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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDING DECEMBER 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
_______________
Commission file number - 0-21918
FLIR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-0708501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16505 S.W. 72ND AVENUE, PORTLAND, OREGON 97224
(Address of principal executive offices) (Zip Code)
(503) 684-3731
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class of Stock Name of each exchange on which
---------------------------- ------------------------------
registered
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COMMON STOCK, $0.01 PAR VALUE NASDAQ
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X . NO ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or amendment to this Form 10-K [X]
As of March 31, 1999, the aggregate market value of the shares of voting stock
of the Registrant held by non-affiliates was $218,074,291
As of March 31, 1999 there were 12,031,685 shares of the Registrant's common
stock, $0.01, par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the FLIR Systems, Inc.'s Proxy Statement for the 1999 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
<TABLE>
PART I
<S> <C>
Item 1 Business........................................................................ 1
Item 2 Properties...................................................................... 13
Item 3 Legal Proceedings............................................................... 13
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters............ 13
Item 6 Selected Consolidated Financial Data............................................ 14
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 15
Item 8 Financial Statements and Supplementary Data..................................... 21
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 42
PART III
Item 10 Directors and Executive Officers of the Registrant.............................. 42
Item 11 Executive Compensation.......................................................... 42
Item 12 Security Ownership of Certain Beneficial Owners and Management.................. 42
Item 13 Certain Relationships and Related Transactions.................................. 42
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 42
SIGNATURES..................................................................................... 44
FINANCIAL STATEMENT SCHEDULES.................................................................. 45
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PART I
ITEM 1. BUSINESS.
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GENERAL
The Company is a world leader in the design, manufacture and marketing of
thermal imaging and broadcast camera systems for a wide variety of applications
in the commercial and government markets. The Company's thermal imaging systems
use advanced infrared technologies that detect infrared radiation, or heat,
enabling the operator to measure minute temperature differences and to see
objects in daylight or total darkness and through obscurants such as smoke, haze
and most types of fog. The Company's products can also incorporate visible light
cameras, proprietary image analysis software and gyrostabilized gimbal
technology. The Company's products come in a variety of configurations such as
handheld or ground-based systems, or can be mounted on ships, helicopters or
fixed-wing aircraft. The Company's products provide state-of-the-art imaging
technology coupled with competitive price performance characteristics for
existing commercial and government applications including condition monitoring,
research and development, manufacturing process control, airborne observation
and broadcast, search and rescue, federal drug interdiction, surveillance and
reconnaissance, navigation safety, border and maritime patrol, environmental
monitoring and ground-based security. The Company has also developed innovative
new products utilizing advanced "uncooled" thermal imaging technology, which
allows for less expensive, smaller, lighter, solid state systems that require
less power to operate. In addition, the Company's product configurations and
image analysis software tools increase the Company's ability to provide products
tailored to meet individual customer requirements.
INDUSTRY OVERVIEW
BACKGROUND
Infrared radiation is light that is not visible because its wavelength is too
long to be detected by the human eye. Unlike visible light, infrared radiation
is emitted directly by all objects and materials. Thermal imaging systems are
used to detect infrared radiation and convert it into an electronic signal,
which is then processed and formatted into a video signal and displayed on a
monitor. These systems are distinguished from one another by their capability to
detect and resolve infrared radiation, the clarity of the image displayed,
detection range, system reliability, acquisition cost and adaptability to a
variety of customer requirements. Thermal imaging systems, unlike night vision
goggles, enable the operator to see objects in total darkness and through
obscurants such as smoke, haze and most types of fog. Advanced thermal imaging
systems can also detect and measure minute temperature differences, a critical
tool for a variety of applications.
Early applications of thermal imaging technology primarily involved the use of
expensive high-resolution systems in military combat applications such as
weapons targeting, where performance factors were far more important in the
procurement decision than system acquisition cost. A simpler form of the
technology was also employed in limited commercial applications such as
detection of heat loss from buildings or houses, where system price was more
important than sophisticated performance. Consequently, a large group of
potential users in both the commercial and government markets did not use
thermal imaging technology since available systems either failed to meet their
performance requirements or were too expensive.
An infrared detector, which absorbs infrared radiation and converts it into an
electronic signal, is a primary component of thermal imaging systems. Until
recently, thermal imaging systems incorporated infrared detectors which needed
to be cooled to near absolute zero in order to operate. The cryogenic "coolers"
needed for such detectors are expensive components that require greater power
consumption and add to the weight, size and overall complexity of the system.
Thermal imaging systems that use new "uncooled" detector technology do not
require these cooling components but instead operate at room temperature. This
feature allows for less expensive, smaller, lighter, solid state systems
requiring less power to operate, which in turn are expected to increase the
demand for such systems in existing market segments and create demand in new
market segments, such as fire fighting and machine vision (a new manufacturing
process control application incorporating real-time, fully automated process
control solutions). Despite the advantages of uncooled technology, cooled
systems should continue to play a significant role in the government markets due
to their longer range
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performance capabilities. Additionally, as hardware prices decline, the
sophistication of image analysis software and the incremental functionality
provided by such analysis tools are expected to become a more critical component
of customers' purchasing decisions.
MARKETS
Applications for thermal imaging technology are found in both the commercial
and government markets, as described below.
COMMERCIAL MARKET. The commercial market is comprised of a broad range of
thermal imaging applications including condition monitoring, research and
development, manufacturing process control and airborne observation and
broadcast. This market has evolved from the use of simple heat sensing devices
to sophisticated radiometric (temperature measuring) instruments that use a
variety of accessories and extensive image analysis software. The increasing
emphasis on improving manufacturing productivity and product quality,
underscored by the growing importance of quality assurance programs such as
International Standards Organization (ISO) 9000 and the increasing complexity of
manufacturing processes, has expanded the commercial market. The introduction of
uncooled thermal imaging technology has created opportunities to further
penetrate existing markets as well as to create demand in new markets that can
benefit from the enhanced price and performance characteristics of such
technology. The growth of the commercial market has also been driven by
increased demand resulting from improvements in hardware functionality, enhanced
image analysis software performance and declining hardware prices.
The commercial market is comprised of the following market segments:
Condition Monitoring. Thermal imaging systems are used in condition monitoring
applications to improve productivity by detecting the location of equipment
faults so they can be corrected before leading to catastrophic failures or major
equipment damage, thereby enabling companies to significantly reduce operating
expenses by lowering repair costs and reducing downtime. Additionally, improved
functionality of image analysis software, longer battery operation and
simplicity of system operation are critical factors for these applications.
Specific condition monitoring applications include locating and repairing
defective power transmission components or electrical connections, predicting
the end of life of bearings in rotating machinery, evaluating the integrity or
amount of insulation in a building or container and locating roof leaks and
related damage.
Research and Development. Thermal imaging, due to its non-destructive analysis
capability, is a useful tool in a wide variety of research and development
applications. Because many component and product designs involve the use or
control of heat, thermal imaging can be effectively used in the research and
design of the component or product. For example, thermal imaging is used in
laser design to determine the power distribution of the beam, in the development
of diesel engines using ceramic-coated pistons to determine proper adhesion of
the ceramic to the metal piston and in the design of rubber tires to evaluate
uniform heat distribution. Research and development applications typically
require very high performance systems with extensive software capabilities and
tools to analyze the thermal image.
Manufacturing Process Control. The ability to determine whether a
manufacturing process will produce acceptable results at the earliest point in
the production cycle is critical to quality assurance and cost reduction.
Thermal imaging and image analysis allow for the monitoring and control of heat,
which is used in virtually all industrial processes. Similarly, thermal imaging
systems can identify moisture and contaminants and help identify the thickness
of material as well as the integrity of the bonding of composite materials.
Thermal imaging applications for manufacturing process control are varied and
extensive, including monitoring the quality of metal, plastic and glass cast
parts, which are highly dependent upon the temperature distribution in the mold,
monitoring the quality of paper, which is dependent upon proper and even
moisture distribution during the drying process, and monitoring the quality of
products such as rubber gloves, which can be thermally examined to locate
abnormally warm or cool spots, indicating non-uniform thickness that may result
in a quality defect.
Airborne Observation and Broadcast. The use of airborne observation and
broadcast systems is becoming a standard tool for television stations and
broadcast networks. This technology is also used by law enforcement agencies
around the world for surveillance, suspect search and apprehension and officer
support. This market segment typically requires either
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very high performance daylight cameras or dual imaging systems with both visible
light and thermal imaging capabilities, in addition to state-of-the-art
stabilization, the ability to provide jitter-free images from great distances,
and the ability to downlink the information from the aircraft to the production
studio or command center on a real-time basis. The Company expects that this
market segment will continue to grow as more television stations and broadcast
networks use helicopters and other aircraft to provide real-time reporting of
news and sporting events. Furthermore, such applications should increase as
system size and weight continue to decline, enabling the use of such systems on
small and weight restricted helicopters. In addition, law enforcement agencies
have established thermal imaging as a primary support tool and should continue
to take advantage of system price performance improvements.
New Commercial Market Opportunities. In addition to existing market segments,
new market segments for thermal imaging are developing due to the availability,
cost effectiveness and enhanced performance characteristics of uncooled thermal
imaging technology. Machine vision and fire fighting are near-term market
opportunities, while landing guidance, maritime navigation, security and
handheld law enforcement support represent future growth opportunities. As
system prices decline, uncooled thermal imaging technology will provide cost
effective solutions for a wide variety of new commercial applications.
GOVERNMENT MARKET. The government market is comprised of a broad range of
thermal imaging applications including search and rescue, federal drug
interdiction, surveillance and reconnaissance, navigation safety, border and
maritime patrol, environmental monitoring, and ground-based security. Although
the majority of government applications require the use of cooled technology,
uncooled thermal imaging systems can be used for ground-based security, handheld
observation and mine detection applications. Customers in the government market
demand competitively priced systems that can be mounted on a variety of
helicopters, fixed-wing aircraft and ships, operate in different climatic
conditions and perform a variety of tasks requiring high image resolution
quality and substantial image stabilization.
The government market is comprised of the following market segments:
Search and Rescue. Thermal imaging systems are used in traditional search and
rescue missions to rescue individuals in danger or distress on boats or in
vehicles, to provide offshore oil platform safety and to provide emergency or
disaster response support for missing persons or accident victims.
Federal Drug Interdiction. Thermal imaging systems enable government agencies
to expand their drug interdiction and support activities by allowing greater
surveillance and detection capabilities.
Surveillance and Reconnaissance. Thermal imaging systems are used in
surveillance and reconnaissance applications for the precise positioning of
objects from substantial distances and for enhanced situation awareness,
particularly at night or in conditions of reduced or obscured visibility.
Navigation Safety. Thermal imaging systems are used in navigation safety
applications to improve missions by enabling crews piloting helicopters, fixed-
wing aircraft and ships, to see terrain and objects and to detect and avoid
obstacles at night and in conditions when visibility is limited due to smoke,
haze or fog.
Border and Maritime Patrol. Thermal imaging systems are used in airborne
operations for border and maritime surveillance, particularly at night, to
maintain the territorial integrity of borders and coastal waters, to monitor
national fishing boundaries and to prevent smuggling.
Environmental Monitoring. Thermal imaging systems are used in environmental
monitoring applications including forest fire detection and suppression, oil
spill detection and monitoring and wildlife management.
Ground-based Security. Thermal imaging systems are used for ground-based
surveillance and perimeter security of government and military installations,
particularly at night.
COMPANY STRATEGY
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The Company's objective is to strengthen its position as the leading provider
of thermal imaging hardware and software to the commercial and government
markets. Key elements of the Company's strategy to achieve this objective
include:
Drive Demand Through Price Performance Leadership. The Company is committed
to providing high value imaging products with improved system capability and
performance. The Company is rapidly incorporating new uncooled thermal imaging
technology in its products, which enables the Company to provide smaller,
lighter, solid state systems at a much lower cost. The Company intends to expand
market share by aggressively marketing the performance advantages of its
recently introduced products that incorporate this uncooled thermal imaging
technology and by focusing its development efforts on new products utilizing
such technology.
Expand Penetration in Core Markets. The Company is a global market leader
that provides a complete range of thermal imaging systems, image analysis
software and visible light camera systems for the commercial and government
markets and intends to continue to expand its market share in both markets. The
Company intends to continue introducing and providing cost effective systems
that utilize state-of-the-art technology while building upon its reputation for
quality, service and reliability to further penetrate its core markets. In
addition, the Company's extensive installed customer base provides upgrade
opportunities through technology and product advances.
Target New Market Applications. The Company intends to develop and
aggressively market new products incorporating uncooled thermal imaging
technology for major markets where price performance benefits were previously
unavailable. By maintaining a customer-focused approach to its product
development efforts, the Company is able to better identify and understand broad
customer applications and develop products to meet these new market
opportunities. For example, the Company is currently seeking to apply its
technology to fire fighting and machine vision applications. In the future, the
Company intends to develop systems for landing guidance, maritime navigation and
mine detection.
Leverage Global Sales and Marketing Organization. The Company, with eight
strategic locations, has developed an extensive, worldwide, multi-channel sales
and marketing network consisting of direct sales staff and independent
representatives and distributors in over 50 countries. The Company believes its
experience in the complexities associated with the sales and marketing of its
products to distinct government and commercial markets through multiple channels
around the world provides it with a competitive advantage. The Company's
expertise includes an understanding of export regulations, establishing and
operating sales and service centers throughout the world, and successfully
understanding and addressing cultural differences. The Company also provides
comprehensive training to its sales force, representatives, distributors and
customers about its technology and the operation of its products. The Company
intends to expand its international sales and marketing network to further
penetrate existing markets and reach undeveloped markets around the world.
Expand Software Applications. The Company intends to continue to increase the
software content of its products as image analysis and application specific
software become an increasingly important capability and competitive distinction
among thermal imaging products. For example, with the expanded application of
thermal imaging technology in machine vision and manufacturing process control
applications, the Company believes it will be well positioned to take advantage
of its pattern recognition and gauging image analysis software to solve critical
customer problems in commercial applications such as automobile manufacturing,
electronics design and food processing.
Pursue Strategic Acquisitions. The Company frequently evaluates strategic
acquisition opportunities that could enhance the Company's existing product
offerings or provide an avenue for developing new complementary businesses,
product lines or technologies. The Company has grown and intends to continue to
grow internally as well as through the acquisition of complementary businesses,
product lines or technologies. For example, in December 1997, the Company
acquired AGEMA, the world leader in the design, manufacture and marketing of
handheld infrared cameras that detect and measure temperature differences for a
wide variety of commercial and research applications. This acquisition increased
the Company's worldwide commercial thermal imaging market share, enabled the
Company to enhance its product development efforts through the elimination of
duplicative research and development programs, created an extensive
international sales and marketing organization and allowed the Company to more
efficiently focus its manufacturing operations. Additionally, on March 30,
1999, the Company consummated its merger with Inframetrics, Inc., a privately
held infrared imaging company headquartered in Billerica, Massachusetts, by
issuing approximately 2.3 million shares of
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the Company's stock for all the outstanding stock of Inframetrics. Inframetrics,
with 1998 sales of $55.0 million, is one of the major suppliers of commercial
thermal imaging systems in the world. The Company believes that selective
acquisitions will continue to provide the Company with opportunities to broaden
its technology and product offerings, expand its market presence and enter into
new markets.
TECHNOLOGY
The Company uses its expertise in diverse technologies and engineering
capabilities to develop and produce sophisticated thermal imaging systems. The
following describes the engineering disciplines and manufacturing processes that
are integrated by the Company to produce cost-effective products and shorten the
product development cycle.
System Design and Radiometry. The Company believes that its extensive system
integration experience allows it to effectively combine a wide variety of
engineering disciplines necessary to design and manufacture thermal imaging
systems. The Company also possesses the specialized system design knowledge
required to produce thermal imaging systems that can accurately measure
temperature, which is a critical tool for many commercial applications.
Software Development. The Company utilizes both internal and external sources
to develop the software capabilities necessary to simplify complex thermal
imaging systems. The Company has developed Windows-based image analysis software
applications that solve a variety of manufacturing process and quality control
problems. The Company also has the expertise necessary to develop embedded
software control systems, communications software and testing programs for its
thermal imaging systems.
Optical Design and Fabrication. The Company designs and manufactures many of
the sophisticated optics that are required to gather and transmit detected
thermal images with minimum distortion, allowing it to significantly shorten the
product development cycle and avoid costs and delays associated with reliance on
third-party optics sources.
Electronic Design. The Company designs signal processing circuits that
interface directly with the detector arrays to convert detected infrared
radiation into electronic signals and designs the electronic image processing
that is necessary to convert the electronic signals into standard video format.
Advances in microprocessors, electric miniaturization and image processing have
made significant contributions to the performance and utility of the Company's
thermal imaging systems.
Mechanical Engineering. The Company's design and production of thermal
imaging systems involves highly sophisticated mechanical engineering techniques.
It is critical that the design and assembly of the supporting structures for
system components such as detector arrays, coolers, scanners and optics meet
high-precision mechanical tolerances. Similarly, the gyrostabilized gimbal
assembly for the SAFIRE, Star SAFIRE, ULTRA 6000, UltraMedia, and UltraMedia-RS
requires expertise in electro-mechanical control, gyroscopes and specialized
stabilization controls.
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PRODUCTS
The Company serves the commercial and government thermal imaging markets with
a variety of state-of-the-art products. Of the Company's commercial products,
handheld products typically range in price from approximately $30,000 to
$80,000, software image analysis products are typically priced at approximately
$5,000 and airborne observation and broadcast products typically range in price
from approximately $180,000 to $350,000. The Company's government products
typically range in price from approximately $80,000 to $500,000. The Company's
principal products are listed in the table below and described in greater detail
in the following pages.
<TABLE>
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COMMERCIAL PRODUCTS
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Product Name Description and Application
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<S> <C>
ThermoVision Uncooled radiometric camera used for manufacturing
process control and machine vision applications
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AGEMA 570 Handheld uncooled radiometric camera used for
condition monitoring, research and development and
manufacturing process control applications
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Tracer Windows-based real-time Pentium digital recording
system used for research and development and
manufacturing process control applications
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AGEMA 550 Handheld radiometric camera used for condition
monitoring and manufacturing process control
applications
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AGEMA 900 Handheld radiometric camera used for research and
development applications
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Xcaliper High precision software product used for certain
manufacturing process control and machine vision
applications
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IRwin Report Windows-based software package used for review,
analysis and processing of captured images
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ULTRA 6000 High resolution thermal imaging system with a
color video camera system used for search and
rescue, federal drug interdiction, surveillance
and reconnaissance, navigation safety, border and
maritime patrol, and environmental monitoring
applications
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UltraMedia-RS Compact high resolution gyrostabilized broadcast
camera system used for real-time news and sports
coverage applications
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UltraMedia High resolution gyrostabilized broadcast camera
system used for real-time news and sports coverage
and for surveillance and reconnaissance, federal
drug interdiction and border and maritime patrol
applications
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UltraMedia LE Digital High resolution gyrostabilized broadcast
low light camera system used for real-time news
and sports coverage and for surveillance and
reconnaissance, federal drug interdiction and
border and maritime patrol applications
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GOVERNMENT PRODUCTS
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Product Name Description and Application
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Star SAFIRE Focal plane array, high resolution thermal imaging
system used for search and rescue, surveillance
and reconnaissance, navigation safety, border and
maritime patrol and environmental monitoring
applications
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SAFIRE High resolution thermal imaging system used for
search and rescue, surveillance and
reconnaissance, navigation safety, border and
maritime patrol and environmental monitoring
applications
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AGEMA 1000 Fixed or tripod mounted thermal imaging system
used for ground-based security
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ThermoVision Sentry Fixed or tripod mounted uncooled thermal imaging
system used for ground-based security
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</TABLE>
COMMERCIAL PRODUCTS. The Company offers a range of state-of-the-art thermal
imaging products for a variety of applications including condition monitoring,
research and development, and manufacturing process control, in addition to
airborne observation and broadcast. The Company has penetrated the commercial
market by developing customized products with increased flexibility and
features, in addition to software analysis tools.
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The Company's handheld commercial thermal imaging systems incorporate a
thermal imaging detector housed in a compact self-contained unit, a video
display or viewfinder, an embedded processor and various image analysis software
packages. A viewfinder much like that of a home video camera is a standard
feature in most models. The thermal image can also be displayed on an
independent video display. The systems also include a PC-based processor that
allows accurate measurement of minute temperature differences and extensive
real-time analysis and post-processing of the acquired image. Most of the
Company's airborne and observation broadcast camera systems incorporate industry
standard visible light broadcast cameras rather than thermal imaging cameras.
The Company also manufactures dual imaging systems, including both visible light
and thermal imaging cameras. The product is typically mounted to an aircraft,
primarily a helicopter, and operated by the use of a hand controller, which
remotely directs the stabilized turret. The broadcast camera inside the turret
provides the video output that is then either recorded on a video recorder or
downlinked to a production studio for live broadcast.
ThermoVision. The ThermoVision, introduced in early 1998, is an uncooled
thermal imaging camera for manufacturing process control and machine vision
applications. Operating as a remote controlled "smart" sensor in supervised
operation or integrated into a complete control system, the ThermoVision
transmits data on a continuous real-time basis at 60 frames per second. Using
built-in intelligence, the ThermoVision can process multiple areas of interest,
trigger alarms or transmit control data. A variety of flexible, high-speed and
reliable digital cable, fiber-optic and wireless transmission media allow for
flexible system integration with controllers, computers and vision systems.
Examples of ThermoVision applications include monitoring the manufacture of
metal, plastic or glass cast parts and automatically making necessary
adjustments in the manufacturing line on a real-time basis to ensure consistent
product quality.
AGEMA 570. The AGEMA 570, introduced in December 1997, was developed to meet
the need for a high performance lightweight cost-effective portable thermal
imager and is the world's first commercially available handheld radiometric
thermal imaging system incorporating state-of-the-art uncooled detector
technology, solid state in electronic design with instant-on performance. The
detector used in the AGEMA 570 provides for accurate temperature measurement of
objects from -20 degrees C to +2000 degrees C. The imager is enclosed in a
single lightweight package weighing less than five pounds which facilitates one-
hand, point and shoot operation. Image optimization is automatic and menu and
data displays appear in any of 14 languages. The AGEMA 570 has applications
across all commercial radiometric market segments. Examples of AGEMA 570
applications include locating and repairing defective power transmission
components or electrical connections, predicting the end of life of bearings in
rotating machinery, evaluating the integrity or amount of insulation in a
building or container and locating roof leaks and related damage.
Tracer. The Tracer, introduced in the first quarter of 1997, is the first
industrial imaging system capable of recording and analyzing long thermal event
sequences at real-time frame rates on a Windows-based PC. The Tracer combines a
high-resolution thermal imaging camera, such as the AGEMA 550 and 570, with a
Pentium PC, digital recording system and Windows-based image analysis software
for research and development applications such as in laser design to determine
the power distribution of the beam or in the development of diesel engines using
ceramic-coated pistons to determine proper adhesion of the ceramic to the metal
piston.
AGEMA 550. The AGEMA 550, introduced by AGEMA in the fourth quarter of 1996,
is a handheld infrared camera developed for condition monitoring applications.
The AGEMA 550 uses a stirling cooled PtSi focal plane array and, in its standard
version, is calibrated for temperature measurements of up to 1500 degrees C. The
AGEMA 550 has built-in digital recording and is available with various lenses,
for different fields of views, as well as filters and other accessories.
Examples of AGEMA 550 applications include monitoring the quality of products
such as paper, which depends upon proper and even moisture distribution during
the drying process, and rubber gloves, which can be thermally examined to locate
abnormally warm or cool spots, indicating nonuniform thickness that may result
in a quality defect.
AGEMA 900. The AGEMA 900, first introduced by AGEMA in 1992, is a high
resolution, handheld thermal imaging system available in both short and long
wave versions. The AGEMA 900, with its wide range of lenses, filters and other
accessories is ideally suited for research and development applications such as
evaluating the uniformity of heat distribution in the design of rubber tires.
Xcaliper. Xcaliper image analysis software, introduced in the second quarter
of 1995, is a high precision software product addressing certain industrial
machine vision tasks such as gauging, part-presence or absence, edge detection
and
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part alignment. Xcaliper software combines high speed with easy development
using Visual Basic programming. It also contains pattern recognition software
algorithms, which can perform high speed part orientation and inspection tasks,
such as the evaluation of laser printer test sheets to ensure the precise
alignment of thousands of tiny dots of ink and the minimization of ink scatter.
IRwin Report. IRwin Report software, the latest release of which was
introduced by AGEMA in 1996, allows for review, analysis and processing of
captured images and data. IRwin software is a Windows-based program that is easy
to use and affordable. IRwin software is typically packaged with the AGEMA 550
and 570, though it is capable of operating with data gathered from other imaging
products as well.
ULTRA 6000. The ULTRA 6000, first introduced in the third quarter of 1997, is
a compact, lightweight, 5-axis gyrostabilized high performance dual imaging
system that combines advanced focal plane array thermal imaging technology with
a visible light color camera to provide stable, high resolution imaging
capability. The ULTRA 6000 standard features include user-selected fields of
view, electronic zoom, freeze frame, and up to 15:1 magnification with the
visible light camera. These images can be recorded directly to videotape or
transmitted live to ground centers using an optional microwave downlink.
Examples of ULTRA 6000 applications include the detection and apprehension of
suspects, and the monitoring of vehicle chases by law enforcement agencies.
UltraMedia-RS. The UltraMedia-RS, introduced in the first quarter of 1997,
combines many of the features of the larger UltraMedia system in a compact 35-
pound configuration. The UltraMedia-RS allows small and weight restricted
aircraft to gather high quality video footage from long distances, delivering a
maximum of 40:1 magnification.
UltraMedia. The UltraMedia, introduced in the first quarter of 1996, is a
compact daylight broadcast system that delivers a maximum of 72:1 magnification
in a lightweight, 5-axis gyrostabilized package that is ideally suited for
airborne broadcast teams. It was developed to meet the needs of television
stations and entertainment networks to cover live news and sporting events. The
UltraMedia is also used by law enforcement agencies around the world for
surveillance, suspect search and apprehension, and officer support.
UltraMedia LE. The UltraMedia, introduced in the fourth quarter of 1998, is a
compact digital lowlight broadcast system that delivers a maximum of 96:1
magnification in a lightweight, 5-axis gyrostabilized package that is ideally
suited for airborne broadcast teams. It was developed to meet the needs of
television stations and entertainment networks to cover live news and sporting
events. The UltraMedia LE is also used by law enforcement agencies around the
world for surveillance, suspect search and apprehension, and officer support.
GOVERNMENT PRODUCTS. The Company offers a range of state-of-the-art products
to government agencies. To meet the needs of these customers, the Company
provides a range of products consisting of a thermal imaging system enclosed in
a gyrostabilized gimbal which is typically mounted to an aircraft or ship. A
thermal imaging system for the government market typically consists of a turret,
an electronics module, a hand control unit and a video display monitor. The
infrared sensor incorporates the most critical system components including a
detector assembly, closed cycle cooler, scanner (depending on detector
technology utilized), optics and electronics. The hand control unit is used to
remotely direct the turret.
Star SAFIRE. The Company's newest product for the government market, with
first deliveries in June 1998, is the Star SAFIRE, a 3-axis gyrostabilized, 360
degrees field of view thermal imaging system incorporating third generation
focal plane array detector technology. Using three fields of view, the system
provides extended detection range capability and visually advanced imagery. The
system permits multiple optical payloads in addition to the infrared detector,
including a TV camera with a zoom lens for daylight operations, laser
rangefinder, laser illuminator or laser designator. Examples of Star SAFIRE
applications include the detection of vehicles, ships or planes transporting
illegal narcotics, and search and rescue for individuals in danger or distress.
SAFIRE. The SAFIRE system, first introduced in the second quarter of 1992, is
a digital system with an advanced detector design that provides a range of
features designed to satisfy the most demanding government and military customer
requirements. The unit's 3-axis gyrostabilized gimbal configuration has been
certified to operate at airspeeds in excess of 400 knots, ensuring that the
SAFIRE can operate and produce, a stable, high resolution image when mounted on
most
8
<PAGE>
aircraft designed for subsonic operations. The SAFIRE has a digital
microprocessor, which permits optional features such as autotracking,
autoscanning, laser illumination, laser rangefinder, use of a TV camera,
navigation interfaces, digital image filters and freeze frame. Examples of
SAFIRE applications include navigation assistance at night and in adverse
weather for medical evacuation helicopters and border patrol.
AGEMA 1000. The ground-based AGEMA 1000, first introduced by AGEMA in 1992,
is a fixed or tripod mounted thermal imaging system that can detect small
objects up to several kilometers away under extreme environmental conditions,
day or night. Highly reliable and ready for 24-hour operation, these compact and
versatile thermal imaging systems switch dual lenses at a touch of a button,
optimize images automatically and offer remote control software. The AGEMA 1000
can also be integrated into a gimbal for airborne applications. Examples of
AGEMA 1000 applications include perimeter security of military bases and
sensitive government installations or buildings.
ThermoVision Sentry. The ground-based ThermoVision Sentry, first introduced
in the fourth quarter of 1998, is the first fixed or tripod mounted thermal
imaging system utilizing uncooled detector technology. The system can detect
small objects up to several kilometers away under extreme environmental
conditions, day or night and incorporates an integrated Pan and Tilt mechanism.
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. Examples of ThermoVision
Sentry applications include perimeter security of military bases and sensitive
government installations or buildings.
9
<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, 1998, such sales represented 17.7% 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 believes that its sales and marketing organization is the largest
in the industry and effectively covers the world with its combination of direct
sales, independent representatives and distributors, application engineers and
service centers. The process of selling and marketing the Company's products
involves extensive product promotion, technical selling and after-sales support.
The Company's commercial and government products are highly technical and have
distinct characteristics and functionality. The Company's sales and service
personnel undergo a comprehensive training program to educate them as to the
technical aspects of the products as well as familiarize them with individual
customer requirements. The Company's ongoing training programs are continuously
updated for changes in technology and competition.
The Company has distinct sales channels for commercial, airborne observation
and broadcast and government customers. The Company sells its commercial thermal
imaging products worldwide through a direct sales staff of more than 150 people
and a network of 75 distributors (many with multiple offices) and
representatives, each with an exclusive right to sell the Company's products in
a defined geographic area. This network is managed by 25 regional sales managers
employed by the Company. The Company sells its airborne observation and
broadcast products through a seven person direct sales staff. The Company sells
its government products in the United States through a 23 person direct sales
staff, and internationally, through a 14 person direct sales staff and 50
independent representatives and distributors covering all major markets
worldwide. The Company has a technical and customer support staff comprised of
35 people in the United States and Europe who provide application development,
technical training, operational assistance, installation design and support, and
software assistance to direct and indirect sales personnel as well as to
customers. Additionally, the Company maintains service facilities at its
factories in Portland, Oregon, Stockholm, Sweden and West Malling, U.K. and at
its subsidiaries in Frankfurt, Germany, Toronto, Canada, Paris, France and
Milan, Italy. Each of the Company's service facilities has the capability to
perform the complex calibrations required to service commercial thermal imaging
systems. The Company employs 35 people worldwide in its service organizations.
The Company also maintains limited service capability in three additional
foreign locations under the direction of its independent representatives or
distributors. Product marketing by the Company involves Internet promotion,
advertising, direct mail, press tours, technical articles for publications and
participation in approximately 100 trade shows per year.
10
<PAGE>
BACKLOG
The Company believes that backlog is not indicative of revenue for any future
periods because the Company's sales to commercial customers are generally made
pursuant to purchase orders rather than long term contracts and, accordingly,
the backlog at any given time is for immediate shipments. In addition, the
backlog for the government business is heavily dependent upon the timing of
receipt of government contracts which may have multiple year delivery schedules.
Furthermore, delivery schedules are frequently revised to accommodate changes in
customer needs. Although orders received by the Company are generally subject to
cancellation, in the case of most orders included in backlog, the customer is
obligated to pay certain costs and/or penalties for cancellation.
MANUFACTURING
The Company manufactures many of the critical components of its products,
including gimbals, optics, certain detectors and high speed motors, allowing the
Company to minimize lead times, facilitate prompt delivery of its products,
control costs and ensure that these components satisfy its quality standards.
The Company purchases other parts pre-assembled, including detectors, coolers,
circuit boards, cables and wiring harnesses. The Company purchases certain
components from sole or limited source suppliers. In particular, the Company,
through its subsidiary, FLIR Systems AB, has entered into a supply contract with
Lockheed Martin for the supply of uncooled detectors for integration into the
Company's line of products. Lockheed Martin is currently the only producer of
uncooled detectors capable of being used in radiometric applications that is
manufacturing such detectors in volume. Subject to certain exceptions, the
contract provides FLIR Systems AB with the exclusive right to purchase uncooled
detectors for use in the commercial thermography market and a limited,
nonexclusive right to purchase uncooled detectors for use in the government
market. Under the contract, FLIR Systems AB has the corresponding obligation to
purchase uncooled detectors solely from Lockheed Martin. Currently, the AGEMA
570, the ThermoVision and the ThermoVision Sentry are the only products of the
Company that use uncooled detectors supplied by Lockheed Martin. However, the
Company intends in the future to use uncooled detectors supplied by Lockheed
Martin in other handheld products or ground-based security products. While the
contract provides for the delivery of a fixed number of uncooled detectors on a
monthly basis, the delivery schedule may be increased or decreased by FLIR
Systems AB within certain limits. Based on current and anticipated production
levels and supply requirements, the Company expects that the contract will
continue through the fourth quarter of 1999 or the first quarter of 2000.
The Company has in the past, and may in the future, experience delays in
receiving adequate supplies of sole and limited source components. If Lockheed
Martin or any other significant sole or limited source supplier were to become
unable or unwilling to continue to provide critical components in required
volumes, the Company's ability to manufacture products incorporating such
components would be disrupted unless the Company could identify and qualify
acceptable replacement components or redesign such products with different
components. No assurance can be given that additional sources would be available
to the Company or that product redesign would be feasible on a timely basis or
at acceptable costs. Specifically, no assurance can be given that, upon
expiration of the current supply contract with Lockheed Martin, the Company will
be able to successfully negotiate a new contract with Lockheed Martin for the
supply of uncooled detectors on an exclusive basis or at all, or that the
Company will be able to identify another source of uncooled detectors. A
significant amount of the Company's revenue is expected to be derived from the
sale of the AGEMA 570. Accordingly, any failure of the Company to renew the
contract or identify another source of uncooled detectors would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, any extended interruption in the supply of sole or limited
source components would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's manufacturing operations are, from time to time, audited by
certain of its OEM customers, which include several major aircraft
manufacturers, and have been certified as meeting their quality standards. The
Company's facilities in Stockholm, Sweden and West Malling, U.K. are ISO 9000
certified.
11
<PAGE>
COMPETITION
Competition in the market for thermal imaging equipment is significant. The
Company believes that the principal competitive factors in its market are
performance, cost, customer service, product reputation and effective marketing
and sales efforts. In addition, the Company believes that the speed with which
companies can identify new applications for thermal imaging, develop products to
meet those needs and supply commercial quantities to the market are important
competitive factors. The Company's competitors are different in each market
segment. In the commercial market, the Company's principal competitors include
Inframetrics, Inc., Raytheon Company, Cincinnati Electronics Corp., Nippon
Avionics Co., Ltd., Wescam Ltd. and Media Cybernetics Image Analysis. In the
government market, the Company competes with Inframetrics, Inc., General
Electric Company, p.l.c., Wescam Ltd., Lockheed Martin Corp., The Boeing
Company, Daimler-Benz Aerospace AG and Thompson-CSF. Many of the Company's
competitors have substantially greater financial, technical and marketing
resources than the Company. In addition, the Company's products compete
indirectly with numerous other products, such as image intensifiers and low-
light cameras, for limited military and government funds. As the markets for the
Company's products expand, the Company expects that additional competition will
emerge and that existing competitors may commit more resources to the markets
addressed by the Company. To remain competitive, the Company must continue to
invest in and focus upon research and development and product innovation. There
can be no assurance that the Company will be successful in such efforts. No
assurance can be given that the Company will be able to compete effectively in
the future.
PROPRIETARY RIGHTS
The Company's ability to compete successfully and achieve future revenue
growth will depend in part on its ability to protect its proprietary technology
and operate without infringing the rights of others. The Company relies on a
combination of patent, trademark and trade secret laws, confidentiality
agreements and contractual provisions to protect its proprietary rights.
However, the Company believes that its historical success has been primarily a
function of other competitive advantages such as the skill and experience of its
employees, its worldwide, multi-channel sales, distribution and servicing
network and its name recognition and quality products. Although the Company
currently holds United States patents covering certain aspects of its
technologies, there can be no assurance that the Company will obtain additional
patents or trademarks on its technology, products and trade names or that its
patents or trademarks will be sufficiently broad to protect the Company's
proprietary rights and will not be challenged or circumvented by competitors.
Likewise, there can be no assurance that measures that the Company takes to
protect its proprietary rights will be adequate to deter their misappropriation
or disclosure. Any failure by the Company to meaningfully protect its
intellectual property could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, because
intellectual property does not necessarily represent a barrier to entry into the
thermal imaging industry, there can be no assurance that the Company will be
able to maintain its competitive advantage or that competitors will not develop
capabilities equal or superior to that of the Company.
EMPLOYEES
As of December 31, 1998, the Company had 662 employees of whom 63 were in
administration, 189 were in engineering, 10 were in quality assurance, 213 were
in manufacturing, assembly and testing and 187 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 unions. The Company
believes its relationships with its employees and unions are good.
12
<PAGE>
ITEM 2. PROPERTIES.
----------
The Company leases its facilities under various operating leases which expire in
1998 through 2004. 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 92,000
FLIR Systems AB - Danderyd, Sweden 2001 63,000
FSI Automation, Inc. - Bothell, Washington 2000 9,600
FLIR Systems International Ltd. - West Malling, United Kingdom 2001 12,500
FLIR Systems Ltd. - Toronto, Canada 1999 4,200
FLIR Systems S.A.R.L. - Paris, France 1999 2,900
FLIR Systems GmbH - Frankfurt, Germany 2003 2,200
FLIR Systems Limited - Leighton Buzzard, United Kingdom 1999 4,500
FLIR Systems s.r.l. - Milan, Italy 2004 2,200
</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.
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>
1998 1997
-------------------------------------- --------------------------------------
HIGH LOW HIGH LOW
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
First Quarter........... 20.63 16.75 17.75 13.25
Second Quarter.......... 21.63 17.25 17.75 14.75
Third Quarter........... 18.13 10.50 22.00 15.75
Fourth Quarter.......... 23.75 10.50 22.00 17.50
</TABLE>
At December 31, 1998, there were approximately 400 holders of record of the
Company's common stock and 12,025,852 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 quarter ended December 1998, 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 1,100 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.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
Commercial........................... $ 93,172 $ 43,288 $ 23,059 $ 16,550 $ 13,172
Government........................... 60,760 48,483 42,958 33,575 35,805
-------------- -------------- -------------- -------------- --------------
Total revenue....................... 153,932 91,771 66,017 50,125 48,977
Cost of goods sold.................... 65,055 58,507 * 30,415 22,724 23,813
-------------- -------------- -------------- -------------- --------------
Gross profit........................ 88,877 33,264 35,602 27,401 25,164
Operating expenses:
Research and development............. 22,122 11,814 9,485 7,786 7,588
Selling and other operating costs.... 41,694 26,551 18,999 14,656 12,353
Combination costs.................... -- 36,450 * -- -- --
-------------- -------------- -------------- -------------- --------------
Total operating costs............... 63,816 74,815 28,484 22,442 19,941
Earnings (loss) from operations.... 25,061 (41,551) 7,118 4,959 5,223
Interest income....................... 364 182 44 226 705
Interest expense and other............ (3,233) (2,103) (819) (795) (172)
-------------- -------------- -------------- -------------- --------------
Earnings (loss) before income
taxes.............................. 22,192 (43,472) 6,343 4,390 5,756
Income tax provision (benefit)........ 5,938 (12,884) 1,251 523 570
-------------- -------------- -------------- -------------- --------------
Net earnings (loss)................... $ 16,254 $ (30,588) $ 5,092 $ 3,867 $ 5,186
============== ============== ============== ============== ==============
Net earnings (loss) per share:
Basic............................ $ 1.49 $ (5.23) $ 0.95 $ 0.74 $ 1.01
============== ============== ============== ============== ==============
Diluted.......................... $ 1.45 $ (5.23) $ 0.91 $ 0.70 $ 0.95
============== ============== ============== ============== ==============
BALANCE SHEET DATA:
Working capital....................... $ 75,212 $ 33,461 $ 44,190 $ 37,884 $ 35,573
Total assets.......................... 201,829 153,857 75,104 56,918 49,269
Long-term debt, excluding
Current portion...................... 1,009 1,679 5,173 1,175 1,209
Total shareholders' equity............ $ 124,625 $ 75,189 $ 49,971 $ 43,470 $ 39,162
</TABLE>
* - In connection with the acquisition of AGEMA 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 merger-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.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
-------------
Overview
FLIR Systems, Inc., founded in 1978, is a world leader in the design,
manufacture and marketing of thermal imaging and broadcast camera systems for a
wide variety of commercial and government applications, including condition
monitoring, research and development, manufacturing process control, airborne
observation and broadcast, search and rescue, federal drug interdiction,
surveillance and reconnaissance, navigation safety, border and maritime patrol,
environmental monitoring and ground-based security.
The Company's business is organized around two principal markets, commercial
and government. Historically, a majority of the Company's revenue has been
derived primarily from government sales, which accounted for 39.5% and 52.8%,
respectively, of the Company's revenue for the years ended December 31, 1998 and
1997. However, the Company is shifting its product mix in favor of commercial
applications, which accounted for 60.5% and 47.2%, respectively, of the
Company's revenue for the years ended December 31, 1998 and 1997. The Company
continues to enhance its state-of-the-art products within existing commercial
and government markets, as well as develop products for new market applications
that use advanced thermal imaging technology such as new "uncooled" detector
technology that operates at room temperature, allowing for systems that are less
expensive, smaller and lighter, and require less power to operate. Additionally,
the Company has developed higher-margin image analysis software tools that
enhance the capability and customization of the Company's products. As hardware
prices decline, the sophistication of image analysis software and the
incremental functionality provided by such analysis tools are expected to become
a more critical component of the Company's products.
On March 30, 1999, the Company consummated 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
stock for all the outstanding stock of Inframetrics. This acquisition increases
the Company's worldwide commercial thermal imaging market share, enables the
Company to expand its product development efforts through the elimination of
duplicative research and development programs, creates an extensive sales and
marketing organization and allows the Company to more efficiently focus its
manufacturing efforts. Inframetrics, with 1998 sales of $55.0 million, is one
of the major suppliers of commercial thermal imaging systems in the world. The
transaction is expected to be accounted for as a pooling of interests.
Effective December 1, 1997, the Company acquired AGEMA, headquartered in
Stockholm, Sweden. AGEMA is the world leader in the design, manufacture and
marketing of handheld infrared cameras for detecting and measuring temperature
differences for a wide variety of commercial and research applications. AGEMA
reported revenue of $52.4 million for the year ended December 31, 1997. However,
as the acquisition was accounted for as a purchase, the Company's Consolidated
Statement of Operations includes AGEMA's results only for the month of December
1997.
The acquisition of AGEMA was accomplished through the issuance of 4,162,000
shares of common stock, valued at $54.1 million, to Spectra-Physics AB, AGEMA's
parent company, in exchange for all the outstanding shares of AGEMA stock. In
conjunction with the acquisition, during the quarter ended December 31, 1997,
the Company recognized a one-time charge of $52.5 million. The write-off
consisted of $36.4 million of in-process research and development and
acquisition-related costs, which were included as a separate line item in
operating expenses, and $16.1 million of inventories due to the creation of
duplicative product lines, which were included in cost of goods sold. In
addition, the Company expects to amortize a total of approximately $20.6 million
in intangible assets over periods ranging from 15 to 17 years. The Company has
divided production responsibilities between its primary facilities, with
handheld and ground-based products manufactured in Stockholm and government and
airborne observation and broadcast products manufactured in Portland.
15
<PAGE>
Sales to customers outside of the United States accounted for approximately
55%, 47% and 32% of the Company's revenue in 1998, 1997 and 1996, respectively.
The Company anticipates that international sales will continue to account for a
significant portion of revenue. Historically, currency fluctuations have had
little impact on revenue realization. However, since the Company seeks to reduce
its exposure to currency fluctuations by denominating the majority of its
international sales in U.S. dollars, a decrease in the value of foreign
currencies relative to the U.S. dollar could make the Company's products less
price-competitive. With the acquisition of AGEMA contributing a significant
volume of sales denominated in foreign currencies, the Company has increased
exposure to foreign exchange fluctuations and changing dynamics of foreign
competitiveness based on variations in the value of the U.S. dollar relative to
other currencies. The Company typically experiences longer payment cycles on its
international sales, which can have an adverse impact upon the Company's
liquidity. In addition, a substantial portion of the Company's operations are
conducted outside the United States, particularly in Sweden. International sales
and operations may be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, political and economic instability, trade restrictions, labor union
activities, changes in tariffs and taxes, difficulties in staffing and managing
international operations, and general economic conditions.
The Company experiences fluctuations in orders and sales due to seasonal
fluctuations and customer sales cycles. Revenue in the fourth quarter of each
year generally has been significantly higher than any other quarter in that year
and the first, and in some cases, the second quarter of the following year, due
to the seasonal pattern of contracting by the U.S. and certain foreign
governments, the frequent requirement by international customers to take
delivery of equipment prior to the end of December due to funding
considerations, and the tendency of commercial enterprises to fully utilize
yearly capital budgets prior to expiration. In addition, a significant portion
of the Company's quarterly sales have historically occurred in the last month of
each quarter, with sales frequently concentrated in the last week or days of the
quarter. Such events are likely to continue to result in substantial
fluctuations in quarterly results in the future. As a result of such quarterly
fluctuations in operating results, the Company believes that quarter-to-quarter
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance.
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,
--------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
<S> <C> <C> <C>
Revenue:
Commercial.............................................. 60.5 % 47.2 % 34.9%
Government.............................................. 39.5 52.8 65.1
------------------- ------------------- --------------------
Total revenue.......................................... 100.0 100.0 100.0
Cost of goods sold....................................... 42.3 63.8 (1) 46.1
------------------- ------------------- --------------------
Gross profit........................................... 57.7 36.2 (1) 53.9
Operating expenses:
Research and development................................ 14.4 12.9 14.4
Selling and other operating costs....................... 27.1 28.9 28.8
Combination costs....................................... -- 39.7 --
------------------- ------------------- --------------------
Total operating expenses............................... 41.5 81.5 43.2
Earnings (loss) from operations...................... 16.2 (45.3) (1) 10.7
Interest income.......................................... 0.2 0.2 0.1
Interest expense and other............................... (2.1) (2.3) (1.2)
------------------- ------------------- --------------------
Earnings (loss) before income taxes.................. 14.3 (47.4) 9.6
Income tax provision (benefit)........................... 3.8 (14.0) 1.9
Net earnings (loss)...................................... 10.5% (33.4)% (1) 7.7%
=================== =================== ====================
</TABLE>
(1) Excluding the one-time charge of $52.5 million in connection with the
acquisition of AGEMA, costs of goods sold, gross profit, earnings from
operations and net earnings in 1997 would have been 46.2%, 53.8%, 12.0% and
7.5%, respectively.
16
<PAGE>
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUE. Revenue increased 67.7%, from $91.8 million in 1997 to $153.9
million in 1998. Commercial revenue increased 115.2%, from $43.3 million in 1997
to $93.2 million in 1998. This improvement was principally attributable to the
inclusion of a full year of AGEMA's operations in 1998 compared to only one
month in 1997; increased deliveries of the Company's handheld products,
particularly the AGEMA 570 with revenue aggregating $31.1 million compared to
$6.3 million in 1997; and continued strong demand for the full line of broadcast
camera systems including the UltraMedia and the UltraMedia RS. Revenue from
the sale of thermal imaging systems to the government market increased 25.3%,
from $48.5 million in 1997 to $60.8 million in 1998. This increase was primarily
attributable to continued robust sales of the SAFIRE thermal imaging system,
inclusion of revenue from the sales of the Star SAFIRE, which was introduced in
1998, increased deliveries to international customers, which typically have
higher sales prices than domestic orders, and increased sales of the Company's
ground-based surveillance products.
Revenue increased 39.0%, from $66.0 million in 1996 to $91.8 million in 1997.
Commercial revenue increased 87.7%, from $23.1 million in 1996 to $43.3 million
in 1997. This improvement was principally attributable to increased sales of the
UltraMedia, the Company's airborne camera system for the airborne observation
and broadcast market segment, which aggregated $12.2 million in 1997 compared to
$6.3 million in 1996, further production and deliveries of the Company's
handheld imaging systems, which aggregated $10.9 million in 1997 compared to
$4.7 million in 1996, higher international sales, and the one month contribution
from AGEMA's operations which aggregated $9.4 million. Revenue in 1997 from
the sale of thermal imaging systems to the government market increased 12.9%,
from $43.0 million in 1996 to $48.5 million in 1997. This increase was primarily
due to increased sales of the SAFIRE thermal imaging system, principally to the
U.S. Marine Corps and the U.S. Air Force.
The Company has continued to benefit from its significant investment in
developing a worldwide sales and distribution channel. The majority of the
Company's revenue outside the United States is derived from Europe, Japan and
South America. International revenue increased from $43.3 million in 1997 to
$85.2 million in 1998 and accounted for approximately 55.3% of the Company's
revenue in 1998, an increase from the 47.2% experienced in 1997 and the 32.0%
experienced in 1996. The increase in absolute dollars and as a percentage of
revenue in 1998 was primarily due to increased shipments to international
government customers and increased commercial international sales as a result of
the inclusion of a full year of AGEMA revenue in 1998 which was primarily
international.
Gross profit. As a percentage of revenue, gross profit increased from 36.2% in
1997 to 57.7% in 1998, primarily due to the $16.1 million write-off of
duplicative inventories related to the AGEMA acquisition which were included in
cost of goods sold in 1997. Exclusive of this write-off, gross margin increased
from 53.8% for 1997 to 57.7% in 1998. The gross margin increase was primarily
due to an increase in higher margin international sales and a higher proportion
of total revenue derived from the sale of commercial products which, as a result
of the favorable cost structure of the uncooled products, now generally exceed
those margins experienced from the sale of imaging systems to the government
market. This increase was mitigated, in part, by an increase in sales to the
U.S. government, which aggregated $27.2 million in 1998 compared to $19.0
million in 1997 and which typically have lower margins than other sales to the
government market. Gross profit, exclusive of the AGEMA-related write-off in
1997, remained relatively consistent as a percentage of revenue at 53.7% in 1997
compared to 53.9% in 1996.
Research and development. Research and development expense increased 87.3%,
from $11.8 million in 1997 to $22.1 million in 1998, and increased 24.6%, from
$9.5 million in 1996 to $11.8 million in 1997. As a percentage of revenue,
research and development expense increased from 12.9% in 1997 to 14.4% in 1998
and decreased from 14.4% in 1996 to 12.9% in 1997. The increase in research and
development expense, in absolute dollar terms, was attributable to the inclusion
of a full year of AGEMA's operations in 1998 compared to only one month in 1997
and increased research and development activities related to the introduction of
the Star SAFIRE, UltraMedia LE and FireFLIR, as well as to ongoing product
enhancements. Further affecting 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 $0, $800,000 and $200,000 in 1998, 1997 and 1996,
respectively. Without these reclassifications, research and development expense
as a percentage of revenue would have been 14.4%, 13.7% and 14.7% in 1998, 1997
and 1996, respectively.
17
<PAGE>
Selling and other operating costs. Selling and other operating costs increased
57.0%, from $26.6 million in 1997 to $41.7 million in 1998, and increased 39.7%,
from $19.0 million in 1996 to $26.6 million in 1997. Selling and other operating
costs as a percentage of revenue decreased from 28.9% in 1997 to 27.1% in 1998,
and remained relatively consistent at 28.9% in 1997 and 28.8% in 1996. This
increase, in absolute dollar terms, was primarily due to the inclusion of a full
year of AGEMA's operations in 1998 compared to only one month in 1997, costs
associated with increased revenue, particularly the increase in international
sales, expenses related to the expanded operations of the Company's
international operations and to increased personnel. Further, the Company has
continued to expand and strengthen the direct sales and marketing staff.
Interest expense and other. Interest expense and other includes costs related
to short-term and long-term debt, capital lease obligations, miscellaneous bank
charges and expenses and foreign currency transaction gains and losses. The
increase from $2.1 million in 1997 to $3.2 million in 1998 and from $819,000 in
1996 to $2.1 million in 1997 was primarily due to increased short-term debt as a
result of increased working capital needs during each year.
Income taxes. The Company's effective income tax rates for 1998, 1997 and
1996 were 26.8%, 29.6% and 19.7%, 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 benefit of
$14.7 million and $400,000 in 1997 and 1996, 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 benefit 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, 1998, the Company had net operating loss carryforwards
aggregating $3.8 million, which expire in the years 2005 through 2010.
Utilization of the Company's acquired net operating loss carryforwards from FSI
Automation (formerly known as "Optimas Corporation") is limited to future
earnings of FSI Automation and further limited to approximately $350,000 per
year, as FSI Automation experienced a cumulative change in ownership of more
than 50% within a three-year period. Additionally, the Company has various tax
credits available aggregating $2.7 million which expire in the years 2007
through 2013. Finally, the Company has a $11.8 million deferred tax asset
related to acquired in-process research and development. The realization of
this deferred tax asset is dependent upon the ability of foreign subsidiaries to
remit earnings to the US parent and is further limited to realization over a 15-
year period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had notes payable, net of cash on hand, of
$34.7 million compared with $20.7 million at December 31, 1997. The increase in
notes payable was principally caused by increased inventories and receivables
and payment of accrued payroll and other liabilities.
Accounts receivable increased from $55.5 million at December 31, 1997, to
$81.0 million at December 31, 1998. The increase in receivables was primarily
due to an exceptionally large volume of shipments late in the year and the fact
that much of the revenue in the fourth quarter of 1998 related to amounts due
from aircraft integrators and OEMs. In many cases the Company has accepted
payment terms that require the Company to wait until these customers have been
paid prior to the Company receiving funds. The Company does not grant any
rights of return. The Company anticipates that receivable levels and days sales
outstanding will decline in 1999 as a higher proportion of revenue is derived
from commercial customers which tend to have a shorter collection cycle.
Inventories increased from $34.7 million at December 31, 1997, to $53.0
million at December 31, 1998. The increase in inventories was primarily
attributable to the build-up of inventories to support the Company's new
products, including the Star SAFIRE, UltraMedia LE and the FireFLIR, the build-
up of finished goods inventories in anticipation of sales of products in 1999 as
part of the Company's plan to reduce component inventories, and the build-up of
finished goods on certain contracts that were delayed into 1999. Finished goods
inventories aggregated $17.5 million at December 31, 1998, compared to $894,000
at December 31, 1997.
18
<PAGE>
The Company's investing activities have consisted primarily of expenditures
for fixed assets, which totaled $12.2 million in 1998 compared to $10.8 million
in 1997. A large percentage of the 1998 expenditures related to the replacement
of the Company's enterprise resource planning (ERP) system and other Year 2000
compliance issues. Such expenditures have aggregated approximately $4.0
million.
At December 31, 1998, the Company had available a $42.0 million line of credit
which bears interest at LIBOR plus 1.75% (7.0% at December 31, 1998) secured by
all the Company's assets. The loan agreement governing the line of credit
requires the Company to maintain certain financial ratios and restricts the
Company from taking certain significant actions, including incurring additional
debt or making acquisitions, without the consent of the bank. Additionally, the
Company, through one of its subsidiaries, has a 40.0 million Swedish Kroner
(approximately $5.0 million) line of credit, which bears interest at 4.7% at
December 31, 1998. The Company had $37.4 million outstanding under the lines of
credit at December 31, 1998. On March 30, 1999, the Company expanded the $42.0
million credit facility to $70.0 million, approximately $24.0 million of
borrowings in the new line of credit were utilized to pay off existing debt of
Inframetrics, Inc. at the time of the merger.
The use of cash by operating activities is primarily due to the increases in
inventories and receivables and the decrease in accrued liabilities discussed
above. The Company believes that its existing cash and available credit
facilities together with continuing efforts to expedite the collection of
accounts receivable and management of inventory levels will be sufficient to
meet its cash requirements for the foreseeable future.
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
begun the installation of a new enterprise resource planning system, both
hardware and software, to correct this deficiency. The Company's existing
product line is 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.
19
<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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
This item includes the following financial information:
<TABLE>
<CAPTION>
STATEMENT Page
- -------------------------------------------------------------------------------------------- -------------------
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants............................... 22
Consolidated Statement of Operations for the Years Ended December 31,
1998, 1997 and 1996..................................................................... 23
Consolidated Balance Sheet as of December 31, 1998 and 1997................................. 24
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996......................................................... 25
Consolidated Statement of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996...................................................................... 26
Notes to the Consolidated Financial Statements.............................................. 27
Quarterly Financial Data (Unaudited)........................................................ 41
</TABLE>
21
<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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
April 15, 1999
22
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenue:
Commercial............................................... $ 93,172 $ 43,288 $23,059
Government............................................... 60,760 48,483 42,958
----------- ----------- ----------
Total revenue........................................ 153,932 91,771 66,017
Cost of goods sold......................................... 65,055 58,507 30,415
Research and development................................... 22,122 11,814 9,485
Selling and other operating costs.......................... 41,694 26,551 18,999
Combination costs.......................................... -- 36,450 --
----------- ----------- ----------
128,871 133,322 58,899
Earnings (loss) from operations........................ 25,061 (41,551) 7,118
Interest income............................................ 364 182 44
Interest expense and other................................. (3,233) (2,103) (819)
----------- ----------- ----------
Earnings (loss) before income taxes.................... 22,192 (43,472) 6,343
Income tax provision (benefit)............................. 5,938 (12,884) 1,251
----------- ----------- ----------
Net earnings (loss)........................................ $ 16,254 $(30,588) $ 5,092
=========== =========== ==========
Net earnings (loss) per share:
Basic................................................... $1.49 $(5.23) $0.95
=========== =========== ==========
Diluted................................................. $1.45 $(5.23) $0.91
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)
<TABLE>
<CAPTION>
ASSETS
December 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 2,660 $ 5,884
Accounts receivable, net.................................................... 80,984 55,463
Inventories................................................................. 52,986 34,724
Prepaid expenses............................................................ 5,902 3,516
Deferred income taxes....................................................... 4,915 6,894
------------- -------------
Total current assets...................................................... 147,447 106,481
Property and equipment, net.................................................. 24,654 18,423
Software development costs, net.............................................. 488 1,043
Deferred income taxes........................................................ 9,501 9,979
Intangible assets, net....................................................... 15,936 14,013
Other assets................................................................. 3,803 3,918
------------- -------------
$201,829 $153,857
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................................... $ 37,360 $ 26,558
Accounts payable............................................................ 18,942 15,493
Accounts payable to related parties......................................... -- 6,228
Accrued payroll and other liabilities....................................... 12,618 19,105
Accrued income taxes........................................................ 2,709 363
Current portion of long-term debt........................................... 606 5,273
------------- -------------
Total current liabilities................................................. 72,235 73,020
Long-term debt............................................................... 1,009 1,679
Pension liability............................................................ 3,960 3,969
Commitments and contingencies............................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at December 31, 1998 or 1997............................. -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
12,025,852 and 9,756,458 shares issued at December 31, 1998 and 1997,
respectively.............................................................. 120 98
Additional paid-in capital.................................................. 132,564 97,684
Accumulated deficit......................................................... (6,077) (22,331)
Accumulated other comprehensive income...................................... (1,982) (262)
------------- -------------
Total shareholders' equity................................................ 124,625 75,189
------------- -------------
$201,829 $153,857
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid-in Earnings
------------------------- -------------------------
Shares Amount Shares Amount Capital (Deficit)
------------ ----------- ------------ ----------- ------------ ----------
$0.01 $0.01
Authorized.................................. 10,000,000 par value 30,000,000 par value
============ =========== ============ ===========
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................. -- $ -- 5,283,365 $ 53 $ 40,252 $ 3,165
Net earnings for the year................ -- -- -- -- -- 5,092
Common stock options exercised........... -- -- 70,788 1 587 --
Common stock issued pursuant to
stock option plans................... -- -- 33,330 -- 398 --
Income tax benefit from stock
options exercised.................... -- -- -- -- 596 --
Translation adjustment................... -- -- -- -- -- --
------------ ----------- ------------ ----------- ------------ ----------
Balance, December 31, 1996.................. -- -- 5,387,483 54 41,833 8,257
Comprehensive income, year ended
December 31, 1996........................
Net (loss) for the year.................. -- -- -- -- -- (30,588)
Common stock options exercised........... -- -- 206,975 2 1,460 --
Common stock issued for acquisition...... -- -- 4,162,000 42 54,064 --
Income tax benefit from stock
options exercised.................... -- -- -- 327 --
Translation adjustment................... -- -- -- -- -- --
------------ ----------- ------------ ----------- ------------ ----------
Balance, December 31, 1997.................. -- -- 9,756,458 98 97,684 (22,331)
Comprehensive income, year ended
December 31, 1997........................
Net earnings for the year................ -- -- -- -- -- 16,254
Common stock options exercised........... -- -- 159,764 1 1,670 --
Common stock issued pursuant to
stock option plans..................... -- -- 111,130 1 1,181 --
Common stock issued...................... -- -- 1,998,500 20 32,656 --
Cost of stock issuance................... -- -- -- -- (627) --
Translation adjustment................... -- -- -- -- -- --
------------ ----------- ------------ ----------- ------------ ----------
Balance, December 31, 1998.................. -- $ -- 12,025,852 $ 120 $132,564 $ (6,077)
============ =========== ============ =========== ============ ==========
Comprehensive income, year ended
December 31, 1998........................
<CAPTION>
Accumulated
Other Total
Comprehensive Comprehensive
Income Total Income
--------------- ------------- ---------------
<S> <C> <C> <C>
Authorized..................................
Balance, December 31, 1995.................. $ -- $ 43,470 $ --
Net earnings for the year................ -- 5,092 5,092
Common stock options exercised........... -- 588 --
Common stock issued pursuant to
stock option plans................... -- 398 --
Income tax benefit from stock
options exercised.................... -- 596 --
Translation adjustment................... (173) (173) (173)
--------------- ------------- ---------------
Balance, December 31, 1996.................. (173) 49,971
Comprehensive income, year ended
December 31, 1996........................ $ 4,919
===============
Net (loss) for the year.................. -- (30,588) (30,588)
Common stock options exercised........... -- 1,462 --
Common stock issued for acquisition...... -- 54,106 --
Income tax benefit from stock
options exercised.................... -- 327 --
Translation adjustment................... (89) (89) (89)
--------------- ------------- ---------------
Balance, December 31, 1997.................. (262) 75,189
Comprehensive income, year ended
December 31, 1997........................ $(30,677)
===============
Net earnings for the year................ -- 16,254 16,254
Common stock options exercised........... -- 1,671 --
Common stock issued pursuant to
stock option plans..................... -- 1,182 --
Common stock issued...................... -- 32,676 --
Cost of stock issuance................... -- (627) --
Translation adjustment................... (1,720) (1,720) (1,720)
--------------- ------------- ---------------
Balance, December 31, 1998.................. $(1,982) $124,625
=============== =============
Comprehensive income, year ended
December 31, 1998........................ $ 14,534
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash used by operating activities:
Net earnings (loss)........................................... $ 16,254 $(30,588) $ 5,092
Income charges not affecting cash:
In-process research and development write-off................ -- 33,600 --
Depreciation................................................. 5,109 2,689 1,972
Amortization................................................. 2,412 680 481
Disposal and write-offs of property and equipment............ 446 333 239
Deferred income taxes........................................ 2,457 (13,796) (400)
Changes in certain working capital components:
Increase in accounts receivable.............................. (25,521) (18,210) (3,413)
(Increase) decrease in inventories........................... (18,262) 8,966 (9,847)
Increase in prepaid expenses................................. (2,386) (35) (1,112)
(Increase) decrease in other assets.......................... (115) 609 (329)
Increase in accounts payable................................. 3,449 4,981 2,151
(Decrease) increase in accounts payable to related parties... (6,228) 976 (145)
(Decrease) increase in accrued payroll and other liabilities. (6,487) 4,446 (58)
Increase (decrease) in accrued income taxes.................. 2,346 (767) 488
-------------- -------------- --------------
Cash used by operating activities.............................. (26,526) (6,116) (4,881)
-------------- -------------- --------------
Cash used by investing activities:
Additions to property and equipment........................... (12,217) (10,843) (5,526)
Net cash acquired with AGEMA.................................. -- 805 --
Increase in intangible assets................................. (2,880) -- --
Software development costs.................................... (239) (703) (630)
-------------- -------------- --------------
Cash used by investing activities.............................. (15,336) (10,741) (6,156)
-------------- -------------- --------------
Cash provided by financing activities:
Net increase in notes payable................................. 10,802 19,971 4,309
Proceeds from long-term debt.................................. -- 995 5,817
Repayments of long-term debt including current portion........ (5,337) (593) (877)
Reduction of pension liability................................ (9) (107) --
Proceeds from common stock issued............................. 32,676 -- --
Cost of common stock issuance................................. (627) -- --
Proceeds from exercise of stock options and shares issued
pursuant to incentive stock option plans, including
tax benefit................................................. 2,853 1,789 1,582
-------------- -------------- --------------
Cash provided by financing activities.......................... 40,358 22,055 10,831
-------------- -------------- --------------
Effect of exchange rate changes on cash........................ (1,720) (89) (173)
-------------- -------------- --------------
Net (decrease) increase in cash................................ (3,224) 5,109 (379)
Cash and cash equivalents, beginning of year................... 5,884 775 1,154
-------------- -------------- --------------
Cash and cash equivalents, end of year......................... $ 2,660 $ 5,884 $ 775
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------
The Company is a world leader in the design, manufacture and marketing of
thermal imaging and broadcast camera systems for a wide variety of applications
in commercial and government markets. The Company's thermal imaging systems use
advanced infrared technologies that detect infrared radiation, or heat, enabling
the operator to measure minute temperature differences and to see objects in
daylight or total darkness and through obscurants such as smoke, haze and most
types of fog. The Company's products can also incorporate visible light
cameras, proprietary image analysis software and gyrostabilized gimbal
technology. The Company's products come in a variety of configurations such as
handheld or ground-based systems, or can be mounted on ships, helicopters or
fixed-wing aircraft. The Company's products provide state-of-the-art imaging
technology coupled with competitive price performance characteristics for
existing commercial and government applications, including condition monitoring,
research and development, manufacturing process control, airborne observation
and broadcast, search and rescue, federal drug interdiction, surveillance and
reconnaissance, navigation safety, border and maritime patrol, environmental
monitoring and ground-based security. The Company has also developed innovative
new products utilizing advanced "uncooled" thermal imaging technology, which
allows for less-expensive, smaller, lighter, solid-state systems that require
less power to operate. In addition, the Company's product configurations and
image analysis software tools increase the Company's ability to provide products
tailored to meet individual customer requirements.
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 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.
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, 1998, the Company did not hold
any short-term investments.
Inventories
- -----------
Inventories are stated at the lower of average cost or market.
27
<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 three
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.
Earnings per share
- ------------------
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods, computed
using the treasury stock method for stock options. In 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings per
Share." The following table sets forth the reconciliation of the denominator
utilized in the computation of basic and diluted earnings (loss) per share (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding......................................... 10,875 5,843 5,361
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method........................................ 335 -- 263
--------------- --------------- ---------------
Diluted shares outstanding............................. 11,210 5,843 5,624
=============== =============== ===============
</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.
28
<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,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash paid for:
Interest..................................... $3,349 $1,508 $ 782
Taxes........................................ $3,592 $1,549 $ 763
</TABLE>
The non-cash portion of the AGEMA acquisition in December 1997 was excluded from
the 1997 statement of cash flows (see Note 16).
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, 1998, 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 $14,000 in excess of
its recorded value at December 31, 1998.
Stock-based compensation
- ------------------------
The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
effective January 1, 1996. SFAS No. 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 No. 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.
29
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------------------
Comprehensive income
- --------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company has adopted this standard as of
January 1, 1998.
Translation adjustment represents the Company's only other comprehensive income
item. Translation adjustment represents unrealized gains/losses resulting from
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.
Recent accounting pronouncements
- --------------------------------
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Investments and Hedging
Activities." The Company plans to adopt SFAS No. 133 in 1999, 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,
-----------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Representative commissions............................ $ 7,416 $ 3,371 $ 1,587
Allowance for doubtful accounts....................... 165 839 1,260
Other selling, general and
Administrative expenses............................ 34,113 22,341 16,152
--------------- ---------------- ----------------
$41,694 $26,551 $18,999
=============== ================ ================
</TABLE>
NOTE 3 - INCOME TAXES
- ---------------------
SFAS No. 109, "Accounting for Income Taxes," 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.
30
<PAGE>
NOTE 3 - INCOME TAXES - (Continued)
- -----------------------------------
The provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current tax expense:
Federal............................................ $ 1,550 $ 377 $ 1,361
State.............................................. -- -- 290
Foreign............................................ 1,931 538 --
---------------- ----------------- ----------------
3,481 915 1,651
---------------- ----------------- ----------------
Deferred tax expense (benefit):
Federal............................................ 4,990 (16,566) 675
State.............................................. 198 (1,817) 144
Foreign............................................ -- 478 --
---------------- ----------------- ----------------
5,188 (17,905) 819
---------------- ----------------- ----------------
(Decrease) increase in valuation allowance............ (2,731) 4,106 (1,219)
---------------- ----------------- ----------------
Total provision (benefit)............................. $ 5,938 $ (12,884) $ 1,251
================ ================= ================
</TABLE>
Deferred tax assets (liabilities) are composed of the following components (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Allowance for doubtful accounts................................... $ 971 $ 759
Warranty reserve.................................................. 377 392
Inventory basis differences....................................... 1,101 2,841
Accrued liabilities............................................... 2,455 1,841
Other............................................................. 11 1,061
------------------ ------------------
Net current deferred tax assets................................... $ 4,915 $ 6,894
================== ==================
Acquired in-process research and development...................... $ 11,846 $ 12,768
Net operating loss carryforwards.................................. 1,406 3,358
Credit carryforwards.............................................. 2,673 1,334
Depreciation...................................................... (254) (196)
Software development costs........................................ (185) (396)
Intangible assets................................................. (1,003) --
Unremitted foreign earnings....................................... (824) --
------------------ ------------------
Gross long-term deferred tax asset................................ 13,659 16,868
Deferred tax asset valuation allowance............................ (4,158) (6,889)
------------------ ------------------
Net long-term deferred tax asset.................................. $ 9,501 $ 9,979
================== ==================
</TABLE>
31
<PAGE>
NOTE 3 - INCOME TAXES - (Continued)
- -----------------------------------
The provision for income taxes differs from the amount of tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal tax rate............................ 34.0% (34.0)% 34.0%
Increase (decrease) in rates resulting from:
State taxes........................................... 2.1 (4.2) 4.5
Foreign sales corporation benefit..................... (1.5) (2.7) (3.2)
Utilization of research and development credits....... (4.5) -- (11.3)
(Decrease) increase in valuation allowance............ (12.3) 9.5 (6.3)
Non-deductible expenses............................... 8.2 0.4 --
Other................................................. 0.8 1.4 2.0
--------------- --------------- ---------------
Effective tax rate.................................... 26.8% (29.6)% 19.7%
=============== =============== ===============
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards which
aggregated $3,795,000 and expire in the years 2005 through 2010. Utilization of
the Company's acquired net operating loss carryforwards from FSI Automation
(formerly known as "Optimas Corporation") is limited to future earnings of FSI
Automation and is further limited to approximately $350,000 per year, as FSI
Automation 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 $2,673,000 as of December 31, 1998, which expire in the
years 2007 through 2013.
U.S. and foreign withholding taxes are provided on the earnings of foreign
subsidiaries. The Company is required to remit earnings of foreign subsidiaries
in order to realize the benefit of the acquired in-process research and
development deferred tax assets. The valuation allowance related to long-term
deferred tax assets was decreased in 1998 due to the effects that foreign
subsidiaries profitability had on management's assessment of the amount of
deferred tax asset that is more likely than not to be realized in the future.
NOTE 4 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are net of an allowance for doubtful accounts of $2,906,000
and $2,483,000 at December 31, 1998 and 1997, respectively.
NOTE 5 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Raw material and subassemblies................................. $28,996 $26,631
Work-in-progress............................................... 7,378 9,995
Finished goods................................................. 17,472 894
----------------- -----------------
53,846 37,520
Less progress payments received from customers................. (860) (2,796)
----------------- -----------------
$52,986 $34,724
================= =================
</TABLE>
32
<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Machinery and equipment........................................ $ 25,828 $20,099
Office equipment and other..................................... 12,833 7,632
----------------- -----------------
38,661 27,731
Less accumulated depreciation.................................. (14,007) (9,308)
----------------- -----------------
$ 24,654 $18,423
================= =================
</TABLE>
Property and equipment includes the cost of equipment held by the Company under
capital lease agreements. Such cost and related accumulated depreciation
aggregated $2,475,000 and $1,978,000, respectively, at December 31, 1998, and
$3,674,000 and $1,939,000 respectively, at December 31, 1997.
NOTE 7 - SOFTWARE DEVELOPMENT COSTS
- -----------------------------------
Software development costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Software development costs..................................... $ 765 $ 2,236
Less accumulated amortization.................................. (277) (1,193)
----------------- -----------------
$ 488 $ 1,043
================= =================
</TABLE>
During 1998, the Company sold the Optimas software product line for $1,500,000.
Related to this sale, the Company wrote off all capitalized software costs and
related accumulated amortization, which aggregated $1,710,000 and $1,225,000,
respectively. The unamortized balance of the capitalized software sold, which
aggregated $485,000, is included in cost of sales as amortization expense for
the year ended 1998.
Amortization of capitalized software costs aggregated $794,000, $459,000 and
$300,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 8 - NOTES PAYABLE
- ----------------------
The Company has a $42,000,000 line of credit bearing interest at LIBOR plus
1.75% (7.0% at December 31, 1998), which is secured by all assets of the Company
and expires on June 1, 2000. Additionally, the Company, through one of its
subsidiaries, has a 40,000,000 Swedish Kroner (approximately $4,932,000) line of
credit at 4.7% at December 31, 1998. At December 31, 1998 and 1997, the Company
had $37,360,000 and $26,558,000, respectively, outstanding against these lines.
Standby letters of credit were outstanding at December 31, 1998, totaling
$662,000. In conjunction with the completion of the Inframetrics transaction on
March 30, 1999 (see Note 17), the Company's line of credit was increased to
$70,000,000. Approximately $24,000,000 million of the line of credit was
utilized to payoff existing Inframetrics debt at the time of merger.
33
<PAGE>
NOTE 9 - LONG-TERM DEBT
- -----------------------
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Note payable - patent.......................................... $ 109 $ 206
Note payable to bank; 7.75% interest rate. Paid in full in
1998.......................................................... -- 4,609
Capital leases................................................. 1,506 2,137
----------------- -----------------
1,615 6,952
Less current portion........................................... (606) (5,273)
----------------- -----------------
$1,009 $ 1,679
================= =================
</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 $119,000, $116,000 and $115,000 were made in the years ended
December 31, 1998, 1997 and 1996, 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
- -----------------------
The Company 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 plans for substantially all employees outside the United States follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ --------------------
Change in benefit obligation:
<S> <C> <C>
Projected benefit obligation at beginning of the period....... $3,421
Service costs................................................. --
Interest costs................................................ 278
Actuarial loss................................................ 241
Benefits paid................................................. (57)
Foreign currency exchange changes............................. (288)
------------------
Projected benefit obligation at December 31................... 3,595
------------------
Fair value of plan assets at January 1.......................... -- $ --
Funded status................................................... 3,595 3,421
Unrecognized net (loss) gain.................................... (73) 90
Unrecognized transition obligation.............................. 438 458
------------------ --------------------
Pension liability recognized.................................... $3,960 $3,969
================== ====================
</TABLE>
Changes in benefit obligation amounts are not reflected for 1997 since the
pension plan for employees outside the United States was acquired with AGEMA in
December 1997, (see Note 16).
Assumptions used for the defined benefit pension plans were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Weighted average discount rate.................................. 5.00% 6.00%
Rates of increase in compensation levels........................ 2.50% 3.00%
Inflation rate.................................................. 1.50% 2.00%
</TABLE>
34
<PAGE>
NOTE 10 - PENSION PLANS - (Continued)
- -------------------------------------
Components of net periodic benefit cost are as follows (in thousands):
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Interest costs.......................................... $ 278
Amortization of transition costs........................ (35)
Net periodic pension costs -----------------
$ 243
=================
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases its primary facilities under various operating leases which
expire in 1999 through 2004. Total rent expense for the years ended December 31,
1998, 1997 and 1996 amounted to $3,190,000, $1,940,000 and $1,471,000,
respectively.
Minimum rental payments required under all non-cancelable leases for equipment
and facilities at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------------- ---------------
<S> <C> <C>
1999......................................... $ 610 $ 2,580
2000......................................... 499 2,152
2001......................................... 427 1,016
2002......................................... 198 165
2003......................................... 39 129
Thereafter................................... -- 12
---------------- ---------------
Total minimum lease payments.................... 1,773 $ 6,054
===============
Less amount representing interest............... (267)
----------------
Present value of lease payments................. $ 1,506
================
</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 $678,000, $511,000 and $533,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 12 - CAPITAL STOCK
- -----------------------
In 1998, the Company increased the number of shares of common stock reserved for
future issuance pursuant to its incentive stock plans to 4,269,400. 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 1998 and 1997 aggregated 133,500 and
115,000 shares, respectively. Of the shares granted, 53,630 and 57,500 shares
were earned in 1998 and 1997, respectively, based upon achievement of specified
performance goals. Shares granted which are not issued lapse and cease to be
subject to the award. Compensation expense related to these awards in the
amounts of $1,050,000, $1,747,000 and $398,000 was recorded in 1998, 1997 and
1996, respectively, and is included in selling and other operating costs. At
December 31, 1998, there were 81,500 shares available for future awards.
35
<PAGE>
NOTE 12 - CAPITAL STOCK- (Continued)
- ------------------------------------
On July 6, 1998, the Company completed a secondary public offering of 2,399,130
shares of common stock, including 1,638,630 shares of common stock issued and
sold by the Company. Additionally, on July 24, 1998, the underwriters exercised
the over-allotment option related to the secondary offering and the Company
issued and sold an additional 359,870 shares of common stock. The net proceeds
of $32,049,000 were utilized to repay in full a payable to a related party,
which aggregated approximately $4,985,000, and to reduce amounts outstanding
under the Company's lines of credit.
NOTE 13 - STOCK OPTIONS
- -----------------------
The Company has elected to account for its stock-based compensation under APB
25; however, as required by SFAS No. 123, the Company has computed for pro forma
disclosure purposes the value of options granted during 1998, 1997 and 1996
using the Black-Scholes option pricing model. The weighted average assumptions
used for stock option grants for 1998, 1997 and 1996 were a risk-free interest
rate of 5.7%, 6.0% and 5.2%, respectively; an expected dividend yield of 0%; an
expected life of three years; and an expected volatility of 48.4%, 40.2% and
22.7%, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1998, 1997 and 1996, the total value of the options
granted was computed to be $2,440,000, $1,879,000 and $819,000, respectively,
which would be amortized on a straight-line basis over the vesting period of the
options.
If the Company had accounted for these plans in accordance with SFAS No. 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,
----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net earnings (loss)- as reported.................... $16,254 $(30,588) $5,092
Net earnings (loss) - pro forma..................... $15,092 $(31,353) $4,593
Earnings (loss) per share:
Basic - as reported............................ $ 1.49 $ (5.23) $ 0.95
Diluted - as reported.......................... $ 1.45 $ (5.23) $ 0.91
Earnings (loss) per share:
Basic - pro forma.............................. $ 1.39 $ (5.37) $ 0.86
Diluted - pro forma............................ $ 1.35 $ (5.37) $ 0.82
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosure for
1998, 1997 and 1996 are not likely to be representative of the effects on
reported net earnings and earnings per share for future years, since options
vest over several years and additional awards may be made.
36
<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, 1995........................ 828,571 $ 9.41
Granted............................................. 331,000 11.07
Exercised........................................... (70,788) 8.41
Terminated.......................................... (27,757) 11.56
---------------------- ----------------------
Balance at December 31, 1996........................ 1,061,026 9.94
Granted............................................. 361,500 15.38
Exercised........................................... (206,975) 7.97
Terminated.......................................... (92,378) 11.41
---------------------- ----------------------
Balance at December 31, 1997........................ 1,123,173 11.96
Granted............................................. 368,000 17.37
Exercised........................................... (159,764) 10.46
Terminated.......................................... (104,710) 13.86
---------------------- ----------------------
Balance at December 31, 1998........................ 1,226,699 $13.61
====================== ======================
</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
Weighted Average
Number of Average Remaining
Exercise Price Range Shares Exercise Price Contractual Life
- ---------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
$ 1.63 - $ 5.23 125,249 $ 4.98 2.5
$ 9.13 - $13.69 407,449 11.46 6.2
$13.75 - $20.50 651,501 16.14 8.5
$20.63 - $21.38 42,500 20.93 9.4
------------------- ------------------- -------------------
1,226,699 $13.61 7.1
=================== =================== ===================
</TABLE>
Options exercisable at December 31, 1998, totaled 680,127 shares at a weighted
average exercise price of $11.67. Options available for grant at December 31,
1998 totaled 2,122,687 shares.
NOTE 14 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The Company and Hughes Aircraft Company were related parties resulting from
Hughes' stock interest in the Company. During 1998, Hughes Aircraft disposed of
its holdings and accordingly was no longer a related party at December 31, 1998.
The Company purchases inventory parts from Hughes and its subsidiaries. During
the years ended December 31, 1997 and 1996, the Company purchased parts
aggregating $2,243,000 and $1,670,000, respectively, from Hughes and its
subsidiaries. As of December 31, 1997, the Company owed Hughes $1,243,000. Sales
of the Company's products to Hughes and its affiliates amounted to $34,000 and
$103,000 for the years ended December 31, 1997 and 1996, respectively.
As a result of the AGEMA acquisition (see Note 16), Spectra-Physics AB and
subsidiaries ("Spectra") are related parties as a result of Spectra's stock
interest in the Company. At December 31, 1998 and 1997, the Company owed Spectra
$0 and $4,985,000, respectively.
37
<PAGE>
NOTE 15 - 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 segments are the same as those described in Note
1. 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>
Year ended December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
Revenue Gross Profit Revenue Gross Profit Revenue Gross Profit
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Commercial........... $ 93,172 $55,891 $43,288 $ 5,306 $23,059 $12,071
Government........... 60,760 32,986 48,483 27,958 42,958 23,531
--------------- --------------- --------------- --------------- --------------- ---------------
Total................ $153,932 $88,877 $91,771 $33,264 $66,017 $35,602
=============== =============== =============== =============== =============== ===============
</TABLE>
Information related to revenue by significant geographical location is as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States......................................... $ 68,772 $48,462 $44,865
Europe................................................ 34,855 24,008 14,883
Other foreign......................................... 50,305 19,301 6,269
---------------- ---------------- ----------------
$153,932 $91,771 $66,017
================ ================ ================
Major customers:
U.S. government..................................... $ 27,221 $18,983 $26,469
================ ================ ================
</TABLE>
All longed-lived assets are generally located in the United States with the
exception of property and equipment. At December 31, property and equipment is
located in the following geographic areas (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
United States......................................... $16,692 $ 8,702
Europe................................................ 7,962 9,721
----------------- -----------------
$24,654 $18,423
================= =================
</TABLE>
38
<PAGE>
NOTE 16 - AGEMA ACQUISITION
- ---------------------------
Effective December 1, 1997, the Company acquired all of the outstanding shares
of AGEMA Infrared Systems AB, a corporation organized under the laws of Sweden,
AGEMA Infrared Systems Limited, a corporation organized under the laws of the
United Kingdom, AGEMA Infrared Systems Ltd., a corporation organized under the
laws of Canada and AGEMA Infrared Systems, Inc., a Delaware corporation
("AGEMA") in exchange for 4,162,000 shares of the Company's common stock with a
value of $54,106,000. An additional $1,559,000 of direct acquisition costs were
also incurred and included in the purchase price. AGEMA designs, manufactures
and markets handheld infrared imaging systems for the commercial market. The
results of AGEMA's operations have been combined with those of the Company since
the date of acquisition.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, 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>
Included in current liabilities acquired was $2,000,000 of estimated costs to
shut down certain identified AGEMA facilities. Such estimated costs included the
cost to involuntarily terminate or relocate employees, sell or relocate certain
assets, terminate operating leases and otherwise wind up operations
(collectively the "shutdown") at certain facilities formerly operated by AGEMA.
The shutdown was substantially completed prior to December 1, 1998. Actual costs
to accomplish the shutdown exceeded the costs originally estimated by
approximately $2,880,000. Excess shutdown costs were recorded as an adjustment
to the purchase price of AGEMA and resulted in an increase in the excess of
purchase price over net assets acquired. Total shutdown costs incurred are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Salaries and personnel related................................ $2,466
Plant shutdown costs.......................................... 1,263
Relocation costs.............................................. 1,151
-----------------
$4,880
=================
</TABLE>
Intangible assets acquired and the excess of purchase price over net assets
acquired are being amortized on a straight-line basis over 15 years. Related
amortization expense aggregated $1,179,000 and $79,000 for 1998 and 1997,
respectively, and is included in selling and other operating costs.
39
<PAGE>
NOTE 16 - AGEMA ACQUISITION - (Continued)
- -----------------------------------------
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 expense, and
$16,099,000 of inventories due to the creation of duplicative product lines,
which is included in cost of goods sold.
NOTE 17 - SUBSEQUENT EVENTS
- ---------------------------
On March 30, 1999, the Company completed the acquisition of Inframetrics,
Inc., a privately held infrared imaging company headquartered in Billerica,
Massachusetts by issuing approximately 2.3 million shares of the Company's stock
for all the outstanding stock of Inframetrics, Inc. Additionally, the Company
assumed and paid-off approximately $24,000,000 of Inframetrics, Inc. short- and
long-term debt. The transaction is expected to be accounted for as a pooling of
interests.
40
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
FLIR Systems, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------------- -------------- -------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1998
- ----
Revenue:
Commercial.......................... $17,785 $21,758 $25,428 $ 28,201 $ 93,172
Government.......................... 9,914 13,314 15,833 21,699 60,760
-------------- -------------- -------------- -------------- --------------
Total revenue..................... 27,699 35,072 41,261 49,900 153,932
Gross profit.......................... 15,199 20,784 22,430 30,464 88,877
Net earnings.......................... 290 2,755 5,227 7,982 16,254
Net earnings per share:
Basic.............................. $ 0.03 $ 0.28 $ 0.44 $ 0.67 $ 1.49 *
Diluted............................ $ 0.03 $ 0.27 $ 0.44 $ 0.65 $ 1.45 *
1997
- ----
Revenue:
Commercial.......................... $ 7,418 $ 8,963 $10,969 $ 15,938 $ 43,288
Government.......................... 8,403 10,976 12,946 16,158 48,483
-------------- -------------- -------------- -------------- --------------
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 earnings (loss)................... 91 1,450 2,437 (34,566) (30,588)
Net earnings (loss) per share:
Basic.............................. $ 0.02 $ 0.26 $ 0.44 $ (4.96) $ (5.23) *
Diluted............................ $ 0.02 $ 0.25 $ 0.41 $ (4.96) $ (5.23) *
</TABLE>
* - The sum of the quarterly earnings (loss) per share does not the equal annual
loss per share as a result of the computation of quarterly versus annual
average shares outstanding.
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.
41
<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(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its 1999 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 1999 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 1999 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
Hughes Aircraft Company were related parties resulting from Hughes's stock
interest in the Company. During 1998, Hughes Aircraft disposed on its holdings
and accordingly was no longer a related party at December 31, 1998. The Company
purchases inventory parts from Hughes and its subsidiaries. During the years
ended December 31, 1997 and 1996, the Company purchased parts aggregating
$2,243,000 and $1,670,000, 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 and $103,000 for the years ended December 31, 1997 and 1996,
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, 1998 and 1997, the Company owed Spectra $0 and
$4,985,000, respectively.
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
42
<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
------ -----------
<S> <C>
3.1 Second Restated Articles of Incorporation of the 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 the 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 the 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 Lease Dated February 11, 1985, as amended, by and among the 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))
10.6 Business Loan Agreement with Bank of America NT & SA
10.7 Amendment No. 1 to Business Loan Agreement with Bank of America NT & SA
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
21.0 Subsidiaries of FLIR Systems, Inc.
23.0 Consent of PricewaterhouseCoopers LLP
27.0 Financial Data Schedule
</TABLE>
(B) During the quarter ended December 31, 1998, the Company did not file any
Form 8-K.
(C) See (a)(3) above.
(D) See (a)(2) above.
43
<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 19th day of April
1999.
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 April 19, 1999.
Signature Title
--------- -----
/s/ ROBERT P. DALTRY Chairman of the Board of Directors
- ---------------------------------------
Robert P. Daltry
Director, President and Chief
Executive Officer (Principal
/s/ J. KENNETH STRINGER III Executive 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
44
<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 Expenses Described Recoveries Of the Year
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 2,483 $ 165 $ 0 $ 258 $ 2,906
============== ============== ============== ============== ==============
Allowance for Deferred Tax Assets $ 6,889 $ (2,731) $ 0 $ 0 $ 4,158
============== ============== ============== ============== ==============
Year ended December 31, 1997
Allowance for Doubtful Accounts $ 1,671 $ 839 $ 0 $ (27) $ 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
============== ============== ============== ============== ==============
</TABLE>
45
<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 April 15, 1999 in 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
April 15, 1999
46
<PAGE>
EXHIBIT 10.6
BANK OF AMERICA NT & SA BUSINESS LOAN AGREEMENT
This Agreement dated as of September 1/st/, 1998 is between Bank of America NT &
SA (the "Bank") and FLIR Systems, Inc (the "Borrower").
1. LINE OF CREDT 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
"Commitment") is Thirty Five Million Dollars ($35,000,000) subject to the
following reductions:
(i) The Commitment will reduce by the proceeds obtained from any
lease to finance a product demonstration line of equipment as allowed
elsewhere in this Agreement
(b) This is a revolving line of credit with a within line multi-currency
facility and a within line facility for standby letters 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 plus the outstanding amounts of any letters of credit, including
amounts drawn on letters of credit and not yet reimbursed, to exceed the
Commitment.
1.2 AVAILABILITY PERIOD.
The line of credit is available between the date of this Agreement and 3une 1,
2000 (the "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 minus 0.25 percentage points.
(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 loam. 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 September 1, 1998, 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 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 late than the Expiration Date.
47
<PAGE>
(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
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 One Million
Dollars ($1,000,000).
(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 recoverable by the Bank by replacing the
amount prepaid on deposit in the certificate of deposit in 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 1.50 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 One Million
Dollars ($1,000,000) 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.)
48
<PAGE>
Offshore Rate = Grand Cayman Rate
----------------
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
banns 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 Eurocurrrency
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, 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 descried 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 1.50 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
49
<PAGE>
(b) Each LIBOR Rate portion will be an amount not less than One Million
Dollars ($1,000,000).
(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
-----------
(100 - 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 banns in the London inter-
bank market at approximately 11:00 a- m. London time two (2) banning
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 banns 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.
50
<PAGE>
1.9 MULTI-CURRENCY FACILITY
A. FACILITY AMOUNT
During the availability period, the Bank agrees to provide to the Borrower
advances under the line of credit in an Offshore Currency, provided that, after
giving effect to any requested Offshore Currency Advance, the aggregate
principal Dollar Equivalent amount of all advances in Offshore Currencies shall
not exceed Ten Million Dollars (10,000,000)..
Any advance denominated in an Offshore Currency as of the Expiration Date shall,
as of such date, be redenominated and converted into Dollars at the Dollar
Equivalent amount.
If on any Computation Date, the Bank determines that the aggregate Dollar
Equivalent principal amount of advances in Offshore Currencies exceeds Ten
Million Dollars (10,000,000), or the aggregate Dollar Equivalent principal
amount of all advances under the line of credit exceeds the Commitment, due to a
change in applicable rates of exchange between Dollars and Offshore Currencies,
then Bank shall give notice to Borrower of such determination, and Borrower
agrees thereupon to make prepayments of advances such that, after giving effect
to such prepayment that the aggregate Dollar Equivalent amount of all advances
is equal or less than the Commitment, and the aggregate Dollar Equivalent amount
of advances in Offshore Currencies is equal or less than Ten Million Dollars
($10,000,000)
For purposes of determining utilization in order to calculate the unused
commitment fee as described in Paragraph 2.1(b), the amount of any outstanding
Offshore Currency Advance on any date shall be determined based upon the Dollar
Equivalent amount as of the most recent Computation Date with respect to such
Offshore Currency Advance.
B. MANNER OF BORROWING
Borrower shall give the Bank an irrevocable Notice of Borrowing in an Offshore
Currency specifying the date, the amount and the Applicable Currency of the
advance in an Offshore Currency. The Notice of Borrowing is to be provided to
the Bank by the Borrower one (1) day in advance of the Borrowing Date, except in
the case of a LIBOR advance, where the Notice of Borrowing is to be provided
four (4) days in advance of the Borrowing Date.
In the absence of a Notice of Borrowing request for the extension of an existing
Offshore Currency Advance's expiration date under the time frames specified
above, the Bank will deem the Borrower has requested a 30 day extension under
similar interest rate options, provided that such an extension complies with all
other provisions of the Agreement
The Bank will be under no obligation to process an Offshore Currency Advance if
it notifies the Borrower four (4) days in advance of the Borrowing Date that it
is unable to provide advances in the requested Offshore Currency.
C. REPAYMENT TERMS FOR OFFSHORE CURRENCY ADVANCE
All payments and prepayments of principal and interest on any other amounts
relating to any Offshore Currency Advance snail be made in the Offshore Currency
in which such advance is denominated or payable. All such payments shall be made
in Same Day Funds to Bank at its designated office, no later than such time on
the dates specified herein as may be determined by Bank to be necessary for such
payment to be credited on such date in accordance with normal banking procedures
in the place of payment If such payment is received after the time designated by
the Bank, then it will be deemed received on the next Banning Day.
"Offshore Currency" and "Offshore Currencies" means at any time English Pounds
Sterling, or Swedish Kroner.
51
<PAGE>
"Offshore Currency Advance" means any advance denominated in an Offshore
Currency.
"Dollars", "dollars", and "S" each mean lawful money of the United States of
America.
"Spot Rate" means for a currency tile rate quoted by the Bank as the spot rate
for the purchase by the Bank of such currency with another currency through the
Bank's FX trading office at approximately 8:00 a.m. Pacific time) on the date
which the foreign exchange computation is made.
"Computation Date" refers to dates in which Bank will determine the Dollar
Equivalent amount with respect to (1) any Offshore Currency Advance; (2) the
aggregate outstanding advances in Offshore Currencies as of the last Banking Day
of each month; and (3) or any redenomination date to Dollars as required with
regard to this multi-currency facility.
"Dollar Equivalent" means, at any time, as to any amount denominated in Dollars,
tile amount thereof at such time, and as to any amount denominated in Offshore
Currency, the equivalent amount in Dollars as determined by the Bank at such
time on tile basis of the Spot Rate for tile purchase of Dollars with such
Offshore Currency on the most recent Computation Date.
"Borrowing Date" means the Borrower's requested day to advance funds in a
designated Offshore Currency under this multi-currency facility.
"Applicable Currency" means, as to any particular payment or advance, Dollars or
tile Offshore Currency in which it is denominated or is payable.
"Notice of Borrowing" means a request for an advance from Borrower delivered to
Bank in substantially tile the form of Exhibit A to this Agreement, which will
specify the date, the amount, and the Applicable Currency of the advance in an
Offshore Currency. The Notice of Borrowing is to be provided to the Bank by the
Borrower one (1) day in advance of Borrowing Date, except in the case of a LIBOR
advance, where Notice of Borrowing is to be provided four (4) days in advance of
the Borrowing Date.
"Same Day Funds" means with respect to disbursements and payments in Dollars,
immediately available funds, and with respect to disbursements and payments in
an Offshore Currency, same day or other funds as may be determined by Bank to be
customary in the place of disbursement or payment for tile settlement of
international banking transactions in the relevant Offshore Currency.
1.10 LETTERS OF CREDIT
During the availability period, the Bank agrees to provide to the Borrower
standby letters of credit with a maximum maturity of 365 days but not to
extend more than 365 days beyond the Expiration Date.
The amount of outstanding standby letters of credit, including amounts
drawn on standby letters of credit and not yet reimbursed, may not exceed
at any one time Three Million Dollars (3,000,000).
The Borrower agrees:
(a) so long as credit remains available from Bank under this line of
credit, any sum drawn under standby letters of credit may, at the
Option of the Bank; be repaid by an advance from Bank under the line
of credit
(b) if there is a default under this Agreement, to immediately prepay
and make Bank whole for any outstanding standby letters of credit.
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(c) the issuance of any standby letters of credit and any amendment to
standby letters of credit is subject to Bank's written approval and
must be in form and content satisfactory to Bank and in favor of a
beneficiary acceptable to Bank.
(d) to sign Bank's form Application and Agreement for standby letter
of credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing standby letters
of credit for the Borrower.
2. FEES AND EXPENSES
2.1 FEES
(a) LOAN FEE. The Borrower agrees to pay a Thirty Five Thousand Dollar
($35,000) fee due upon execution of this Agreement.
(b) UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any difference
between the Commitment and the amount of credit it actually uses,
determined by the weighted average loan balance maintained during the
specified period. The fee will be calculated at 0.15% per year and paid
quarterly in arrears until the expiration of the availability period.
2.2 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, tide report fees, documentation fees.
(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.
3. COLLATERAL
3.1 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.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 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.
4.2 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;
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(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.
4.3 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.
4.4 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 banning day, the Designated Account will
be debited on the next banning 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.
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4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banning 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 or Offshore Currency. 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.
4.6 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.
4.7 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
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
4.8 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 and
the actual number of days elapsed. This results in more interest or a
higher fee than if a 365- day year is used.
4.9 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 minus 0.25 percentage
points. This may result in compounding of interest.
4.10 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.
5. 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
5.1 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.
5.2 SECURITY AGREEMENTS. Signed original security agreements, financing
statements and fixture filings (together with collateral in which the Bank
requires a promissory security interest), which the Bank requires.
5.3 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.
5.4 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
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5.5 GUARANTIES. Guaranties signed by FLIR Systems Ltd., FSI Automation, Inc
FLIR Systems Limited, and FLIR Systems International Ltd., each in the amount
of Forty Million Dollars ($40,000,000)
Guaranties signed by FLIR Systems AB, FLIR Systems GmbH, FLIR
Systems S.A.R.L, and FLIR Systems S.R.L, each in the amount of Ten
Million Dollars ($10,000,000).
5.6 OTHER ITEMS. Any other items that the Bank reasonably requires.
6. 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:
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state or country where organized.
6.2 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.
6.3 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.
6.4 GOOD STANDING. In each state or country in which the Borrower or Guarantor
does business, it is properly licensed, in existence and in good standing, and,
where required, in compliance with fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower or any guarantor is bound.
6.6 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, 1998, 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.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower or any guarantor 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.
6.8 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
interest fee of any title defects or any liens or interests of others.
6.9 PERMITS FRANCHISES. The Borrower or any guarantor 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.
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6.10 OTHER OBLIGATIONS. The Borrower or any guarantor is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation
6.11 INCOME TAX RETURNS. The Borrower or any guarantor 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.
6.12 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.
6.13 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
BRISA 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.
(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.
6.14 YEAR 2000 COMPLIANCE. On the basis of a comprehensive review and
assessment of Borrower's systems and equipment and inquiry made of Borrower's
material suppliers, vendors and customers, Borrower reasonably believes that the
year 2000 problem" (that is, the inability of computers, as well as embedded
microchips in non-computing devices, to perform properly date-sensitive
functions with respect to certain dates prior to and after December 31, 1999),
including costs of remediation, will not result in a material adverse change in
the operations, business, properties, condition (financial or otherwise) or
prospects of Borrower. Borrower has developed feasible contingency plans
adequately to ensure uninterrupted and unimpaired business operation in the
event of failure of its own or a third party's systems or equipment due to the
Year 2000 problem, including those of vendors, customers, and suppliers, as well
as a general failure of or interruption in its communications and delivery
infrastructure.
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7. COVENANTS
The Borrower agrees, so long as credit is available under this
Agreement and until the Bank is repaid in full:
7.1 USE OF PROCEEDS.
(a) To use the proceeds of the credit only for working capital and
refinance of existing Bank of America Three Million Nine Hundred Forty
One Thousand Dollar ($3,941,000) non-revolving term facility, and
refinance of existing Five Million Dollar ($5,000,000) revolving
facility at Svenska Handelsbanken in Sweden.
7.2 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 consolidating and 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 prepare The statements
shall be prepared on a consolidating and consolidated basis.
(d) Within 45 days of the period's end of the first through third accounting
periods, the Borrower's quarterly compliance certificate
7.3 MINIMUM FIXED CHARGE COVERAGE To maintain on a rolling 4 quarter basis, a
Minimum Fixed Charge Coverage Ratio of at least 1.75:1.O.
Minimum Fixed Charge Coverage is defined as the sum of EBIT
(Earnings Before Interest and Taxes or any extraordinary charges
related to the merger with AGEMA Infrared Systems) plus Rents (or
Lease Payments) divided by the sum of Interest plus Rents (or Lease
Payments).
This ratio will be calculated at the end of each fiscal quarter,
using the results of that quarter and each of the 3 immediately
preceding quarters on a rolling 4 quarter basis.
7.4 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%.
"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.
7.5 MINIMUM NET WORTH. To maintain quarterly on a consolidated basis, a
minimum net worth equal to Seventy Million Dollars ($70,000,000) as of fiscal
year end December 31, 1997, plus 50% of future net income without reductions for
net losses, plus 90% of increases in Net Worth from other stock issuances
subsequent to December 31, 1997.
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7.6 TRANSFER OF ASSETS. Borrower will not transfer any assets, except for
transfer payments for inventory at cost, subsequent to the date of this
Agreement, to any subsidiary of Borrower, that has not provided a guarantee of
Borrower's obligations to the Bank or in excess of each subsidiary's guaranty,
as required in Paragraph 5.5 Any transfers restricted by this paragraph are to
be disclosed in Borrower's compliance certificate as required in Paragraph
7.2(a) and 7.2(d).
7.7 OTHER DEBTS. The Borrower or any guarantor will not 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 7.8(d) or a sale/leaseback of a product demonstration line
of equipment, where the proceeds of the lease are not to exceed Two
Million Dollars ($2,000,000).
7.8 OTHER LIENS. The Borrower, or any guarantor, will not create, assume, or
allow any security interest or lieu (including judicial liens) on property the
Borrower, or any guarantor, 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 the 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, or a sale/leaseback transaction
as described in 7.7 (d), if the aggregate principal amount of debts secured
by such liens does not exceed 5% of Consolidated Net Worth at any one time.
7.9 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars (1,000,000) against the Borrower, or
any guarantor.
(b) any substantial dispute between the Borrower, or any guarantor, and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's, or any guarantor's,
financial condition or operations.
(e) any change in the Borrower's, or any guarantor's, name, address or legal
structure.
7.10 BOOKS AND RECORDS. To maintain adequate books and records.
7.11 Audits. To allow the Bank and its agents to inspect the Borrower's, or any
guarantor's, properties and examine, audit and make copies of books and records
at any reasonable time. if any of the Borrower's, or any guarantor's,
properties, books or records are in the possession of a third party, the
Borrower, or any guarantor, authorizes that third party to permit the Bank or
its agents to have access to perform inspections or audits and to respond to the
Bark's requests for information concerning such properties, books and records.
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7.12 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 or any guarantor's business.
7.13 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and the Borrower or any guarantor now has.
7.14 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's, or any guarantor's, properties in good working
condition.
7.15 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.
7.16 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
7.17 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.
7.18 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's, or any guarantor's, present business.
(b) liquidate or dissolve the Borrower's, or any guarantor'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, or
any guarantor's, business or 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, except as allowed elsewhere in this
Agreement
7.19 NEGATIVE PLEDGE. Not to sell, refinance or allow liens on 'the Borrower's,
or any guarantor's, unencumbered assets.
7.20 MERGER. Borrower to remain successor and/or parent to any merger.
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7.21 ERISA PLANS. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(1,) of ERISA
for which the PBGC requires 30 day notice.
(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(1,) of ERISA
(d) The commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA
8 HAZARDOUS WASTE INDEMNIFICATION
The Borrower or any guarantor will indemnity 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, or any guarantor's, property or operations
or property leased to the Borrower or any guarantor. The indemnity includes
but is not limited to attorneys' fees (including the reasonable estimate of
the allocated cost of in-house counsel and stall). 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.
9. 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 default with
respect to the Borrower, the entire debt outstanding under this Agreement will
automatically become due immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
9.2 NON-COMPLIANCE. The Borrower, or any guarantor, 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 or any guarantor has with the Bank or any
affiliate of the Bank.
9.3 CROSS-DEFAULT.. Any default occurs under any agreement in connection with
any credit the Borrower or any guarantor has Obtained from anyone else or which
the Borrower, or any guarantor, has guaranteed.
9.4 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.
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9.5 FALSE INFORMATION. The Borrower, or any guarantor, has given the Bank false
or misleading information or representations.
9.6 BANKRUPTCY. The Borrower, or any guarantor, files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower or any guarantor, or the
Borrower or any guarantor makes a general assignment for the benefit of
creditors.
9.7 RECEIVERS. A receiver or similar official is appointed for the Borrower's,
or any guarantor's, business, or the business is terminated.
9.8 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower or any guarantor in an aggregate amount of One
Million Dollars ($1,000,000) or more in excess of any insurance coverage.
9.9 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower or any guarantor; or the Borrower, or any guarantor, 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.
9.10 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's financial condition or
ability to repay.
9.11 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.
9.12 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's, or any guarantor's, financial condition, properties or prospects, or
ability to repay the loan.
9.13 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.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 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.
10.2 OREGON LAW. This Agreement is governed by Oregon law.
10.3 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.
62
<PAGE>
10.4 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);
(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.
63
<PAGE>
10.5 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,
10.6 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
attorneys1 fees, including any allocated costs of in-house counsel.
10.7 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.
10.8 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.
10.9 EXCHANGE OF INFORMATION. The Borrower agrees that the Bank may exchange
financial information about the Borrower with BankAmerica Corporation affiliates
and other related entities.
10.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mall, 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.
10.11 HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement
10.12 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.
10.13 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 SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING EXPRESS
- ------------------------------------------ --------------------------
CONSIDERATION AND BE SIGNED BY THAT BANK TO BE ENFORCEABLE.
- -----------------------------------------------------------
64
<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.
/s/ Robert Countryman /s/ J. Mark Samper
--------------------- -----------------------------
By: ROBERT COUNTRYMAN 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. 72/nd/
P.O. Box 6400 Portland, OR 97224
Portland, OR 97228
65
<PAGE>
EXHIBIT 10.7
BANK OF AMERICA AMENDMENT TO DOCUMENTS
AMENDMENT NO.1 TO BUSINESS LOAN
AGREEMENT
This Amendment No.1 (the "Amendment") dated as of October 6th 1998, 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 September 1, 1998, (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
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 Subparagraph 1.1(a) of the Agreement is amended in its entirety
to read as follows:
(a) During the availability period described below, the Bank will
provide a line of credit to the Borrower. From the date of this
Amendment to January 15, 1999, the amount of the line of credit
is Forty Two Million Dollars ($42,000,000) (the "Commitment"). On
January 16, 1999, and thereafter, the Commitment will reduce to
Thirty Five Million Dollars ($35,000,000). The Commitment is
subject to the following reductions:
(i) The Commitment will reduce by the proceeds obtained from any
lease to finance a product demonstration line of equipment as
allowed elsewhere in the Agreement.
2.2 Paragraph 5.5 of the Agreement is amended in its entirety to read
as follows
5.5 GUARANTIES. Guaranties signed by FLIR Systems Ltd., FSI Automation,
Inc., FLIR Systems Limited, and FLIR Systems International Ltd., each in
the amount of Forty Two Million Dollars ($42,000,000)
Guaranties signed by FLIR Systems AB, FLIR Systems GmbH, FLIR Systems
S.AR.L, and FLIR Systems S.R.L., each in the amount of Ten Million
Dollars ($10,000,000).
3. CONDITIONS. This Amendment will be effective when the Bank receives
----------
the following items, in form and content acceptable to the Bank:
3.1 LOAN FEE. The Borrower agrees to pay a Two Thousand Dollar ($2,000)
fee due upon execution of the 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.
<PAGE>
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA FLIR STEMS, INC
/s/ Robert Countryman /s/ J. Mark Samper
- -------------------------------------------------------------------------------
By: Robert Countryman By: J. Mark Samper
- -------------------------------------------------------------------------------
Title: Vice President Title: Vice President - Finance 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 April 15, 1999 in this Form 10-K. We also consent to
the incorporation by reference of our report on the Financial Statement Schedule
in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
April 15, 1999
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<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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0
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