<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q/A
________ AMENDMENT NO. 2__________
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 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 September 30, 1999, there were 14,347,766 shares of the Registrant's common
stock, $0.01, par value, outstanding.
1
<PAGE>
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, as filed by the Registrant on May
November 15, 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>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Nine Months Ended September 30, 1999 and 1998......... 3
Consolidated Balance Sheet - September 30, 1999 and
December 31, 1998......................................... 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 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 6. Exhibits and Reports on Form 8-K.......................... 18
Signatures................................................ 19
</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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Commercial............................ $ 35,624 $ 37,627 $ 90,855 $ 99,274
Government............................ 17,515 18,386 47,421 46,240
-------- -------- --------- ---------
Total revenue..................... 53,139 56,013 138,276 145,514
Cost of goods sold........................ 23,370 26,705 83,768 68,506
Research and development.................. 6,354 6,334 20,167 19,852
Selling and other operating costs......... 13,966 14,089 43,884 41,576
Combination costs......................... 524 -- 5,152 --
-------- -------- --------- ---------
44,214 47,128 152,971 129,934
Earnings (loss) from operations........ 8,925 8,885 (14,695) 15,580
Interest income........................... -- 250 18 715
Interest expense and other................ (1,576) (865) (3,579) (3,538)
-------- -------- --------- ---------
Earnings (loss) before income taxes.... 7,349 8,270 (18,256) 12,757
Provision for income taxes................ 1,170 2,539 1,537 3,788
-------- -------- --------- ---------
Net earnings (loss)....................... $ 6,179 $ 5,731 $ (19,793) $ 8,969
======== ======== ========= =========
Net earnings (loss) per share
Basic................................ $ 0.43 $ 0.41 $ (1.39) $ 0.71
======== ======== ========= =========
Diluted.............................. $ 0.43 $ 0.40 $ (1.39) $ 0.68
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Restated)
(Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 4,140 $ 4,793
Accounts receivable, net........................................ 69,231 84,442
Inventories..................................................... 68,258 71,416
Prepaid expenses................................................ 7,895 6,061
Deferred income taxes........................................... 6,776 6,776
--------- ---------
Total current assets........................................ 156,300 173,488
Property and equipment, net......................................... 28,229 26,775
Software development costs, net..................................... 282 488
Deferred income taxes, net.......................................... 16,940 15,927
Intangible assets, net.............................................. 15,105 15,936
Other assets........................................................ 3,578 3,897
--------- ---------
$ 220,434 $ 236,511
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable................................................... $ 68,317 $ 39,958
Accounts payable................................................ 24,236 24,031
Accrued payroll and other liabilities........................... 17,954 26,580
Accrued income taxes............................................ 5,070 3,893
Current portion of long-term debt............................... 1,239 2,680
--------- ---------
Total current liabilities................................... 116,816 97,142
Long-term debt...................................................... 1,702 19,296
Pension liability................................................... 4,007 3,960
Commitments and contingencies....................................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at September 30, 1999, and
December 31, 1998............................................. -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,347,766 and 14,133,403 shares issued at September 30,
1999, and December 31, 1998, respectively..................... 144 141
Additional paid-in capital...................................... 142,980 142,169
Accumulated deficit............................................. (43,917) (24,124)
Accumulated other comprehensive loss............................ (1,298) (2,073)
--------- ---------
Total shareholders' equity.................................. 97,909 116,113
--------- ---------
$ 220,434 $ 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>
Nine Months Ended
September 30,
------------------------------------
1999 1998
----------- -----------
(Restated) (Restated)
<S> <C> <C>
Cash used by operations:
Net (loss) earnings.................................................... $ (19,793) $ 8,969
Income charges not affecting cash:
Depreciation....................................................... 4,854 4,599
Amortization....................................................... 2,041 1,934
Disposals and write-offs of property and equipment................. 471 265
Deferred income taxes.............................................. (1,013) (6)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable......................... 15,211 (19,200)
Decrease (increase) in inventories................................. 3,158 (7,899)
Increase in prepaid expenses....................................... (1,834) (354)
Decrease in other assets........................................... 157 103
Increase (decrease) in accounts payable............................ 205 (5,969)
Decrease in accounts payable to related parties.................... -- (6,228)
Decrease in accrued payroll and other liabilities.................. (8,626) (13,252)
Increase in accrued income taxes................................... 1,177 1,880
---------- -----------
Cash used by operating activities...................................... (3,992) (35,158)
---------- -----------
Cash used by investing activities:
Additions to property and equipment.................................... (7,621) (10,077)
Software development costs............................................. -- (239)
---------- -----------
Cash used by investing activities.......................................... (7,621) (10,316)
---------- -----------
Cash provided by financing activities:
Net increase in notes payable.......................................... 28,359 13,072
Proceeds from long term debt........................................... 1,538 1,217
Repayment of long term debt including current portion.................. (20,573) (5,684)
Increase in pension liability.......................................... 47 123
Proceeds from exercise of stock options................................ 814 1,273
Common stock issued.................................................... -- 32,676
Cost of common stock issued............................................ -- (551)
Common stock issued pursuant to stock option plans..................... -- 971
---------- -----------
Cash provided by financing activities.................................. 10,185 43,097
---------- -----------
Effect of exchange rate changes on cash.................................... 775 (697)
---------- -----------
Net decrease in cash and cash equivalents.................................. (653) (3,074)
Cash and cash equivalents, beginning of period............................. 4,793 7,545
---------- -----------
Cash and cash equivalents, end of period................................... $ 4,140 $ 4,471
========== ===========
</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 nine month periods
ended September 30, 1999 and as of September 30, 1999 and December 31, 1998
follows (in millions except per share amounts):
Results of Operations
- ---------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
-------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenue:
Commercial $36,191 $35,624 $ 92,479 $ 90,855
Government 18,515 17,515 38,867 47,421
------- ------- -------- --------
54,706 53,139 131,346 138,276
Cost of goods sold 20,971 23,370 71,027 83,768
Research and development 6,354 6,354 20,167 20,167
Selling and other
operating costs 13,241 13,966 41,535 43,884
Combination cost -- 524 6,110 5,152
------- ------- -------- --------
40,566 44,214 138,839 152,971
Earnings (loss) from
operations 14,140 8,925 (7,493) (14,695)
Interest income -- -- 18 18
Interest expense and other (1,576) (1,576) (3,841) (3,579)
------- ------- -------- --------
Earnings (loss)
before income taxes 12,564 7,349 (11,316) (18,256)
Provision (benefit) for
income taxes 4,020 1,170 (3,622) 1,537
------- ------- -------- --------
Net earnings (loss) $ 8,544 $ 6,179 $ (7,694) $(19,793)
======= ======= ======== ========
Net earnings (loss) per
share:
Basic $ 0.60 $ 0.43 $ (0.54) $ (1.39)
======= ======= ======== ========
Diluted $ 0.59 $ 0.43 $ (0.54) $ (1.39)
======= ======= ======== ========
</TABLE>
7
<PAGE>
Financial Position
- ------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
September 30, 1999 December 31, 1998
------------------------------ ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Accounts receivable, net $ 77,755 $ 69,231 $ 91,202 $ 84,442
Inventories 75,119 68,258 70,312 71,416
Prepaid expenses 7,418 7,895 6,061 6,061
Total current assets 171,208 156,300 179,144 173,488
Property and equipment, net 28,429 28,229 26,775 26,775
Deferred income taxes, net 16,940 16,940 9,749 15,927
Total Assets 235,542 220,434 235,989 236,511
Accrued payroll and other liabilities 10,974 17,954 16,189 26,580
Accrued income taxes 6,089 5,070 3,893 3,893
Total current liabilities 109,956 116,816 86,751 97,142
Accumulated deficit 21,949 43,917 14,255 24,124
Total shareholders' equity 119,877 97,909 125,982 116,113
</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 (SFAS) 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 Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding................................. 14,311 13,862 14,213 12,604
Assumed exercise of stock options net of
shares assumed reacquired under the
treasury stock method....................... 212 407 -- 537
------- ------- ------- -------
Diluted shares outstanding..................... 14,523 14,269 14,213 13,141
======= ======= ======= =======
</TABLE>
8
<PAGE>
The effect of stock options aggregating 297,000 shares have been excluded for
purposes of diluted earnings per share for the nine months ended September 30,
1999, since the effect would have been anti-dilutive.
NOTE 5 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Restated) (Restated)
<S> <C> <C>
Raw material and subassemblies.......... $ 36,098 $ 37,419
Work-in-progress........................ 17,175 12,527
Finished goods.......................... 16,797 22,330
-------- --------
70,070 72,276
Less - progress payments received from
Customers....................... (1,812) (860)
-------- --------
$ 68,258 $ 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.......... -- 3 811 -- -- 814
Net loss for the nine month period...... -- -- -- (19,793) -- (19,793) $ (19,793)
Translation adjustment.................. -- -- -- -- 775 775 775
----- ----- --------- --------- -------- --------- ---------
Balance, September 30, 1999............. $ -- $ 144 $ 142,980 $ (43,917) $ (1,298) $ 97,909
===== ===== ========= ========= ======== =========
Comprehensive loss, nine months
ended September 30, 1999............... $ (19,018)
=========
</TABLE>
Translation adjustment represents the Company's only other comprehensive income
item. 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 were 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 six months ended September 30, 1999 the
Company recorded additional charges totaling $1.5 million for transaction
related costs and 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. As of September 30, 1999 the
Company had written-off and disposed of inventories totaling $2.7 million.
The transaction related costs consisted of investment advisor fees, legal and
accounting fees and other direct transaction costs. Such costs are included in
combination costs, a separate line item in operating expenses. The cost to exit
activities amount relates to estimated shut down costs related to duplicative
facilities in the United Kingdom, Germany and France. The related reserve is
recorded in accrued payroll and other liabilities on the balance sheet.
Preliminary shutdown plans have been identified and activities related to the
shutdown of these facilities has begun. It is expected that the shutdown of
these facilitates will be completed by December 31, 1999. Such costs are also
included in combination costs. As of September 30, 1999 the Company has paid
$4.5 million of the transaction related costs and cost 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 Nine Months
Ended Ended
September 30, September 30,
------------- -------------
<S> <C> <C>
Revenue:
Previously reported............... $ 41,261 $ 104,032
Inframetrics...................... 14,752 41,482
-------- ---------
Restated.......................... $ 56,013 $ 145,514
======== =========
Net earnings:
Previously reported............... $ 5,227 $ 8,272
Inframetrics...................... 504 697
-------- ---------
Restated.......................... $ 5,731 $ 8,969
======== =========
</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>
Nine Months Ended September 30,
----------------------------------------------
1999 1998
--------------------- ---------------------
Gross Gross
Revenue Profit Revenue Profit
<S> <C> <C> <C> <C>
Commercial............ $ 90,855 $ 38,718 $ 99,274 $ 52,615
Government............ 47,421 15,790 46,240 24,393
--------- -------- --------- --------
Total................. $ 138,276 $ 54,508 $ 145,514 $ 77,008
========= ======== ========= ========
</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>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
United States.................... $ 23,127 $ 18,577
Europe........................... 5,102 8,198
-------- --------
$ 28,229 $ 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
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 September 30,
1999 decreased 5.2%, from $56.0 million in the third quarter of 1998 to $53.1
million in the third quarter of 1999. Commercial revenue decreased 5.3% from
$37.6 million in the third quarter of 1998 to $35.6 million in the third quarter
of 1999. The decrease in commercial revenue was primarily due to declines in the
commercial broadcast and airborne law enforcement markets as a result of the
cyclical nature of the commercial broadcast market and a pronounced shift in
focus on capital expenditures away from capital goods and toward expenditures to
ensure Year 2000 compliance. Revenue from the sale of systems to government
customers decreased 4.9% to $17.5 million in the third quarter of 1999 compared
with $18.4 million in the third quarter of 1998. The revenue for the quarter was
impacted due to supply constraints on cooled detectors for the MilCam products.
The Company has experienced a significant increase in demand for cooled
detectors used in the MilCam and the Mark III products and the Company continues
to work with its suppliers to increase production to meet the demand.
12
<PAGE>
Revenue for the nine months ended September 30, 1999 decreased 4.9%, from $145.5
million in the first nine months of 1998 to $138.3 million in the first nine
months of 1999. Commercial revenue for the nine months ended September 30, 1999
decreased 8.5% from $99.3 million in the first nine months of 1998 to $90.9
million in first nine months 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 Federal Trade Commission and
the Department of Justice and to decreased sales to commercial broadcasters and
law enforcement agencies. This delay created uncertainty in the Company's
customer base and management believes that many orders that would have been
placed earlier in 1999 were delayed until the merger was completed and the
surviving product lines were identified. While this delay impacted the first two
quarters of 1999, management believes that market has recovered as evidenced by
increased thermography orders.
Revenues from the sale of systems to government customers for the nine months
ended September 30, 1999 totaled $47.4 million, an increase of 2.6% from the
$46.2 million in revenue generated in the first nine months of 1998. The
increase in government revenue was due to higher deliveries of the SAFIRE family
of airborne products, particularly the StarSAFIRE system that began shipments.
The impact of increased deliveries of these products on government revenues 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 third quarter of 1999 decreased slightly to 67.0% as compared to 67.2%
in the third quarter of 1998. For the nine months ended September 30, 1999,
commercial revenue declined to 65.7% of total revenue, as compared to 68.2% for
the first nine months of 1998.
Revenue from sales outside the United States increased as a percentage of total
revenue from approximately 34.7% to approximately 37.1% for the quarters ended
September 30, 1998 and 1999, respectively. The increase in the percentage of
international sales was primarily due to increased deliveries of thermography
products in Europe and increased deliveries on existing international government
contracts. For the first nine months of 1999, revenue from sales outside the
United States constituted 41.0% of total revenue, as compared to 36.8% for the
first nine months of 1998. While the percentage of revenue from international
sales will continue to fluctuate from quarter to quarter due to the timing of
shipments under international and domestic government contracts, management
anticipates that revenue from international sales as a percentage of total
revenue will continue to comprise a significant percentage of revenue.
Gross profit. As a percentage of revenue, gross profit increased from 52.3%
in the third quarter of 1998 to 56.0% in the third quarter of 1999. The increase
in gross profit as a percentage of revenue was principally attributable to the
higher proportion of commercial revenue generated from uncooled commercial
products, which, as a result of the favorable cost structure of the uncooled
commercial products and through manufacturing cost control efforts, exceed those
margins experienced from the sale of cooled commercial products.
As a percentage of revenue, gross profit decreased from 52.9% to 39.4% for the
nine-month periods ended September 30, 1998 and 1999, respectively. The primary
reason for this significant decline was the inclusion in cost of goods sold for
the nine month period ended September 30, 1999 of a one-time charge of $20.1
million related to duplicate inventories and products which
13
<PAGE>
were determined to have reached the end of life, both created by overlapping
product lines as a result of the merger with Inframetrics. Without this charge,
gross profit as a percentage of revenue would have increased from 52.9% to 54.0%
for the nine months ended September 30, 1998 and 1999, respectively. This
increase in gross profit as a percentage of revenue was principally attributable
to the higher proportion of total revenue derived from the sale of commercial
products which, as a result of the favorable cost structure of the uncooled
commercial products, now generally exceed those margins experienced from the
sale of cooled imaging products and imaging systems to the government market.
Research and development. Research and development expense for the quarter
increased slightly, from $6.3 million for the third quarter of 1998 to $6.4
million for the third quarter of 1999. As a percentage of revenue, research and
development expense increased from 11.3% to 12.0% for the three months ended
September 30, 1998 and 1999. In absolute dollar terms, the relatively consistent
level of research and development expense reflects the continued emphasis on
product development offset by continued cost control efforts and efficiencies
realized as a result of the Inframetrics transaction.
Research and development expense increased 1.6% for the nine months ended
September 30, 1999, from $19.9 million in the first nine months of 1998 to $20.2
million in the first nine months of 1999. As a percentage of revenue, research
and development expense increased from 13.6% to 14.6% for the nine months ended
September 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, Maritime FLIR 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.
Selling and other operating costs. Selling and other operating costs for
the quarter decreased slightly, from $14.1 million for the third quarter of 1998
to $14.0 million for the third quarter of 1999. As a percentage of revenue,
selling and other operating costs increased from 25.2% to 26.3% for the three
months ended September 30, 1998 and 1999, respectively.
Selling and other operating costs increased 5.5% for the nine months ended
September 30, 1999, from $41.6 million in the first nine months of 1998 to $43.9
million in the first nine months of 1999. As a percentage of revenue, selling
and other operating costs increased from 28.6% to 31.7% for the nine months
ended September 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 the rest of the
year.
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 issuance upon the 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
14
<PAGE>
million of transaction related costs, which are included in combination costs, a
separate line in operating expenses. During the six months ended September 30,
1999 the Company incurred additional charges of $1.5 million for transaction
related costs and costs to exit activities. These charges and related reserves
are more fully discussed in Note 7 to the consolidated financial statements.
Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations, foreign
currency transaction gains and losses and miscellaneous bank charges. The
increase from $865,000 for the third quarter of 1998 to $1.6 million for the
third quarter of 1999, and the increase from $3.5 million in the first nine
months of 1998 to $3.6 in the first nine months of 1999 was primarily due to
higher interest rates and increased debt levels to support working capital
needs.
Income taxes. The provision for income taxes for the three and nine months
ended September 30, 1999 resulted in an effective tax rate of 15.9% compared to
30.7% for the third quarter of 1998. The effective tax rate remained below
statutory rates due to utilization of net operating loss carryforwards, various
tax credits, and benefits from the favorable tax treatment of international
revenue.
For the nine months ended September 30, 1999, the Company recorded an income tax
provision of $1.5 million despite having a pre-tax loss of $18.3 million. The
lack of tax benefit in the first nine months 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 nine months ended September 30, 1998 the
Company's effective tax rate was 29.7%.
Liquidity and Capital Resources
At September 30, 1999, the Company had short-term borrowings net of cash on hand
of $64.2 million compared to $62.7 million at June 30, 1999 and compared to
$35.2 million at December 31, 1998. The increase in short-term borrowings during
the nine months ended September 30, 1999, was principally caused by the
repayment of Inframetrics' existing long-term debt that aggregated $18.3 million
at December 31, 1998 and the continued high levels of inventories and
receivables.
At September 30, 1999, the Company had inventories on hand of $68.3 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 declined
only $3.1 million due to the build-up of component inventory in anticipation of
shipments to government customers during the last quarter of 1999, which
typically is the largest revenue quarter of the year and build-up of component
inventories for FireFLIR and Maritime FLIR systems in anticipation of deliveries
of these new products. The level of inventory decreased $3.7 million from the
June 30, 1999 balance of $72.0 million. This decrease, in a quarter in which the
Company normally experiences an increase in inventory in anticipation of the
volume of shipment in the fourth quarter, reflects the results of management's
continued efforts to increase inventory turns.
At September 30, 1999, the Company had accounts receivable in the amount of
$69.2 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 nine months of 1999. Days sales outstanding increased from 129 at June
30, 1999 to 137 at September 30, 1999.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $7.6 million and $10.1 million for the nine months
ended September 30, 1999 and
15
<PAGE>
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 $6.1
million through September 30, 1999.
The Company has available a $70.0 million line of credit which bears interest at
LIBOR plus 1.5% (6.8% at September 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 5.1% at
September 30, 1999. At September 30, 1999, the Company had $68.3 million
outstanding on these lines. The Company is currently negotiating an increase to
the $70.0 million line of credit to $100.0 million. The new operating line is
expected to be effective in early December.
The Company believes that its existing cash and available credit facilities,
financing available from other sources and continuing efforts to expedite the
collection of accounts receivable and management of inventory levels will be
sufficient to meet its cash requirements for the foreseeable future.
Quantitative and Qualitative Disclosure about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The Company
currently hedges interest rate exposure through the use of long-term interest
rate swaps. 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 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 has
conducted 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 have
been 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 has evaluated Year 2000 compliance on products from
its suppliers and partners. Both internal and external resources are being
employed
16
<PAGE>
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 finalized for dealing with the most reasonably likely worst-case
scenario, as such scenario has not yet been clearly identified. The Company
currently plans to complete such analysis and contingency planning by December
31, 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be timely converted or
that any such failure to convert by a vendor, customer or another company would
not have an adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's computer systems and software products do
not contain undetected problems associated with Year 2000 Compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995 that are based on current expectations,
estimates and projections about the Company's business, management's beliefs,
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "sees," "estimates" and variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements due to numerous
factors, including, but not limited to, those discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as those discussed from time to time in the Company's Securities and
Exchange Commission fillings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions. Such forward-looking statements
speak only as of the date on which they are made and the Company does not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date of this report. If the Company does
update or correct one or more forward-looking statement, investors and others
should not conclude that the Company will make additional updates or corrections
with respect thereto or with respect to other forward-looking statements.
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 11,600 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Contract for the Supply of Uncooled Imaging Modules, dated
August 8, 1999. (1)
27.1 Restated Financial Data Schedule
_________
(1) Filed with and incorporated by reference to the Registrant's
Amendment to Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1999 filed on December 2, 1999. Portions
of this Exhibit have been omitted pursuant to a request for
confidential treatment under 17 C.F.R. (S) 240.24b-2.
(b) During the three months ended September 30, 1999, the Company did not
file any reports on Form 8-K.
18
<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, Finance and Chief
Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
19
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