================================================================================
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 September 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 October 31, 2000, there were 14,499,504 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 September 30, 2000, as filed by the Registrant on
November 14, 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 November 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 Nine Months Ended
September 30, 2000 and 1999...................................................... 3
Consolidated Balance Sheet - September 30, 2000 and December 31, 1999............ 4
Consolidated Statement of Cash Flows - Nine Months Ended September, 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................................................................ 22
Item 3. Default Upon Senior Securities................................................... 22
Item 4. Submission of Matters to a Vote of Shareholders.................................. 22
Item 6. Exhibits and Current Reports on Form 8-K......................................... 23
Signatures....................................................................... 24
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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- --------------
(Restated) (Restated) (Restated) (Restated)
Revenue.................................... $ 39,912 $ 45,569 $ 129,150 $ 130,497
Cost of goods sold......................... 29,214 21,382 76,595 83,379
--------------- -------------- --------------- --------------
Gross profit............................ 10,698 24,187 52,555 47,118
Operating expenses:
Research and development.................. 6,816 6,354 23,251 20,167
Selling and other operating costs......... 15,995 14,990 48,811 41,573
Combination costs......................... -- 524 -- 5,152
--------------- -------------- --------------- --------------
Total operating expenses................ 22,811 21,868 72,062 66,892
(Loss) earnings from operations......... (12,113) 2,319 (19,507) (19,774)
Interest expense........................... 3,307 1,576 8,245 3,783
Other (income) expenses - net.............. (242) -- (257) (222)
--------------- -------------- --------------- --------------
(Loss) earnings before income taxes..... (15,178) 743 (27,495) (23,335)
Income tax provision....................... 2,971 550 1,135 917
--------------- -------------- --------------- --------------
Net (loss) earnings........................ $ (18,149) $ 193 $ (28,630) $ (24,252)
=============== ============== =============== ==============
Net (loss) earnings per share:
Basic................................... $ (1.25) $ 0.01 $ (1.98) $ (1.71)
=============== ============== =============== ==============
Diluted................................. $ (1.25) $ 0.01 $ (1.98) $ (1.71)
=============== ============== =============== ==============
The accompanying notes are an integral part of these financial statements
3
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
September 30, December 31,
2000 1999
-------------------- -------------------
(Restated) (Restated)
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents..................................... $ 5,648 $ 4,255
Accounts receivable, net...................................... 35,893 56,788
Inventories................................................... 59,607 65,074
Prepaid expenses and other current assets..................... 3,076 6,040
Deferred income taxes......................................... 9,887 7,216
-------------------- -------------------
Total current assets...................................... 114,111 139,373
Property and equipment, net....................................... 17,129 20,854
Deferred income taxes, net........................................ 16,710 16,499
Intangible assets, net............................................ 16,976 17,932
Other assets...................................................... 654 1,829
-------------------- -------------------
$ 165,580 $ 196,487
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable................................................. $ 96,945 $ 81,247
Accounts payable.............................................. 11,647 22,128
Accrued payroll and other liabilities......................... 23,854 27,226
Accrued income taxes.......................................... 1,758 3,207
Current portion of capital lease obligations.................. 978 1,084
-------------------- -------------------
Total current liabilities................................. 135,182 134,892
Long-term debt.................................................... 1,408 1,497
Pension and other long-term liabilities........................... 3,471 3,879
Commitments and contingencies.....................................
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
no shares issued at September 30, 2000, and
December 31, 1999........................................... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,494,993 and 14,388,600 shares issued at September 30, 2000,
and December 31, 1999, respectively............................ 145 144
Additional paid-in capital.................................... 143,850 143,318
Accumulated deficit........................................... (113,373) (84,744)
Accumulated other comprehensive loss.......................... (5,103) (2,499)
-------------------- -------------------
Total shareholders' equity................................ 25,519 56,219
-------------------- -------------------
$ 165,580 $ 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)
Nine Months Ended
September 30,
------------------------------------
2000 1999
---------------- ----------------
(Restated) (Restated)
Cash used by operations:
Net loss........................................................ $(28,630) $(24,252)
Income charges not affecting cash:
Depreciation................................................ 6,850 4,854
Amortization................................................ 1,201 2,041
Disposals and write-offs of property and equipment.......... 2,456 684
Fair value adjustment on interest swaps..................... 535 --
Deferred income taxes....................................... (2,882) (1,013)
Changes in operating assets and liabilities:
Decrease in accounts receivable............................. 18,711 22,087
Decrease in inventories..................................... 3,653 2,316
Decrease (increase) in prepaid expenses..................... 2,736 (1,763)
Decrease in other assets.................................... 943 157
Decrease in accounts payable................................ (9,852) (337)
Decrease in accrued payroll and other liabilities (2,106) (8,407)
(Decrease) increase in accrued income taxes................. (1,416) 536
Increase (decrease) in pension and other long-term
liabilities................................................ 67 (103)
---------------- ----------------
Cash used by operating activities............................... (7,734) (3,200)
---------------- ----------------
Cash used by investing activities:
Additions to property and equipment............................. (5,966) (7,621)
---------------- ----------------
Cash used by investing activities............................... (5,966) (7,621)
---------------- ----------------
Cash provided by financing activities:
Net increase in notes payable................................... 15,698 28,359
Proceeds from long-term debt.................................... -- 1,538
Repayment of long-term debt including current portion........... (823) (20,573)
Proceeds from exercise of stock options......................... 241 814
Stock issued pursuant to employee stock purchase plan........... 292 --
---------------- ----------------
Cash provided by financing activities........................... 15,408 10,138
---------------- ----------------
Effect of exchange rate changes on cash............................. (315) 30
---------------- ----------------
Net increase (decrease) in cash and cash equivalents................ 1,393 (653)
Cash and cash equivalents, beginning of period...................... 4,255 4,793
---------------- ----------------
Cash and cash equivalents, end of period............................ $ 5,648 $ 4,140
================ ================
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 nine
months ended September 31, 2000 and 1999 and as of September 31, 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 nine months ended September 30, 2000 include one-
time charges totaling $20.0 million, or $1.39 per share. The charges were
$12.7 million and $7.3 million recorded in the third and second quarters,
respectively.
Charges to the third quarter were to adjust inventory carrying values and other
expenses associated with streamlining the Company's manufacturing and corporate
operations. These charges include charges of $9.0 million to cost of sales
primarily for inventory reserves related to certain low margin products and
older products that the Company is phasing out, and $3.7 million of charges to
operating and other expenses associated with workforce reductions and related
costs, and write-offs of certain assets.
The second quarter charges of $7.3 million 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
Weighted average number of common shares
outstanding............................. 14,484 14,311 14,452 14,213
Dilutive stock options................... -- 1,574 -- --
----------- ------------ ----------- ------------
Diluted shares outstanding............... 14,484 15,885 14,452 14,213
=========== ============ =========== ============
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
Stock Options............................ 2,153 -- 2,153 1,574
=========== ============ =========== ============
Note 4. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2000 1999
---------------- -----------------
(Restated) (Restated)
Raw material and subassemblies..................... $ 31,483 $ 32,452
Work-in-progress................................... 14,847 15,261
Finished goods..................................... 13,277 17,361
------------------- ------------------
$ 59,607 $ 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
--------------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
Balance, December 31, 1999................. $ $ 144 $143,318 $ (84,744) $(2,499) $ 56,219
--
Common stock options exercised............. -- -- 241 -- -- 241
Stock issued pursuant to employee share
purchase plan............................. -- 1 291 -- -- 292
Net loss for the nine month period......... -- -- -- (28,629) -- (28,629) $(28,629)
Foreign translation adjustment............. -- -- -- -- (2,604) (2,604) (2,604)
--------------------------------------------------------------------------------------
Balance, September 30, 2000................ $ -- $ 145 $143,850 $(113,373) $(5,103) $ 25,519
=======================================================================================
Comprehensive loss, nine months ended
September 30, 2000........................ $(31,233)
============
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 6, 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 and has filed a motion to dismiss the
complaint, based on the specificity requirements of the Private Securities
Litigation Reform Act of 1995, which will be heard in mid-November.
The Company was involved in other litigation, investigations of a routine nature
and various legal matters during the first nine 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 September 30, 2000, the Company
had written-off and disposed of inventories totaling $20.1 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 September 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 Nine Months Ended
September 30, September 30,
------------------------------ ---------------------------------
2000 1999 2000 1999
------------- ------------- -------------- ---------------
(Restated) (Restated) (Restated) (Restated)
Thermography.......................... $ 16,099 $ 22,834 $ 57,654 $ 62,072
Imaging............................... 23,814 22,735 71,496 68,425
------------- ------------- -------------- ---------------
$ 39,912 $ 45,569 $ 129,150 $ 130,497
============= ============= ============== ===============
Long-lived assets by significant geographic location is as follows (in
thousands):
September 30, December 31,
2000 1999
------------- -----------
(Restated) (Restated)
United States............................ $14,404 $18,886
Europe................................... 20,355 21,729
------------- -----------
$34,759 $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 nine months ended September 30, 2000 and 1999, as of September 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 Nine Months Ended
- --------------------- September 30, 2000 September 30, 2000
-------------------------------- ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
--------------- -------------- --------------- ---------------
Revenue.................................... $ 38,539 $ 39,912 $ 127,258 $ 129,150
Cost of goods sold......................... 27,427 29,214 72,519 76,594
--------------- ------------- --------------- --------------
Gross profit............................. 11,112 10,698 54,739 52,556
Operating expenses:
Research and development.................. 6,816 6,816 23,251 23,251
Selling and other operating costs......... 17,792 15,995 53,543 48,811
Combination costs......................... -- -- 1,217 --
--------------- ------------- --------------- --------------
Total operating expenses................. 24,608 22,811 78,011 72,062
(Loss) earnings from operations.......... (13,496) (12,113) (23,272) (19,506)
Interest expense........................... 2,772 3,307 7,619 8,245
Other (income) expenses - net.............. (242) (242) (258) (257)
--------------- ------------- --------------- --------------
(Loss) earnings before income taxes...... (16,026) (15,178) (30,633) (27,494)
Income tax provision....................... 2,569 2,971 733 1,135
--------------- ------------- --------------- --------------
Net (loss) earnings........................ $ (18,595) $ (18,149) $ (31,366) $ (28,629)
=============== ============= =============== ==============
Net (loss) earnings per share:
Basic................................... $ (1.28) $ (1.25) $ (2.17) $ $(1.98)
=============== ============= =============== ==============
Diluted................................. $ (1.28) $ (1.25) $ (2.17) $ (1.98)
=============== ============= =============== ==============
11
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 9. Restatements and Reclassifications--(Continued)
Results of Operations Three Months Ended Nine Months Ended
- -------------------------------------------
September 30, 1999 September 30, 1999
-------------------------------- ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
--------------- ------------- --------------- --------------
Revenue.................................... $47,007 $45,569 $132,144 $130,497
Cost of goods sold......................... 21,576 21,382 81,974 83,379
--------------- ------------- --------------- --------------
Gross profit............................. 25,431 24,187 50,170 47,118
Operating expenses:
Research and development.................. 6,354 6,354 20,167 20,167
Selling and other operating costs......... 16,466 14,990 46,384 41,573
Combination costs......................... 524 524 5,152 5,152
--------------- ------------- --------------- --------------
Total operating expenses................. 23,344 21,868 71,703 66,892
(Loss) earnings from operations.......... 2,087 2,319 (21,533) (19,774)
Interest expense........................... 1,576 1,576 3,579 3,783
Other (income) expenses - net.............. -- -- (18) (222)
--------------- ------------- --------------- --------------
(Loss) earnings before income taxes...... 511 743 (25,094) (23,335)
Income tax provision....................... 550 550 917 917
--------------- ------------- --------------- --------------
Net (loss) earnings........................ $ (39) $ 193 $(26,011) $(24,252)
=============== ============= =============== ==============
Net (loss) earnings per share:
Basic................................... $(0.00) $0.01 $(1.83) $(1.71)
=============== ============= =============== ==============
Diluted................................. $(0.00) $0.01 $(1.83) $(1.71)
=============== ============= =============== ==============
Financial Position September 30, 2000
- ------------------ -----------------------------------
Previously As
Reported Restated
--------------- ----------------
Accounts receivable, net.................................. $ 36,627 $ 35,893
Inventories............................................... 59,256 59,607
Total current assets...................................... 114,494 114,111
Property and equipment, net............................... 17,099 17,129
Total assets.............................................. 165,933 165,580
Accrued payroll and other liabilities..................... 21,991 23,854
Accrued income taxes...................................... 1,356 1,758
Total current liabilities................................. 132,917 135,182
Accumulated deficit....................................... (110,127) (113,373)
Total shareholders' equity................................ 28,765 25,519
Total liabilities and shareholders' equity................ 165,933 165,580
12
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 9. Restatements and Reclassifications--(Continued)
Financial Position September 30, 1999
- ------------------ ----------------------------------
Previously As
Reported Restated
--------------- ---------------
Accounts receivable, net.................................. $ 63,099 $ 58,688
Inventories............................................... 70,052 71,648
Total current assets...................................... 151,962 149,147
Property and equipment, net............................... 28,229 28,297
Total assets.............................................. 216,096 213,349
Accrued payroll and other liabilities..................... 20,454 22,187
Accrued income taxes...................................... 4,450 4,450
Total current liabilities................................. 118,696 120,429
Accumulated deficit....................................... (50,135) (54,615)
Total shareholders' equity................................ 91,691 87,211
Total liabilities and shareholders' equity................ 216,096 213,349
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 $18.1 million, or $1.25 per share,
for the third quarter of 2000, compared to a net profit of $0.2 million, or
$0.01 per share for the third quarter of 1999. For the nine months ended
September 30, 2000, the Company recorded a net loss of $28.6 million, or $1.98
per share, compared to a net loss of $24.3 million, or $1.71 per share, for the
nine months ended September 30, 1999.
Results of operations for the nine months ended September 30, 2000 include one-
time charges totaling $20.0 million, or $1.39 per share. The charges were $12.7
million and $7.3 million recorded in the third and second quarters,
respectively. 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.
Charges to the third quarter were to adjust inventory carrying values and other
expenses associated with streamlining the Company's manufacturing and corporate
operations. These charges include charges of $9.0 million to cost of sales
primarily for inventory reserves related to certain low margin products and
older products that the company is phasing out, and $3.7 million of charges to
operating and other expenses associated with workforce reductions and related
costs, and write-offs of cost accumulations and certain assets.
The second quarter 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 September 30, 2000
decreased 12.4 percent, from $45.6 million in the third quarter of 1999 to $39.9
million in the third quarter of 2000.
Thermography revenue declined 29.5 percent, from $22.8 million in the third
quarter of 1999 to $16.1 million in the third quarter of 2000. The decrease in
Thermography revenue of $6.7 million was due in part to delays in approval of
U.S. export licenses for certain of the Company's products, delays in orders in
anticipation of the introduction of the new products and the impact of currency
translations on sales in Europe.
Revenue from the sale of systems to Imaging customers increased $1.1 million, or
4.7 percent, from $22.7 million in the third quarter of 1999 to $23.8 million in
the third quarter of 2000.
Revenue for the nine months ended September 30, 2000 decreased $1.3 million, or
1.0 percent, from $130.5 million in the first nine months of 1999 to $129.2
million in the first nine months of 2000.
Thermography revenue for the nine months ended September 30, 2000 declined $4.4
million, or 7.1 percent from $62.1 million in the first nine
14
months of 1999 to $57.7 million in the first nine months of 2000. The decrease
in Thermography revenue was due in part to delays in approval of U.S. export
licenses for certain of the Company's products and the impact of currency
translation on sales in Europe, as well as delays in orders in anticipation of
the introduction of new products.
Revenue from the sale of systems to Imaging customers for the nine months ended
September 30, 2000 totaled $71.5 million, an increase of $3.1 million, or 4.5
percent, from the $68.4 million in revenue generated in the first nine months of
1999. The increase was due to increased demand for products in most of the
Company's market segments within the Imaging business.
Revenue from sales outside the United States increased as a percentage of
revenue from 30.4 percent to 48.3 percent for the quarters ended September 30,
1999 and 2000, respectively. For the first nine months of 2000, revenue from
sales outside the United States constituted 47.1 percent of total revenue, as
compared to 36.2 percent for the first nine 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.
Gross profit. Gross profit for the quarter ended September 30, 2000 was
$10.7 million compared to $24.2 million for the same quarter last year. As a
percentage of revenue, gross profit declined to 26.8 percent in the third
quarter of 2000 compared to 53.1 percent in the third quarter of 1999. The
decline was primarily due to charges in the quarter totaling $9.2 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 49.8 percent.
Gross profit for the nine months ended September 30, 2000 was $52.6 million
compared to $47.1 million for the nine months ended September 30, 1999. As a
percentage of revenue, gross profit was 40.7 percent for the nine months ended
September 30, 2000 compared to 36.1 percent for the nine months ended September
30, 1999. Without the current year charges to write off cost accumulations and
certain asset valuations totaling $4.0 million recorded in the second quarter
and other charges in the nine months totaling $9.3 million, gross profit would
have been $65.8 million or 51.0 percent of revenue.
Included in cost of goods sold for the nine months ended September 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 51.5
percent for the nine months ended September 30, 1999.
Research and development. Research and development expense for the third
quarter of 2000 totaled $6.8 million, compared to $6.4 million in the third
quarter of 1999. Research and development expense as a percentage of revenue
increased from 13.9 percent to 17.1 percent for the three months ended September
30, 1999 and 2000, respectively. Research and development expense in the third
quarter of 2000 includes a $0.9 million charge for expenses associated with the
realignment of the Company's operations. Without this charge, research and
development expense would have been $5.9 million or 14.9 percent of revenue for
the three months ended September 30, 2000.
15
Research and development expense for the first nine months of 2000 totaled $23.3
million, an increase from $20.2 million in the first nine months of 1999.
Research and development expense as a percentage of revenue increased from 15.5
percent to 18.0 percent for the nine months ended September 30, 1999 and 2000,
respectively. Research and development expense in the nine month period ended
September 30, 2000 includes charges totaling $2.9 million to write off cost
accumulations and certain asset valuations and $0.2 million for expenses
associated with streamlining the Company's manufacturing operations. Without
these charges, research and development expense would have been $20.1 million or
15.6 percent of revenue for the nine months ended September 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 $15.0 million to $16.0 million for the quarters ended September
30, 1999 and 2000, respectively. Selling and other operating costs as a
percentage of revenue increased from 32.9 percent to 40.1 percent. Selling and
other operating costs for the third quarter of 2000 included charges totaling
$2.4 million associated with the streamlining of the Company's manufacturing and
corporate operations. Without these charges, selling and other operating costs
would have been $13.6 million or 34.0 percent of revenue for the quarter ended
September 30, 2000, a $1.4 million decrease from the quarter ended September 30,
1999.
Selling and other operating costs increased from $41.6 million in the first nine
months of 1999 to $48.8 million in the first nine months of 2000. Selling and
other operating costs as a percentage of revenue increased from 31.9 percent to
37.8 percent. Selling and other operating costs for the nine month period ended
September 30, 2000 includes charges totaling $1.6 million related to the write
off of cost accumulations and certain asset valuations and charges totaling $1.8
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 35.2 percent for the nine months ended September 30,
2000. In addition to these one-time charges, the increase in absolute dollar
terms was due to increases in audit and legal fees ($1.5 million), increased
depreciation ($1.0 million) related to the Company's enterprise resource
planning system implemented in April 1999, and other selling, marketing, and
administrative overhead expense increases.
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
16
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 $1.6 million in the third
quarter of 1999 to $3.3 million for the quarter ended September 30, 2000, due to
increased debt levels, increased interest rates, and the fair value adjustment
on interest swap agreements. Interest expense increased from $3.8 million in the
first nine months of 1999 to $8.2 million in the first nine months of 2000 due
to these same factors.
Income taxes. The income tax provision of $3.0 million and $1.1 million for
the three months and nine months ended September 30, 2000, respectively,
reflects revisions to the Company's estimate of expected year-end earnings and
losses in its various tax jurisdictions. Certain foreign subsidiaries are
expected to have taxable income while the combined entities are expected to have
a consolidated loss. Given the recurring losses in certain tax jurisdictions, no
benefit has been provided for in the income statement for such losses.
Management is continuing to assess the extent and timing of future
profitability. If management's forecast of future earnings differs from actual
results, the Company may need to record a further valuation against its deferred
tax assets.
Liquidity and Capital Resources
At September 30, 2000, the Company had short-term borrowings net of cash on hand
of $91.3 million compared to $89.7 million at June 30, 2000 and compared to
$77.0 million at December 31, 1999. The increase in short-term borrowings during
the nine months ended September 30, 2000, was primarily due to operating losses
and capital expenditures during the period.
Accounts receivable decreased from $56.8 million at December 31, 1999 to $35.9
million at September 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 76 at September 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 September 30, 2000, the Company had inventories on hand of $59.6 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 higher
inventory levels as a result of lower than anticipated revenues in the third
quarter.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $6.0 million and $7.6 million for the nine months
ended September 30, 2000 and 1999, respectively.
The Company has a Credit Agreement with a number of banks that provides it with
a $95.5 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
17
on borrowings under the agreement increase as the Company's consolidated debt
level increases. The weighted average interest rate on borrowings at September
30, 2000 was 12.1 percent.
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 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 September 30, 2000 and for the quarters then ended, the
Company was in violation of the new minimum revenue and minimum EBITDA covenants
and the consolidated tangible net worth covenant under the Credit Agreement, as
amended. As of June 30, 2000 and for the quarter then ended, the Company was in
violation of the new minimum EDITDA covenant and the consolidated tangible net
worth covenant.
The Company currently has a forbearance agreement in place with the lenders
under the Credit Agreement until December 15, 2000. This forbearance is related
to the defaults under the Credit Agreement as amended due to the violation of
the new financial covenants. All advances currently bear interest at the default
rate (currently at 12.25 percent) provided in the Credit Agreement. Presently
the Company and the lenders are exploring the prospective development of a
longer-term loan agreement. If the Company is unable to negotiate a longer-term
financing arrangement with the banks, renegotiate the terms of the Credit
Agreement or obtain additional forbearance from the lenders by December 15,
2000, the lenders may exercise their rights under the Credit Agreement,
including acceleration of all amounts due under the Credit Agreement. The
renegotiation of this lending facility is a critical step in the future
liquidity of the Company and the inability to renegotiate such terms by the
Company could have material adverse affect on the Company. The Company has been
advised by its independent public accountants that if these uncertainties are
not resolved prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 2000, their auditors' report on
those financial statements may be modified for a going concern uncertainty.
Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kroner (approximately $4.2 million) line of credit bearing interest at
4.3 percent at September 30, 2000.
At September 30, 2000, the Company had $95.5 million outstanding under the
Credit Agreement and $1.4 million outstanding under the Swedish Kroner line of
credit.
The use of cash for operating activities in the first nine months of 2000 was
$7.7 million, compared to $3.2 million for the first nine months of 1999. Use of
cash increased as the result of increased net loss. The Company believes that
its existing cash and available credit facilities,
18
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.
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.
19
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 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.
20
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.
21
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 September 30, 2000 and for the quarters then ended, the
Company was in violation of the new minimum revenue and minimum EBITDA covenants
and the consolidated tangible net worth covenant under the Credit Agreement, as
amended. As of June 30, 2000 and for the quarter then ended, the Company was in
violation of the new minimum EDITDA covenant and the consolidated tangible net
worth covenant. The Company currently has a forbearance agreement in place with
its creditors until December 15, 2000.
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 4. Submission of Matters to a Vote of Shareholders
The Company's annual shareholders' meeting was held on Tuesday, August 15, 2000,
at which the following persons were elected to the Board of Directors by a vote
of the shareholders, by the votes and for the terms indicated:
Vote
---------------------------------------
Withhold Term
Director For Authority Ending
- ----------------------------- ----------------- ------------------ ------------
Earl R. Lewis 12,675,903 108,311 2003
Ronald L. Turner 12,674,403 109,811 2003
Steven E. Wynne 12,673,842 110,372 2003
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
------ ---------------------------------------------------------
27.1 Financial Data Schedule for the three months and nine
months ended September 30, 2000
(b) During the three months ended September 30, 2000, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated July 13, 2000,
reporting under Item 4 the engagement of Arthur Andersen LLP as its
independent auditors, and Item 5 the SEC investigation relating to the
Company.
2. The Company filed a current report on Form 8-K, dated August 15, 2000,
reporting under Item 5 and 7 its financial results for the quarter ended
June 30, 2000.
3. The Company filed a current report on Form 8-K, dated August 30, 2000,
reporting under Item 5 and 7 the press release on Company's workforce
reduction.
23
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)
24