<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-29179
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
OSI SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
CALIFORNIA 3674 33-0238801
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
----------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DEEPAK CHOPRA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OSI SYSTEMS, INC.
12525 CHADRON AVENUE
HAWTHORNE, CALIFORNIA 90250
TEL. (310) 978-0516
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
ISTVAN BENKO, ESQ. TROY & GOULD BERTRAM R. ZWEIG, ESQ. JONES, DAY, REAVIS
PROFESSIONAL CORPORATION 1801 & POGUE 555 WEST 5TH STREET, SUITE 4600
CENTURY PARK EAST, SUITE 1600 LOS LOS ANGELES, CALIFORNIA 90013-1025 TEL.
ANGELES, CALIFORNIA 90067 TEL. (310) (213) 489-3939 FAX. (213) 243-2539
553-4441 FAX. (310) 201-4746
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
[LOGO OF OPTO-SENSORS, INC.]
------------------
3,700,000 SHARES
COMMON STOCK
Of the 3,700,000 shares of Common Stock offered hereby, 3,330,000 shares are
being sold by OSI Systems, Inc. (the "Company") and 370,000 shares are being
sold by the Selling Shareholders. See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $12.50 and $14.50 per share. See "Underwriting" for
information relating to the method of determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "OSIS."
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share... $ $ $ $
- --------------------------------------------------------------------------------
Total(3).... $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated offering expenses of $ payable by the Company
and $ payable by the Selling Shareholders.
(3) Certain of the Selling Shareholders have granted to the Underwriters a 30-
day option to purchase up to an additional 555,000 shares of Common Stock
solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Selling Shareholders will be $ , $ and
$ , respectively. See "Underwriting."
----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
WILLIAM BLAIR & COMPANY
VOLPE BROWN WHELAN & COMPANY
The date of this Prospectus is , 1997.
<PAGE>
OSI Systems, Inc. is a vertically integrated worldwide provider of devices,
subsystems and end-products based on optoelectronic technology. The Company
designs and manufactures optoelectronic devices and value-added subsystems for
original equipment manufacturers for use in a broad range of applications,
including security, medical diagnostics, telecommunications, office automation,
aerospace, computer peripherals and industrial automation. In addition, the
Company utilizes its optoelectronic technology and design capabilities to
manufacture security and inspection products that it markets worldwide to end
users under the "Rapiscan" brand name. These products are used to inspect
baggage, cargo and other objects for weapons, explosives, drugs and other
contraband.
RAPISCAN
Security and Inspection Products
[Picture of a woman standing in front of a Rapiscan 119
Table Top System machine]
Rapiscan 119 Table Top System
[Picture of a woman walking through a Rapiscan AMD 750 Metal
Arch machine]
Rapiscan AMD 750 Metal Arch
[Picture of Rapiscan 520 Carry On System machine]
Rapiscan 520 Carry On System
[Picture of Rapiscan 532 Cargo System machine with image of
person next to the system]
Rapiscan 532 Cargo System
[Three images of baggage with various contents]
Conventional Dual Energy Image
Organic Material Image
Enhanced Picture X-Ray (EPX) Image
[Picture of a Rapiscan Series 500 X-Ray van with open side
door]
Rapiscan Series 500 X-Ray Van
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[TWO PAGE GATEFOLD]
OSI SYSTEMS, INC.
----------------
Optoelectronic Devices and Subsystems
[Picture of man with Pulse Oximetry Probe attached to his finger and woman
sitting next to him]
Pulse Oximetry Probe
[Picture of computer and medical imaging equipment]
Medical Imaging Sensor Electronics
[Picture of hand-held Barcode Readout Sensor]
Barcode Readout Sensor
[Picture of detector device]
High Energy Radiation Detector
[Picture of various cables and subassemblies]
Opto-Assembly/Medical
[Picture of various printed circuit boards]
Custom PC Boards
[Picture of various optical components and subassemblies]
Optics
[Picture of X-ray scanning machine]
Imaging Sensor Electronics
[Picture of military attack helicopter]
Laser Warning Detector
[Picture of sensor device]
Satellite Sun Sensors
[Picture of submarine]
Fire Detection Subassembly
[Picture of various molding parts and casings]
Tool & Die and Injection Molding
[Picture of various photodetectors]
Custom Photodetectors
[Picture of various chips and printed circuit boards]
Ceramic Substrates/Hybrids
[Picture of array chip]
Hybrid
[Picture of slot machine]
Hopper Optical Assembly
[Schematic Image of Ring Laser Gyro Detector]
Ring Laser Gyro (RLG) Detector
[Picture of Color Sensor Hybrid]
Color Sensor Hybrid
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED OFFER AND SALE OF THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 28
Management................................................................ 41
Certain Transactions...................................................... 49
Principal and Selling Shareholders........................................ 51
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
The Company intends to furnish its shareholders with annual reports
containing consolidated audited financial statements and quarterly reports
containing unaudited consolidated financial data for the first three quarters
of each fiscal year.
Rapiscan(R) is a registered trademark of the Company. This Prospectus also
contains trademarks and tradenames of other companies.
The Company is a California corporation organized in 1987. In June 1997, the
Company changed its name from Opto Sensors, Inc. to OSI Systems, Inc. The
Company's principal subsidiaries are: UDT Sensors, Inc., a California
corporation ("UDT Sensors"); Rapiscan Security Products (U.S.A.), Inc., a
California corporation ("Rapiscan U.S.A."); Ferson Optics, Inc. ("Ferson"), a
California corporation; Rapiscan Security Products Limited, a United Kingdom
corporation ("Rapiscan UK"); Opto Sensors (Singapore) Pte Ltd, a corporation
organized under the laws of Singapore ("OSI Singapore"); Opto Sensors
(Malaysia) Sdn. Bhd., a Malaysian corporation ("OSI Malaysia"); and Advanced
Micro Electronics AS, a Norwegian company ("AME"). The principal executive
offices of the Company are located at 12525 Chadron Avenue, Hawthorne,
California 90250. The Company's telephone number is (310) 978-0516. Unless
otherwise indicated by the context, all references in this Prospectus to the
"Company" are to OSI Systems, Inc. and to one or more, but not necessarily all
of its consolidated subsidiaries.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus, including the information under "Risk Factors."
THE COMPANY
OSI Systems, Inc. (the "Company") is a vertically integrated worldwide
provider of devices, subsystems and end-products based on optoelectronic
technology. The Company designs and manufactures optoelectronic devices and
value-added subsystems for original equipment manufacturers ("OEMs") for use in
a broad range of applications, including security, medical diagnostics,
telecommunications, office automation, aerospace, computer peripherals and
industrial automation. In addition, the Company utilizes its optoelectronic
technology and design capabilities to manufacture security and inspection
products that it markets worldwide to end users under the "Rapiscan" brand
name. These products are used to inspect baggage, cargo and other objects for
weapons, explosives, drugs and other contraband. In fiscal 1997, revenues from
the sale of optoelectronic devices and subsystems amounted to $42.9 million, or
approximately 55.2%, of the Company's revenues, while revenues from sales of
security and inspection products amounted to $34.7 million, or approximately
44.8%, of the Company's revenues.
Optoelectronic Devices and Subsystems
The Company manufactures a wide range of optoelectronic devices which it
integrates into complex subsystems vital to various end products, including x-
ray and computer tomography ("CT") imaging systems, industrial robotics,
medical monitoring and diagnostic products, optical drives for computer
peripherals, bar code scanners, and aviation gyroscopes. These optoelectronic
devices operate by sensing light of varying wave lengths and converting the
light into electronic signals. In addition to manufacturing optoelectronic
devices, the Company produces optoelectronic subsystems and offers a range of
vertically integrated services to its subsystem customers. These services
include component design and customization, subsystem concept design and
application engineering, product prototyping and development, pre-production,
and short-run and high volume manufacturing. In fiscal 1997, the Company
manufactured subsystems for use in more than 100 different applications,
including those of approximately 50 major OEM customers such as Picker
International, Honeywell Avionics, Eastman Kodak, Xerox, Johnson & Johnson,
Bausch & Lomb, Texas Instruments, Boeing Aircraft Co. and Hewlett-Packard.
During fiscal 1997, no single OEM customer accounted for more than 10.0% of the
Company's revenues and the top five customers collectively represented less
than 20.0% of the Company's revenues.
The Company believes that in recent years advances in technology and
reductions in the cost of key components of optoelectronic systems, including
computer processing power and memory, have broadened the market by enabling the
use of optoelectronic devices in a greater number of applications. In addition,
the Company believes that there is a trend among OEMs to increasingly outsource
the design and manufacture of optoelectronic subsystems to fully integrated,
independent manufacturers who may have greater specialization, broader
expertise, and the ability and flexibility to respond in shorter time periods
than the OEMs could accomplish in-house. The Company believes that its high
level of vertical integration, substantial engineering resources, expertise in
the use and application of optoelectronic technology, and low-cost
international manufacturing operations, enable it to effectively compete in the
market for optoelectronic devices and subsystems.
Security and Inspection Products
The Company manufactures a range of security and inspection products that are
used for conventional security purposes including the detection of concealed
weapons and contraband, as well as for a variety of non-security applications.
The Company's security and inspection products utilize linear x-ray technology
to create a two-dimensional image of the contents of the object being
inspected. These products may function either as stand-alone systems or as
components of an integrated security system. Locations where these products are
currently used for security inspection purposes include airports, government
offices, post offices,
4
<PAGE>
courthouses, jails, embassies, commercial buildings and mail sorting
facilities. Non-security inspection uses of these products include the
detection of illegal narcotics, inspection of agricultural products,
examination of cargo to mitigate the avoidance of import duties, and non-
destructive product testing. The Company currently manufactures 16 models of
products with different sizes, price points and imaging capabilities in order
to appeal to the breadth of security and non-security applications for its
products. Since entering the security and inspection market in 1993, the
Company has shipped more than 2,000 units of its security and inspection
products to over 50 countries. The Company believes that the growth in the
market for security and inspection products will continue to be driven by the
increased perception of threat fueled by recent terrorist incidents, increased
government mandates and appropriations, and the emergence of a growing market
for the non-security applications of its products.
The Company's objectives are to be a leading provider of specialized
optoelectronic products, to enhance its position in the international
inspection and detection marketplace, and to leverage its expertise in the
optoelectronic technology industry by integrating into new end-markets on a
selective basis. Key elements of the Company's growth strategy include
leveraging its expertise in optoelectronic design and manufacturing to address
new applications, further penetrating existing security and inspections
markets, capitalizing on its high-level of vertical integration and on its
global presence, and selectively entering into new end-product markets. Since
1990, the Company has completed four acquisitions. The Company intends to
continue to pursue additional acquisition opportunities that expand the
Company's technological capabilities, increase the breadth of its product
offerings, and increase its geographic presence. As with the security and
inspection operations that the Company acquired in 1993, the Company seeks to
make acquisitions in which: (i) the Company's core optoelectronic technology is
a significant technology component; (ii) the market for the products offers
favorable pricing dynamics; (iii) the competitive market dynamics provide for
substantial growth in market share; and (iv) the Company's existing
manufacturing, sales and service organization provide the acquired operations
with a strategic and cost advantage.
The Company currently manufactures its optoelectronic devices and subsystems
at facilities in Hawthorne, California, in Ocean Springs, Mississippi, in Johor
Bahru, Malaysia, and in Horten, Norway. Its security and inspection products
are currently manufactured at facilities in Crawley, England, in Long Beach,
California, and in Johor Bahru, Malaysia. As of June 30, 1997 the Company
marketed its products worldwide through approximately 42 sales and marketing
employees located in five countries, and through approximately 95 independent
sales representatives.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company. 3,330,000 shares
Common Stock Offered by the Selling
Shareholders....................... 370,000 shares
Common Stock Outstanding after the
Offering........................... 9,563,778 shares(1)
Use of Proceeds..................... To repay certain indebtedness, to increase
funds available for research and
development, to enhance its sales and
marketing capabilities, to pursue possible
acquisitions, and for general corporate
purposes, including working capital. See
"Use of Proceeds."
Nasdaq National Market Symbol....... OSIS
</TABLE>
- ---------------
(1) Based on the number of shares outstanding on September 30, 1997. Excludes
783,236 shares of Common Stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $7.74 per share.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues.................... $27,225 $47,735 $49,815 $61,518 $77,628
Cost of goods sold.......... 20,591 36,037 37,818 45,486 56,174
--------- --------- --------- --------- ---------
Gross profit................ 6,634 11,698 11,997 16,032 21,454
Operating expenses:
Selling, general and
administrative(1)......... 4,014 7,974 7,601 9,757 11,304
Research and development... 1,034 1,451 1,591 1,663 2,504
Stock option
compensation(2)........... -- -- -- -- 856
--------- --------- --------- --------- ---------
Total operating expenses... 5,048 9,425 9,192 11,420 14,664
--------- --------- --------- --------- ---------
Income from operations...... 1,586 2,273 2,805 4,612 6,790
Interest expense............ 471 710 1,251 1,359 1,197
--------- --------- --------- --------- ---------
Income before income taxes
and minority interest...... 1,115 1,563 1,554 3,253 5,593
Provision for income taxes.. 462 814 413 1,111 1,416
--------- --------- --------- --------- ---------
Income before minority
interest................... 653 749 1,141 2,142 4,177
Minority interest........... 6 38 17 117 --
--------- --------- --------- --------- ---------
Net income.................. $659 $787 $1,158 $2,259 $4,177
========= ========= ========= ========= =========
Net income available to
common shareholders(3)(4).. $814 $995 $1,357 $2,308 $4,269
========= ========= ========= ========= =========
Net income per
share(3)(4)(5)............. $0.13 $0.16 $0.22 $0.38 $0.68
========= ========= ========= ========= =========
Weighted average shares
outstanding(5)............. 6,139,429 6,249,674 6,172,901 6,134,669 6,263,963
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(6)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................... $ 553 $29,839
Working capital......................................... 10,800 49,961
Total assets............................................ 47,333 76,619
Total debt.............................................. 13,180 1,258
Total shareholders' equity.............................. 16,809 58,017
</TABLE>
- -------------
(1) Fiscal 1994 includes a one-time charge of $1.5 million incurred in
connection with the settlement of a governmental proceeding. See
"Business--Legal Proceedings."
(2) Represents a charge resulting from the acceleration of the vesting periods
of outstanding stock options having exercise prices below the fair market
value on the date of grant. The charge had the effect of decreasing income
from operations, net income and net income available to common shareholders
by $856,000, $514,000 and $514,000 respectively.
(3) Gives effect to the conversion of certain subordinated debt into preferred
stock and Common Stock in October and November 1996, and the issuance of
Common Stock for the purchase of the remaining minority interests in
certain subsidiaries in October and December 1996 as if such transactions
occurred on July 1, 1992. Adjustments in each of the five years ended June
30, 1997 consist of: (i) the elimination of interest expense related to
converted subordinated debt of $161,000, $246,000, $216,000, $166,000 and
$92,000, net of income taxes, respectively; and (ii) the elimination of the
minority interest in the net loss of subsidiaries of $6,000, $38,000,
$17,000, $117,000 and $0, respectively.
(4) Supplementary net income for each of the five years ended June 30, 1997 is
$936,000, $1,163,000, $1,939,000, $2,913,000 and $4,872,000, respectively,
reflecting the reduction in interest expense, net of income taxes, from the
effect of debt repayments discussed under "Use of Proceeds." Supplementary
net income per share for the corresponding periods is $0.15, $0.18, $0.28,
$0.42 and $0.68, respectively, and reflects only the additional shares
issued to repay that debt.
(5) Assumes the conversion of 2,568,750 shares of preferred stock into
3,853,125 shares of Common Stock as of July 1, 1992. The preferred stock
had a liquidation preference of $1.00 per share, and was otherwise entitled
to the same voting, dividend and all other rights as the Common Stock.
(6) Adjusted to give effect to the sale of 3,330,000 shares of Common Stock
offered by the Company hereby, at an assumed initial public offering price
of $13.50 per share and after deducting underwriting discounts, commissions
and estimated Offering expenses, and the application of the net proceeds
therefrom.
Unless otherwise indicated, all information in this Prospectus: (i) reflects
a 1.5-for-1 stock split (the "Stock Split") of the Common Stock effected in
June 1997; (ii) reflects the conversion of each outstanding share of the
Company's preferred stock into 1.5 shares of the Common Stock concurrent with
the Stock Split; and (iii) assumes the Underwriters' over-allotment is not
exercised. All references to the Company's fiscal years refer to the periods
ending June 30.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, investors should
carefully consider the following risk factors when evaluating an investment in
the Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this Prospectus.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have varied in the past and are
likely to vary significantly in the future. These quarterly fluctuations are
the result of a number of factors, including the volume and timing of orders
received and shipments made during the period, variations in the Company's
product mix, changes in demand for the Company's products, the timing and
amount of expenditures made by the Company in anticipation of future sales,
variability in selling price, and other competitive conditions. The Company's
revenues, particularly from the sale of security and inspection products, are
increasingly dependent upon larger orders of multiple units and upon the sale
of products having higher average selling prices. The Company is unable to
predict the timing of the receipt of such orders and, as a result, significant
variations between forecasts and actual orders will often occur. Furthermore,
the rescheduling of the shipment of any large order, or portion thereof, or
any production difficulties or delays experienced by the Company, could have a
material adverse effect on the Company's quarterly operating results. Due to
the foregoing factors, it is possible that in future quarters the Company's
operating results will not meet the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business -- Backlog."
COMPETITION
The markets in which the Company operates are highly competitive and are
characterized by evolving customer needs and rapid technological change. The
Company competes with a number of other manufacturers, many of whom have
significantly greater financial, technical and marketing resources than the
Company. In addition, these competitors may have the ability to respond more
quickly to new or emerging technologies, may adapt more quickly to changes in
customer requirements, may have stronger customer relationships, may have
greater name recognition, and may devote greater resources to the development,
promotion and sale of their products than does the Company. In the
optoelectronic device and subsystem market, competition is based primarily on
factors such as expertise in the design and development of optoelectronic
devices, product quality, timeliness of delivery, price, customer technical
support, and on the ability to provide fully integrated services from
application development and design through volume subsystem production. The
Company believes that its major competitors in the optoelectronic device and
subsystem market are EG&G Electro-Optics, a division of EG&G, Inc., Optek
Technology Inc., Hamamatsu Corporation, and Honeywell Optoelectronics, a
division of Honeywell, Inc. In the security and inspection market, competition
is based primarily on such factors as product performance, functionality and
quality, the over-all cost of the system, prior customer relationships,
technological capabilities of the product, price, certification by government
authorities, local market presence, and breadth of sales and service
organization. The Company believes that its principal competitors in the
market for security and inspection products are EG&G Astrophysics, a division
of EG&G, Inc. ("EG&G Astrophysics"), Heimann Systems GmbH, InVision
Technologies, Inc., Vivid Technologies, American Science and Engineering,
Inc., Barringer Technologies Inc., Control Screening L.L.C., and Thermedics
Detection, Inc. In addition, the Company supplies optoelectronic devices and
subsystems to certain OEMs which, in turn, manufacture end-products that
compete with the Company's own products. There can be no assurance that these
competing OEMs will continue to purchase
7
<PAGE>
optoelectronic products from the Company. Competition could result in price
reductions, reduced margins, and a decrease in the Company's market share.
There can be no assurance that the Company will be able to compete
successfully against any current or future competitors in either market or
that future competitive pressures will not materially and adversely affect its
business, financial condition and results of operations. See "Business--
Competition."
LARGE ORDERS; LENGTHY SALES CYCLES
Sales of the Company's security and inspection products have increasingly
been characterized by large orders of multiple units or of products having
higher average selling prices. The Company's inability to obtain such
additional large orders could have a material adverse effect on the Company's
business, financial condition and results of operations. Sales of security and
inspection products depend in significant part upon the decision of
governmental agencies to upgrade or expand existing airports, border crossing
inspection sites and other security installations. Accordingly, a portion of
the Company's sales of security inspection and detection products is often
subject to delays associated with the lengthy approval processes that often
accompany such capital expenditures. During these approval periods, the
Company expends significant financial and management resources in anticipation
of future orders that may not occur. A failure by the Company to receive an
order after expending such resources could have a material adverse effect on
its business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The markets for all of the Company's products are subject to rapidly
changing technology. As OEMs seek to develop and introduce new,
technologically-advanced products and product enhancements, the Company is
required to design, develop and manufacture optoelectronic devices and
subsystems to meet these new and enhanced product requirements. Accordingly,
the Company's performance as a designer and manufacturer of optoelectronic
devices and subsystems is dependent upon its ability to keep pace with
technological developments in both the optoelectronic market and in the
numerous markets that its products serve. Any delay or failure in the
Company's ability to design and manufacture the increasingly complex and
technologically-advanced products that its customers demand will have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, technological changes and market forces
continually affect the products sold by the Company's customers and thereby
alter the demand for the Company's optoelectronic subsystems. The Company has
in the past suddenly and unexpectedly lost orders for entire subsystem product
lines due to technological changes that made the products sold by the
Company's customers obsolete. The market for the Company's security and
inspection products is also characterized by rapid technological change as the
security industry seeks to develop new and more sophisticated products. New
and enhanced security and inspection products are continuously being developed
and introduced by the Company's competitors, including products that use
advanced x-ray technologies, CT technology, or electro-magnetic and ultrasound
technologies. The Company believes that its future success in the security and
inspection industry will depend in large part upon its ability to enhance its
existing product lines and to successfully develop new products that meet
changing customer requirements. No assurance can be given that new industry
standards or changing technology will not render the Company's existing
security and inspection products obsolete. The failure of the Company's
security and inspection product lines to meet new technological requirements
or new industry standards will have a material adverse effect on the Company's
business, financial condition and results of operations.
AVAILABILITY OF RAW MATERIALS AND COMPONENTS
The Company purchases certain raw materials and subcomponents from third
parties pursuant to purchase orders placed from time to time. Purchase order
terms range from three months to one year at fixed costs, but the Company has
no guaranteed long-term supply arrangements with its suppliers. Any material
interruption in the Company's ability to purchase necessary raw materials or
subcomponents could have a material adverse effect on the Company's business,
financial condition and results of operations. Silicon-based optoelectronic
devices manufactured by the Company are critical components in most of the
Company's
8
<PAGE>
subsystems. Since 1987, the Company has purchased substantially all of the
silicon wafers it uses to manufacture its optoelectronic devices from Wacker
Siltronic Corp., a United States subsidiary of Wacker Siltronic AG, a German
company. The Company's dependence on this single source of supply exposes the
Company to several risks, including limited control over pricing, availability
of material, and material delivery schedules. Although the Company has not
experienced any significant shortages or material delays in obtaining silicon
wafers from Wacker Siltronic Corp., a major interruption in the delivery of
silicon wafers from Wacker Siltronic Corp. would materially disrupt the
Company's operations and could have a material adverse effect on the Company's
business, financial condition and results of operations. The inability of the
Company to develop alternative sources for single or sole source components,
or to obtain sufficient quantities of these components, would adversely affect
the Company's operations. See "Business--Manufacturing and Materials
Management."
INTERNATIONAL BUSINESS; FLUCTUATION IN EXCHANGE RATES; RISKS OF CHANGES IN
FOREIGN REGULATIONS
In fiscal 1995, 1996 and 1997, revenues from shipments made outside of the
United States accounted for approximately 32.0%, 38.0% and 42.2%,
respectively, of the Company's revenues. Of the revenues generated during
fiscal 1997 from shipments made outside of the United States, 14.9%
represented sales from the United States to foreign customers, and the balance
represented sales generated by the Company's foreign subsidiaries. The Company
anticipates that international sales will continue to account for a material
portion of the Company's revenues and that, accordingly, a major portion of
the Company's business will be exposed to the risks associated with conducting
international business operations, including unexpected changes in regulatory
requirements, changes in foreign legislation, possible foreign currency
controls, currency exchange rate fluctuations or devaluations, tariffs,
difficulties in staffing and managing foreign operations, difficulties in
obtaining and managing vendors and distributors, potentially negative tax
consequences, and difficulties in collecting accounts receivable. The Company
is also subject to risks associated with laws regulating the import and export
of high technology products. The Company cannot predict whether quotas,
duties, taxes or other charges or restrictions upon the importation or
exportation of the Company's products will be implemented by the United States
or any other country in the future. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH MANAGING GROWTH AND ACQUISITIONS
Since 1990, the Company has experienced significant growth through both
internal expansion and through acquisitions. During this period, OSI Systems,
Inc. established its Rapiscan U.S.A. operations and its Malaysian
manufacturing facilities and acquired UDT Sensors, Rapiscan UK, Ferson and
AME. This growth has placed, and may continue to place, significant demands on
the Company's management, working capital and financial resources. Failure to
continue to expand and enhance the Company's management and its financial
control systems could adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's current management and systems will be adequate to address any
future expansion of the Company's business. An element of the Company's
strategy is to pursue acquisitions that would complement its existing range of
products, augment its market coverage or enhance its technological
capabilities or that may otherwise offer growth opportunities. Such future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and the
amortization of expenses related to goodwill and other intangible assets, any
of which could materially adversely affect the Company's business, financial
condition and results of operations. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no, or
limited, prior experience and the potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any acquired business, product, technology or personnel
with the operations of the Company, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company has no current
agreement or negotiations underway with
9
<PAGE>
respect to any such acquisition, the Company may make acquisitions of
businesses, products or technologies in the future. See "Use of Proceeds."
PROPRIETARY TECHNOLOGY; PENDING LITIGATION
The Company believes that its principal competitive strength is its ability
to design, develop and manufacture complex optoelectronic devices and
subsystems for various industry segments. The Company does not rely upon any
of its own patents or copyrights in the development or manufacture of its
products. Accordingly, there are no legal barriers that prevent potential
competitors from copying the Company's products, processes and technologies or
from otherwise entering into operations in direct competition with the
Company.
The Company's Rapiscan U.S.A. subsidiary has entered into a non-exclusive
patent license agreement with EG&G Inc. Under the license, Rapiscan U.S.A. is
permitted to make, use and sell or otherwise dispose of security and
inspection products that use an x-ray line scan system for baggage inspection
purposes covered by EG&G Inc.'s patent. The patent, which expires in 2000,
does not affect sales of the Company's security and inspection products
manufactured and sold outside of the United States. The license may be
terminated by EG&G Inc. in the event of a breach of the license agreement by
Rapiscan U.S.A. The termination of the EG&G Inc. license would have a material
adverse effect upon the Company's sales of its security and inspection
products in the United States and upon the Company's business, financial
condition and results of operations.
In a lawsuit currently pending before the United States District Court for
the Central District of California, Lunar Corporation ("Lunar") and the
University of Alabama Research Foundation ("UAB") have alleged that OSI
Systems, Inc., UDT Sensors and Rapiscan U.S.A. infringe United States Patent
No. 4,626,688 (" '688 patent"). UAB owns the '688 patent and has granted an
exclusive license to Lunar. The '688 patent is directed to a dual energy
radiation detector. The lawsuit concerns those Rapiscan U.S.A.'s baggage
scanner products which contain a dual energy detector, and detector components
produced by UDT Sensors ("accused products"). Lunar and UAB are requesting
that the court grant them damages in an unspecified amount and an injunction
barring Rapiscan U.S.A., UDT Sensors and OSI Systems, Inc. from making, using,
selling or offering for sale, the accused products in the United States.
Rapiscan U.S.A., UDT Sensors and OSI Systems, Inc. have alleged that the
accused products do not infringe the '688 patent, that the '688 patent is
invalid and that in any event, Lunar had previously agreed that Rapiscan
U.S.A. and UDT Sensors did not infringe the '688 patent, so that Lunar's claim
is estopped, limited by laches or that an implied license has been granted by
Lunar.
The Company believes it has meritorious defenses and claims in the lawsuit
with Lunar and UAB and believes that the likelihood of Lunar and UAB
prevailing in its patent infringement lawsuit against the Company is remote.
However, no assurance can be given that the Company will be successful in this
lawsuit. In the event that the court determines that the accused products
infringe the '688 patent and that Rapiscan U.S.A. and UDT Sensors do not have
the right to use technology covered by the '688 patent, the court could grant
Lunar and UAB a permanent injunction in which case Rapiscan U.S.A. could be
prevented from marketing most of its baggage scanner products in the United
States and UDT Sensors could be prevented from marketing certain detector
components. Rapiscan U.S.A. and UDT Sensors could also be required to pay a
significant amount of damages. Any such outcome would have a material adverse
effect upon the Company's business, financial condition and results of
operations. For the year ended June 30, 1997, sales of security and inspection
products that are allegedly infringing upon Lunar and UAB's rights constituted
$10.5 million or approximately 13.5% of the Company's revenues. Through June
30, 1997, the Company has incurred legal fees in the amount of approximately
$368,000 in connection with this lawsuit. The Company intends to pursue
vigorously its legal remedies in this lawsuit. As a result, the Company will
continue to expend significant financial and other resources in connection
with this lawsuit. See "Business--Legal Proceedings."
The Company may from time to time in the future receive communications from
third parties alleging infringements by the Company of patents or other
intellectual property rights owned by such third parties. If
10
<PAGE>
any of the Company's products are found to infringe a patent, a court may
grant an injunction to prevent the Company from making, selling or using these
products in the applicable country. Protracted litigation may be necessary to
defend the Company against alleged infringement of others' rights.
Irrespective of the validity or the success of such claims, the defense of
such claims could result in significant costs to the Company and the diversion
of time and effort by management, either of which by itself could have a
material adverse effect on the business, financial condition and results of
operations of the Company. Further, adverse determinations in such litigation
could subject the Company to significant liabilities (including treble damages
under certain circumstances), or prevent the Company from selling certain of
its products. If infringement claims are asserted against the Company, the
Company may be forced to seek to obtain a license of such third party's
intellectual property rights. No assurance can be given that the Company could
enter into such a license agreement on terms favorable to the Company, or at
all. The failure to obtain such a license agreement on reasonable terms could
have an adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH MANUFACTURING
The Company's ability to manufacture optoelectronic subsystems as well as
security and inspection products is dependent upon the optoelectronic devices
manufactured at the Company's Hawthorne, California facility. In addition, the
Company's success also depends on its ability to manufacture its products at
its various other facilities. Accordingly, any material disruption in the
operations of any of its manufacturing facilities, and especially at its
Hawthorne, California facility, would have a material adverse effect on the
Company's business, financial condition and results of operations. Such
interruption or disruption could occur due to the unavailability of parts,
labor or raw materials, to political unrest, or to natural disasters, such as
earthquakes or fires. The Company also believes that its long-term competitive
position depends in part on its ability to increase manufacturing capacity. No
assurance can be given that the Company will be able to increase its
manufacturing capabilities in the future. The failure of the Company to build
or acquire sufficient additional manufacturing capacity if and when needed
could adversely impact the Company's relationships with its customers and
materially adversely affect the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY RISKS
The Company's business exposes it to potential product liability risks,
particularly with respect to its security and inspection products. There are
many factors beyond the control of the Company that could lead to liability
claims, including the failure of the products in which the Company's
subsystems are installed, the reliability of the customer's operators of the
inspection equipment, and the maintenance of the inspection units by the
customers. There can be no assurance that the amount of product liability
insurance that the Company carries will be sufficient to protect the Company
from product liability claims. A product liability claim in excess of the
amount of insurance carried by the Company could have a material adverse
effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the continuing contributions of its key
management, technical and product development personnel. In particular, the
Company is dependent upon the services of Deepak Chopra, the Chairman of the
Company's Board of Directors, its President and Chief Executive Officer. In
addition, the loss of the services of any of the Company's other senior
managerial, technical or product development personnel could materially
adversely affect the Company's business, financial condition and results of
operations. The Company has entered into a five-year employment agreement with
Mr. Chopra and maintains a $13.0 million policy of key man life insurance on
the life of Mr. Chopra. The Company has also entered into shorter-term
employment agreements with certain of the Company's senior managerial and
technical personnel but does not maintain key man insurance policies on any of
its other employees. The
11
<PAGE>
Company's future success depends on its continuing ability to attract, retain
and motivate highly qualified managerial and technical personnel. Competition
for qualified technical personnel is intense. There can be no assurance that
these individuals will continue employment with the Company. The loss of
certain key personnel could materially adversely affect the Company's
business, financial condition and results of operations. See "Business--
Employees" and "Management."
ENVIRONMENTAL REGULATION
The Company is subject to various federal, state and local environmental
laws, ordinances and regulations relating to the use, storage, handling and
disposal of certain hazardous substances and wastes used or generated in the
manufacturing and assembly of the Company's products. Under such laws, the
Company may become liable for the costs of removal or remediation of certain
hazardous substances or wastes that have been or are being disposed of offsite
as wastes or that have been or are being released on or in its facilities.
Such laws may impose liability without regard to whether the Company knew of,
or caused, the release of such hazardous substances or wastes. The Company
believes that it is currently in compliance with all material environmental
regulations in connection with its manufacturing operations, that it has
obtained all necessary material environmental permits to conduct its business
and has no knowledge of any offsite disposal or releases on site that could
have a material adverse affect on the Company. However, there can be no
assurance that any environmental assessments undertaken by the Company with
respect to its facilities have revealed all potential environmental
liabilities, that any prior operator of the properties did not create any
material environmental condition not known to the Company, or that an
environmental condition that could result in penalties, expenses, or liability
for the Company does not otherwise exist in any one or more of the facilities.
In addition, the amount of hazardous substances or wastes produced or
generated by the Company may increase in the future depending on changes in
the Company's operations. Any failure by the Company to comply with present or
future regulations could subject the Company to the imposition of substantial
fines, suspension of production, alteration of manufacturing processes or
cessation of operations, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Compliance with such regulations could require the Company to acquire
expensive remediation equipment or to incur substantial expenses. Any failure
of the Company to control or properly manage the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or assist in the
cleanup of, hazardous or toxic substances, could subject the Company to
significant liabilities, including joint and several and retroactive liability
under certain statutes. Furthermore, the presence of hazardous substances on a
property or at certain offsite locations could result in the Company incurring
substantial liabilities as a result of a claim by a private third party for
personal injury or a claim by an adjacent property owner for property damage.
The imposition of any of the foregoing liabilities could materially adversely
affect the Company's business, financial condition and results of operations.
See "Business--Environmental Regulations."
CONCENTRATION OF OWNERSHIP; CONTROL BY MANAGEMENT
Upon successful completion of this Offering, the Company's principal
shareholders, Scope Industries and Deepak Chopra, the President and Chief
Executive Officer of the Company, will beneficially own approximately 18.1%
and 16.1%, respectively, of the Company's Common Stock (17.1% and 14.2%,
respectively, if the Underwriters' over-allotment option is exercised in
full), and the present directors and executive officers of the Company
(including Scope Industries, an affiliate of one of the directors) will, in
the aggregate, beneficially own 41.7% of the outstanding Common Stock (37.6%
if the Underwriters' over-allotment option is exercised in full). Meyer
Luskin, the President, Chief Executive Officer, Chairman of the Board of
Directors and principal shareholder of Scope Industries, is a director of the
Company. Consequently, Scope Industries, together with the Company's directors
and executive officers acting in concert, will have the ability to
significantly affect the election of the Company's directors and have a
significant effect on the outcome of corporate actions requiring shareholder
approval. Such concentration may also have the effect of delaying or
preventing a change of control of the Company. See "Principal and Selling
Shareholders," and "Management."
12
<PAGE>
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL ANTI-
TAKEOVER PROVISIONS
The Company's Articles of Incorporation authorize the Company's Board of
Directors to issue up to 10,000,000 shares of preferred stock in one or more
series, to fix the rights, preferences, privileges and restrictions granted to
or imposed upon any wholly unissued shares of preferred stock, to fix the
number of shares constituting any such series, and to fix the designation of
any such series, without further vote or action by its shareholders. The terms
of any series of preferred stock, which may include priority claims to assets
and dividends and special voting rights, could adversely affect the rights of
the holders of Common Stock and thereby reduce the value of the Common Stock.
The Company has no present plans to issue shares of preferred stock. The
issuance of preferred stock, coupled with the concentration of ownership in
the directors and executive officers, could discourage certain types of
transactions involving an actual or potential change in control of the
Company, including transactions in which the holders of Common Stock might
otherwise receive a premium for their shares over then current prices,
otherwise dilute the rights of holders of Common Stock, and may limit the
ability of such shareholders to cause or approve transactions which they may
deem to be in their best interests, all of which could have a material adverse
effect on the market price of the Common Stock offered hereby. See
"Description of Capital Stock--Preferred Stock."
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION
Prior to this Offering there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after the Offering. The initial
public offering price will be determined through negotiations between the
Company and the representatives of the Underwriters. See "Underwriting."
Additionally, the market price of the Common Stock could be subject to
significant fluctuations in response to variations in actual and anticipated
quarterly operating results and other factors, including announcements of new
products or technical innovations by the Company or its competitors. Further,
investors participating in the Offering will incur immediate and substantial
dilution in the net tangible book value of their shares. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this Offering could have an adverse effect on the market price of the Common
Stock. Upon completion of this Offering, the Company will have outstanding
approximately 9,563,778 shares of Common Stock, of which 3,700,000 shares
offered hereby (4,255,000 shares if the Underwriters' over-allotment option is
exercised in full), will be freely tradeable without restriction or further
registration under the Securities Act. The remaining 5,863,778 shares of
Common Stock outstanding upon completion of this Offering are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"). Pursuant to lock-up agreements between certain
securityholders and representatives of the Underwriters, the securityholders
have agreed not to sell approximately 5,838,000 shares of Common Stock
(including any additional shares issued upon the exercise of any options) for
180 days following the date of this Prospectus. However, beginning 180 days
after the date of this Prospectus, subject in certain cases to the volume
restrictions of Rule 144, all 5,863,778 shares will become freely transferable
and available for immediate sale in the public market. The existence of a
large number of shares eligible for future sale could have an adverse impact
on the Company's ability to raise additional equity capital or on the price at
which such equity capital could by raised.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER CALIFORNIA LAW
The Company's Articles of Incorporation provide that, pursuant to the
California Corporations Code, the liability of the directors of the Company
for monetary damages shall be eliminated to the fullest extent permissible
under California law. This is intended to eliminate the personal liability of
a director for monetary damages in an action brought by, or in the right of,
the Company for breach of a director's duties to the Company or its
shareholders. This provision does not eliminate the directors' fiduciary duty
and does not apply
13
<PAGE>
for certain liabilities: (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law; (ii) for acts or
omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived
an improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders; (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders; (vi) with respect
to certain transactions or the approval of transactions in which a director
has a material financial interest; and (vii) expressly imposed by statute for
approval of certain improper distributions to shareholders or certain loans or
guarantees. See "Management--Limitation on Directors' Liability."
BROAD DISCRETION AS TO USE OF PROCEEDS
Of the net proceeds of this Offering to be received by the Company,
approximately $29.3 million or approximately 71.1% of the total estimated net
proceeds has been generally allocated to increasing the Company's research and
development activities, to enhancing the Company's sales and marketing
capabilities, to pursuing possible acquisitions, and for working capital
purposes. The amount of net proceeds allocated to each of these specific
purposes has not been established and will, therefore, be used for these
purposes as management may determine in its sole discretion without the need
for shareholder approval with respect to any such allocation.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of 3,330,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $13.50 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, are estimated to be
approximately $41.2 million. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholders. The Selling
Shareholders who own the 370,000 shares to be sold in this Offering will bear
their pro rata share of all expenses incurred in connection with this
Offering.
The principal reasons for this Offering are to enable the Company to repay
bank indebtedness, to increase the Company's research and development
activities, to enhance its sales and marketing capabilities, to pursue
possible acquisitions, and to increase the Company's funds available for
general corporate purposes, including working capital purposes. Although a
portion of the net proceeds may be used to pursue possible strategic
acquisitions, the Company is not currently a party to any commitments or
agreements, and is not currently involved in any negotiations with respect to
any acquisitions. While the Company intends to use the net proceeds it
receives from this Offering for the foregoing purposes, other than the
repayment of indebtedness, the Company is currently unable to specifically
allocate the net proceeds among the foregoing purposes. See "Risk Factors--
Broad Discretion as to Use of Proceeds." The Company intends to repay a total
of approximately $11.9 million outstanding under various bank facilities as
described below.
<TABLE>
<CAPTION>
APPROXIMATE
PRINCIPAL
AMOUNT AT RATE BASIS RATE AT
FACILITY JUNE 30, 1997 PER ANNUM(1) JUNE 30, 1997 MATURITY
- -------- ------------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Revolving Credit $5,077,000 Variable rate plus 0.25% 8.75% November 1998
Term Loan 2,344,000 Variable rate plus 0.50% 9.00% March 2001
Revolving Credit 1,500,000 Variable rate plus 0.25% 8.75% October 1997
Revolving Credit 963,000 Variable rate plus 1.85% 7.85% December 1997
Revolving Credit 974,000 Variable rate plus 1.50% 10.00% On demand
Term Loan 41,000 Variable rate plus 2.25% 10.75% November 1997
Revolving Credit 586,000 Variable rate 6.65% Evergreen
Term Loan 437,000 5.75% 5.75% June 2001
</TABLE>
- ---------------
(1) The term "variable rate" means the bank's prime rate or other published
reference rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Borrowings under the foregoing bank facilities are generally used for
working capital purposes. However, in connection with the acquisition of AME
earlier this year, the Company borrowed approximately $900,000 under these
facilities to pay the cash portion of the purchase price of that subsidiary.
The Company is also considering exercising its option to purchase its
headquarters and its engineering and manufacturing facilities in Hawthorne,
California. See "Business--Facilities." If the Company elects to purchase the
facilities, it may use a portion of the proceeds of this Offering to pay part
or all of the approximately $3.0 million purchase price.
Pending the foregoing uses, the Company intends to invest the net proceeds
of this Offering in short-term, interest bearing, investment-grade securities.
DIVIDEND POLICY
The Company currently anticipates that it will retain any available funds
for use in the operation of its business, and does not currently intend to pay
any cash dividends in the foreseeable future. Future cash dividends, if any,
will be determined by the Board of Directors. The payment of cash dividends by
the Company is restricted by certain of the Company's current bank credit
facilities, and future borrowings may contain similar restrictions.
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<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997: (i) the actual short-
term debt and capitalization of the Company; and (ii) the short-term debt and
capitalization as adjusted to give effect to the sale of the 3,330,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $13.50 per share and the application of the estimated net
proceeds from the Offering.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(In thousands)
<S> <C> <C>
Short-term debt........................................ $10,340 $ 465
======= =======
Long-term debt, less current portion................... 2,840 793
Shareholders' equity:
Preferred Stock, no par value;
10,000,000 shares authorized; none issued and
outstanding......................................... -- --
Common Stock, no par value(1)(2);
40,000,000 shares authorized, actual and as
adjusted;
6,156,528 shares issued and outstanding, actual;
9,486,528 issued and outstanding, as adjusted....... 7,367 48,575
Retained earnings.................................... 9,171 9,171
Cumulative foreign currency translation adjustment... 271 271
------- -------
Total shareholders' equity......................... 16,809 58,017
------- -------
Total capitalization............................. $19,649 $58,810
======= =======
</TABLE>
- ---------------
(1) Excludes 860,486 shares of Common Stock issuable upon exercise of
outstanding stock options as of June 30, 1997. An additional 77,250 shares
of Common Stock were issued in September 1997 for a total purchase price
of $252,625 upon the exercise of outstanding stock options.
(2) Includes 27,654 shares of Common Stock that were issued after June 30,
1997 as additional consideration for the Company's purchase in November
1996 of certain minority shareholdings in Rapiscan U.S.A. See "Certain
Transactions."
16
<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1997 , was
$14,707,000 or $2.39 per share. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
assets net of goodwill less total liabilities of the Company) by the number of
shares of Common Stock outstanding . After giving effect to the sale of
3,330,000 shares offered by the Company hereby at an assumed initial public
offering price of $13.50 per share (after deduction of estimated underwriting
discounts and commissions and estimated offering expenses), the pro forma net
tangible book value of the Company as of June 30, 1997 would have been
$55,915,000, or $5.89 per share. This represents an immediate increase in the
net tangible book value of $3.50 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $7.61 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $13.50
Net tangible book value before Offering...................... $2.39
Increase in net tangible book value attributable to this
Offering.................................................... 3.50
-----
Pro forma net tangible book value after Offering............... 5.89
------
Dilution to new investors...................................... $ 7.61
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid, and the average price per share paid by the existing
shareholders and by purchasers of the shares of Common Stock offered hereby
(assuming the sale of 3,330,000 shares by the Company at an assumed initial
public offering price of $13.50 per share, before deduction of underwriting
discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 6,233,778 65.2% $ 7,620,000 14.5% $ 1.22
New public investors... 3,330,000 34.8 44,955,000 85.5 $13.50
--------- ----- ----------- -----
Total................. 9,563,778 100.0% $52,575,000 100.0%
========= ===== =========== =====
</TABLE>
As of September 30, 1997, there are outstanding options to purchase an
aggregate of 783,236 of Common Stock at a weighted average exercise price of
approximately $7.74 per share. To the extent that options are exercised or
additional shares are issued, there will be further dilution to new investors.
See "Management--Stock Option Plans" and "Certain Transactions."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain financial data which should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein. The statement of operations data for each of the three fiscal years in
the period ended June 30, 1997, and the balance sheet data at June 30, 1996
and 1997 are derived from the consolidated financial statements of the Company
which have been audited by Deloitte & Touche, LLP, independent accountants,
and are included elsewhere in this Prospectus. The statements of operations
data for the years ended June 30, 1993 and 1994 and the balance sheet data at
June 30, 1993, 1994 and 1995 are derived from audited financial statements not
otherwise contained herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues................ $ 27,225 $ 47,735 $ 49,815 $61,518 $77,628
Cost of goods sold...... 20,591 36,037 37,818 45,486 56,174
--------- --------- --------- --------- ---------
Gross profit............ 6,634 11,698 11,997 16,032 21,454
Operating expenses:
Selling, general and
administrative(1)..... 4,014 7,974 7,601 9,757 11,304
Research and
development........... 1,034 1,451 1,591 1,663 2,504
Stock option
compensation(2)....... -- -- -- -- 856
--------- --------- --------- --------- ---------
Total operating
expenses.............. 5,048 9,425 9,192 11,420 14,664
--------- --------- --------- --------- ---------
Income from operations.. 1,586 2,273 2,805 4,612 6,790
Interest expense........ 471 710 1,251 1,359 1,197
--------- --------- --------- --------- ---------
Income before income
taxes and minority
interest............... 1,115 1,563 1,554 3,253 5,593
Provision for income
taxes.................. 462 814 413 1,111 1,416
--------- --------- --------- --------- ---------
Income before minority
interest............... 653 749 1,141 2,142 4,177
Minority interest....... 6 38 17 117 --
--------- --------- --------- --------- ---------
Net income.............. $659 $787 $1,158 $2,259 $4,177
========= ========= ========= ========= =========
Net income available to
common
shareholders(3)(4)..... $814 $995 $1,357 $2,308 $4,269
========= ========= ========= ========= =========
Net income per
share(3)(4)(5)......... $0.13 $0.16 $0.22 $0.38 $0.68
========= ========= ========= ========= =========
Weighted average shares
outstanding(5)......... 6,139,429 6,249,674 6,172,901 6,134,669 6,263,963
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................... $941 $625 $1,405 $581 $553
Working capital......................... 3,852 2,280 12,117 6,044 10,800
Total assets............................ 15,739 25,807 30,780 35,309 47,333
Total debt.............................. 6,882 11,140 14,113 15,462 13,180
Total shareholders' equity.............. 2,256 3,128 4,951 7,194 16,809
</TABLE>
- -------------
(1) Fiscal 1994 includes a one time charge of $1.5 million incurred in
connection with the settlement of a governmental proceeding. See
"Business--Legal Proceedings."
(2) Represents a charge resulting from the acceleration of the vesting periods
of outstanding stock options having exercise prices below the fair market
value on the date of grant. The charge had the effect of decreasing income
from operations, net income and net income available to common
shareholders by $856,000, $514,000 and $514,000, respectively.
(3) Gives effect to the conversion of certain subordinated debt into preferred
stock and Common Stock in October and November 1996, and the issuance of
Common Stock for the purchase of the remaining minority interests in
certain subsidiaries in October and December 1996 as if such transactions
occurred on July 1, 1992. Adjustments in each of the five years ended June
30, 1997 consist of: (i) the elimination of interest expense related to
converted subordinated debt of 161, 000, 246,000, 216,000, $166,000 and
$92,000, net of income taxes, respectively; and (ii) the elimination of
the minority interest in the net loss of subsidiaries of 6,000, 38,000,
17,000, $117,000 and $0, respectively.
(4) Supplementary net income for each of the five years ended June 30, 1997 is
$936,000, $1,163,000, $1,939,000, $2,913,000 and $4,872,000, respectively,
reflecting the reduction in interest expense, net of income taxes, from
the effect of debt repayments discussed under "Use of Proceeds."
Supplementary net income per share for the corresponding periods is $0.15,
$0.18, $0.28, $0.42 and $0.68, respectively, and reflects only the
additional shares issued to repay that debt.
(5) Assumes the conversion of 2,568,750 shares of preferred stock into
3,853,125 shares of Common Stock as of July 1, 1992. The preferred stock
had a liquidation preference of $1.00 per share, and was otherwise
entitled to the same voting, dividend and all other rights as the Common
Stock.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a vertically integrated worldwide provider of devices,
subsystems and end-products based on optoelectronic technology. The Company
designs and manufactures optoelectronic devices and value added subsystems for
OEMs for use in a broad range of applications, including security, medical
diagnostics, telecommunications, office automation, aerospace, computer
peripherals and industrial automation. In addition, the Company utilizes its
optoelectronic technology and design capabilities to manufacture security and
inspection products that it markets worldwide to end users under the
"Rapiscan" brand name. These products are used to inspect baggage, cargo and
other objects for weapons, explosives, drugs and other contraband. In fiscal
1997, revenues from the sale of optoelectronic devices and subsystems amounted
to $42.9 million, or approximately 55.2% of the Company's revenues, while
revenues from sales of security and inspection products amounted to $34.7
million, or approximately 44.8% of the Company's revenues.
The Company was organized in May 1987. The Company's initial products were
optoelectronic devices and subsystems sold to customers for use in the
manufacture of x-ray scanners for carry-on airline baggage. In December 1987,
the Company formed OSI Singapore to manufacture optoelectronic devices and
subsystems. In April 1990, the Company acquired United Detector Technology's
subsystem business. In February 1993, the Company acquired the Rapiscan UK
security and inspection operations and, through Rapiscan U.S.A., commenced its
operations as a provider of security and inspection products in the United
States. In April 1993, the Company acquired Ferson, a U.S. manufacturer of
passive optic components. In July 1994, the Company established OSI Malaysia
to manufacture optoelectronic subsystems as well as security and inspection
products. In March 1997, the Company acquired AME for the purpose of
broadening its optoelectronic subsystem business in Europe. The Company
currently owns all of the outstanding shares of each of these companies.
In January 1994 the Company entered into a joint venture agreement with
Electronics Corporation of India, Limited ("ECIL"), an unaffiliated Indian
corporation, pursuant to which the Company and ECIL formed ECIL-Rapiscan
Security Products Limited ("ECIL Rapiscan"). The joint venture was established
for the purpose of manufacturing security and inspection products in India
from kits sold to ECIL by the Company. The Company currently owns a 36.0%
interest in ECIL Rapiscan.
The Company engages in significant international operations. The Company
currently manufactures its optoelectronic devices and subsystems at its
facilities in Hawthorne, California, in Ocean Springs, Mississippi, in Johor
Bahru, Malaysia, and in Horten, Norway. Its security and inspection products
are manufactured at its facilities in Crawley, England, in Long Beach,
California, and in Johor Bahru, Malaysia. As of June 30, 1997, the Company
markets its products worldwide through approximately 42 sales and marketing
employees located in five countries, and through approximately 95 independent
sales representatives. Revenues from shipments made outside of the United
States accounted for 32.0%, 38.0%, and 42.2% of revenues for the fiscal years
1995, 1996 and 1997, respectively. Information regarding the Company's
operating income or loss and identifiable assets attributable to each of the
Company's geographic areas is set forth in Note 14 in the Company's
Consolidated Financial Statements.
The effective income tax rate for the Company for fiscal 1995, 1996 and 1997
was 26.6%, 34.2% and 25.3%, respectively. Certain products manufactured in the
United States and sold overseas are sold through a Foreign Sales Corporation
("FSC") organized by the Company in 1990. Export sales made through the FSC
are subject to federal tax advantages. If the tax advantages derived from
sales made through the FSC and certain existing state and federal tax credits
remain in effect, and if certain future foreign tax benefits are received as
anticipated, the Company believes that its effective income tax rate will be
below 32.0% during the next three fiscal years.
19
<PAGE>
The Company's products currently address two principal markets. The
Company's optoelectronic devices and subsystems are designed and manufactured
primarily for sale to OEMs, while the Company's security and inspection
products are sold to end-users. Two principal customers of the Company's
optoelectronic devices and subsystems are the Company's Rapiscan UK and
Rapiscan U.S.A. subsidiaries. Revenues from the sale of the Company's
optoelectronic devices and subsystems to these two subsidiaries are eliminated
from the Company's reported revenues. Revenues from the Company's principal
markets and intercompany eliminations are presented in the table below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Optoelectronic devices and subsystems...... $34,729 $37,977 $45,007 $51,554
(Inter-company eliminations)............... (1,257) (1,529) (6,392) (8,675)
------- ------- ------- -------
Unaffiliated optoelectronic devices and
subsystems .............................. 33,472 36,448 38,615 42,879
Security and inspection products........... 14,263 13,367 22,903 34,749
------- ------- ------- -------
Total revenues............................ $47,735 $49,815 $61,518 $77,628
======= ======= ======= =======
In recent years, the Company has experienced increased revenues from its
security and inspection products, both in absolute dollars and as a percentage
of total Company revenues, a trend which the Company believes will continue.
The Company has recently initiated a program to produce larger security and
inspection products, including those for use in inspecting cargo, which
products are likely to have significantly higher selling prices than most of
the Company's products sold to date. Sales of products with higher average
selling prices may increase fluctuations in the Company's quarterly revenues
and earnings.
The Company recognizes revenues upon shipment. As the Company's product
offerings change to include sales of significantly larger systems, such as
cargo inspection products, the Company may adopt the percentage of completion
method of revenue recognition for certain products.
RESULTS OF OPERATIONS
The following table sets forth certain income and expenditure items as a
percentage of total revenues for the periods indicated:
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 75.5 75.9 73.9 72.4
------- ------- ------- -------
Gross profit............................... 24.5 24.1 26.1 27.6
Operating expenses:
Selling, general and administrative....... 16.7 15.3 15.9 14.6
Research and development.................. 3.0 3.2 2.7 3.2
Stock option compensation................. -- -- -- 1.1
------- ------- ------- -------
Total operating expenses................. 19.7 18.5 18.6 18.9
------- ------- ------- -------
Income from operations..................... 4.8 5.6 7.5 8.7
Interest expense........................... 1.5 2.5 2.2 1.5
------- ------- ------- -------
Income before income taxes and minority
interest.................................. 3.3 3.1 5.3 7.2
Provision for income taxes................. 1.7 0.8 1.8 1.8
------- ------- ------- -------
Income before minority interest............ 1.6 2.3 3.5 5.4
Minority interest.......................... -- -- 0.2 --
------- ------- ------- -------
Net income................................. 1.6% 2.3% 3.7% 5.4%
======= ======= ======= =======
</TABLE>
20
<PAGE>
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1997 TO THE FISCAL YEAR ENDED
JUNE 30, 1996
Revenues. Revenues consist of sales of optoelectronic devices and subsystems
as well as of security and inspection products. Revenues are recorded net of
all inter-company eliminations. Revenues for the fiscal year ended June 30,
1997 increased by $16.1 million, or 26.2%, to $77.6 million from $61.5 million
for the fiscal year ended June 30, 1996. Revenues from the sale of
optoelectronic devices and subsystems, net of inter-company eliminations,
increased by $4.3 million, or 11.0%, to $42.9 million from $38.6 million for
fiscal 1996. The increase was the result of increased orders from existing
customers, particularly in the medical diagnostics industry, and the expansion
of the Company's product base. Revenues from the sale of security and
inspection products increased by $11.8 million, or 51.7%, to $34.7 million
from $22.9 million for fiscal 1996. The increase was due mainly to the
continued acceptance of the Rapiscan Series 500 EPX System, which was
introduced in 1995, the growth in sales of the Rapiscan 119 tabletop model and
the introduction of large cargo inspection machines.
Gross Profit. Cost of goods sold consists of material, labor and
manufacturing overhead. Gross profit increased by $5.4 million, or 33.8%, to
$21.5 million from $16.0 million for fiscal 1996. As a percentage of revenues,
gross profit increased to 27.6% in fiscal 1997 from 26.1% in fiscal 1996.
Gross margin increased as a result of the fact that fixed costs did not
increase proportionally with the increase in revenues. In addition, gross
profit improved as a result of the Company continuing to increase the
production of product manufactured at its offshore facilities, thereby
capitalizing on lower labor and other manufacturing costs.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of compensation paid to sales, marketing, and
administrative personnel, professional service fees, and marketing expenses.
For fiscal 1997, such expenses increased by $1.5 million, or 15.9%, to $11.3
million from $9.8 million in fiscal 1996. As a percentage of revenues,
selling, general and administrative expenses decreased to 14.6% from 15.9%.
The increase in expenses was due to increases in payroll expenses to support
revenue growth as well as to increases in legal expenses.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For
fiscal 1997, such expenses increased by $841,000, or 50.6%, to $2.5 million
from $1.7 million in fiscal 1996. As a percentage of revenues, research and
development expenses increased to 3.2% from 2.7%. The increase was due
primarily to continued enhancement of the Rapiscan Series 500 EPX System and
efforts to develop products for cargo scanning. In addition, the Company
expensed all research and development expenses in the 1997 period as incurred,
whereas certain of such expenses related to software products, the
technological feasibility of which had been established, were capitalized in
the 1996 period.
Income from Operations. Income from operations for fiscal 1997 increased by
$2.2 million, or 47.2%, to $6.8 million from $4.6 million for fiscal 1996.
Excluding the non-recurring non-cash incentive compensation expense of
$856,000 incurred in connection with the acceleration of the vesting period of
stock options granted to certain employees during fiscal 1997, income from
operations increased by $3.0 million, or 65.8%, to $7.6 million from $4.6
million. As a percent of revenues, income from operations increased to 8.7%
from 7.5%, and excluding the non-cash compensation expense referenced above,
it would have increased to 9.8% from 7.5%.
Interest Expense. Interest expense for fiscal 1997 decreased by $162,000, or
11.9%, to $1.2 million from $1.4 million for fiscal 1996. As a percentage of
revenues, interest expense decreased to 1.5% from 2.2%. The decrease was due
to the conversion of the Company's subordinated debt to preferred and common
stock during fiscal 1997, and to a decrease in the Company's borrowings
outstanding under its lines of credit.
21
<PAGE>
Provision for Income Taxes. Provision for income taxes for fiscal 1997
increased by $305,000, or 27.5%, to $1.4 million from $1.1 million for fiscal
1996. As a percentage of income before provision for income taxes and minority
interest, provision for income taxes decreased to 25.3% from 34.2% in fiscal
1996. The decrease was a result of increases in the Company's export sales
through its FSC, which has the effect of reducing the tax rate on revenues
from foreign sales made from the United States, and the increased utilization
of research and development and certain state tax credits. In addition, the
Company has made the California Waters Edge election under California tax law,
which has the effect of exempting its foreign subsidiaries from California
taxes through fiscal 2003.
Net Income. For the reasons outlined above, net income for fiscal 1997,
increased $1.9 million, or 84.9%, to $4.2 million from $2.3 million in fiscal
1996. The compensation charge described above, decreased net income by
$514,000 in fiscal 1997.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1996 TO THE FISCAL YEAR ENDED
JUNE 30, 1995
Revenues. Revenues for the fiscal year ended June 30, 1996 increased by
$11.7 million, or 23.5%, to $61.5 million from $49.8 million for the fiscal
year ended June 30, 1995. Revenues from the sale of optoelectronic devices and
subsystems, net of inter-company eliminations, increased by $2.2 million, or
5.9%, to $38.6 million from $36.4 million for fiscal year 1995. The increase
was the result of a 10.0% growth in sales of active optoelectronic devices and
subsystems, offset in part by a decline in sales of lenses and other passive
optic components. Revenues from the sale of security and inspection products
increased by $9.5 million, or 71.3%, to $22.9 million from $13.4 million in
the comparable 1995 period. The increase was due mainly to the increased
penetration of the U.S. security and inspection market and to larger shipments
made to two international customers.
Gross Profit. Gross profit increased by $4.0 million, or 33.6%, to $16.0
million from $12.0 million for fiscal 1995. As a percentage of revenues, gross
profit increased to 26.1% from 24.1%. Gross margin increased as a result of
the Company more fully realizing the benefits of having established a
manufacturing facility in Malaysia in fiscal 1995, which had the effect of
decreasing labor rates.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $2.2 million, or 28.4%, to $9.8 million from $7.6
million for fiscal 1995. As a percentage of revenues, selling, general and
administrative expenses increased to 15.9% from 15.3%. The increase in
expenses was due to increases in sales and marketing activities to support the
growth in sales of security and inspection products in the United States, as
well as general increases in payroll and administration to support sales
growth.
Research and Development. Research and development expenses increased by
$72,000, or 4.5%, to $1.7 million from $1.6 million for fiscal 1995. As a
percentage of revenues, research and development expenses decreased to 2.7%
from 3.2%, as increased research and development expenses related to security
and inspection products were offset in part by decreases in such expenses
related to optoelectronic products.
Income from Operations. Income from operations increased by $1.8 million, or
64.4%, to $4.6 million from $2.8 million for fiscal 1995. As a percent of
revenues, income from operations increased to 7.5% from 5.6%. The increase was
due to the reasons outlined above, as both cost of goods sold and selling,
general, and administrative expenses did not increase as much as revenues
during the period.
Interest Expense. Interest expense increased by $108,000, or 8.6%, to $1.4
million from $1.3 million for fiscal 1995. The increase was due to an increase
in borrowings outstanding under the Company's line of credit. As a percentage
of revenues, interest expense decreased to 2.2% from 2.5%.
Provision for Income Taxes. Provision for income taxes increased by
$698,000, or 169%, to $1.1 million from $413,000 in fiscal 1995. As a
percentage of income before provision for income taxes and minority
22
<PAGE>
interest, provision for income taxes increased to 34.2% in fiscal 1996 from
26.6% for the prior fiscal year. The increase resulted primarily from a
reduction in certain state income tax credits, the repeal of the federal
research and development credits, and a lower tax benefit from the Company's
FSC in fiscal 1996.
Net Income. For the reasons outlined above, net income for the fiscal year
ended June 30, 1996, increased $1.1 million, or 95.1%, to $2.3 million from
$1.2 million for fiscal 1995.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1995 TO THE FISCAL YEAR ENDED
JUNE 30, 1994
Revenues. Revenues for the fiscal year ended June 30, 1995 increased by $2.1
million, or 4.4%, to $49.8 million from $47.7 million for the fiscal year
ended June 30, 1994. Revenues from the sale of optoelectronic devices and
subsystems, net of inter-company eliminations, increased by $2.9 million, or
8.9%, to $36.4 million from $33.5 million in fiscal 1994. The increase was the
result of increased sales of subsystems in most of the product markets served
by the Company. Revenues from the sale of security and inspection products
decreased by $896,000, or 6.3%, to $13.4 million from $14.3 million in fiscal
1994. The decrease was due mainly to the shipment of large orders to customers
in fiscal year 1994 that were not repeated in fiscal year 1995. Aside from the
timing of these large order shipments, base business in security and
inspection products in fiscal 1995 increased over the prior fiscal year.
Gross Profit. Gross profit increased by $299,000, or 2.6%, to $12.0 million
from $11.7 million for fiscal 1994. As a percentage of revenues, gross profit
decreased to 24.1% from 24.5%. Gross margin decreased because of the start-up
expenses associated with the opening of the Company's Malaysian manufacturing
facility during fiscal 1995.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $373,000, or 4.7%, to $7.6 million from $8.0 million for
fiscal 1994. As a percentage of revenues, selling, general and administrative
expenses decreased to 15.3% from 16.7%. Excluding a $1.5 million settlement
with the U.S. government which occurred in fiscal 1994, selling, general, and
administrative expenses increased by $1.1 million, or 17.4%. See "Business--
Legal Proceedings." Excluding this settlement, such expenses as a percentage
of revenues would have increased during the year from 13.6% to 15.3%. The
increase was due to increases in legal fees and other general increases
associated with revenue growth.
Research and Development. Research and development expenses increased by
$140,000, or 9.6%, to $1.6 million from $1.5 million for fiscal 1994. As a
percentage of revenues, research and development expenses increased to 3.2%
from 3.0%. The increase in research and development expenses occurred
primarily due to increased expenses related to the development of security and
inspection products.
Income from Operations. Income from operations increased by $532,000, or
23.4%, to $2.8 million from $2.3 million for fiscal 1994. As a percentage of
revenues, income from operations increased to 5.6% from 4.8%. The increase was
due to the decrease in selling, general, and administrative expenses in the
context of modest revenue growth.
Interest Expense. Interest expense increased by $541,000, or 76.2%, to $1.3
million from $710,000 in fiscal 1994. As a percentage of revenues, interest
expense increased to 2.5% from 1.5%. The increase was due to increased
borrowings under the Company's line of credit and interest on outstanding
amounts owed under the government settlement.
Provision for Income Taxes. Provision for income taxes decreased by
$401,000, or 49.3%, to $413,000 from $814,000 in fiscal 1994. As a percentage
of income before provision for income taxes and minority interest, provision
for income taxes decreased to 26.6% from 52.1%. The decrease was principally
the result of the non-deductible portion of the government settlement in
fiscal 1994.
Net Income. For the reasons outlined above, net income for the fiscal year
ended June 30, 1995 increased $371,000, or 47.1%, to $1.2 million from
$787,000 for fiscal 1994.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
eight consecutive quarters in the period ended June 30, 1997. This data is
unaudited but, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for fair
presentation of this information in accordance with generally accepted
accounting principles. The operating results for any quarter are not
necessarily indicative of results for any future period or for the entire
fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $12,539 $15,119 $17,336 $16,524 $16,530 $18,563 $20,880 $21,655
Cost of goods sold...... 9,657 11,382 12,599 11,848 11,884 13,286 15,210 15,794
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 2,882 3,737 4,737 4,676 4,646 5,277 5,670 5,861
Operating expenses:
Selling, general and
administrative........ 1,879 2,126 2,740 3,012 2,737 2,686 2,760 3,121
Research and
development........... 419 408 453 383 517 636 584 767
Stock option
compensation.......... -- -- -- -- -- -- 856 -
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,298 2,534 3,193 3,395 3,254 3,322 4,200 3,888
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 584 1,203 1,544 1,281 1,392 1,955 1,470 1,973
Interest expense........ 336 345 345 333 360 331 209 297
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest............... 248 858 1,199 948 1,032 1,624 1,261 1,676
Provision for income
taxes.................. 85 293 409 324 259 408 316 433
------- ------- ------- ------- ------- ------- ------- -------
Income before minority
interest............... 163 565 790 624 773 1,216 945 1,243
Minority interest....... 19 17 (8) 89 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 182 $ 582 $ 782 $ 713 $ 773 $ 1,216 $ 945 $ 1,243
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth, as a percentage of revenues, certain
consolidated statements of operations data for the four quarters in each of
fiscal years 1996 and 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 77.0 75.3 72.7 71.7 71.9 71.6 72.8 72.9
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 23.0 24.7 27.3 28.3 28.1 28.4 27.2 27.1
Operating expenses:
Selling, general and
administrative........ 15.0 14.1 15.8 18.2 16.6 14.5 13.2 14.4
Research and
development........... 3.3 2.7 2.6 2.3 3.1 3.4 2.8 3.5
Stock option
compensation.......... -- -- -- -- -- -- 4.1 --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 18.3 16.8 18.4 20.5 19.7 17.9 20.1 17.9
----- ----- ----- ----- ----- ----- ----- -----
Income from operations.. 4.7 7.9 8.9 7.8 8.4 10.5 7.1 9.2
Interest expense........ 2.7 2.3 2.0 2.0 2.2 1.8 1.0 1.4
----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes and minority
interest............... 2.0 5.6 6.9 5.8 6.2 8.7 6.1 7.8
Provision for income
taxes.................. .7 1.9 2.3 2.0 1.6 2.2 1.5 2.0
----- ----- ----- ----- ----- ----- ----- -----
Income before minority
interest............... 1.3 3.7 4.6 3.8 4.6 6.5 4.6 5.8
Minority interest....... 0.2 -- (0.1) 0.5 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 1.5% 3.7% 4.5% 4.3% 4.6% 6.5% 4.6% 5.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
24
<PAGE>
The Company's quarterly operating results have varied in the past and are
likely to vary significantly in the future. These quarterly fluctuations are
the result of a number of factors, including the volume and timing of orders
received and shipments made during the period, variations in the Company's
product mix, changes in demand for the Company's products, the timing and
amount of expenditures made by the Company in anticipation of future sales,
variability in selling price, and other competitive conditions. The Company's
revenues, particularly from the sale of security and inspection products, are
increasingly dependent upon larger orders of multiple units and upon the sale
of products having higher average selling prices. The Company is unable to
predict the timing of the receipt of such orders and, as a result, significant
variations between forecasts and actual orders will often occur. Furthermore,
the rescheduling of the shipment of any large order, or portion thereof, or
any production difficulties or delays experienced by the Company, could have a
material adverse effect on the Company's quarterly operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash provided by
operations and through various term loans, discounting facilities, and
revolving credit lines extended to its different subsidiaries worldwide. As of
June 30, 1997, the Company's principal sources of liquidity consisted of
$553,000 in cash and several credit agreements described below.
The Company's operations provided net cash of $3.4 million during fiscal
1997. For fiscal 1997, the amount of net cash provided by operations reflects
adjustments for depreciation and amortization, the increase in accounts
payable and accrued expenses and the increase in advances from customers,
which is primarily attributable to advances received on a significant security
and inspection product contract obtained in fiscal 1997. Net cash provided by
operations was offset in part by increases in receivables and inventories.
Net cash used in investing activities was $3.0 million and $2.2 million in
fiscal 1997 and 1996, respectively, in each case due primarily to purchases of
property and equipment in the amount of approximately $2.2 million and $1.6
million, respectively. The Company expects to spend approximately $2.0 million
for purchases of property and equipment in fiscal 1998. In addition, the
Company may spend approximately $3.0 million if it exercises its option to
purchase its Hawthorne, California, facilities. The Company has no significant
capital spending or purchase commitments other than normal purchase
commitments and commitments under leases.
Net cash used in financing activities for fiscal 1997 was $526,000 due
primarily to the repayment of debt. Net cash provided by financing activities
in fiscal 1996 was $1.4 million due to increases in borrowings under the
Company's lines of credit. The Company intends to use a portion of the net
proceeds of this Offering to repay the amounts outstanding under the Company's
lines of credit.
In January 1997, OSI Systems, Inc. and its three U.S. subsidiaries entered
into a credit agreement with Sanwa Bank California. The agreement provides for
a $10.0 million line of credit, which includes revolving, letter of credit,
acceptance and foreign exchange facilities. In addition, the Company has a
$1.0 million equipment line of credit for capital purchases. At the borrowers'
election, advances under both lines of credit bear interest at a rate equal to
a variable bank reference rate plus 0.25% per annum or, at the Company's
option, at a fixed rate above LIBOR. At the borrowers' election, advances
under the equipment purchase facility bear interest at a variable bank
reference rate plus 0.25% per annum or a fixed rate quoted by the bank. The
agreement also provides for a term loan in a maximum amount of $2.5 million to
refinance existing indebtedness. At the borrowers' election, the term loan may
bear interest at a fixed or variable rate, as quoted by the bank. As of June
30, 1997, there was outstanding approximately $5.1 million under the $10.0
million line of credit, $2.4 million under the term loan, and approximately
$154,000 under the letter of credit facility. As of June 30, 1997, there were
no outstanding borrowings under the equipment line. Borrowings under the
agreement are secured by liens on substantially all of the Company's assets.
The agreement restricts the four borrowers from incurring certain additional
indebtedness and from making capital expenditures greater than $1.8 million in
the U.S. in any fiscal year. In addition, the credit agreement currently
requires that the Company at all times maintain (on a consolidated basis) a
current ratio of not less than 1.2 to 1, a tangible net worth of at least
$11.0 million, a ratio of debt to tangible net worth of not more than 3.0 to
1, and a ratio of cash, cash equivalents and accounts receivable to current
liabilities of not less than 0.6 to 1. The Company is currently in compliance
with all of these financial conditions.
25
<PAGE>
In November 1996, OSI Systems, Inc. and its three U.S. subsidiaries entered
into an agreement with Wells Fargo HSBC Trade Bank, N.A. Under the agreement
Wells Fargo will provide the four borrowers with a revolving credit line of up
to a maximum of $5.0 million to be used to pay obligations incurred in
connection with export orders. The revolving credit lines bear interest at the
bank's prime rate plus 0.25% per annum. Although the credit lines are
scheduled to expire on October 27, 1997, the bank has informed the Company
that, unless there is a material adverse change in the financial condition of
the Company, the bank intends to extend the term of the credit lines for one
additional year. As of June 30, 1997, there was outstanding approximately $1.5
million under the facility. The agreement also provides for a letter of credit
sub-facility up to an aggregate maximum of $4.0 million to be used for standby
letters of credit in support of bid and performance bonds associated with
specific foreign contracts, of which $1.9 million was used as of June 30,
1997. The facility terminates on October 27, 1997. Borrowings under the
agreement are secured by liens on certain of the Company's assets. The
agreement prohibits the Company from paying any dividends and restricts OSI
Systems, Inc. and these subsidiaries from making capital expenditures greater
than $1.8 million in the U.S. in any fiscal year.
In December 1996, Midland Bank plc agreed to provide certain banking
facilities to Rapiscan UK under two agreements. Under the first agreement,
Midland agreed to provide Rapiscan UK with a pound sterling overdraft, maximum
amount of 1.2 million pounds sterling (approximately $2.1 million at June 30,
1997) outstanding at any one time, which amounts are secured by certain assets
of Rapiscan UK. Outstanding borrowings will bear interest at a base rate plus
2.00% per annum. At June 30, 1997, no amounts were outstanding under the
overdraft facility. The second agreement provides for a 750,000 pound sterling
(approximately $1.3 million as of June 30, 1997) facility for purchase of
accounts receivable at 1.85% over a base rate and a 500,000 pound sterling
(approximately $832,000 as of June 30, 1997) facility for tender and
performance bonds. These facilities are secured by certain assets of Rapiscan
UK and OSI Systems, Inc. has guarantied Rapiscan UK's obligations under the
performance bond facility. As of June 30, 1997, there was outstanding
approximately $963,000 under the line of credit and $452,000 was outstanding
under the performance bond facility. The above facilities expire in December
and November 1997, respectively.
OSI Singapore has a loan agreement with Indian Bank (Singapore), which
provides for an accounts receivable discounting facility for borrowings of up
to 2.6 million Singapore dollars (approximately $1.8 million at June 30,
1997). The agreement also provides for a term loan with borrowings of 434,000
Singapore dollars (approximately $300,000 at June 30, 1997). Borrowings under
the line of credit bear interest at the bank's prime rate plus 1.50%. The line
of credit is terminable at any time. As of June 30, 1997 there was
approximately $974,000 outstanding under the line of credit and approximately
$41,000 was outstanding under the term loan. Borrowings under the line of
credit are collateralized by certain assets of OSI Singapore. The borrowings
under this line are guarantied by Messrs. Chopra, Mehra and Hickman, officers
of the Company. Borrowings secured by intercompany receivables are guarantied
by OSI Systems, Inc.
AME has a loan agreement with Christiania Bank OG Kreditkasse which provides
for a revolving line of credit for borrowings of up to 5.0 million Norwegian
krone (approximately $682,000 at June 30, 1997), of which $586,000 was
outstanding as of June 30, 1997. Borrowings under the line of credit bear
interest at an annual variable rate of 6.65%. The agreement also provides for
a term loan which matures in June 2001 and bears interest at an annual rate of
5.75%. At June 30, 1997 outstanding term loan borrowings totalled
approximately 3.2 million Norwegian krone (approximately $437,000).
OSI Malaysia has a bank guarantee line of credit for 2.5 million Malaysian
ringgits (approximately $1,000,000) with the Hong Kong Bank Malaysia Berhad
for performance bonds and standby letters of credit. This line expires in
October 1997.
The Company believes that the net proceeds from this offering together with
cash from operations, existing cash and lines of credit will be sufficient to
meet its cash requirements for the foreseeable future.
26
<PAGE>
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's operations in Singapore, Malaysia, England and
Norway are maintained in Singapore dollars, Malaysian ringgits, U.K. pounds
sterling and Norwegian krone, respectively. Foreign currency financial
statements are translated into U.S. dollars at current rates, with the
exception of revenues, costs and expenses, which are translated at average
rates during the reporting period. Gains and losses resulting from foreign
currency transactions are included in income, while those resulting from
translation of financial statements are excluded from income and accumulated
as a component of shareholder's equity. Transaction (losses) gains of
approximately ($19,000), $76,000, ($123,000) and $68,000 were included in
income for fiscal 1994, 1995, 1996 and 1997.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
27
<PAGE>
BUSINESS
GENERAL
The Company is a vertically integrated worldwide provider of devices,
subsystems and end-products based on optoelectronic technology. The Company
designs and manufactures optoelectronic devices and value-added subsystems for
OEMs for use in a broad range of applications, including security, medical
diagnostics, telecommunications, office automation, aerospace, computer
peripherals and industrial automation. In addition, the Company utilizes its
optoelectronic technology and design capabilities to manufacture security and
inspection products that it markets worldwide to end users under the
"Rapiscan" brand name. These products are used to inspect baggage, cargo and
other objects for weapons, explosives, drugs and other contraband. In fiscal
1997, revenues from the sale of optoelectronic devices and subsystems amounted
to $42.9 million, or approximately 55.2%, of the Company's revenues, while
revenues from sales of security and inspection products amounted to $34.7
million, or approximately 44.8% of the Company's revenues.
INDUSTRY OVERVIEW
The Company's products currently address two principal markets. The
Company's optoelectronic devices and subsystems are designed and manufactured
primarily for sale to OEMs, while the Company's security and inspection
products are sold to end-users.
Optoelectronic Devices and Subsystems. Optoelectronic devices consist of
both active components, such as silicon photodiodes, that sense light of
varying wavelengths and convert the light detected into electronic signals,
and passive components, such as lenses, prisms, filters and mirrors. An
optoelectronic subsystem typically consists of one or more optoelectronic
devices that are combined with other electronic components for integration
into an end-product. Optoelectronic devices and subsystems are used for a wide
variety of applications ranging from simple functions, such as the detection
of paper in the print path of a laser printer, to complex monitoring,
measurement or positioning functions, such as in industrial robotics where the
subsystem is used to detect the exact position, motion or size of another
object. Because optoelectronic devices and subsystems can be used in a wide
variety of measurement, control and monitoring applications, optoelectronics
may be used in a broad array of industrial applications.
The Company believes that in recent years advances in technology and
reductions in the cost of key components of optoelectronic systems, including
computer processing power and memory, have broadened the market by enabling
the use of optoelectronic devices in a greater number of applications. In
addition, the Company believes that there is a trend among OEMs to
increasingly outsource the design and manufacture of optoelectronic subsystems
to fully integrated, independent manufacturers who may have greater
specialization, broader expertise, and the ability and flexibility to respond
in shorter time periods than the OEM could accomplish in-house. The Company
believes that its high level of vertical integration, substantial engineering
resources, expertise in the use and application of optoelectronic technology,
and low-cost international manufacturing operations enable it to effectively
compete in the market for optoelectronic devices and subsystems.
Security and Inspection Products. A variety of products are currently used
worldwide in security and inspection applications. These products include
single energy x-ray equipment, dual energy x-ray equipment, trace detection
systems that detect particulate and chemical traces of explosive materials,
and CT scanners. To date, most of these products have been deployed primarily
at commercial airports worldwide. The Company believes that the growth in the
market for security and inspection products will continue to be driven by the
increased perception of threat fueled by recent terrorist incidents, increased
government mandates and appropriations, and the emergence of a growing market
for the non-security applications of its products.
28
<PAGE>
In the 1970s, principally in response to civilian airline hijackings, the
U.S. Federal Aviation Administration ("FAA") established security standards by
setting guidelines for the screening of carry-on baggage for weapons such as
guns and knives. These standards were later mandated by the United Nations for
adoption by all of its member states. The Company believes that to date the
imposition of these standards has resulted in the installation of over 10,000
x-ray inspection systems installed in airports worldwide. Additionally, the
United Kingdom Department of Transport has required the United Kingdom's
commercial airports to deploy systems for 100% screening of international
checked baggage by the end of 1998, and the European Civil Aviation
Conference, an organization of 33 member states, has agreed to implement 100%
screening of international checked baggage by the year 2000. In the United
States, largely in response to the explosion of Pan Am Flight 103 in December
1988, Congress enacted the Aviation Security Improvement Act of 1990 which,
among other initiatives, directed the FAA to establish and implement strict
security measures and to deploy advanced technology for the detection of
various contraband, including explosives, drugs, and currency. In July 1996,
President Clinton formed the White House Commission on Aviation Safety and
Security (the "Gore Commission"), to review airline and airport security and
to oversee aviation safety. In response to the initial report released by the
Gore Commission, the United States enacted legislation that includes $144
million in appropriations for the initial deployment of advanced security and
inspection technology at major U.S. airports.
X-ray inspection equipment, such as that sold by the Company, is also
increasingly being used for a number of purposes not related to security.
Newer versions of x-ray inspection equipment combine x-ray inspection with
computer image enhancement capabilities and can be applied to various non-
security purposes such as the detection of narcotics, gold and currency, the
inspection of agricultural products, and the inspection of cargo by customs
officers and international shippers. The Company believes that the market for
cargo inspection systems will increase significantly in the future.
GROWTH STRATEGY
The Company's objectives are to be a leading provider of specialized
optoelectronic products, to enhance its position in the international
inspection and detection marketplace and to leverage its expertise in the
optoelectronic technology industry by entering into new end-product markets on
a selective basis. Key elements of this strategy include:
Leverage its Optoelectronic Design and Manufacturing Expertise to Address
New Applications. The Company believes that one of its primary competitive
strengths is its expertise in designing and manufacturing specialized
optoelectronic subsystems for its OEM customers in a cost-effective manner.
The Company currently designs and manufactures devices and subsystems for over
200 customers serving over 100 applications. The Company has developed this
expertise in the past through internal research and development efforts and
through selective acquisitions. In 1990, the Company acquired UDT Sensors to
broaden its expertise and capabilities in developing and manufacturing
optoelectronic devices and subsystems. Thereafter, in 1992, the Company
acquired Ferson for its passive optic technologies, and AME in 1997 for AME's
hybrid optoelectronic capabilities. The Company intends to continue to build
this expertise in order to address a greater number of applications. By
expanding the number of potential applications its products may serve, the
Company intends to increase its business with existing customers and attract
new customers.
Further Penetrate Existing Security and Inspection Markets and Expand into
Other Markets. For the year ended June 30, 1997, approximately 27.3% of the
Company's security and inspection products were sold to airports or airlines
for security purposes, with the remainder of these products being sold to
other facilities for both security and nonsecurity related purposes. The
Company intends to continue to expand its sales and marketing efforts both
domestically and internationally to capitalize on opportunities in its
existing markets for new installations as well as on opportunities to replace,
service and upgrade existing security installations. In addition, through
research and development and selective acquisitions, the Company intends to
enhance and expand its current product offering to better address new
applications including automatic bomb detection and cargo scanning. The
Company believes that this strategy will enable it to take advantage of the
29
<PAGE>
growth its existing markets are experiencing and to benefit from additional
growth that these new and enhanced products will provide. The Company believes
that sales of its security and inspection products at locations other than at
airports will constitute an increasingly larger portion of its sales in the
future.
Capitalize on Vertical Integration. The Company believes it offers
significant added value to its OEM customers by providing a full range of
vertically integrated services including component design and customization,
subsystem concept design and application engineering, product prototyping and
development, and efficient pre-production, short-run and high volume
manufacturing. The Company believes that its vertical integration
differentiates it from many of its competitors and provides value to its OEM
customers who can rely on the Company to be an integrated supplier of an
optoelectronic subsystem. In addition, the Company's vertical integration
provides several other advantages in both its optoelectronic devices and
subsystems and security and detection product lines. These advantages include
reduced manufacturing and delivery times, lower costs due to its access to
competitive international labor markets and direct sourcing of raw materials,
and superior quality control. The Company intends to continue to leverage its
vertically integrated services to create greater value for its customers in
the design and manufacturing of its products. The Company believes that this
strategy better positions the Company for penetration into other end markets.
Capitalize on Global Presence. The Company operates in three locations in
the United States, three in Europe and two in Asia. The Company views its
international operations as providing an important strategic advantage over
competitors in both the optoelectronic device and subsystem market and the
security and inspection market for three primary reasons. First, international
manufacturing facilities allow the Company to take advantage of competitive
labor rates in order to be a low cost producer. Second, its international
offices strengthen its sales and marketing efforts and its ability to maintain
and repair its systems by providing direct access to growing foreign markets
and to its existing international customer base. Third, multiple manufacturing
locations allow the Company to reduce delivery times to its global customer
base. In the future, the Company intends to develop new sources of
manufacturing and sales capabilities to maintain and enhance the benefits of
its international presence.
Selectively Enter New End Markets. The Company intends to selectively enter
new end markets that complement its existing capabilities in designing,
developing and manufacturing optoelectronic devices and subsystems. The
Company believes that by manufacturing other end products which rely on the
technological capabilities of the Company, it can leverage its existing
integrated design and manufacturing infrastructure to capture greater margins
and build a significant presence in new end markets which present attractive
competitive market dynamics. The Company intends to achieve this strategy
through internal growth or through selective acquisitions of end-product
manufacturers.
PRODUCTS AND TECHNOLOGY
The Company designs, develops, manufactures and sells products based on its
core optoelectronic technology. These products range from discrete devices to
value-added subsystems to complete x-ray security and inspection products.
Discrete Devices and Subsystems. Optoelectronic devices generally consist of
both active and passive components. Active components sense light of varying
wavelengths and convert the light detected into electronic signals, whereas
passive components amplify, separate or reflect light. Active components
manufactured by the Company consist of silicon photodiodes and hybrid
photodetectors. Passive components include lenses, prisms, filters, mirrors
and other precision optical products that are used by the Company in the
manufacture of its optoelectronic products or are sold to others for use in
telescopes, laser printers, copiers, microscopes and other detection and
vision equipment. The devices manufactured by the Company are both standard
products and products customized for specific applications. Most of the
devices manufactured by the Company are incorporated by it into the subsystems
that it manufactures. The Company
30
<PAGE>
does, however, also sell its discrete devices separately to OEMs. Direct sales
of devices to third parties constituted less than 10.0% of the Company's
revenues in fiscal 1997.
In addition to the manufacture of discrete devices, the Company also
specializes in designing and manufacturing customized optoelectronic
subsystems for use in a wide range of products and equipment. An
optoelectronic subsystem typically consists of one or more optoelectronic
devices that are combined with other electronic components and packaging for
use in an end-product. The composition of a subsystem can range from a simple
assembly of various optoelectronic devices that are incorporated into other
subsystems (for example, a printed circuit board containing the Company's
optoelectronic devices), to complete end-products (for example, medical pulse
oximeter probes that are manufactured and packaged by the Company on behalf of
the OEM customer and then shipped directly to the customer or the customer's
distributors). Since the end of fiscal 1996, the Company has manufactured
subsystems for a variety of applications, including the following: imaging
electronics for medical CT scanners; disposable and reusable medical probes
for use with medical pulse oximetry equipment; components and subsystems for
laser gyroscopes used in military and commercial aviation; optoelectronic
subsystems for slot machines; laser subsystems in military helicopter gun
sighting equipment; positioning subassemblies for computer peripheral
equipment; alignment subsystems for laser heads in optical disc players; and
ultra-violet fire detection subsystems for submarines and surface ships.
Security and Inspection Equipment. The Company manufactures and sells a
range of security and inspection equipment that it markets under the
"Rapiscan" brand name. To date, the security and inspection equipment has
principally been used at airports to inspect carry-on and checked baggage for
guns and knives. However, inspection products are increasingly being used for
both security purposes at a wide range of facilities other than airports and
for other non-security purposes. For fiscal years 1995, 1996, and 1997
approximately 28.7%, 33.1%, and 27.3% respectively, of the Company's security
and inspection revenues were derived from the sale of inspection products to
airlines and airports, and the balance of such revenues were derived from all
other sales. The Company believes that sales of its inspection products for
use at non-airport locations will constitute an increasingly larger portion of
future revenues.
The Company's inspection and detection products combine the use of x-ray
technology with the Company's core optoelectronic capabilities. The base
models of its product line use single energy x-ray technology and are used for
identifying weapons with distinct shapes, such as guns and knives. The
Company's enhanced models combine dual- or multi-energy x-ray technology with
computer enhanced imaging technology to facilitate the detection of materials
such as explosives, narcotics, currency or other contraband. While all x-ray
systems produce a two-dimensional image of the contents of the inspected
material, the dual-energy x-ray systems also measure the x-ray absorption of
the inspected materials' contents at two x-ray energies to determine the
atomic number, mass and other characteristics of the object's contents. The
different organic and non-organic substances in the inspected material are
displayed in various colors. This information is then displayed to an operator
of the inspection equipment who can identify and differentiate the objects in
the inspected materials.
Currently, all of the Company's inspection products require an operator to
monitor the images produced by the inspection equipment. Depending on the
model, the Company's products permit the operator to inspect the contents of
packages at varying image modes and magnifications. The images range from the
monochrome and pseudo-color images produced by single x-ray imaging systems,
to high resolution, multi-color images in the Company's computer enhanced
dual-energy models. The Company believes that its Rapiscan 500 Series provides
one of the highest quality images currently available in the x-ray security
and inspection industry.
In order to monitor the performance of operators of the x-ray baggage
screening systems that are used in the United States airports, the FAA has
implemented a computer-based training and evaluation program known as the
Screener Proficiency Evaluation And Reporting System ("SPEARS"). The Company's
Rapiscan 500 Series EPX System is, to date, the only system that meets the
FAA's SPEARS criteria. In order to test the proficiency and attentiveness of
the operator, the Company's system is able to insert test threat images, such
as weapons, into an actual parcel stream by use of computer images.
31
<PAGE>
The following table sets forth certain information related to the standard
security and inspection products currently offered by the Company. The Company
does, however, also customize its standard products to suit specific
applications and customer requirements:
<TABLE>
<CAPTION>
MODEL (TECHNOLOGY) APPLICATIONS SELECTED INSTALLATIONS
- -------------------------------------------------------------------------------
<S> <C> <C>
Rapiscan 19 (single en- Inspection of incoming package Embassies
ergy)
Rapiscan 119 (single en- Post offices
ergy)
Courthouses
High risk office buildings
Manufacturing companies
- -------------------------------------------------------------------------------
Rapiscan 300 Series (160 Inspection of hand carried baggage Airports
kV x-ray source, Prisons
single energy and Government buildings
dual energy) Nuclear facilities
- -------------------------------------------------------------------------------
Rapiscan 500 Series- Airport hand carried and checked Airports
Standard baggage Cruise ships
Tunnel (single view and Pallet inspection Freight shippers
dual Customs inspections Border crossings
view 160 kV x-ray Agriculture inspection
source, single
energy and dual energy)
- -------------------------------------------------------------------------------
Rapiscan 500 Series- Large pallet inspection Airports
Large Tunnel Customs inspections Freight shippers
(single view and dual Border crossings
view High risk seaport locations
320-450 kV x-ray
source)
- -------------------------------------------------------------------------------
Rapiscan 500 Series-Mo- Mobile x-ray inspection Conventions and special events
bile Airports
Systems (x-ray van or Customs inspections
trailer) Border crossing
</TABLE>
In addition to its x-ray security and inspection products, the Company also
markets three models of an archway walk-through metal detector and two models
of a hand-held metal detector. These products are used to detect metal weapons
such as guns and knives and are installed at airports and other locations,
including prisons and schools. During fiscal 1997, sales of the walk-through
and hand-held metal detectors constituted 1.6% of the Company's revenues.
The Company's Rapiscan U.S.A. subsidiary has entered into a non-exclusive
patent license agreement with EG&G Inc. Under the license, Rapiscan U.S.A. is
permitted to make, use and sell or otherwise dispose of security and
inspection products that use an x-ray line scan system for baggage inspection
purposes covered by EG&G Inc.'s patent. The patent, which expires in 2000,
does not affect sales of the Company's security and inspection products
manufactured and sold outside of the United States.
32
<PAGE>
MARKETS, CUSTOMERS AND APPLICATIONS
Optoelectronic Devices and Subsystems. The Company's optoelectronic devices
and subsystems are used in a broad range of products by a variety of
customers. The following chart illustrates, for the year ended June 30, 1997:
(i) the major product categories for which the Company provided optoelectronic
products; (ii) the percentage of revenues from the sale of optoelectronic
devices and subsystems related to such categories; (iii) certain customers
("Major Customers") in each such category who purchased more than $100,000 of
optoelectronic products; and (iv) the total number of Major Customers in each
such category. The Company expects that the list of product categories, the
amount of business derived from each such product category, and the
composition of its major customers will vary from period to period.
<TABLE>
<CAPTION>
PERCENTAGE OF REPRESENTATIVE
OPTOELECTRONIC MAJOR APPROXIMATE NUMBER
PRODUCT CATEGORY SALES CUSTOMERS OF MAJOR CUSTOMERS
---------------- -------------- ------------------------------------- ------------------
<S> <C> <C> <C>
Computed Tomography and
X-Ray Imaging 23.3% Picker International 7
Hologic, Inc.
InVision Technologies
Aerospace and Avionics 12.3% Kearfott Guidance 10
Honeywell Avionics
Litton Systems
Medical Monitoring 12.1% Datascope 8
BioChem International
Criticare Systems
Analytical, Medical
Diagnostics, and
Particle Analyzers 6.9% Johnson & Johnson 10
Leica
Coulter Corporation
Office Automation and
Computer Peripherals 7.6% Xerox 8
Eastman Kodak
Dr. Johannes Heidenhain
Construction, Robotics
and Industrial
Automation 6.2% 3M 7
Spectra Physics
Baumer Electric
Military/Defense and
Weapons Simulations 5.1% Lockheed Martin (Loral) 7
Hughes (HDOS)
Texas Instruments
Bar Code Scanners 3.6% Symbol Technologies 3
Intermec
United Barcode Industries (Singapore)
Gaming Industry 2.1% Bally Gaming 2
Ardac, Inc.
</TABLE>
33
<PAGE>
Security and Inspection Products. Since entering the security and inspection
products market in 1993, the Company has shipped over 2,000 units to over 50
countries. The Company has sold 10 or more of its security and inspection
products, or more than $100,000 of such products, in at least 26 countries.
The following is a list of certain customers and/or installations that have
purchased at least 10 units, or more than $100,000, of the Company's security
and inspection products since January 1993:
<TABLE>
<S> <C>
Nanjing Airport; People's Republic of
China Ukraine Airports; Ukraine
Prague Airport; Czech Republic United Kingdom Prison System; United Kingdom
Gatwick Airport; England American Airlines; U.S.A
Heathrow Airport; England Continental Airlines; U.S.A
TNT Freight; England Delta Airlines; U.S.A.
Finnish Customs; Finland Federal Courthouses; U.S.A.
Malaysian Airport Board; Malaysia Federal Reserve Bank; U.S.A.
New Zealand Customs; New Zealand JFK International Terminal; U.S.A.
Pakistan Airports; Pakistan Los Angeles County Courthouse; U.S.A.
Doha International Airport; Qatar Miami Airport; U.S.A.
HAJ Terminal; Saudi Arabia Orlando Airport; U.S.A.
Spanish Radio/Television; Spain USAir; U.S.A.
Sri Lanka Government; Sri Lanka Japanese Embassies; Worldwide
Dubai Airport; U.A.E.
</TABLE>
Because the market for most security and inspection products developed in
response to civilian airline hijackings, historically a large portion of the
Company's security and inspection products were sold for use at airports.
Recently, however, the Company's security and inspection products have been
used for security purposes at locations other than airports, such as
courthouses, government buildings, mail rooms, schools, prisons and at unique
locations such as Buckingham Palace, England. In addition, the Company's
security and inspections products are increasingly being used for non-security
purposes, such as for cargo inspection to detect narcotics and contraband,
prevention of pilferage at semiconductor manufacturing facilities, quality
assurance for agricultural products, and the detection of gold and currency.
MARKETING, SALES AND SERVICE
The Company markets and sells its optoelectronic devices and subsystems
worldwide through both a direct sales and marketing staff of 23 employees and
indirectly through a network of approximately 23 independent sales
representatives and distributors, as of June 30, 1997. Most of the in-house
sales staff is based in the United States while most of the independent sales
representatives and distributors are located abroad. Since the acquisition of
AME in March 1997, the Company's marketing efforts in Europe have been
conducted through AME's sales and marketing staff and through a network of
approximately four independent sales representatives. The Company markets and
sells its security and inspection products worldwide through a direct sales
and marketing staff of approximately 19 employees located in the United
States, the United Kingdom, Dubai, and Malaysia and through a network of over
72 independent sales representatives, as of June 30, 1997. Following this
Offering, the Company intends to expand its direct sales force.
The Company's optoelectronic products sales staff located in the United
States and Norway is supported by an applications engineering group whose
members are available to provide technical support. This support includes
designing applications, providing custom tooling and process integration,
defining solutions for customers and developing products that meet customer
defined specifications. The security and inspection
34
<PAGE>
products sales staff is supported by a service organization of approximately
23 persons, as of June 30, 1997, located primarily in the United States, the
United Kingdom and Malaysia. The Company also supports these sales and
customer relations efforts by providing operator training, computerized
training and testing equipment, in-country service, software upgrades, service
training for customer technicians and a newsletter on security issues.
The Company considers its maintenance service operations to be an important
element of its business. After the expiration of the standard one-year product
warranty period, the Company is often engaged by its customers to provide
maintenance services for its security and inspection products through annual
maintenance contracts. The Company believes that its international maintenance
service capabilities give it a competitive advantage in selling its security
and inspection products. Furthermore, the Company believes that as its
installed base of security and inspection products increases, revenues
generated from such annual maintenance service contracts and from the sale of
replacement parts will increase. In fiscal 1996 and 1997, maintenance service
revenues and replacement part sales collectively represented 3.3% and 3.6%,
respectively, of the Company's revenues.
RESEARCH AND DEVELOPMENT
The Company's components and optoelectronic subsystems are designed and
engineered at the Company's offices in either Hawthorne, California, or
Horten, Norway. The subsystems that the Company manufactures are engineered by
the Company to solve specific application needs of its OEM customers. The
Company's customers typically request that the Company design custom
optoelectronic solutions for their specific needs when standard components or
subsystems are not available from other manufacturers of optoelectronic
devices. After an end-product has been conceptualized by the OEM, the Company
normally will involve its engineers to design the application, to establish
the mechanical specifications for the application, to create the appropriate
subsystem architecture for the application, and to design the development,
production, and assembly process for the manufacture of the ultimate
subsystem. However, because the Company has the engineering, tooling and
manufacturing capabilities to design and manufacture entire subsystems, and
not just a specific component, the Company typically also designs,
manufactures and assembles the entire subsystem for the customer. Because the
Company's engineers are able to provide additional value and services to its
customers through the entire production process from concept to completion,
the Company considers its engineering personnel to be an important extension
of its core sales and marketing effort.
In addition to close collaboration with the Company's customers in the
design and development of optoelectronics-based products, the Company
maintains an active program for the development and introduction of new
products and enhancements and improvements to its existing products, including
the implementation of new applications of its technology. The Company seeks to
further develop its research and development program and considers such
program to be an important element of its business and operations. As of June
30, 1997, in addition to the engineers that the Company employed in
manufacturing, process design and applications development, the Company
engaged approximately 33 full-time engineers and technicians in research and
development. During the fiscal 1994, 1995, 1996 and 1997, the Company's
research and development expenses were approximately $1.5 million, $1.6
million, $1.7 million and $2.5 million, respectively. In order to fulfill its
strategy of increasing its security and inspection product lines and of
enhancing the capabilities of its existing products, the Company intends to
increase its research and development efforts in the future.
MANUFACTURING AND MATERIALS MANAGEMENT
The Company currently has manufacturing facilities in the United Kingdom,
Malaysia and Norway in addition to its manufacturing facilities in Hawthorne,
California, Long Beach, California, and Ocean Springs, Mississippi. The
Company's principal manufacturing facility is in Hawthorne, California.
However, most of the Company's high volume, labor intensive manufacturing and
assembly is generally performed at its facilities
35
<PAGE>
in Malaysia. Since most of the Company's customers currently are located in
Europe, Asia and the United States, the Company's ability to assemble its
products in these markets and provide follow-on service from offices located
in these regions is an important component of the Company's global strategy.
The Company seeks to focus its subsystem manufacturing resources on its core
competencies that enable it to provide value-added enhancements and
distinctive value. The Company believes that its manufacturing organization
has expertise in optoelectronic, electrical and mechanical manufacturing and
assembly of products for commercial applications and for high reliability
applications. High reliability devices and subsystems are those which are
designed, manufactured, screened and qualified to function under exceptionally
severe levels of environmental stress. See "Legal Proceedings." The
manufacturing techniques include silicon wafer processing and fabrication,
manufacture and assembly of photodiodes, SMT (surface mounting) and manual
thru-hole assembly, thick-film ceramic processing, wire bonding, molding,
assembly of components, testing, and packaging. The Company also has the
ability to manufacture plastic parts and certain other parts that are either
not available from third party suppliers or that can be more efficiently or
cost-effectively manufactured in-house. The Company outsources certain
manufacturing operations including its sheet metal fabrication. The
manufacturing process for components and subsystems consists of manual tasks
performed by skilled and semi-skilled workers as well as automated tasks. The
number of subsystems that the Company manufacturers depends on the customers'
needs and may range from a few subsystems (such as an optoelectronic sun
sensor for use in a satellite) to many thousands (sensors used in laser
printers and bar code readers).
The principal raw materials and subcomponents used in producing the
Company's optoelectronic devices and subsystems consist of silicon wafers,
ceramics, electronic subcomponents, light emitting diodes, phototransistors,
printed circuit boards, headers and caps, housings, cables, filters and
packaging materials. For cost, quality control and efficiency reasons, the
Company generally purchases raw materials and subcomponents only from single
vendors with whom the Company has on-going relationships. The Company does,
however, qualify second sources for all of its raw materials and
subcomponents, or has identified alternate sources of supply. The Company
purchases the materials pursuant to purchase orders placed from time to time
in the ordinary course of business with procurement commitment terms ranging
from three months to one year at fixed costs but has no guaranteed long-term
supply arrangements with such suppliers. The silicon-based optoelectronic
devices manufactured by the Company are critical components in most of its
subsystems. Since 1987, the Company has purchased substantially all of the
silicon wafers it uses to manufacture its optoelectronics devices from Wacker
Siltronic Corp. Although to date the Company has not experienced any
significant shortages or material delays in obtaining any of its raw materials
or subcomponents, there can be no assurance that the Company will not face
such shortages or delays in one or more of these materials in the future. See
"Risk Factors--Availability of Raw Materials and Components."
Substantially all of the optoelectronic subsystems, circuit boards and x-ray
generators used in the Company's inspection and detection systems are
manufactured in-house. The metal shells of the x-ray inspection systems, and
certain standard mechanical parts are purchased from various third-party
unaffiliated providers.
ENVIRONMENTAL REGULATIONS
The Company is subject to various federal, state and local environmental
laws, ordinances and regulations relating to the use, storage, handling, and
disposal of certain hazardous substances and wastes used or generated in the
manufacturing and assembly of the Company's products. Under such laws, the
Company may become liable for the costs of removal or remediation of certain
hazardous substances that have been or are being released on or in its
facilities or that have been or are being disposed of off site as wastes. Such
laws may impose liability without regard to whether the Company knew of, or
caused, the release of such hazardous substances. In the past, the Company has
conducted a Phase I environmental assessment report for each of the properties
in the United States at which it currently manufactures products. The purpose
of each such report was to identify, as of the date of that report, potential
sources of contamination of the property. In
36
<PAGE>
certain cases, the Company has received a Phase II environmental assessment
report consisting of further soil testing and other investigations deemed
appropriate by an independent environmental consultant. The Company believes
that it is currently in compliance with all material environmental regulations
in connection with its manufacturing operations, and that it has obtained all
environmental permits necessary to conduct its business. The amount of
hazardous substances and wastes produced and generated by the Company may
increase in the future depending on changes in the Company's operations. Any
failure by the Company to comply with present or future regulations could
subject the Company to the imposition of substantial fines, suspension of
production, alteration of manufacturing process or cessation of operations,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. For a discussion of the risks
imposed upon the Company's business by environmental regulations, see "Risk
Factors--Environmental Regulation."
COMPETITION
The markets in which the Company operates are highly competitive and are
characterized by evolving customers needs and rapid technological change. The
Company competes with a number of other manufacturers, many of which have
significantly greater financial, technical and marketing resources than the
Company. In addition, these competitors may have the ability to respond more
quickly to new or emerging technologies, may adapt more quickly to changes in
customer requirements, may have stronger customer relationships, may have
greater name recognition, and may devote greater resources to the development,
promotion and sale of their products than the Company. There can be no
assurance that the Company will be able to compete successfully against any
current or future competitors in either the optoelectronic devices and
subsystem markets or the security and inspection markets or that future
competitive pressures will not materially and adversely affect its business,
financial conditions and results of operations.
In the optoelectronic device and subsystem market, competition is based
primarily on such factors as expertise in the design and development of
optoelectronic devices, product quality, timeliness of delivery, price,
customer technical support, and on the ability to provide fully integrated
services from application development and design through volume subsystem
production. The Company believes that its major competitors in the
optoelectronic device and subsystem market are EG&G Electro-Optics, a division
of EG&G, Inc., Optek Technology Inc., Hamamatsu Corporation, and Honeywell
Optoelectronics, a division of Honeywell, Inc. Because the Company specializes
in custom subsystems requiring a high degree of engineering expertise, the
Company believes that it generally does not compete to any significant degree
with any other large United States, European or Far Eastern manufacturers of
standard optoelectronic components.
In the security and inspection market, competition is based primarily on
such factors as product performance, functionality and quality, the over-all
cost effectiveness of the system, prior customer relationships, technological
capabilities of the products, price, local market presence, and breadth of
sales and service organization. The Company believes that its principal
competitors in the market for security and inspection products are EG&G
Astrophysics, a division of EG&G, Inc., Heimann Systems GmbH, InVision
Technologies, Inc., Vivid Technologies, American Science and Engineering,
Inc., Barringer Technologies Inc., Control Screening L.L.C., and Thermedics
Detection, Inc. Competition could result in price reductions, reduced margins,
and loss of market share by the Company. In the airline and airport security
and inspection market, particularly in the upgrade and replacement market, the
Company also competes for potential customers based on existing relationships
between its competitors and the customers. Certain of the Company's
competitors have been manufacturing inspection systems since the 1980's and
have established strong relationships with airlines and airport authorities.
The Company believes that the image quality and resolution of certain of its
security and inspection products is superior to the image quality offered by
most of its competitors' x-ray based inspection products. Although the Company
also has established relationships with a number of airport and airline
customers, no assurance can be given that the Company will be able to
successfully compete in the future with existing competitors or with new
entrants.
37
<PAGE>
BACKLOG
The Company measures its backlog as orders for which purchase orders or
contracts have been signed, but which have not yet been shipped and for which
revenues have not yet been recognized. The Company typically ships its
optoelectronics devices and subsystems as well as its security and inspection
products within one to three months after receiving an order. However, such
shipments may be delayed for a variety of reasons including any special design
or engineering requirements of the customer. In addition, large orders (more
than 10 machines) of security and inspection products typically require more
lead time. Large cargo scanning machines require six to twelve months lead
time.
At June 30, 1997, the Company's backlog products totalled approximately
$52.7 million, compared to approximately $30.0 million at June 30, 1996.
Substantially all of the Company's backlog as of June 30, 1997 is expected to
be shipped during the fiscal year ending June 30, 1998. Any failure of the
Company to meet an agreed upon schedule could lead to the cancellation of the
related order. Variations in the size of the order, the product mix, and
delivery requirements of the customer order may result in substantial
fluctuations in backlog from period to period. Backlog as of any particular
date should not be relied upon as indicative of the Company's revenues for any
future period and cannot be considered a meaningful indicator of the Company's
performance on an annual or quarterly basis.
EMPLOYEES
As of June 30, 1997, the Company employed approximately 725 people, of whom
565 were employed in manufacturing, 33 in research and development, 62 in
finance and administration, 42 in sales and marketing, and 23 in its service
organization. Of the total employees, approximately 453 were employed in the
United States, 109 were employed in Europe, 162 were employed in Asia, and one
employee was employed in the Middle East. Nine employees at AME are members of
a union and have collective bargaining rights. Other than the employees of
AME, none of the Company's other employees are unionized. There has never been
a work stoppage or strike at the Company, and management believes that its
relations with its employees are good.
FACILITIES
The Company currently leases all of its facilities with remaining lease
terms ranging from one to 14 years as reflected in the following table:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
LOCATION DESCRIPTION OF FACILITY FOOTAGE EXPIRATION
- -------- ----------------------- ----------- ----------
<S> <C> <C> <C>
Hawthorne, California Executive offices, manufacturing, 61,700 2005
engineering, sales and marketing
Long Beach, California Manufacturing, engineering, sales 26,200 1998
and marketing and service
Ocean Springs, Mississippi Manufacturing, engineering and 41,800 2001
sales and marketing
Johor Bahru, Malaysia Manufacturing and sales 13,500 1997
Johor Bahru, Malaysia Manufacturing 10,500 1998
Horten, Norway Manufacturing, engineering, 18,200 1999
marketing and sales
Singapore, Republic of
Singapore Administrative and materials 3,000 2000
procurement
Crawley, United Kingdom Manufacturing, engineering, sales 11,900 2011
and marketing
Hayes, United Kingdom Service 3,900 2003
</TABLE>
38
<PAGE>
The Company believes its facilities are in good condition and are adequate
to support its operations for the foreseeable future. The Company currently
anticipates that it will be able to renew the leases that are scheduled to
expire in the next few years on terms substantially the same as currently in
effect. However, even if the Company were not able to renew one or more of the
leases, the Company believes that suitable substitute space is available to
relocate any of the facilities where the lease is not renewed. Accordingly,
the Company does not believe that its failure to renew any of the leases that
are scheduled to expire in the next few years will have a material adverse
effect on the Company's operations.
The Company has an option to purchase the Hawthorne, California, facility
for a base price of approximately $3.0 million. The option is exercisable by
the Company upon prior written notice of six months to the landlord at any
time during the term of the lease. After October 1999, the option purchase
price will be increased each year by the percentage increase in the Consumer
Price Index as calculated by the United States Department of Labor for urban
consumers in the Los Angeles area. In addition to the option to purchase, the
Company also has a right of first refusal to purchase the Hawthorne facility
in the event that the landlord entertains a third party offer to buy the
facility.
LEGAL PROCEEDINGS
On January 21, 1997, Rapiscan U.S.A. filed a complaint in the U.S. District
Court for the Central District of California against Lunar in response to
claims by Lunar that certain security inspection products produced by Rapiscan
U.S.A. infringe the '688 patent, which patent is owned by UAB and licensed
exclusively to Lunar. The complaint seeks a declaratory judgment that the
products produced by Rapiscan U.S.A. do not infringe the '688 patent, that the
'688 patent is invalid, and that the patent may not be enforced against
Rapiscan U.S.A. for a number of equitable and legal reasons. The complaint
also asserts related nonpatent claims including fraud and the breach of an
oral agreement whereby Lunar would compensate Rapiscan U.S.A. for assisting
Lunar in its enforcement of the '688 patent and seeks compensatory and
punitive damages for these claims.
On January 23, 1997, Lunar and UAB, filed suit against OSI Systems, Inc.,
Rapiscan U.S.A. and UDT Sensors in the U.S. District Court for the Western
District of Wisconsin. Lunar and UAB asserted patent infringement,
contributory infringement and inducement thereof. Lunar and UAB seek damages
in an unspecified amount and an injunction preventing OSI Systems, Inc.,
Rapiscan U.S.A. and UDT Sensors from further making, using, selling and
offering for sale products including the dual energy detector allegedly
covered by the '688 patent. The Wisconsin lawsuit has been transferred to the
U.S. District Court for the Central District of California and has been
consolidated with the lawsuit brought by Rapiscan U.S.A.
OSI Systems, Inc., Rapiscan U.S.A. and UDT Sensors moved for partial summary
judgment on the scope of claims 38 and 39 of the '688 patent, which are
presently the only claims being asserted by Lunar and UAB. In July 1997, the
court granted the motion for partial summary judgment and ordered that (1)
claim 38 is construed to require that the scintillator material of the first
detector element is a different material than the scintillator material of the
second element, (2) claim 38 is construed to require the use of an area beam,
and (3) claim 39 is construed to require that the phosphor material and
primary radiation absorber in the first detector element are different
materials than the phosphor material and primary radiation absorber in the
second detector element. The issue of whether claims 38 and 39, as now
construed, can cover the Company's specific products was not before the court.
However, because the Company's products use only the same scintillator
materials and use only fan beams, the Company believes that the likelihood of
Lunar and UAB prevailing in its patent infringement lawsuit against the
Company is remote. No assurance can be given that the Company will be
successful in this lawsuit. See "Risk Factors--Proprietary Technology; Pending
Litigation." The Company intends to continue its defense against Lunar's and
UAB's claims and to vigorously pursue its claims against Lunar.
In October 1994, UDT Sensors, one of the Company's subsidiaries, entered
into a Consent Judgment and a Criminal Plea and Sentencing Agreement
(collectively, the "Consent Agreements") with the United States of America.
The charges contained in the Consent Agreements relate to high-reliability
optoelectronic subsystems that UDT Sensors manufactured for use in military
aircraft, attack helicopters and submarines. In
39
<PAGE>
the Consent Agreements, UDT Sensors agreed that it had not tested 100% of
these products as required by the applicable military specifications. Under
the terms of the Consent Agreements, UDT Sensors agreed to pay a total of $1.5
million, plus interest, in five annual installments ending on March 31, 1999.
UDT Sensors was placed on probation for the five-year period ending March 31,
2000 with respect to sales of optoelectronic subsystems for use by the U.S.
Department of Defense. Probation does not, however, prohibit UDT Sensors from
selling optoelectronic products to the United States, and UDT Sensors has,
since the date of the Consent Agreements, continued to manufacture and sell
the same optoelectronic products for use in military aircraft, attack
helicopters and submarines. In addition, in order to ensure that UDT Sensors
complies with all Federal procurement laws, UDT Sensors agreed to implement
programs and practices to establish and monitor complying contracting
procedures, and agreed to file periodic reports evidencing such practices and
programs.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Deepak Chopra......... 46 Chairman of the Board, Chief Executive Officer and President
Ajay Mehra............ 34 Vice President, Chief Financial Officer, Secretary and Director
Andreas F. Kotowski... 42 President of U.S. Operations, Rapiscan U.S.A.
Manoocher Mansouri
Aliabadi............. 41 Vice President - Corporate Marketing, UDT Sensors
Anthony S. Crane...... 43 Managing Director, Rapiscan UK
Thomas K. Hickman..... 55 Managing Director, OSI Singapore and OSI Malaysia
Steven C. Good(1)..... 55 Director
Meyer Luskin(1)....... 71 Director
Madan G. Syal(1)...... 71 Director
</TABLE>
- ----------------
(1) Member of Audit Committee and Compensation Committee
Deepak Chopra is the founder of the Company and has served as President,
Chief Executive Officer and Director since the Company's inception in May
1987. He has served as the Company's Chairman of the Board since February
1992. Mr. Chopra also serves as the President and Chief Executive Officer of
the Company's major subsidiaries, including UDT Sensors, Rapiscan U.S.A.,
Rapiscan UK, OSI Singapore and Ferson Optics, Inc. From 1976 to 1979 and from
1980 to 1987, Mr. Chopra held various positions with ILC Technology, Inc.
("ILC"), a publicly-held manufacturer of lighting products, including serving
as Chairman of the Board, Chief Executive Officer, President and Chief
Operating Officer of its United Detector Technology Division. In 1990, the
Company acquired certain assets of ILC's United Detector Technology Division.
Mr. Chopra has held various positions with Intel Corporation, TRW
Semiconductors and RCA Semiconductors. Mr. Chopra holds a B.S. in Electronics
and a M.S. in Semiconductor Electronics. Messrs. Ajay Mehra and Madan G. Syal
are the first cousin and father-in-law, respectively, of Mr. Chopra.
Ajay Mehra joined the Company as Controller in 1989, has served as Vice
President and Chief Financial Officer since November 1992, and became
Secretary and a Director in March 1996. Mr. Mehra also serves as Vice
President and Chief Financial Officer of the Company's major subsidiaries
including UDT Sensors, Rapiscan U.S.A., Rapiscan UK, OSI Singapore, and Ferson
Optics, Inc. Prior to joining the Company, Mr. Mehra held various financial
positions with Thermador/Waste King, a household appliance company, Presto
Food Products, Inc. and United Detector Technology. Mr. Mehra holds a B.A.
from the School of Business of the University of Massachusetts, Amherst, and a
M.B.A from Pepperdine University. Mr. Deepak Chopra is the first cousin of Mr.
Mehra.
Andreas F. Kotowski has served as the President of U.S. Operations, General
Manager and a director of the Company's subsidiary, Rapiscan U.S.A., since
January 1993. As General Manager of Rapiscan U.S.A., Mr. Kotowski is also
responsible for the operations of Rapiscan UK, the subsidiary of Rapiscan
U.S.A. From September 1989 to January 1993, Mr. Kotowski was self-employed as
an Engineering Consultant providing technical and management consulting
services to businesses in the explosive detection and medical imaging
industries. In 1992, Mr. Kotowski was a director of Dextra Medical, Inc., a
company that filed for bankruptcy in July of that year. From 1979 to 1989, Mr.
Kotowski held various positions with EG&G Astrophysics, including Vice
President of Engineering and Chief Engineer in which he was responsible for
product planning, design, development and management. Prior to 1979, he worked
as an Engineer at National
41
<PAGE>
Semiconductor Corporation and the Jet Propulsion Laboratory. Mr. Kotowski
holds a B.S. in Electrical Engineering and a B.S. in Physics from California
State Polytechnic University, Pomona, and a M.S. in Electrical Engineering
from Stanford University.
Manoocher Mansouri Aliabadi has served as Vice President of Corporate
Marketing for the Company's UDT Sensors subsidiary since March 1994. From
March 1992 to November 1993, Mr. Mansouri served as Director of Sales and
Marketing for UDT Sensors, and from 1990 to 1992, as a Division Director of
the Aerospace and Defense Division of UDT Sensors. Mr. Mansouri joined United
Detector Technology, the predecessor of UDT Sensors in 1982 as an Engineer and
holds a B.S. in Electrical Engineering from the University of California, Los
Angeles.
Anthony S. Crane has served as Managing Director of the Company's
subsidiary, Rapiscan UK, since March 1996. From March 1995 to March 1996, he
served as Sales and Marketing Director for Rapiscan UK, and from February 1993
to March 1995, he served as Sales Director, Middle East, for Rapiscan UK. From
November 1980 to January 1993, Mr. Crane held various positions at Rapiscan UK
before it was acquired by the Company including Exports Business Manager,
Sales Manager and Service Engineer. From May 1974 to November 1980, Mr. Crane
served as Production Coordinator and Electrical and Electronic Inspector for
Redifon Flight Simulation where he was responsible for production and customer
relations.
Thomas K. Hickman has served as Managing Director of the Company's
subsidiaries, OSI Singapore and OSI Malaysia, since July 1995 and as the
Managing Director of Rapiscan Consortium (M) Sdn. Bhd. since its formation in
October 1996. From July 1993 to July 1995, Mr. Hickman served as Vice
President of Operations and Director of Operations for Rapiscan U.S.A. and
Rapiscan UK, respectively. From November 1992 to July 1993, Mr. Hickman served
as Director of Materials for UDT Sensors and, from July through November 1992,
provided service as an independent consultant to UDT Sensors. From 1985
through 1992, Mr. Hickman held various positions at Mouse Systems Corporation,
a manufacturer of computer optical mouse systems, including that of Director
of OEM Operations, Purchasing Manager and Representative Director of a joint
venture. Prior to 1985, Mr. Hickman was the Director of Materials for Measurex
Corporation, the Representative Director for Hitachi-Singer Corp. and a
Product Line Manager for Singer Business Machines. Mr. Hickman holds a B.A.
from Stetson University and a M.B.A. from the University of San Francisco.
Steven C. Good has served as Director of the Company since September 1987.
He is a Senior Partner in the accounting firm of Good Swartz & Berns, which he
founded in 1974, and has been active in consulting and advisory services for
businesses in various sectors including the manufacturing, garment, medical
services and real estate development industries. Mr. Good is the founder and
has served as Chairman of California United Bancorp, and was elected in 1997
as a Director of Arden Realty Group, Inc., a publicly-held Real Estate
Investment Trust listed on the New York Stock Exchange. Mr. Good holds a B.S.
in Business Administration from the University of California, Los Angeles.
Meyer Luskin has served as Director of the Company since February 1990.
Since 1961 Mr. Luskin has served as the President, Chief Executive Officer and
Chairman of the Board of Scope Industries, a publicly-held company listed on
the American Stock Exchange and engaged in the business of recycling and
processing food waste products into animal food. Mr. Luskin has also served as
Director of Scope Industries since 1958 and currently serves as Director of
Stamet, Inc., an industrial solid pump manufacturer. Mr. Luskin holds a B.A.
from the University of California, Los Angeles, and a M.B.A. from Stanford
University.
Madan G. Syal has served as Director of the Company since the Company's
inception in May 1987. From May 1987 until February 1992, he served as
Secretary of the Company. Mr. Syal is the sole proprietor of Pro Printers, a
printing service business he founded in October 1984. Prior to 1984, Mr. Syal
held various positions with Shell Oil Company, Exxon Corporation, Burmah Oil
Company, C.F. Braun and Bechtel Group, Incorporated. Mr. Syal holds a B.S.
from the American College in Lahore (now Pakistan) and a B.S.E. in Electrical
and Mechanical Engineering from London University. Mr. Deepak Chopra is the
son-in-law of Mr. Syal.
42
<PAGE>
There are currently five members of the Board of Directors. After the
completion of the Offering, the management of the Company intends to increase
the number of independent directors of the Company by increasing the number of
directors constituting the Board of Directors. No nominees for the additional
Board seats have yet been identified. The Directors serve until the next
annual meeting of shareholders or until successors are elected and qualified.
The Company's executive officers are appointed by, and serve at the discretion
of, the Board of Directors of the Company.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The functions of the Audit Committee include recommending to the
Board the selection and retention of independent auditors, reviewing the scope
of the annual audit undertaken by the Company's independent auditors and the
progress and results of their work, and reviewing the financial statements of
the Company and its internal accounting and auditing procedures. The functions
of the Compensation Committee include establishing the compensation of the
Chief Executive Officer, reviewing and approving executive compensation
policies and practices, reviewing salaries and bonuses for certain executive
officers of the Company, administering the Company's employee stock option
plans, and considering such other matters as may, from time to time, be
delegated to the Compensation Committee by the Board of Directors.
Each non-employee Director currently receives a cash fee of $1,250 per Board
meeting attended and an additional $1,250 per Board committee meeting attended
if such committee meeting is held on a day different from that of the Board
meeting. During the fiscal year ended June 30, 1997, each non-employee
Director received, as additional director compensation, options to purchase
5,000 shares of Common Stock at an exercise price of $13.50 per share. The
Directors are reimbursed for expenses incurred in connection with the
performance of their services as Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1997, all of the outside Directors,
Steven C. Good, Meyer Luskin and Madan G. Syal, served on the Board's
compensation committee. Certain transactions between the Company and the
members of the compensation committee include the following: Mr. Good is a
senior partner of Good Swartz & Berns, an accounting firm that provided
services to the Company. The Good Swartz & Berns Pension & Profit Sharing
Plan, in which Mr. Good participates, exercised certain warrants to purchase
stock of the Company by applying the outstanding principal amount under
certain promissory notes issued to the pension plan by the Company. Mr. Luskin
is the President, Chief Executive Officer and Chairman of Scope Industries
which provided consultation services to the Company for a fee in the amount of
$100,000. Scope Industries also exercised certain warrants to purchase stock
of the Company by applying the outstanding principal amount under a promissory
note issued by the Company to Scope Industries. Mr. Syal owns Pro Printers, a
printing service company that provides printing services to the Company. For
additional information regarding these direct or indirect transactions between
the outside Directors, see "Certain Transactions." Mr. Syal is the father-in-
law of Deepak Chopra, the President, Chief Executive Officer and Chairman of
the Company.
The Company believes that each of the foregoing transactions was on terms at
least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties. The Company currently intends that any future
transactions with affiliates of the Company will be on terms at least as
favorable to the Company as those that can be obtained from nonaffiliated
third parties.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation earned during the fiscal
year ended June 30, 1997, by the Company's Chief Executive Officer and the
four other most highly compensated executive officers whose total salary and
bonus during such year exceeded $100,000 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
----------------- ------------
SECURITIES
UNDERLYING
OPTIONS
NAME AND PRINCIPAL POSITION SALARY BONUS (#)(2)
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Deepak Chopra(1)................................. $370,843 $175,000 137,500
Chief Executive Officer
Ajay Mehra ...................................... 172,216 58,040 73,750
Chief Financial Officer
Andreas F. Kotowski ............................. 124,452 10,000 57,029
President of U.S. Operation, Rapiscan U.S.A.
Manoocher Mansouri Aliabadi...................... 110,019 28,000 15,000
Vice President--Corporate Marketing, UDT Sensors
Thomas K. Hickman ............................... 124,220 12,500 10,125
Managing Director, OSI Malaysia and OSI
Singapore
</TABLE>
- ----------------
(1) The Company paid aggregate insurance premiums of approximately $23,000 for
two universal life insurance policies of Mr. Chopra. Mr. Chopra or his
estate is obligated to repay to the Company all amounts paid by it on
behalf of Mr. Chopra upon the death or termination of employment of Mr.
Chopra. The value of such benefit is not susceptible to precise
determination.
(2) For additional information see "Option Grants."
The Company has entered into an employment agreement with Deepak Chopra,
with a term of five years commencing on April 1, 1997, pursuant to which he
serves as President, Chief Executive Officer and Chairman of the Board of the
Company. The employment agreement provides for a base salary of $450,000 per
year, with annual raises to be determined by the Compensation Committee.
Pursuant to the employment agreement, Mr. Chopra is also entitled to receive
at least one-third of the amount of the aggregate bonus pool established by
the Company for its officers and employees. Mr. Chopra is eligible to
participate in certain incentive compensation and other employee benefit plans
established by the Company from time to time.
The Company has also entered into a three-year employment agreement with
Ajay Mehra and a two-year employment agreement with Manoocher Mansouri
Aliabadi, each of which became effective on April 1, 1997. The employment
agreements provide for base salaries of $200,000 and $120,000 per year, for
Messrs. Mehra and Mansouri, respectively, with annual raises to be determined
by the Company's Chief Executive Officer. Pursuant to these employment
agreements, Messrs. Mehra and Mansouri are also eligible for certain bonus
payments and to participate in incentive compensation and other employee
benefit plans established by the Company from time to time. Each of the
employment agreements contains confidentiality provisions and provides that
the employee shall assign and the Company shall be entitled to any inventions
or other proprietary rights developed by the employee under certain
circumstances during his employment.
Andreas F. Kotowski is currently employed by the Company pursuant to an
employment agreement that is terminable by either party thereto at any time
for any reason. Mr. Kotowski's current annual salary is $140,000.
44
<PAGE>
Thomas K. Hickman is currently employed by the Company pursuant to an
employment agreement that may be terminated by either the Company or by Mr.
Hickman upon six months prior notice. Under the employment agreement, Mr.
Hickman's annual salary is $125,000. In addition to the salary, the Company
has agreed to pay certain relocation expenses related to Mr. Hickman's service
in Singapore.
Anthony S. Crane is currently employed by the Company pursuant to an
employment agreement with a term that ends in December 1998.
Pursuant to an incentive compensation agreement entered into in December
1996 by the Company and Andreas F. Kotowski, Mr. Kotowski is entitled to
receive as additional incentive compensation, 10.0% of the consolidated pre-
tax earnings of Rapiscan U.S.A. and Rapiscan UK in excess of certain pre-
determined amounts. Such incentive compensation may not exceed $150,000 for
any fiscal year and is based on earnings of Rapiscan U.S.A. and Rapiscan UK
for the 1997, 1998 and 1999 fiscal years. Mr. Kotowski was not entitled to
receive such additional incentive compensation for the 1997 fiscal year.
The management of the Company allocates bonuses to officers and employees of
the Company under a bonus plan that has been in effect since the Company's
inception. The amount of bonus for each officer or employee is determined by
comparing the profits of the subsidiary or division in which such person
performed services against the budget profit goals for such subsidiary or
division as determined before the start of the fiscal year. Bonuses were
distributed to over 100 officers and employees in May and June 1997 based on
their performances during the fiscal year ended June 30, 1997.
OPTION GRANTS
The following table sets forth certain information concerning grants of
options to the Named Executive Officers during the year ended June 30, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE MARKET OPTION TERM(1)
OPTIONS EMPLOYEES PRICE PRICE EXPIRATION ------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) ($/SHARE) DATE 0% ($) 5% ($) 10% ($)
---- ----------- -------------- --------- --------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deepak Chopra........... 37,500 5.7% $3.33 $6.67 12/14/01 $125,000 $34,535 $76,314
100,000 15.3 13.50 N/A 5/31/02 N/A 372,980 824,189
Ajay Mehra(2)........... 30,000 4.6 3.33 6.67 12/14/01 100,000 27,601 60,990
10,000 1.5 13.50 N/A 5/31/02 N/A 37,298 82,419
30,000 4.6 11.50 N/A 5/31/02 N/A 95,317 210,626
Andreas F. Kotowski(2).. 7,500 1.1 2.83 6.67 12/14/01 28,750 5,871 12,973
20,000 3.1 11.50 N/A 5/31/02 N/A 63,545 140,417
Manoocher Mansouri
Aliabadi(2)............ 7,500 1.1 2.83 6.67 12/14/01 28,750 5,871 12,973
7,500 1.1 11.50 N/A 5/31/02 N/A 23,829 52,656
Thomas K. Hickman(2).... 3,750 0.6 2.83 6.67 12/14/01 14,375 2,935 6,487
6,000 0.9 11.50 N/A 5/31/02 N/A 19,063 42,125
</TABLE>
- ----------------
(1) Sets forth potential option gains based on assumed annualized rates of
stock price appreciation from the exercise price at the date of grant of
5.0% and 10.0% (compounded annually) over the full term of the grant with
appreciation determined as of the expiration date. The 0.0%, 5.0% and
10.0% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission, and do not represent the Company's
estimate or projection of future Common Stock prices.
(2) Excludes options granted as consideration for the acquisition by the
Company of the minority interests in Rapiscan U.S.A. See "Certain
Transactions."
45
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information regarding option
exercises by the Named Executive Officers during the fiscal year 1997 and held
by them on June 30, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS AT
SHARES END (#) FISCAL YEAR END ($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Deepak Chopra........... 0 -- 37,500 100,000 $381,375 $ 0
Ajay Mehra.............. 9,000 $107,100 75,000 40,000 814,500 60,000
Andreas F. Kotowski..... 0 -- 7,500 20,000 80,025 40,000
Manoocher Mansouri
Aliabadi............... 7,500 89,250 13,500 8,250 149,500 23,625
Thomas K. Hickman....... 9,750 109,925 15,187 14,813 174,648 109,600
</TABLE>
- ---------------
(1) Amounts are shown as the positive spread between the exercise price and
fair market value (based on an estimated initial offering price of $13.50
per share).
STOCK OPTION PLANS
1987 Incentive Stock Option Plan. In May 1987, the Board of Directors
adopted the Incentive Stock Option Plan (the "1987 Plan"). The 1987 Plan
provides for the grant of options to directors, officers and other key
employees of the Company to purchase up to an aggregate of 1,050,000 shares of
Common Stock. The purpose of the 1987 Plan is to provide participants with
incentives which will encourage them to acquire a proprietary interest in, and
continue to provide services to, the Company. The 1987 Plan is administered by
the Board of Directors which has discretion to select optionees and to
establish the terms and conditions of each option, subject to the provisions
of the 1987 Plan. Pursuant to the 1987 Plan, the Company has from time to time
granted its directors, officers and employees options to purchase shares of
the Company's Common Stock at exercise prices determined by the Board of
Directors. The stock options generally expire either on the fifth or tenth
anniversary of the date of grant of the option. All stock options are non-
transferrable by the grantee and may be exercised only by the optionee during
his service to the Company as a director, officer or employee. The aggregate
number of options issuable under the 1987 Plan, number of options outstanding
and the exercise price thereof are subject to adjustment in the case of
certain transactions such as mergers, recapitalizations, stock splits or stock
dividends. As of September 30, 1997, 466,500 shares had been issued upon the
exercise of stock options under the 1987 Plan, stock options to purchase an
aggregate of 348,750 shares were outstanding under the 1987 Plan at exercise
prices ranging from $0.17 to $3.33 per share, and 234,750 shares remained
available for grant. As of such date, stock options to purchase 316,501 shares
of Common Stock were exercisable. No stock options may be granted under the
1987 Plan after December 31, 1998.
1997 Stock Option Plan. In May 1997, the Board of Directors adopted the
Company's 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan, which was
approved by the Company's shareholders in June 1997, provides for the grant of
options to directors, officers, other employees and consultants of the Company
to purchase up to an aggregate of 850,000 shares of Common Stock. No eligible
person may be granted options during any 12-month period covering more than
425,000 shares of Common Stock. The purpose of the 1997 Plan is to provide
participants with incentives which will encourage them to acquire a
proprietary interest in, and continue to provide services to, the Company. The
1997 Plan is to be administered by the Board of Directors, or a committee of
the Board, which has discretion to select optionees and to establish the terms
and conditions of each option, subject to the provisions of the 1997 Plan.
Options granted under the 1997 Plan may be "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified options.
46
<PAGE>
The exercise price of incentive stock options may not be less than 100% of
the fair market value of Common Stock as of the date of grant (110% of the
fair market value if the grant is to an employee who owns more than 10.0% of
the total combined voting power of all classes of capital stock of the
Company). The Code currently limits to $100,000 the aggregate value of Common
Stock that may be acquired in any one year pursuant to incentive stock options
under the 1997 Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the 1997 Plan at an exercise price
of not less than 85.0% of the fair market value of the Common Stock on the
date of grant. Nonqualified options may be granted without regard to any
restriction on the amount of Common Stock that may be acquired pursuant to
such options in any one year. Options may not be exercised more than ten years
after the date of grant (five years after the date of grant if the grant is an
incentive stock option to an employee who owns more than 10.0% of the total
combined voting power of all classes of capital stock of the Company). Options
granted under the 1997 Plan generally are nontransferable, but transfers may
be permitted under certain circumstances in the discretion of the
administrator. Shares subject to options that expire unexercised under the
1997 Plan will once again become available for future grant under the 1997
Plan. The number of options outstanding and the exercise price thereof are
subject to adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends. The 1997 Plan is effective
for ten years, unless sooner terminated or suspended.
In May 1997, the Board of Directors of the Company authorized grants of
options to purchase 434,486 shares of Common Stock available for issuance
under the 1997 Plan to certain directors, officers and employees of the
Company. Of these options, 125,000 are exercisable at a price of $13.50 per
share and 309,486 are exercisable at $11.50 per share. The options generally
will be subject to vesting and will become exercisable over a period of four
years from the date of grant, subject to the optionee's continuing employment
with the Company.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination will immediately terminate, and any options that are exercisable
will terminate not more than three months (six months in the case of
termination by reason of death or disability) following termination of
employment.
To the extent nonqualified options are granted under the 1987 Plan and the
1997 Plan after the Offering, the Company intends to issue such options with
an exercise price of not less than the market price of the Common Stock on the
date of grant.
EMPLOYEE BENEFIT PLAN, PENSION PLANS
In 1991, the Company established a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of its employees. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by
up to the annual limit prescribed by statute ($9,500 in 1997) and contribute
the amount of such reduction to the 401(k) Plan. The 401(k) Plan allows for
matching contributions to the 401(k) Plan by the Company, such matching and
the amount of such matching to be determined at the sole discretion of the
Board of Directors. To date, no such matching contributions have been made
with respect to the 401(k) Plan. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in
numerous investment options. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that contributions by employees to the 401(k) Plan,
and income earned on plan contributions, are not taxable until withdrawn, and
so that the contributions by employees will be deductible by the Company when
made.
Rapiscan UK and AME each have a pension plan in effect for certain of their
employees. As of the date hereof, approximately 50 employees are covered by
these plans.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Articles of Incorporation ("Articles") provide that, pursuant
to the California Corporations Code, the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by, or in
the right of, the Company for breach of a
47
<PAGE>
director's duties to the Company or its shareholders. This provision in the
Articles does not eliminate the directors' fiduciary duty and does not apply
for certain liabilities: (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law; (ii) for acts or
omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived
an improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders; (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders; (vi) with respect
to certain transactions or the approval of transactions in which a director
has a material financial interest; and (vii) expressly imposed by statute for
approval of certain improper distributions to shareholders or certain loans or
guarantees. This provision also does not limit or eliminate the rights of the
Company or any shareholder to seek non-monetary relief such as an injunction
or rescission in the event of a breach of a director's duty of care. The
Company's Amended and Restated Bylaws require the Company to indemnify its
officers and directors under certain circumstances Among other things, the
Bylaws require the Company to indemnify directors and officers against certain
liabilities that may arise by reason of their status or service as directors
and officers and allows the Company to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company has entered into indemnity agreements ("Indemnity Agreement(s)")
with each of its directors and executive officers. Each such Indemnity
Agreement provides that the Company shall indemnify the indemnitee against
expenses, including reasonable attorneys' fees, judgements, penalties, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with any civil or criminal action or administrative proceeding
arising out of the performance of his duties as a director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action, had no reasonable cause
to believe his conduct was unlawful. The Indemnity Agreements also require
that the Company indemnify the director or executive officer in all cases to
the fullest extent permitted by applicable law. Each Indemnity Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnity Agreement and to recover the
expenses of such a suit if he is successful. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. The Company believes that its
Articles and Bylaw provisions are necessary to attract and retain qualified
persons as directors and officers.
48
<PAGE>
CERTAIN TRANSACTIONS
In 1993, the Company formed Rapiscan U.S.A. for the purpose of acquiring
most of the capital stock of Rapiscan UK. As of October 1996, the Company
owned 85.5% of the outstanding capital stock of Rapiscan U.S.A., and 14.5%
(the "Option Shares") was owned by executive officers or employees of the
Company, including Ajay Mehra, Andreas F. Kotowski, Anthony S. Crane and
Thomas K. Hickman. See "Management--Executive Officers and Directors." In
connection with the formation of Rapiscan U.S.A., the Company was granted an
option to purchase all of the Option Shares. In November 1996, the Company
exercised its option to acquire the Option Shares. The aggregate consideration
paid for the Option Shares consisted of the following: (i) the issuance of a
total of 159,201 shares of Common Stock valued at $6.67 per share; (ii) the
issuance of options to purchase a total of 45,486 shares of Common Stock at a
purchase price of $11.50 per share; and (iii) the issuance to the holders of
the Option Shares of 27,654 additional shares of Common Stock which was based
on the net income before taxes of Rapiscan U.S.A. and Rapiscan UK combined for
the fiscal year ended June 30, 1997. The consideration paid by each of Messrs.
Kotowski, Crane, Hickman and Mehra for their minority interests in Rapiscan
U.S.A. was $119,372, $6,610, $500 and $125, respectively.
Until September 1996, the Company owned approximately 95.9% of the
outstanding capital stock of Ferson Optics, Inc., and certain employees and
officers of the Company, including Ajay Mehra and Thomas K. Hickman, the
Managing Director of OSI Malaysia, owned the remaining shares. Mr. Mehra and
Mr. Hickman acquired their minority interests in Ferson for $250 and $3,000,
respectively. In September 1996, the Company purchased all of the remaining
shares of Ferson from the minority shareholders in exchange for a total of
19,755 shares of Common Stock. The Common Stock was valued at $6.67 per share.
Ajay Mehra and Thomas K. Hickman received 12,500 and 750 shares of Common
Stock, respectively, in connection with the foregoing exchange.
In June 1989, April 1990 and February 1993 the Company, as part of its plan
of financing, issued subordinated promissory notes in the aggregate principal
amounts of approximately $385,000, $3,520,000 and $575,000, respectively, with
related warrants or conversion rights to purchase capital stock of the
Company. The purchasers of the subordinated notes included certain of the
Company's directors, executive officers, principal shareholders and members of
their families (collectively, the "Related Parties"). The June 1989 promissory
notes bore interest at a fixed rate of 11.00% per annum while the April 1990
and February 1993 promissory notes bore interest at a variable rate based on
certain banks' prime rate plus 1.50% per annum. The promissory notes, warrants
and conversion rights provided that the note holders were entitled to exercise
the warrants or convert the notes into capital stock of the Company by
cancelling the appropriate amounts of the outstanding principal amount and
accrued interest of such promissory notes. The exercise price of the warrants
issued in June 1989 and April 1990 was $1.33 per share, whereas the exercise
price of the warrants and convertible notes issued in February 1993 was $1.87
per share.
During fiscal 1995, 1996 and 1997, all amounts outstanding under the
promissory notes were either paid in full by the Company to the note holders
or applied towards the exercise of the related warrants or conversion rights
at the election of the note holders. The Company paid in cash the outstanding
principal amount of $530,000 and all interest due thereon to one principal
shareholder, Sally F. Chamberlain, in satisfaction of the promissory notes
held by her personally and as trustee of the Edward P. Fleischer and Sally F.
Fleischer Family Trust. The other Related Parties elected to exercise their
warrants and conversion rights by purchasing the Company's capital stock with
the outstanding principal amounts of their promissory notes. As a result,
certain Related Parties who were collectively owed $2,710,000 under the
promissory notes, were issued an aggregate of 2,030,358 shares of Common Stock
in lieu of the repayment of the principal amount of their promissory notes.
Other Related Parties included Scope Industries, Ajay Mehra, members of Mr.
Mehra's family, members of Mr. Chopra's family, and the Good Swartz & Berns
Pension Fund. Scope Industries is a principal shareholder of the Company, and
Meyer Luskin is a director of the Company and is the President, director and a
major shareholder of Scope Industries. Steve C. Good is a director of the
Company and a participant in the Good Swartz & Berns Pension Fund.
49
<PAGE>
The Company, Mr. Chopra and Mr. Mehra, each currently owns a 36.0%, 10.5%
and 4.5% interest, respectively, in ECIL Rapiscan. Mr. Chopra is the Chairman,
President and Chief Executive Officer of the Company. The remaining 49.0%
interest in ECIL Rapiscan is owned by ECIL, an unaffiliated Indian company.
The Company sells the security and inspection kits to ECIL at a price no less
favorable to the Company than the price the Company charges unaffiliated third
parties for such products. To date the Company's portion of the earnings of
ECIL Rapiscan have been insignificant.
Pursuant to a Consulting Agreement entered into in July 1996, the Company
hired Scope Industries to provide planning and financial consulting services
to the Company including advice regarding the valuation of the Company and
certain of its subsidiaries. Upon the completion of the consulting services in
December 1996, the Company paid Scope Industries a fee in the amount of
$100,000 as full payment for such services.
From time to time the Company contracts for automobile rental and messenger
services from a business that is owned by Deepak Chopra and his wife. The
Company paid the business approximately $83,000 and $111,000 for such services
during fiscal 1996 and 1997, respectively. The Company also contracts for
printing services from a business owned by Madan G. Syal, a director of the
Company. The Company paid the business approximately $63,000 and $82,000 for
such services during fiscal 1996 and 1997, respectively.
The Company believes that each of the foregoing transactions was on terms at
least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties. The Company currently intends that any future
transactions with affiliates of the Company will be on terms at least as
favorable to the Company as those that can be obtained from nonaffiliated
third parties.
50
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Stock as
of September 30, 1997, and as adjusted to reflect the sale of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person known by the Company to beneficially own 5.0% or
more of the outstanding shares of Common Stock; (ii) each director of the
Company; (iii) each Named Executive Officer of the Company; (iv) the Selling
Shareholders; and (v) all directors and executive officers of the Company as a
group. Footnotes (2) and (3) to the table also set forth certain information
with respect to the beneficial ownership of the Selling Shareholders, assuming
the Underwriters exercise their over-allotment option in full. The information
set forth in the table and accompanying footnotes has been furnished by the
named beneficial owners.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(1) SHARES OFFERING(1)(3)
----------------- BEING -----------------
NAME AND BENEFICIAL OWNERS NUMBER PERCENT OFFERED(2) NUMBER PERCENT
-------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Scope Industries(4)(5).......... 1,875,000 30.1% 148,148 1,726,852 18.1%
Sally F. Chamberlain(6)(7)...... 1,170,375 18.8 63,343 1,107,032 11.6
Deepak Chopra(6)(8)............. 1,539,484 24.7 0 1,539,484 16.1
Ajay Mehra(9)................... 195,693 3.1 0 195,693 2.0
Andreas F. Kotowski(10)......... 128,806 2.1 0 128,806 1.3
Manoocher Mansouri Aliabadi(11). 73,607 1.2 0 73,607 *
Thomas K. Hickman(12)........... 27,228 * 0 27,228 *
Steven C. Good(13).............. 40,313 * 21,896 18,417 *
Madan G. Syal(14)............... 243,938 3.9 25,926 218,012 2.3
Meyer Luskin(15)................ 23,438 * 0 23,438 *
Good Swartz & Berns Pension &
Profit Sharing Plan(16)........ 148,125 2.4 3,000 145,125 1.5
Leila and Birinder Mehra........ 25,500 * 3,704 21,796 *
Zev and Elaine Edelstein Trust.. 77,679 1.2 9,259 68,420 *
Mohinder Chopra................. 75,000 1.2 9,259 65,741 *
Glenn P. Sorenson............... 75,000 1.2 9,259 65,741 *
Charles and Kiran M. Kerpelman.. 65,357 1.0 9,259 56,098 *
Martha B. Holmes................ 60,000 * 9,259 50,741 *
Combined TR/DR Account Trust.... 52,500 * 7,407 45,093 *
Gary E. Fleischer............... 14,625 * 14,625 0 --
Cathleen A. Redinger............ 14,625 * 14,625 0 --
Mark and Penny Berns Trust...... 9,732 * 5,982 3,750 *
Arnold G. and Hope Anisgarten... 9,287 * 5,709 3,578 *
Rajiv Mehra..................... 2,057 * 450 1,607 *
Surendra V. and Kala Jain(17)... 13,393 * 5,186 8,207 *
Renu Jivrajka................... 11,250 * 1,852 9,398 *
Amita Jivrajka.................. 7,500 * 1,852 5,648 *
All executive officers and
directors as a group
(9 persons).................... 2,286,136 36.3 47,822 2,238,314 23.2
</TABLE>
- ----------------
* Less than 1.0%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days of
September 30, 1997, are deemed outstanding for computing the percentage of
the person holding such options but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
51
<PAGE>
(2) Excludes shares of Common Stock to be offered by the Selling Shareholders
if the over-allotment option granted to the Underwriters is exercised.
The following Selling Shareholders will sell the following number of
additional shares of Common Stock if the Underwriters' over-allotment
option is exercised in full: Scope Industries (88,519); Sally F.
Chamberlain (49,630); Deepak Chopra (185,185); Ajay Mehra (33,333);
Andreas F. Kotowski (18,519); Manoocher Mansouri Aliabadi (14,815);
Thomas K. Hickman (3,704); Steven C. Good (15,604); Madan G. Syal
(18,519); Meyer Luskin (9,259); Good Swartz & Berns Pension & Profit
Sharing Plan (3,309); Leila and Birinder Mehra (3,704); Zev and Elaine
Edelstein Trust (9,259); Mohinder Chopra (11,111); Glenn P. Sorenson
(11,111); Charles and Kiran M. Kerpelman (9,259); Combined TR/DR Account
Trust (7,407); Susan Sutherland (7,407); Anuj Wadhawan (7,407); Bette J.
Moore (7,407); Robert W. Kephart (5,556); Phillip M. Wascher (7,407);
Charan J. Dewan (3,704); Jack Kimbro (1,111); Narayan Taneja (1,481);
Dennis Noble (741); Peter Bui (741); Alan J. and Pamela Barnard (1,481);
Christine Williams (741); Christopher Chin (926); Anthony S. and Suzie B.
Crane (1,481); Khai Le (741); Mark and Penny Berns Trust (1,518); Arnold
G. and Hope Anisgarten (1,791); Surendra and Kala Jain (5,926); Neil
Jivrajka (740); Renu Jivrajka (1,482); Amita Jivrajka (1,482); Louis S.
and Linda O. Peters (741); Lincoln A. Gladden (741). Susan Sutherland,
Anuj Wadhawan, Bette J. Moore, Robert W. Kephart, Phillip M. Wascher,
Charan J. Dewan, Jack Kimbro, Narayan Taneja, Dennis Noble, Peter Bui,
Alan J. Barnard, Christine Williams, Christopher Chin, Khai Le, Louis
Peters and Lincoln A. Gladden are employees of the Company or its
affiliates. Anthony S. Crane is the Managing Director of Rapiscan UK. See
"Management."
(3) Assuming the Underwriters' over-allotment option is exercised in full,
the number and percent of the shares beneficially owned after the
Offering by the Selling Shareholders will be as follows: Scope Industries
(1,638,333, 17.1%); Sally F. Chamberlain 1,057,402, 11.1%); Deepak Chopra
(1,354,299, 14.2%); Ajay Mehra (162,360, 1.7%); Andreas F. Kotowski
110,287, 1.2%); Manoocher Mansouri Aliabadi (58,792); Thomas K. Hickman
(23,524) Steven C. Good (2,843); Madan G. Syal (199,493, 2.1%); Meyer
Luskin (14,179); Good Swartz & Berns Pension & Profit Sharing Plan
(141,816, 1.5%); Leila and Birender Mehra (18,092); Zev and Elaine
Edelstein Trust (59,161); Mohinder Chopra (54,630); Glenn P. Sorenson
(54,630); Charles and Kiran M. Kerpelman (46,839); Combined TR/DR Account
Trust (37,686); Susan Sutherland (35,343); Anuj Wadhawan (29,835);
BetteJ. Moore (28,218); Robert W. Kephart (22,944); Phillip M. Wascher
(23,241); Charan J. Dewan (16,171); Jack Kimbro (15,389); Narayan Taneja
(23,698); Dennis Noble (11,446); Peter Bui (7,884); Alan J. and Pamela
Barnard (9,704); Christine Williams (6,384); Christopher Chin (6,199);
Anthony S. and Suzie B. Crane (12,148); Khai Le (8,956); Mark and Penny
Berns Trust (2,232); Arnold G. and Hope Anisgarten (1,787); Surendra and
Kala Jain (2,281); Neil Jivrajka (10,510); Renu Jivrajka (7,916); Amita
Jivrajka (4,166); Louis S. and Linda O. Peters (6,510); Lincoln A.
Gladden (4,134). Except as otherwise indicated in this footnote the
percentage of Common Stock beneficially owned by the Selling Shareholders
after this Offering if the over-allotment option is exercised in full is
less than 1.0% for each person listed in this footnote.
(4) The address of Scope Industries is 233 Wilshire Boulevard, Suite 310,
Santa Monica, California 90401.
(5) Does not include shares beneficially owned by Meyer Luskin. Mr. Luskin is
the President, Chief Executive Officer, Chairman of the Board and a
principal shareholder of Scope Industries.
(6) The address of such shareholder is c\\o OSI Systems, Inc., 12525 Chadron
Avenue, Hawthorne, California 90250.
(7) Such shares are held by Sally F. Chamberlain as Trustee of the Edward P.
Fleischer and Sally F. Fleischer Family Trust dated June 3, 1991.
(8) Includes 254,951 shares and 254,951 shares owned by The Deepika Chopra
Trust UDT dated July 17, 1987 and The Chandini Chopra Trust UDT dated
July 17, 1987, respectively. Deepak Chopra is the co-trustee of both
irrevocable trusts. Also includes 10,179 shares and 10,179 shares owned
by Deepika Chopra and Chandini Chopra, respectively, who are the
daughters of Mr. Chopra. Of the balance of such shares, 960,099 shares
are held jointly by Mr. Chopra and his wife, Nandini Chopra, and 49,125
shares are held individually by Mr. Chopra. Mr. Chopra is the President,
Chief Executive Officer and Chairman of the Board of the Company. See
"Management."
(9) Includes 45,000 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Mr. Mehra is the Vice President, Chief
Financial Officer, Secretary and Director of the Company. See
"Management."
(10) Includes 7,500 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Mr. Kotowski is the President of U.S.
Operations of Rapiscan U.S.A. See "Management."
(11) Includes 13,500 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Mr. Mansouri is the Vice President-Corporate
Marketing of UDT Sensors. See "Management."
(12) Includes 15,187 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Mr. Hickman is the Managing Director of OSI
Singapore and OSI Malaysia. See "Management."
52
<PAGE>
(13) Includes 2,813 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Includes 22,500 shares held by the Steve Cary
Good & Bari Anne Good Trust and 15,000 shares held individually by
Mr. Good. Does not include shares beneficially owned by the Good Swartz &
Berns Pension Fund. Mr. Good is a Director of the Company. See
"Management."
(14) Includes 2,813 shares issuable pursuant to options exercisable within 60
days of September 30, 1997. Includes 217,500 shares held by Mr. Syal and
his wife, Mohini Syal as trustees for the Syal Trust. Mr. Syal is a
Director of the Company. See "Management."
(15) Includes 15,000 shares held by the Meyer and Doreen Luskin Family Trust.
Does not include shares beneficially owned by Scope Industries. Includes
8,438 shares issuable pursuant to options exercisable within 60 days of
September 30, 1997. Mr. Luskin is the President, Chief Executive Officer,
Chairman of the Board and a principal shareholder of Scope Industries.
(16) Does not include shares beneficially owned by Steven C. Good, Mark and
Penny Berns Trust, Arnold G. and Hope Anisgarten and Rajiv Mehra. Steven
C. Good and Mark S. Berns are the trustees of the Good Swartz & Berns
Pension & Profit Sharing Plan.
(17) Includes 6,429 shares held by Surendra V. Jain M.D. Inc.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 40,000,000
shares of Common Stock and 10,000,000 shares of preferred stock.
COMMON STOCK
As of September 30, 1997, 6,233,778 shares of Common Stock were outstanding,
held of record by 79 shareholders. After completion of the Offering, there
will be 9,563,778 shares of Common Stock outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are entitled to cumulative voting rights with respect to the
election of directors so long as at least one shareholder has given notice at
the meeting of shareholders prior to the voting of that shareholder's desire
to cumulate votes. Subject to preferences that may be applicable to any shares
of preferred stock issued in the future, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefore. See "Dividend Policy." In the event
of a liquidation, dissolution or winding up of the Company, holders of the
Common Stock are entitled to share ratably with the holders of any then
outstanding preferred stock in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of the Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has authority to issue up to 10,000,000 shares of
preferred stock, no par value, and to fix the rights, preferences, privileges
and restrictions, including voting rights, of those shares without any future
vote or action by the shareholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance
of preferred stock could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of preferred stock. No
shares of preferred stock are currently outstanding.
STOCK TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,563,778 shares of
Common Stock outstanding (assuming no exercise of stock options after
September 30, 1997). Of these shares, the 3,700,000 shares sold in this
Offering (4,255,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or
registration under the Securities Act unless they are purchased by
"affiliates" of the Company as that term is defined under Rule 144. The
remaining 5,863,778 shares will be "restricted securities" as defined in Rule
144 ("Restricted Shares"). Of such Restricted Shares, approximately 5,838,000
Restricted Shares (or approximately 5,283,000 if the Underwriters' over-
allotment option is exercised in full) are subject to lock-up agreements with
the Underwriters. See "Underwriting."
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and adversely affect the
Company's ability to raise additional capital in the capital markets at a time
and price favorable to the Company. As a result of the lock-up agreements and
the provisions of Rule 144(k), Rule 144 and Rule 701, all currently
outstanding shares will be available for sale in the public market upon
expiration of the lock-up agreements 180 days after the date of this
Prospectus, subject to the provisions of Rule 144 and Rule 701.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1.0% of the then outstanding
shares of the Company's Common Stock (approximately 95,638 shares immediately
after this Offering) or the average weekly trading volume during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and availability of
current public information about the Company. A person who is not an
affiliate, has not been an affiliate within three months prior to the sale and
has beneficially owned the Restricted Shares for at least two years is
entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers between May 20, 1988,
the effective date of Rule 701, and the date the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission (the "Commission") has indicated that Rule
701 will apply to typical stock options granted by an issuer before it becomes
subject to the reporting requirements of the Exchange Act (including options
granted before May 20, 1988, if made in accordance with the Rule had it been
in effect), along with the shares acquired upon exercise of such options
beginning May 20, 1988 (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, such securities may be
sold: (i) by persons other than Affiliates, subject only to the manner of sale
provisions of Rule 144; and (ii) by Affiliates under Rule 144 without
compliance with its minimum holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved for issuance
under the 1987 Plan and the 1997 Plan or previously issued upon the exercise
of options, thus permitting the resale of shares issued under such plans by
non-affiliates in the public market without restriction under the Securities
Act. The registration statement is expected to be filed within 90 days after
the date of this Prospectus and will automatically become effective upon
filing.
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of Common Stock offered
hereby.
55
<PAGE>
UNDERWRITING
The Underwriters (the "Underwriters") named below, acting through their
representatives, Robertson, Stephens & Company LLC, William Blair & Company,
L.L.C. and Volpe Brown Whelan & Company, LLC (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement by and among the Company, the Selling Shareholders and the
Underwriters, to purchase from the Company and the Selling Shareholders the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such
shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
Robertson, Stephens & Company LLC.....................................
William Blair & Company, L.L.C........................................
Volpe Brown Whelan & Company, LLC.....................................
---------
Total............................................................... 3,700,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the shares of Common Stock at the
offering price set forth on the cover page of this Prospectus: (i) to the
public; and (ii) to certain dealers who will be offered a concession of not
more than $ per share, of which $ may be reallowed to other dealers. After
the consummation of this Offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company or
the Selling Shareholders as set forth on the cover page of this Prospectus.
The Underwriters have been granted an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 555,000 additional
shares of Common Stock from certain Selling Shareholders at the same price per
share as the Company and the Selling Shareholders will receive for the
3,700,000 shares that the Underwriters have agreed to purchase in this
Offering. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it set forth in the above table bears to the total number of
shares of Common Stock listed in such table. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of certain lock-up agreements, officers and directors
of the Company, the Selling Shareholders and certain other shareholders
holding collectively approximately 5,838,000 shares of the Company's Common
Stock outstanding prior to this Offering, have agreed with the Representatives
that except for the 3,700,000 shares being offered in this Offering, or the
shares sold pursuant to the over-allotment option, without the prior written
consent of Robertson, Stephens & Company LLC or as a gift or distribution to
one who agrees to be bound by these restrictions, until 180 days after the
effective date of this Prospectus (the "lock-up period"), they will not offer
to sell, contract to sell or otherwise dispose of any shares of Common Stock,
including shares issuable under options or warrants exercisable during the 180
days after the date of this Prospectus, any options or warrants to purchase
shares of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock owned directly by such holders or with respect to which
they have the power of disposition. Approximately 5,838,000 shares of Common
Stock subject to the lock-up agreements will become eligible for immediate
public sale following expiration of the lock-up period, subject to the
provisions of the Securities Act and the Rules promulgated thereunder.
Robertson, Stephens & Company LLC may, in its sole discretion, and at any time
without notice, release all or a portion of the
56
<PAGE>
securities subject to the lock-up agreements. See "Shares Eligible for Future
Sale." In addition, the Company has agreed that until the expiration of the
lock-up period, the Company will not, without the prior written consent of
Robertson, Stephens & Company LLC, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock, other than the Company's sales of shares in this Offering, the
issuance of shares of Common Stock upon the exercise of outstanding stock
options, and the grant of options to purchase shares or the issuance of shares
of Common Stock under the Company's 1997 Plan.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters in connection with this
Offering. The Underwriters may also cover all or a portion of such short
position, by exercising the Underwriters' over-allotment option referred to
above. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or
syndicate member in connection with this Offering if the Common Stock
originally sold by such Underwriter or syndicate member is purchased by the
Representatives in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The
Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Company's
securities. The initial public offering price of the Common Stock was
determined by negotiation among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in
recent periods, market valuations of publicly traded companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development, the current state of the industry and the economy as a
whole, and any other factors deemed relevant.
57
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Certain legal matters with respect to this Offering will be passed upon for
the Underwriters by Jones, Day, Reavis & Pogue, Los Angeles, California. As of
the date of this Prospectus, Troy & Gould Professional Corporation and certain
of its members collectively own 52,500 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement onForm S-1 under the Securities Act with respect to the
Common Stock being offered hereby. As permitted by the rules and regulations
of the Commission, this Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement, and such
exhibits and schedules. A copy of the Registration Statement, and the exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the Commissions regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies
of all or any part of the Registration Statement may be obtained from such
offices upon payment of the fees prescribed by the Commission. In addition,
the Registration Statement may be accessed at the Commission's site on the
World Wide Web located at http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
58
<PAGE>
OSI SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995,
1996 and 1997............................................................ F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 1995, 1996 and 1997.................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995,
1996 and 1997............................................................ F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
OSI Systems, Inc.:
We have audited the accompanying consolidated balance sheets of OSI Systems,
Inc. (the "Company") and its subsidiaries as of June 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended June 30, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OSI Systems, Inc. and its
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for the years ended June 30, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 15, 1997
F-2
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- -------
<S> <C> <C>
ASSETS (NOTE 4)
Current Assets:
Cash and cash equivalents (Note 1)........................... $ 581 $ 553
Accounts receivable, net of allowance for doubtful accounts
of $276 and $586 at June 30, 1996 and 1997, respectively
(Note 1).................................................... 13,295 15,556
Other receivables (Note 2)................................... 783 2,346
Inventory (Note 1)........................................... 13,642 18,517
Prepaid expenses............................................. 633 537
Deferred income taxes (Notes 1 and 7)........................ 700 874
------- -------
Total current assets....................................... 29,634 38,383
------- -------
Property and Equipment, Net (Notes 1 and 4):................... 4,454 5,841
Intangible and Other Assets, Net (Notes 1, 2 and 3)............ 1,221 3,109
------- -------
Total...................................................... $35,309 $47,333
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit (Note 4)................................ $ 7,783 $ 9,100
Current portion of long-term debt (Notes 6 and 13)........... 1,491 1,240
Current portion of senior subordinated debt (Note 5)......... 2,500
Accounts payable (Note 1).................................... 6,522 7,712
Accrued payroll and related expenses......................... 1,667 1,607
Income taxes payable (Notes 1 and 7)......................... 799 1,804
Advances from customers...................................... 219 2,410
Other accrued expenses and current liabilities............... 2,609 3,710
------- -------
Total current liabilities.................................. 23,590 27,583
Senior Subordinated Debt (Notes 1 and 5)....................... 575
Long-Term Debt (Notes 1, 6 and 13)............................. 3,113 2,840
Deferred Income Taxes (Notes 1 and 7).......................... 827 101
Minority Interest (Note 1)..................................... 10
------- -------
Total liabilities.......................................... 28,115 30,524
Commitments and Contingencies (Notes 8 and 13)
Shareholders' Equity (Notes 4, 5, 9 and 10):
Preferred stock, voting shares, no par value; authorized,
3,000,000 shares; issued and outstanding, 1,318,750 shares
at June 30, 1996 and 0 shares at June 30, 1997 (Note 10).... 1,514
Preferred stock, no par value; 10,000,000 shares authorized;
none issued and outstanding at June 30, 1996 and 1997.......
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 1,858,132 and 6,156,528 shares at
June 30, 1996 and 1997, respectively........................ 560 7,367
Retained earnings............................................ 4,994 9,171
Cumulative foreign currency translation adjustment (Note 1).. 126 271
------- -------
Total shareholders' equity................................. 7,194 16,809
------- -------
Total...................................................... $35,309 $47,333
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues (Note 1).............................. $ 49,815 $ 61,518 $ 77,628
Cost of goods sold............................. 37,818 45,486 56,174
--------- --------- ---------
Gross profit................................... 11,997 16,032 21,454
Operating expenses:
Selling, general and administrative expenses
(Notes 11 and 12)............................ 7,601 9,757 11,304
Research and development (Note 1)............. 1,591 1,663 2,504
Stock option compensation (Note 9)............ -- -- 856
--------- --------- ---------
Total operating expenses....................... 9,192 11,420 14,664
--------- --------- ---------
Income from operations......................... 2,805 4,612 6,790
Interest expense (Notes 4, 5, 6 and 11)........ 1,251 1,359 1,197
--------- --------- ---------
Income before provision for income taxes and
minority interest............................. 1,554 3,253 5,593
Provision for income taxes (Notes 1 and 7)..... 413 1,111 1,416
--------- --------- ---------
Income before minority interest in net loss of
subsidiaries.................................. 1,141 2,142 4,177
Minority interest in net loss of subsidiaries
(Note 1)...................................... 17 117 --
--------- --------- ---------
Net income..................................... $ 1,158 $ 2,259 $ 4,177
========= ========= =========
Historical net income.......................... $ 1,158 $ 2,259 $ 4,177
Interest on subordinated debt, net of income
taxes......................................... 216 166 92
Minority interest in net loss of subsidiaries.. (17) (117) --
--------- --------- ---------
Net income available to common shareholders.... $ 1,357 $ 2,308 $ 4,269
========= ========= =========
Net income per share (Note 1).................. $ 0.22 $ 0.38 $ 0.68
========= ========= =========
Weighted average shares
outstanding................................... 6,172,901 6,134,669 6,263,963
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED COMMON FOREIGN
------------------- ---------------- CURRENCY
NUMBER OF NUMBER OF RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
---------- ------- --------- ------ -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994... 1,123,750 $ 1,124 1,703,257 $ 363 $1,577 $ 64 $ 3,128
Exercise of stock
options.............. 35,000 70 60,000 75 -- -- 145
Conversion of debt.... 160,000 320 78,750 105 -- -- 425
Translation
adjustment........... -- -- -- -- -- 95 95
Net income............ -- -- -- -- 1,158 -- 1,158
---------- ------- --------- ------ ------ ---- -------
BALANCE, JUNE 30, 1995.. 1,318,750 1,514 1,842,007 543 2,735 159 4,951
Exercise of stock
options.............. -- -- 16,125 17 -- -- 17
Translation
adjustment........... -- -- -- -- -- (33) (33)
Net income............ -- -- -- -- 2,259 -- 2,259
---------- ------- --------- ------ ------ ---- -------
BALANCE, JUNE 30, 1996.. 1,318,750 1,514 1,858,132 560 4,994 126 7,194
Exercise of stock
options.............. -- -- 118,125 146 -- -- 146
Conversion of debt.... 1,250,000 2,500 120,536 225 -- -- 2,725
Minority interest
acquisitions......... -- -- 206,610 1,566 -- -- 1,566
Conversion of
preferred stock...... (2,568,750) (4,014) 3,853,125 4,014 -- -- --
Stock option
compensation......... -- -- -- 856 -- -- 856
Translation
adjustment........... -- -- -- -- -- 145 145
Net income............ -- -- -- -- 4,177 -- 4,177
---------- ------- --------- ------ ------ ---- -------
BALANCE, JUNE 30, 1997.. -- $ -- 6,156,528 $7,367 $9,171 $271 $16,809
========== ======= ========= ====== ====== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,158 $ 2,259 $ 4,177
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest in net loss of subsidiaries.... (17) (117)
Provision for losses on accounts receivable...... (70) 404 389
Depreciation and amortization.................... 1,551 2,014 2,302
Stock option compensation........................ 856
Deferred income taxes............................ 240 (12) (900)
Gain on sale of property and equipment........... (11) (13)
Changes in operating assets and liabilities, net
of business acquisition:
Accounts receivable............................ (1,239) (858) (1,980)
Other receivables.............................. 226 (194) (1,530)
Inventory...................................... (2,599) (4,068) (4,573)
Prepaid expenses............................... (139) (245) 96
Accounts payable............................... 221 120 1,026
Accrued payroll and related expenses........... 191 707 (60)
Income taxes payable........................... (217) 652 1,005
Advances from customers........................ 9 183 1,448
Other accrued expenses and current
liabilities................................... (87) (827) 1,101
------- ------- -------
Net cash provided by (used in) operating
activities.................................. (783) 5 3,357
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment...... 142 120
Additions to property and equipment............... (1,396) (1,612) (2,182)
Cash paid for business acquisition, net of cash
acquired......................................... (848)
Cash paid for minority interest................... (160)
Other assets...................................... (662) (688) 23
------- ------- -------
Net cash used in investing activities........ (2,076) (2,180) (3,007)
------- ------- -------
Cash flows from financing activities:
Net proceeds from (repayment of) bank lines of
credit........................................... 2,668 1,502 1,014
Payments on senior subordinated debt.............. (700) (350)
Payments on junior subordinated debt.............. (280)
Payments on long-term debt........................ (1,095) (1,250) (3,983)
Proceeds from issuance of long-term debt.......... 2,806 1,097 2,647
Proceeds from exercise of stock options and
warrants......................................... 145 17 146
Proceeds from issuance of minority interest....... 21
------- ------- -------
Net cash provided by (used in) financing
activities.................................. 3,544 1,387 (526)
------- ------- -------
Effect of exchange rate changes on cash............. 95 (36) 148
------- ------- -------
Net (decrease) increase in cash..................... 780 (824) (28)
Cash, beginning of period........................... 625 1,405 581
------- ------- -------
Cash, end of period................................. $ 1,405 $ 581 $ 553
======= ======= =======
Supplemental disclosures of cash flow information--
Cash paid during the period for:
Interest.......................................... $ 1,229 $ 1,346 $ 1,197
Income taxes...................................... $ 82 $ 377 $ 1,511
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
- ---------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, certain related parties converted $105 and $320 of junior and
senior subordinated debt into 78,750 and 160,000 shares of common and
preferred stock, respectively.
During 1995, the Company refinanced $1,244 in long-term debt obligations
through a new financing arrangement with a bank.
During 1997, certain related parties converted $225 and $2,500 of senior
subordinated debt into 120,536 and 1,250,000 shares of common and preferred
stock, respectively.
During October and December 1996, the Company acquired the minority interest
of its two majority-owned subsidiaries through the issuance of 178,956 shares
of common stock, at an estimated fair value of $6.67 per share. An additional
27,654 shares, at an estimated fair value of $13.50 per share, are issuable at
June 30, 1997. The excess of the fair value of the common stock of $1,566 over
the book value of the minority interests of $12 has been recorded as goodwill.
In 1997, the Company acquired all of the capital stock of Advanced Micro
Electronics AS. In conjunction with the acquisition, liabilities were assumed
as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired........................................ $2,350
Goodwill............................................................. 588
Cash paid for the capital stock...................................... (916)
------
Liabilities assumed.................................................. $2,022
======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- OSI Systems, Inc. (formerly Opto Sensors, Inc.) and its
subsidiaries (collectively, the "Company") is a vertically integrated,
worldwide provider of devices, subsystems and end-products based on
optoelectronic technology. The Company designs and manufactures optoelectronic
devices and value-added subsystems for original equipment manufacturers
("OEMs") in a broad range of applications, including security, medical
diagnostics, telecommunications, office automation, aerospace, computer
peripherals and industrial automation. In addition, the Company utilizes its
optoelectronic technology and design capabilities to manufacture security and
inspection products that it markets worldwide to end users under the
"Rapiscan" brand name. These products are used to inspect baggage, cargo and
other objects for weapons, explosives, drugs and other contraband.
Consolidation -- The consolidated financial statements include the accounts
of OSI Systems, Inc. and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In October and December 1996 the Company purchased the minority interests of
its two majority-owned subsidiaries by exchanging 178,956 shares of common
stock for the minority shares of the subsidiaries. The excess of the fair
value of the common stock issued of $1,193,000 over the carrying value of the
minority interest of $12,000 has been recorded as goodwill and is being
amortized over a period of 20 years. The Company also agreed to issue
additional shares of the Company's common stock to the selling shareholders of
one of the subsidiaries. The number of shares to be issued is based upon the
pre-tax income of the subsidiary for the year ended June 30, 1997, and has
been determined to be 27,654 shares and have been included in the number of
shares issued for minority interest acquisitions in the accompanying 1997
consolidated statement of shareholders' equity.
Concentrations of Credit Risk -- The Company's financial instruments that
are exposed to credit risk consist primarily of accounts receivable. The
Company performs ongoing credit evaluations of its customers' financial
condition and provides an allowance for potential credit losses. The
concentration of credit risk is generally diversified due to the large number
of entities comprising the Company's customer base and their geographic
dispersion.
Inventory -- Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method.
Inventory at June 30, 1996 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- -------
<S> <C> <C>
Raw materials................................................ $ 7,795 $11,408
Work-in-process.............................................. 3,114 4,224
Finished goods............................................... 2,733 2,885
------- -------
Total...................................................... $13,642 $18,517
======= =======
</TABLE>
F-8
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line and
accelerated methods over lives ranging from three to ten years. Amortization
of leasehold improvements is calculated on the straight-line basis over the
shorter of the useful life of the asset or the lease term.
Property and equipment at June 30, 1996 and 1997 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- -------
<S> <C> <C>
Equipment................................................... $ 6,280 $ 7,545
Leasehold improvements...................................... 1,601 2,093
Tooling..................................................... 1,558 1,967
Furniture and fixtures...................................... 488 666
Computer equipment.......................................... 1,283 1,699
Vehicles.................................................... 93 176
------- -------
Total..................................................... 11,303 14,146
Less accumulated depreciation and amortization.............. 6,849 8,305
------- -------
Property and equipment, net................................. $ 4,454 $ 5,841
======= =======
</TABLE>
Intangibles and Other Assets -- Intangible and other assets at June 30, 1996
and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- -------
<S> <C> <C>
Software development costs.................................. $ 588 $ 588
Goodwill.................................................... -- 2,142
Deposits.................................................... 262 320
Other....................................................... 524 444
------- -------
Total..................................................... 1,374 3,494
Less accumulated amortization............................... 153 385
------- -------
Intangible and other assets, net............................ $ 1,221 $ 3,109
======= =======
</TABLE>
Goodwill in the amount of $1,554,000 resulting from the acquisition of
minority interests and $588,000 resulting from the acquisition of Advanced
Micro Electronics AS (see Note 3) is being amortized, on a straight-line
basis, over a period of twenty years.
Software development costs incurred in the research and development of
software products are expensed as incurred until the technological feasibility
of the product has been established. After technological feasibility is
established, certain software development costs are capitalized. The software,
once developed, is a component which is included in X-ray security machines
when they are sold to customers. The Company amortizes these costs on a
straight-line basis over a two-year period. No software development costs were
capitalized during the year ended June 30, 1997.
Impairment of Long-Lived Assets -- The Company reviews long-lived assets,
including goodwill, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If the
sum of the expected future cash flows, undiscounted and without interest
charges, is less than the carrying amount of the asset, the Company recognizes
an impairment loss based on the estimated fair value of the asset.
F-9
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes -- Deferred income taxes are provided for temporary differences
between the financial statement and income tax bases of the Company's assets
and liabilities, based on enacted tax rates. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
Fair Value of Financial Instruments -- The Company's financial instruments
consist primarily of cash accounts receivable, accounts payable, and debt
instruments. The carrying values of financial instruments other than debt
instruments, are representative of their fair values due to their short-term
maturities. The carrying values of the Company's long-term debt instruments
are considered to approximate their fair values because the interest rates of
these instruments are variable or comparable to current rates offered to the
Company. The fair value of the Company's senior subordinated debt cannot be
determined due to the related-party nature of the obligations.
Revenue Recognition-- The Company recognizes revenue upon shipment of its
product.
Foreign Currency Translation -- The accounts of the Company's operations in
Singapore, Malaysia, Norway and the United Kingdom are maintained in Singapore
dollars, Malaysian ringgits, Norwegian Krone and U.K. pounds sterling,
respectively. Foreign currency financial statements are translated into U.S.
dollars at current rates, with the exception of revenues, costs and expenses,
which are translated at average rates during the reporting period. Gains and
losses resulting from foreign currency transactions are included in income,
while those resulting from translation of financial statements are excluded
from income and accumulated as a component of shareholders' equity.
Transaction (losses) gains of approximately $76,000, ($123,000), and $68,000
were included in income for the years ended June 30, 1995, 1996 and 1997,
respectively.
Earnings Per Share -- Earnings per share information is computed using the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from preferred stock, convertible debt and stock
options using the treasury stock method. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin Topic 4D, common stock and stock options
issued or granted during the twelve month period prior to the date of the
initial filing of the Company's Form S-1 Registration Statement have been
included in the calculation of the weighted average number of common and
common equivalent shares using the treasury stock method as if they were
outstanding for each period. Net income and net income per share have been
presented to reflect the effect of the conversion of the preferred stock into
shares of the Company's common stock (see Notes 5 and 10).
Recently Issued Accounting Pronouncements -- In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share". The statement is effective for interim
periods and fiscal years ending after December 15, 1997. The Company does not
expect that the statement will have a material effect on the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting for Comprehensive Income"
and No. 131, "Disclosure about Segments of an Enterprise and Related
Information." These statements are effective for financial statements issued
for periods beginning after December 15, 1997. The Company has not yet
analyzed the impact of adopting these statements.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT IN JOINT VENTURE
In January 1995, the Company, together with an unrelated company, formed
ECIL-Rapiscan Security Products Limited, a joint venture organized under the
laws of India. The Company, the Company's chairman and the Company's chief
financial officer have a 36.0%, 10.5% and 4.5% ownership interest,
respectively, in the joint venture. The Company's investment of approximately
$108,000 at June 30, 1997 is included in other assets in the accompanying
financial statements and the Company's equity in the earnings of the joint
venture, since its inception, have been insignificant.
The joint venture was formed for the purpose of the manufacture, assembly,
service and testing of X-ray security and other products. One of the Company's
subsidiaries is a supplier to the joint venture partner, who in turn
manufactures and sells the resulting products to the joint venture utilizing
technology received from the subsidiary. The agreement provides for technology
transfer between the Company and the joint venture, subject to certain
restrictions.
During the year ended June 30, 1995 and 1997, the Company earned a technical
fee from the joint venture in the amount of $200,000 and $115,000,
respectively. At June 30, 1997, $100,000 was unpaid and included in other
receivables in the accompanying consolidated financial statements.
3. ACQUISITIONS
On March 3, 1997, the Company acquired the capital stock of Advanced Micro
Electronics AS ("AME") headquartered in Horten, Norway, from Industriinvestor
ASA. The cash purchase price amounted to $916,000. The acquisition has been
accounted for by the purchase method of accounting, and accordingly, the
purchase price has been allocated to the assets acquired of $2,350,000, and
liabilities assumed of $2,022,000, based on the estimated fair values of the
assets and liabilities at the date of acquisition. The excess of the purchase
price over the fair value of net assets acquired is being amortized over a
period of 20 years.
The results of operations of AME are included in the Company's consolidated
financial statements from the date of acquisition. Had the acquisition
occurred as of July 1, 1994, pro forma consolidated sales for the years ended
June 30, 1995, 1996 and 1997 would have been $53,338,000, $65,371,000, and
$79,871,000, respectively. Consolidated pro forma net income and net income
per share would not have been materially different than the amounts reported
for the respective periods.
4. BANK AGREEMENTS
At June 30, 1996 and 1997, line of credit borrowings consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Line of credit -- U.S......................................... $6,361 $6,577
Line of credit -- Singapore................................... 1,422 974
Line of credit -- Norway...................................... 586
Line of credit -- Rapiscan U.K. .............................. 963
------ ------
Total bank lines of credit.................................. $7,783 $9,100
====== ======
</TABLE>
F-11
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company maintains a senior loan agreement with a U.S. bank, which
provides for a $10,000,000 revolving line of credit, a $2,500,000 term loan, a
$1,000,000 equipment line and a $1,500,000 stock purchase facility (see Note
6). Total borrowings under the agreement are not to exceed $15,000,000.
Borrowings under the line of credit bear interest at the bank's prime rate
(8.5% at June 30, 1997) plus .25% or, at the Company's option, at 2.25% above
the LIBOR rate for specific advances and terms. Interest is payable monthly,
and the line expires in November 1998. Borrowings under the senior loan
agreement are collateralized by substantially all of the assets of the
Company. At June 30, 1997 approximately $5,077,000 was issued and outstanding
under the revolving line of credit. The agreement also provides a commitment
for letters of credit up to $10,000,000 not to exceed the available balance
under the line of credit. At June 30, 1997 approximately $154,000 was issued
and outstanding under letters of credit.
Covenants in connection with the agreement impose restrictions and
requirements related to, among other things, maintenance of certain financial
ratios, limitations on outside indebtedness, rental expense and capital
expenditures.
The Company has a credit agreement with a U.S. bank, which provides for a
$5,000,000 revolving line of credit and a $4,000,000 letter of credit sub-
facility. Total borrowings under the agreement may not exceed $5,000,000.
Borrowings under the line of credit bear interest at the bank's prime rate
(8.5% at June 30, 1997) plus .25%. Interest is payable monthly, and the line
expires in October 1997. Borrowings under the current agreement are secured by
certain of the Company's assets. At June 30, 1997 $1,500,000 was issued and
outstanding under the revolving line of credit. The agreement also provides a
commitment for letters of credit up to $4,000,000. At June 30, 1997
approximately $1,917,000 was issued and outstanding under letters of credit.
Covenants in connection with the agreement impose restrictions and
requirements related to, among other things, maintenance of certain financial
ratios, limitations on outside indebtedness, profitability, and capital
expenditures.
Opto Sensors Pte. Ltd. ("OSP") has a loan agreement with a Singapore bank,
which provides for revolving line of credit borrowings up to 2,600,000
Singapore dollars (approximately $1,800,000 at June 30, 1997). The agreement
also has a term note feature providing for borrowings up to approximately
$300,000 (see Note 6). Borrowings under the line of credit bear interest at
the bank's prime rate (8.5% at June 30, 1997) plus 1.5%. Interest is payable
monthly, and borrowings are due on demand. Borrowings under the line of credit
are collateralized by certain OSP assets and are guaranteed by the Company and
certain officers of the Company.
AME has a loan agreement with a Norwegian bank, which provides for revolving
line of credit borrowings up to 5,000,000 Norwegian Krone (approximately
$682,000 at June 30, 1997). Borrowings under the line of credit bear interest
at a variable rate, which was 6.65% at June 30, 1997. Interest is payable
quarterly. The loan agreement has no expiration date. Borrowings under the
line of credit are collateralized by certain AME assets.
A subsidiary has loan agreements with a U.K. bank, which provide for
overdraft borrowings of up to 1,250,000 pound sterling (approximately
$2,081,000 at June 30, 1997), line of credit borrowings up to 750,000 pound
sterling (approximately $1,248,000 at June 30, 1997) and a 500,000 pound
sterling (approximately $832,000 at June 30, 1997) borrowing facility for
tender and performance bonds. Borrowings under the overdraft facility bear
interest at a base rate (6.0% at June 30, 1997) plus 2%. The overdraft
facility expires in December 1997. At June 30, 1997 no amounts were
outstanding under the overdraft facility. Borrowings under the line of credit
bear interest at the base rate plus 1.85%. Interest is payable monthly and the
line expires in November 1997. Borrowings under this agreement are secured by
certain assets of the subsidiary and are guaranteed by the Company.
Approximately $452,000 was outstanding under performance bonds at June 30,
1997.
F-12
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A subsidiary has a loan agreement with a Malaysian bank, which provides for
revolving line of credit borrowings up to 2,500,000 Malaysian ringgits
(approximately $990,000 at June 30, 1997) for performance bonds and standby
letter of credits. This line expires in October 1997. No amounts were
outstanding under this agreement at June 30, 1997.
5. SENIOR SUBORDINATED DEBT
The Company has issued convertible notes payable to non affiliates and
certain related parties. Under the terms of the various agreements, certain
debt contained nondetachable warrants to convert the related debt into shares
of the Company's preferred stock at $2.00 per share. Certain other notes
provided for the conversion of the debt into shares of the Company's preferred
stock at $2.80 per share at the option of the holder. The remaining debt, at
the option of the holder, provided for conversion of the debt into shares of
the Company's common stock at $1.87 per share. During the year ended June 30,
1997, all of the debt outstanding under the various agreements was repaid or
converted in accordance with the conversion terms as summarized in the
following table:
<TABLE>
<CAPTION>
JUNE 30,
--------------
1996 1997
------ ------
(In thousands)
<S> <C> <C>
Convertible note payable to a related party, interest due quarterly
at a bank's prime rate (8.25% at June 30, 1996) plus 1.5%,
principal due on April 24, 1997 converted into 1,250,000 shares of
preferred stock on November 27, 1996.............................. $2,500 $--
Convertible notes payable, (including $50,000 to a related party)
interest due quarterly at a bank'sprime rate (8.25% at June 30,
1996) plus 1.5%, principal due on February 19, 1998, paid in full
as of October 28, 1996............................................ 350 --
Convertible notes payable to directors, interest due quarterly at a
bank's prime rate (8.25% at June 30, 1996) plus 1.5%, principal
due on February 19, 1998, converted into 26,786 shares of common
stock on October 31, 1996......................................... 50 --
Convertible notes payable, interest due quarterly at a bank's prime
rate (8.25% at June 30, 1996) plus 1.5%, principal due on February
19, 1998 converted into 93,750 shares of common stock on October
31, 1996.......................................................... 175 --
------ ----
Total senior subordinated debt..................................... 3,075 --
Less current portion............................................... 2,500 --
------ ----
Total long-term portion............................................ $ 575 $--
====== ====
</TABLE>
F-13
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
At June 30, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------
1996 1997
------ ------
(In thousands)
<S> <C> <C>
Term loan payable to a bank, interest due monthly at the bank's
prime rate (8.25% at June 30, 1996) plus 0.25%, principal due
in monthly installments of $52,083. The term loan was repaid in
January 1997................................................... $1,667 --
Term loan payable to a bank, interest due monthly at the bank's
prime rate (8.25% at June 30, 1996) plus 0.25%, principal due
in equal monthly installments of $16,666. The term loan was
repaid in January 1997......................................... 750 --
Equipment line note payable to a bank, interest due monthly at
the bank's prime rate (8.25% at June 30, 1996) plus 0.25%,
principal due in monthly installments of $11,623. The term loan
was repaid in January 1997..................................... 511 --
Term loan payable to a bank, interest due monthly at the bank's
prime rate (8.5% at June 30, 1997) plus 0.50%, principal due in
monthly installments of $52,083 until paid in full on March 31,
2001. Outstanding balances are collateralized by substantially
all of the assets of the Company............................... -- $2,344
Term loan payable to a Norwegian bank, interest due quarterly at
a rate of 5.75% principal due in monthly installments of
$12,129 until paid in full on June 1, 2001. Outstanding
balances are collateralized by certain assets of the
subsidiary..................................................... -- 437
Term loan payable to a bank, interest due monthly at the bank's
prime rate (8.5% at June 30, 1997) plus 2.25%, principal due in
monthly installments of $8,333 until paid in full on November
30, 1997....................................................... 141 41
Liability under settlement agreements, interest computed at the
52 week treasury bill rate (5.35% at June 30, 1997), principal
due $300,000 in 1998, and $400,000 in 1999..................... 1,000 700
Other........................................................... 535 558
------ ------
4,604 4,080
Less current portion of long-term debt.......................... 1,491 1,240
------ ------
Long-term portion of debt....................................... $3,113 $2,840
====== ======
</TABLE>
Fiscal year principal payments of long-term debt as of June 30, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $1,240
1999.................................................................. 1,333
2000.................................................................. 896
2001.................................................................. 592
2002.................................................................. 19
------
Total............................................................... $4,080
======
</TABLE>
F-14
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
For financial reporting purposes, income before provision for income taxes
and minority interest includes the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Pretax income:
United States......................................... $1,277 $1,965 $2,655
Foreign............................................... 277 1,288 2,938
------ ------ ------
Total pretax income................................. $1,554 $3,253 $5,593
====== ====== ======
</TABLE>
The Company's provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
-------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 43 $ 510 $1,256
State................................................. 3 21 24
Foreign............................................... 127 592 1,036
---- ------ ------
173 1,123 2,316
Deferred................................................ 240 (12) (900)
---- ------ ------
Total provision..................................... $413 $1,111 $1,416
==== ====== ======
</TABLE>
Deferred income tax assets (liabilities) at June 30, 1996 and 1997 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- ------
<S> <C> <C>
Expenses not currently deductible........................... $ 873 $1,455
State income taxes.......................................... -- --
Other....................................................... -- 301
------- ------
Total deferred income tax assets.......................... 873 1,756
------- ------
Depreciation................................................ (145) (43)
Capitalized software development costs...................... (214) (219)
State income taxes.......................................... (173) (329)
Revitalization zone deductions.............................. (278) (392)
Other....................................................... (190) --
------- ------
Total deferred income tax liabilities..................... (1,000) (983)
------- ------
Net deferred income taxes................................... $ (127) $ 773
======= ======
</TABLE>
F-15
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated effective income tax rate differs from the federal
statutory income tax rate due primarily to the following:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes at federal statutory rate... 35.0 % 35.0 % 35.0 %
State income taxes (credits), net of federal benefit... (2.6) 0.2 (4.7)
Nontaxable earnings of FSC............................. (7.1) (5.7) (4.9)
Research and development tax credits................... (2.8) -- (1.7)
Foreign income subject to tax at other than federal
statutory rate........................................ 0.7 1.1 (1.0)
Other.................................................. 3.4 3.6 2.6
---- ---- ----
Effective income tax rate.............................. 26.6 % 34.2 % 25.3 %
==== ==== ====
</TABLE>
The Company does not provide for U.S. income taxes on the undistributed
earnings of the foreign subsidiaries as it is the Company's intention to
utilize those earnings in the foreign operations for an indefinite period of
time. At June 30, 1997 undistributed earnings of the foreign subsidiaries
amounted to approximately $3,656,000. It is not practicable to determine the
amount of income or withholding tax that would be payable upon the remittance
of those earnings.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its production and office facilities and certain
equipment under various operating leases. Most of these leases provide for
increases in rents based on the Consumer Price Index and include renewal
options ranging from two to ten years. The lease for the production and office
facilities in Hawthorne, California expires in 2005, and the Company is
currently considering exercising its option to purchase the facilities for
approximately $3,000,000. Future minimum lease payments under such leases as
of June 30, 1997 are as follows: $280,000; 1998, $1,046,000; 1999, $826,000;
2000, $684,000; 2001, $658,000; 2002, $401,000; and thereafter, $2,561,000.
Total rent expense included in the accompanying consolidated financial
statements was $959,000, $901,000 and $921,000 for the years ended June 30,
1995, 1996 and 1997, respectively.
The Company is involved in various claims and legal proceedings arising out
of the conduct of its business, principally related to patent rights and
related licensing issues. The principal litigation involves claims that
certain technology used in the Company's scanners infringes on certain
existing patents and seeks damages in an unspecified amount and an injunction
barring the Company from making, using, selling or offering for sale certain
of its security and inspection products in the United States. The Company has
alleged that its security products do not infringe the patents, and that the
plaintiffs in the suit had previously granted the Company the right to market
its security and inspection products. In the event it is determined that the
Company's products infringe upon the rights of the plaintiffs and that the
Company does not have the right to use the technology in its products, the
Company could be prevented from marketing most of its security and inspection
products in the United States and could be required to pay a significant
amount of damages.
An estimate of loss or range of loss cannot be made at this time, however,
management of the Company believes that the resolution of the above noted
litigation and other legal proceedings will not have a material adverse effect
on the Company's consolidated financial statements.
F-16
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS
The Company has two stock option plans. Under the 1987 plan, 1,050,000
shares of common stock have been reserved for the issuance of incentive stock
options to key employees, directors and officers of the Company. The price,
terms and conditions of each issuance are determined by the Board of
Directors.
The 1997 plan was established in May 1997 and authorizes the grant of up to
850,000 shares of the Company's common stock in the form of incentive and
nonqualified options. Employees, officers and directors are eligible under
this plan, which is administered by the Board of Directors who determine the
terms and conditions of each grant. The exercise price of nonqualified options
may not be less than 85% of the fair market value of the Company's common
stock at the date of grant. The exercise price of incentive stock options may
not be less than the fair market value of the Company's common stock at the
date of grant. The exercise price of incentive stock options granted to
individuals that own greater than ten percent of the Company's voting stock
may not be less than 110% of the fair market value of the Company's common
stock at the date of grant.
Exercise periods for incentive and nonqualified options granted under this
plan may not exceed ten years from the grant date.
In November and December 1996, the Company granted stock options for the
purchase of 235,125 shares of the Company's common stock to certain employees
at prices below the $6.67 estimated fair market value at the date grant. The
options were accelerated to vest immediately and accordingly, the Company has
recorded compensation expense for the year ended June 30, 1997, representing
the excess of the fair value of the Company's common stock at the date of
grant over the option exercise price.
F-17
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes stock option activity for the years ended June 30,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER -------------------
OF WEIGHTED
OPTIONS AVERAGE TOTAL
-------- -------- ----------
<S> <C> <C> <C>
Outstanding, July 1, 1994..................... 307,875 $1.43 $ 440,000
Granted....................................... 69,000 2.00 138,000
Exercised..................................... (60,000) 1.25 (75,000)
Canceled...................................... (19,500) 1.77 (34,000)
-------- ----------
Outstanding, June 30, 1995.................... 297,375 1.57 469,000
Granted....................................... 51,000 2.17 111,000
Exercised..................................... (16,125) 1.06 (17,000)
Canceled...................................... (13,500) 1.60 (22,000)
-------- ----------
Outstanding, June 30, 1996.................... 318,750 1.70 541,000
Granted....................................... 669,611 8.88 5,947,000
Exercised..................................... (118,125) 1.24 (146,000)
Canceled...................................... (9,750) 2.38 (23,000)
-------- ----------
Outstanding, June 30, 1997.................... 860,486 $7.34 $6,319,000
======== ==========
</TABLE>
The following summarizes pricing and term information for options
outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES JUNE 30, 1997 CONTRACTUAL LIFE PRICE JUNE 30, 1997 PRICE
- --------------- -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.17 to $0.67.......... 13,500 1.0 years $0.64 13,500 $0.64
1.87 to 2.00.......... 134,625 2.0 1.95 102,563 1.93
2.33 to 3.33.......... 277,875 4.1 2.89 269,250 2.90
11.50 to 13.50......... 434,486 5.0 12.08 -- --
------- -------
$0.17 to $13.50......... 860,486 4.2 $7.34 385,313 $2.56
======= =======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The estimated fair value of options
granted during 1996 and 1997 pursuant to SFAS 123 was approximately $19,000
and $1,054,000, respectively. Had the Company adopted SFAS 123, pro forma net
income would have been $2,297,000 and $4,058,000, and pro forma net income per
share would have been $0.36 and $0.64 for 1996 and 1997, respectively. The
fair value of each option grant was estimated using the Black-Scholes option-
pricing model with the following weighted average assumptions: dividend yield
and volatility of zero, a risk free interest rate of 6.33% and expected option
lives of 5 years.
10. STOCKHOLDERS' EQUITY
In May 1997, the Company's Board of Directors authorized a 1.5 for 1 stock
split of the outstanding common stock. All share and per share numbers have
been adjusted to retroactively reflect the common stock split.
F-18
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The preferred stock had a liquidation preference of $1.00 per share, and was
otherwise entitled to the same voting, dividend and all other rights as the
common stock.
In June 1997, in order to simplify the capital structure of the Company,
holders of the preferred stock converted each preferred share into 1.5 shares
(post-split) of common stock.
In June 1997, the Company amended its articles of incorporation, which
articles authorize 10,000,000 shares of new preferred stock. Such preferred
stock has no par value, and no preferred shares are issued and outstanding at
June 30, 1997.
In connection with the acquisition of the minority interest of a subsidiary
in November 1996 (see Note 1), the Company granted the selling shareholders
options to purchase 45,486 shares of the Company's common stock at $11.50 per
share. The options vest over four years from the date of grant. If the Company
does not successfully complete an underwritten public offering of its common
stock by December 31, 1997, the options revert back to the Company.
11. RELATED PARTY TRANSACTIONS
The Company contracts with entities affiliated by common ownership to
provide messenger service and auto rental and printing services. The Company
also contracts for professional services from a firm that has a partner
serving as a member of the Company's Board of Directors. Included in selling,
general and administrative expenses for the years ended June 30, 1995, 1996
and 1997 are approximately $77,000, $83,000, and $111,000 for messenger
service and auto rental; $78,000, $63,000, and $82,000 for printing services;
and $23,000, $7,000, and $11,000 for professional services, respectively.
During the year ended June 30, 1997, the Company paid a one time consulting
fee amounting to $100,000 to an entity that is a shareholder of the Company.
Shareholders and other parties related to the Company have made loans to the
Company under agreements subordinating such loans to the Company's bank
borrowings (see Notes 4, 5 and 6). Interest expense related to such borrowings
was approximately $315,000, $263,000, and $146,000 for the years ended June
30, 1995, 1996 and 1997, respectively.
12. GOVERNMENT SETTLEMENT
During 1994, a subsidiary of the Company was notified that the U.S.
Department of Justice was conducting an investigation regarding the testing of
certain products that were sold by a subsidiary under government contracts. A
settlement of $1,500,000 was agreed to, and was accrued and charged to
operations in the year ended June 30, 1994. The settlement is being paid in
five increasing installments, with the unpaid principal balance bearing
interest at the 52-week Treasury bill rate. At June 30, 1997, the unpaid
balance of this settlement was $700,000 (see Note 6).
13. EMPLOYEE BENEFIT PLANS
OSI Systems, Inc. has a qualified employee retirement savings plan. The plan
provides for a contribution by the Company, which is determined annually by
the Board of Directors. In addition, the plan permits voluntary salary
reduction contributions by employees. The Company made no contributions to the
plan for the years ended June 30, 1997, 1996 and 1995. During 1995, a
subsidiary in the U.K. ("Rapiscan") transferred its existing employees from
their former owner's plan to a new plan, the Rapiscan defined benefit plan,
which covers certain Rapiscan employees. The benefits under this plan are
based on years of service and the employee's highest 12 months' compensation
during the last five years of employment. Rapiscan's funding policy is to make
the minimum annual contributions required by applicable regulations based on
an independent actuarial valuation sufficient to provide for benefits accruing
after that date. Pension expense for the years ended June 30, 1995, 1996 and
1997 was approximately $111,000, $91,000, and $89,000, respectively.
F-19
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SEGMENT INFORMATION
The Company's operating locations include the United States, Europe (United
Kingdom and Norway) and Asia (Singapore and Malaysia). The Company's
operations and identifiable assets by geographical area are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
-------------------------------------------------
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $33,158 $11,341 $ 5,316 $49,815
Transfer between geographical
areas....................... 1,698 788 3,831 $ (6,317) --
------- ------- ------- -------- -------
Net revenues................. $34,856 $12,129 $ 9,147 $ (6,317) $49,815
======= ======= ======= ======== =======
Operating income............. $ 1,996 $ 485 $ 267 $ 57 $ 2,805
======= ======= ======= ======== =======
Identifiable assets.......... $36,751 $10,832 $ 4,839 $(21,642) $30,780
======= ======= ======= ======== =======
<CAPTION>
YEAR ENDED JUNE 30, 1996
-------------------------------------------------
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $42,403 $15,346 $ 3,769 $61,518
Transfer between geographical
areas....................... 6,304 3,092 10,974 $(20,370) --
------- ------- ------- -------- -------
Net revenues................. $48,707 $18,438 $14,743 $(20,370) $61,518
======= ======= ======= ======== =======
Operating income............. $ 2,641 $ 1,278 $ 890 $ (197) $ 4,612
======= ======= ======= ======== =======
Identifiable assets.......... $42,932 $10,179 $ 5,986 $(23,788) $35,309
======= ======= ======= ======== =======
<CAPTION>
YEAR ENDED JUNE 30, 1997
-------------------------------------------------
UNITED
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $54,310 $18,915 $ 4,403 $77,628
Transfer between geographical
areas....................... 8,655 5,156 12,191 $(26,002) --
------- ------- ------- -------- -------
Net revenues................. $62,965 $24,071 $16,594 $(26,002) $77,628
======= ======= ======= ======== =======
Operating income............. $ 3,814 $ 1,849 $ 1,390 $ (263) $ 6,790
======= ======= ======= ======== =======
Identifiable assets.......... $52,367 $15,066 $ 8,395 $(28,495) $47,333
======= ======= ======= ======== =======
</TABLE>
F-20
<PAGE>
[INSIDE BACK PAGE]
[Background names of various countries]
[Picture of inspection machine with image of gun and various
items on monitor]
RAPISCAN
2000 Units Shipped Worldwide
[Picture of cruise ship terminal]
Cruise Ship Terminal
[Picture of correctional facility]
Correctional Facility
[Picture of freight forwarder facility]
International Freight Forwarder
[Picture of court house]
Municipal Court House
[Picture of Buckingham Palace]
Buckingham Palace
[Picture of airport terminal]
International Airport
<PAGE>
[LOGO OF OPTO-SENSORS, INC.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities
that are the subject of this Registration Statement other than underwriting
discounts and commissions. All expenses incurred with respect to the
distribution will be paid by the Company, and such amounts, other than the
Securities and Exchange Commission registration fee and the NASD filing fee,
are estimates only.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 18,052
NASD filing fee................................................... 6,457
Nasdaq National Market System listing fee......................... 42,000
Printing and engraving expenses................................... 100,000
Transfer agent and registrar fees................................. 2,000
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 150,000
"Blue sky" fees and expenses...................................... 15,000
Other expenses.................................................... 151,491
--------
Total........................................................... $660,000*
========
</TABLE>
- ---------------------
* The Selling Shareholders participating in the Offering of the 370,000
shares to be sold by such Selling Shareholders will pay their pro rata
share of all expenses incurred with respect to the distribution of the
Common Stock, which amount is currently estimated to be approximately
$60,000. The Selling Shareholders who are selling in the case that the
underwriters over-allotment option is exercised will not pay any of the
above expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation ("Articles") provide that, pursuant
to the California Corporations Code, the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by, or in
the right of, the Company for breach of a director's duties to the Company or
its shareholders. This provision in the Articles does not eliminate the
directors' fiduciary duty and does not apply for certain liabilities: (i) for
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law; (ii) for acts or omissions that a director believes
to be contrary to the best interest of the Company or its shareholders or that
involve the absence of good faith on the part of the director; (iii) for any
transaction from which a director derived an improper personal benefit; (iv)
for acts or omissions that show a reckless disregard for the director's duty
to the Company or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the Company or its
shareholders; (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders; (vi) with respect to certain transactions or the
approval of transactions in which a director has a material financial
interest; and (vii) expressly imposed by statute for approval of certain
improper distributions to shareholders or certain loans or guarantees. This
provision also does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws require the Company to indemnify its officers and directors
under certain circumstances. Among other things, the Bylaws require the
Company to indemnify directors and officers against certain liabilities that
may arise by reason of their status or service as directors and officers and
allows the Company to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
Section 317 of the California Corporations Code ("Section 317") provides
that a California corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative
(other than
II-1
<PAGE>
action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the corporation, and, with respect to any criminal action or proceeding, had
no cause to believe his conduct was unlawful.
Section 317 also provides that a California corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect to any claim, issue or matter
as to which such persons shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which such action
or suit was brought shall determine that despite the adjudication of
liability, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court shall deem proper.
Section 317 provides further that to the extent a director or officer of a
California corporation has been successful in the defense of any action, suit
or proceeding referred to in the previous paragraphs or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification authorized by Section 317 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 317.
In May 1994, the Company entered into indemnification agreements with Deepak
Chopra, Ajay Mehra and Thomas K. Hickman in connection with certain personal
guarantees provided by them to a Singapore financial institution that provided
a loan to OSI Singapore, a subsidiary of the Company. The indemnification
agreements provide that the Company shall indemnify Messrs. Chopra, Mehra and
Hickman against all debts, liabilities, damages, claims, expenses and costs
including attorneys' fees incurred by them in connection with OSI Singapore's
inability to fulfill its obligations under the loan and their respective
guarantees of such loan. Messrs. Chopra, Mehra and Hickman are directors
and/or executive officers of the Company.
In connection with certain settlements entered into pursuant to the Consent
Agreements, the Company's subsidiary, UDT Sensors, agreed to pay the United
States government a total of $1,500,000 in five annual installments ending on
March 31, 1999. In order to ensure the full payment, Deepak Chopra personally
guaranteed the payment of $750,000 of the foregoing amount. The Company
entered into an indemnification agreement with Mr. Chopra pursuant to which
the Company shall indemnify Mr. Chopra against all debts, liabilities,
damages, claims, expenses and costs including attorneys' fees incurred by him
in connection with his guarantee of the payment of $750,000.
In addition, the Company has entered into indemnity agreements ("Indemnity
Agreement(s)") with each of its directors and executive officers. Each such
Indemnity Agreement provides that the Company shall indemnify the indemnitee
against expenses, including reasonable attorneys' fees, judgements, penalties,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with any civil or criminal action or administrative proceeding
arising out of the performance of his duties as a director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action, had no reasonable cause
to believe his conduct was unlawful. Each Indemnity Agreement permits the
director or officer that is party thereto to bring suit to seek recovery of
amounts due under the Indemnity Agreement and to recover the expenses of such
a suit if he is successful.
II-2
<PAGE>
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
The Company believes that it is the position of the Commission that insofar
as the foregoing provisions may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1997, Deepak Chopra, Ajay Mehra, Anuj Wadhawan and Dennis Noble
exercised options to purchase a total of 77,250 shares of Common Stock for a
total purchase price of $252,625. The options had been granted pursuant to the
Company's 1987 Plan. Each of Messrs. Chopra, Mehra, Wadhawan and Noble is an
officer and/or employee of the Company.
As of May 31, 1997, the Company had outstanding 2,568,750 shares of
Preferred stock which had the same rights, preferences, privileges and
restrictions as the Common Stock except for a liquidation preference entitling
each holder of Preferred Stock to receive $1.00 per share of Preferred Stock
prior to any payment to holders of Common Stock upon any liquidation,
dissolution or winding up of the Company. The then outstanding shares of
Preferred Stock were held by 29 investors including certain directors,
executive officers and principal shareholders of the Company. On June 12,
1997, in connection with the Stock Split, each outstanding share of Preferred
Stock was converted into one and one-half shares of Common Stock (the
"Preferred Stock Conversion"). As a result, all of the shares of Preferred
Stock were converted into 3,853,125 shares of Common Stock. No Preferred Stock
is currently outstanding.
In June 1989, April 1990 and February 1993 the Company issued and sold
(without payment of any selling commission to any person) subordinated
promissory notes in the aggregate principal amounts of approximately $385,000,
$3,520,000 and $575,000, respectively, with related warrants or conversion
rights to purchase capital stock of the Company. The purchasers of the
subordinated notes consisted of a financial institution and certain of the
Company's directors, executive officers, principal shareholders and their
family members, friends and acquaintances. The promissory notes, warrants and
conversion rights provided that the note holders were entitled to exercise the
warrants or convert the notes into capital stock of the Company by cancelling
the appropriate amounts of the outstanding principal amount and accrued
interest of such promissory notes. The exercise price of the warrants issued
in June 1989 and April 1990 was $1.33 per share (after giving effect to the
Stock Split), whereas the exercise price of the warrants and convertible notes
issued in February 1993 was $1.87 per share (after giving effect to the Stock
Split). During the period from March 1995 to November 1996, an aggregate
principal amount of $3,150,000 underlying the subordinated notes were
converted into 132,858 shares of Common Stock and 1,410,000 shares of
Preferred Stock (before giving effect to the Preferred Stock Conversion and
the Stock Split) as a result of the exercise of the warrants and conversion
rights. As a result of the Preferred Stock Conversion and the Stock Split, the
former note holders that exercised their warrants and conversion rights
currently hold 2,314,287 shares of Common Stock.
In April 1990, the Company issued warrants to purchase 35,000 shares of
Preferred Stock to Troy & Gould Professional Corporation ("Troy & Gould") in
consideration for legal services rendered by Troy & Gould. In April 1995, Troy
& Gould and certain principals thereof exercised such warrants by acquiring an
aggregate of 35,000 shares of Preferred Stock for a total exercise price of
$70,000. As a result of the Preferred Stock Conversion, Troy & Gould and
certain of its principals currently hold 52,500 shares of Common Stock.
Since June 1, 1994, the Company sold an aggregate of 194,250 shares of
Common Stock for an aggregate purchase price of $238,075 to various employees
pursuant to the exercise of options granted under the Company's 1987 Incentive
Stock Option Plan.
II-3
<PAGE>
Since June 1, 1994, the Company has issued options to purchase a total of
789,611 shares of its Common Stock to a total of 89 officers, directors and
employees of the Company. The exercise price of the foregoing options granted
by the Company ranged from $2.00 to $13.50 per share.
In November 1996, the Company issued 159,201 shares of its Common Stock to
10 officers and key employees of the Company in exchange for all of the shares
of capital stock of Rapiscan U.S.A., one of the Company's subsidiaries, then
owned by such officers and employees. The shares of Common Stock were valued
at $6.67 per share. As part of the same arrangement, the Company issued 27,654
additional shares of its Common Stock to such officers and key employees in
August 1997. The number of shares of Common Stock issued was based on the
combined net income before taxes of Rapiscan U.S.A. and Rapiscan UK for the
fiscal year ended June 30, 1997.
In September 1996, the Company issued 19,755 shares of its Common Stock to
six officers and key employees of the Company in exchange for all of the
shares of capital stock of Ferson Optics, Inc., one of the Company's
subsidiaries, then owned by such officers and employees. The shares of Common
Stock were valued at $6.67 per share.
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act
of 1933, as amended, by virtue of Section 4(2) or Section 3(b).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as a part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Amended Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(4)
5.1 Opinion of Troy & Gould Professional Corporation.(4)
10.1 1987 Incentive Stock Option Plan, as amended, and form of Stock Option
Agreement.(1)
10.2 1997 Stock Option Plan and forms of Stock Option Agreements.(2)
10.3 Employment Agreement dated April 1, 1997 between the Company and
Deepak Chopra.(1)
10.4 Employment Agreement dated April 1, 1997 between the Company and Ajay
Mehra.(1)
10.5 Employment Agreement dated March 1, 1993 between the Company and
Andreas F. Kotowski.(3)
10.6 Employment Agreement dated April 1, 1997 between the Company and
Manoocher Mansouri Aliabadi.(1)
10.7 Employment Agreement dated October 5, 1994 between the Company and
Anthony S. Crane.(4)
10.8 Expatriate Employment Agreement dated July 11, 1995 between the
Company and Thomas K. Hickman.(2)
10.9 Incentive Compensation Agreement dated December 18, 1996 between the
Company and Andreas F. Kotowski.(1)
10.10 Form of Indemnity Agreement for directors and executive officers of
the Company.(4)
10.11 Joint Venture Agreement dated January 4, 1994 among the Company,
Electronics Corporation of India, Limited and ECIL-Rapiscan Security
Products Limited ("ECIL-Rapiscan") as amended.(2)
10.12 Amendment Number Two to Lease, dated October 24, 1995 to lease dated
January 1, 1989 by and between KB Management Company, and UDT
Sensors, Inc.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.13 Lease Agreement dated July 4, 1986 by and between Electricity Supply
Nominees Limited and Rapiscan Security Products Limited (as assignee
of International Aeradio Limited).(4)
10.14 Lease Agreement dated January 17, 1997 by and between Artloon Supplies
Sdn. Bhd. and Opto Sensors (M) Sdn. Bhd.(1)
10.15 Credit Agreement entered into on January 24, 1997, by and between
Sanwa Bank California and Opto Sensors, Inc., UDT Sensors, Inc.,
Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc.(1)
10.16 Credit Agreement entered into on November 1, 1996 by and between Opto
Sensors, Inc., UDT Sensors, Inc., Rapiscan Security Products
(U.S.A.), Inc. and Ferson Optics, Inc., and Wells Fargo HSBC Trade
Bank.(1)
10.17 License Agreement made and entered into as of December 19, 1994, by
and between EG&G Inc. and Rapiscan Security Products, Inc.(1)
10.18 Stock Purchase Agreement dated March 5, 1997 between Industriinvestor
ASA and Opto Sensors, Inc.(1)
11.1 Statement regarding computation of earnings per share.(3)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.
99.1 Criminal Plea and Sentencing Agreement between UDT Sensors, Inc. and
U.S. Attorney's Office.(2)
99.2 Agreement between UDT Sensors, Inc. and Department of Navy.(2)
</TABLE>
- ---------------
(1) Previously filed with the Company's Registration Statement filed June 13,
1997.
(2) Previously filed with the Company's Amendment No. 1 to the Registration
Statement filed August 1, 1997.
(3) Replaces the exhibit previously filed with the corresponding exhibit
number.
(4) Previously filed with the Company's Amendment No. 2 to the Registration
Statement filed August 15, 1997.
(b) The following schedules supporting the financial statements are included
herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted, since the required information is not
present in amounts sufficient to require submission of schedules or because
the information required is included in the Registrant's financial statements
and notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act
II-5
<PAGE>
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Hawthorne, State of California, on September 30, 1997.
OSI SYSTEMS, INC.
By: /s/ AJAY MEHRA
___________________________________
Ajay Mehra
Vice President, Chief Financial
Officer,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman, Chief Executive
- ------------------------------------- Officer and President September 30, 1997
Deepak Chopra (Principal Executive
Officer)
/s/ AJAY MEHRA Vice President, Chief
- ------------------------------------- Financial Officer, September 30, 1997
Ajay Mehra Secretary and Director
(Principal Financial and
Accounting Officer)
* Director
- ------------------------------------- September 30, 1997
Steven C. Good
* Director
- ------------------------------------- September 30, 1997
Meyer Luskin
* Director
- ------------------------------------- September 30, 1997
Madan G. Syal
*By: /s/ AJAY MEHRA
- ------------------------------------- September 30, 1997
Ajay Mehra
as Attorney-In-Fact
</TABLE>
II-7
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE (1) (2) BALANCE
AT CHARGED CHARGED DEDUCTIONS-- AT END
BEGINNING TO COSTS AND TO OTHER WRITE-OFFS OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (RECOVERIES) PERIOD
- ----------- --------- ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year Ended June 30,
1994.................. $ 38 $150 -- (15) $203
==== ==== === === ====
Year Ended June 30,
1995.................. $203 (70) -- 80 $ 53
==== ==== === === ====
Year Ended June 30,
1996.................. $ 53 $404 -- 181 $276
==== ==== === === ====
Year Ended June 30,
1997.................. $276 $389 -- 79 $586
==== ==== === === ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Amended Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(4)
5.1 Opinion of Troy & Gould Professional Corporation.(4)
10.1 1987 Incentive Stock Option Plan, as amended, and form of Stock Option
Agreement.(1)
10.2 1997 Stock Option Plan and forms of Stock Option Agreements.(2)
10.3 Employment Agreement dated April 1, 1997 between the Company and
Deepak Chopra.(1)
10.4 Employment Agreement dated April 1, 1997 between the Company and Ajay
Mehra.(1)
10.5 Employment Agreement dated March 1, 1993 between the Company and
Andreas F. Kotowski.(3)
10.6 Employment Agreement dated April 1, 1997 between the Company and
Manoocher Mansouri Aliabadi.(1)
10.7 Employment Agreement dated October 5, 1994 between the Company and
Anthony S. Crane.(4)
10.8 Expatriate Employment Agreement dated July 11, 1995 between the
Company and Thomas K. Hickman.(2)
10.9 Incentive Compensation Agreement dated December 18, 1996 between the
Company and Andreas F. Kotowski.(1)
10.10 Form of Indemnity Agreement for directors and executive officers of
the Company.(4)
10.11 Joint Venture Agreement dated January 4, 1994 among the Company,
Electronics Corporation of India, Limited and ECIL-Rapiscan Security
Products Limited ("ECIL-Rapiscan") as amended.(2)
10.12 Amendment Number Two to Lease, dated October 24, 1995 to lease dated
January 1, 1989 by and between KB Management Company, and UDT
Sensors, Inc.(1)
10.13 Lease Agreement dated July 4, 1986 by and between Electricity Supply
Nominees Limited and Rapiscan Security Products Limited (as assignee
of International Aeradio Limited).(4)
10.14 Lease Agreement dated January 17, 1997 by and between Artloon Supplies
Sdn. Bhd. and Opto Sensors (M) Sdn. Bhd.(1)
10.15 Credit Agreement entered into on January 24, 1997, by and between
Sanwa Bank California and Opto Sensors, Inc., UDT Sensors, Inc.,
Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc.(1)
10.16 Credit Agreement entered into on November 1, 1996 by and between Opto
Sensors, Inc., UDT Sensors, Inc., Rapiscan Security Products
(U.S.A.), Inc. and Ferson Optics, Inc., and Wells Fargo HSBC Trade
Bank.(1)
10.17 License Agreement made and entered into as of December 19, 1994, by
and between EG&G Inc. and Rapiscan Security Products, Inc.(1)
10.18 Stock Purchase Agreement dated March 5, 1997 between Industriinvestor
ASA and Opto Sensors, Inc.(1)
11.1 Statement regarding computation of earnings per share.(3)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.
99.1 Criminal Plea and Sentencing Agreement between UDT Sensors, Inc. and
U.S. Attorney's Office.(2)
99.2 Agreement between UDT Sensors, Inc. and Department of Navy.(2)
</TABLE>
- ---------------
(1) Previously filed with the Company's Registration Statement filed June 13,
1997.
(2) Previously filed with the Company's Amendment No. 1 to the Registration
Statement filed August 1, 1997.
(3) Replaces the exhibit previously filed with the corresponding exhibit
number.
(4) Previously filed with the Company's Amendment No. 2 to the Registration
Statement filed August 15, 1997.
<PAGE>
3,700,000 Shares/1/
OSI SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1997
--------
ROBERTSON, STEPHENS & COMPANY LLC
WILLIAM BLAIR & COMPANY, L.L.C.
VOLPE BROWN WHELAN & COMPANY LLC
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
OSI SYSTEMS, INC., a California corporation (the "Company"), and certain
shareholders of the Company named in Schedules B and C hereto (hereafter called
the "Selling Shareholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
3,330,000 shares of its authorized and unissued common stock, no par value, to
the Underwriters. The Selling Shareholders, acting severally and not jointly,
propose to sell an aggregate of 370,000 shares of the Company's issued and
outstanding common stock, no par value, to the several Underwriters. The
3,330,000 shares of common stock, no par value, of the Company to be sold by the
Company are hereinafter called the "Company Shares" and the 370,000 shares of
common stock, no par value, to be sold by the Selling Shareholders are
hereinafter called the "Selling Shareholder Shares." The
- --------------------
/1/ Plus an option to purchase up to 555,000 additional shares from certain
shareholders of the Company to cover over-allotments.
<PAGE>
Company Shares and the Selling Shareholder Shares are hereinafter collectively
referred to as the "Firm Shares." Certain Selling Shareholders also propose to
grant, severally and not jointly, to the Underwriters, an option to purchase up
to 555,000 additional shares of the Company's common stock, no par value (the
"Option Shares"), as provided in Section 8 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of the Company's common stock, no par value, outstanding after giving
effect to the sales contemplated hereby, including the Shares, are hereinafter
referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company. The
---------------------------------------------------------
Company represents and warrants to and agrees with each Underwriter and each
Selling Shareholder that:
(a) A registration statement on Form S-1 (File No. 333-29179) with
respect to the offer and sale of the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
prescribed by the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") prescribed by the
Securities and Exchange Commission (the "Commission") pursuant to the Act and
has been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared and
filed with the Commission; and the Company will file such additional amendments
to such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related prospectus
subject to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement in reliance upon Rule 430A(a) or, if Robertson, Stephens & Company
LLC, on behalf of the Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) of the Rules and Regulations pursuant
to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or
as part of a post-effective amendment to the registration statement (including a
final form of prospectus). If the registration statement relating to the Shares
has not been declared effective under the Act by the Commission, the Company
will prepare and promptly file an amendment to the registration statement,
including a final form of prospectus, or, if Robertson, Stephens & Company LLC,
on behalf of the Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) of the Rules and Regulations. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it was or is, as the case may be, declared effective (including, if the
Company omitted information from the registration statement in reliance upon
Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and
Regulations, the information deemed to be a part of the registration statement
at the time it was declared effective pursuant to Rule 430A(b) or Rule 434(d) of
the Rules and Regulations) and, in the event of any amendment thereto or the
filing of any abbreviated registration statement pursuant to Rule 462(b)
-2-
<PAGE>
of the Rules and Regulations after the effective date of such registration
statement, shall also mean (from and after the effectiveness of such amendment
or the filing of such abbreviated registration statement) such registration
statement as so amended, together with any such abbreviated registration
statement. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in the Registration Statement at
the time it is declared effective (including, if the Company omitted information
from the Registration Statement in reliance upon Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) of the Rules and Regulations as of the time it was
declared effective; provided, however, that if in reliance on Rule 434 of the
-------- -------
Rules and Regulations and with the written consent of Robertson, Stephens &
Company LLC, acting on behalf of the Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) prior to the
time that a confirmation is sent or given for purposes of Section 2(10)(a) of
the Act, the term "Prospectus" shall mean the "prospectus subject to completion"
(as defined in Rule 434(g) of the Rules and Regulations) last provided to the
Underwriters by the Company and circulated by the Underwriters to all
prospective purchasers of the Shares (including the information deemed to be a
part of the Registration Statement pursuant to Rule 434(d) of the Rules and
Regulations) at the time the Registration Statement was declared effective.
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of Robertson, Stephens &
Company LLC, acting on behalf of the Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) prior to the
time that a confirmation is sent or given for purposes of Section 2(10)(a) of
the Act, the Prospectus and the term sheet, together, will not be materially
different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and the Preliminary Prospectus last provided to the Underwriters
by the Company and circulated by the Underwriters to certain prospective
purchasers of the Shares has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement was or is, as the case may be, declared effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under
-3-
<PAGE>
which they were made, not misleading; provided, however, that none of the
-------- -------
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter, furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification; no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification; each of the Company and its subsidiaries is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of the Company and its
subsidiaries business, all of which are valid and in full force and effect as of
the date hereof; neither the Company nor any of its subsidiaries is in violation
of its respective incorporating charter or bylaws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound; and neither the
Company nor any of its subsidiaries is in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties of which
it has knowledge and which would have a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise (a "Material Adverse Effect"). The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than Rapiscan Security Products (U.S.A.),
Inc., a California corporation, Rapiscan Security Products Limited, a private
company formed under the laws of the United Kingdom and registered in England,
Ferson Optics, Inc., a California corporation, UDT Sensors, Inc., a California
corporation, Advanced Micro Electronics AS ("AME"), a company incorporated under
Norwegian law, Opto Sensors (Singapore) Pte Ltd, a private company limited by
shares and incorporated in the Republic of Singapore, Opto Sensors (Malaysia)
Sdn. Bhd., a private company limited by shares and incorporated in Malaysia, OSI
Electronics, a California corporation, and Rapiscan Consortium (M) Sdn. Bhd., a
private company limited by shares and incorporated in Malaysia (collectively,
the "Material Subsidiaries"). In addition the Company owns a minority interest
in ECIL Rapiscan Ltd., a limited liability joint stock corporation organized
under the laws of India,
(d) The Company has full legal right, power and authority to
enter into this Agreement and to perform the transactions contemplated hereby.
This Agreement has been duly
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authorized, executed and delivered by the Company and is a valid and binding
agreement on the part of the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except to the extent that the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (if applicable), or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) Except as disclosed in the Registration Statement, there is
not any pending or, to the best of the Company's knowledge, threatened action,
suit, claim or proceeding against the Company, any of its subsidiaries or any of
their respective officers (i.e., relating to or in connection with their duties
as officers of the Company and any of its subsidiaries) or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) may result in any material adverse change in
the condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise (a "Material Adverse
Change") or may materially and adversely affect their properties, assets or
rights, (ii) may prevent consummation of the transactions contemplated hereby or
(iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company
(including the Selling Shareholder Shares) have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" and conforms
in all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements
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<PAGE>
correctly state the substance of the instruments defining the capitalization of
the Company); the Company Shares have been duly authorized for issuance and sale
to the Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable, and
will be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Company Shares or the sale
thereof or the issuance of the Company Shares other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire on the Closing Date; the Selling Shareholder Shares have been duly
authorized for sale to the Underwriters pursuant to this Agreement and, when
delivered by the Selling Shareholders against payment therefor in accordance
with the terms of this Agreement, will be duly and validly issued and fully paid
and nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right, co-
sale right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Shareholder Shares or the sale
thereof other than those that have been expressly waived prior to the date
hereof and those that will automatically expire upon and will not apply to the
consummation of the transactions contemplated on the Closing Date. No further
approval or authorization of any shareholder, the Board of Directors of the
Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Exchange Act or under state
or other securities or Blue Sky laws. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description in the Prospectus of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted and exercised thereunder, accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(g) Deloitte & Touche LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, for the fiscal year ended June 30, 1997 and for each of the years in the
two (2) fiscal years ended June 30, 1996 filed with the Commission as a part of
the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally
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<PAGE>
accepted accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any Material Adverse Change, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
Material Adverse Effect.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a Material Adverse Effect, (ii) the agreements to which the Company or any
of its subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company and its subsidiaries
(as applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) the Company and each of its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement,
the Company owns or leases all such properties as are necessary to its
operations.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, other than those contested in good faith or
for which adequate reserves have been provided or those currently payable with
out penalty or interest, and there is no tax deficiency that has been or, to the
best of the Company's knowledge, might be asserted against the Company or any of
its subsidiaries that would have a Material Adverse Effect; and all tax
liabilities are adequately provided for on the books of the Company and its
subsidiaries.
(k) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for
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<PAGE>
their respective businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company or
its subsidiaries, against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full force
and effect; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent
that would result in a Material Adverse Change. Except for with respect to the
employees of AME, no collective bargaining agreement exists with any of the
Company's or its subsidiaries' employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a Material
Adverse Effect; except as set forth in the Prospectus, the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect.
(n) The Common Stock has been approved for quotation on The
Nasdaq National Market, subject to official notice of issuance.
(o) The Company has been advised as to the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such a manner as to ensure that it will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
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<PAGE>
(q) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling
Shareholder and each beneficial owner of more than 7,500 shares of Common Stock,
has agreed in writing that such person will not, for a period of 180 days from
the date that the Registration Statement is declared effective by the Commission
(the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
Robertson, Stephens & Company LLC. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete
copies of all of the agreements pursuant to which its officers, directors and
shareholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Robertson, Stephens &
Company LLC.
(t) Except as set forth in the Registration Statement and Prospectus, (i)
the Company is in material compliance with all rules, laws and regulations
relating to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment
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<PAGE>
("Environmental Laws") which are applicable to its business, (ii) the Company
has received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be disclosed
in the Registration Statement and the Prospectus, (iii) the Company is not aware
of any requirement that will require it to make future material capital
expenditures to comply with Environmental Laws and (iv) no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a
-- ----
contaminated site under applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as required to be, and as, disclosed in the Registration Statement and
the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
3. Representations and Warranties of the Selling Shareholders. Each
----------------------------------------------------------
Selling Shareholder, severally and not jointly, represents and warrants to and
agrees with each Underwriter and the Company that:
(a) Such Selling Shareholder now has and on the Closing Date,
and on any later date on which Option Shares are purchased, will have, valid
marketable title to the Shares to be sold by such Selling Shareholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Shareholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Shareholder or such Selling Shareholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Shareholder.
(b) Such Selling Shareholder has duly authorized (if applicable)
executed and delivered, in form heretofore furnished to the Representatives, an
Irrevocable Custody Agreement and Power of Attorney (the "Power of Attorney and
Custody Agreement") appointing
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Deepak Chopra as attorney-in-fact (the "Attorney") with Deepak Chopra as
custodian (the "Custodian"); each Power of Attorney and Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholders' Attorney, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 7(h) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 4
hereof, to authorize the delivery of the Selling Shareholder Shares and the
Option Shares to be sold by such Selling Shareholder under this Agreement and to
duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Shareholder of the Power of
Attorney and Custody Agreement, the execution and delivery by or on behalf of
such Selling Shareholder of this Agreement and the sale and delivery of the
Selling Shareholder Shares and the Option Shares to be sold by such Selling
Shareholder under this Agreement (other than, at the time of the execution
hereof (if the Registration Statement has not yet been declared effective by the
Commission), the issuance of the order of the Commission declaring the
Registration Statement effective and such consents, approvals, authorizations or
orders as may be necessary under state or other securities or Blue Sky laws)
have been obtained and are in full force and effect; such Selling Shareholder,
if other than a natural person, has been duly organized and is validly existing
in good standing under the laws of the jurisdiction of its organization as the
type of entity that it purports to be; and such Selling Shareholder has full
legal right, power and authority to enter into and perform its obligations under
this Agreement and such Power of Attorney and Custody Agreement, and to sell,
assign, transfer and deliver the Shares to be sold by such Selling Shareholder
under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Shareholder or with respect to which such Selling
Shareholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such Selling Shareholder, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of Robertson, Stephens & Company LLC. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
Selling Shareholder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Such Selling
Shareholder also agrees and consents to the entry of stop transfer instructions
with the Company's
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<PAGE>
transfer agent against the transfer of the securities held by such Selling
Shareholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such Selling Shareholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Shareholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other material
agreement or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder, or any Selling Shareholder Shares or any Option Shares
to be sold by such Selling Shareholder hereunder, may be bound or, to the best
of such Selling shareholders' knowledge, result in any violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Shareholder or over the properties of such
Selling Shareholder, or, if such Selling Shareholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling Shareholder
Shares that is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney and Custody
Agreement or set forth in the Registration Statement or the Prospectus is, and
at the time the Registration Statement became or becomes, as the case may be,
effective, and at all times subsequent thereto through the Closing Date, and on
any later date on which Option Shares are to be purchased, was or will be, true,
correct and complete, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto through the Closing Date (hereinafter defined), and on any later date on
which Option Shares
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<PAGE>
are to be purchased, will not, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make such information not misleading.
(j) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise its Attorney and Robertson, Stephens & Company LLC prior to the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, if any statement to be made on behalf of such Selling
Shareholder in the certificate contemplated by Section 7(h) would be inaccurate
if made as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be.
(k) Such Selling Shareholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right, in order to purchase any of the Shares that are
to be sold by the Company or any of the other Selling Shareholders to the
Underwriters pursuant to this Agreement; such Selling Shareholder does not have,
or has waived prior to the date hereof, any registration right or other similar
right, in order to participate in the offering made by the Prospectus, other
than such rights of participation as have been satisfied by the participation of
such Selling Shareholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Shareholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
4. Purchase, Sale and Delivery of Shares.
-------------------------------------
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and the Selling Shareholders agree, severally and not
jointly, to sell to the Underwriters, and each Underwriter agrees, severally and
not jointly, to purchase from the Company and the Selling Shareholders,
respectively, at a purchase price of $______ per share, the respective number of
Company Shares as hereinafter set forth and Selling Shareholder Shares set forth
opposite the names of the Selling Shareholders in Schedule B hereto. The
obligation of each Underwriter to the Company and to each Selling Shareholder
shall be to purchase from the Company and such Selling Shareholder that number
of Company Shares or Selling Shareholder Shares, as the case may be, which (as
nearly as practicable, as determined by you) is in the same proportion to the
number of Company Shares or Selling Shareholder Shares, as the case may be, set
forth opposite the name of the Company or such Selling Shareholder in Schedule
B hereto as the number of Firm Shares which is set forth opposite the name of
such Underwriter in Schedule A hereto (subject to adjustment as provided in
Section 11) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement.
(b) The certificates in negotiable form for the Selling
Shareholder Shares have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Shareholder agrees,
severally and not jointly, that the certificates for the Selling Shareholder
Shares of such Selling Shareholder so held in custody are subject to the
interests of the
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Underwriters hereunder, that the arrangements made by such Selling Shareholder
for such custody, including the Power of Attorney, is to that extent irrevocable
and that the obligations of such Selling Shareholder hereunder shall not be
terminated by the act of such Selling Shareholder or by operation of law,
whether by the death or incapacity of such Selling Shareholder or the occurrence
of any other event, except as specifically provided herein or in the Custody
Agreement. If any Selling Shareholder should die or be incapacitated, or if any
other such event should occur before the delivery of the certificates for the
Selling Shareholder Shares hereunder, the Selling Shareholder Shares to be sold
by such Selling Shareholder shall, except as specifically provided herein or in
the Custody Agreement, be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether the Custodian shall have received
notice of such death or other event.
(c) Delivery of definitive certificates for the Firm Shares to
be purchased by the Underwriters pursuant to this Section 4 shall be made
against payment of the purchase price therefor by the several Underwriters by
certified or official bank check or checks drawn in next-day funds, payable to
the order of the Company with regard to the Shares being purchased from the
Company, and to the order of the Custodian for the respective accounts of the
Selling Shareholders with regard to the Shares being purchased from such Selling
Shareholders (and the Company and such Selling Shareholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn, and not to take any other action with the purpose or effect of
receiving immediately available funds, until the business day following the date
of its delivery to the Company or the Custodian, as the case may be, and, in the
event of any breach of the foregoing, the Company or the Selling Shareholders,
as the case may be, shall reimburse the Underwriters for the interest lost and
any other expenses borne by them by reason of such breach), at the offices of
Troy & Gould, 1801 Century Park East, 16th Floor, Los Angeles, California 90067
(or at such other place as may be agreed upon among the Representatives and the
Company and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third
(3rd) full business day following the first day that Shares are traded, (b) if
this Agreement is executed and delivered after 1:30 P.M., San Francisco time,
the fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than seven
(7) full business days following the first day that Shares are traded as the
Representatives and the Company and the Attorneys may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 11 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
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available to the Representatives copies of the Prospectus within the time
provided in Section 5(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you for examination at such office or such other location including, without
limitation, in Chicago, as you may reasonably request, at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
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(d) It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
(e) After the Registration Statement is declared effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 12 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
(f) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and under the ____ and ____ paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement, and
you, on behalf of the respective Underwriters, represent and warrant to the
Company and the Selling Shareholders that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
5. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement, has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c) of the Rules and Regulations, as applicable, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules
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and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed with the Commission
within the time period prescribed; the Company will notify you promptly of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; promptly upon your
request, the Company will prepare and file with the Commission any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
Underwriters; the Company will promptly prepare and file with the Commission,
and promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
the event that any Underwriter is required to deliver a prospectus nine (9)
months or more after the effective date of the Registration Statement in
connection with the sale of the Shares, the Company will prepare promptly upon
request, but at the expense of such Underwriter, such amendment or amendments to
the Registration Statement and such prospectus or prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act; and the Company will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations (in the judgment of the Company and its counsel) and
the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you may
reasonably request and to continue the effectiveness of such qualifications for
so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith, or as a
condition thereof, to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you (to the extent not
previously furnished), as soon as available, and, in the case of the Prospectus
and any term sheet or abbreviated term sheet under Rule 434, in no event later
than the first (1st) full business day following the first day that Shares are
traded, copies of the Registration Statement (three of which will be signed and
which will include all exhibits), each Preliminary Prospectus, the Prospectus
and any amendments
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<PAGE>
or supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request. Notwithstanding the foregoing, if
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall
agree to the utilization of Rule 434 of the Rules and Regulations, the Company
shall provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you, in such quantities as you may from time to
time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in no event later than the forty-
fifth (45th) day following the end of the fiscal quarter first occurring after
the first anniversary of the effective date of the Registration Statement, an
earnings statement (which will be in reasonable detail but need not be audited)
complying with the provisions of Section 11(a) of the Act and covering a twelve
(12) month period beginning after the effective date of the Registration
Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v)
every material press release and every material news item or article in respect
of the Company or its affairs which was generally released to shareholders or
prepared by the Company or any of its subsidiaries, and (vi) any additional
information of a public nature concerning the Company or its subsidiaries, or
its business which you may reasonably request. During such five (5) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or any
Selling Shareholder to perform any agreement on their respective parts to be
performed hereunder, or to fulfill any condition
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of the Underwriters' obligations hereunder, or if the Company shall terminate
this Agreement pursuant to Section 12(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 12(b)(i), the Company will
reimburse the several Underwriters for all reasonable out-of-pocket expenses
(including reasonable fees and disbursements of Underwriters' Counsel) incurred
by the Underwriters in investigating, or preparing to market, or marketing the
Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to, or amendment of, the Prospectus), the Company
will, after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Company Shares, the issuance of shares of Common Stock upon the exercise of
outstanding stock options, and the Company's issuance of options or Common Stock
under the Company's presently authorized 1997 Stock Option Plan (the "Option
Plan").
(l) During a period of ninety (90) days from the effective date
of the Registration Statement, the Company will not file a registration
statement registering the offer and sale of shares under the Option Plan or any
other employee benefit plan.
6. Expenses.
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(a) The Company and the Selling Shareholders agree with each
Underwriter that:
(i) The Company and the Selling Shareholders will pay and
bear all costs and expenses in connection with the preparation, printing
and filing of the Registration Statement (including financial statements,
schedules and exhibits), Preliminary Prospectuses and the Prospectus and
any amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments
related to any of the foregoing; the issuance and delivery of the Shares
hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents'
and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of
the foregoing; NASD filing fees and the cost of qualifying the Shares under
the laws of such jurisdictions as you may designate (including filing fees
and fees and disbursements of
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Underwriters' Counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company
and the Selling Shareholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the
sale of the Shares by the Selling Shareholders will be borne collectively
by the Company and the Selling Shareholders. The provisions of this Section
6(a)(i) are intended to relieve the Underwriters from the payment of the
expenses and costs which the Selling Shareholders and the Company hereby
agree to pay, but shall not affect any agreement which the Selling
Shareholders and the Company may make, or may have made, for the sharing of
any of such expenses and costs. Such agreements shall not impair the
obligations of the Company and the Selling Shareholders hereunder to the
several Underwriters.
(ii) In addition to its other obligations under Section
9(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 9(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of
a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Company together
with interest, compounded daily, determined on the basis of the prime rate
(or other commercial lending rate for borrowers of the highest credit
standing) set forth from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by at least seventy-five
percent (75%) of the nation's thirty (30) largest banks (the "Prime Rate").
Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section
9(b) hereof, each Selling Shareholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 9(b) hereof relating to such Selling
Shareholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Selling
Shareholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Selling
Shareholders, together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Underwriters within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
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(b) In addition to their other obligations under Section 9(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 9(c) hereof, they will reimburse the
Company and each Selling Shareholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Shareholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Shareholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Shareholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
6(a)(ii), 6(a)(iii) and 6(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
6(a)(ii), 6(a)(iii) and 6(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 9(a), 9(b) and 9(c) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 9(e)
hereof.
7. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the
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Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any Material Adverse
Change from that set forth in the Registration Statement or Prospectus, which,
in your reasonable judgment, is material and adverse and that makes it, in your
reasonable judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company and the Selling Shareholders, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company and each Material Subsidiary has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation;
(ii) The Company and each Material Subsidiary has the
corporate power and corporate authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus;
(iii) The Company and each Material Subsidiary is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in
good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business
of the Company and its subsidiaries considered as one enterprise. To
such counsel's knowledge, the Company does not own or control,
directly or indirectly, any subsidiary corporation, association or
other entity other than Rapiscan Security Products (U.S.A.), Inc.,
Rapiscan Security Products Limited, Ferson Optics, Inc., UDT Sensors,
Inc., AME, Opto Sensors (Singapore) Pte Ltd, Opto Sensors (Malaysia)
Sdn. Bhd., OSI Electronics and Rapiscan Consortium (M) Sdn. Bhd.;
(iv) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization"
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as of the dates stated therein, the issued and outstanding shares of
capital stock of the Company (including the Selling Shareholder
Shares) have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, have not been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
(v) All issued and outstanding shares of capital stock of
each Material Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, have not been issued in violation of or subject
to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right and, to such counsel's knowledge,
are owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares to be issued by the Company and the
Firm Shares and Option Shares to be purchased from the Selling
Shareholders pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, the Firm Shares will be duly and
validly issued and the Firm Shares as well as the Option Shares will
be fully paid and nonassessable, and will not have been issued in
violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right
known to such counsel.
(vii) The Company has the corporate power and corporate
authority to enter into this Agreement and to issue, sell and deliver
to the Underwriters the Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been
duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, is a valid and binding
agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(ix) The Registration Statement has become effective under
the Act and, based on the oral advice of the staff of the Commission,
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are pending or before the Commission or under the
Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and other statistical and
financial data included therein as to which such counsel need express
no opinion), as of the effective date of
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the Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations;
(xi) The information in the Prospectus under the caption
"Description of Capital Stock, " to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and is a fair summary of such matters and conclusions; and the forms
of certificates evidencing the Common Stock and filed as exhibits to
the Registration Statement comply with California law;
(xii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes
are accurate in all material respects and fairly present the
information required to be presented by the Act and the applicable
Rules and Regulations;
(xiii) There are no agreements, contracts, leases or
documents to which the Company is a party, known to such counsel, of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein
or filed as required;
(xiv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to
which the Company is a party or by which its properties are bound, and
which breach or violation would have a Material Adverse Effect, or any
Applicable Law (as hereinafter defined). The term "Applicable Law"
means those statutes, rules, regulations, orders, writs or decrees of
any Governmental Authority (as defined below) by which the Company or
any of its subsidiaries is bound, the existence of which is actually
known to such counsel and which, in the experience of such counsel,
are typically applicable to public offerings of securities of the type
contemplated by this Agreement. The "Governmental Authority" means any
legislative, judicial, administrative or regulatory body of the States
of California and Mississippi or the United States of America;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations is necessary in
connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act
or such as may be required under state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the
Shares by the
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Underwriters, provided, however, that the foregoing opinion may be
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limited to such consents, approvals, authorizations, and orders which
are actually known to such counsel and which in such counsel's
experience, are typically applicable to public offerings of securities
of the type contemplated by this Agreement;
(xvi) There are no legal or governmental proceedings
pending or threatened against the Company, or any of its subsidiaries,
known to such counsel, of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations other than those described therein;
(xvii) To such counsel's knowledge, neither the Company nor
any of its Material Subsidiaries is (a) in material violation of its
respective charter or bylaws, or (b) in material breach of any
Applicable Law;
(xviii) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock
or other securities of the Company have registration rights with
respect to the offer and sale of any securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all
prior holders of such registration rights have waived such rights or
such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration
Statement or have included securities in the Registration Statement
pursuant to the exercise, and in full satisfaction, of such rights;
(xix) Each Selling Shareholder which is not a natural
person has full right, power and authority to enter into and to
perform its obligations under the Power of Attorney and Custody
Agreement to be executed and delivered by it in connection with the
transactions contemplated herein; the Power of Attorney and Custody
Agreement of each Selling Shareholder that is not a natural person has
been duly authorized by all necessary action on the part of such
Selling Shareholder; the Power of Attorney and Custody Agreement of
each Selling Shareholder has been duly executed and delivered by or on
behalf of such Selling Shareholder; and the Power of Attorney and
Custody Agreement of each Selling Shareholder constitutes the valid
and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or
by general equitable principles;
(xx) Each of the Selling Shareholders has full right,
power and authority to enter into and to perform its obligations under
this Agreement and to sell, transfer, assign and deliver the Shares to
be sold by such Selling Shareholder hereunder;
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(xxi) This Agreement has been duly authorized by each
Selling Shareholder that is not a natural person and has been duly
executed and delivered by or on behalf of each Selling Shareholder;
and
(xxii) Upon the delivery of, and payment for, the Shares
as contemplated by this Agreement, each of the Underwriters will
receive valid marketable title to the Shares purchased by it from such
Selling Shareholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest known to such
counsel. In rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of the
Shares being purchased from the Selling Shareholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and Prospectus and related matters were discussed,
and although they have are not passing upon and do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, and have not made any independent
check or verification of the thereof, on the basis of the foregoing, nothing has
come to the attention of such counsel which leads them to believe that, at the
time the Registration Statement became effective and at the Closing Date and on
any later date on which Option Shares are to be purchased, the Registration
Statement and any amendment or supplement thereto contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading (other
than the financial statements, including supporting schedules and other
financial and statistical information included therein, as to which such counsel
need express no comment).
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of California
upon opinions of local counsel, and as to questions of fact upon representations
or certificates of officers of the Company, the Selling Shareholders or officers
of the Selling Shareholders (when the Selling Shareholder is not a natural
person), and of government officials, in which case their opinion is to state
that they are so relying. Copies of any opinion, representation or certificate
so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares to be purchased, as the case may be, an opinion of
Jones, Day, Reavis & Pogue, in form and substance reasonably satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
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<PAGE>
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from Deloitte & Touche LLP addressed to the Underwriters, dated the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
five (5) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries considered
as one enterprise from that set forth in the Registration Statement or
Prospectus, which, in your reasonable judgment, is material and adverse and that
makes it, in your reasonable judgment, impracticable or inadvisable to proceed
with the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from Deloitte & Touche LLP shall be addressed to or for the use
of the Underwriters in form and substance reasonably satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the consolidated
balance sheet of the Company at June 30, 1997, 1996 and 1995 and related
consolidated statements of operations, shareholders' equity, and cash flows for
the twelve (12) months ended June 30, 1997, 1996 and 1995, and (iii) address
other matters agreed upon by Deloitte & Touche LLP and you. In addition, you
shall have received from Deloitte & Touche LLP a letter addressed to the Company
and made available to you for the use of the Underwriters stating that their
review of the Company's system of internal accounting controls, to the extent
they deemed necessary in establishing the scope of their examination of the
Company's consolidated financial statements at June 30, 1997, 1996 and 1995, did
not disclose any weaknesses in internal controls that they considered to be
material weaknesses.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct in all material respects, as if
made on and as of the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, and the Company has
complied in all material respects with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
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<PAGE>
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information
required to be included therein by the Act and the Rules and
Regulations and in all material respects conformed to the requirements
of the Act and the Rules and Regulations, the Registration Statement,
and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any Material Adverse Change, (b) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock
of the Company or any of its subsidiaries, or (f) any loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained
which has a Material Adverse Effect.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorney for each Selling
Shareholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such
Selling Shareholder herein are not true or correct in any material
respect on the Closing Date or on any later date on which Option
Shares are to be purchased, as the case may be; or
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<PAGE>
(ii) Such Selling Shareholder has not complied in any
material respects with any obligation or satisfied any condition which
is required to be performed or satisfied on the part of such Selling
Shareholder at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Shareholder and each beneficial owner of shares of Common Stock as reflected on
Exhibit A attached hereto in writing prior to the date hereof that such person
will not, during the Lock-up Period, effect the Disposition of any Securities
now owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC. The foregoing restriction
shall have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(j) The Company and the Selling Shareholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Shareholders herein, as to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will
be in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Shareholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
8. Option Shares.
-------------
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholders set forth on Schedule C hereto hereby grant to
the several Underwriters, severally and not jointly, for the
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purpose of covering over-allotments in connection with the distribution and sale
of the Firm Shares only, a nontransferable option to purchase up to an aggregate
of 555,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 4 hereof. The number of Option Shares to be purchased from each
Selling Shareholder listed on Schedule C shall be in the same proportion that
the number of shares listed across from each such Selling Shareholder's name
bears to the total number of Shares listed on Schedule C. Such option may be
exercised by the Representatives on behalf of the several Underwriters on one
(1) or more occasions in whole or in part during the period of thirty (30) days
after the date on which the Firm Shares are initially offered to the public, by
giving written notice to the Company and the Custodian. The number of Option
Shares to be purchased by each Underwriter from each of such Selling
Shareholders set forth on Schedule C upon the exercise of such option shall be
in the same proportion as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 8 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Custodian (and the
Custodian agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Custodian). In the event of any breach of the foregoing, the
Selling Shareholders set forth on Schedule C, severally and not jointly, shall
reimburse the Underwriters for the interest lost and any other expenses borne
by them by reason of such breach. Such delivery and payment shall take place at
the offices of Troy & Gould, 1801 Century Park East, 16th Floor, Los Angeles,
California 90067, or at such other place as may be agreed upon among the
Representatives, the Company and the Custodian (i) on the Closing Date, if
written notice of the exercise of such option is received by the Company and the
Custodian at least two (2) full business days prior to the Closing Date, or (ii)
on a date which shall not be later than the third (3rd) full business day
following the date the Company and Custodian receive written notice of the
exercise of such option, if such notice is received by the Company and Custodian
less than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered
will be made available to you for examination at such office or such other
location including, without limitation, in Chicago, as you may reasonably
request at least one (1) full business day prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to such date of
payment and delivery. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such
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<PAGE>
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 8(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Shareholders herein, to the accuracy of the statements of the Company, the
Selling Shareholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder, to the conditions set forth in Section 7
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Shareholders or
the satisfaction of any of the conditions herein contained.
9. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
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liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
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Section 9(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material
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<PAGE>
fact purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected had not been sent or given to such person within the time required by
the Act and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 5(d) hereof.
The indemnity agreement in this Section 9(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject (including, without limitation, in its capacity as an Underwriter or as
a "qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 9(b) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Shareholder, directly or through such Selling Shareholder's
representatives, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
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provided in this Section 9(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 5(d) hereof.
The indemnity agreement in this Section 9(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Shareholder may otherwise have.
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(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Shareholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Shareholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 9(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Shareholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Shareholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 9(c) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Shareholder and each person, if any, who controls
the Company or any Selling Shareholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 9, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 9 (unless and only to the extent that such
omission results in the loss or compromise of any material rights or defence by
the indemnifying party). In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
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include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded (based on the advice of
counsel) that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such
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<PAGE>
indemnified party of the indemnifying party's election so to assume the defense
of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the reasonable expenses of more than
one separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 9(a),
9(b) or 9(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved in writing the terms of such settlement; provided that
--------
such consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
9 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 9(f) hereof, the Underwriters severally and not jointly are
responsible pro-rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Shareholders are responsible for the remaining portion,
provided, however, that (i) except as otherwise agreed among the Underwriters,
- -------- -------
no Underwriter shall be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares purchased by
such Underwriter exceeds the amount of damages which such Underwriter has
otherwise been required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 9(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter, the Company or any Selling
Shareholder within the meaning of the Act or the Exchange Act and each officer
of the Company who signed the Registration Statement and each director of the
Company.
(f) Notwithstanding any other provision herein to the contrary,
the liability of each Selling Shareholder under this Agreement, including under
the representations, warranties and agreements contained herein and under the
indemnity and contribution agreements contained in the provisions of this
Section 9 shall be limited to an amount equal to the initial public offering
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<PAGE>
price of the Selling Shareholder Shares sold by such Selling Shareholder to the
Underwriters minus the amount of the underwriting discount paid thereon to the
Underwriters by such Selling Shareholder. The Company and such Selling
Shareholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
10. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Shareholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 9 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Shareholder, or
any of their officers, directors or controlling persons within the meaning of
the Act, or the Exchange Act, and shall survive the delivery of the Shares to
the several Underwriters hereunder or termination of this Agreement.
11. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting
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<PAGE>
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, neither the Company nor any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 6
and 9 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 6 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter pursuant to the terms of this Section 11.
12. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 13 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 5(i), 6 and 9 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Shareholder shall have failed, refused or been
unable to perform any agreement in any material respect on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled in any
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<PAGE>
material respect, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your reasonable judgment, is
material and adverse and would, in your opinion, make it impractical to
distribute the Shares, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured and would, in your opinion, make it impractical to distribute the
Shares, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets which would, in
your opinion, make it impractical to distribute the Shares, or (v) if there
shall have been an outbreak or escalation of hostilities or of any other
insurrection or armed conflict or the declaration by the United States of a
national emergency which, in the reasonable opinion of the Representatives,
make it impractical to distribute the Shares. In the event of termination
pursuant to subparagraph (i) above, the Company shall remain obligated to pay
costs and expenses pursuant to Sections 5(i), 6 and 9 hereof. Any termination
pursuant to any of subparagraphs (ii) through (v) above shall be without
liability of any party to any other party except as provided in Sections 6 and 9
hereof.
If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 12, you
shall promptly notify the Company by telephone, telecopy or telegram, in each
case confirmed by letter. If the Company shall elect to prevent this Agreement
from becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
13. Notices. All notices or communications hereunder, except as
-------
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel, with copy to Jones, Day,
Reavis & Pogue, 555 West Fifth Street, Suite 4600, Los Angeles, California
90013, Attention: Bert Zweig; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 12525 Chadron Avenue, Hawthorne, California 90250,
telecopier number (310) 644-1727, Attention: Deepak Chopra, President, with copy
to Troy & Gould, 1801 Century Park East, Suite 1600, Los Angeles, California
90067, Attention: Istvan Benko; if sent to one or more of the Selling
Shareholders, such notice shall be sent mailed, delivered, telegraphed (and
confirmed by letter) or telecopied (and confirmed by letter) to Deepak Chopra,
as Attorney-in-Fact for the Selling Shareholders, at 12525 Chadron Avenue,
Hawthorne, California 90250, telecopier number (310) 644-1727, with copy to Troy
& Gould, 1801 Century Park East, Suite 1600, Los Angeles, California 90067,
Attention: Istvan Benko.
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<PAGE>
14. Parties. This Agreement shall inure to the benefit of and be
-------
binding upon the several Underwriters and the Company and the Selling
Shareholders and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or entity, other than the parties hereto and
their respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 9 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity. No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Shareholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Robertson, Stephens & Company LLC on behalf of you.
15. Applicable Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the laws of the State of California without regard
to principles of conflict of law.
16. Counterparts. This Agreement may be signed in several
------------
counterparts, each of which will constitute an original.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Shareholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Shareholders
and the several Underwriters.
Very truly yours,
OSI SYSTEMS, INC.
By:______________________________
Name:____________________________
Its:_____________________________
SELLING SHAREHOLDERS
By:______________________________
Attorney-in-Fact for the Selling
Shareholders named in Schedules B and
C hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
WILLIAM BLAIR & COMPANY, L.L.C.
VOLPE BROWN WHELAN & COMPANY LLC
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: ROBERTSON, STEPHENS & COMPANY LLC
By: ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By:_____________________________________________
Authorized Signatory
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ -----------
<S> <C>
Robertson, Stephens & Company LLC .... __________
William Blair & Company, L.L.C. ...... __________
Volpe Brown Whelan & Company LLC ..... __________
Total ................................ 3,700,000
</TABLE>
-1-
<PAGE>
SCHEDULE B
Firm Shares
<TABLE>
<CAPTION>
Number of Company
Company Shares To Be Sold
------- -----------------
<S> <C>
OSI Systems, Inc. 3,300,000
Total............... 3,300,000
</TABLE>
<TABLE>
<CAPTION>
Number of Selling
Shareholder
Name of Selling Shareholder Shares To Be Sold
--------------------------- -----------------
<S> <C>
Scope Industries 148,148
Sally F. Chamberlain Trustee, Edward P. and Sally F. 63,343
Fleischer Family Trust
Gary E. Fleischer 14,625
Cathleen A. Redinger 14,625
Madan and Mohini Syal 25,926
Good Swartz Berns Pension & Profit Sharing Plan 3,000
Steve Cary Good and Bari Anne Good Trust 13,831
Steven C. Good 8,065
Mark and Penny Berns Trust 5,982
Arnold G. and Hope Anisgarten 5,709
Rajiv Mehra 450
Zev and Elaine Edelstein Trust 9,259
Glenn P. Sorenson 9,259
Mohinder and Ranjana Chopra 9,259
Charles and Kiran M. Kerpelman 9,259
Martha B. Holmes 9,259
Combined Tehari & Durya Rangawala Account Trust 7,407
Leila and Birendra Mehra 3,704
Surendra V. and Kala Jain 5,186
Renu Jivrajka 1,852
Amita Jivrajka 1,852
Total........................................................ 370,000
</TABLE>
-2-
<PAGE>
SCHEDULE C
Option Shares
<TABLE>
<CAPTION>
Number of
Shareholder
Name of Selling Shareholder Shares To Be Sold
--------------------------- -----------------
<S> <C>
Scope Industries 88,519
Sally F. Chamberlain Trustee, Edward P. and Sally F. 49,630
Fleischer Trust
Deepak and Nandini Chopra 185,185
Madan and Mohini Syal 18,519
Ajay Mehra 33,333
Good Swartz & Berns Pension & Profit Sharing Plan 3,309
Steven C. Good 15,604
Mark and Penny Berns Trust 1,518
Arnold G. and Hope Anisgarten 1,791
Andreas F. Kotowski 18,519
Zev and Elaine Edelstein Trust 9,259
Glenn P. Sorenson 11,111
Mohinder Chopra 11,111
Manoocher Mansouri Aliabadi 14,815
Charles and Kiran Kerpelman 9,259
Combined Tehari & Durya Rangawala Account Trust 7,407
Susan Sutherland 7,407
Anuj Wadhawan 7,407
Bette J. Moore 7,407
Thomas K. Hickman 3,704
Robert Kephart 5,556
Phillip M. Wascher 7,407
Narayan Taneja 1,481
Leila and Birendra Mehra 3,704
Charan J. Dewan 3,704
Jack Kimbro 1,111
Surendra and Kala Jain 5,926
Meyer Luskin 9,259
Denis Noble 741
Anthony S. and Suzie B. Crane 1,481
Neil Jivrajka 740
Renu Jivrajka 1,482
Amita Jivrajka 1,482
Alan J. and Pamela Barnard 1,481
Peter Bui 741
Christine Williams 741
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Number of
Shareholder
Name of Selling Shareholder Shares To Be Sold
--------------------------- -----------------
<S> <C>
Christopher Chin 926
Louis S. and Linda O. Peters 741
Khai Le 741
Lincoln Gladden 741
Total.................................................. 555,000
</TABLE>
-4-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Shareholders of
OSI Systems, Inc.
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-29179 of OSI Systems, Inc. of our report dated August 15, 1997, appearing
in the Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Consolidated Financial Data" and
"Experts" in such Prospectus.
Our audits of financial statements referred to in our aforementioned report
also included the financial statement schedule of OSI Systems, Inc., listed in
Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche llp
Los Angeles, California
September 30, 1997
