================================================================================
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, 2000
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 July 31, 2000, there were 14,479,080 shares of the Registrant's common stock,
$0.01, par value, outstanding.
================================================================================
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, as filed by the Registrant on August
15, 2000, and is being filed to reflect the restatements of the Registrant's
consolidated financial statements (the "Restatements."). The Restatements
reflect adjustments to revenue and related costs of sales and certain operating
costs for certain sales transactions recorded in 1998 and 1999 to be consistent
with the Company's revenue recognition policy. The Restatements also reflect
certain reclassifications. A discussion of the Restatements and a summary of the
effects of the Restatements are presented in Note 9 to the Consolidated
Financial Statements.
The information contained in this Form 10-Q/A is as of August 14, 2000, except
for the information relating to the Restatements discussed above, which has been
updated through March 23, 2001. This amended Form 10-Q/A should be read in
conjunction with the Form 10-Q for the quarterly period ended March 31, 2001,
filed by the Registrant on May 9, 2001.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations - Three Months and Six Months Ended June
30, 2000 and 1999................................................................ 3
Consolidated Balance Sheet - June 30, 2000 and December 31, 1999................. 4
Consolidated Statement of Cash Flows - Six Months Ended June 30, 2000 and 1999... 5
Notes to the Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 21
Item 3. Default Upon Senior Securities................................................... 21
Item 6. Exhibits and Current Reports on Form 8-K......................................... 21
Signatures....................................................................... 22
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- ------------- --------------- --------------
(Restated) (Restated) (Restated) (Restated)
Revenue.................................... $52,560 $45,890 $ 89,238 $ 84,928
Cost of goods sold......................... 29,861 22,559 47,381 61,997
-------------- ------------- --------------- --------------
Gross profit............................ 22,699 23,331 41,857 22,931
Operating expenses:
Research and development.................. 9,514 6,836 16,435 13,813
Selling and other operating costs......... 16,847 12,639 32,816 26,583
Combination costs......................... -- 974 -- 4,628
-------------- ------------- --------------- --------------
Total operating expenses................ 26,361 20,449 49,251 45,024
(Loss) earnings from operations......... (3,662) 2,882 (7,394) (22,093)
Interest expense........................... 2,846 981 4,938 2,207
Other expenses (income) - net.............. 67 (204) (15) (222)
-------------- ------------- --------------- --------------
(Loss) earnings before income taxes..... (6,575) 2,105 (12,317) (24,078)
Income tax provision (benefit)............. -- 367 (1,836) 367
-------------- ------------- --------------- --------------
Net (loss) earnings........................ $(6,575) $ 1,738 $(10,481) $(24,445)
============== ============= =============== ==============
Net (loss) earnings per share:
Basic................................... $(0.45) $0.12 $(0.73) $(1.73)
============== ============= =============== ==============
Diluted................................. $(0.45) $0.12 $(0.73) $(1.73)
============== ============= =============== ==============
The accompanying notes are an integral part of these financial statements
3
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
June 30, December 31,
2000 1999
----------------- --------------------
(Restated) (Restated)
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents..................................... $ 6,627 $ 4,255
Accounts receivable, net...................................... 42,738 56,788
Inventories................................................... 67,915 65,074
Prepaid expenses and other current assets..................... 3,617 6,040
Deferred income taxes......................................... 9,887 7,216
----------------- --------------------
Total current assets...................................... 130,784 139,373
Property and equipment, net....................................... 19,199 20,854
Deferred income taxes, net........................................ 16,499 16,499
Intangible assets, net............................................ 17,316 17,932
Other assets...................................................... 610 1,829
----------------- --------------------
$184,408 $196,487
================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable................................................. $ 96,305 $ 81,247
Accounts payable.............................................. 12,307 22,128
Accrued payroll and other liabilities......................... 22,427 27,226
Accrued income taxes.......................................... 1,464 3,207
Current portion of capital lease obligations.................. 947 1,084
----------------- --------------------
Total current liabilities................................. 133,450 134,892
Long-term debt.................................................... 1,160 1,497
Pension and other long-term liabilities........................... 3,759 3,879
Commitments and contingencies.....................................
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at June 30, 2000, and December 31, 1999....... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,478,749 and 14,388,600 shares issued at June 30, 2000, and
December 31, 1999, respectively................................ 145 144
Additional paid-in capital...................................... 143,766 143,318
Accumulated deficit............................................. (95,225) (84,744)
Accumulated other comprehensive loss............................ (2,647) (2,499)
----------------- --------------------
Total shareholders' equity................................ 46,039 56,219
----------------- --------------------
$184,408 $196,487
================= ====================
The accompanying notes are an integral part of these financial statements
4
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
------------------------------------
2000 1999
---------------- ----------------
(Restated) (Restated)
Cash used by operations:
Net loss........................................................ $(10,481) $(24,445)
Income charges not affecting cash:
Depreciation................................................ 4,617 3,453
Amortization................................................ 800 1,175
Disposals and write-offs of property and equipment.......... 1,315 586
Fair value adjustment on interest swaps..................... 93 --
Deferred income taxes....................................... (2,671) (1,013)
Changes in operating assets and liabilities:
Decrease in accounts receivable............................. 13,932 22,196
(Increase) decrease in inventories.......................... (2,931) 1,028
Decrease (increase) in prepaid expenses..................... 2,410 (4,186)
Decrease in other assets.................................... 1,035 302
(Decrease) increase in accounts payable..................... (9,794) 8,217
Decrease in accrued payroll and other liabilities (4,749) (10,832)
(Decrease) increase in accrued income taxes................. (1,726) 852
Decrease in pension and other long-term liabilities......... (98) (202)
---------------- ----------------
Cash used by operating activities............................... (8,248) (2,869)
---------------- ----------------
Cash used by investing activities:
Additions to property and equipment............................. (4,299) (4,544)
---------------- ----------------
Cash used by investing activities............................... (4,299) (4,544)
---------------- ----------------
Cash provided by financing activities:
Net increase in notes payable................................... 15,058 28,200
Repayment of long-term debt including current portion........... (567) (20,387)
Proceeds from exercise of stock options......................... 157 220
Stock issued pursuant to employee stock purchase plan........... 292 --
---------------- ----------------
Cash provided by financing activities........................... 14,940 8,033
---------------- ----------------
Effect of exchange rate changes on cash............................. (21) 23
---------------- ----------------
Net increase in cash and cash equivalents........................... 2,372 643
Cash and cash equivalents, beginning of period...................... 4,255 4,793
---------------- ----------------
Cash and cash equivalents, end of period............................ $ 6,627 $ 5,436
================ ================
The accompanying notes are an integral part of these financial statements
5
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 necessary
for a fair presentation of the consolidated financial position and results of
operations for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States 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, 1999.
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.
The Company's consolidated financial statements for the three months and six
months ended June 30, 2000 and 1999 and as of June 30, 2000 and December 31,
1999 have been restated. In addition, certain reclassifications, which had no
impact on previously reported results of operations or shareholders' equity,
have been made to previously reported data. See Note 9 to the Consolidated
Financial Statements for a description of the restatements and
reclassifications.
Note 2. Special Charges
Results of operations for the six months ended June 30, 2000 include one-time
charges totaling $7.3 million, or $0.51 per share, recorded in the second
quarter. These charges include $6.9 million related to cost accumulations and
asset valuations that have been written off as a result of operation changes.
There were also workforce reduction charges of $0.4 million recorded in the
quarter.
6
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 3. Net Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods, computed
using the treasury stock method for stock options. The following table sets
forth the reconciliation of the denominator utilized in the computation of basic
and diluted earnings per share (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
Weighted average number of common shares
outstanding............................. 14,461 14,197 14,437 14,163
Dilutive stock options................... -- 274 -- --
----------- ------------ ----------- ------------
Diluted shares outstanding............... 14,461 14,471 14,437 14,163
=========== ============ =========== ============
Potentially dilutive securities that are not included in the diluted earnings
per share calculation because they would have been anti-dilutive include the
following (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
Stock Options............................ 1,795 915 1,795 1,747
=========== ============ =========== ============
Note 4. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
2000 1999
----------------- -----------------
(Restated) (Restated)
Raw material and subassemblies...................... $36,668 $32,452
Work-in-progress.................................... 13,984 15,261
Finished goods...................................... 17,263 17,361
----------------- -----------------
$67,915 $65,074
================= =================
7
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 5. Changes in Shareholders' Equity
Changes in Shareholders' Equity consist of the following (in thousands):
Accumulated
Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Comprehensive
Stock Stock Capital Deficit Loss Total Loss
--------- ------ ---------- ----------- ------------- -------- -------------
Balance, December 31, 1999................. $-- $144 $143,318 $(84,744) $(2,499) $ 56,219
Common stock options exercised............. -- -- 157 -- -- 157
Stock issued pursuant to employee share
purchase plan............................. -- 1 291 -- -- 292
Net loss for the six month period.......... -- -- -- (10,481) -- (10,481) $(10,481)
Foreign translation adjustment............. -- -- -- -- (148) (148) (148)
--- ---- -------- -------- ------- -------- --------
Balance, June 30, 2000..................... $-- $145 $143,766 $(95,225) $(2,647) $ 46,039
=== ==== ======== ======== ======= ========
Comprehensive loss, six months ended
June 30, 2000............................. $(10,629)
========
Cumulative foreign translation adjustment represents the Company's only other
comprehensive income item. Cumulative foreign translation adjustment represents
unrealized gains/losses in the translation of the financial statements of the
Company's subsidiaries in accordance with SFAS No. 52, "Foreign Currency
Translation." The Company has no intention of liquidating the assets of the
foreign subsidiaries in the foreseeable future.
Note 6. Litigation
Beginning on March 13, 2000, five complaints alleging violations of the federal
securities laws were filed against the Company and certain of its former
officers in the United States District Court for the District of Oregon. Upon
order of the Court, plaintiffs in those actions filed a consolidated complaint
on July 24, 2000. The consolidated complaint names the Company, Robert P.
Daltry, J. Kenneth Stringer, III, and J. Mark Samper as defendants. The
complaint purports to be filed on behalf of a class of purchasers of the
Company's common stock between March 3, 1999 and March 3, 2000 and alleges that
the defendants violated the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by intentionally issuing false and/or misleading
statements regarding the Company's financial results in the Company's SEC
filings and in press releases and other public statements. The complaint does
not specify the amount of damages that plaintiffs seek. The Company intends to
contest the litigation vigorously.
The Company was involved in other litigation, investigations of a routine nature
and various legal matters during the first six months of 2000 that are being
defended and handled in the ordinary course of business.
While the ultimate results of the matters described above cannot presently be
determined, management does not expect that they will have a material adverse
effect on the Company's results of operations or financial position. Therefore,
no adjustments have been made to the accompanying financial statements relative
to these matters.
8
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 7. Inframetrics Merger
In conjunction with the merger with Inframetrics, Inc., 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 course of 1999,
the Company recorded additional costs related to the merger including an
increase to the reserve for duplicative inventories of $5.2 million, an increase
of costs to exit activities of $5.6 million and $1.2 million related to the
write-off of certain assets related to the merger.
The inventory reserve relates to duplicative product lines created by the merger
and was included in cost of goods sold. As of June 30, 2000 the Company had
written-off and disposed of inventories totaling $19.5 million. The transaction
related costs consisted of investment advisor fees, legal and accounting fees
and other direct transaction costs. Such costs were 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 sales offices
in the United Kingdom, Germany and France. As of June 30, 2000 the Company has
no remaining accruals related to the transaction costs and cost to exit
activities.
Consolidated results of operations for the three months ended March 31, 1999 of
the Company and Inframetrics on a stand-alone basis, excluding one time charges
for duplicative inventories created as a result of overlapping product lines,
reserve for shutdown of duplicate sales offices and other direct transaction
costs are as follows (in thousands):
FLIR Inframetrics
---------------- ------------------
(Restated) (Restated)
Revenue............................ $25,458 $13,580
================ ==================
Net (loss) earnings................ $(2,560) $ 177
================ ==================
Note 8. Segment Information
The Company has determined its operating segments to be the Thermography and
Imaging market segments. The Thermography market is comprised of a broad range
of commercial and industrial applications utilizing infrared cameras to provide
precise temperature measurement. The Imaging market is comprised of a broad
range of applications that is focused on providing enhanced vision capabilities
where temperature measurement is not required, although differences in
temperatures are used to create an image. The Imaging market also includes high
performance daylight imaging applications.
The accounting policies of each segment are the same. The Company evaluates
performance based upon net revenue for each segment and does not evaluate
segment performance on any other income measurement.
9
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 8. Segment Information--(Continued)
Previously, the Company reported its operating segments to be the commercial and
government market segments. The information below for 1999 and 2000 has been
reclassified to be consistent with the reporting for these market segments.
Operating segment information for net revenue is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------------
2000 1999 2000 1999
------------- ------------- -------------- ---------------
(Restated) (Restated) (Restated) (Restated)
Thermography.......................... $20,029 $18,335 $41,556 $39,238
Imaging............................... 32,531 27,555 47,682 45,690
------------- ------------- -------------- ---------------
$52,560 $45,890 $89,238 $84,928
============= ============= ============== ===============
Long-lived assets by significant geographic location is as follows (in
thousands):
June 30, December 31,
2000 1999
---------------- ----------------
(Restated) (Restated)
United States....................... $17,153 $18,886
Europe.............................. 19,972 21,729
---------------- ----------------
$37,125 $40,615
================ ================
Note 9. Restatements and Reclassifications
In March 2001, the Company determined that it was necessary to restate its 1999
consolidated financial statements and its interim 2000 and 1999 consolidated
financial statements. The restatements were effected after the Company
determined, based on a review of the specific terms and conditions underlying
certain sales transactions recorded in 1999 and 1998, that revenue was
recognized with respect to such transactions during periods or in amounts that
were not consistent with the Company's revenue recognition policy. Accordingly,
the restatements include the deferral of revenue from the reporting period in
which the revenue was originally recorded to the reporting period in which the
revenue would be properly recorded under the Company's revenue recognition
policy. The related cost of sales and certain operating costs have also been
restated as appropriate.
In addition, reclassifications have been made to the consolidated statement of
operations for the reporting of representative commissions incurred by the
Company. These commissions, which were previously recorded as a portion of
selling and other operating costs, have been reclassified as a reduction of
revenue. The reclassifications had no impact on net earnings for the periods
presented.
10
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 9. Restatements and Reclassifications--(Continued)
The financial statements and related notes set forth in this Form 10-Q/A for the
three and six months ended June 30, 2000 and 1999, as of June 30, 2000 and 1999,
and as of December 31, 1999 reflect all such restatements.
A summary of the impact of the restatements and reclassifications follows (in
thousands except per share amounts):
Results of Operations Three Months Ended Six Months Ended
- --------------------- June 30, 2000 June 30, 2000
-------------------------------- ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
--------------- ------------- --------------- --------------
Revenue.................................... $52,891 $52,560 $ 88,719 $ 89,238
Cost of goods sold......................... 28,914 29,861 45,092 47,381
--------------- ------------- --------------- --------------
Gross profit............................. 23,977 22,699 43,627 41,857
Operating expenses:
Research and development.................. 9,514 9,514 16,435 16,435
Selling and other operating costs......... 18,906 16,847 35,751 32,816
Combination costs......................... -- -- 1,217 --
--------------- ------------- --------------- --------------
Total operating expenses................. 28,420 26,361 53,403 49,251
Loss from operations..................... (4,443) (3,662) (9,776) (7,394)
Interest expense........................... 2,753 2,846 4,846 4,938
Other expenses (income) - net.............. 67 67 (15) (15)
--------------- ------------- --------------- --------------
Loss before income taxes................. (7,263) (6,575) (14,607) (12,317)
Income tax benefit......................... -- -- (1,836) (1,836)
--------------- ------------- --------------- --------------
Net loss................................... $(7,263) $(6,575) $(12,771) $(10,481)
=============== ============= =============== ==============
Net loss per share:
Basic................................... $ (0.50) $ (0.45) $(0.88) $(0.73)
=============== ============= =============== ==============
Diluted................................. $ (0.50) $ (0.45) $(0.88) $(0.73)
=============== ============= =============== ==============
11
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 9. Restatements and Reclassifications--(Continued)
Results of Operations Three Months Ended Six Months Ended
- --------------------- June 30, 1999 June 30, 1999
-------------------------------- ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
--------------- ------------- --------------- --------------
Revenue.................................... $46,316 $45,890 $ 85,137 $ 84,928
Cost of goods sold......................... 21,571 22,559 60,398 61,997
--------------- ------------- --------------- --------------
Gross profit............................. 24,745 23,331 24,739 22,931
Operating expenses:
Research and development.................. 6,836 6,836 13,813 13,813
Selling and other operating costs......... 14,861 12,639 29,918 26,583
Combination costs......................... 974 974 4,628 4,628
--------------- ------------- --------------- --------------
Total operating expenses................. 22,671 20,449 48,359 45,024
Earnings (loss) from operations.......... 2,074 2,882 (23,620) (22,093)
Interest expense........................... 981 981 2,207 2,207
Other income - net......................... (204) (204) (222) (222)
--------------- ------------- --------------- --------------
Earnings (loss) before income taxes...... 1,297 2,105 (25,605) (24,078)
Income tax provision....................... 367 367 367 367
--------------- ------------- --------------- --------------
Net earnings (loss)........................ $ 930 $ 1,738 $(25,972) $(24,445)
=============== ============= =============== ==============
Net earnings (loss) per share:
Basic................................... $ 0.07 $ 0.12 $ (1.83) $ (1.73)
=============== ============= =============== ==============
Diluted................................. $ 0.06 $ 0.12 $ (1.83) $ (1.73)
=============== ============= =============== ==============
Financial Position June 30, 2000
- ------------------ ----------------------------------
Previously As
Reported Restated
--------------- ---------------
Accounts receivable, net.................................. $ 43,481 $ 42,738
Inventories............................................... 67,559 67,915
Total current assets...................................... 131,171 130,784
Property and equipment, net............................... 19,160 19,199
Total assets.............................................. 184,756 184,408
Accrued payroll and other liabilities..................... 19,175 22,427
Total current liabilities................................. 130,198 133,450
Accumulated deficit....................................... (91,532) (95,225)
Total shareholders' equity................................ 49,732 46,039
Total liabilities and shareholders' equity................ 184,756 184,408
12
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 9. Restatements and Reclassifications--(Continued)
Financial Position June 30, 1999
- ------------------ ----------------------------------
Previously As
Reported Restated
--------------- ---------------
Accounts receivable, net.................................. $ 60,181 $ 57,832
Inventories............................................... 71,972 72,678
Total current assets...................................... 154,612 152,969
Property and equipment, net............................... 26,989 27,066
Total assets.............................................. 217,863 216,297
Accrued payroll and other liabilities..................... 16,373 19,519
Total current liabilities................................. 122,609 125,755
Accumulated deficit....................................... (50,096) (54,808)
Total shareholders' equity................................ 90,623 85,911
Total liabilities and shareholders' equity................ 217,863 216,297
Financial Position December 31, 1999
- ------------------ ----------------------------------
Previously As
Reported Restated
--------------- ---------------
Accounts receivable, net.................................. $ 57,777 $ 56,788
Inventories............................................... 64,374 65,074
Total current assets...................................... 139,662 139,373
Property and equipment, net............................... 20,796 20,854
Total assets.............................................. 196,718 196,487
Accrued payroll and other liabilities..................... 21,474 27,226
Accrued income taxes...................................... 3,207 3,207
Total current liabilities................................. 129,140 134,892
Accumulated deficit....................................... (78,761) (84,744)
Total shareholders' equity................................ 62,202 56,219
Total liabilities and shareholders' equity................ 196,718 196,487
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (2000 and 1999 amounts have been restated as discussed in
Note 9 of the Consolidated Financial Statements):
Overview. The Company recorded a net loss of $6.6 million, or $0.45 per
share, for the second quarter of 2000, compared to net earnings of $1.7 million,
or $0.12 per share, for the second quarter of 1999. For the six months ended
June 30, 2000, the Company recorded a net loss of $10.5 million, or $0.73 per
share, compared to a net loss of $24.4 million, or $1.73 per share, for the six
months ended June 30, 1999.
Results of operations for the six months ended June 30, 2000 include one-time
charges totaling $7.3 million, or $0.51 per share recorded in the second
quarter. During the course of the year, the Company, under new management, has
been restructuring its operations to improve profitability. As a result, the
Company has recorded these one-time charges associated with realigning its
operations to focus on higher margin products, eliminate aged or lower margin
products, improve manufacturing efficiencies and reduce production and
distribution costs.
These charges of $7.3 million include the write off of $6.9 million related to
cost accumulations and asset valuations. The effect of each of these charges on
prior years is not material. There were also workforce reduction charges of $0.4
million recorded in the quarter.
Revenue. The Company's revenue for the three months ended June 30, 2000
increased 14.5 percent, from $45.9 million in the second quarter of 1999 to
$52.6 million in the second quarter of 2000.
Thermography revenue increased 9.2 percent, from $18.3 million in the second
quarter of 1999 to $20.0 million in the second quarter of 2000. Revenue from the
sale of systems to Imaging customers increased $4.9 million, or 18.1 percent,
from $27.6 million in the second quarter of 1999 to $32.5 million in the second
quarter of 2000.
Revenue for the six months ended June 30, 2000 increased $4.3 million, or 5.1
percent, from $84.9 million in the first six months of 1999 to $89.2 million in
the first six months of 2000.
Thermography revenue for the six months ended June 30, 2000 increased $2.4
million, or 5.9 percent from $39.2 million in the first six months of 1999 to
$41.6 million in the first six months of 2000. Revenue from the sale of systems
to Imaging customers for the six months ended June 30, 2000 totaled $47.7
million, an increase of $2.0 million, or 4.4 percent, from the $45.7 million in
revenue generated in the first six months of 1999. The increase was due to
increased demand for products in most of the Company's market segments.
Revenue from sales outside the United States increased as a percentage of total
revenue from 39.9 percent to 41.4 percent for the quarters ended June 30, 1999
and 2000, respectively. For the first six months of 2000, revenue from sales
outside the United States constituted 45.3 percent of total revenue, as compared
to 36.9 percent for the first six months of 1999. 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.
14
Gross profit. Gross profit for the quarter ended June 30, 2000 was $22.7
million compared to $23.3 million for the same quarter last year. As a
percentage of revenue, gross profit declined to 43.2 percent in the second
quarter of 2000 compared to 50.8 percent in the second quarter of 1999. The
decline was primarily due to charges in the quarter totaling $4.1 million to
adjust inventory carrying values and record other expenses associated with
refocusing the Company's manufacturing operations on higher margin products and
improving manufacturing efficiencies. Without these charges, gross profit would
have been 50.9 percent.
Gross profit for the six months ended June 30, 2000 was $41.9 million compared
to $22.9 million for the six months ended June 30, 1999. As a percentage of
revenue, gross profit was 46.9 percent for the six months ended June 30, 2000
compared to 27.0 percent for the six months ended June 30, 1999. Without the
current year charges to write off cost accumulations and certain asset
valuations totaling $4.1 million recorded in the second quarter, gross profit
would have been $45.9 million or 51.5 percent of revenue.
Included in cost of goods sold for the six months ended June 30, 1999 is 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 been 50.7 percent for the six
months ended June 30, 1999.
Research and development. Research and development expense for the second
quarter of 2000 totaled $9.5 million, compared to $6.8 million in the second
quarter of 1999. Research and development expense as a percentage of revenue
increased from 14.9 percent to 18.1 percent for the three months ended June 30,
1999 and 2000, respectively. Research and development expense in the second
quarter of 2000 includes a $2.2 million charge for expenses associated with the
realignment of the Company's operations. Without this charge, research and
development expense would have been $7.3 million or 13.8 percent of revenue for
the three months ended June 30, 2000.
Research and development expense for the first six months of 2000 totaled $16.4
million, an increase from $13.8 million in the first six months of 1999.
Research and development expense as a percentage of revenue increased from 16.3
percent to 18.4 percent for the six months ended June 30, 1999 and 2000,
respectively. Research and development expense in the six month period ended
June 30, 2000 includes charges totaling $2.1 million to write off cost
accumulations and certain asset valuations and $0.1 million for expenses
associated with streamlining the Company's manufacturing operations. Without
these charges, research and development expense would have been $14.2 million or
15.9 percent of revenue for the six months ended June 30, 2000.
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 half of the year than on a full year
basis.
Selling and other operating costs. Selling and other operating costs increased
from $12.6 million to $16.8 million for the quarters ended June 30, 1999 and
2000, respectively. Selling and other operating costs as a percentage of revenue
increased from 27.5 percent to 32.1 percent. Selling and other operating costs
for the second quarter of 2000 included charges totaling $1.0
15
million associated with the streamlining of the Company's manufacturing and
corporate operations. Without these charges, selling and other operating costs
would have been $15.9 million or 30.2 percent of revenue for the quarter ended
June 30, 2000. The increase in selling and other operating costs also includes
approximately $0.6 million of increased audit and legal fees.
Selling and other operating costs increased from $26.6 million in the first six
months of 1999 to $32.8 million in the first six months of 2000. Selling and
other operating costs as a percentage of revenue increased from 31.3 percent to
36.8 percent. Selling and other operating costs for the six month period ended
June 30, 2000 includes charges totaling $0.8 million related to the write off of
cost accumulations and certain asset valuations and charges totaling $0.2
million associated with refocusing the Company's manufacturing and corporate
operations. Without theses charges, selling and other operating costs as a
percentage of revenue was 35.7 percent for the six months ended June 30, 2000.
In addition to these one-time charges, the increase in absolute dollar terms was
due to an increase of $0.9 million in audit and legal fees, increased
depreciation related to the Company's enterprise resource planning system
implemented in April 1999, and other selling, marketing, and administrative
overhead expense increases.
Cost reduction initiatives announced in June of this year are expected to yield
annualized cost savings of approximately $10 million starting in the third
quarter of 2000.
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.
During the quarter ended December 31, 1999, the Company recorded a charge of
$1.2 million for the write-off of certain assets related to the merger. This
charge is reported on the combination costs line in the financial statements.
Interest expense. Interest expense increased from $1.0 million in the second
quarter of 1999 to $2.8 million for the quarter ended June 30, 2000, due to
increased debt levels, increased interest rates, and the fair value adjustment
on interest swap agreements. Interest expense increased from $2.2 million in the
first six months of 1999 to $4.9 million in the first six months of 2000 due to
these same factors.
Income taxes. The Company recorded no income tax benefit for the loss in the
three months ended June 30, 2000. Each quarter, management assesses the extent
and timing of future profitability in order to determine the amount of the
deferred tax asset that is more likely than not
16
to be realized in the future. The income tax provision for the second quarter of
1999 resulted in an effective tax rate of 17.4 percent.
For the six months ended June 30, 2000, the Company recorded an income tax
benefit of $1.8 million, resulting in an effective tax rate of 14.9 percent. For
the first six months of 1999, the Company recorded a tax provision of $0.4
million despite having a pre-tax loss of $24.4 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.
The Company's effective tax rate has historically been below the US statutory
rate primarily due to utilization of net operating loss carryforwards, various
tax credits, benefits from the utilization of a foreign sales corporation, and
state and foreign tax rates. Management expects that the effective tax rate will
continue to be below the US statutory rate. The effective tax rate is very
sensitive to the geographic mix of sales and profits, and therefore could be
higher or lower in the future depending on the actual profits realized.
Liquidity and Capital Resources
At June 30, 2000, the Company had short-term borrowings net of cash on hand of
$89.7 million compared to $86.6 million at March 31, 2000 and compared to $77.0
million at December 31, 1999. The increase in short-term borrowings during the
six months ended June 30, 2000, was primarily caused by increased working
capital needs.
Accounts receivable decreased from $56.8 million at December 31, 1999 to $42.7
million at June 30, 2000. The Company has increased its collection efforts and
tightened its credit policies. Days sales outstanding decreased from 116 at
December 31, 1999 to 87 at June 30, 2000. The timing of sales, particularly the
recording of large system sales, can significantly impact the calculation of
days sales outstanding at any point in time.
At June 30, 2000 the Company had inventories on hand of $67.9 million compared
to $65.1 million at December 31, 1999. The decrease was primarily the result of
adjustments to inventory carrying values partially offset by a buildup of
materials in anticipation of increased shipments to customers throughout the
balance of the year.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $4.3 million and $4.5 million for the six months
ended June 30, 2000 and 1999, respectively.
The Company has a Credit Agreement with a number of banks that provides it with
a $100 million revolving line of credit. Interest on borrowings under the
agreement is at a fluctuating rate generally equal to the higher of the Federal
Funds Rate plus 0.50% or the prime rate of the primary lender for domestic
borrowings, and LIBOR for offshore borrowings. The interest rates on borrowings
under the agreement increase as the Company's consolidated debt level increases.
The weighted average interest rate on borrowings at June 30, 2000 was 9.6
percent. The agreement allows the Company to elect any time prior to December 1,
2002, to convert the entire principal balance under the agreement into a term
loan that would be payable in 24 subsequent equal monthly payments plus
interest.
The Company's obligations under the Credit Agreement are secured by
substantially all the assets of the Company. The Credit Agreement includes
negative covenants that, among other
17
things, impose limitations on the Company's ability to incur additional
indebtedness, engage in certain acquisition or disposition transactions, incur
lease obligations and make investments, capital expenditures and certain other
payments. The Credit Agreement also includes certain financial covenants,
including consolidated tangible net worth, interest coverage ratio and leverage
ratio.
As of December 31, 1999 and for the year then ended, the Company was in
violation of certain of these covenants. Pursuant to an amendment to the Credit
Agreement dated as of April 13, 2000, the lenders waived their rights to declare
a default based upon such covenant violations as of December 31, 1999 and
through December 30, 2000. The amendment to the Credit Agreement also modified
the consolidated tangible net worth covenant, added covenants with respect to
minimum levels of revenue and EBITDA and increased the interest rates applicable
to offshore borrowings under the Credit Agreement.
As of March 31, 2000 and for the quarter then ended, the Company was in
violation of the minimum revenue, minimum EBITDA and consolidated tangible net
worth covenants under the Credit Agreement. As of June 30, 2000 and for the
quarter then ended, the Company was in violation of the minimum EDITDA and
consolidated tangible net worth covenants. As a result of these covenant
violations, the lenders have the right at any time to declare the full amount
outstanding under the Credit Agreement immediately due and payable. The Company
and the lenders have discussed the covenant violations. As of this date, the
lenders have not taken any action to enforce their rights under the Credit
Agreement, nor have they waived their rights to declare a default based upon
such covenant violations.
Additionally, the Company, through one of its subsidiaries, has a 50,000,000
Swedish Kroner (approximately $5.8 million) line of credit at 4.3 percent at
June 30, 2000.
At June 30, 2000, the Company had $95.5 million outstanding under the Credit
Agreement and $0.8 million outstanding under the Swedish Kroner line of credit.
The use of cash for operating activities in the first six months of 2000 was
$8.2 million, compared to $2.9 million for the first six months of 1999. Use of
cash increased as the result of increased working capital needs. The Company
believes that its existing cash and available credit facilities, financing
available from other sources, continuing efforts to control costs, improved
collection of accounts receivable and management of inventory levels will be
sufficient to meet its cash requirements for the foreseeable future.
Impact of the Year 2000
The Company 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 was not Year 2000 compliant, and
installed a new enterprise resource planning system, both hardware and software,
to correct this deficiency. The Company's existing product line was tested and
reviewed to ensure Year 2000 compliance, and the Company's products under
development were designed to be Year 2000 compliant. Additionally, the Company
evaluated Year 2000 compliance on products from its suppliers and partners. A
contingency plan for dealing with the most reasonably likely worst-case scenario
was developed.
18
Both internal and external resources were employed to identify, correct or
reprogram, and test the systems for Year 2000 compliance. The total cost of the
project was approximately $7 million and was funded through existing cash
resources.
To date, the Company has not encountered any material Year 2000 problems with
respect to products, internal systems or any third party products or systems.
Revenue Recognition
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements." SAB 101 provides guidance for
public companies on the recognition, presentation and disclosure of revenue in
their financial statements. The Company generally recognizes revenue upon
delivery to the customer, passage of title to the customer as indicated by the
shipping terms and fulfillment of all significant obligations.
The SEC has deferred implementation of SAB 101 to the fourth quarter of 2000.
The SEC will allow the cumulative effect of this change, if any, on the
Company's quarterly financial results to be reported in our annual financial
statements for the year ended December 31, 2000.
The Company is still evaluating the impact of implementing SAB 101, including
recently released interpretations by the SEC staff, and is currently unable to
predict if such final interpretations will materially affect the timing and
predictability of revenue recognition.
New Accounting Pronouncements
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 137 and 138 establish
accounting and reporting standards for all derivative instruments. SFAS 137 and
138 are effective for fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of these pronouncements to have a material impact
on its financial position or results of operations.
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
19
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.
Item 3. Quantitative and Qualitative Disclosures 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 debt obligations
are at variable rates. The Company has not historically utilized interest rate
swap or similar hedging arrangements to fix interest rates, but in March 2000,
the Company entered into interest swap agreements with one of its lender banks
for a notional amount of $40.0 million. A change in interest rates related to
the swap agreements impacts interest incurred, cash flows and the fair value of
the instrument.
The foreign subsidiaries of the Company generally use their local currency as
the functional currency. The Company does not currently enter into any foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. To
date, such exposure has been immaterial. The Company does maintain cash balances
denominated in currencies other than the US Dollar.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the Consolidated Financial Statements.
Item 3. Default Upon Senior Securities
As of December 31, 1999 and for the year then ended, the Company was in
violation of certain financial covenants under its Credit Agreement. Pursuant to
an amendment to the Credit Agreement dated as of April 13, 2000, the lenders
waived their rights to declare a default based upon such covenant violations as
of December 31, 1999 and through December 30, 2000. The amendment to the Credit
Agreement also modified the consolidated tangible net worth covenant, added
covenants with respect to minimum levels of revenue and EBITDA and increased the
interest rates applicable to offshore borrowings under the Credit Agreement.
As of March 31, 2000 and for the quarter then ended, the Company was in
violation of the minimum revenue, minimum EBITDA and consolidated tangible net
worth covenants under the Credit Agreement. As of June 30, 2000 and for the
quarter then ended, the Company was in violation of the minimum EDITDA and
consolidated tangible net worth covenants. As a result of these covenant
violations, the lenders have the right at any time to declare the full amount
outstanding under the Credit Agreement immediately due and payable. The Company
and the lenders have discussed the covenant violations. As of this date, the
lenders have not taken any action to enforce their rights under the Credit
Agreement, nor have they waived their rights to declare a default based upon
such covenant violations.
See further discussion of the Credit Agreement under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
--------- -------------------------------------------------------------
27.1 Financial Data Schedule for the three months and six months
ended June 30, 2000
(b) During the three months ended June 30, 2000, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated April 17,
2000, reporting under Item 5 and Item 7 its financial results for
the year ended December 31, 1999 and restated financial results
for the fourth quarter and year ended December 31, 1998 and the
first three quarters of 1999.
2. The Company filed a current report on Form 8-K, dated May 2, 2000,
reporting under Item 4 and Item 7 the dismissal of
PricewaterhouseCoopers LLP as its independent auditors.
3. The Company filed a current report on Form 8-K, dated June 30,
2000, reporting under Item 5 and Item 7 its financial results for
the quarter ended March 31, 2000.
21
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 11, 2001 /s/ Stephen M. Bailey
---------------------- ---------------------------------------------
Stephen M. Bailey
Sr. Vice President, Finance and Chief
Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
22