<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q/A
________ AMENDMENT NO. 1__________
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to _________________
Commission file number 0-21918
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
Oregon 93-0708501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16505 S.W. 72nd Avenue, Portland, Oregon 97224
(Address of principal executive offices) (Zip Code)
(503) 684-3731
(Registrant's telephone number, including area code)
__________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
-----
At June 30, 1999, there were 14,256,996 shares of the Registrant's common stock,
$0.01, par value, outstanding.
<PAGE>
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, as filed by the Registrant on
August 16, 1999, and is being filed to reflect the restatement of the
Registrant's condensed consolidated financial statements (the "Restatement.").
The Restatement reflects corrections of accounting for certain costs and
allowances that were either not accrued or not recorded correctly during the
appropriate periods and modification of the Registrant's historical revenue
recognition policy for certain transactions. A discussion of the Restatement
and a summary of the effects of the Restatement are presented in Note 2 to the
Condensed Consolidated Financial Statements.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Six Months Ended June 30, 1999 and 1998................. 3
Consolidated Balance Sheet -- June 30, 1999 and
December 31, 1998........................................... 4
Consolidated Statement of Cash Flows -- Six Months
Ended June 30, 1999 and 1998................................ 5
Notes to the Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities....................................... 18
Item 4. Submission of Matters to a Vote of Shareholders............. 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures.................................................. 20
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Commercial................................ $27,245 $33,604 $ 55,231 $61,647
Government................................ 19,071 15,793 29,906 27,854
--------- --------- ---------- ----------
Total revenue......................... 46,316 49,397 85,137 89,501
Cost of goods sold............................ 21,571 22,199 60,398 41,801
Research and development...................... 6,836 7,025 13,813 13,518
Selling and other operating costs............. 14,861 14,516 29,918 27,487
Combination costs............................. 974 -- 4,628 --
--------- --------- ---------- ----------
44,242 43,740 108,757 82,806
Earnings (loss) from operations............ 2,074 5,657 (23,620) 6,695
Interest income............................... -- 102 18 465
Interest expense and other.................... (777) (1,198) (2,003) (2,673)
--------- --------- ---------- ----------
Earnings (loss) before income taxes........ 1,297 4,561 (25,605) 4,487
Provision for income taxes.................... 367 1,128 367 1,249
--------- --------- ---------- ----------
Net earnings (loss)........................... $ 930 $ 3,433 $(25,972) $ 3,238
========= ========= ========== ==========
Net earnings (loss) per share
Basic.................................... $ 0.07 $ 0.29 $ (1.83) $ 0.27
========= ========= ========== ==========
Diluted.................................. $ 0.06 $ 0.27 $ (1.83) $ 0.26
========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
----------- ------------
(Unaudited) (Restated)
(Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 5,436 $ 4,793
Accounts receivable, net........................................... 60,181 84,442
Inventories........................................................ 71,972 71,416
Prepaid expenses................................................... 10,247 6,061
Deferred income taxes.............................................. 6,776 6,776
----------- ------------
Total current assets........................................... 154,612 173,488
Property and equipment, net............................................ 26,989 26,775
Software development costs, net........................................ 367 488
Deferred income taxes, net............................................. 16,940 15,927
Intangible assets, net................................................. 15,396 15,936
Other assets........................................................... 3,559 3,897
----------- ------------
$217,863 $236,511
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ 68,158 $ 39,958
Accounts payable................................................... 32,509 24,031
Accrued payroll and other liabilities.............................. 16,373 26,580
Accrued income taxes............................................... 4,778 3,893
Current portion of long-term debt.................................. 791 2,680
----------- ------------
Total current liabilities...................................... 122,609 97,142
Long-term debt......................................................... 798 19,296
Pension liability...................................................... 3,833 3,960
Commitments and contingencies.......................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at June 30, 1999, and December 31, 1998......... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,256,996 and 14,133,403 shares issued at June 30, 1999,
and December 31, 1998, respectively.............................. 142 141
Additional paid-in capital......................................... 142,388 142,169
Accumulated deficit................................................ (50,096) (24,124)
Cumulative foreign translation adjustment......................... (1,811) (2,073)
----------- ------------
Total shareholders' equity..................................... 90,623 116,113
----------- ------------
$217,863 $236,511
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1999 1998
-------------- --------------
(Restated) (Restated)
<S> <C> <C>
Cash used by operations:
Net (loss) earnings................................................... $(25,972) $ 3,238
Income charges not affecting cash:
Depreciation...................................................... 3,453 2,936
Amortization...................................................... 1,175 1,443
Disposals and write-offs of property and equipment................ 471 165
Deferred income taxes............................................. (1,013) 146
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable........................ 24,261 (1,457)
(Increase) in inventories......................................... (556) (7,246)
Decrease (increase) in prepaid expenses........................... (4,186) 202
Decrease in other assets.......................................... 230 133
Increase in accounts payable...................................... 8,478 2,614
Decrease in accounts payable to related parties................... -- (1,198)
Decrease in accrued payroll and other liabilities................. (10,207) (13,272)
Increase in accrued income taxes.................................. 885 807
-------- --------
Cash used by operating activities..................................... (2,981) (11,489)
-------- --------
Cash used by investing activities:
Additions to property and equipment................................... (4,544) (6,838)
Software development costs............................................ -- (239)
-------- --------
Cash used by investing activities........................................ (4,544) (7,077)
-------- --------
Cash provided by financing activities:
Net increase in notes payable......................................... 28,200 14,152
Proceeds from long term debt.......................................... -- 567
Repayment of long term debt including current portion................. (20,387) (896)
(Decrease) increase in pension liability.............................. (127) 25
Proceeds from exercise of stock options............................... 220 1,145
Common stock issued pursuant to stock option plans.................... -- 969
-------- --------
Cash provided by financing activities................................. 7,906 15,962
-------- --------
Effect of exchange rate changes on cash................................... 262 (821)
-------- --------
Net increase (decrease) in cash and cash equivalents...................... 643 (3,425)
Cash and cash equivalents, beginning of period............................ 4,793 7,545
-------- --------
Cash and cash equivalents, end of period.................................. $ 5,436 $ 4,120
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The accompanying consolidated financial statements of FLIR Systems, Inc. (the
"Company") are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the consolidated financial position and results of operations
for the interim periods. See Note 2 regarding the restatement of the Company's
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto for the year ended December 31, 1998.
The accompanying financial statements include the accounts of FLIR Systems, Inc.
and its subsidiaries. All intercompany accounts and transactions have been
eliminated. The results of the interim period are not necessarily indicative of
the results for the entire year.
Certain reclassifications have been made to prior years' data to conform to the
current year's presentation. These reclassifications had no impact on
previously reported results of operations or shareholders' equity.
NOTE 2 - RESTATEMENT:
In March 2000 the Company determined that it was necessary to revise its 1998
financial statements and its interim 1999 financial statements. The restatement
was required because of incorrect consolidation of the Company's subsidiary
information, inaccurate inventory valuation, insufficient accruals of commission
expense and the inadequate accumulation and misclassification of certain
subsidiary costs. As a result of these matters, certain costs and allowances
were either not accrued or not recorded correctly during the appropriate
periods.
In addition, in December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which among other guidance clarifies certain conditions to be met in
order to recognize revenue. In April 2000, in connection with the audit of the
Company's financial statements and in light of the focus on revenue recognition
issues resulting from the issuance of SAB 101, the Company re-examined its
historical application of generally accepted accounting principles relating to
revenue recognition and the terms underlying certain transactions where title
and the risks of ownership had transferred to the buyer, but physical delivery
to the buyer had not occurred (bill and hold transactions). As a result of this
review, the Company modified its historical revenue recognition policy with
respect to those bill and hold transactions.
In view of the cumulative effect of the unrecorded adjustments for costs and
allowances, and the bill and hold revenue matters, the Company restated its
retained earnings for 1997 as a result of the revenue recognition matters, its
annual and fourth quarter consolidated financial statements for 1998 and its
quarterly consolidated financial statements for the first three quarters of
1999.
6
<PAGE>
The financial statements and related notes set forth in this Form 10-Q/A
reflect all such restatements, including changes to the tax provision for all
periods presented.
A summary of the impact of the restatements for the three and six month periods
ended June 30, 1999 and as of June 30, 1999 and December 31, 1998 follows (in
millions except per share amounts):
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenue:
Commercial $28,652 $27,245 $ 56,288 $ 55,231
Government 13,550 19,071 20,352 29,906
------- ------- -------- --------
42,202 46,316 76,640 85,137
Cost of goods sold 16,702 21,571 50,056 60,398
Research and development 6,836 6,836 13,813 13,813
Selling and other operating costs 13,437 14,861 28,294 29,918
Combination cost -- 974 6,110 4,628
------- ------- -------- --------
36,975 44,242 98,273 108,757
Earnings (loss) from operations 5,227 2,074 (21,633) (23,620)
Interest income -- -- 18 18
Interest expense and other (1,039) (777) (2,265) (2,003)
------- ------- -------- --------
Earnings (loss) before income taxes 4,188 1,297 (23,880) (25,605)
Provision (benefit) for income taxes 1,343 367 (7,642) 367
------- ------- -------- --------
Net earnings (loss) $ 2,845 $ 930 $(16,238) $(25,972)
Net earnings (loss) per share:
Basic $ 0.20 $ 0.07 $ (1.15) $ (1.83)
======= ======= ======== ========
Diluted $ 0.20 $ 0.06 $ (1.15) $ (1.83)
======= ======= ======== ========
</TABLE>
7
<PAGE>
Financial Position
- ------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------
June 30, 1999 December 31, 1998
---------------------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Accounts receivable, net $ 68,075 $ 60,181 $ 91,202 $ 84,442
Inventories 76,171 71,972 70,312 71,416
Prepaid expenses 10,247 9,759 6,061 6,061
Total current assets 166,847 154,612 179,144 173,488
Property and equipment, net 27,189 26,989 26,775 26,775
Deferred income taxes, net 16,940 16,940 9,749 15,927
Total Assets 230,298 217,863 235,989 236,511
Accrued payroll and other liabilities 11,685 16,373 16,189 26,580
Accrued income taxes 2,947 4,778 3,893 3,893
Total current liabilities 115,441 122,609 86,751 97,142
Accumulated deficit 30,493 50,096 14,255 24,124
Total shareholders' equity 110,226 90,623 125,982 116,113
</TABLE>
In addition, the financial information presented for 1998 has been restated for
the merger with Inframetrics, Inc., which was accounted for as a pooling of
interest. See Note 7.
NOTE 3 -- REVENUE RECOGNITION:
Revenue is recognized upon shipment of product to the end customer. Revenues
from development contracts are recognized on a percentage of completion basis.
Provisions for estimated losses on sales or related receivables are recorded
when identified.
NOTE 4 -- NET EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods, computed
using the treasury stock method for stock options. In 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
The following table sets forth the reconciliation of the denominator utilized in
the computation of basic and diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding.................................... 14,197 12,021 14,163 11,964
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method................................... 274 592 -- 603
-------- ------ ------ ------
Diluted shares outstanding........................ 14,471 12,613 14,163 12,567
======== ====== ====== ======
</TABLE>
<PAGE>
The effect of stock options for the six months ended June 30, 1999, which
aggregated 340,000 shares have been excluded for purposes of diluted earnings
per share since the effect would have been anti-dilutive.
NOTE 5 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
(Restated) (Restated)
<S> <C> <C>
Raw material and subassemblies................................ $36,878 $37,419
Work-in-progress.............................................. 18,165 12,527
Finished goods................................................ 18,343 22,330
------- -------
73,386 72,276
Less - progress payments received from
Customers........................................ (1,414) (860)
------- -------
$71,972 $71,416
======= =======
</TABLE>
NOTE 6 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Comprehensive
Stock Stock Capital Deficit Income Total Loss
--------- ------ ---------- ----------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998................. $ -- $141 $142,169 $(24,124) $(2,073) $116,113
Common stock options exercised............. -- 1 219 -- -- 220
Net loss for the six month period.......... -- -- -- (25,972) -- (25,972) $(25,972)
Foreign translation adjustment............. -- -- -- -- 262 262 262
--------- ------ --------- ---------- -------- -------- --------
Balance, June 30, 1999..................... $ -- $142 $142,388 $(50,096) $(1,811) $ 90,623
========= ====== ========= ========== ======== ========
Comprehensive loss, six months ended
June 30, 1999............................. $(25,710)
========
</TABLE>
Cumulative foreign translation adjustment represents the Company's only other
comprehensive income item. Cumulative foreign translation adjustment represents
unrealized gains/losses in the translation of the financial statements of the
Company's subsidiaries in accordance with SFAS No. 52, "Foreign Currency
Translation." The Company has no intention of liquidating the assets of the
foreign subsidiaries in the foreseeable future.
NOTE 7 - INFRAMETRICS MERGER:
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of March 19, 1999 by and among the Company, Irabu
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
the Company ("Merger Sub"), Inframetrics, Inc., a Delaware corporation
("Inframetrics") and the stockholders of Inframetrics, Merger Sub was merged
with and into Inframetrics effective as of March 30, 1999 (the "Effective
Time").
9
<PAGE>
The shares of capital stock of Inframetrics outstanding immediately prior to the
effective time were converted into and exchanged for a total of 2,107,552 shares
of the Company's common stock (including 210,755 shares of the Company's common
stock to be held in escrow to secure the indemnification obligations of the
stockholders of Inframetrics until September 26, 1999). In addition, all options
to purchase Inframetrics common stock that were outstanding immediately prior to
the effective time were assumed by the Company. As of the Effective Time of the
merger, a total of 192,439 shares of the Company's common stock are issuable
upon the exercise of the stock options assumed by the Company in the Merger.
The transaction was accounted for as a pooling of interests and, therefore,
financial statements for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatement had no effect on previously reported separate results of operations
or shareholders' equity.
In conjunction with the merger, on March 31, 1999, the Company recognized a one-
time charge of $23.8 million consisting of a reserve for duplicative inventories
of $20.1 million, transaction related costs of $3.2 million and cost to exit
activities of $0.5 million. During the three months ended June 30, 1999 the
Company incurred an additional charge of $1.0 million for cost to exit
activities.
The inventory reserve relates to duplicative product lines created by the merger
and is included in cost of goods sold. The Company intends to write-off and
dispose of the related inventories throughout 1999. There were no disposals or
write-offs recognized through June 30, 1999.
The transaction related costs consisted of investment advisor fees, legal and
fees and other direct transaction costs. Such costs are included in combination
costs, a separate line item in operating expenses. The cost to exit activities
amount relates to estimated shut down costs related to duplicative facilities in
the United Kingdom, Germany and France. The related reserve is recorded in
accrued payroll and other liabilities on the balance sheet. Preliminary shutdown
plans have been identified and activities related to the shutdown of these
facilities has begun. It is expected that the shutdown of these facilitates will
be completed by December 31, 1999. Such costs are also included in combination
costs. As of June 30, 1999 the Company has paid $4.0 million of the transaction
related costs and costs to exit activities.
The following reconciles revenue and net earnings previously reported to the
restated information presented in the consolidated financial statements:
<TABLE>
<CAPTION>
1998
-----------------------------------------
Three Months Six Months Ended
Ended June 30, June 30,
------------------- -------------------
<S> <C> <C>
Revenue:
Previously reported.................................. $ 35,072 $ 62,771
Inframetrics......................................... 14,325 26,730
------------------- -------------------
Restated............................................. $ 49,397 $ 89,501
Net earnings:
Previously reported.................................. $ 2,755 $ 3,045
Inframetrics......................................... 678 193
------------------- -------------------
Restated............................................. $ 3,433 $ 3,238
=================== ===================
</TABLE>
10
<PAGE>
NOTE 8 - SEGMENT INFORMATION:
The Company has determined its operating segments to be the commercial and
government market segments. The commercial segment comprises thermal imaging
applications including condition monitoring, research and development,
manufacturing process control and airborne observation and broadcast. The
government segment comprises thermal imaging applications including search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environment monitoring, and ground-based
security.
The accounting policies of the each segment are the same. The Company evaluates
performance based upon revenue and gross profit for each segment and does not
evaluate segment performance on any other income measurement.
Operating segment information including revenue and gross profit are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------
1999 1998
-------------------- -----------------
Gross Gross
Revenue Profit Revenue Profit
------- ------- ------- -------
<S> <C> <C> <C> <C>
Commercial.................... $55,231 $19,689 $61,647 $31,728
Government.................... 29,906 5,677 27,854 15,972
------- ------- ------- -------
Total......................... $85,137 $24,739 $89,501 $47,700
======= ======= ======= =======
</TABLE>
All longed-lived assets are generally located in the United States with the
exception of property and equipment. Property and equipment is located in the
following geographic areas (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
United States........................................ $19,114 $18,577
Europe............................................... 7,875 8,198
------- -------
$26,989 $26,775
======= =======
</TABLE>
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
Restatement of financial statements. In March 2000 the Company determined that
it was necessary to revise its 1998 financial statements and its interim 1999
financial statements. The restatement was required because of incorrect
consolidation of the Company's subsidiary information, inaccurate inventory
valuation, insufficient accruals of commission expense and the inadequate
accumulation and misclassification of certain subsidiary costs. As a result of
these matters, certain costs and allowances were either not accrued or not
recorded correctly during the appropriate periods.
In addition, in December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which among other guidance clarifies certain conditions to be met in
order to recognize revenue. In April 2000, in connection with the audit of the
Company's financial statements and in light of the focus on revenue recognition
issues resulting from the issuance of SAB 101, the Company re-examined its
historical application of generally accepted accounting principles relating to
revenue recognition and the terms underlying certain transactions where title
and the risks of ownership had transferred to the buyer, but physical delivery
to the buyer had not occurred (bill and hold transactions). As a result of this
review, the Company modified its historical revenue recognition policy with
respect to those bill and hold transactions.
In view of the cumulative effect of the unrecorded adjustments for costs and
allowances, and the bill and hold revenue matters, the Company restated its
retained earnings for 1997 as a result of the revenue recognition matters, its
annual and fourth quarter consolidated financial statements for 1998 and its
quarterly consolidated financial statements for the first three quarters of
1999. The financial statements and related notes set forth in this Form 10-Q/A
and all amounts included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations reflect all such restatements,
including changes to the tax provision for all periods presented.
In addition, as a result of the merger with Inframetrics which was accounted for
as a pooling of interests (See Note 7), the financial statements and all amounts
included in this Management's Discussion and Analysis of Financial Condition and
Results of Operations for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatements had no effect on previously reported separate results of operations
or shareholders' equity.
Revenue. The Company's revenue for the three months ended June 30, 1999
decreased 6.3%, from $49.4 million in the second quarter of 1998 to $46.3
million in the second quarter of 1999. Commercial revenue decreased 19.0% from
$33.6 million in the second quarter of 1998 to $27.2 million in the second
quarter of 1999. The decrease in commercial revenue was primarily due to
uncertainty in the Company's customer base as a result of the March 30, 1999
merger with Inframetrics. Management believes that many orders that would have
been placed in the early portion of the second quarter of 1999 were delayed
until the surviving product lines were identified. Based on improved order rates
experienced in the latter part of the second quarter, management believes such
concerns have been resolved.
Revenue from the sale of systems to government customers increased 20.9% to
$19.1 million in the second quarter of 1999 compared with $15.8 million in the
second quarter of 1998. The increase in government revenue was primarily due to
higher deliveries of the SAFIRE family of
12
<PAGE>
airborne products, particularly the StarSAFIRE system that began shipments.
Higher deliveries of the MilCAM, a hand held surveillance product, also added to
the increase of government sales compared to the second quarter of 1998.
Revenue for the six months ended June 30, 1999 decreased 4.9%, from $89.5
million in the first half of 1998 to $85.1 million in the first half of 1999.
Commercial revenue for the six months ended June 30, 1999 decreased 10.4% from
$61.6 million in the first half of 1998 to $55.2 million in first half of 1999.
The decrease in commercial revenue was primarily due to disruptions encountered
in the distribution channel as a result of the four-month delay in consummating
the merger with Inframetrics caused by the delayed approval of the transaction
from the Department of Justice. This delay created uncertainty in the Company's
customer base and management believes that many orders that would have been
placed in the first six months of 1999 were delayed until the merger was
completed and the surviving product lines were identified.
Revenues from the sale of systems to government customers for the six months
ended June 30, 1999 totaled $29.9 million, an increase of 7.2% from the $27.9
million in revenue generated in the first half of 1998. The increase in
government revenue was primarily due to higher deliveries of the SAFIRE family
of airborne products, particularly the StarSAFIRE system that began shipments.
Higher deliveries of the MilCAM, a hand held surveillance product, also added to
the increase of government sales compared to the first half of 1998. The impact
of increased deliveries of these products on government revenues in the first
half of 1999 was offset somewhat by issues encountered primarily in the first
quarter and the early portion of the second quarter by agencies of the U.S.
Government and other NATO countries in obtaining release of 1999 procurement
funds due to the funding uncertainties caused by the NATO campaign in Kosovo,
and the continued depressed economic conditions in several international
markets.
The Company's commercial products continued to account for the majority of the
Company's total revenue. As a percentage of total revenue, commercial revenue
for the second quarter of 1999 decreased to 58.8% as compared to 68.0% in the
second quarter of 1998. For the six months ended June 30, 1999, commercial
revenue declined to 64.9% of total revenue, as compared to 68.9% for the first
six months of 1998.
Revenue from sales outside the United States decreased as a percentage of total
revenue from approximately 42.3% to approximately 40.5% for the quarters ended
June 30, 1998 and 1999, respectively. For the first half of 1999, revenue from
sales outside the United States constituted 39.8% of total revenue, as compared
to 38% for the first half of 1998. While the percentage of revenue from
international sales will continue to fluctuate from quarter to quarter due to
the timing of shipments under international and domestic government contracts,
management anticipates that revenue from international sales as a percentage of
total revenue will continue to comprise a significant percentage of revenue.
Gross profit. As a percentage of revenue, gross profit decreased from
55.1% in the second quarter of 1998 to 53.4% in the second quarter of 1999. The
decline in gross profit as a percentage of revenue was principally attributable
to lower than expected production and delivery volumes resulting in excess
manufacturing costs that were not fully absorbed into the products.
As a percentage of revenue, gross profit decreased from 53.3% to 29.1% for the
six- month periods ended June 30, 1998 and 1999, respectively. The primary
reason for this significant decline was the inclusion in cost of goods sold for
the six month period ended June 30, 1999 of a one-time charge of $20.1 million
related to duplicate inventories and products which were determined to have
reached the end of life, both created by overlapping product lines as a result
of the merger with Inframetrics. Without this charge, gross profit as a
percentage of revenue would have decreased from 53.3% to 52.7% for the six
months ended June 30, 1998 and 1999,
13
<PAGE>
respectively. This decline in gross profit as a percentage of revenue was
principally attributable to lower than expected production and delivery volumes
resulting in excess manufacturing costs that were not fully absorbed into the
products.
Research and development. Research and development expense for the quarter
decreased 2.7%, from $7.0 million for the second quarter of 1998 to $6.8 million
for the second quarter of 1999. As a percentage of revenue, research and
development expense increased from 14.2% to 14.8% for the three months ended
June 30, 1998 and 1999. In absolute dollar terms, the decrease in research and
development expense was primarily due to cost control efforts and efficiencies
realized as a result of the Inframetrics transaction.
Research and development expense increased 2.2% for the six months ended June
30, 1999, from $13.5 million in the first half of 1998 to $13.8 million in the
first half of 1999. As a percentage of revenue, research and development
expense increased from 15.1% to 16.2% for the six months ended June 30, 1998 and
1999, respectively. In absolute dollar terms, the increase in research and
development expense was primarily due to engineering efforts related to the
introduction of new products including the FireFLIR, UltraMedia LE and
UltraMedia III, as well as on-going new product development and existing product
enhancements. This increase was mitigated by increased cost control efforts and
efficiencies realized as a result of the Inframetrics transaction. The overall
level of research and development expense reflects the continued emphasis on
product development and new product introductions. Due to the timing of revenue
during the year, research and development expense as a percentage of revenue is
typically higher in the first quarter than on a full year basis.
Selling and other operating costs. Selling and other operating costs for the
quarter increased slightly, from $14.5 million for the second quarter of 1998 to
$14.9 million for the second quarter of 1999. As a percentage of revenue,
selling and other operating costs increased from 29.4% to 32.1% for the three
months ended June 30, 1998 and 1999, respectively.
Selling and other operating costs increased 8.8% for the six months ended June
30, 1999, from $27.5 million in the first half of 1998 to $29.9 million in the
first half of 1999. As a percentage of revenue, selling and other operating
costs increased from 30.7% to 35.1% for the six months ended June 30, 1998 and
1999, respectively. The increase in absolute dollar terms resulted from expense
increases due to anticipated higher volumes of business and increased commission
expense. Selling and other operating costs are expected to continue to
increase in absolute dollar terms, however, as a percentage of revenue they are
expected to decline throughout 1999.
Inframetrics Merger. Effective March 30, 1999, the Company completed its
merger with Inframetrics, Inc., a privately held infrared imaging company
headquartered in Billerica, Massachusetts, by issuing approximately 2.3 million
shares of the Company's common stock (including approximately 192,000 shares
reserved for exercise of outstanding options) for all the outstanding stock of
Inframetrics. Additionally, the Company assumed and paid off approximately $24
million of Inframetrics, Inc.'s short- and long-term debt.
In conjunction with the merger, during the quarter ended March 31, 1999, the
Company recorded a one-time charge of $23.8 million. The charge consisted of a
$20.1 million inventory reserve due to the creation of duplicative product
lines, which is included in cost of goods sold, and $3.7 million of transaction
related costs, which are included in combination costs, a separate line in
operating costs. During the three months ended June 30, 1999 the Company
incurred additional charges of $1.0 million for transaction related costs.
These charges and related reserves are more fully discussed in Note 7 to the
consolidated financial statements.
14
<PAGE>
Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations, foreign
currency transaction gains and losses and miscellaneous bank charges. The
decrease from $1.2 million for the second quarter of 1998 to $0.8 million for
the second quarter of 1999, and the decrease from $2.7 million in the first half
of 1998 to $2.0 in the first half of 1999 were primarily due to lower interest
rates and favorable exchange gains.
Income taxes. The provision for income taxes for the three months ended June
30, 1999 resulted in an effective tax rate of 28.3% compared to 24.7% for the
second quarter of 1998 The Company's effective tax rate is substantially below
statutory rates due to utilization of net operating loss carryforwards, various
tax credits, and benefits from the favorable tax treatment of international
revenue.
For the six months ended June 30. 1999, the Company recorded an income tax
provision of $0.4 million despite having a pre-tax loss of $25.6 million. The
lack of tax benefit in the first half of 1999 was primarily due to the fact that
certain foreign subsidiaries had taxable income while the combined entities had
a net loss. For the six months ended June 30, 1998, the Company's effective tax
rate was 27.8%.
Liquidity and Capital Resources
At June 30, 1999, the Company had short- term borrowings net of cash on hand of
$62.7 million compared to $60.9 million at March 31, 1999 and compared to $35.2
million at December 31, 1998. The increase in short-term borrowings during the
six months ended June 30, 1999, was principally caused by the repayment of
Inframetrics' existing long-term debt that aggregated $19.3 million at December
31, 1998 and continued high levels of inventories.
At June 30, 1999, the Company had inventories on hand of $72.0 million compared
to $71.4 million at December 31, 1998. Despite a $20.1 million inventory
reserve recorded in the first quarter of this year for duplicative product lines
created by the merger with Inframetrics, inventories have increased due to the
build-up of component inventory in anticipation of shipments to government
customers during the last six months of 1999 and build-up of component inventory
for FireFLIR systems in anticipation of deliveries of this new product.
At June 30, 1999, the Company had accounts receivable in the amount of $60.2
million compared to $84.4 million at December 31, 1998. The decrease in the
level of accounts receivable was primarily due to decreased shipments during the
first six months of 1999. Days sales outstanding decreased from 146 at March
31, 1999 to 129 at June 30, 1999.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $4.5 million and $6.8 million for the six months
ended June 30, 1999 and 1998, respectively. The Company has budgeted for
approximately $7.0 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 and other issues
and has expended approximately $5.5 million to date.
The Company has available a $70.0 million line of credit which bears interest at
LIBOR plus 1.5% (6.68% at June 30, 1999) secured by all the Company's assets.
Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Krone (approximately $4.7 million) line of credit at 4.7% at June 30,
1999. At June 30, 1999, the Company had $68.2 million outstanding on these
lines.
The Company believes that its existing cash and available credit facilities,
financing available from other sources and continuing efforts to expedite the
collection of accounts receivable and
15
<PAGE>
management of inventory levels will be sufficient to meet its cash requirements
for the foreseeable future.
Quantitative and Qualitative Disclosure about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The Company
believes that its net income or cash flow exposure relating to rate changes for
short-term and long-term debt obligations are immaterial. Interest expense is
affected by the general level of U.S. interest rates and/or LIBOR. The Company
currently does not hedge any interest rate exposure.
The foreign subsidiaries of the Company generally use their local currency as
the functional currency. The Company does not currently enter into any foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. To
date, such exposure has been immaterial. The Company does maintain small cash
balances denominated in currencies other than the U.S. Dollar. If foreign
exchange rates were to weaken against the U.S. Dollar, the Company believes that
the fair value of these foreign currency amounts would decline by an immaterial
amount.
Impact of the Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company or its significant
suppliers or customers fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 issue could have a material
adverse effect on the Company's business, operations, cash flows and financial
conditions.
The Year 2000 issue affects the Company's internal systems as well as any of the
Company's products that include date-sensitive software. The Company is
currently conducting a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue. The Company
identified that the internal manufacturing system acquired by the Company in
connection with the acquisition of AGEMA is not Year 2000 compliant, and has
completed the installation of a new enterprise resource planning system, both
hardware and software, to correct this deficiency. The Company's existing
product lines are being tested and reviewed to ensure Year 2000 compliance, and
the Company's products under development are being designed to be Year 2000
compliant. Additionally, the Company is evaluating Year 2000 compliance on
products from its suppliers and partners. Both internal and external resources
are being employed to identify, correct or reprogram, and test the systems for
Year 2000 compliance. The total cost of the project is estimated to be
approximately $7.0 million and is being funded through existing cash resources.
A contingency plan has not been developed for dealing with the most reasonably
likely worst-case scenario, as such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be timely converted or
that any such failure to convert by a vendor, customer or another company would
not have an adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's computer systems and software products do
not contain undetected problems associated with Year 2000 Compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
16
<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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter, the Company sold securities without registration under the
Securities Act of 1933, as amended (the "Securities Act") upon the exercise of
certain stock options granted under the Company's 1984 Stock Incentive Plan. An
aggregate of 4,800 shares of Common Stock were issued at exercise prices ranging
from $1.625 to $5.225. These transactions were effected in reliance upon the
exemption from registration under the Securities Act provided by Rule 701
promulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3 (b) of the Securities Act.
Item 4. Submission of Matters to a Vote of Shareholders
The Company's annual shareholders' meeting was held on Tuesday, June 2, 1999, at
which the following actions were taken by a vote of the shareholders:
1. The following persons were re-elected to the Board of Directors by the
votes and for the terms indicated:
<TABLE>
<CAPTION>
Vote
--------------------------------
Withhold Term
Director For Authority Ending
---------------- ---------- --------- ------
<S> <C> <C> <C>
Robert P. Daltry 11,718,325 1,181,085 2002
John C. Hart 11,717,810 1,181,600 2002
</TABLE>
2. By a vote of 10,483,700 to 2,216,306 (with 182,364 abstentions and
17,037 Broker Non-Votes), the proposal to approve the 1999 employee
stock purchase plan was approved.
3. By a vote of 12,877,931 to 15,829 (with 5,650 abstentions), the
Company's selection of PricewaterhouseCoopers LLP as the Company's
independent auditors for the year ending December 31, 1999 was
ratified.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Rights agreement dated as of June 2, 1999 between the Company and
ChaseMellon Shareholder Services, LLC as Rights agreement
(incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on June 11, 1999).
10.1 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 30, 1999).
10.2 Form of Agreement Amending Executive Employment Agreement dated
as of January 30, 1999 amending Executive Employment Agreement of
Robert P. Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J.
Mark Samper, William N. Martin, Arne Almerfors and David Smith.
(1)
18
<PAGE>
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule for the year ended December 31,
1998. (1)
27.3 Restated Financial Data Schedule for the year ended December 31,
1999. (1)
_______
(1) Filed with and incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
filed on August 16, 1999.
(b) During the three months ended June 30, 1999, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated April 14, 1999,
reporting under Item 2 the completion of the merger with Inframetrics,
Inc.
2. The Company filed a current report on Form 8-K, dated April 23, 1999,
reporting under Item 5, that the Company issued a press release
announcing the Company's expectation as to revenue and earnings for
the quarter ended March 31, 1999.
3. The Company filed a current report on Form 8-K, dated June 3, 1999,
reporting under Item 5, results of operations for the one- month ended
April 30, 1999 representing 30 days of combined operations of the
Company and Inframetrics, Inc.
4. The Company filed a current report on Form 8-K/A, dated June 14, 1999,
reporting under Item 7, the audited financial statements of
Inframetrics, Inc. and pro-forma combining financial statements of the
Company and inframetrics, Inc. as required by the Merger with
Inframetrics.
5. The Company filed a current report on Form 8-K, dated June 14, 1999,
reporting under item 5, the adoption by the Board of Directors of a
Shareholders Rights Plan.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLIR SYSTEMS, INC.
Date May 3, 2000 /s/ Stephen M. Bailey
--------------- ----------------------
Stephen M. Bailey
Sr. Vice President and Chief Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
20
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
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<CURRENT-ASSETS> 154,612 154,612
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<CGS> 21,571 60,398
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<OTHER-EXPENSES> 22,671 48,359
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<INCOME-PRETAX> 1,297 (25,605)
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<INCOME-CONTINUING> 930 (25,972)
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