government
customers. Days sales outstanding decreased from 213 at March 31, 1999 to 150 at
June 30, 1999.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $4.7 million and $6.8 million for the six months
ended June 30, 1999 and 1998, respectively. The Company has budgeted for
approximately $7.0 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 and other issues
and has expended approximately $5.5 million to date.
The Company has available a $70.0 million line of credit which bears interest at
LIBOR plus 1.5% (6.68% at June 30, 1999) secured by all the Company's assets.
Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Krone (approximately $4.7 million) line of credit at 4.7% at June 30,
1999. At June 30, 1999, the Company had $68.2 million outstanding on these
lines.
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.
Quantitative and Qualitative Disclosure about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The Company 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 small cash
balances denominated in currencies other than the U.S. Dollar. If foreign
exchange rates were to weaken against the U.S. Dollar, the Company believes that
the fair value of these foreign currency amounts would decline by an immaterial
amount.
Impact of the Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company or its significant suppliers
13
<PAGE>
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 $7.0 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, as such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be timely converted or
that any such failure to convert by a vendor, customer or another company would
not have an adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's computer systems and software products do
not contain undetected problems associated with Year 2000 Compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
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 4,800 shares of Common Stock were issued at exercise prices ranging
from $1.625 to $5.225. These transactions were effected in reliance upon the
exemption from registration under the Securities Act provided by Rule 701
promulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3 (b) of the Securities Act.
Item 4. Submission of Matters to a Vote of Shareholders
The Company's annual shareholders' meeting was held on Tuesday, June 2, 1999, at
which the following actions were taken by a vote of the shareholders:
1. The following persons were re-elected to the Board of Directors by the
votes and for the terms indicated:
<TABLE>
<CAPTION>
Vote
-------------------------------------
Withhold Term
Director For Authority Ending
- --------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Robert P. Daltry 11,718,325 1,181,085 2002
John C. Hart 11,717,810 1,181,600 2002
</TABLE>
2. By a vote of 10,483,700 to 2,216,306 (with 182,364 abstentions and
17,037 Broker Non-Votes), the proposal to approve the 1999 employee
stock purchase plan was approved.
3. By a vote of 12,877,931 to 15,829 (with 5,650 abstentions), the
Company's selection of PricewaterhouseCoopers LLP as the Company's
independent auditors for the year ending December 31, 1999 was
ratified.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Rights agreement dated as of June 2, 1999 between the Company and
ChaseMellon Shareholder Services, LLC as Rights agreement
(incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on June 11, 1999).
10.1 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 30, 1999).
10.2 Form of Agreement Amending Executive Employment Agreement dated
as of January 30, 1999 amending Executive Employment Agreement of
Robert P. Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J.
Mark Samper, William N. Martin, Arne Almerfors and David Smith.
15
<PAGE>
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for year ended December 31, 1998
27.3 Restated Financial Data Schedule for year ended December 31, 1997
(b) During the three months ended June 30, 1999, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated April 14, 1999,
reporting under Item 2 the completion of the merger with Inframetrics,
Inc.
2. The Company filed a current report on Form 8-K, dated April 23, 1999,
reporting under Item 5, that the Company issued a press release
announcing the Company's expectation as to revenue and earnings for
the quarter ended March 31, 1999.
3. The Company filed a current report on Form 8-K, dated June 3, 1999,
reporting under Item 5, results of operations for the one month ended
April 30, 1999 representing 30 days of combined operations of the
Company and Inframetrics, Inc.
4. The Company filed a current report on Form 8-K/A, dated June 14, 1999,
reporting under Item 7, the audited financial statements of
Inframetrics, Inc. and pro-forma combining financial statements of the
Company and inframetrics, Inc. as required by the Merger with
Inframetrics.
5. The Company filed a current report on Form 8-K, dated June 14, 1999,
reporting under item 5, the adoption by the Board of Directors of a
Shareholders Rights Plan.
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 August 12, 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
<PAGE>
Exhibit 10.2
AGREEMENT AMENDING EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement Amending Executive Employment Agreement ("Amendment") is
entered into this 20th day of January, 1999 by and between _______________
("Executive") and FLIR SYSTEMS, INC. ("FSI").
A. Each of Executive and FSI are parties to a certain Executive Employment
Agreement dated May 5, 1997, as amended by written agreement on December 2, 1997
("Employment Agreement").
B. FSI and Executive wish to extend the term of the Employment Agreement until
December 31, 2001.
C. FSI's largest shareholder, Spectra Physics AB ("Spectra"), has recommended
to its shareholders that it accept a cash tender offer from Thermo Instruments,
Inc. ("Thermo") for all of the outstanding shares of Spectra (the
"Transaction"). Should the Transaction be successfully concluded, Thermo will
have acquired at least 90% of the outstanding shares of Spectra and, as a
result, will also have acquired the shares of FSI currently owned by Spectra.
D. The consummation of the Transaction contemplated by Thermo and Spectra
constitutes a "Change of Control" as that term is defined in the Employment
Agreement.
E. Under the terms of the Employment Agreement, the occurrence of a "Change of
Control" gives rise to certain rights and entitlements of the Executive.
F. The parties to this Amendment intend and desire to amend the terms of the
Employment Agreement to provide that the consummation of the Transaction
contemplated by Thermo and Spectra does not constitute a Change of Control under
the terms of the Employment Agreement; provided, however, that the effectiveness
of which amendment shall be subject to certain limitations related to the
ownership of FSI stock as more fully set forth below.
NOW THEREFORE, for valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. Amendment to Section 2.3. Section 2.3 of the Employment Agreement
shall be amended to strike out the date "December 31, 1999" in each place it
occurs and insert in lieu thereof the date of "December 31, 2001."
2. Amendment to Article VI. Article VI of the Employment Agreement shall
be amended to add the following Section 6.7:
6.7 Thermo Transaction. Notwithstanding anything to the contrary contained
in this Article VI, the consummation of the transaction contemplated
by Spectra Physics, AB and Thermo Industries, Inc shall not constitute
a "Change of Control" for purposes of Article VI.
3. Effectiveness of Amendment. Notwithstanding anything to the contrary
contained herein, the amendment to the Employment Agreement set out in Section 2
of this Amendment shall be null and void and of no effect at such time following
the consummation of the Transaction that: (1) Thermo acquires any additional
shares of FSI Common Stock beyond that which they had acquired immediately upon
the consummation of the Transaction, or (2) Thermo asserts any
17
<PAGE>
rights to representation on the FSI Board of Directors.
4. Other Terms of Agreement Unmodified. Except as expressly modified herein or
by that written amendment dated December 2, 1997, all terms and provisions of
the Employment Agreement shall remain unmodified and in full force and effect.
IN WHITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered as of the day and year first written above.
EXECUTIVE FLIR SYSTEMS, INC.
By: /s/ J. Kenneth Stringer, III
----------------------------
Title: President
18
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