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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 1999;
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to .
Commission File Number 0-23125
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OSI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 33-0238801
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
12525 Chadron Avenue Hawthorne, 90250
California (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, Including Area Code:
(310) 978-0516
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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Name of Each
Exchange on Which
Title of Each Class Registered
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Common Stock, No Par Value Nasdaq
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Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based upon the closing sales price of the
Common Stock on the Nasdaq National Market on September 23, 1999, was
$30,538,303.
The number of shares of the registrant's Common Stock outstanding as of
September 23, 1999 was 9,733,915.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1999
Annual Meeting of Stockholders (to be filed subsequently) are incorporated by
reference into Part III.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 16
Item 3. Legal Proceedings.......................................... 16
Item 4. Submission on Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters........................................ 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 31
Item 8. Financial Statements and Supplementary Data................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant......... 32
Item 11. Executive Compensation..................................... 32
Security Ownership of Certain Beneficial Owners and
Item 12. Management................................................. 32
Item 13. Certain Relationships and Related Transactions............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 33
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PART I
ITEM 1. Business
General
The Company is a vertically integrated worldwide provider of devices,
subsystems and end-products based on optoelectronic and silicon pressure-sensor
microstructure technology. The Company designs and manufactures optoelectronic
and silicon pressure-sensor devices and value-added subsystems for original
equipment manufacturers ("OEMs") for use in a broad range of applications,
including security, medical diagnostics, telecommunications, gaming, 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," "Secure" and "Metor" brand names.
These products are used to inspect people, baggage, cargo and other objects for
weapons, explosives, drugs and other contraband. The Company has also, through
the acquisition of Osteometer MediTech A/S ("Osteometer"), expanded into the
manufacture and sale of bone densitometers, which are used to provide bone loss
measurements in the diagnosis of osteoporosis. In fiscal 1999, revenues from
the sale of optoelectronic and silicon pressure-sensor devices and subsystems
and medical imaging systems amounted to $55.5 million, or approximately 54.5%
of the Company's revenues, while revenues from sales of security and inspection
products amounted to $46.3 million, or approximately 45.5% of the Company's
revenues. Unless the context otherwise requires, the term the "Company" as used
herein includes OSI Systems, Inc., a California corporation, and its
subsidiaries.
Industry Overview
The Company's optoelectronic and silicon pressure-sensor devices and
subsystems are designed and manufactured primarily for sale to OEMs, while the
Company's security products and medical imaging systems are sold to end-users.
Optoelectronic and Silicon Pressure-Sensor 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, and medical imaging systems, 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 compete in the market for
optoelectronic devices and subsystems.
Silicon pressure sensors and microstructures are based upon the same process
technologies as the optoelectronic components and are also used as components
in a variety of applications primarily in the
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automotive, medical, and industrial markets. Typical applications include
pressure sensing in fuel vapor systems, engine controls, respiration and
aneasthesia machines, and industrial pressure transducers, and heating, venting
and air-conditioning markets. The Company sells its products in die form to
other sensor companies as well as packaged parts. A primary focus of the
companies' pressure products has been in the precision low-pressure segment of
the silicon sensor market, where the performance of its parts allow replacement
of non-silicon sensors with lower cost silicon components.
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, metal detectors,
trace detection systems that detect particulate and chemical traces of
explosive materials, computer tomography ("CT"), scanners and x-ray machines
employing backscatter detection technology. 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.
In the 1970s, principally in response to civilian airline highjackings, 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 since 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 in the future. 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. The Clinton Administration is continuing to
fund procurements of $100 million annually for state-of-the-art detection
equipment at major U.S. airports. A portion of this funding is allocated for
TIP Ready X-ray (TRX) systems at security checkpoints throughout the nation.
Rapiscan, through FAA funding, has deployed some 40 TIP systems in the last two
years and is currently one of the vendors being evaluated for procurement
decisions.
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.
Growth Strategy
The Company's objectives are to be a leading provider of specialized
optoelectronic and silicon pressure-sensor 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
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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,
Inc. ("UDT Sensors") to broaden its expertise and capabilities in developing
and manufacturing optoelectronic devices and subsystems. In 1993, the Company
acquired Rapiscan Security Products Limited ("Rapiscan U.K.") and, through
Rapiscan Security Products (U.S.A.), Inc. ("Rapiscan U.S.A.") (Rapiscan U.S.A.
and Rapiscan U.K. are sometimes collectively referred to as "Rapiscan"),
commenced its operations as a provider of security and inspection products in
the United States. Thereafter, in 1993, the Company acquired Ferson Optics,
Inc. ("Ferson Optics") for its passive optic technologies. In 1994, the Company
commenced operations of Opto Sensors (Malaysia) Sdn. Bhd. ("OSI Malaysia") to
take advantage of low cost manufacturing. In 1997, the Company acquired
Advanced Micro Electronics AS ("AME") for AME's hybrid optoelectronic
capabilities.
In September 1998, the Company acquired Osteometer, a Danish manufacturer of
diagnostic scanners used to detect osteoporosis. The Company paid $7.9 million
in cash, including professional fees associated with the acquisition.
Osteometer concentrates on the development of small, cost optimized scanners
making it possible for small clinics to offer their patients a cost effective
diagnosis of osteoporosis and is committed to the development of scientifically
and clinically validated devices that result in accurate, precise, reliable and
cost effective diagnosis. Due to the global decline in the bone densitometer
market, the Company recently announced the closure of Osteometer's
manufacturing facilities in Denmark. Currently, the Company intends to relocate
certain of these operations to the United States over the next several months.
The Company expects to incur additional expenses in connection with the
discontinuation of those operations and their intended relocation to the United
States, which will be recorded in future periods. The osteoporosis industry is
currently weak and is expected to remain so for at least the near-term.
In November 1998, the Company purchased the security products business of
Metorex International Oy ("Metorex Security") of Espoo, Finland. The Company
paid $4.7 million in cash, including professional fees associated with the
acquisition. In July 1999, the Company paid 4.4 million Finnish markka
(approximately $759,000), in lieu of contingent payments of up to $1.5 million,
based on future sales.
The acquisition of Metorex Security brings a complete security metal
detection product line to the Company. "Metor" brand security archway metal
detectors are among the most widely recognized such products in the world.
These metal detectors complement the x-ray screening systems supplied by
Rapiscan. Metorex Security continues to supply a large number of systems to the
U.S. Government, as well as to customers around the world. The products include
Metor 100 series archways, as well as Metor 200 series zonal archways. The
Company's MetorNet(TM) product allows monitoring and control of multisystem
installations.
In November 1998, the Company acquired all the outstanding stock of Silicon
Microstructures, Inc. ("SMI"), a silicon pressure-sensor manufacturer, from
Exar Corporation of Fremont, California. The Company paid $2.7 million in cash,
including professional fees associated with the acquisition. The Company may
pay up to an additional $3.9 million in cash, at a later date, based on future
sales. The designs and processes of SMI allow leveraging of the Company's
silicon wafer fabrication technologies to initially serve pressure-sensor
markets and extend into the future to a variety of products based on mechanical
structures in silicon.
In December 1998, the Company acquired most of the assets and assumed
certain liabilities of Corrigan Canada Ltd. ("Corrigan"), a Canadian security
products manufacturer, for approximately $476,000 in cash, including
professional fees associated with the acquisition.
In January 1999, the Company acquired Aristo Medical Products, Inc.
("Aristo") for approximately $277,000 in cash, including professional fees
associated with the acquisition. Aristo develops and manufactures new
generation pulse oximeter probes used in the medical field.
In August 1998, the Company invested $315,000, including professional fees
associated with the acquisition, in Square One Inc. ("Square One") for an
equity share of approximately 16%. Square One develops and manufactures
infrared-based patient monitoring medical subsystems.
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During fiscal 1999, the Company invested $1,002,000, including professional
fees associated with the acquisition, in TFT Medical, Inc. ("TFT Medical")
(formerly known as Physiometrics, Inc.) for an equity share of approximately
40%. TFT Medical develops new generation pulse oximeter instruments and probes
for use in the medical field.
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, 1999, the Company continued to
expand sales of its security and inspection products beyond the traditional
focus on airports and airlines to include government buildings, customs
facilities, courthouses, school districts, departments of corrections and
businesses for their respective security and inspection needs. 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 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 its strategy will enable it to take advantage of
the growth its existing markets are experiencing and to benefit from additional
growth that these new and enhanced products will provide.
Capitalize on Vertical Integration. The Company believes that 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 quality control. Further leverage is obtained by extending the silicon
wafer fabrication processes to manufacture the pressure sensors and
microstructure processes of SMI. The Company intends to continue to leverage
its vertically integrated services to create greater value for its customers in
the design and manufacture 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 from locations in the
United States, Europe, Asia and Canada. 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 service 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, such as the
expansion during fiscal 1998 into optoelectronic products for medical
diagnostic applications. The Company believes that by manufacturing other end
products which rely on the technological
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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
and through selective acquisitions of end-product manufacturers.
Products and Technology
The Company designs, develops, manufactures and sells products based on its
core optoelectronic and silicon pressure-sensor technology. These products
range from discrete devices to value-added subsystems to complete x-ray
security and inspection products, and medical imaging systems.
Discrete Devices and Subsystems, and Medical Imaging Systems. Optoelectronic
and silicon pressure-sensor 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. A second group of
discrete devices are the pressure sensors and microstructures of SMI. These are
primarily manufactured in the same wafer fabrication facility as the
optoelectronic components, thereby achieving greater utilization and economy of
scale in this specialized facility. The same lithographic, furnace and metal
processes are combined with silicon etching to form precise miniature
electromechanical structures in silicon. SMI has developed specific structural
designs that concentrate stresses and provide higher signals and improved
performance over conventional silicon pressure sensors. 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 does,
however, also sell its discrete devices separately to OEMs. Direct sales of
devices to third parties constituted less than 10% of the Company's revenues in
each of fiscal 1998 and fiscal 1999.
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.
The Company has also moved into the field of manufacturing and selling the
DTX 200 (DEXACARE) and U.S. Food & Drug Administration ("FDA")-approved forearm
DEXA (Dual Energy X-Ray) densitometer, which is used to diagnose osteoporosis
as well as to provide follow-up bone density measurements. The Company also
produces the ultrasound DTU-One, the first commercially available scanner using
imaging capability for the diagnosis of osteoporosis. The DTU-One is currently
not available for sale in the United States, although the Company filed for
pre-market approval ("PMA") from the FDA in Spring 1998. It has been the
experience of the Company and other similarly situated companies that FDA
approval on PMAs for ultrasound devices can take 12 to 18 months from date of
submission on average, but this is an estimate only and the Company does not
know when the FDA process will be completed or what the outcome will be.
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Security and Inspection Equipment. The Company manufactures and sells a
range of security and inspection equipment that it markets under the
"Rapiscan," "Secure" and "Metor" brand names. 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 1997, 1998 and 1999, approximately 27.3%, 22.0%, and 20.5% 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'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. These systems range in size from compact tabletop systems
to large cargo pallet inspection systems weighing over 100,000 lbs.
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 the field of inspection of people, the Company's "Secure" brand product
line uses x-ray systems employing backscatter detection technology. Secure 1000
is an electronic screening system for hands off people screening. The system is
based on an extremely low dose of backscatter x-ray imaging to detect
contraband and weapons concealed underneath clothing and hair. The system
provides better screening than metal detectors as it detects very small amounts
of metal as well as non-metallic contraband.
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"). To
continuously monitor the effectiveness of the screening system and its
operator, test threat images, such as weapons, are projected into the images of
actual parcels being inspected. The results of these tests are available to
government agencies. The FAA is currently evaluating TRX (TIP Ready X-Ray)
systems for procurement and deployment. The Company is participating as a
finalist in the initial phase of this procurement.
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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:
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SELECTED
MODEL (technology) APPLICATIONS INSTALLATIONS
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Rapiscan 19 Inspection of incoming package Embassies
(single energy)
Rapiscan 119 Post offices
(single energy) Courthouses
High risk office buildings
Manufacturing companies
Rapiscan 300 Series Inspection of hand carried baggage Airports
(160 kVx-ray source, Prisons
single Government buildings
energy and dual energy) Nuclear facilities
Rapiscan 500 Series- Airport hand carried and checked Airports
Standard baggage Cruise ships
Tunnel Pallet inspection Freight shippers
(single view and dual Customs inspections Border crossings
view Agriculture inspection
160 kV x-ray source,
single
energy and dual energy)
Rapiscan 500 Series- Large pallet inspection Airports
Large Customs inspections Freight shippers
Tunnel Border crossings
(single view and dual High risk seaport locations
view
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
Rapiscan Series 2000 Fixed Site Cargo Inspection Systems Airports
Cargo Freight Shippers
Inspection Systems Border Crossings
Metor 100 Series Archway metal detection Airports
Government buildings
Conventions and special events
Metor 200 Series Zonal archway metal detection Airports
Prisons
Nuclear facilities
SECURE 1000 High Security Personnel Inspection Prisons
(non-intrusive personal Military Facilities
screening system)
SPEAR (Threat Image Performance Monitoring Any Rapiscan 500 Series
Projection ("TIP") System
Software)
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Markets, Customers and Applications
Optoelectronic and Silicon Pressure-Sensor Devices and Subsystems. The
Company's optoelectronic and silicon pressure-sensor 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, 1999: (i) the major product
categories for which the Company provided optoelectronic and silicon pressure-
sensor products; and (ii) certain representative 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.
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Product Category Representative Major Customers
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Computed Tomography and X-Ray Imaging Picker International
InVision Technologies
Aerospace and Avionics EDO Barnes
Allied Signal
Honeywell Avionics
Litton Systems
Medical Monitoring Datascope
BCI
Analytical, Medical Diagnostics and
Particle Analyzers Abaxis
Leica
Coulter Corporation
Office Automation and Computer Peripherals Xerox
Eastman Kodak
Dr. Johannes Heidenhain
Construction, Industrial Automation and
Exploration Schlumberger
Spectra Physics
Baumer Electric
Military/Defense and Weapons Simulations Lockheed Martin (Loral)
Raytheon
Norsk Forsvarstekmol
Bar Code Scanners Symbol Technologies
Gaming Industry Bally Gaming
Automotive Motorola
Analog Microelectronics GMBH
Medical Siemens Elcma
Resmed Corp.
Endosonics Corp.
Industrial Honeywell Corp.
OJ Electronics
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During fiscal 1999, the Company entered into a number of significant
agreements for the sale of the Company's optoelectronic and silicon pressure-
sensor devices and subsystems. Some of the principal agreements are the
following.
In fiscal 1998, the Company received a $2.3 million purchase commitment from
a U.S. defense systems manufacturer, for optoelectronic subsystems. These
subsystems were shipped during fiscal 1999 and will be finished shipping during
fiscal 2000.
In August 1998, the Company entered into a Master Purchase Agreement with a
long-term customer, for $31.1 million of optical subsystems to be used in
medical products. Of this amount, $8.1 million represents a firm order received
in fiscal 1998, $4.4 million was received in fiscal 1999 and the rest is
cancellable based on convenience and other terms of the agreement. The
subsystems are being delivered over a four-year period.
In September 1998, the Company received an order of approximately $10.0
million from the seismic services division of the world's largest oil services
company. The contract is for hybrid optoelectronic subsystems that will be
incorporated into sea-floor scanning devices. These systems began to be shipped
during fiscal 1999 and will be finished shipping during fiscal 2000. Due to the
worldwide decline in the oil exploration business, the Company and the customer
have subsequently agreed to reduce total shipments relating to the order, to
approximately $7.0 million.
Security and Inspection Products. Since entering the security and inspection
products market in 1993, the Company has shipped approximately 3,500 units to
approximately 50 countries. The following is a list of certain customers and/or
installations that have purchased the Company's security and inspection
products since January 1993:
<TABLE>
<CAPTION>
Overseas Domestic
-------- --------
<S> <C>
Nanjing Airport, People's Republic of
China American Airlines
Prague Airport, Czech Republic Bush Intercontinental Airport
Gatwick Airport, England Continental Airlines
Heathrow Airport, England Delta Airlines
TNT Freight, England Federal Courthouses
Japanese Embassies, worldwide Federal Reserve Bank
Malaysian Airport Berhad, Malaysia JFK International Airport
HAJ Terminal, Saudi Arabia Los Angeles County Courthouse
Dubai Airport, U.A.E. Los Angeles International Airport
United Kingdom Prison System, United
Kingdom Miami Airport
INFRAERO, airports, Brazil Orlando Airport
Chek Lap Kok International Airport,
Hong Kong Ronald Reagan National Airport
Pudong Shanghai International Airport,
P.R. China USAir
Airport Authority of Japan U.S. Government
Nagano Olympic Games 1998 California Department of Corrections
Kremlin, Russia U.S. Department of Corrections
Schiphol Airport, Netherlands Empire State Building
New Zealand Customs, New Zealand World Trade Center
</TABLE>
Because the market for most security and inspection products developed in
response to civilian airline highjackings, historically a large portion of the
Company's security and inspection products were sold and continue to be sold
for use at airports. Recently, however, the Company's security and inspection
products have been used for security purposes at locations in addition to
airports, such as courthouses, government buildings, mail rooms, schools,
prisons and at unique locations such as Buckingham Palace in London, England.
In addition, the Company's security and inspection 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.
9
<PAGE>
In May 1998, Rapiscan U.S.A. and the FAA entered into a Cooperative Research
and Development Agreement (the "CRDA"). Under the CRDA, the Company and the
FAA's Technical Center will jointly attempt to develop, over a three-year
period, effective enhanced automated baggage screening systems at airports,
using Rapiscan's proprietary scanner technology and image processing ability.
Rapiscan U.S.A. will retain title in all inventions made solely by employees of
Rapiscan U.S.A. and the U.S. Government will have the option to retain title to
all inventions made solely by the employees of the U.S. Government or jointly
by employees of Rapiscan U.S.A. and the U.S. Government. If the U.S. Government
retains title to any inventions under the CRDA, the U.S. Government will grant
Rapiscan U.S.A. an exclusive license for any invention for use in automated
detection of explosives in baggage, and a non-exclusive license for all other
inventions developed under the CRDA, in exchange for a royalty based on gross
revenues from the licensed invention. If Rapiscan U.S.A. retains title to any
inventions under the CRDA, Rapiscan U.S.A. will grant the U.S. Government a
non-exclusive license with respect to such inventions. The party retaining
title to inventions developed under the CRDA has the option to file a patent
application with respect thereto. Rapiscan U.S.A. has the option to own the
copyright in all software, documentation and other works created in whole or in
part by employees of Rapiscan U.S.A. under the CRDA.
During fiscal 1999, the Company entered into a number of significant
agreements for the development and sale of the Company's security and
inspection products. Some of the principal agreements are the following.
In November 1996, the Company entered into a $14 million contract with a
foreign customer to deliver 16 large cargo scanners. Eight of these cargo
scanners were shipped during fiscal 1998 and the balance were shipped during
fiscal 1999. Some installations are to be completed and spare parts are
expected to ship in the future.
In September 1998, the Company entered into an agreement with the Federal
Aviation Administration for advanced contraband detection systems with Threat
Image Projection ("TIP") features. The systems began to be shipped to Category
X airports (designated due to their high security priority) in the United
States during fiscal 1999 and the remainder will be shipped during fiscal 2000.
In addition, the FAA ordered Rapiscan training computers to assist in the
instruction of advanced detection technologies to security personnel.
In January 1999, the Company entered into an agreement with the People's
Republic of China to upgrade and provide technical support for the Vehicle
Cargo X-ray System ("VCXS") operated by the Chinese customs authority at
Shenzhen, near Hong Kong. The VCXS system allows a fast, detailed inspection of
fully loaded trucks, and 20-foot and 40-foot containers in lieu of a full
manual search.
In March 1999, the Company was awarded a contract by BAA plc, the operator
of 11 airports around the world, including London's Heathrow Airport, the
busiest international airport in the world. Rapiscan U.K. will supply, install
and maintain approximately 100 x-ray systems used in screening cabin baggage
for explosives, weapons and other contraband. These systems feature advanced
detection software, including TIP. The agreement also provides for Rapiscan
U.K. to provide maintenance and support services on the installed systems for
five years.
Marketing, Sales and Service
The Company markets and sells its optoelectronic and silicon pressure-sensor
devices and subsystems, and medical imaging systems, worldwide through both a
direct sales and marketing staff of 30 employees and indirectly through a
network of approximately 47 independent sales representatives and distributors.
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 eight independent sales representatives. The Company
markets and sells its security and inspection products worldwide through a
direct sales and marketing staff of approximately 34 employees located in the
United States, Finland, Canada, the United Kingdom, Dubai, and Malaysia and
through a network of approximately 133 independent sales representatives.
10
<PAGE>
The Company's optoelectronic and silicon pressure-sensor products and
medical imaging systems sales staff, located in the United States, Denmark 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 and medical imaging products sales
staff is supported by a service organization of approximately 32 persons,
located primarily in the United States, the United Kingdom, Finland 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 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 allow it to be competitive 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 1998 and 1999, maintenance service revenues and replacement
part sales collectively represented 3.5%, 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 facilities in either Hawthorne and Fremont,
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 and silicon pressure-sensor devices. After an end-product has
been conceptualized by the OEM, the Company normally will involve its engineers
to design the application, establish the mechanical specifications for the
application, create the appropriate subsystem architecture for the application,
and 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 a
program to be an important element of its business and operations. As of June
30, 1999, in addition to the engineers that the Company employed in
manufacturing, process design and applications development, the Company engaged
approximately 64 full-time engineers and technicians in research and
development. During fiscal 1998 and 1999, the Company's research and
development expenses were approximately $3.8 million and $5.7 million,
respectively. A significant portion of the increase in research and development
in fiscal 1999 is the result of acquisitions during that year. 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 continue to increase its research and development efforts in the future.
The Company's security screening products are designed at Rapiscan U.S.A.'s
facilities in Hawthorne, California and Rapiscan U.K.'s facilities in Crawley,
England and Espoo, Finland. These products include mechanical, electrical,
electronic, digital electronic and software subsystems, which are all designed
by the
11
<PAGE>
Company. In addition to product design, the Company provides system integration
services to integrate its products into turnkey systems at the customer site.
The Company supports cooperative research projects with government agencies
and, on occasion, provides contract research for its customers and government
agencies.
Manufacturing and Materials Management
The Company currently has manufacturing facilities in the United Kingdom,
Malaysia, Finland, Canada, Norway and Denmark, in addition to its manufacturing
facilities in Hawthorne and Fremont, California and Ocean Springs, Mississippi.
The Company recently announced that its facilities in Denmark will be closed.
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 in Malaysia. Since most of
the Company's customers currently are located in Europe 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. The manufacturing techniques include silicon
wafer processing and fabrication, manufacture and assembly of photodiodes,
surface mounting (SMT) 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 ongoing relationships. The Company does,
however, qualify second sources for most 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. 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 optoelectronic 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.
Substantially all of the optoelectronic devices, 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.
12
<PAGE>
Patents and Trademarks
In July 1999, as part of the settlement of an arbitration, the Company
entered into a nonexclusive patent license agreement with EG&G, Inc. ("EG&G")
for U.S. Patent No. 4,366,382, which expires in 2000. Under the fully paid up
license, for which the Company has paid $450,000, the Company 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's patent. The Company may be required to make additional payments of up to
$350,000, based on certain potential future orders and shipments.
In December 1998, as part of the settlement of certain litigation, the
Company and Lunar Corporation ("Lunar") made payments to each other which
resulted in a net payment to the Company of $400,000. As part of the
settlement, the parties entered into a license agreement pursuant to which the
Company, Rapiscan and UDT were granted a fully paid up worldwide, nonexclusive
license under U.S. Patent Nos. 4,626,688 (the "688 patent") and 5,138,167 (the
"167 patent") in the non-medical field. The Company paid Lunar $1.5 million for
this fully paid up license.
Prior to the Company's acquisition of Osteometer in September 1998,
Osteometer had also been involved in litigation with Lunar regarding the 688
and 167 patents. In December 1998, the parties to this litigation entered into
a settlement agreement. As a part of the settlement, the parties entered into a
license agreement pursuant to which Osteometer was granted a worldwide,
nonexclusive license under the 688 and 167 patents for certain bone
densitometers. Osteometer made an initial royalty payment of $250,000 with
respect to products manufactured prior to the entering into of this license
agreement and the Company will make royalty payments on future sales of the
licensed products. The license expires in December 2003 or the last to expire
of the licensed patents, whichever is later.
Rapiscan owns U.S. Patent No. 5,181,234 covering personnel screening systems
and manufactures the Secure 1000 in accordance to the patent. This patent was
issued in 1993 and expires in 2010. Rapiscan utilizes the trademarks
Rapiscan(R) and Secure(TM).
SMI owns U.S. Patent No. 5,812,047, which applies in connection with the
manufacture of silicon pressure-sensor devices. The patent expires in 2017. SMI
has other patent applications pending for various applications; it is unknown
at this time if these patents will be issued.
Metorex Security's "Metor" trademark is registered in 25 countries,
including the United States, the European Union countries and Japan. Metorex
Security has also registered the trademark "Metorscan" in the United States and
the European Union countries. Metorex Security utilizes four patents registered
in the United States (U.S. Patent Nos. 4605898, 5121105, 5047718, 4894619) and
other countries, including the European Union countries. These patents were
issued between 1986 and 1995, with expirations between 2002 and 2008. The
patents cover various improvements in metal detection systems.
The Company believes that the above patents and trademarks are important to
the Company's business. The loss of some of these patents or trademarks might
have a negative impact; however, the Company operates in a competitive
environment with a known customer base and relies mainly on providing value for
money with quality products and services to ensure continuing business.
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
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<PAGE>
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 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.
Competition
The markets in which the Company operates are highly competitive and
characterized by evolving customer 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, adapt more quickly to changes in
customer requirements, have stronger customer relationships, have greater name
recognition, and devote greater resources to the development, promotion and
sale of their products than does 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 and silicon pressure-sensor devices
and subsystems and medical imaging systems market or the security and
inspection market or that future competitive pressures will not materially and
adversely affect its business, financial conditions and results of operations.
In the optoelectronic and silicon pressure-sensors devices and subsystems
market, competition for optoelectronic devices and subsystems 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., 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 Asian manufacturers of standard optoelectronic
components. Competition for the Company's medical imaging products comes
principally from Lunar Corporation, Hologic, Inc. and Norland Medical Systems,
Inc. In the case of silicon pressure-sensors and microstructures, the Company
bases much of its current competitive position on pressure sensor performance,
particularly at low pressures, and process and manufacturing controls,
particularly in the automotive areas. Customer support and design expertise are
also very important. The Company believes that its primary silicon pressure-
sensor competitors include IC Sensors Division of EG&G, Inc., Novasensor
Division of Lucas Controls, Sensym ICT, and Motorola Semiconductor group.
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. The Company believes that the
principal competitor for its products using x-ray backscatter detection
technology is American Science & Engineering, Inc. In the airline
14
<PAGE>
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
1980s 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.
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
optoelectronic and silicon pressure-sensor devices and subsystems, and medical
imaging systems, 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 ten
machines) of security and inspection products typically require more lead time.
Large cargo scanning machines require six to twelve months lead time. The
only significant shipping delays which the Company has experienced are with
large cargo scanners. Such delays can occur for any of the following reasons:
(i) additional time necessary to conduct large cargo inspections at the factory
before shipment; (ii) the customer's needs to engage in timely special site
preparation to accommodate such a scanner, and as to which the Company has no
control or responsibility; and (iii) additional fine tuning of such scanners
once they are installed. The Company has experienced delays in shipping large
cargo scanners to one customer because of logistical delays by that customer;
however, all such delayed shipments of scanners to that customer were shipped
during fiscal 1999.
At June 30, 1999, the Company's backlog products totaled approximately $44.1
million, compared to approximately $46.9 million at June 30, 1998. Most of the
Company's backlog as of June 30, 1999 is expected to be shipped during the
fiscal year ending June 30, 2000. 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, 1999, the Company employed approximately 922 people, of whom
687 were employed in manufacturing, 64 were employed in research and
development, 75 were employed in finance and administration, 64 were employed
in sales and marketing, and 32 were employed in its service organization. Of
the total employees, approximately 433 were employed in the United States, 26
in Canada, 191 were employed in Europe, 271 were employed in Asia, and one was
employed in the Middle East. Thirty-two employees at AME and nine Metorex
Security employees in Finland are members of a union and have collective
bargaining rights. Other than the employees of AME and nine Metorex Security
employees in Finland, none of the Company's other employees is unionized. There
has never been a work stoppage or strike at the Company, and management
believes that its relations with its employees are good.
15
<PAGE>
ITEM 2. Properties
The Company owns three buildings (approximately 88,000 square feet) which
comprise its principal facility in Hawthorne, California. This facility is used
for manufacturing, engineering, sales and marketing.
As of June 30, 1999, the Company leased all of its other facilities, as
reflected in the following table:
<TABLE>
<CAPTION>
Approximate Lease
Location Description of Facility Square Footage Expiration
- -------- ----------------------- -------------- ----------
<S> <C> <C> <C>
Hawthorne, California Manufacturing, engineering, sales and
marketing and service 41,600 2006
Ocean Springs, Manufacturing, engineering and sales and
Mississippi marketing 41,800 2001
Fremont, California Manufacturing, engineering, sales and
marketing and service 6,500 2001
Princeton, New Jersey Service and sales and marketing 2,900 2001
Georgetown, Canada Manufacturing, engineering, sales and
marketing and service 22,000 2003
Johor Bahru, Malaysia Manufacturing and sales 13,500 1999
Johor Bahru, Malaysia Manufacturing 21,000 2000
Singapore, Republic of
Singapore Administrative and materials procurement 3,000 2000
Crawley, United Kingdom Manufacturing, engineering, sales and marketing 18,700 2011
Hayes, United Kingdom Service 3,900 2003
Horten, Norway Manufacturing, engineering, sales and marketing 19,800 2008
Espoo, Finland Manufacturing, engineering, sales and marketing 13,300 2001
Horsholm, Denmark Manufacturing, engineering, sales and marketing 34,900 2009
</TABLE>
The Company's lease of facilities in Johor Bahru, Malaysia covering
approximately 13,500 square feet will expire in November 1999 and it is
anticipated that this lease will be extended on terms yet to be negotiated. The
Company's lease of facilities in Johor Bahru, Malaysia covering approximately
21,000 square feet will expire in April 2000 and it is anticipated that this
lease will be extended on terms yet to be negotiated.
The Company's lease of facilities in Singapore will expire during fiscal
2000. The Company expects to renew this lease but has not yet begun
negotiations with respect thereto.
The Company believes that 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 that are substantially the
same as those 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. 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.
ITEM 3. Legal Proceedings
In October 1994, UDT Sensors 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 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 has paid 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
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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.
The Company is also involved in routine litigation from time to time in the
course of conducting its business.
ITEM 4. Submission on Matters to a Vote of Security Holders
None.
17
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PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Stock Market and Other Information
The Company's common stock has been traded on the Nasdaq National Market
under the symbol "OSIS" since October 2, 1997. Prior to such date, there was no
public trading market for the Company's equity securities.
The following table sets forth the high and low sale prices of a share of
the Company's Common Stock as reported by the Nasdaq National Market on a
quarterly basis for the Company's fiscal years ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998:
Quarter ended December 31, 1997............................. $16.00 $10.88
Quarter ended March 31, 1998................................ $16.00 $11.13
Quarter ended June 30, 1998................................. $12.50 $ 9.25
1999:
Quarter ended September 30, 1998............................ $11.63 $ 7.13
Quarter ended December 31, 1998............................. $ 8.75 $ 4.75
Quarter ended March 31, 1999................................ $12.13 $ 4.75
Quarter ended June 30, 1999................................. $ 6.13 $ 4.50
</TABLE>
As of September 23, 1999, there were approximately 90 holders of record of
the Company's Common Stock. This number does not include beneficial owners
holding shares through nominee or "street" name.
Dividend Policy
The Company has not paid any dividends since the consummation of its initial
public offering in 1997 and 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 borrowing may contain similar restrictions.
Transfer Agent and Registrar
U.S. Stock Transfer Corp. of Glendale, California, serves as transfer agent
and registrar of the Company's Common Stock.
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ITEM 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company as of and for each of the five fiscal years ended June 30, 1999 and is
derived from the Consolidated Financial Statements of the Company. The
consolidated financial statements as of June 30, 1998 and June 30, 1999, and
for each of the years in the three-year period ended June 30, 1999, and the
auditor's report thereon, are included elsewhere herein. The following data
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 in this Report.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues................ $ 49,815 $ 61,518 $ 77,628 $ 93,918 $ 101,763
Cost of goods sold...... 37,818 45,486 56,174 66,952 71,705
---------- ---------- ---------- ---------- ----------
Gross profit............ 11,997 16,032 21,454 26,966 30,058
Operating expenses:
Selling, general and
administrative....... 7,601 9,757 11,265 12,670 17,452
Research and
development.......... 1,591 1,663 2,504 3,790 5,711
Stock option
compensation(1)...... -- -- 856 -- --
Goodwill
Amortization......... -- -- 39 106 595
Asset impairment
charge(2)............ -- -- -- -- 5,189
In process research
and development (3).. -- -- -- -- 2,579
Restructuring costs
(4).................. -- -- -- -- 458
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 9,192 11,420 14,664 16,566 31,984
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 2,805 4,612 6,790 10,400 (1,926)
Interest expense
(income)............... 1,251 1,359 1,197 ( 600) (102)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
minority Interest ..... 1,554 3,253 5,593 11,000 (1,824)
Provision (benefit) for
income taxes........... 413 1,111 1,416 2,752 (2,565)
---------- ---------- ---------- ---------- ----------
Income before minority
interest............... 1,141 2,142 4,177 8,248 741
Minority interest....... 17 117 -- -- --
---------- ---------- ---------- ---------- ----------
Net income.............. $ 1,158 $ 2,259 $ 4,177 $ 8,248 $ 741
========== ========== ========== ========== ==========
Net income available to
common
shareholders(5)........ $ 1,357 $ 2,308 $ 4,269 $ 8,248 $ 741
========== ========== ========== ========== ==========
Net income per
share(5)(6)............ $ 0.22 $ 0.38 $ 0.68 $ 0.92 $ 0.08
========== ========== ========== ========== ==========
Weighted average shares
outstanding(6)......... 6,172,901 6,134,669 6,263,963 8,955,919 9,828,971
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 1,405 $ 581 $ 553 $ 22,447 $ 7,241
Working capital......... 12,117 6,044 10,800 52,417 41,468
Total assets............ 30,780 35,309 47,333 86,822 93,371
Total debt.............. 14,113 15,462 13,180 1,243 9,087
Total shareholders'
equity................. $ 4,951 $ 7,194 $ 16,809 $ 65,915 $ 65,782
</TABLE>
- --------
(1) 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.
19
<PAGE>
(2) Represents a charge resulting from the closure of the operations of
Osteometer in Denmark. The charge had the effect of decreasing income from
operations, net income and net income available to common shareholders by
$5,189,000, $1,635,000 and $1,635,000 respectively.
(3) Represents a charge resulting from acquired in process research and
development of Osteometer, Metorex Security and SMI. The charge had the
effect of decreasing income from operations, net income and net income
available to common shareholders by $2,579,000, $2,579,000 and $2,579,000
respectively.
(4) Represents a charge resulting from consolidating certain subsidiaries. The
charge had the effect of decreasing income from operations, net income and
net income available to common shareholders by $458,000, $391,000 and
$391,000 respectively.
(5) 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, 1994. Adjustments in each of the five years ended June
30, 1999 consist of: (i) the elimination of interest expense related to
converted subordinated debt of $216,000, $166,000, $92,000, $0, and $0 net
of income taxes, respectively; and (ii) the elimination of the minority
interest in the net loss of subsidiaries of $17,000, $117,000, $0, $0 and
$0, respectively.
(6) Assumes the conversion of 2,568,750 shares of preferred stock into
3,853,125 shares of Common Stock as of July 1, 1994. 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.
20
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Annual Report on Form 10-K. Certain statements contained herein that are
not related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position and estimated cost savings, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and involve risks and
uncertainties. Although the Company believes that the assumptions upon which
these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, regulatory policies in the United States and other countries,
foreign currency fluctuations, market and general economic factors, competitive
factors including other companies' pricing and marketing efforts, availability
of third-party products at reasonable prices, risks of obsolescence due to
shifts in market demand, litigation outcomes and such other risks and
uncertainties as are described in this Annual Report on Form 10-K and other
documents previously filed or hereafter filed by the Company from time to time
with the Securities and Exchange Commission. All forward-looking statements
contained in this Annual Report on Form 10-K are qualified in their entirety by
this statement.
Overview
The Company is a vertically integrated worldwide provider of devices,
subsystems and end-products based on optoelectronic and silicon pressure-sensor
micro-structure technology. The Company designs and manufactures optoelectronic
and silicon pressure-sensor devices and value-added subsystems for OEMs for use
in a broad range of applications, including security, medical diagnostics,
telecommunications, gaming, 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," "Secure"
and "Metor" brand names. These products are used to inspect people, baggage,
cargo and other objects for weapons, explosives, drugs and other contraband.
The Company has also, through the acquisition of Osteometer, expanded into the
manufacture and sale of bone densitometers, which are used to provide bone loss
measurements in the diagnosis of osteoporosis. In fiscal 1999, revenues from
the sale of optoelectronic and silicon pressure-sensor devices and subsystems
and medical imaging systems amounted to $55.5 million, or approximately 54.5%
of the Company's revenues, while revenues from sales of security and inspection
products amounted to $46.3 million, or approximately 45.5% 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 Opto Sensors (Singapore) Pte Ltd. ("OSI Singapore") to
manufacture optoelectronic devices and subsystems. In April 1990, the Company
acquired UDT Sensors' subsystem business. In February 1993, the Company
acquired the security and inspection operations of Rapiscan U.K. 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 Optics, 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 1998, the Company acquired the "Secure"
product line from ThermoSpectra for the purpose of expanding into the area of
inspection of people. In fiscal 1999, the Company acquired Osteometer for the
purpose of expanding further into the field of optoelectronic medical devices
used for medical diagnostic purposes. Due to the global decline in the bone
densitometer market, the Company recently announced the closure of Osteometer's
manufacturing facilities in Denmark. Currently, the Company intends to relocate
certain of these operations to the United States over the next several months.
The Company expects to incur additional expenses in connection with the
discontinuation of those operations and
21
<PAGE>
their intended relocation to the United States, which will be recorded in
future periods. Based on its assessment to date, the Company currently
estimates these expenses to be in the range of $2.0 million to $2.7 million. As
the Company continues to proceed with the closure and intended relocation of
these manufacturing facilities, it will be able to more accurately estimate the
range of these costs, which may change from the current estimate.
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. 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.
In August 1998, the Company invested $315,000, including professional fees
associated with the acquisition, in Square One for an equity share of
approximately 16%. The Company's equity in the earnings of the investment,
since acquisition, has not been significant. Square One develops and
manufactures infrared-based patient monitoring medical subsystems.
During fiscal 1999, the Company invested $1,002,000, including professional
fees associated with the acquisition, in TFT Medical for an equity share of
approximately 40%. At June 30, 1999, the Company's equity in the losses of the
investment was $187,000. TFT Medical develops new generation pulse oximeter
instruments and probes for use in the medical field.
The Company engages in significant international operations. The Company
currently manufactures its optoelectronic and silicon pressure-sensor devices
and subsystems, and medical imaging systems, at its facilities in Hawthorne and
Fremont, California, Ocean Springs, Mississippi; Johor Bahru, Malaysia; Horten,
Norway; and Horsholm, Denmark. Its security and inspection products are
manufactured at its facilities in Crawley, England; Hawthorne, California;
Johor Bahru, Malaysia; and Espoo, Finland. As of June 30, 1999, the Company
marketed its products worldwide through approximately 64 sales and marketing
employees located in eight countries, and through approximately 180 independent
sales representatives. Revenues from shipments made outside of the United
States accounted for 42.2%, 49.4% and 48.5% of revenues for the fiscal years
1997, 1998 and 1999 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 15 in the Company's Consolidated
Financial Statements.
The effective income tax rate for the Company for fiscal 1997, 1998 and
excluding the non-recurring asset impairment charge, in-process research and
development and restructuring costs for fiscal 1999 was 25.3%, 25.0% and 16.5%,
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. Because of a number of factors, primarily variable and changing
international taxation policies, including those in Malaysia, and utilization
of previously unrealized net operating loss, the Company is not able to
estimate its effective tax rate during the next fiscal year.
Certain competitive and industry trends include the following. Rapiscan
U.S.A. and its competitors in the security and inspection business have been
experiencing weakness in the domestic market, partly as a result of hesitation
by airlines to order security and inspection equipment pending a decision by
the FAA to buy 440 cabin-baggage scanners using current technology. The FAA has
leased, with an option to buy, ten such scanners from the Company. FAA trials
are continuing.
The incorporation of SMI's silicon pressure-sensor products into the
Company's operations has taken longer than originally anticipated. As a result,
costs of operations for SMI's operations have been higher than expected and may
continue as such for at least the next few quarters. The Company has
established an internal task force to oversee the incorporation of SMI's
operations into those of the Company.
The Company's subsystems optics business is conducted by Ferson Optics,
which manufactures passive components used in other products and systems
manufactured by outside parties and the Company. Because of
22
<PAGE>
competitive market forces, primarily in Asia with significantly lower costs of
labor, sales of Ferson Optic's products to outside parties show little
opportunity of growth in the foreseeable future. The Company is actively
monitoring this situation and will consider implementing additional cost-saving
and cost-cutting measures, including use of subcontractors and consolidation of
manufacturing operations, in the future. Ferson Optics is a small portion of
the Company's business, contributing approximately $ 3.3 million, or
approximately 3.2% of total revenue in fiscal 1999.
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.
<TABLE>
<CAPTION>
Year Ended June
30,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0%
Cost of goods sold......................................... 72.4 71.3 70.5
----- ----- -----
Gross profit............................................... 27.6 28.7 29.5
Operating expenses:
Selling, general and administrative...................... 14.5 13.5 17.1
Research and development................................. 3.2 4.0 5.6
Stock option compensation................................ 1.1 -- --
Good will amortization................................... 0.1 0.1 0.6
Asset impairment charge.................................. -- -- 5.1
In process research and development...................... -- -- 2.5
Restructuring Costs...................................... -- -- 0.5
----- ----- -----
Total operating expenses............................... 18.9 17.6 31.4
----- ----- -----
Income from operations..................................... 8.7 11.1 (1.9)
Interest expense (income).................................. 1.5 (0.6) (0.1)
----- ----- -----
Income before income taxes and minority interest........... 7.2 11.7 (1.8)
Provision for income taxes................................. 1.8 2.9 (2.5)
----- ----- -----
Net Income................................................. 5.4% 8.8% 0.7%
</TABLE>
Comparison of Fiscal Year Ended June 30, 1999 to Fiscal Year Ended June 30,
1998
Revenues. Revenues consist of sales of optoelectronic and silicon pressure
sensor devices, subsystems and medical imaging systems as well as security and
inspection products. Revenues are recorded net of inter-company eliminations.
Revenues for the fiscal year ended June 30, 1999, increased by $7.8 million or
8.4% to $101.8 million from $93.9 million for the fiscal year ended June 30,
1998. Revenues for the sale of optoelectronics and silicon pressure sensor
devices, subsystems and medical imaging systems, net of intercompany
eliminations, increased by $5.4 million, or 10.7% to $55.5 million from $50.1
million for fiscal 1998. The increase was primarily due to an increase in sales
to the oil exploration industry and sales of medical imaging systems and
silicon pressure sensors through the acquisitions of Osteometer and SMI,
respectively. Due to the worldwide decline in the oil exploration business, the
Company expects declines in shipments to the oil exploration industry to
continue and has no plans to actively pursue this market after the completion
of its current contract. Revenues from the sale of security and inspection
products increased $2.5 million, or 5.7% to $46.3 million from $43.8 million
for fiscal 1998. The increase in revenues from the sale of security and
inspection products was primarily due to an increase in walk through metal
detection systems through the acquisition of Metorex Security, which was offset
in part by decrease in revenues due to weakness in the security and inspection
products market.
23
<PAGE>
Gross Profit. Cost of goods sold consist of material, labor and
manufacturing overhead. Gross profit increased by $3.1 million, or 11.5% to
$30.1 million from $27.0 million for fiscal 1998. As a percent of revenues,
gross profit increased to 29.5% in fiscal 1999 from 28.7% in fiscal 1998. The
increase in gross profit was due to increased sales, change in product mix and
increased efficiencies in manufacturing.
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
the year ended June 30, 1999, such expenses increased by $4.8 million, or 37.7%
to $17.5 million from $12.7 million in fiscal 1998. As a percentage of
revenues, selling, general and administrative expenses increased to 17.1% in
fiscal 1999 from 13.5% in fiscal 1998. The increase in expenses was due
primarily to the inclusion of selling, general and administrative expenses of
recent acquisitions in the Company's consolidated financial statements,
exchange rate fluctuation losses due to currency translation relating to the
relatively strong U.S. dollar compared to European currencies and an increase
in marketing expenses to penetrate new markets for the Company's existing
products and was offset in part by the proceeds from the settlement of certain
material litigation. For the year ended June 30, 1999, $4.5 million of selling,
general and administrative expenses of recent acquisitions were included in the
Company's consolidated financial statements. The exchange rate losses for
fiscal 1999 were $743,000 compared to $39,000 for fiscal 1998.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For
the year ended June 30, 1999, such expenses increased by $1.9 million, or 50.7%
to $5.7 million from $3.8 million in fiscal 1998. As a percentage of revenues,
research and development expenses increases to 5.6% in fiscal 1999 from 4.0% in
fiscal 1998. The increase in expenses was primarily due to the increase in
personnel cost resulting from the recent acquisitions. For the year ended June
30, 1999, $1.8 million of research and development expenses incurred by the
acquired companies were included in the Company's consolidated financial
statements.
Goodwill Amortization. Amortization of goodwill increased to $595,000 in
fiscal 1999 from $106,000 in fiscal 1998. The increase in amortization expense
was primarily due to amortization of goodwill associated with the acquisition
of Osteometer, Metorex Security and SMI. In the prior years, goodwill
amortization was included as a component of selling, general and administrative
expenses.
Asset Impairment Charge. The asset impairment charge relates to the closure
of the manufacturing facilities of Osteometer in Denmark. For the year ended
June 30, 1999, the asset impairment charge was $5.2 million, which includes the
write off of $3.7 million of goodwill and $1.5 million of other assets. Some of
these operations may be relocated to the United States over the next several
months. The Company expects to incur additional expenses in connection with the
discontinuation of those operations and their intended relocation to the United
States, which will be recorded in future periods.
In Process Research and Development. The Company used a total of $15.3
million for the acquisitions of Osteometer, Metorex Security and SMI, including
professional fees associated with these acquisitions. Out of the total of $15.3
million, the company incurred an aggregate of $2.6 million in in-process
research and development charges in fiscal 1999, related to these acquisitions.
In September 1998, the Company acquired the assets, including the developmental
technology, and assumed the liabilities of Osteometer. The Company paid $7.9
million in cash, including professional fees associated with the acquisition.
In November 1998, the Company acquired the assets, including developmental
technology, of Metorex Security. The Company paid $4.7 million in cash,
including professional fees associated with the acquisition, and in July 1999,
the Company paid $4.4 million Finnish markka (approximately $759,000), in lieu
of contingent payments up to $1.5 million, based on future sales. Also in
November 1998, the Company acquired the assets, including the developmental
technology, of SMI. The Company paid $2.7 million in cash, including
professional fees associated with the acquisition, and may pay up to $3.9
million in additional contingent purchase payments based on future sales.
Based on the valuations, the Company allocated the excess of the non-
contingent purchase price over the fair value of net tangible assets acquired
to goodwill and identified intangible assets. In performing this
24
<PAGE>
allocation, the Company considered, among other factors, the attrition rate of
the active users of the technology at the date of acquisition and the research
and development projects in process at the date of acquisition. With regard to
the in-process research and development projects, the Company considered, among
other factors, the stage of development of each project at the time of
acquisition, the importance of each project to the overall development plan,
and the projected incremental cash flows from the projects when completed and
any associated risks. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the impact of potential changes in future
target markets. As of June 30,1999, with the exception of Osteometer, the above
mentioned research and development projects were progressing as planned.
Restructuring Costs. During fiscal 1999, the Company adopted a restructuring
plan to consolidate certain subsidiaries and, in connection therewith, the
Company recorded a non-recurring expense of $458,000. These costs were
associated primarily with the termination of certain employees, in the amount
of $395,000, and consolidation of certain subsidiaries, in the amount of
$63,000. All of the restructuring costs were incurred and recorded before March
31, 1999.
Income (loss) from operations. For the year ended June 30, 1999, loss from
operations was $1.9 million compared to income of $10.4 million in fiscal 1998.
Excluding, the non-recurring asset impairment charge, in process research and
development and restructuring costs of $8.2 million, income from operations for
the year ended June 30, 1999 decreased by $4.1 million or 39.4%, to $6.3
million from $10.4 million in fiscal 1998. Income from operations decreased due
to increased selling, general and administrative expenses, increased research
and development expenses and increased goodwill amortization and was partially
offset by increased gross profit.
Interest expense (income). For the year ended June 30, 1999, the Company
earned net interest income of $102,000 compared to net interest income of
$600,000 for fiscal 1998. The reduction in net interest income was due to
increased borrowing on the Company's lines of credit and a reduction in short
term investments used for working capital and acquisitions.
Provision (benefit) for income taxes. For the year ended June 30, 1999, the
Company had an income tax benefit of $2.6 million compared to provision for
income taxes of $2.7 million for fiscal 1998. Excluding, the non-recurring
asset impairment charge, in process research and development and restructuring
costs, provision for income taxes for the year ended June 30, 1999, was $1.1
million, compared to $2.8 million for fiscal 1998 and as a percentage of income
before provision for income taxes, provision for income taxes was 16.5% for the
year ended June 30, 1999 compared to 25.0% for fiscal 1998. The reduction in
the Company's effective tax rate was primarily due to a mix in income from U.S.
and foreign operations, utilization of previously unrealized foreign net
operating losses and a one year tax holiday in Malaysia for fiscal year ended
June 30, 1999.
Net Income. For the reasons outlined above, including the non-recurring
asset impairment charge, in process research and development and restructuring
costs, for the year ended June 30, 1999, the Company had a net income of
$741,000, compared to $8.2 million for fiscal 1998. Excluding, the non-
recurring asset impairment charge, in process research and development and
restructuring costs of $8.2 million ($4.7 million of net of taxes), net income
for the year ended June 30, 1999 decreased 35.2% to $5.3 million, compared to
$8.2 million for fiscal 1998.
Comparison of Fiscal Year Ended June 30, 1998 to Fiscal Year Ended June 30,
1997
Revenues. Revenues consist of sales of optoelectronics devices and
subsystems as well as security and inspection products. Revenues are recorded
net of inter-company eliminations. Revenues for the fiscal year ended June 30,
1998 increased by $16.3 million, or 21.0% to $93.9 million from $77.6 million
for the fiscal year ended June 30, 1997. Revenues for the sale of
optoelectronics devices and subsystems, net of intercompany eliminations,
increased by $7.2 million, or 16.9% to $50.1 million from $42.9 million for
fiscal 1997. The increase was the result of increase in sales to medical
diagnostic and gaming industry and introduction of products that are sold for
use in the oil exploration field. Revenues from the sale of security and
25
<PAGE>
inspection products increased by $9.0 million, or 26.0% to $43.8 million from
$34.7 million for fiscal 1997. The increase was due to an increase in sales of
the Company's Rapiscan Series 500 systems and large cargo inspection machines,
and continuing penetration in the security and inspection products market.
Gross Profit. Cost of goods sold consists of material, labor and
manufacturing overhead. Gross profit increased by $5.5 million, or 25.7% to
$27.0 million from $21.5 million for fiscal 1997. As a percentage of revenues,
gross profit increased to 28.7% in fiscal 1998 from 27.6% in fiscal 1997. The
increase in gross profit was due to increased sales and increased efficiencies
in manufacturing.
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 the year ended June 30, 1998 such expenses increased by $1.4 million, or
12.5%, to $12.7 million from $11.3 million in fiscal 1997. This increase was
due primarily to an increase in payroll expenses and marketing expenses to
support revenue growth as well as an increase in legal expenses related
primarily to ongoing litigation matters. As a percentage of revenues, selling,
general and administrative expenses decreased to 13.5% in fiscal 1998 from
14.5% in fiscal 1997.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For
the year ended June 30, 1998, such expenses increased by $1.3 million, or
51.4%, to $3.8 million from $2.5 million in fiscal 1997. As a percentage of
revenues, research and development expenses increased to 4.0% in fiscal 1998
from 3.2% in fiscal 1997. The increase was due primarily to acceleration of
certain research and development projects, continued enhancement of Rapiscan x-
ray systems, and increased efforts to develop product for cargo scanning and
optoelectronic devices and subsystems products.
Goodwill Amortization. Amortization of goodwill increased to $106,000 in
fiscal 1998 from $39,000 in fiscal 1997. The increase in goodwill was due to
the whole year's amortization in fiscal 1998 compared to a partial year's
amortization in fiscal 1997, as related to the acquisitions of minority
interests in Rapiscan and Ferson Optics, and the acquisition of AME.
Income from Operations. Income from operations for the year ended June 30,
1998 increased by $3.6 million, or 53.2%, to $10.4 million from $6.8 million in
fiscal 1997. 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 and officers during the
year ended June 30, 1997, income from operations increased by $2.8 million or
36.0%, from $7.6 million last year. As a percentage of revenues, income from
operations increased to 11.1% from 8.7% last year and excluding the non-cash
compensation expense referenced above, it would have increased to 11.1% from
9.8%.
Interest Expense. For the year ended June 30, 1998, the Company earned net
interest income of $600,000 compared to net interest expense of $1.2 million in
fiscal 1997. The interest income was due to proceeds from the initial public
offering of the Company's common stock, in October 1997. A portion of the
proceeds was used to repay a majority of the Company's debt and the remaining
proceeds are invested in short-term investments.
Provision for Income Taxes. Provision for income taxes for fiscal 1998
increased by $1.3 million, or 94.4% to $2.8 million, from $1.4 million for
fiscal 1997. As a percentage of income before provision for income taxes,
provision for income taxes decreased to 25.0% from 25.3% for fiscal 1997.
Net Income. For the reasons outlined above, net income for the year ended
June 30, 1998 increased by $4.1 million, or 97.5%, to $8.2 million from $4.2
million in fiscal 1997. The non-cash compensation charge described above,
decreased net income by $514,000 in fiscal 1997.
Liquidity and Capital Resources
The Company has financed its operations primarily through cash provided by
operations, through various term loans, discounting facilities, and credit
lines extended to its different subsidiaries worldwide and from its
26
<PAGE>
public offering. As of June 30, 1999, the Company's principal source of
liquidity consisted of $7.2 million in cash and several credit agreements
described below.
The Company's operations provided net cash of $80,000 during fiscal 1999,
compared to net cash used of $436,000 in fiscal 1998. The amount of net cash
provided by operations was offset in part primarily because of increase in
accounts receivable, other receivables, deferred income taxes, income taxes
receivable, reduction in accrued payroll and related expenses, income taxes
payable and advances from customers.
The net cash used in investing activities was $23.4 million and $8.0 million
for fiscal 1999 and 1998, respectively. In fiscal 1999, net cash used in
investing activities reflects primarily cash used in business acquisitions and
professional fees associated with these acquisitions of $16.0 million, cash
used in equity investments, purchase of marketable securities and the purchase
of property and equipment, and was partially offset by cash provided by sale of
property and equipment. In fiscal 1998, the net cash used in investing
activities was primarily the purchase of property and equipment. The Company
expects to purchase property and equipment in fiscal 2000 as required. The
Company has no significant capital spending or purchase commitment other than
in normal course of business and commitments under leases.
Net cash provided by financing activities was $7.5 million for fiscal 1999
compared to net cash provided by financing activities of $30.6 million for
fiscal 1998. In fiscal 1999, net cash provided by financing activities resulted
primarily from net proceeds from bank lines of credit and was partially offset
by payment of long term debt and purchase of treasury stock.
In March 1999, the Company announced a stock repurchase program of up to
2,000,000 of its Common Stock. Through June 30, 1999, the Company repurchased
85,000 shares at an average price of $5.15 per share. Subsequent to the end of
the fiscal year ended June 30, 1999, the Company repurchased an additional
247,500 shares (through September 23, 1999) at an average price of $4.72 per
share. The stock repurchase program did not have a material effect on the
Company's liquidity and is not expected to have a material effect on liquidity
in subsequent quarters.
The Company anticipates that current cash balances, anticipated cash flows
from operations and current borrowing arrangements will be sufficient to meet
its working capital, stock repurchase program and capital expenditure needs for
the foreseeable future.
In January 1997, the Company and its U.S. subsidiaries entered into a credit
agreement with Sanwa Bank California. The agreement, as amended and restated in
September 1999, provides for a $10.0 million line of credit, which includes
revolving line, letter of credit, acceptance and foreign exchange facilities.
In addition, the Company has a $3.0 million equipment line of credit for
capital purchases, a $3.0 million term loan and a $15.0 million line of credit
for acquisitions with certain restrictions. Advances under the lines of credit
bear interest at a rate equal to a variable bank reference rate (7.75% at June
30, 1999) or, at the Company's option, at a fixed rate as quoted by the bank
upon request for specific advances. As of June 30, 1999, there were no amounts
outstanding under the line of credit or equipment line of credit and $8.5
million was outstanding under the acquisition line of credit. As of June 30,
1999, $66,000 was outstanding under letters of credit. The lines expire in
November 2000. Borrowings under the agreement are secured by liens on
substantially all of the assets of the Company's U.S. subsidiaries. The
agreement restricts the borrowers from incurring certain additional
indebtedness and from making capital expenditures greater than $5.0 million on
a consolidated basis (excluding assets acquired through acquisition) in any
fiscal year. In addition, the credit agreement contains certain covenants.
Among these, the Company is at all times required to maintain (on a
consolidated basis) a tangible net worth of at least $50.0 million; a ratio of
debt to tangible net worth of not more than 3.0 to 1; a ratio of cash, cash
equivalents and accounts receivable to current liabilities of not less than 0.8
to 1; and a debt coverage ratio of 2.0 to 1. The Company was in violation of a
covenant for the quarter ended June 30, 1999, due to the asset impairment
charge. The covenant was subsequently waived by the bank.
27
<PAGE>
In November 1996, the Company and three of its U.S. subsidiaries entered
into an agreement with Wells Fargo HSBC Trade Bank, N.A. The agreement was
renewed in January 1998 and, in August 1998, was extended until November 1999.
As currently in effect, the agreement provides for revolving lines of credit up
to a maximum of $2.1 million to be used to pay obligations incurred in
connection with export orders. Of this total amount, there is a sublimit of
$1.0 million for the purchase of foreign currency and a sublimit of $1.9
million for letters of credit for a specific customer. The revolving credit
lines bear interest at the bank's prime rate (7.75% at June 30, 1999) plus 5.0%
per annum. As of June 30, 1999, there was outstanding approximately $850,000
for standby letters of credit. Borrowings under the agreement are secured by
liens on certain of the Company's assets. 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, payments of dividends and capital expenditures. The Company has
not yet decided how it will handle this facility upon its expiration.
Rapiscan U.K. has a loan agreement with Midland Bank plc, which provides for
an overdraft facility up to a maximum amount of 2.0 million Pounds Sterling
(approximately $3.1 million at June 30, 1999) outstanding at any one time,
which amounts are secured by certain assets of Rapiscan U.K. At June 30, 1999,
no amounts were outstanding under the overdraft facility. Outstanding
borrowings bear interest at a base rate (7.75% at June 30, 1999) plus 1.5% per
annum. The agreement also provides for a 1.0 million Pounds Sterling
(approximately $1.6 million at June 30, 1999) facility for tender and
performance bonds and a 1.0 million Pounds Sterling (approximately $1.6 million
at June 30, 1999) facility for the purchase of forward exchange contracts.
These facilities are secured by certain assets of Rapiscan U.K. and the Company
has guaranteed Rapiscan U.K.'s obligations under the performance bond facility.
As of June 30, 1999, $277,000 was outstanding under the performance bond
facility and Rapiscan U.K. had purchased forward exchange contracts in the
amount of $200,000. The above facilities expire in January 2000 and the Company
believes that they will be renewed on the same or similar terms.
OSI Singapore has a loan agreement with Indian Bank (Singapore), which
provides for an accounts receivable discounting facility for borrowing of up to
2.9 million Singapore dollars (approximately $1.7 million at June 30, 1999).
Borrowings under the line of credit bear interest at the bank's prime rate
(10.0% at June 30, 1999) plus 2.25%. The line of credit is terminable at any
time. As of June 30, 1999 there were no amounts outstanding under the line of
credit. Borrowings under the line of credit are collateralized by certain
assets of OSI Singapore and are guaranteed by certain officers of the Company.
Borrowings secured by intercompany receivables are guaranteed by the Company.
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
kroner (approximately $636,000 at June 30, 1999). As of June 30, 1999, no
amounts were outstanding under this line of credit. Borrowings under the line
of credit bear interest at a variable rate, which was 10.1% at June 30, 1999.
OSI Malaysia has a loan agreement with the Hong Kong Bank Malaysia Berhad,
which provides for a bank guarantee line of credit for 2.5 million Malaysia
ringgits (approximately $658,000 at June 30, 1999) for performance bonds and
standby letters of credit, and a 1.0 million Malaysian ringgits overdraft
facility (approximately $263,000 at June 30, 1999). Borrowings under the
overdraft facility bear interest at the bank's base lending rate (9.5% at June
30, 1999) plus 2.25%. At June 30, 1999, the amount outstanding under the
performance bond facility was $310,000 and there were no amounts outstanding
under the overdraft facility. Borrowings under this agreement are secured by
certain assets of OSI Malaysia. These lines expire in October 1999 and the
Company believes that they will be renewed on the same or similar terms.
OSI Malaysia has a loan agreement with Bank Utama, which provides for a
revolving line of credit of up to an amount of 1.5 million Malaysian ringgits
(approximately $395,000 as of June 30, 1999). Borrowings under the line of
credit bear interest at the bank's base lending rate (9.0% at June 30, 1999)
plus 1.75%. As of
28
<PAGE>
June 30, 1999, no amounts were outstanding under this line of credit.
Borrowings under this agreement are secured by certain assets of OSI Malaysia
and are guaranteed by the Company. The line of credit will expire in February
2000 and the Company believes that it will be renewed on the same or similar
terms.
Metorex Security has a loan agreement with a Finnish bank that provide for a
foreign currency overdraft facility up to 2.0 million Finnish markka
(approximately $347,000 at June 30, 1999). At June 30, 1999, approximately
$178,000 was outstanding under the overdraft facility. The agreement also
provides for 1.0 million Finnish Marks (approximately $174,000 at June 30,
1999) for tender and performance bonds. At June 30, 1999, approximately $26,000
was outstanding under the tender and performance bonds facility. Borrowings
under these facilities bear interest at the bank's prime lending rate (3% at
June 30, 1999) plus 1%. The above facilities expire in February 2000, and the
Company believes that they will be renewed at the same of similar terms.
The Company believes that cash from operations, existing cash and lines of
credit will be sufficient to meet its cash requirements for the foreseeable
future.
Foreign Currency Translation
The accounts of the Company's operations in Singapore, Malaysia, England,
Denmark, Finland, Norway and Canada are maintained in Singapore dollars,
Malaysian ringgits, Pounds Sterling, Danish kroner, Finnish markka, Norwegian
kroner and Canadian dollars, 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 of approximately
$39,000 and $743,000 were included in income for fiscal 1998 and 1999,
respectively.
Importance of International Markets
International markets provide the Company with significant growth
opportunities. However, the following events, among others, could adversely
affect the Company's financial results in subsequent periods: periodic economic
downturns in different regions of the world, changes in trade policies or
tariffs, and political instability. For the year ended June 30, 1999, overall
foreign currency fluctuations relative to the U.S. dollar had an immaterial
effect on the Company's consolidated revenues and results of operations. As a
result of changes in monetary policy in Malaysia, including the pegging of the
Malaysian ringgit to the U.S. dollar, the Company believes that its foreign
currency exposure in Malaysia will not be significant in the foreseeable
future. The Company continues to perform ongoing credit evaluations of its
customers' financial condition and, if deemed necessary, the Company requires
advance payments for sales. The Company is monitoring economic and currency
conditions around the world to evaluate whether there may be any significant
effect on its international sales in the future.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations.
Market Risk
The Company is exposed to certain market risks, which are inherent in the
Company's financial instruments and arise from transactions entered into in the
normal course of business. The Company may enter into derivative financial
instrument transactions in order to manage or reduce market risk in connection
with specific foreign currency denominated transactions. The Company does not
enter into derivative financial instrument transactions for speculative
purposes.
The Company has investments in the common stock of certain companies whose
securities are publicly traded. Therefore, the Company faces fluctuations in
the value of these investments as the market price of these investees'
securities changes. The aggregate amount of all such investments is
approximately $1.7 million. At June 30, 1999, the fair market value of all such
investments was approximately $1.2 million.
29
<PAGE>
The Company is subject to interest rate risk on its short-term borrowings
under its bank lines of credit. Borrowings under these lines of credit do not
give rise to significant interest rate risk because these borrowings have short
maturities and are borrowed at variable interest rates. Historically, the
Company has not experienced material gains or losses due to interest rate
changes.
The Company from time to time enters into foreign currency forward contracts
to hedge certain foreign currency transactions and commitments. These contracts
were not significant at June 30, 1999 and had a notional value of approximately
$200,000 with a net unrealized gain of approximately $5,000.
Year 2000 Compliance
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers, and customers that are not Year 2000 compliant,
and to develop, implement, and test remediation and contingency plans to
mitigate these risks. The project comprises of four phases: (1) identification
of risks, (2) assessment of risks, (3) development of remediation and
contingency plans, and (4) implementation and testing.
The Company's Year 2000 project is currently in the assessment phase and,
with respect to certain information systems and products, is in the remediation
phase. The Company's Year 2000 project is being spearheaded by a special task
force comprised of a senior management team as well as other key personnel. The
task force meets on a regular basis to determine and implement the steps
necessary to insure that the Company becomes fully Year 2000 compliant.
Additionally, the Company has established task forces in each of its major
subsidiaries with designated Year 2000 management representation, which report
status to the Year 2000 committee. This mandate is in effect for foreign
subsidiaries as well as U.S. subsidiaries.
The Company has upgraded its critical database and believes that it is Year
2000 compliant. The financial records of the Company's principal U.S.
subsidiaries, Rapiscan U.S.A., UDT Sensors and SMI have also been upgraded and
are Year 2000 compliant. Following an assessment of the Company's financial
records system, it was determined that each subsidiary will have its own Year
2000 compliant system. The estimated completion date for this implementation is
on or before October 31, 1999. The Company has completed an upgrade of the
telephone systems, including voice-mail software, for Rapiscan U.S.A. and UDT
Sensors. The cost of these upgrades to date has not been material. The
Enterprise Resource Planning software used by several of the Company's
operating subsidiaries has been certified as Year 2000 compliant.
The Company is in the assessment and remediation phase of determining Year
2000 compliance of its own products, which are dependent on third party
suppliers and vendors for critical parts. The Company expects to complete this
assessment by September 30, 1999 and expects to be able to complete remediation
as required by October 31, 1999. Based on what the Company knows at this time,
DOS and Windows 95 are not Year 2000 compliant; therefore, the Company's
products which rely on these products are themselves not Year 2000 compliant.
The Company is in the process of acquiring and installing software, within the
Company's products, which is Year 2000 compliant. The Company's products which
are not presently Year 2000 compliant are not affected in terms of performance
in any material respect; however, archiving of information may be affected by
Year 2000 noncompliance. The Company's exposure exists with respect to its
products under warranty, which were manufactured prior to the software upgrade.
In such cases, the Company will offer its customers a software upgrade to a
Year 2000 compliant version. Until the assessment phase is completed, the
Company is not in a position to know if the costs of upgrading the software
used in the manufacture of its products or offering its customers such
upgrading will be material.
Based on current estimates, the Company expects to have completed by
September 30, 1999 a full assessment of all hardware, operating systems and
software applications in use in the Company's information systems, operations
and infrastructure on a worldwide basis. Some upgrading is expected to be
required. The costs of such assessment and upgrading are not expected to be
material. Required upgrading is expected to be completed on or before October
31, 1999. In addition, the Company is in the process of obtaining Year 2000
compliance statements from the manufacturers of the Company's hardware and
software products.
30
<PAGE>
The Company believes that its greatest potential risks are associated with
(i) its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers. The Company is in the process of assessments of its
operations and infrastructure, and at present time no significant problems have
been identified. The Company has asked its critical vendors, suppliers and
customers to complete a Year 2000 survey to assess the status of their
compliance in order to assess the effect it could have on the Company. The
Company has completed distribution of surveys to its critical vendors and
suppliers and in the process of mailing follow-up requests to those vendors and
suppliers who failed to respond to the initial mailing. The Company has
distributed surveys to all of its critical customers and is in the process of
mailing follow-up requests to those customers who failed to respond to the
initial mailing. Due to slow responses from suppliers and customers, the
Company has not yet determined the full extent of contingency planning that may
be required. Based on the status of the assessments made and remediation plans
developed to date, the Company is not in a position to state the total cost of
remediation of all Year 2000 issues. Costs identified to date have not been
material. The Company does not currently expect the costs to be material, and
it expects to be able to fund the total costs through operating cash flows.
However, the Company has not yet completed all of its assessments, developed
remediation for all problems, developed all contingency plans, or completely
implemented or tested all of its remediation plans.
Based on the Company's current analysis and assessment of the state of its
Year 2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of parts, including critical parts, by certain of
the Company's vendors and suppliers. Such delays could cause the Company to
experience delays in shipping its products. The Company is in process of
formulating contingency plans based on review of compliance surveys from its
vendors and suppliers. These plans could include, among other things,
increasing inventory of critical parts in late 1999 to insure an adequate
supply is on hand to minimize shipping delays by the Company of its products.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed
current expectations and become material. In many cases, the Company is relying
on assurances from suppliers that new and upgraded information systems and
other products will be Year 2000 compliant. The Company plans to test such
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed in a timely and
satisfactory way. Additionally, whereas, the Company has made every effort to
obtain Year 2000 compliance status from its critical suppliers and customers it
cannot enforce responses. In those cases where risks could exist, the necessary
steps will be taken either by reserve funding, building inventory or alternate
sources prior to the end of 1999.
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000 compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those
of its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. If the Company
fails to satisfactorily resolve Year 2000 issues related to its products in a
timely manner, it could be exposed to liability to third parties. The Company
is continuing to evaluate Year 2000-related risks and will take such further
corrective actions as may be required.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated herein by reference to
the section entitled "Market Risk" in Management's Discussion and Analysis of
Results of Operations and Financial Condition (Part II, Item 7).
31
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements of the Company are submitted as a separate section
of this Annual Report on Form 10-K on pages F-1 through F-23.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement relating to the 1999 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 15, 1999.
ITEM 11. Executive Compensation
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement relating to the 1999 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 15, 1999.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement relating to the 1999 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 15, 1999.
ITEM 13. Certain Relationships and Related Transactions
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement relating to the 1999 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 15, 1999.
32
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of Report
(1) FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
<TABLE>
<S> <C>
Independent Auditors' Report.......................................... F-1
Consolidated Balance Sheets at June 30, 1998 and 1999................. F-2
Consolidated Statements of Operations for the years ended June 30,
1997, 1998 and 1999.................................................. F-3
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1997, 1998 and 1999......................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1998 and 1999.................................................. F-5
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES INCLUDED IN ITEM 8:
Schedule II--Valuation and Qualifying Accounts
No other financial statement schedules are presented as the required
information is either not applicable or included in the Consolidated
Financial Statements or notes thereto.
(3) EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed as
part of this Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OSI SYSTEMS, INC.
(Registrant)
Date: September 28, 1999 /s/ Ajay Mehra
By: _________________________________
Ajay Mehra
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Deepak Chopra Chairman of the Board, September 28, 1999
_____________________________ President and Chief Executive
Deepak Chopra Officer (Principal Executive
Officer)
/s/ Ajay Mehra Vice President, Chief September 28, 1999
_____________________________ Financial Officer (Principal
Ajay Mehra Financial and Accounting
Officer), Secretary and
Director
/s/ Steven C. Good Director September 28, 1999
_____________________________
Steven C. Good
/s/ Meyer Luskin Director September 28, 1999
_____________________________
Meyer Luskin
/s/ Madan G. Syal Director September 28, 1999
_____________________________
Madan G. Syal
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
OSI Systems, Inc.:
We have audited the accompanying consolidated balance sheets of OSI Systems,
Inc. (the "Company") and its subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audits
also included the financial schedules listed at Item 14. These financial
statements and financial statement schedule 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 the Company as of June 30,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
September 23 , 1999
F-1
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1999
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
ASSETS (Note 4)
Current Assets:
Cash and cash equivalents (Note 1)......................... $22,447 $ 7,241
Investment securities available for sale (Note 1).......... 1,708
Accounts receivable, net of allowance for doubtful accounts
of $551 and $860 at June 30, 1998 and 1999, respectively
(Note 1).................................................. 24,254 29,330
Other receivables (Note 2)................................. 1,990 1,862
Inventory (Note 1)......................................... 21,705 24,481
Prepaid expenses........................................... 841 1,018
Deferred income taxes (Notes 1 and 6)...................... 1,381 1,108
Income taxes receivable (Notes 1 and 6).................... 1,853
------- -------
Total current assets..................................... 72,618 68,601
Property and Equipment, Net (Notes 1 and 4).................. 11,466 14,486
Intangible and Other Assets, Net (Notes 1, 2 and 3).......... 2,738 8,581
Deferred Income Taxes (Notes 1 and 6)........................ 1,703
------- -------
Total........................................................ $86,822 $93,371
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit (Note 4).............................. $ 198 $ 8,678
Current portion of long-term debt (Notes 1, 5 and 12)...... 633 292
Accounts payable (Note 1).................................. 8,560 9,145
Accrued payroll and related expenses....................... 2,400 2,399
Income taxes payable (Notes 1 and 6)....................... 2,517 717
Advances from customers.................................... 1,808 996
Accrued warranties......................................... 1,948 1,984
Other accrued expenses and current liabilities............. 2,137 2,922
------- -------
Total current liabilities................................ 20,201 27,133
Long-Term Debt (Notes 1 and 5)............................... 412 117
Deferred Income Taxes (Notes 1 and 6)........................ 294 339
------- -------
Total liabilities........................................ 20,907 27,589
------- -------
Commitments and Contingencies (Notes 7 and 12)
Shareholders' Equity (Notes 4, 8 and 9):
Preferred stock, no par value; authorized, 10,000,000
shares; no shares issued or outstanding at June 30, 1998
and 1999, respectively Common stock, no par value;
authorized, 40,000,000 shares; issued and outstanding,
9,691,915 and 9,732,415 shares at June 30, 1998 and 1999,
respectively.............................................. 49,131 49,230
Treasury stock (Note 9).................................... (438)
Retained earnings.......................................... 17,419 18,160
Accumulated other comprehensive income (Note 1)............ (635) (1,170)
------- -------
Total shareholders' equity............................... 65,915 65,782
------- -------
Total........................................................ $86,822 $93,371
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues (Note 1)................................... $77,628 $93,918 $101,763
Cost Of Goods Sold.................................. 56,174 66,952 71,705
------- ------- --------
Gross Profit........................................ 21,454 26,966 30,058
------- ------- --------
Operating Expenses:
Selling, general and administrative expenses
(Notes 10 and 11)................................ 11,265 12,670 17,452
Research and development (Note 1)................. 2,504 3,790 5,711
Stock option compensation (Note 8)................ 856
Goodwill amortization (Note 1).................... 39 106 595
Asset impairment charge (Note 3).................. 5,189
In process research and development (Note 3)...... 2,579
Restructuring costs (Note 1)...................... 458
------- ------- --------
Total operating expenses........................ 14,664 16,566 31,984
------- ------- --------
Income (Loss) From Operations....................... 6,790 10,400 (1,926)
Interest Expense (Income) (Notes 4, 5 and 10)....... 1,197 (600) (102)
------- ------- --------
Income (Loss) Before Provision for Income Taxes..... 5,593 11,000 (1,824)
Provision (Benefit) for Income Taxes (Notes 1 and
6)................................................. 1,416 2,752 (2,565)
------- ------- --------
Net Income.......................................... $ 4,177 $ 8,248 $ 741
======= ======= ========
Earnings Per Common Share (Note 1).................. $ 1.72 $ 0.94 $ 0.08
======= ======= ========
Earnings Per Common Share--
Assuming dilution (Note 1)........................ $ 0.68 $ 0.92 $ 0.08
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Preferred Common Treasury Accumulated
------------------- ----------------- ----------------- Other
Number Number Number Retained Comprehensive Comprehensive
of Shares Amount of Shares Amount of Shares Amount Earnings Income Income Total
---------- ------- --------- ------- --------- ------ -------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
acquisition...... 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
Comprehensive
income:
Net income....... 4,177 $4,177 4,177
Other
comprehensive
income--
translation
adjustment....... 145 145 145
------
Comprehensive
income........... $4,322
---------- ------- --------- ------- ------- ------- ====== -------
Balance, June 30,
1997.............. 6,156,528 7,367 9,171 271 16,809
Initial public
offering (Note
9)............... 3,330,000 40,938 40,938
Exercise of stock
options.......... 205,387 508 508
Tax benefit of
stock options
exercised........ 318 318
Comprehensive
income:
Net income....... 8,248 $8,248 8,248
Other
comprehensive
income--
translation
adjustment....... (906) (906) (906)
------
Comprehensive
income........... $7,342
---------- ------- --------- ------- ------- ------- ====== -------
Balance, June 30,
1998.............. 9,691,915 49,131 17,419 (635) 65,915
Exercise of stock
options.......... 40,500 99 99
Treasury stock
purchased........ (85,000) $(438) (438)
Comprehensive
income:
Net income....... 741 $ 741 741
Other
comprehensive
income--
translation
adjustment....... (49) (49) (49)
Unrealized loss
on available for
sale securities.. (486) (486) (486)
------
Comprehensive
income........... $ 206
---------- ------- --------- ------- ------- ----- ------- ------- ====== -------
Balance, June 30,
1999.............. -- $ -- 9,732,415 $49,230 (85,000) $(438) $18,160 $(1,170) $65,782
========== ======= ========= ======= ======= ===== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................ $ 4,177 $ 8,248 $ 741
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for losses on accounts receivable....... 389 122 86
In-process research and development............... 2,579
Depreciation and amortization..................... 2,302 2,330 3,681
Asset impairment charge........................... 5,189
Stock option compensation......................... 856
Deferred income taxes............................. (900) (314) (1,384)
Gain on sale of property and equipment............ (13) (498)
Changes in operating assets and liabilities, net
of business acquisition:
Accounts receivable.............................. (1,980) (9,481) (4,273)
Other receivables................................ (1,530) 462 (570)
Inventory........................................ (4,573) (3,995) (395)
Prepaid expenses................................. 96 (325) (194)
Accounts payable................................. 1,026 1,352 318
Accrued payroll and related expenses............. (60) 840 (660)
Income taxes payable............................. 1,005 884 (1,775)
Advances from customers.......................... 1,448 (603) (928)
Increase in prepaid income taxes receivable...... (1,853)
Accrued warranty................................. 574 989 (26)
Other accrued expenses and current liabilities... 527 (932) 42
------- ------- --------
Net cash provided by (used in) operating
activities..................................... 3,357 (436) 80
------- ------- --------
Cash Flows from Investing Activities:
Increase in investment securities................. (2,194)
Cash paid for equity investments.................. (1,202)
Proceeds from sale of property and equipment...... 46 861
Additions to property and equipment............... (2,182) (7,487) (4,607)
Cash paid for business acquisition, net of cash
acquired......................................... (848) (750) (16,041)
Other assets...................................... 23 194 (188)
------- ------- --------
Net cash used in investing activities........... (3,007) (7,997) (23,371)
------- ------- --------
Cash Flows from Financing Activities:
Net proceeds from (repayment of) bank lines of
credit........................................... 1,014 (8,797) 8,495
Payments on senior subordinated debt.............. (350)
Payments on long-term debt........................ (3,983) (2,411) (669)
Proceeds from issuance of long-term debt.......... 2,647
Proceeds from initial public offering and exercise
of stock options and warrants.................... 146 41,764 99
Treasury stock.................................... (438)
------- ------- --------
Net cash (used in) provided by financing
activities..................................... (526) 30,556 7,487
------- ------- --------
Effect of Exchange Rate Changes on Cash............ 148 (229) 598
------- ------- --------
Net (Decrease) Increase in Cash Equivalents........ (28) 21,894 (15,206)
Cash and Cash Equivalents, Beginning of Year....... 581 553 22,447
------- ------- --------
Cash and Cash Equivalents, End of Year............. $ 553 $22,447 $ 7,241
======= ======= ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest.......................................... $ 1,197 $ 452 $ 572
Income taxes...................................... $ 1,511 $ 1,869 $ 2,475
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(Dollars in Thousands)
Supplemental Disclosures of Noncash Investing and Financing Activities:
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,
were issued 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>
<S> <C>
Fair value of assets acquired...................................... $2,350
Goodwill........................................................... 588
Cash paid for the capital stock.................................... (916)
------
Liabilities assumed................................................ $2,022
======
</TABLE>
In 1998, the Company acquired the "Secure" product line from ThermoSpectra
In conjunction with the acquisition, assets were acquired as follows:
<TABLE>
<S> <C>
Equipment............................................................. $ 80
Patents............................................................... 20
Inventory............................................................. 650
----
Cash paid............................................................. $750
====
</TABLE>
During the year ended June 30, 1999, the Company completed the following
acquisitions:
In September 1998, the Company acquired all of the capital stock of
Osteometer MediTech A/S ("Osteometer")
In November 1998, the Company acquired the security business of Metorex
International Oy ("Metorex Security")
In November 1998, the Company acquired all of the capital stock of
Silicon Microstructures, Inc. ("SMI")
In December 1998, the Company acquired most of the assets of Corrigan
Canada Ltd. ("Corrigan")
In January 1999, the Company purchased the product line of Aristo
Medical Products, Inc. ("Aristo")
In conjunction with the acquisitions, assets were acquired and liabilities
assumed as follows:
<TABLE>
<CAPTION>
Metorex
Osteometer Security SMI Corrigan Aristo
---------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Fair value of assets acquired.... $ 3,675 $ 914 $ 806 $1,117 $250
Goodwill and identified
intangible assets............... 3,984 3,597 1,470 110 27
In process research and
development..................... 1,957 204 418
Liabilities assumed.............. (1,731) (751)
------- ------ ------ ------ ----
Cash paid........................ $ 7,885 $4,715 $2,694 $ 476 $277
======= ====== ====== ====== ====
</TABLE>
F-6
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
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 and silicon
pressure-sensor microstructure technology. The Company designs and manufactures
optoelectronic and pressure-sensor devices and value-added subsystems for
original equipment manufacturers ("OEMs") in a broad range of applications,
including security, medical diagnostics, telecommunications, gaming, 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 and medical
imaging systems that it markets worldwide to end users. The Company markets its
security and inspection products under the "Rapiscan," "Secure" and "Metor"
brand names. These products are used to inspect baggage, cargo, people 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 Company also issued additional shares of the
Company's common stock to the selling shareholders of one of the subsidiaries.
The number of shares issued was based upon the pre-tax net income of the
subsidiary for the year ended June 30, 1997, and amounted to 27,654 shares.
These shares have been included in the number of shares issued for minority
interest acquisitions in the accompanying consolidated statement of
shareholders' equity. The excess of the fair value of the common stock issued
of $1,566,000 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.
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
Investment Securities
The Company's investment securities are composed of equity securities that
have been classified as available-for-sale securities. The equity securities
are carried at their fair market value based upon the quoted market prices of
those investments at June 30, 1999. Unrealized gains and losses on equity
securities are included in accumulated other comprehensive income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash, cash equivalents and accounts receivable. At June
30, 1999, approximately 62% of the Company's cash and cash equivalents were
held at one financial institution. The Company performs ongoing credit
valuations of its customers' financial condition and provides an allowance for
potential credit losses.
Inventory
Inventory is stated at the lower of cost or market; cost is determined on
the first-in, first-out method.
F-7
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Inventory at June 30, 1998 and 1999 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Raw materials................................................ $12,200 $11,963
Work-in-process.............................................. 6,030 8,000
Finished goods............................................... 3,475 4,518
------- -------
Total........................................................ $21,705 $24,481
======= =======
</TABLE>
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, 1998 and 1999 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Land and buildings.......................................... $ 4,211 $ 4,211
Equipment................................................... 9,046 11,969
Leasehold improvements...................................... 2,768 4,133
Tooling..................................................... 1,953 2,198
Furniture and fixtures...................................... 824 1,107
Computer.................................................... 2,202 3,042
Vehicles.................................................... 142 200
------- -------
Total....................................................... 21,146 26,860
Less accumulated depreciation and amortization.............. 9,680 12,374
------- -------
Property and equipment, net................................. $11,466 $14,486
======= =======
</TABLE>
Intangibles and Other Assets
Intangible and other assets at June 30, 1998 and 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Software development costs.................................... $ 588 $ 588
Goodwill and identified intangible assets..................... 2,142 6,942
Joint venture and equity investments.......................... 108 1,311
Deposits...................................................... 168 102
Other......................................................... 422 721
------ ------
Total......................................................... 3,428 9,664
Less accumulated amortization................................. 690 1,083
------ ------
Intangible and other assets, net.............................. $2,738 $8,581
====== ======
</TABLE>
F-8
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
At June 30, 1998 and 1999, goodwill and identified intangible assets
consisted of the following as a result of the following acquisitions (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Acquisition of minority interests............................. $1,554 $1,554
Acquisition of Advanced Micro Electronics AS.................. 588 588
Acquisition of Metorex Security............................... 3,193
Acquisition of SMI............................................ 1,470
Acquisition of Corrigan....................................... 110
Acquisition of Aristo......................................... 27
------ ------
$2,142 $6,942
====== ======
</TABLE>
Goodwill and identified intangible assets are amortized on a straight-line
basis over periods ranging from 12 to 20 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 that 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 three years ended June 30, 1999.
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. Impairment losses for Osteometer have been
disclosed in Note 3 to the financial statements.
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.
Foreign Exchange Instruments
The Company's use of derivatives is limited to the purchase of foreign
exchange contracts in order to minimize foreign exchange transaction gains and
losses. The Company purchases forward contracts to hedge commitments to acquire
inventory for sale and does not use the contracts for trading purposes. As of
June 30, 1999, there was approximately $200,000 in outstanding foreign exchange
contracts. The estimated fair value of these contracts, based on quoted market
prices from banks, closely approximated their carrying value at June 30, 1999.
F-9
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
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,
Denmark, Finland, Canada and the United Kingdom are maintained in Singapore
dollars, Malaysian ringgits, Norwegian kroner, Danish kroner, Finnish markka,
Canadian dollars 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 gains (losses) of
approximately $68,000, $(39,000) and $(743,000) were included in income for the
years ended June 30, 1997, 1998 and 1999, respectively.
Restructuring Costs
The Company adopted a restructuring plan in the quarter ended March 31,
1999. In terms of the plan the Company recorded $458,000 of restructuring costs
associated primarily with the termination of certain employees and integration
of certain activities of subsidiaries. All of the restructuring costs have been
incurred and recorded before March 31, 1999.
Earnings per Share
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings per Share." The Company has reflected the provisions of SFAS
No. 128 in the accompanying financial statements for all periods presented.
Earnings per common share are computed using the weighted average number of
shares outstanding during the period. Earnings per common share--assuming
dilution are computed using the weighted average number of shares outstanding
during the period and dilutive common stock equivalents from the Company's
stock option plans, and in the 1997 period common equivalent shares from
convertible debt and preferred stock, calculated using the treasury stock and
if converted methods.
The following table reconciles the numerator and denominator used in
calculating earnings per share and earnings per common share--assuming
dilution.
<TABLE>
<CAPTION>
Year Ended June 30, 1997
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Earnings per common share................. $4,177,000 2,430,347 $1.72
=====
Income available to common stockholders
Effect of dilutive securities
Convertible subordinated debt............. 92,000 2,098,125
Convertible preferred stock............... 1,689,815
Options, treasury stock method............ 45,676
---------- ---------
Earnings per common share--assuming
dilution
Income available to common stockholders
and assumed conversions.................. $4,269,000 6,263,963 $0.68
========== ========= =====
</TABLE>
F-10
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Year Ended June 30, 1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Earnings per common share
Income available to common stockholders... $8,248,000 8,753,702 $0.94
=====
Effect of dilutive securities
Options, treasury stock method............ 202,217
---------
Earnings per common share--assuming
dilution
Income available to common stockholders
and assumed conversion................... $8,248,000 8,955,919 $0.92
========== ========= =====
<CAPTION>
Year Ended June 30, 1999
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Earnings per common share
Income available to common stockholders... $ 741,000 9,706,218 $0.08
=====
Effect of dilutive securities
Convertible subordinated debt
Convertible preferred stock
Options, treasury stock method............ 122,753
---------- ---------
Earnings per common share--assuming
dilution
Income available to common stockholders
and assumed conversions.................. $ 741,000 9,828,971 $0.08
========== ========= =====
</TABLE>
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which revises
the accounting for derivative financial instruments. This statement requires
that all derivative instruments be recorded on the balance sheets at their fair
values. Changes in the fair value of derivatives will be recorded in income or
other comprehensive income. The Company is currently analyzing the impact of
this statement, which is required to be adopted in 2001, and does not expect it
to have a material impact on the Company's financial position or results of
operations.
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.
2. Joint Ventures and Equity Investments
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%, 10.5% and 4.5% ownership interest, respectively,
in the joint venture. The Company's investment of approximately $183,000
consists of an initial investment of $108,000 and the Company's equity in the
earnings of the joint venture since inception of $75,000.
F-11
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The joint venture was formed for the purpose of the manufacture, assembly,
service and testing of x-ray security and other products. Some of the Company's
subsidiaries are suppliers to the joint venture partner, which 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 years ended June 30, 1998 and 1999, the Company earned a
technical fee from the joint venture in the amount of $144,000 and $107,000,
respectively. At June 30, 1999, $107,000 was unpaid and included in other
receivables in the accompanying consolidated financial statements.
In August 1998, the Company invested $315,000, including professional fees
associated with the investment, in Square One, Inc. The Company's investment
including goodwill of $242,000 is accounted for under the equity method and
included in other assets in the accompanying financial statements. The
Company's equity in the losses of the investment through June 30, 1999 was not
significant. Square One, Inc. develops and manufactures infrared-based patient
monitoring devices and subsystems.
During the year, the Company invested $1,002,000, including professional
fees associated with the acquisition, in TFT Medical, Inc. for an equity share
of 40.3%. The Company's investment of $1,002,000 includes goodwill of $740,000,
which is the excess of the purchase price over the Company's share of the net
assets acquired. At June 30, 1999, the Company's equity in the losses of the
investment is $187,000 and is included in selling, general and administrative
expenses. The investment and equity losses are included in other assets in the
accompanying financial statements. TFT Medical, Inc. develops new generation
pulse oximeter instruments and probes for use in the medical field.
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.
During fiscal 1998, the Company acquired the "Secure" product line from
ThermoSpectra Corporation. The cash purchase price amounted to $750,000. The
purchased assets include, among other things, equipment, inventory and
intellectual property rights relating to x-ray machines and x-ray backscatter
detection technology (including patents and patent applications).
On September 2, 1998, the Company acquired the capital stock of Osteometer,
a Danish manufacturer of bone densitometers for the diagnosing of osteoporosis.
The cash purchase price amounted to $7,885,000, including professional fees
associated with the acquisition. The acquisition has been accounted for by the
purchase method of accounting, and, accordingly, based on the valuation
obtained, the purchase price has been allocated to the assets acquired of
$3,675,000 and liabilities assumed of $1,731,000, in-process research and
development of $1,957,000 and identified intangible assets of $3,984,000.
Osteometer experienced continued losses due to the worldwide decline in the
bone densometer market. As a result of the aforementioned circumstances, the
Company recorded an asset impairment charge of $5,189,000, which included the
write-off of $3,735,000 of goodwill and $1,454,000 of other assets. The asset
impairment charge was calculated as the difference between the carrying amount
of the assets and the expected net realizable value of the assets.
F-12
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Subsequent to the year ended June 30, 1999, the Company decided to close the
manufacturing facilities of Osteometer in Denmark within the next several
months and currently intends to relocate certain of these operations to the
U.S. facilities of the Company. The Company will incur additional costs related
to this closure and relocation in fiscal 2000. Based on its assessment to date,
the Company currently estimates these costs to be in the range of $2,000,000 to
$2,700,000. As the Company continues to proceed with the closure and intended
relocation of these manufacturing facilities, it will be able to more
accurately estimate the range of these costs, which may change from the current
estimate.
On November 4, 1998, the Company purchased the security products business of
Metorex Security of Espoo, Finland. The Company paid $4,715,000 in cash,
including professional fees associated with the acquisition. The Company may
pay up to an additional $1,500,000 in cash, at a later date, based upon future
sales. The acquisition has been accounted for by the purchase method of
accounting, and, accordingly, based on the valuation obtained, the purchase
price has been allocated to the assets acquired of $914,000, in-process
research and development of $204,000, and goodwill and identified intangible
assets of $3,597,000. Goodwill and identified intangible assets are amortized
over a period of 20 and 12 years, respectively.
On November 17, 1998, the Company acquired all the outstanding stock of SMI,
a silicon pressure sensor manufacturer, from Exar Corporation of Fremont,
California. The Company paid $2,694,000 in cash, including professional fees
associated with the acquisition. The Company may pay up to an additional
$3,900,000 million in cash, at a later date, based on future sales. The
acquisition has been accounted for by the purchase method of accounting, and,
accordingly, based on the valuation obtained, the purchase price has been
allocated to the assets acquired of $806,000, in-process research and
development of $418,000 and identified intangible assets of $1,470,000.
Identified intangible assets are amortized over a period of 12 years.
On December 11, 1998, the Company purchased most of the assets and assumed
certain liabilities of Corrigan, a Canadian security products manufacturer. The
Company paid $476,000 in cash, including professional fees associated with the
acquisition. 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 $1,117,000 and liabilities assumed of $751,000, 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 the net assets acquired
is being amortized over a period of 20 years.
On January 31, 1999, the Company purchased the product line of Aristo.
Aristo develops and manufactures new generation pulse oximeter probes for use
in the medical field. The purchase price amounted to $277,000 in cash,
including professional fees associated with the acquisition. 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 $250,000, based
on the estimated fair values of the assets at the date of acquisition. The
excess of the purchase price over the fair vale of the assets acquired is being
amortized over a period of 20 years.
F-13
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
4. Bank Agreements
At June 30, 1998 and 1999, line of credit borrowings consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Line of credit--U.S........................................... $ 8,500
Line of credit--Singapore
Line of credit--Norway........................................ $ 198
Line of credit--Rapiscan U.K..................................
Line of credit--Metorex Finland............................... 178
----- -------
Total bank lines of credit.................................... $ 198 $ 8,678
===== =======
</TABLE>
The Company maintains a senior loan agreement with a U.S. bank, which
provides for a $10,000,000 revolving line of credit, a $3,000,000 equipment
line of credit and a $15,000,000 line of credit for acquisitions with certain
restrictions and $3,000,000 term loan. Borrowings under the line of credit bear
interest at the bank's prime rate (7.75% at June 30, 1999) or, at the Company's
option, at a fixed rate as quoted by the bank upon request for specific
advances and terms. Interest is payable monthly, and the lines expire in
November 2000. Borrowings under the senior loan agreement are collateralized by
substantially all of the assets of the Company's U.S. subsidiaries. At June 30,
1999, there was $8,500,000 outstanding under the acquisition 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, 1999, approximately $66,000 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 was in violation of a covenant for the quarter ended
June 30, 1999, due to the asset impairment charge. The covenant was
subsequently waived by the bank.
The Company has a credit agreement with a U.S. bank that provides for
borrowings up to an amount of $2,084,903. Included in total borrowings is a
facility for the purchase of foreign currencies of $1,000,000. Borrowings under
the facility bear interest at the bank's prime rate (7.75% at June 30, 1999)
plus 5%. Interest is payable on demand. Borrowings under the current agreement
are secured by certain of the Company's assets. At June 30, 1999, there were no
amounts outstanding under the revolving line of credit. The agreement also
provides a commitment for letters of credit for a specific customer up to
$1,885,000. At June 30, 1999, approximately $850,000 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,
payments of dividends and capital expenditures. The above facility expires in
November 1999, and the Company has not yet decided how it will handle these
facilities upon their expiration.
Opto Sensors Pte. Ltd. ("OSP") has a loan agreement with a Singapore bank
that provides for a revolving line of credit up to 2,900,000 Singapore dollars
(approximately US $1,706,000 at June 30, 1999). Borrowings under the line of
credit bear interest at the bank's prime rate (10% at June 30, 1999) plus
2.25%. Interest is payable monthly, and borrowings are due on demand.
Borrowings under the line of credit are collateralized by certain assets of OSP
and are guaranteed by certain officers of the Company. Borrowings secured by
intercompany receivables are guaranteed by the Company. At June 30, 1999, there
were no amounts outstanding under the revolving line of credit.
AME has a loan agreement with a Norwegian bank that provides for revolving
line of credit borrowings up to 5,000,000 Norwegian kroner (approximately US
$636,000 at June 30, 1999). Borrowings under the line
F-14
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
of credit bear interest at a variable rate, which was 10.1% at June 30, 1999.
Interest is payable quarterly. Borrowings under the line of credit are
collateralized by certain AME assets. At June 30, 1999, there were no amounts
issued and outstanding under the line of credit.
Rapiscan U.K. has a loan agreement with a U.K. bank that provides for an
overdraft facility up to a maximum amount of 2,000,000 pounds sterling
(approximately US $3,140,000 at June 30, 1999) outstanding at any one time,
which amounts are secured by certain assets of Rapiscan U.K. At June 30, 1999,
no amounts were outstanding under the overdraft facility. Outstanding
borrowings bear interest at a base rate (7.5% at June 30, 1999) plus 1.5% per
annum. The agreement also provides for a 1,000,000 pounds sterling
(approximately US $1,570,000 at June 30, 1999) facility for tender and
performance bonds and a 1,000,000 pounds sterling (approximately US $1,570,000
at June 30, 1999) facility for the purchase of foreign exchange contracts.
These facilities are secured by certain assets of Rapiscan U.K., and the
Company has guaranteed Rapiscan U.K.'s obligation under the performance bond
facility. As of June 30, 1999, $277,000 was outstanding under the performance
bond facility, and Rapiscan U.K. had purchased forward exchange contracts in
the amount of $200,000. The above facilities expire in January 2000, and the
Company believes that they will be renewed on the same or similar terms.
A subsidiary has a loan agreement with a Malaysian bank that provides for a
revolving line of credit up to 1,500,000 Malaysian ringgits (approximately US
$395,000 at June 30, 1999). Borrowings under the line of credit bear interest
at the bank's base lending rate (9% at June 30, 1999) plus 1.75%. Interest is
payable monthly. No amounts were outstanding under this agreement at June 30,
1999. Borrowings under this agreement are secured by certain assets of the
subsidiary. The above facility expires in February 2000, and the Company
believes that it will be renewed on the same or similar terms.
A subsidiary has a loan agreement with a Malaysian bank that provides for
performance bonds and standby letters of credit of 2,500,000 Malaysian ringgits
(approximately US $658,000 at June 30, 1999). As of June 30, 1999, $310,000 was
outstanding under the loan agreement. The agreement also provides for overdraft
borrowings up to 1,000,000 Malaysian ringgits (approximately US $263,000 at
June 30, 1999). Borrowings under the overdraft facility bear interest at the
bank's base lending rate (9.5% at June 30, 1999) plus 2.25%. At June 30, 1999,
there were no amounts outstanding under the facility. Borrowings under this
agreement are secured by certain assets of the subsidiary. The above facility
expires in October 1999, and the Company believes that it will be renewed on
the same or similar terms.
Metorex Security, Finland, has a loan agreement with a Finnish bank that
provides for a foreign currency overdraft facility up to 2,000,000 Finnish
markka (approximately US $347,000 at June 30, 1999). At June 30, 1999,
approximately $178,000 was outstanding under the overdraft facility. The
agreement also provides for 1,000,000 Finnish markka (approximately US $174,000
at June 30, 1999) for tender and performance bonds. At June 30, 1999,
approximately $26,000 was outstanding under the tender and performance bonds
facility. Borrowings under the facility bear interest at the bank's prime
lending rate (3% at June 30, 1999) plus 1%. The above facilities expire in
February 2000, and the Company believes that they will be renewed on the same
or similar terms.
F-15
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
5. Long-Term Debt
At June 30, 1998 and 1999, long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
----- ----
<S> <C> <C>
Term loan payable to a Norwegian bank, interest due quarterly at
a rate of 7%, principal due in monthly installments of $8,680.
The outstanding balance was paid in full in September 1998...... $ 312
Liability under settlement agreements, interest. Treasury bill
rate (5.055% at June 30, 1998). The outstanding balance was paid
in full in March 1999........................................... 400
Capital lease payable in monthly installments of $10,860 until
paid in full on November 1, 2000. Interest is due monthly at a
rate of 9.2%.................................................... 310 $158
Interest-free subsidy payable to a Danish government institution
based on future product sales of a particular product........... 174
Other............................................................ 23 77
----- ----
1,045 409
Less current portion of long-term debt........................... 633 292
----- ----
Long-term portion of debt........................................ $ 412 $117
===== ====
Fiscal year principal payments of long-term debt as of June 30, 1999 are as
follows (in thousands):
2000............................................................. $292
2001............................................................. 117
----
Total............................................................ $409
====
</TABLE>
6. Income Taxes
For financial reporting purposes, income before provision for income taxes
and minority interest includes the following components (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Pre-tax income:
United States.................................... $2,655 $ 4,505 $ 1,838
Foreign.......................................... 2,938 6,495 (3,662)
------ ------- -------
Total pre-tax income (loss)........................ $5,593 $11,000 $(1,824)
====== ======= =======
</TABLE>
The Company's provision for income taxes is composed of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal........................................... $1,256 $1,729 $(1,946)
State............................................. 24 246 290
Foreign........................................... 1,036 1,091 475
------ ------ -------
2,316 3,066 (1,181)
Deferred............................................ (900) (314) (1,384)
------ ------ -------
Total provision..................................... $1,416 $2,752 $(2,565)
====== ====== =======
</TABLE>
F-16
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
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, 1999, undistributed earnings of the foreign subsidiaries
amounted to approximately $4,998,000. It is not practicable to determine the
amount of income or withholding tax that would be payable upon the remittance
of those earnings.
Deferred income tax assets (liabilities) at June 30, 1998 and 1999 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
State income taxes........................................ $ 1,585 $ 1,892
Federal income tax credit carryforwards................... 358
Net operating loss carryforwards.......................... 1,208
Other assets.............................................. 644 1,483
------- -------
Total deferred income tax assets.......................... 2,229 4,941
------- -------
Depreciation.............................................. 67 (406)
Capitalized software development costs.................... (217) (217)
State income taxes........................................ (462) (772)
Revitalization zone deductions............................ (530)
Other liabilities......................................... (1,074)
------- -------
Total deferred income tax labilities (1,142) (2,469)
------- -------
Net deferred income taxes................................. $ 1,087 $ 2,472
======= =======
</TABLE>
As of June 30, 1999, the Company has federal and state net operating loss
carryforwards of approximately $2,718,000 and $2,904,000, respectively. The
Company's federal and state net operating losses will begin to expire in the
tax years ending June 30, 2019 and 2004, respectively. The Company also has
federal research and experimental credit carryforwards and state research and
experimental and revitalization zone credit carryforwards of approximately
$343,000 and $1,892,000, respectively. The Company's federal and state credit
carryforwards will begin to expire in tax years ending June 30, 2019 and 2014,
respectively.
No valuation allowance for deferred tax assets was required for the years
ended June 30, 1998 and 1999, as management believes it is more likely than not
that the Company will generate sufficient taxable income to realize its
deferred tax assets.
The consolidated effective income tax rate differs from the federal
statutory income tax rate due primarily to the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ------
<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............................................. (4.7) (1.1) (19.6)
Nontaxable earnings of FSC........................... (4.9) (1.3) (13.6)
Research and development tax credits................. (1.7) (1.7) (11.8)
Foreign income subject to tax at other than federal
statutory rate...................................... (1.0) (10.9) (95.6)
Foreign losses with no foreign tax benefits.......... 26.1
In process research and development.................. 7.9
Other................................................ 2.6 5.0 2.4
---- ----- ------
Effective income tax rate............................ 25.3% 25.0% (139.2)%
==== ===== ======
</TABLE>
F-17
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
7. Commitments and Contingencies
The Company leases some of 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. Future minimum lease payments under such
leases as of June 30, 1999 are as follows:
<TABLE>
<S> <C>
2000.......................................................... $1,549,000
2001.......................................................... 1,413,000
2002.......................................................... 1,062,000
2003.......................................................... 957,000
2004.......................................................... 818,000
2005 and thereafter........................................... 3,687,000
----------
Total......................................................... $9,486,000
==========
</TABLE>
Total rent expense included in the accompanying consolidated financial
statements was $921,000, $1,013,000 and $1,968,000 for the years ended June 30,
1997, 1998 and 1999, respectively.
The Company is involved in various claims and legal proceedings arising out
of the conduct of its business. In the opinion of the Company's management
after consultation with outside legal counsel, the ultimate disposition of such
proceedings, will not have a materially adverse effect on the Company's
consolidated financial position or future results of operations.
8. 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
with the advice of and input from the Compensation Committee.
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, which determines the
terms and conditions of each grant, with the advice of and input from the
Compensation Committee. 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 10% 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 five 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 of 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 prices.
F-18
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The following summarizes stock option activity for the years ended June 30,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
Option Price
Number --------------------
of Weighted
Options Average Total
-------- -------- -----------
<S> <C> <C> <C>
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
Granted......................................... 168,000 10.10 1,696,000
Exercised....................................... (205,387) 2.47 (508,000)
Canceled........................................ (10,187) 9.34 (95,000)
-------- -----------
Outstanding, June 30, 1998...................... 812,912 9.12 7,412,000
Granted......................................... 180,250 7.43 1,339,000
Exercised....................................... (40,500) 2.43 (99,000)
Canceled........................................ (144,800) 10.29 (1,490,000)
-------- -----------
Outstanding, June 30, 1999...................... 807,862 8.87 $ 7,162,000
======== ===========
</TABLE>
The following summarizes pricing and term information for options
outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted Weighted Weighted
Number Average Average Exercisable Average
Range of Outstanding at Remaining Exercise at Exercise
Exercise Prices June 30, 1999 Contractual Life Price June 30, 1999 Price
--------------- -------------- ---------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$2.00 35,250 0.6 $ 2.00 35,250 $ 2.00
2.33 to
3.33 137,175 2.3 2.74 137,175 2.74
6.56 to
7.00 124,000 4.5 6.89
10.00 to
11.01 151,000 4.0 10.11 37,750 10.11
11.50 to
13.50 360,437 3.0 12.03 180,218 12.03
------- -------
$2.00 to
13.50 807,862 3.2 $ 8.87 390,393 $ 7.67
======= =======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The estimated fair value of options
granted during 1997, 1998 and 1999 pursuant to SFAS No. 123 was approximately
$1,054,000, $768,000 and $1,272,000, respectively. Had the Company adopted SFAS
No. 123, pro forma net income would have been $4,058,000, $7,787,000 and
$(213,000), and pro forma net income per share would have been $0.64, $0.87 and
$(0.02) for 1997, 1998 and 1999, 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 of zero and volatility
of 71% (1998 and 1997, 44% and 0%, respectively), a risk-free interest rate of
5.67% (1998 and 1997, 5.47% and 6.53%, respectively) and expected option lives
of five years.
9. 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-19
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
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, 1998 and 1999.
In connection with the acquisition of the minority interest of a subsidiary
in November 1996 (see Note 1), the Company granted the selling
shareholders/employees 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.
The Company's Registration Statement for its initial public offering of
securities (File No. 333-29179) became effective on October 1, 1997, when the
Company issued 3,330,000 shares of its common stock for net proceeds of
approximately $41,000,000.
In March 1999, the Board of Directors instituted a treasury stock program
under which the Company is authorized to purchase up to a total of 2,000,000
shares for reissuance in future proceeds. The Company purchased 85,000 shares
at a cost of $438,000 during fiscal 1999. These shares are disclosed as
treasury stock in the accompanying financial statements.
10. 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 cost of sales,
selling, general and administrative expenses for the years ended June 30, 1997,
1998 and 1999 are approximately $111,000, $99,000 and $103,000 for messenger
service and auto rental; $82,000, $186,000 and $76,000 for printing services;
and $11,000, $13,000 and $4,000 for professional services, respectively. For
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 had made loans to the
Company under agreements subordinating such loans to the Company's bank
borrowings (see Notes 4 and 5). Interest expense related to such borrowings was
approximately $146,000 for the year ended June 30, 1997.
11. 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. The final payment under this
settlement was made during the year ended June 30, 1999.
F-20
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
12. 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, 1998, 1997 and 1996. During 1995, a subsidiary in the
U.K. ("Rapiscan U.K.") transferred its existing employees from their former
owner's plan to a new plan, the Rapiscan U.K. Defined Benefit Plan, which
covers certain Rapiscan U.K. employees. The benefits under this plan are based
on years of service and the employees' highest 12 months' compensation during
the last five years of employment. Rapiscan U.K.'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, 1997, 1998 and
1999 was approximately $91,000, $138,000 and $106,000, respectively.
13. Subsequent Events
The acquisition of Metorex Security provided for additional future payments,
up to $1,500,000 in cash, based on future sales. In July 1999, the Company paid
4,400,000 Finnish markka (approximately US $759,000) in lieu of the future
contingent payments.
In July 1999, the Company entered into a non-exclusive patent license
agreement. The Company paid $450,000 for the patent license which expires in
2000. The Company may be required to make additional payments of up to $350,000
based on certain future orders and shipments.
Subsequent to the end of the year, the Company purchased 247,500 additional
shares under the treasury stock repurchase plan at a total cost of $1,167,125.
F-21
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
14. Unaudited Quarterly Results
The following table presents unaudited quarterly financial information for
the four quarters ended June 30, 1999:
<TABLE>
<CAPTION>
Quarter Ended in Thousands
-----------------------------------------------
June
September 30, December 31, March 31, 30,
1998 1998 1999 1999
------------- ------------ --------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues..................... $21,404 $24,847 $24,606 $30,906
Costs of goods sold.......... 14,988 17,424 17,099 22,194
------- ------- ------- -------
Gross profit............. 6,416 7,423 7,507 8,712
------- ------- ------- -------
Operating expenses:
Selling, general and
administrative............ 3,363 3,386 5,104 5,599
Research and development... 1,024 1,559 1,537 1,591
In-process research and
development............... 2,579
Goodwill amortization...... 26 162 203 204
Asset impairment charge.... 5,189
Restructuring costs........ 458
------- ------- ------- -------
Total operating
expenses................ 4,413 7,686 7,302 12,583
------- ------- ------- -------
Income (loss) from
operations.................. 2,003 (263) 205 (3,871)
Interest (income) expense,
net......................... (167) (83) 125 23
------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes................ 2,170 (180) 80 (3,894)
Provision (benefit) for
income taxes................ 510 423 (300) (3,198)
------- ------- ------- -------
Net income (loss)........ $ 1,660 $ (603) $ 380 $ (696)
======= ======= ======= =======
Earnings (loss) per common
share....................... $ 0.17 $ (0.06) $ 0.04 $ (0.07)
======= ======= ======= =======
Earnings (loss) per common
share--assuming dilution.... $ 0.17 $ (0.06) $ 0.04 $ (0.07)
======= ======= ======= =======
</TABLE>
15. Segment Information
The Company has adopted SFAS No. 131, "Segment Disclosure." The Company has
reflected the provisions of SFAS No. 131 in the accompanying financial
statements for all periods presented. The Company believes that it operates in
two identifiable industry segments, namely optoelectronic and silicon pressure-
sensor devices and subsystems and medical imaging systems, and security and
inspection products. For the years ended June 30 1997, 1998 and 1999 external
revenues from optoelectronic and silicon pressure-sensor devices subsystems and
medical imaging systems were $42,879, $50,120 and $55,469, respectively.
Revenues from security and inspection systems were $34,749, $43,798 and $46,294
for the years ended June 30 1997, 1998 and 1999, respectively. Segment
information is provided by geographic area. As discussed in Note 1, the Company
is vertically integrated and is sharing common resources and facilities.
Therefore, with the exception of external revenues, therefore, meaningful
information is not available by industry or product segment.
F-22
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The Company's operating locations include the North America (United States
and Canada), Europe (United Kingdom, Denmark, Finland 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, 1997
---------------------------------------------------
North
America 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
======== ======= ======= ========= ========
Capital expenditure....... $ 1,561 $ 293 $ 328 $ 2,182
======== ======= ======= ========= ========
Depreciation.............. $ 1,503 $ 584 $ 215 $ 2,302
======== ======= ======= ========= ========
<CAPTION>
Year Ended June 30, 1998
---------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 56,710 $27,537 $ 9,671 $ 93,918
Transfer between
geographical areas....... 6,786 3,329 12,672 $ (22,787)
-------- ------- ------- --------- --------
Net revenues.............. $ 63,496 $30,866 $22,343 $ (22,787) $ 93,918
======== ======= ======= ========= ========
Operating income.......... $ 4,151 $ 2,686 $ 4,329 $ (766) $ 10,400
======== ======= ======= ========= ========
Identifiable assets....... $143,080 $16,254 $ 9,591 $ (82,103) $ 86,822
======== ======= ======= ========= ========
Capital expenditure....... $ 6,313 $ 1,047 $ 127 $ $ 7,487
======== ======= ======= ========= ========
Depreciation.............. $ 1,435 $ 676 $ 113 $ $ 2,224
======== ======= ======= ========= ========
<CAPTION>
Year Ended June 30, 1999
---------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 63,208 $33,874 $ 4,681 $101,763
Transfer between
geographical areas....... 7,387 7,434 13,485 $ (28,306)
-------- ------- ------- --------- --------
Net revenues.............. $ 70,595 $41,308 $18,166 $ (28,306) $101,763
======== ======= ======= ========= ========
Operating income (loss)... $ 2,064 $(6,942) $ 3,957 $ (1,005) $ (1,926)
======== ======= ======= ========= ========
Identifiable assets....... $160,335 $30,358 $13,515 $(110,837) $ 93,371
======== ======= ======= ========= ========
Capital expenditure....... $ 2,426 $ 1,767 $ 414 $ $ 4,607
======== ======= ======= ========= ========
Depreciation.............. $ 1,859 $ 975 $ 252 $ $ 3,086
======== ======= ======= ========= ========
</TABLE>
F-23
<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
of period expenses accounts (Recoveries) period
--------- ------------ -------- ------------ -------
Description
- -----------
<S> <C> <C> <C> <C> <C>
Balance for doubtful
accounts:
Year Ended June 30,
1997.................. $276 $389 -- $ 79 $586
==== ==== ==== ==== ====
Year Ended June 30,
1998.................. $586 $122 -- $157 $551
==== ==== ==== ==== ====
Year Ended June 30,
1999.................. $551 $ 86 $295 $ 72 $860
==== ==== ==== ==== ====
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Description
------ -------------------
<C> <S>
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 (3)
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 (3)
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 (3)
10.11 Joint Venture Agreement dated January 4, 1994 among the Company,
Electronics Corporation of India, Limited and ECIL-Rapiscan Security
Products Limited, 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) (3)
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 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)
10.16 License Agreement made and entered into as of December 19, 1994, by
and between EG&G, Inc. and Rapiscan Security Products, Inc.(1)
10.17 Stock Purchase Agreement dated March 5, 1997 between Industriinvestor
ASA and Opto Sensors, Inc.(1)
10.18 Lease dated September 24, 1997 between the Company and D.S.A.
Properties (4)
10.19 Agreement of Purchase and Sale and Joint Escrow Instructions dated as
of June 23, 1998 by and between KB Chadron Building, LLC and UDT
Sensors, Inc. (5)
10.20 Agreement of Purchase and Sale and Joint Escrow Instructions dated as
of June 23, 1998 by and between Chadron II, LLC and UDT Sensors, Inc.
(5)
10.21 Cooperative Research and Development Agreement dated May 13, 1998
between Rapiscan Security Products, Inc. and the Federal Aviation
Administration (portions of this exhibit have been omitted pursuant to
a request for confidential treatment filed with the Securities and
Exchange Commission, which request has been granted) (6)
10.22* Amended and Restated Credit Agreement entered into on September 2,
1999, by and between Sanwa Bank California and OSI Systems, Inc., UDT
Sensors, Inc., Ferson Optics, Inc., Rapiscan Security Products Inc.,
Metorex Security Products, Inc., Silicon Microstructures, Inc. and
Aristo Medical Products, Inc.
21* Subsidiaries of the Company
23* Independent Auditors' Consent
27* 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>
<PAGE>
- --------
* Filed herewith
(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) Previously filed with the Company's Amendment No. 2 to the Registration
Statement filed August 15, 1997.
(4) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1997.
(5) Previously filed with the Company's Annual Report on Form 10-K, as amended
on Form 10-K/A, for the fiscal year ended June 30, 1998.
(6) Previously filed with the Company's quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998.
<PAGE>
EXHIBIT 10.22
[Logo of Sanwa AMENDED AND RESTATED CREDIT AGREEMENT
Bank California] ($10,000,000 Revolving Line of Credit)
($10,000,000 Letter of Credit Sub-Facility, $5,000,000 Acceptance
Sub-Facility and $4,500,000 Foreign Exchange Sub-Facility)
($3,000,000 Equipment Purchase Facility)
($15,000,000 Acquisition Non-revolving Line Converting to Term)
($3,000,000 Term Loan)
This Agreement (the "Agreement") is made and entered into as of September
2, 1999, by and between SANWA BANK CALIFORNIA (the "Bank") and OSI SYSTEMS,
INC., UDT SENSORS, INC., FERSON OPTICS, INC., RAPISCAN SECURITY PRODUCTS, INC.,
METOREX SECURITY PRODUCTS, INC., SILICON MICROSTRUCTURES, INC., and ARISTO
MEDICAL PRODUCTS, INC. (each a "Borrower" and together, the "Borrowers"), on the
terms and conditions that follow and completely amends, restates, and supersedes
all previous Credit Agreements between the Borrower and the Bank.
SECTION
1
DEFINITIONS
1.1 Certain Defined Terms: Unless elsewhere defined in this Agreement, the
following terms shall have the following meanings (such meanings to be generally
applicable to the singular and plural forms of the terms defined):
1.1.1 "Acceptance Facility": shall mean the credit facility described as
such in Section 2.
1.1.2 "Advance": shall mean an advance to any of the Borrowers under the
credit facility (ies) described in Section 2.
1.1.3 "Alternate Currency": shall mean any lawful currency other than
Dollars which is freely transferable and convertible into Dollars.
1.1.4 "Applicable Margin". shall mean the following interest rate
percentages based upon the Debt Coverage Ratio then in effect:
Debt Coverage Ratio Applicable Margin
------------------- -----------------
Less than 2 to 1 1.25%
Between 2.24 and 2 to 1 1.50%
Between 2.74 and 2.25 to 1 1.75%
-1-
<PAGE>
2.75 to 1 or greater 2.00%
1.1.5 "Business Day": shall mean a day other than a Saturday or Sunday on
which commercial banks are open for business in California, USA,
and, with respect to Eurocurrency Advances, on which dealings are
carried on in the London interbank market and banks are open for
business in London and in the country of issue of the currency of
such Advance.
1.1.6 "Close-Out Date": shall mean the Business Day on which the Bank
closes out and liquidates a FX Transaction.
1.1.7 "Closing Value": has the meaning given to it in Section 8.6(i)
hereof.
1.1.8 "Closing Gain" and "Closing Loss" :shall mean the amount determined
in accordance with Section 8.6(ii) hereof.
1.1.9 "Collateral": shall mean the property described in Section 3,
together with any other personal or real property in which the Bank
may be granted a lien or security interest to secure payment of the
Obligations.
1.1.10 "Companies": shall mean all the Borrowers, Foreign Subsidiaries,
and any subsidiary, either foreign or domestic, hereafter acquired.
1.1.11 "Credit Percentage" : shall mean 15%.
1.1.12 "Current Liabilities": shall mean current liabilities as determined
in accordance with generally accepted accounting principals,
including any negative cash balance on the Borrowers' financial
statements.
1.1.13 "Debt": shall mean all liabilities of the Borrowers, or any
Borrower, as applicable, less Subordinated Debt, if any.
1.1.14 "Dollars" and the sign "$": shall mean lawful money of the United
States.
1.1.15 "EBITDA": shall mean earnings exclusive of extraordinary gains and
before deductions for interest expense, taxes, depreciation and
amortization expense.
1.1.16 "Effective Tangible Net Worth": shall mean each Borrower's stated
net worth plus Subordinated Debt but less all intangible assets of
the Borrowers (i.e., goodwill, trademarks, patents, copyrights,
organization expense, and similar intangible items including, but
not limited to, investments in and all amounts due from affiliates,
officers or employees).
1.1.17 "Environmental Claims": shall mean all claims, however asserted, by
any governmental authority or other person alleging potential
liability or responsibility for violation of any Environmental Law
or for release or injury to the environment or threat to public
health, personal injury (including sickness, disease or death),
property damage, natural resources damage, or otherwise alleging
liability or responsibility for damages (punitive or otherwise),
cleanup, removal, remedial or response costs, restitution, civil or
criminal penalties, injunctive relief, or other type
-2-
<PAGE>
of relief, resulting from or based upon (a) the presence,
placement, discharge, emission or release (including intentional
and unintentional, negligent and non-negligent, sudden or non-
sudden, accidental or non-accidental placement, spills, leaks,
discharges, emissions or releases) of any Hazardous Material at,
in, or from property, whether or not owned by any of the Borrowers,
or (b) any other circumstances forming the basis of any violation,
or alleged violation, of any Environmental Law.
1.1.18 "Environmental Laws": shall mean all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and
codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements
with, any governmental authorities, in each case relating to
environmental, health, safety and land use matters; including the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water
Pollution Control Act of 1972, the Solid Waste Disposal Act, the
Federal Resource Conservation and Recovery Act, the Toxic
Substances Control Act, the Emergency Planning and Community Right-
to-Know Act, the California Hazardous Waste Control Law, the
California Solid Waste Management, Resource, Recovery and Recycling
Act, the California Water Code and the California Health and Safety
Code.
1.1.19 "Environmental Permits": shall have the meaning provided in Section
5.11 hereof.
1.1.20 "Equipment": shall mean equipment as defined in the California
Uniform Commercial Code.
1.1.21 "Equipment Purchase Facility": shall mean the credit facility
described as such in Section 2.
1.1.22 "Equipment Value": shall mean the lesser of: the invoice cost of
the equipment (excluding taxes, license fees, transportation costs,
insurance premiums, and installation and connection expenses, fees
and costs); or the book value of the equipment; or the liquidation
value of the equipment as determined by the Bank.
1.1.23 "ERISA": shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including (unless the context
otherwise requires) any rules or regulations promulgated
thereunder.
1.1.24 "Eurocurrency Advance", "Eurocurrency Interest Period" and
"Eurocurrency Rate": shall have the meanings provided in Section
2.1.4 hereof.
1.1.25 "Event of Default": shall have the meaning set forth in Section 7.
1.1.26 "Expiration Date": shall mean November 30, 2000, or the date of
termination of the Bank's commitment to lend under this Agreement
pursuant to Section 8, whichever shall occur first.
1.1.27 "Fixed Rate Advance": shall have the respective meaning as it is
defined for each facility under Section 2, hereof if applicable.
-3-
<PAGE>
1.1.28 "Fixed Rate": shall have the respective meaning as it is defined
for each facility under Section 2, hereof if applicable.
1.1.29 "Foreign Currency": shall mean any legally traded currency other
than US dollars and which may be transferred by paperless wire
transfer or cash and in which the Bank regularly trades.
1.1.30 "Foreign Exchange Facility": shall mean the credit facility
described as such in Section 2.
1.1.31 "Foreign Subsidiaries": shall mean a corporate entity that is not
organized or created in the United states, including only the
States and the District of Columbia, or under the law of the United
states or of any state or territory.
1.1.32 "Funded Debt": shall mean all Indebtedness for borrowed money.
1.1.33 "FX Risk Liability": shall mean the product of (a) the Credit
Percentage, times (b) the aggregate of the Notional Values of all
FX Transactions outstanding, net of any Offsetting Transactions.
1.1.34 "FX Limit": shall mean $4,500,000.00.
1.1.35 "FX Transaction": shall mean any transaction between the Bank and
any of the Borrowers pursuant to which the Bank has agreed to sell
to or to purchase from such Borrower a Foreign Currency of an
agreed amount at an agreed price in US dollars or such other agreed
upon Foreign Currency, deliverable and payable on an agreed date.
1.1.36 "Hazardous Materials": shall mean all those substances which are
regulated by, or which may form the basis of liability under, any
Environmental Law, including all substances identified under any
Environmental Law as a pollutant, contaminant, hazardous waste,
hazardous constituent, special waste, hazardous substance,
hazardous material, or toxic substance, or petroleum or petroleum
derived substance or waste.
1.1.37 "Indebtedness": shall mean, with respect to any of the Borrowers,
(i) all indebtedness for borrowed money or for the deferred
purchase price of property or services in respect of which such
Borrower is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which such Borrower
otherwise assures a creditor against loss and (ii) obligations
under leases which shall have been or should be, in accordance with
generally accepted accounting principles, reported as capital
leases in respect of which such Borrower is liable, contingently or
otherwise, or in respect of which such Borrower otherwise assures a
creditor against loss.
1.1.38 "Interest Period": shall have the respective meaning as it is
defined for each facility under Section 2, hereof.
1.1.39 "Letter of Credit Facility": shall mean the credit facility
described as such in Section 2.
-4-
<PAGE>
1.1.40 "LIBOR Advance": shall have the respective meaning as it is defined
for each facility under Section 2, hereof.
1.1.41 "LIBOR Interest Period": shall have the respective meaning as it is
defined for each facility under Section 2, hereof.
1.1.42 "LIBOR Rate": shall have the respective meaning as it is defined
for each facility under Section 2, hereof.
1.1.43 "Line Account": shall have the meaning provided in Section 2.9
hereof.
1.1.44 "Line of Credit": shall mean the credit facility described as such
in Section 2.
1.1.45 "Notional Value": shall mean the US Dollar equivalent of the price
at which the Bank agreed to purchase or sell to the Borrower a
Foreign Currency.
1.1.46 "Obligations": shall mean all amounts owing by the Borrowers to the
Bank pursuant to this Agreement including, but not limited to, the
unpaid principal amount of Advances.
1.1.47 "Offsetting Transaction": shall mean a FX Transaction to purchase a
Foreign Currency and a FX Transaction to sell the same Foreign
Currency, each with the same Settlement Date and designated as an
Offsetting Transaction at the time of entering into the FX
Transaction.
1.1.48 "Ordinary Course of Business": shall mean, with respect to any
transaction involving any of the Borrowers or any of its
subsidiaries or affiliates, the ordinary course of such Borrower's
business, as conducted by such Borrower in accordance with past
practice and undertaken by such Borrower in good faith and not for
the purpose of evading any covenant or restriction in this
Agreement or in any other document, instrument or agreement
executed in connection herewith.
1.1.49 "Permitted Liens": shall mean: (i) liens and security interests
securing indebtedness owed by the Borrowers to the Bank; (ii) liens
for taxes, assessments or similar charges not yet due; (iii) liens
of materialmen, mechanics, warehousemen, or carriers or other like
liens arising in the Ordinary Course of Business and securing
obligations which are not yet delinquent; (iv) purchase money liens
or purchase money security interests upon or in any property
acquired or held by any of the Borrowers in the Ordinary Course of
Business to secure Indebtedness outstanding on the date hereof or
permitted to be incurred under Section 5.7 hereof; (v) liens and
security interests which, as of the date hereof, have been
disclosed to and approved by the Bank in writing; and (vi) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the
net value of the Borrowers' assets.
1.1.50 "Redenominate", "Redenomination" and "Redenominated": each refers
to redenomination of each Advance from Dollars into an Alternate
Currency or from an Alternate Currency into Dollars or another
Alternate Currency pursuant to Section 2.06.
-5-
<PAGE>
1.1.51 "Reference Rate": shall mean an index for a variable interest rate
which is quoted, published or announced by Bank as its reference
rate and as to which loans may be made by Bank at, above or below
such rate.
1.1.52 "Settlement Date": shall mean the Business Day on which the
applicable Borrower has agreed to (a) deliver the required amount
of Foreign Currency, or (b) pay in US dollars the agreed upon
purchase price of the Foreign Currency.
1.1.53 "Subordinated Debt": shall mean such liabilities of any of the
Borrowers which have been subordinated to those owed to the Bank in
a manner acceptable to the Bank.
1.1.54 "Variable Rate Advance": shall have the respective meaning as it is
defined for each facility under Section 2, hereof.
1.1.55 "Variable Rate": shall have the respective meaning as it is defined
for each facility under Section 2, hereof.
1.2 Accounting Terms: All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein
shall mean such financial statements or such items prepared or determined
in accordance with generally accepted accounting principles consistently
applied and, except where otherwise specified, all financial data submitted
pursuant to this Agreement shall be prepared in accordance with such
principles.
1.3 Other Terms: Other terms not otherwise defined shall have the meanings
attributed to such terms in the California Uniform Commercial Code.
1.4 Currency Equivalents Generally: For all purposes of this Agreement other
than Section 2, the equivalent in any Alternate Currency of an amount in
Dollars shall be determined at the rate of exchange quoted by the Bank in
Los Angeles, at 9:00 A.M. on the date of determination, for the spot
purchase in the relevant foreign exchange market of such amount of Dollars
with such Alternate Currency.
SECTION
2
CREDIT FACILITIES
2.1 THE LINE OF CREDIT
2.1.1 The Line of Credit: On terms and conditions as set forth herein,
the Bank agrees to make Advances in Dollars or in Alternate
Currency to the Borrowers from time to time from the date hereof
to the Expiration Date, provided the aggregate amount of such
Advances outstanding at any time does not exceed $10,000,000.00 or
the equivalent in Alternate Currency (the "Line of Credit").
Within the foregoing limits, the Borrowers may borrow, partially
or wholly prepay, and reborrow under this Section 2.1. Proceeds of
the Line of Credit shall be used for general working capital
purposes.
-6-
<PAGE>
2.1.2 Making Line Advances: Each Advance under the Line of Credit shall
be conclusively deemed to have been made at the request of and for
the benefit of the Borrowers (i) when credited to any deposit
account of any of the Borrowers maintained with the Bank or (ii)
when paid in accordance with the Borrowers' written instructions.
Subject to the requirements of Section 4, Advances shall be made
by the Bank upon telephonic or facsimile request received from the
Borrower, which request shall be received not later than 12:00
p.m. (Pacific Standard Time) on the date specified for a Variable
Rate Advance, as hereinafter defined, and 11:00 a.m. (Pacific
Standard Time) two business days prior to the date specified for a
Eurocurrency Advance or a Cost of Funds Advance, as hereinafter
defined, each of which dates shall be a Business Day. The rates
for a Eurocurrency Advance or a Cost of Funds Advance shall be set
on the same Business Day as the request is received if received by
11:00 a.m. and on the next Business Day if received after 11:00
a.m.. Requests for Advances received after such time may, at the
Bank's option, be deemed to be a request for an Advance to be made
on the next succeeding Business Day for a Variable Rate Advance
and the third succeeding Business Day for a Eurocurrency Advance
or a Cost of Funds Advance.
2.1.3 Repayment: On the Expiration Date, each Borrower hereby jointly
and severally promises and agrees to pay to the Bank in full the
aggregate unpaid principal amount of all Advances then
outstanding, together with all accrued and unpaid interest
thereon. provided, however, that any Advance denominated in
Dollars must be repaid in Dollars and any Advance denominated in
an Alternate Currency must be repaid in the same Alternate
Currency.
2.1.4 Interest on Advances: Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as
quoted by the Bank and as elected by the Borrowers hereinbelow:
(i) Variable Rate Advances: For Advances denominated in Dollars,
a variable rate per annum equivalent to an index for a
variable interest rate which is quoted, published or
announced from time to time by the Bank as its reference
rate (the "Reference Rate") and as to which loans may be
made by the Bank at, below or above such Reference Rate (the
"Variable Rate"). Interest shall be adjusted concurrently
with any change in the Reference Rate. An Advance which
bears interest at the Variable Rate is hereinafter referred
to as a "Variable Rate Advance".
(ii) Eurocurrency Advances: For Advances denominated in Dollars
or in Alternate Currency, a fixed rate quoted by the Bank
for one, three, six, nine or twelve months or for such other
period of time that the Bank may quote and offer (provided
that any such period of time does not extend beyond the
Expiration Date) [the "Eurocurrency Interest Period"] for
Advances in the minimum amount of $100,000 and in $100,000
increments thereafter. Such interest rate shall be a
percentage, rounded upward to the nearest one-hundredth of
one percent, equivalent to the Bank's Eurocurrency Rate for
Dollars or such Alternate Currency plus the Applicable
Margin which is that rate determined by the Bank's Treasury
Desk as being the approximate rate at which the Bank could
purchase offshore Dollar deposits or Alternate Currency
deposits in an amount approximately equal
-7-
<PAGE>
to the amount of the relevant Advance and for a period of
time approximately equal to the relevant Eurocurrency
Interest Period (adjusted for any and all assessments,
surcharges and reserve requirements pertaining to the
purchase by the Bank of such Alternate Currency deposits
[the "Eurocurrency Rate"]. An Advance which bears interest
at the Eurocurrency Rate is hereinafter referred to as the
"Eurocurrency Advance".
(iii) Cost of Funds Advances. For Advances denominated in Dollars,
the Bank hereby agrees to make Advances to the Borrower, at
Borrower's election, at a fixed rate quoted by Bank in its
sole discretion for each Advance (the "Cost of Funds Rate")
plus the Applicable Margin and for such period of time that
the Bank may quote and offer, provided that any such period
of time does not extend beyond the Expiration Date (the
"Cost of Funds Interest Period") for Advances in the minimum
amount $100,000 and in $100,000 increments thereafter.
Advances based upon the Cost of Funds Rate are hereinafter
referred to as "Cost of Funds Advances". The Bank shall
provide the Borrower with a statement of the Borrower's Cost
of Funds Rate, which statement shall be considered to be
correct and conclusively binding on the Borrower unless the
Borrower notifies the Bank to the contrary within 30 days
after the Borrower's receipt of any such statement which it
deems to be incorrect.
Eurocurrency Advances and Cost of Funds Advances are sometimes
hereinafter referred to as a "Fixed Rate Advance".
Interest on Variable Rate Advances and Cost of Funds Advances
shall be paid in Dollars in monthly installments commencing on the
first day of the month following the date of the first such
Advance and continuing on the first day of each month thereafter.
Interest on any Eurocurrency Advance shall be paid on the last day
of the Eurocurrency Interest Period pertaining to such
Eurocurrency Advance and shall be paid in Dollars or in the
relevant Alternate Currency as the case may be. Each Borrower
further jointly and severally promises and agrees to pay the Bank
interest on any Eurocurrency Advance with an Eurocurrency Interest
Period in excess of 90 days on a quarterly basis (i.e., on the
last day of each 90-day period occurring in such Eurocurrency
Interest Period) and on the last day of the relevant Eurocurrency
Interest Period.
If interest is not paid as and when it is due, it shall be added
to the principal, become and be treated as a part thereof, and
shall thereafter bear like interest.
2.1.5 Notice of Election to Adjust Interest Rate: The Borrowers may
elect that interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Eurocurrency Rate or Cost of Funds Rate;
provided, however, that such notice shall be received by the Bank
no later than 11:00 a.m. two business days prior to the last day
of the Eurocurrency Interest Period for a Eurocurrency Advance and
1:00 p.m. one business day prior to the last day of a Cost of
Funds Interest Period for a Cost of Funds Advance. Such notice may
be by telephone if confirmed in writing by telecopy with the
original of such writing deposited in the US mail or with
-8-
<PAGE>
an air courier on the same day. The Bank shall not incur any
liability to any Borrower in acting upon any telephonic notice
referred to above that the Bank believes in good faith to have
been given by a duly authorized officer or other person authorized
to act on behalf of any Borrower and upon any borrowing,
Redenomination or continuation by the Bank in accordance with this
Agreement pursuant to any telephonic notice, each Borrower shall
have effected the borrowing, redenomination or continuation of
Advances hereunder. The Borrowers may elect that interest on a
Fixed Rate Advance shall accrue at the Variable Rate; provided,
however, that such notice shall be received by the Bank no later
than one business day prior to the last day of the Interest Period
pertaining to such Fixed Rate Advance, and provided further,
however, that such Fixed Rate Advance shall be in Dollars or
Redenominated in Dollars pursuant to the terms hereinbelow. If the
Bank shall not have received notice (as prescribed herein) of
Borrowers' election that interest on any Fixed Rate Advance shall
continue to accrue at the newly quoted Eurocurrency Rate or Cost
of Funds Rate or Variable Rate as the case may be, the Borrowers
shall be deemed to have elected that interest thereon shall be
adjusted to accrue at the Variable Rate then in effect and any
Alternate Currency shall be Redenominated in Dollars.
2.1.6 Redenomination of Advances: The Borrowers may, upon notice given
to the Bank at least four Business Days prior to the date of the
proposed Redenomination, request that a Eurocurrency Advance be
Redenominated from Dollars into an Alternate Currency or from an
Alternate Currency into Dollars or another Alternate Currency;
provided, however, that any Redenomination shall be made on, and
only on, the last day of an Interest Period for such Advances.
Each such notice of request of a Redenomination ( "Notice of
Redenomination") shall be by telecopier, telex or cable, confirmed
immediately in writing, or may be by telephone if confirmed in
writing by telecopy with the original of such writing deposited in
the US mail or with an air courier on the same day, and the Bank
shall not incur any liability to any Borrower in acting upon any
telephonic notice referred to above that the Bank believes in good
faith to have been given by a duly authorized officer or other
person authorized to act on behalf of any Borrower and upon any
borrowing, Redenomination or continuation by the Bank in
accordance with this Agreement pursuant to any telephonic notice,
the Borrowers shall have effected the borrowing, redenomination or
continuation of Advances hereunder, specifying (i) the
Eurocurrency Advance(s) to be Redenominated, (ii) the date of the
proposed Redenomination, (iii) the Alternate Currency into which
such Advances are to be Redenominated, and (iv) the duration of
the Interest Period for such Advances upon being so Redenominated.
In the case of a Notice of Redenomination which requests a
Redenomination of Advances into an Alternate Currency, such
Redenomination is subject to confirmation by Bank not later than
the third Business Day before the requested date of such
Redenomination that such Bank agrees to such Redenomination. which
confirmation shall be notified to the Borrowers. If no
confirmation is provided the Redenomination will not occur. Each
Advance so requested to be Redenominated will be Redenominated, on
the date specified therefor in such Notice of Redenomination, into
an equivalent amount thereof in the currency requested in such
Notice of Redenomination, such equivalent amount to be determined
on such date in accordance with Section 2.7, and, upon being so
Redenominated, will have an initial Interest Period as requested
in such Notice of Redenomination.
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2.1.7 Prepayment:
(i) The Borrowers may prepay any Advance in whole or in part, at
any time and without penalty, provided, however, that: (i)
any partial prepayment shall first be applied, at the Bank's
option, to accrued and unpaid interest and next to the
outstanding principal balance; and (ii) during any period of
time in which interest is accruing on any Advance on the
basis of the Eurocurrency Rate or the Cost of Funds Rate, no
prepayment shall be made except on a day which is the last
day of the Interest Period pertaining thereto provided,
however, if the whole or any part of any Fixed Rate Advance
is prepaid by reason of acceleration or otherwise, the
Borrower shall jointly and severally upon the Bank's
request, promptly pay to and indemnify the Bank for all
costs and any loss actually incurred by the Bank, excluding
loss of profit on any margin, but including any loss
resulting from the re-employment of funds, sustained by the
Bank as a consequence of such prepayment, and provided
further, that any prepayment hereunder shall not be deemed
to be an event of default.
(ii) If, on the last day of any Interest Period, the equivalent
in Dollars of the aggregate principal amount of all
Eurocurrency Advances then outstanding when combined with
the aggregate principal amount of all Variable Rate Advances
and Cost of Funds Advances then outstanding exceeds the Line
of Credit, the Borrowers shall jointly and severally on such
last day prepay an aggregate principal amount of such
Advances to the Bank in an amount at least equal to such
excess, with accrued interest to the date of such prepayment
on the principal amount prepaid.
(iii) The Bank shall be entitled to fund all or any portion of its
Advances in any manner it may determine in its sole
discretion, but all calculations and transactions hereunder
shall be conducted as though the Bank actually funded all
Advances through the purchase of dollar deposits bearing
interest at the same rate as U.S. Treasury securities in the
amount of the relevant Advance and in maturities
corresponding to the date of such purchase to the Expiration
Date hereunder.
2.1.8 Indemnification for Eurocurrency Rate and Cost of Funds Rate
Costs: During any period of time in which interest on any Advance
is accruing on the basis of the Eurocurrency Rate or the Cost of
Funds Rate, the Borrowers shall jointly and severally, within 15
days of the Bank's written request, which request shall explain in
reasonable detail the reason for such costs or payments, promptly
pay to and reimburse the Bank for all costs incurred and payments
made by the Bank by reason of any future assessment, reserve,
deposit or similar requirement or any surcharge, tax or fee
imposed upon the Bank or as a result of the Bank's compliance with
any directive or requirement of any regulatory authority
pertaining or relating to the Alternate Currency or Dollars or
cost of funds used by the Bank in quoting and determining the
Eurocurrency Rate or the Cost of Funds Rate under this Agreement.
Bank shall use its best efforts to provide Borrowers, in advance,
with an estimate of any such costs which may potentially be
incurred hereunder.
2.1.9 Eurocurrency Rate or Cost of Funds Rate Infeasible: In the event
that the Bank shall at any time determine that the accrual of
interest on the basis of the
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Eurocurrency Rate or the Cost of Funds Rate (i) is infeasible at
the time of any borrowing, continuation or Redenomination because
the Bank is unable to determine the Eurocurrency Rate or Cost of
Funds Rate due to the unavailability of Dollars or Alternate
Currency deposits, contracts or time deposits in an amount
approximately equal to the amount of the relevant Advance and for
a period of time approximately equal to relevant Interest Period
or (ii) is or has become unlawful or infeasible by reason of the
Bank's compliance with any new law, rule, regulation, guideline or
order, or any new interpretation of any present law, rule,
regulation, guideline or order, then the Bank shall give
telephonic notice thereof (confirmed in writing) to the Borrowers,
in which event such Fixed Rate Advance shall be immediately
prepaid but then may be converted or Redenominated into a Variable
Rate Advance at the election of the Borrowers.
2.1.10 Failure to Borrow: In the case of any Fixed Rate Advance, the
Borrowers shall jointly and severally indemnify Bank against any
loss, cost or expense incurred by Bank as a result of any failure
to borrow on the date specified for such Fixed Rate Advance (other
than as a result of Bank's failure to make funds available for
such Advance), including, without limitation, any loss (excluding
loss of anticipated profits), cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds
acquired by Bank to fund such Fixed Rate Advance to be made by
Bank when such Fixed Rate Advance is not made on such date.
2.1.11 Computations and Payments: Interest on any Advance shall be
computed on the basis of 360 days per year, but charged on the
actual number of days elapsed. Whenever any payment hereunder
shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the
computation of payment of interest; provided, however, if such
extension would cause payment of interest on or principal of
Eurocurrency Advances to be made in the next following calendar
month, such payment shall be made on the immediately preceding
Business Day.
2.1.12 Loan Fee. The Borrowers promise and agree, concurrently with the
execution and delivery of this Agreement, to pay to the Bank a
non-refundable loan fee equal to .125% of the unused portion of
the Line of Credit, payable quarterly in arrears on the last day
of each March, June, September and December of each year.
2.2 LETTER OF CREDIT SUB-FACILITY
2.2.1 Letter of Credit Sub-Facility: The Bank agrees to issue commercial
and/or standby letters of credit (each a "Letter of Credit") on
behalf of the Borrowers of up to $10,000,000.00. At no time,
however, shall the total principal amount of all Advances
outstanding under the Line of Credit, together with the total face
amount of all Letters of Credit outstanding, less any partial
draws paid by the Bank, exceed the Line of Credit.
(i) Upon the Bank's request, the Borrowers shall promptly pay to
the Bank issuance fees and such other fees, commissions, costs
and any out-of-
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pocket expenses charged or incurred by the Bank with respect to
any Letter of Credit.
(ii) The commitment by the Bank to issue Letters of Credit shall,
unless earlier terminated in accordance with the terms of the
Agreement, automatically terminate on the Expiration Date of the
Letter of Credit and no Letter of Credit shall expire on a date
which is 90 days after the Expiration Date.
(iii) Each Letter of Credit shall be in form and substance satisfactory
to the Bank and in favor of beneficiaries satisfactory to the
Bank, provided that the Bank may refuse to issue a Letter of
Credit due to the nature of the transaction or its terms or in
connection with any transaction where the Bank, due to the
beneficiary or the nationality or residence of the beneficiary,
would be prohibited by any applicable law, regulation or order
from issuing such Letter of Credit.
(iv) Prior to the issuance of each Letter of Credit, but in no event
later than 10:00 a.m. (California time) on the day such Letter of
Credit is to be issued (which shall be a Business Day), the
Borrowers shall deliver to the Bank a duly executed form of the
Bank's standard form of application for issuance of a letter of
credit with proper insertions.
(v) The Borrowers shall, upon the Bank's request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the
Bank by reason of any future assessment, reserve, deposit or
similar requirement or any surcharge, tax or fee imposed upon the
Bank or as a result of the Bank's compliance with any directive or
requirement of any regulatory authority pertaining or relating to
any Letter of Credit. In the event that the Borrowers fail to pay
any drawing under any Letter of Credit or the balances in the
depository account or accounts maintained by the Borrowers with
Bank are insufficient to pay such drawing, without limiting the
rights of Bank hereunder or waiving any Event of Default caused
thereby, Bank may, and Borrowers hereby authorize the Bank to
create an Advance bearing interest at the rate or rates provided
in Section 9.2 hereof to pay such drawing.
2.3 ACCEPTANCE SUB-FACILITY
2.3.1 Acceptance Sub-Facility: The Borrowers may from time to time request the
Bank to accept one or more drafts drawn on the Bank for the account of
the Borrowers (each an "Acceptance") of up to $5,000,000. At no time,
however, shall the total principal balance of all Acceptances
outstanding, together with the total face amount of all outstanding
Letters of Credit less any partial draws paid by the Bank, exceed the
sum of $10,000,000.00 and, together with the total principal balance of
all Advances outstanding under the Line of Credit, exceed the Line of
Credit.
(i) Requests for Acceptances. Each request for an Acceptance shall be
made in writing or by telephone confirmed in writing (each a
"Request"), shall be irrevocable, and shall involve one or more
drafts as described below. Each Request shall be delivered or
communicated to the Bank no
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<PAGE>
later than 10:00 a.m. (California time) on the day (which shall be a
business day) on which the creation of an Acceptance is requested. By
making any such Request, the Borrowers agree that all matters relating to
each such Acceptance shall be governed hereby and the Borrowers restate
all warranties and representations made by the Borrower herein as if made
on the date of the Request and on the date that the Acceptance is
created.
(ii) Acceptances. Each Acceptance shall be created upon a Request by the
Bank's acceptance of a draft in form and substance satisfactory to the
Bank (each a "Draft"). Each Draft shall: (i) be drawn on the Bank by or
on behalf or for the account of the Borrowers in accordance with the
provisions hereof ; (ii) have a minimum face amount of $100,000.00; (iii)
be for the purpose of financing only those transactions permitted by
Subsection 7 of Section 13 of the Federal Reserve Act, as amended from
time to time; and (iv) mature not more than 180 days after the date
thereof (provided that, if such date is not a Business Day, the maturity
shall be extended to the next succeeding Business Day). However, no Draft
shall mature after the Expiration Date. The Borrowers hereby warrant that
any Acceptances relating to the importation or exportation of goods or
relating to the domestic shipment of goods shall: (i) not have a term in
excess of the period of time which is usual and reasonably necessary to
finance transactions of the character of the underlying import or export
transaction or the underlying domestic shipment; (ii) not, together with
all other Acceptances relating to any such shipment, have an aggregate
face amount exceeding the CIF value of such shipment; and (iii) not be
created more than 30 days after the date of shipment of goods to which
such Acceptance relates. Acceptances relating to the storage of goods
shall be subject to the further conditions that: (i) at the time such
Acceptance is created, the goods being stored are covered by a warehouse
receipt issued by a bonded warehouse independent of the Borrowers and
acceptable to the Bank; (ii) the goods covered by the warehouse receipt
are readily marketable staples (as such term is defined in Section 13 of
the Federal Reserve Act by the Board of Governors of the Federal Reserve
System or by Federal Reserve Bulletins) held pending a reasonably
immediate sale, distribution or shipment; and (iii) the face amount of
the Acceptance relating to such goods does not exceed the fair market
value of the goods.
(iii) Acceptance Liability. The Borrowers are obligated, and hereby
unconditionally promise and agree, to pay the Bank, on the maturity date
of each Acceptance or on such earlier date as may be required pursuant
hereto, the face amount of each such Acceptance.
(iv) Acceptance Commissions. The Borrowers agree, upon acceptance by the Bank
of each Draft and as a condition precedent to such Acceptance, to pay to
the Bank a fee (the "Commission") in an amount equal to 1.5% per annum of
the face amount of each Acceptance calculated on the basis of 360 days
per year for the actual number of days (including the first day but
excluding the last day) during the period which is for the term of the
Draft.
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<PAGE>
(v) Discount of Acceptances. The Bank agrees to discount any
Acceptance that is created and presented to it for discount at
a rate quoted by the Bank at the time the Acceptance is
presented to the Bank for discount and for a similar dollar
amount and a similar maturity as the Draft being presented to
the Bank by the Borrowers for acceptance (the "Acceptance
Discount Rate"). On the date any such Acceptance is presented
for discount, the Bank shall: (i) cause the aggregate
discounted amount (less any Commission then payable by the
Borrowers to the Bank hereunder) to be made available to the
Borrowers by crediting such amount to the Borrowers' demand
deposit account maintained with the Bank, and (ii) advise the
Borrowers of the Acceptance Discount Rate at which the Bank
discounted such Acceptance. The Bank shall have the right, in
its sole discretion, to sell, rediscount, hold or otherwise
deal with or dispose of any such Acceptance discounted by it.
(vi) Acceptance Collateral. Each Draft accepted by the Bank shall be
secured by a security interest in the goods (as defined in the
California Uniform Commercial Code) involved in the transaction
out of which the Acceptance arose to the extent that such a
security interest is either required by the Bank or in order
that the relevant Acceptance conform to the requirements of
Section 13 of the Federal Reserve Act.
(vii) Future Assessments. The Borrowers shall, within 15 days of the
Bank's written request, promptly pay to and reimburse the Bank
for all costs incurred and payments made by the Bank by reason
of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank
or as a result of the Bank's compliance with any directive or
requirement of any regulatory authority pertaining or relating
to any Acceptance. Bank shall use its best efforts to provide
Borrowers, in advance, with an estimate of any such costs which
may potentially be incurred hereunder.
2.4 FOREIGN EXCHANGE SUB-FACILITY
2.4.1 Foreign Exchange Sub-Facility: The Bank agrees to enter into FX
Transactions with the Borrowers, at the Borrowers' request therefor
made prior to the Expiration Date, provided however, that at no time
shall the aggregate FX Risk Liability of the Borrowers exceed the FX
Limit, and provided further, at no time shall the aggregate FX Risk
Liability combined with the total face amount of all Letters of Credit
outstanding, less any partial draws paid by the Bank, together with
the total principal balance of all Acceptances outstanding, together
with the total principal amount of all outstanding Advances, exceed
the Line of Credit. Each FX Transaction shall be used to hedge the
Borrowers' foreign exchange exposure.
(i) Requests. Each request for a FX Transaction shall be made by
telephone to the Bank's Treasury Department ("Request"), shall
specify the Foreign Currency to be purchased or sold, the
amount of such Foreign Currency and the Settlement Date. Each
Request shall be communicated to the Bank no later than 3:00
p.m. California time on the Business Day on which the FX
Transaction is requested.
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<PAGE>
(ii) Tenor. No FX Transaction shall have a Settlement Date which is
more than 365 days after the date of entry into such FX
Transaction.
(iii) Availability. Bank may refuse to enter into a FX Transaction
with the Borrowers where the Bank, at its sole discretion,
determines that (1) the requested Foreign Currency is
unavailable, or (2) the Bank is not then dealing in the
requested Foreign Currency, or (3) the Bank would be
prohibited by any applicable law, rule, regulation or order
from purchasing such Foreign Currency.
(iv) Payment. Payment is due on the Settlement Date of the relevant
FX Transaction. The Bank is hereby authorized by the Borrowers
to charge the full settlement price of any FX Transaction
against the depository account or accounts maintained by the
Borrowers with the Bank on the Settlement Date. In the event
that the Borrowers fail to pay the settlement price of any FX
Transaction on the Settlement Date or the balances in the
depository account or accounts maintained with Bank are
insufficient to pay the settlement price, without limiting the
rights of Bank hereunder or waiving any Event of Default
caused thereby, Bank may , and Borrowers hereby authorize Bank
to, create an Advance bearing interest at the Variable Rate to
pay the settlement price on the Settlement Date.
(v) Increased Costs. Borrowers shall, within 15 days of the Bank's
written request promptly pay to and reimburse the Bank for all
costs incurred and payments made by the Bank by reason of any
assessment, reserve, deposit, capital maintenance or similar
requirement or any surcharge, tax or fee imposed upon the Bank
or as a result of the Bank's compliance with any directive or
requirement of any regulatory authority pertaining or relating
to any FX Transaction. Bank shall use its best efforts to
provide Borrowers, in advance, with an estimate of any such
costs which may potentially be incurred hereunder.
(vi) Impossibility of Performance. In the event that the Borrowers
or the Bank cannot perform under a FX Transaction due to force
majeure or an act of State or it becomes unlawful or
impossible to perform, all in the good faith judgement of the
Borrowers or the Bank, then upon notice to the other party,
the Borrowers or the Bank may require the close-out and
liquidation of the affected FX Transaction in accordance with
the provisions of this Agreement
2.5 EQUIPMENT PURCHASE FACILITY
2.5.1 Equipment Purchase Facility: The Bank hereby agrees to make loans
and advances ("Advances") to assist the Borrowers in purchasing
items of equipment, upon a request therefor made by the Borrowers to
the Bank prior to November 30, 2000 (the "Equipment Purchase
Facility"). Each Advance made hereunder shall be in an amount not to
exceed 80% of the Value of the item(s) of Equipment being purchased;
provided, however, that at no time shall the total aggregate
outstanding principal amount of Advances made hereunder exceed the
sum of $3,000,000.00; and provided further that the amount of any
Advance which is repaid, in whole or in part, may not be reborrowed.
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<PAGE>
2.5.2 Equipment Account: The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and such
other debits and credits as shall be appropriate in connection with the
Equipment Purchase Facility (the "Equipment Account").
2.5.3 Security Interest in Equipment. The Borrowers, shall execute and deliver
to the Bank, security agreements, financing statements, disbursement
instructions and such other documents and instruments which the Bank may
require with respect to such Advance and the perfection of the Bank's
security interest in the Equipment pertaining to such Advance.
2.5.4 Repayment: Unless sooner due in accordance with the terms of the
Agreement, on the Expiration Date, each Borrower hereby jointly and
severally promises and agrees to pay to the Bank in full the aggregate
unpaid principal amount of all Advances then outstanding hereunder,
together with all accrued and unpaid interest thereon.
2.5.5 Interest on Advances: Interest shall accrue from the date of each Advance
under the Equipment Purchase Facility at one of the following rates, as
quoted by the Bank and as elected by the Borrowers pursuant to Subsection
(i) or Subsection (ii) or Subsection (iii) below:
(i) Variable Rate Advances: A variable rate per annum equivalent to the
----------------------
Reference Rate (the "Variable Rate"). Interest shall be adjusted
concurrently with any change in the Reference Rate. An Advance
based upon the Variable Rate is hereinafter referred to as a
"Variable Rate Advance".
(ii) Fixed Rate Advances: A fixed rate per annum quoted by the Bank for
-------------------
30, 60, 90 or 180 days or for such other period of time that the
Bank may quote and offer (provided that any such period of time
does not extend beyond the Expiration Date) (the "Interest Period")
for Advances in the minimum amount of $100,000.00. Such interest
rate shall be a percentage approximately equivalent to the
Applicable Margins plus the rate which the Bank determines in its
sole and absolute discretion to be equal to the Bank's cost of
acquiring funds (adjusted for any and all assessments, surcharges
and reserve requirements pertaining to the borrowing or purchase by
the Bank of such funds) in an amount approximately equal to the
amount of the relevant Advance and for a period of time
approximately equal to the relevant Interest Period (the "Fixed
Rate"). Advances based upon the Fixed Rate are hereinafter referred
to as "Fixed Rate Advances".
(iii) LIBOR Advances: A fixed rate quoted by the Bank for one week, 1, 2,
--------------
3, or 6 months or for such other period of time that the Bank may
quote and offer (provided that any such period of time does not
extend beyond the Expiration Date) (the "LIBOR Interest Period")
for Advances in the minimum amount of $100,000.00. Such interest
rate shall be a percentage approximately equivalent to the
Applicable Margin plus the Bank's LIBOR Rate which is that rate
determined by the Bank's Treasury Desk as being the arithmetic mean
(rounded upwards, if necessary, to the nearest whole multiple of
one-sixteenth of one percent (1/16%)) of the U. S. dollar London
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<PAGE>
Interbank Offered Rates for such period appearing on page 3750 (or
such other page as may replace page 3750) of the Telerate screen at
or about 11:00 a.m. (London time) on the second Business Day prior
to the first days of such period (adjusted for any and all
assessments, surcharges and reserve requirements) (the "LIBOR
Rate"). An Advance based upon the LIBOR Rate is hereinafter
referred to as a "LIBOR Advance".
Interest on any Advance shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.
Each Borrower hereby jointly and severally promises and agrees to pay
interest in arrears on Variable Rate Advances on the last calendar day of
each month.
Interest on any LIBOR Advance or Fixed Rate Advance with a LIBOR Interest
Period or Interest Period of 3 months or less shall be paid on the last
day of the LIBOR Interest Period or Interest Period as the case may be.
The Borrowers further promise and agree to pay the Bank interest on any
LIBOR Advance or Fixed Rate Advance with a LIBOR Interest Period or
Interest Period in excess of 3 months on a quarterly basis (i.e., on the
last day of each 3 month period occurring in such LIBOR Interest Period
or Interest Period) and on the last day of the LIBOR Interest Period or
Interest Period.
If interest is not paid as and when it is due, it shall be added to the
principal, become and be treated as a part thereof, and shall thereafter
bear like interest.
2.5.6 Notice of Borrowing: Upon written notice which shall be received by the
Bank at or before 2:00 p.m. (California time) on a Business Day, the
Borrowers may borrow under the Equipment Purchase Facility by requesting:
(i) A Variable Rate Advance or Fixed Rate Advance: A Variable Rate
---------------------------------------------
Advance or Fixed Rate Advance may be made on the day notice is
received by the Bank; provided, however, that if the Bank shall not
have received notice at or before 2:00 a.m. on the day such Advance
is requested to be made, such Variable Rate Advance or Fixed Rate
Advance may, at the Bank's option, be made on the next Business Day.
(ii) A LIBOR Advance: Notice of any LIBOR Advance shall be received by
---------------
the Bank no later than two Business Days prior to the day (which
shall be a Business Day) on which the Borrowers request such LIBOR
Advance to be made.
2.5.7 Notice of Election to Adjust Interest Rate: Upon telephonic notice which
shall be received by the Bank at or before 2:00 p.m. (California time) on
a Business Day, the Borrowers may elect:
(i) That interest on a Variable Rate Advance shall be adjusted to accrue
at the Fixed Rate; provided, however, that such notice shall be
received by the Bank no later than 2:00 p.m. on the Business Day on
which the Borrowers request that interest be adjusted to accrue at
the Fixed Rate.
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<PAGE>
(ii) That interest on a Variable Rate Advance shall be adjusted to
accrue at the LIBOR Rate; provided, however, that such notice shall
be received by the Bank no later than two Business Days prior to
the Business Day on which the Borrowers request that interest be
adjusted to accrue at the LIBOR Rate.
(iii) That interest on a Fixed Rate Advance shall continue to accrue at a
newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Variable Rate; provided, however, that such notice shall be
received by the Bank no later than 2:00 p.m. on the last day of the
Interest Period pertaining to such Fixed Rate Advance. If the Bank
shall not have received notice (as prescribed herein) of the
Borrowers' election that interest on any Fixed Rate Advance shall
continue to accrue at the newly quoted Fixed Rate as the case may
be the Borrowers shall be deemed to have elected that interest
thereon shall be adjusted to accrue at the Variable Rate upon the
expiration of the relevant Interest Period pertaining to such
Advance.
(iv) That (i) interest on a Fixed Rate Advance shall accrue at a newly
quoted LIBOR Rate or (ii) interest on a LIBOR Advance shall
continue to accrue at a newly quoted Fixed Rate or LIBOR Rate or
shall be adjusted to commence to accrue at the Variable Rate;
provided, however, that such notice shall be received by the Bank
no later than two Business Days prior to the last day of the
relevant Interest Period or LIBOR Interest Period, as applicable.
If the Bank shall not have received notice as prescribed herein of
the Borrowers' election that interest on (x) any Fixed Rate Advance
shall accrue interest at a newly quoted LIBOR Rate or at a newly
quoted Fixed Rate pursuant to subparagraph (c) hereinabove; or (y)
any LIBOR Advance shall continue to accrue at the newly quoted
Fixed Rate or LIBOR Rate as the case may be, the Borrowers shall be
deemed to have elected that interest thereon shall be adjusted to
accrue at the Variable Rate upon the expiration of the relevant
Interest Period or LIBOR Interest Period pertaining to such
Advance.
2.5.8 Prepayment: The Borrowers may prepay any Advance in whole or in part, at
any time and without penalty, provided, however, that: (i) any partial
prepayment shall first be applied at the Bank's option, to accrued and
unpaid interest and next to the outstanding principal balance; and (ii)
during any period of time in which interest is accruing on any Advance on
the basis of the LIBOR Rate or Fixed Rate, no prepayment shall be made
except on a day which is the last day of the LIBOR Interest Period or
Interest Period pertaining thereto. if the whole or any part of any LIBOR
Advance or Fixed Rate Advance is prepaid by reason of acceleration or
otherwise, the Borrower shall jointly and severally upon the Bank's
request, promptly pay to and indemnify the Bank for all costs and any
loss actually incurred by the Bank, excluding loss of profit on any
margin, but including any loss resulting from the re-employment of funds,
sustained by the Bank as a consequence of such prepayment, and provided
further, that any prepayment hereunder shall not be deemed to be an event
of default.
The Bank shall be entitled to fund all or any portion of its Advances in
any manner it may determine in its sole discretion, but all calculations
and transactions hereunder shall be conducted as though the Bank actually
funded all Advances
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through the purchase of dollar deposits bearing interest at the same
rate as U.S. Treasury securities in the amount of the relevant Advance
and in maturities corresponding to the date of such purchase to the
Expiration Date hereunder.
2.5.9 Indemnification for LIBOR Rate or Fixed Rate Costs: During any period of
time in which interest on any Advance is accruing on the basis of the
LIBOR Rate or Fixed Rate, the Borrowers shall, within 15 days of the
Bank's written request, promptly pay to and reimburse the Bank for all
costs incurred and payments made by the Bank by reason of any future
assessment, reserve, deposit or similar requirement or any surcharge,
tax or fee imposed upon the Bank or as a result of the Bank's compliance
with any directive or requirement of any regulatory authority pertaining
or relating to funds used by the Bank in quoting and determining the
LIBOR Rate or Fixed Rate. Bank shall use its best efforts to provide
Borrowers, in advance, with an estimate of any such costs which may
potentially be incurred hereunder.
2.5.10 Conversion from LIBOR Rate or Fixed Rate to Variable Rate: In the event
that the Bank shall at any time determine that the accrual of interest
on the basis of the LIBOR Rate or Fixed Rate (i) has become infeasible
because the Bank is unable to determine the LIBOR Rate or Fixed Rate due
to the unavailability of U.S. Dollar deposits, contracts or certificates
of deposit in an amount approximately equal to the amount of the
relevant Advance and for a period of time approximately equal to the
relevant LIBOR Interest Period or Interest Period as the case may be or
(ii) is or has become unlawful by reason of the Bank's compliance with
any new law, rule, regulation, guideline or order, or any new
interpretation of any present law, rule, regulation guideline or order,
then the Bank shall promptly give telephonic notice thereof (confirmed
in writing) to the Borrowers, in which event any Advance bearing
interest at either the LIBOR Rate or Fixed Rate as the case may be shall
be deemed to be a Variable Rate Advance and interest shall thereupon
immediately accrue at the Variable Rate and shall continue at such rate
until the Bank determines that the LIBOR Rate or Fixed Rate is no longer
infeasible or unlawful.
2.5.11 Term Loan Conversion: The Borrowers may, by giving written notice to the
Bank at any time and from time to time, convert the principal balance
outstanding under the Equipment Purchase Facility as of the Expiration
Date of Equipment Purchase Facility to be payable on a term loan basis.
The term loan (the "Term Loan") shall be in the amount of such
outstanding principal balance and be for a term of 60 months and shall
be evidenced by a promissory note in form and substance satisfactory to
the Bank (the "Equipment Term Note", attached hereto as Exhibit 1).
Accrued and unpaid interest under the Equipment Purchase Facility shall
be paid to the Bank concurrently with the Borrowers' execution of the
Term Note. In addition to the short term fixed rates not to exceed 12
months, the Borrower may fix the rate for the entire 60 month term loan
at a Cost of Funds plus 1.50% or a Federal Funds plus 1.50%. For the
Federal Funds Rate to apply a SWAP Agreement, which includes an ISDA
Master Agreement with schedule to the Separate Master Agreement and a
certified corporate resolution for such transaction, secured with a
blanket lien will be required. Interest shall accrue and principal and
interest shall be paid in accordance with the terms and provisions of
the Term Note.
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2.6 THE ACQUISITION LINE OF CREDIT
2.6.1 The Acquisition Line of Credit: On terms and conditions as set forth
herein, the Bank agrees to make Advances under the Acquisition Line of
Credit, on a non-revolving basis, in Dollars or in Alternate Currency
to the Borrowers from time to time from the date hereof to November
30, 1999, at which time the Acquisition Line must be paid in full or
termed out pursuant to Section 2.6.11, and again the draw down period
will be extended one more year to November 30, 2000, which is the
Expiration Date at which time the Acquisition Line must be paid in
full or termed out pursuant to Section 2.6.11, provided the aggregate
amount of such Advances outstanding at any time does not exceed
$15,000,000.00 or the equivalent in Alternate Currency (the
"Acquisition Line of Credit"). Within the foregoing limits, the
Borrowers may borrow, partially or wholly prepay, but may not
reborrow, under this Section 2.1. Proceeds of the Acquisition Line of
Credit shall be used to acquire companies in related lines of business
as the Borrowers or that are involved in a manufacturing process or
technology similar to those used by the Borrowers, provided that each
such Advance shall be limited to $5,000,000 per transaction hereunder
and subject to the following conditions.
(i) Acquired companies must have a positive EBITDA on an after
acquisition one year proforma basis, adjusted for nonrecurring
expenses including income tax items and reduced payroll, etc.,
due to economies of scale. Borrower is to provide calculations.
(ii) OSI must remain in full compliance with financial covenants on
a proforma basis.
(iii) Aggregate acquisitions in excess of $40 million in fiscal 1999
and $30 million in any fiscal year thereafter must be approved
by the Bank.
(iv) The purchase price of each acquisition may not exceed $25
million without Bank approval.
(v) The cash component of each acquisition may not exceed $15
million without Bank's prior written approval.
(vi) The business acquired must be in a related line of business as
the Borrowers or involve manufacturing processes or technology
similar to those used by the Borrowers.
(vii) The Bank will have a first priority lien on assets acquired in
domestic acquisitions and stock acquired in a domestic stock
purchase will be assigned to Bank in a separate security
agreement. The Bank will not have any lien on assets acquired
in the acquisition of a Foreign Subsidiary and stock acquired
in a foreign stock purchase will not be assigned to Bank.
(viii) Borrower shall provide Bank with a written certification that
all the above conditions are in compliance and provide a
proforma cash flow schedule of acquired company with detail of
expense reduction which results in a
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positive EBITDA.
(ix) A funding fee equal to 0.25% at funding.
Prior acquisitions that had terms exceeding the terms of this Section or terms
that were violations of the prior loan agreements are hereby waived on a one
time basis and such waiver shall not be deemed a waiver of any future violations
or terms of this Agreement.
2.6.2 Making Acquisition Line Advances: Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of
the Borrowers (i) when credited to any deposit account of any of the
Borrowers maintained with the Bank or (ii) when paid in accordance
with the Borrowers' written instructions. Subject to the
requirements of Section 4, Advances shall be made by the Bank upon
telephonic or facsimile request received from the Borrower, which
request shall be received not later than 12:00 p.m. (Pacific
Standard Time) on the date specified for a Variable Rate Advance, as
hereinafter defined, and 11:00 a.m. (Pacific Standard Time) two
business days prior to the date specified for a Eurocurrency Advance
or a Cost of Funds Advance, as hereinafter defined, each of which
dates shall be a Business Day. The rates for a Eurocurrency Advance
or a Cost of Funds Advance shall be set on the same Business Day as
the request is received if received by 11:00 a.m. and on the next
Business Day if received after 11:00 a.m.. Requests for Advances
received after such time may, at the Bank's option, be deemed to be
a request for an Advance to be made on the next succeeding Business
Day for a Variable Rate Advance and the third succeeding Business
Day for a Eurocurrency Advance or a Cost of Funds Advance.
2.6.3 Repayment: On November 30, 1999, and on the Expiration Date, each
Borrower hereby jointly and severally promises and agrees to pay to
the Bank in full the aggregate unpaid principal amount of all
Advances then outstanding, together with all accrued and unpaid
interest thereon, provided, however, that any Advance denominated in
Dollars must be repaid in Dollars and any Advance denominated in an
Alternate Currency must be repaid in the same Alternate Currency.
2.6.4 Interest on Advances: Interest shall accrue from the date of each
Advance under the Acquisition Line of Credit at Variable Rate or at
the Eurocurrency Rate or Cost of Funds Rate plus the Applicable
Margin, each as quoted by the Bank and as elected by the Borrowers
hereinbelow:
Eurocurrency Advances and Cost of Funds Advances are sometimes
hereinafter referred to as a "Fixed Rate Advance".
Interest on Variable Rate Advances and Cost of Funds Advances shall
be paid in Dollars in monthly installments commencing on the first
day of the month following the date of the first such Advance and
continuing on the first day of each month thereafter.
Interest on any Eurocurrency Advance shall be paid on the last day
of the Eurocurrency Interest Period pertaining to such Eurocurrency
Advance and shall be paid in Dollars or in the relevant Alternate
Currency as the case may be. Each Borrower further jointly and
severally promises and agrees to pay the Bank interest on any
Eurocurrency Advance with an Eurocurrency Interest Period in excess
of
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90 days on a quarterly basis (i.e., on the last day of each 90-day period
occurring in such Eurocurrency Interest Period) and on the last day of
the relevant Eurocurrency Interest Period.
If interest is not paid as and when it is due, it shall be added to the
principal, become and be treated as a part thereof, and shall thereafter
bear like interest.
2.6.5 Notice of Election to Adjust Interest Rate: The Borrowers may elect that
interest on a Fixed Rate Advance shall continue to accrue at a newly
quoted Eurocurrency Rate or Cost of Funds Rate; provided, however, that
such notice shall be received by the Bank no later than 11:00 a.m. two
business days prior to the last day of the Eurocurrency Interest Period
for a Eurocurrency Advance and 1:00 p.m. one business day prior to the
last day of a Cost of Funds Interest Period for a Cost of Funds Advance.
Such notice may be by telephone if confirmed in writing by telecopy with
the original of such writing deposited in the US mail or with an air
courier on the same day. The Bank shall not incur any liability to any
Borrower in acting upon any telephonic notice referred to above that the
Bank believes in good faith to have been given by a duly authorized
officer or other person authorized to act on behalf of any Borrower and
upon any borrowing, Redenomination or continuation by the Bank in
accordance with this Agreement pursuant to any telephonic notice, each
Borrower shall have effected the borrowing, redenomination or
continuation of Advances hereunder. The Borrowers may elect that interest
on a Fixed Rate Advance shall accrue at the Variable Rate; provided,
however, that such notice shall be received by the Bank no later than one
business day prior to the last day of the Interest Period pertaining to
such Fixed Rate Advance, and provided further, however, that such Fixed
Rate Advance shall be in Dollars or Redenominated in Dollars pursuant to
the terms hereinbelow. If the Bank shall not have received notice (as
prescribed herein) of Borrowers' election that interest on any Fixed Rate
Advance shall continue to accrue at the newly quoted Eurocurrency Rate or
Cost of Funds Rate or Variable Rate as the case may be, the Borrowers
shall be deemed to have elected that interest thereon shall be adjusted
to accrue at the Variable Rate then in effect and any Alternate Currency
shall be Redenominated in Dollars.
2.6.6 Redenomination of Advances: The Borrowers may, upon notice given to the
Bank at least four Business Days prior to the date of the proposed
Redenomination, request that a Eurocurrency Advance be Redenominated from
Dollars into an Alternate Currency or from an Alternate Currency into
Dollars or another Alternate Currency; provided, however, that any
Redenomination shall be made on, and only on, the last day of an Interest
Period for such Advances. Each such notice of request of a Redenomination
("Notice of Redenomination") shall be by telecopier, telex or cable,
confirmed immediately in writing, or may be by telephone if confirmed in
writing by telecopy with the original of such writing deposited in the US
mail or with an air courier on the same day, and the Bank shall not incur
any liability to any Borrower in acting upon any telephonic notice
referred to above that the Bank believes in good faith to have been given
by a duly authorized officer or other person authorized to act on behalf
of any Borrower and upon any borrowing, Redenomination or continuation by
the Bank in accordance with this Agreement pursuant to any telephonic
notice, the Borrowers shall have effected the borrowing, redenomination
or continuation of Advances hereunder, specifying (i) the Eurocurrency
Advance(s) to be Redenominated, (ii) the date of
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the proposed Redenomination, (iii) the Alternate currency into which such
Advances are to be Redenominated, and (iv) the duration of the Interest
Period for such Advances upon being so Redenominated. In the case of a
Notice of Redenomination which requests a Redenomination of Advances into
an Alternate Currency, such Redenomination is subject to confirmation by
Bank not later than the third Business Day before the requested date of
such Redenomination that such Bank agrees to such Redenomination. which
confirmation shall be notified to the Borrowers. If no confirmation is
provided the Redenomination will not occur. Each Advance so requested to
be Redenominated will be Redenominated, on the date specified therefor in
such Notice of Redenomination, into an equivalent amount thereof in the
currency requested in such Notice of Redenomination, such equivalent
amount to be determined on such date in accordance with Section 2.7, and,
upon being so Redenominated, will have an initial Interest Period as
requested in such Notice of Redenomination.
2.6.7 Prepayment:
(i) The Borrowers may prepay any Advance in whole or in part, at any
time and without penalty, provided, however, that: (i) any partial
prepayment shall first be applied, at the Bank's option, to accrued
and unpaid interest and next to the outstanding principal balance;
and (ii) during any period of time in which interest is accruing on
any Advance on the basis of the Eurocurrency Rate or the Cost of
Funds Rate, no prepayment shall be made except on a day which is
the last day of the Interest Period pertaining thereto provided,
however, if the whole or any part of any Fixed Rate Advance is
prepaid by reason of acceleration or otherwise, the Borrower shall
jointly and severally upon the Bank's request, promptly pay to and
indemnify the Bank for all costs and any loss actually incurred by
the Bank, excluding loss of profit on any margin, but including any
loss resulting from the re-employment of funds, sustained by the
Bank as a consequence of such prepayment, and provided further,
that any prepayment hereunder shall not be deemed to be an event of
default.
(ii) If, on the last day of any Interest Period, the equivalent in
Dollars of the aggregate principal amount of all Eurocurrency
Advances then outstanding when combined with the aggregate
principal amount of all Variable Rate Advances and Cost of Funds
Advances then outstanding exceeds the Acquisition Line of Credit,
the Borrowers shall jointly and severally on such last day prepay
an aggregate principal amount of such Advances to the Bank in an
amount at least equal to such excess, with accrued interest to the
date of such prepayment on the principal amount prepaid.
(iii) The Bank shall be entitled to fund all or any portion of its
Advances in any manner it may determine in its sole discretion, but
all calculations and transactions hereunder shall be conducted as
though the Bank actually funded all Advances through the purchase
of dollar deposits bearing interest at the same rate as U.S.
Treasury securities in the amount of the relevant Advance and in
maturities corresponding to the date of such purchase to the
Expiration Date hereunder.
2.6.8 Indemnification for Eurocurrency Rate and Cost of Funds Rate Costs:
During
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any period of time in which interest on any Advance is accruing on the
basis of the Eurocurrency Rate or the Cost of Funds Rate, the Borrowers
shall jointly and severally, within 15 days of the Bank's written
request, which request shall explain in reasonable detail the reason for
such costs or payments, promptly pay to and reimburse the Bank for all
costs incurred and payments made by the Bank by reason of any future
assessment, reserve, deposit or similar requirement or any surcharge,
tax or fee imposed upon the Bank or as a result of the Bank's compliance
with any directive or requirement of any regulatory authority pertaining
or relating to the Alternate Currency or Dollars or cost of funds used
by the Bank in quoting and determining the Eurocurrency Rate or the Cost
of Funds Rate under this Agreement. Bank shall use its best efforts to
provide Borrowers, in advance, with an estimate of any such costs which
may potentially be incurred hereunder.
2.6.9 Eurocurrency Rate or Cost of Funds Rate Infeasible: In the event that
the Bank shall at any time determine that the accrual of interest on the
basis of the Eurocurrency Rate or the Cost of Funds Rate (i) is
infeasible at the time of any borrowing, continuation or Redenomination
because the Bank is unable to determine the Eurocurrency Rate or Cost of
Funds Rate due to the unavailability of Dollars or Alternate Currency
deposits, contracts or time deposits in an amount approximately equal to
the amount of the relevant Advance and for a period of time
approximately equal to relevant Interest Period or (ii) is or has become
unlawful or infeasible by reason of the Bank's compliance with any new
law, rule, regulation, guideline or order, or any new interpretation of
any present law, rule, regulation, guideline or order, then the Bank
shall give telephonic notice thereof (confirmed in writing) to the
Borrowers, in which event such Fixed Rate Advance shall be immediately
prepaid but then may be converted or Redenominated into a Variable Rate
Advance at the election of the Borrowers.
2.6.10 Failure to Borrow: In the case of any Fixed Rate Advance, the Borrowers
shall jointly and severally indemnify Bank against any loss, cost or
expense incurred by Bank as a result of any failure to borrow on the
date specified for such Fixed Rate Advance (other than as a result of
Bank's failure to make funds available for such Advance), including,
without limitation, any loss (excluding loss of anticipated profits),
cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by Bank to fund such Fixed Rate Advance
to be made by Bank when such Fixed Rate Advance is not made on such
date.
2.6.11 Computations and Payments: Interest on any Advance shall be computed on
the basis of 360 days per year, but charged on the actual number of days
elapsed. Whenever any payment hereunder shall be stated to be due on a
day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case
be included in the computation of payment of interest; provided,
however, if such extension would cause payment of interest on or
principal of Eurocurrency Advances to be made in the next following
calendar month, such payment shall be made on the immediately preceding
Business Day.
2.6.12 Term Loan Conversion: The Borrowers may, by giving written notice to the
Bank at any time and from time to time, convert the principal balance
outstanding under the Acquisition Line of Credit to be payable on a term
loan basis. The term loan (the "Acquisition Term Loan") shall be in the
amount of such outstanding principal
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balance and shall be for a period of 48 months and shall be
evidenced by a promissory note in form and substance satisfactory to
the Bank (the "Acquisition Term Note" attached as Exhibit 2).
Accrued and unpaid interest under the Acquisition Line of Credit
shall be paid to the Bank concurrently with the Borrowers' execution
of the Acquisition Term Note. In addition to the short term fixed
rates not to exceed 12 months, the Borrower may fix the rate for the
entire 48 month term loan at a Cost of Funds plus 1.50% or a Federal
Funds plus 1.50%. For the Federal Funds Rate to apply a SWAP
Agreement, which includes an ISDA Master Agreement with schedule to
the Separate Master Agreement and a certified corporate resolution
for such transaction, secured with a blanket lien will be required.
Interest shall accrue and principal and interest shall be paid in
accordance with the terms and provisions of the Term Note.
2.6.13 Loan Fee. The Borrowers promise and agree to pay to the Bank a non-
refundable funding fee of .25% on the acquisition facility on
funding.
2.7 Currency Equivalents: For purposes of the provisions of this Section 2, (i)
the equivalent in Dollars of any Alternate Currency shall be determined by
using the quoted spot rate at which Bank's principal office in Los Angeles
offers to exchange Dollars for such Alternate Currency at 9:00 A.M. (Los
Angeles time) two Business Days prior to the date on which such equivalent
is to be determined, (ii) the equivalent in any Alternate Currency of any
other Alternate Currency shall be determined by using the quoted spot rate
at which Bank's principal office in Los Angeles offers to exchange such
Alternate Currency for the equivalent in Dollars of such other Alternate
Currency at 9:00 A.M. (Los Angeles time) two Business Days prior to the
date on which such equivalent is to be determined, and (iii) the equivalent
in any Alternate Currency of Dollars shall be determined by using the
quoted spot rate at which Bank's principal office in Los Angeles offers to
exchange such Alternate Currency for Dollars at 9:00 A.M. (Los Angeles
time) two Business Days prior to the date on which such equivalent is to be
determined. Except as specified hereinabove, the equivalent in Dollars of
each Eurocurrency Rate Advance made in an Alternative Currency shall be
recalculated hereunder on each date that it shall be necessary to determine
the unused portion of Bank's Line of Credit or any or all Advance or
Advances outstanding on such date.
2.8 Term Loan:
2.8.1 Term Loan: On the terms and conditions as set forth herein, the Bank
agrees to lend to the Borrowers, in one drawing, upon the Borrowers'
request therefore made prior to October 15, 1999, up to the maximum
amount of $3,000,000 (the "Term Loan").
2.8.2 Making the Term Loan. The Term Loan shall be conclusively deemed to
have been made at the request of and for the benefit of the
Borrowers (i) when credited to any deposit account of the Borrowers
maintained with the Bank or (ii) when paid in accordance with
Borrowers' written instructions.
2.8.3 Interest. Interest on the Term Loan Balance shall accrue from the
date of funding under the Term Loan at one of the following rates,
as quoted by the Bank and as elected by the Borrowers pursuant to
Subsection (i) or Subsection (ii) or Subsection (iii) below:
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(i) Variable Rate Balances: A variable rate per annum equivalent to the
----------------------
Reference Rate (the "Variable Rate"). Interest shall be adjusted
concurrently with any change in the Reference Rate. A Balance based
upon the Variable Rate is hereinafter referred to as a "Variable
Rate Balance".
(ii) Fixed Rate Balances: A fixed rate per annum quoted by the Bank for
-------------------
30, 60, 90 or 180 days or for such other period of time that the
Bank may quote and offer (provided that any such period of time does
not extend beyond the Expiration Date) (the "Interest Period") for
Balances in the minimum amount of $100,000.00. Such interest rate
shall be a percentage approximately equivalent to the Applicable
Margins plus the rate which the Bank determines in its sole and
absolute discretion to be equal to the Bank's cost of acquiring
funds (adjusted for any and all assessments, surcharges and reserve
requirements pertaining to the borrowing or purchase by the Bank of
such funds) in an amount approximately equal to the amount of the
relevant Balance and for a period of time approximately equal to the
relevant Interest Period (the "Fixed Rate"). A Balance based upon
the Fixed Rate are hereinafter referred to as a "Fixed Rate
Balance".
(iii) LIBOR Balances: A fixed rate quoted by the Bank for one week, 1, 2,
--------------
3, or 6 months or for such other period of time that the Bank may
quote and offer (provided that any such period of time does not
extend beyond the Expiration Date) (the "LIBOR Interest Period") for
Balances in the minimum amount of $100,000.00. Such interest rate
shall be a percentage approximately equivalent to the Applicable
Margin plus the Bank's LIBOR Rate which is that rate determined by
the Bank's Treasury Desk as being the arithmetic mean (rounded
upwards, if necessary, to the nearest whole multiple of one-
sixteenth of one percent (1/16%)) of the U. S. dollar London
Interbank Offered Rates for such period appearing on page 3750 (or
such other page as may replace page 3750) of the Telerate screen at
or about 11:00 a.m. (London time) on the second Business Day prior
to the first days of such period (adjusted for any and all
assessments, surcharges and reserve requirements) (the "LIBOR
Rate"). A Balance based upon the LIBOR Rate is hereinafter referred
to as a "LIBOR Balance".
In addition to the interest rates already stated, Borrower may fix the rate
for the entire 60 month term loan at a Cost of Funds plus 1.50% or a
Federal Funds plus 1.50%. For the Federal Funds Rate to apply, a SWAP
Agreement, including an ISDA Master Agreement with schedule to the Separate
Master Agreement and a certified corporate resolution for such transaction,
secured with a blanket lien, will be required. Interest shall accrue and
principal and interest shall be paid in accordance with the terms and
provisions of Paragraph 2.8.8 hereunder.
Interest on any Balance shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.
Each Borrower hereby jointly and severally promises and agrees to pay
interest on the Term Loan, in arrears, on the last calendar day of each
month.
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Interest on any LIBOR Advance or Fixed Rate Advance with a LIBOR Interest
Period or Interest Period of 3 months or less shall be paid on the last
day of the LIBOR Interest Period or Interest Period as the case may be.
The Borrowers further promise and agree to pay the Bank interest on any
LIBOR Advance or Fixed Rate Advance with a LIBOR Interest Period or
Interest Period in excess of 3 months on a quarterly basis (i.e., on the
last day of each 3 month period occurring in such LIBOR Interest Period
or Interest Period) and on the last day of the LIBOR Interest Period or
Interest Period.
If interest is not paid as and when it is due, it shall be added to the
principal, become and be treated as a part thereof, and shall thereafter
bear like interest.
2.8.4 Notice of Election to Adjust Interest Rate: Upon telephonic notice which
shall be received by the Bank at or before 2:00 p.m. (California time) on
a Business Day, the Borrowers may elect:
(i) That interest on a Variable Rate Balance shall be adjusted to
accrue at the Fixed Rate; provided, however, that such notice
shall be received by the Bank no later than 2:00 p.m. on the
Business Day on which the Borrowers request that interest be
adjusted to accrue at the Fixed Rate.
(ii) That interest on a Variable Rate Balance shall be adjusted to
accrue at the LIBOR Rate; provided, however, that such notice
shall be received by the Bank no later than two Business Days
prior to the Business Day on which the Borrowers request that
interest be adjusted to accrue at the LIBOR Rate.
(iii) That interest on a Fixed Rate Balance shall continue to accrue at
a newly quoted Fixed Rate or shall be adjusted to commence to
accrue at the Variable Rate; provided, however, that such notice
shall be received by the Bank no later than 2:00 p.m. on the last
day of the Interest Period pertaining to such Fixed Rate Balance.
If the Bank shall not have received notice (as prescribed herein)
of the Borrowers' election that interest on any Fixed Rate Balance
shall continue to accrue at the newly quoted Fixed Rate as the
case may be the Borrowers shall be deemed to have elected that
interest thereon shall be adjusted to accrue at the Variable Rate
upon the expiration of the relevant Interest Period pertaining to
such Balance.
(iv) That (i) interest on a Fixed Rate Balance shall accrue at a newly
quoted LIBOR Rate or (ii) interest on a LIBOR Balance shall
continue to accrue at a newly quoted Fixed Rate or LIBOR Rate or
shall be adjusted to commence to accrue at the Variable Rate;
provided, however, that such notice shall be received by the Bank
no later than two Business Days prior to the last day of the
relevant Interest Period or LIBOR Interest Period, as applicable.
If the Bank shall not have received notice as prescribed herein of
the Borrowers' election that interest on any Fixed Rate Balance
shall accrue interest at a newly quoted LIBOR Rate or at a newly
quoted Fixed Rate pursuant to subparagraph (c) hereinabove; or any
LIBOR Balance shall continue to accrue at the newly quoted Fixed
Rate or LIBOR Rate as the case may be, the Borrowers shall be
deemed to have elected that interest thereon shall be adjusted to
accrue at the Variable Rate upon the
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expiration of the relevant Interest Period or LIBOR Interest Period
pertaining to such Balance.
2.8.5 Prepayment: The Borrowers may prepay any Balance in whole or in part, at
any time and without penalty, provided, however, that: (i) any partial
prepayment shall first be applied at the Bank's option, to accrued and
unpaid interest and next to the outstanding principal balance; and (ii)
during any period of time in which interest is accruing on any Balance on
the basis of the LIBOR Rate or Fixed Rate, no prepayment shall be made
except on a day which is the last day of the LIBOR Interest Period or
Interest Period pertaining thereto. if the whole or any part of any LIBOR
Balance or Fixed Rate Balance is prepaid by reason of acceleration or
otherwise, the Borrower shall jointly and severally upon the Bank's
request, promptly pay to and indemnify the Bank for all costs and any
loss actually incurred by the Bank, excluding loss of profit on any
margin, but including any loss resulting from the re-employment of funds,
sustained by the Bank as a consequence of such prepayment, and provided
further, that any prepayment hereunder shall not be deemed to be an event
of default.
The Bank shall be entitled to fund all or any portion of its Balances in
any manner it may determine in its sole discretion, but all calculations
and transactions hereunder shall be conducted as though the Bank actually
funded all Advances through the purchase of dollar deposits bearing
interest at the same rate as U.S. Treasury securities in the amount of
the relevant Advance and in maturities corresponding to the date of such
purchase to the Expiration Date hereunder.
2.8.6 Indemnification for LIBOR Rate or Fixed Rate Costs: During any period of
time in which interest on any Advance is accruing on the basis of the
LIBOR Rate or Fixed Rate, the Borrowers shall, within 15 days of the
Bank's written request, promptly pay to and reimburse the Bank for all
costs incurred and payments made by the Bank by reason of any future
assessment, reserve, deposit or similar requirement or any surcharge, tax
or fee imposed upon the Bank or as a result of the Bank's compliance with
any directive or requirement of any regulatory authority pertaining or
relating to funds used by the Bank in quoting and determining the LIBOR
Rate or Fixed Rate. Bank shall use its best efforts to provide Borrowers,
in advance, with an estimate of any such costs which may potentially be
incurred hereunder.
2.8.7 Conversion from LIBOR Rate or Fixed Rate to Variable Rate: In the event
that the Bank shall at any time determine that the accrual of interest on
the basis of the LIBOR Rate or Fixed Rate (i) has become infeasible
because the Bank is unable to determine the LIBOR Rate or Fixed Rate due
to the unavailability of U.S. Dollar deposits, contracts or certificates
of deposit in an amount approximately equal to the amount of the relevant
Advance and for a period of time approximately equal to the relevant
LIBOR Interest Period or Interest Period as the case may be or (ii) is or
has become unlawful by reason of the Bank's compliance with any new law,
rule, regulation, guideline or order, or any new interpretation of any
present law, rule, regulation guideline or order, then the Bank shall
promptly give telephonic notice thereof (confirmed in writing) to the
Borrowers, in which event any Advance bearing interest at either the
LIBOR Rate or Fixed Rate as the case may be shall be deemed to be a
Variable Rate Advance and interest shall thereupon immediately accrue at
the Variable Rate and shall continue at such rate until the
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Bank determines that the LIBOR Rate or Fixed Rate is no longer
infeasible or unlawful.
2.8.8 Repayment. The Term Loan will amortize over 7 years but will be due
in 5 years. The Borrowers hereby promise and agree to pay principal
as follows: Commencing on December 1, 1999, and continuing monthly
thereafter up to and including October 1, 2004, principal shall be
paid monthly on the 1st of each month in 59 installments of
$35,714.29. On November 1, 2004 of the Term Loan, the Borrowers
hereby promise and agree to pay a balloon payment to the Bank of the
entire unpaid principal balance, together with accrued and unpaid
interest.
2.9 Facility and Sub-Facility Accounts:
2.9.1 The Bank shall maintain on its books a record of each separate
facility by an account in which the Bank shall make entries for each
Advance on each facility and such other debits and credits as shall
be appropriate in connection with the credit facilities granted
hereunder (the "Line Account, Equipment Account, Foreign Exchange
Account, Acceptances Account, Letter of Credit Account, Acquisition
Account" and "Term Loan Account"). The Bank shall provide the
Borrowers with a statement of the Borrowers' Accounts, which
statements shall be considered to be correct and conclusively
binding on the Borrowers unless the Borrowers notify the Bank to the
contrary within 18 months after the Borrowers' receipt of any such
statement which it deems to be incorrect.
2.9.2 The Borrowers hereby authorize the Bank to charge, from time to
time, against any or all of the Borrowers' deposit accounts with the
Bank any amount so due under this Agreement, including, but not
limited to, account #261535176 maintained with the Bank's Rosemead
Office (CBC).
2.9.3 If any payment required to be made by the Borrowers hereunder become
due and payable on a day other than a Business Day, the due date
thereof shall be extended to the next succeeding Business Day and
interest thereon shall be payable at the then applicable rate during
such extension. All payments required to be made hereunder shall be
made to the office of the Bank designated for the receipt of notices
herein or such other office as Bank shall from time to time
designate.
2.10 Late Payment: In addition to any other rights the Bank may have hereunder,
if any payment of principal or interest or any portion thereof, under this
Agreement for any of the facilities is not paid within 10 days of when due,
a late payment charge equal to five percent (5%) of such past due payment
may be assessed and shall be immediately payable.
SECTION
3
COLLATERAL
3.1 The Collateral: To secure payment and performance of all the Borrowers'
Obligations under this Agreement and all other liabilities, loans,
guarantees, covenants and duties
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owed by the Borrowers to the Bank, whether or not evidenced by this or by
any other agreement, absolute or contingent, due or to become due, now
existing or hereafter and howsoever created, the Borrowers hereby grant the
Bank a security interest in and to all of the following property
("Collateral"):
(i) Equipment. All goods now owned or hereafter acquired by any of
the Borrowers or in which any of the Borrowers now have or may
hereafter acquire any interest, excluding goods of any Foreign
Subsidiary, including, but not limited to, all machinery,
equipment, furniture, furnishings, fixtures, tools, supplies and
motor vehicles of every kind and description, and all additions,
accessions, improvements, replacements and substitutions thereto
and thereof (the "Equipment").
(ii) Inventory. All inventory now owned or hereafter acquired by any
of the Borrowers, excluding any Foreign Subsidiary, including,
but not limited to, all raw materials, work in process, finished
goods, merchandise, parts and supplies of every kind and
description, including inventory temporarily out of such
Borrower's custody or possession, together with all returns on
accounts (the "Inventory").
(iii) Accounts. All accounts, contract rights and general intangibles
now owned or hereafter created or acquired by any of the
Borrowers, including, but not limited to, all receivables,
goodwill, trademarks, trademark applications, trade styles,
trade names, patents, patent applications, copyrights and
copyright applications, customer lists, business records and
computer programs, tapes, disks and related data processing
software that at any time evidence or contain information
relating to any of the Collateral, provided however that the
accounts, contract rights and general intangibles of the
Borrowers' foreign affiliates and subsidiaries shall not be
included hereunder.
(iv) Documents. All documents, instruments and chattel paper now
owned or hereafter acquired by any of the Borrowers, including,
but not limited to, warehouse and other receipts, bills of sale
and bills of lading, provided, however, that any document or
instrument that derives its value by reference to either the
stock of, or the assets of, a Foreign Subsidiary, are excluded.
(v) Monies. All monies, deposit accounts, certificates of deposit
and securities of any of the Borrowers now or hereafter in the
Bank's or its agents' possession, excluding any interest in
accounts of any Foreign Subsidiary.
(vi) Securities. All securities, stocks, and other instruments or
certificates of shares, in domestic subsidiaries acquired in the
future to be delivered to Bank and to be evidenced by a separate
Security Agreement in favor of the Bank. Securities owner by any
Foreign Subsidiaries are excluded.
The Bank's security interest in the Collateral shall be a continuing lien and
shall include the proceeds and products of the Collateral including, but not
limited to, the proceeds of any insurance thereon.
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The security interest granted to Bank in the Collateral shall not secure or be
deemed to secure any Indebtedness of the Borrowers to the bank which is, at the
time of its creation, subject to the provisions of any state or federal consumer
credit or truth-in-lending disclosure statutes.
SECTION
4
CONDITIONS PRECEDENT
4.1 Conditions Precedent to the Initial Advance: The obligation of the Bank to
make the initial Advance and the first extension of credit to or on account
of the Borrowers hereunder is subject to the conditions precedent that the
Bank shall have received before the date of such initial Advance and such
first extension of credit all of the following, in form and substance
satisfactory to the Bank:
(i) Authority to Borrow. Evidence that the execution, delivery and
performance by the Borrowers of this Agreement and any document,
instrument or agreement required hereunder have been duly
authorized.
(ii) Audit. The Bank shall have conducted an audit of each of the
Borrowers' books, records and operations and the Bank shall be
satisfied as to the condition thereof.
(iii) Miscellaneous. Such other evidence as the Bank may request to
establish the consummation of the transaction contemplated
hereunder and compliance with the conditions of this Agreement.
4.2 Conditions Precedent to All Advances: The obligation of the Bank to make
each Advance and each other extension of credit to or on account of the
Borrowers (including the initial Advance and the first extension of credit)
shall be subject to the further conditions precedent that, on the date of
each Advance or each extension of credit and after the making of such
Advance or extension of credit:
(i) Subsequent Approvals. The Bank shall have received such
supplemental approvals, opinions or documents as the Bank may
reasonably request.
(ii) Representations and Warranties. The representations contained in
Section 5 and in any other document, instrument or certificate
delivered to the Bank hereunder are true, correct and complete.
(iii) Event of Default. No event has occurred and is continuing which
constitutes, or with the lapse of time or giving of notice or
both, would constitute an Event of Default.
(iv) Collateral. The security interest in the Collateral has been
duly authorized, created and perfected with first priority and
is in full force and effect.
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The Borrowers' acceptance of the proceeds of any loan, advance or extension of
credit or the Borrowers' execution of any document or instrument evidencing or
creating any Obligation hereunder shall be deemed to constitute the Borrowers'
representation and warranty that all of the above statements are true and
correct.
SECTION
5
REPRESENTATIONS AND WARRANTIES
Each of the Borrowers, jointly and severally, hereby makes the following
representations and warranties to the Bank, which representations and warranties
are continuing:
5.1 Status: All Borrowers are corporations duly organized and validly existing
under the laws of the state of California and are properly licensed and are
qualified to do business and in good standing in, and, where necessary to
maintain each Borrower's rights and privileges, such Borrower has complied
with the fictitious name statute of every jurisdiction in which such
Borrower is doing business.
5.2 Authority: The execution, delivery and performance by each of the Borrowers
of this Agreement and any instrument, document or agreement required
hereunder have been duly authorized and do not and will not: (i) violate
any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
application to such Borrower; (ii) result in a breach of or constitute a
default under any material indenture or loan or credit agreement or other
material agreement, lease or instrument to which such Borrower is a party
or by which it or its properties may be bound or affected; or (iii) require
any consent or approval of its stockholders or violate any provision of its
articles of incorporation or by-laws; or violate any provision of its
partnership agreement, or require any consent or approval of its members or
violate any provision of its articles of organization or operating
agreement, each as the case may be applicable herein.
5.3 Legal Effect: This Agreement constitutes, and any instrument, document or
agreement required hereunder when delivered hereunder will constitute,
legal, valid and binding obligations of each of the Borrowers enforceable
against such Borrower in accordance with their respective terms.
5.4 Fictitious Trade Styles: There are no fictitious trade styles used by the
Borrowers in connection with their business operations. The Borrowers shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style
at any future date, indicating the trade style and state(s) of its use.
5.5 Financial Statements: The Companies' consolidated financial statements,
information and other data which may have been or which may hereafter be
submitted by the Borrowers to the Bank are true, accurate and correct and
have been or will be prepared in accordance with generally accepted
accounting principles consistently applied and accurately represent the
financial condition or, as applicable, the other information disclosed
therein. Since the most recent submission of such financial information or
data to the Bank, each of the Borrowers, jointly and severally, represents
and warrants that no
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material adverse change in any of the Borrowers' financial condition or
operations has occurred which has not been fully disclosed to the Bank in
writing.
5.6 Litigation: Except as have been disclosed to the Bank in writing, there
are no actions, suits or proceedings pending or, to the knowledge of any
of the Borrowers, threatened against or affecting any of the Borrowers or
such Borrower's properties before any court or administrative agency
which, if determined adversely to such Borrower, would have a material
adverse effect on the Borrower's financial condition or operations or on
the Collateral.
5.7 Title to Assets: Each of the Borrowers has good and marketable title to
all of its assets (including, but not limited to, the Collateral) and the
same are not subject to any security interest, encumbrance, lien or claim
of any third person except for Permitted Liens.
5.8 ERISA: If any of the Borrowers has a pension, profit sharing or
retirement plan subject to ERISA, such plan has been and will continue to
be funded in accordance with its terms and otherwise complies with and
continues to comply with the requirements of ERISA.
5.9 Taxes: Each of the Borrowers has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than such taxes which are currently payable without
penalty or interest or those which are being duly contested in good
faith.
5.10 Margin Stock. The proceeds of any loan or advance hereunder will not be
used to purchase or carry margin stock as such term is defined under
Regulation U of the Board of Governors of the Federal Reserve System.
5.11 Environmental Compliance. The operations of each of the Borrowers comply,
and during the term of this Agreement will at all times comply, in all
material respects with all Environmental Laws; each of the Borrowers has
obtained all material licenses, permits, authorizations and registrations
required under any Environmental Law ("Environmental Permits") and
---------------------
necessary for its ordinary course operations, all such Environmental
Permits are in good standing, and such Borrower is in compliance with all
material terms and conditions of such Environmental Permits; neither the
Borrower nor any of its present property or operations is subject to any
outstanding written order from or agreement with any governmental
authority nor subject to any judicial or docketed administrative
proceeding, respecting any Environmental Law, Environmental Claim or
Hazardous Material; there are no Hazardous Materials or other conditions
or circumstances existing, or arising from operations prior to the date
of this Agreement, with respect to any property of such Borrower that
would reasonably be expected to give rise to Environmental Claims;
provided, however, that with respect to property leased from an unrelated
--------
third party, the foregoing representation is made to the best knowledge
of such Borrower. In addition, (i) none of the Borrowers have any
underground storage tanks (x) that are not properly registered or
permitted under applicable Environmental Laws, or (y) that are leaking or
disposing of Hazardous Materials off-site, and (ii) each of the Borrowers
has notified all of their employees of the existence, if any, of any
health hazard arising from the conditions of their employment and have
met all notification requirements under Title III of CERCLA and all other
Environmental Laws.
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SECTION
6
COVENANTS
Each Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as each Borrower is indebted to the Bank under this
Agreement, each Borrower will, unless the Bank shall otherwise consent in
writing:
6.1 Reporting and Certification Requirements: Deliver or cause to be delivered
to the Bank in form and detail satisfactory to the Bank:
(i) Not later than 125 days after the end of each Companies' fiscal
year, a copy of the annual audited consolidated financial report
of the Companies for such year, prepared by a firm of certified
public accountants acceptable to Bank and accompanied by an
unqualified opinion of such firm plus a copy of the Companies
consolidating financial projections for the upcoming 3 years and
10K report.
(ii) Not later than 50 days after the end of each fiscal quarter, the
Companies' consolidating financial statement and not later than
50 days after the end of each of the first three fiscal quarters
Borrower's 10Q report as of the end of such period.
(iii) Concurrently with the delivery of the financial reports required
hereunder, a compliance certificate stating that each Borrower
is in compliance with all covenants contained herein and that no
Event of Default or potential Event of Default has occurred or
is continuing, and certified to by the chief financial officer
of each Borrower.
(iv) Promptly upon the Bank's request, such other information
pertaining to any Borrower or the Company, the Collateral or any
guarantor hereunder as the Bank may reasonably request.
6.2 Financial Condition: Each Borrower promises and agrees, during the term of
this Agreement and until payment in full of all of the Borrowers'
Obligations, the Companies will maintain at all times on a consolidated
basis:
(i) Net Worth. A minimum Effective Tangible Net Worth of at least
$50,000,000.00.
(ii) Quick Ratio. A ratio of the sum of cash, cash equivalents and
accounts receivable to Current Liabilities plus debt under
working capital line maturing in more than one year of not less
than .80 to 1.
(iii) Debt Coverage Ratio. A ratio of EBITDA to the sum of interest
expense and the current portion of long term Debt of not less
than 2 to 1, measured at the end of each fiscal quarter based
upon the immediately preceding three fiscal quarters and the
current quarter just ended.
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(iv) Losses. Not allow any quarterly losses, excluding any
extraordinary items associated with an acquisition.
(v) Funded Debt Ratio. A ratio of Funded Debt to EBITDA of not more
than 3 to 1 on a rolling 4 quarters basis.
6.3 Preservation of Existence; Compliance with Applicable Laws: Maintain and
preserve its existence and all rights and privileges now enjoyed; and
conduct its business and operations in accordance with all applicable laws,
rules and regulations.
6.4 Merge or Consolidate: Not liquidate or dissolve, merge or consolidate with
or into, or acquire any other business organization, provided however, that
the Borrowers may make business acquisitions of up to $40,000,000 in fiscal
year 1999 and $30,000,000 in any one fiscal year thereafter, provided
however, that any acquired company must have a positive EBITDA and the
total purchase price may not exceed $25,000,000 of which not more than
$15,000,000 may be in cash.
6.5 Maintenance of Insurance: Keep and maintain the Collateral insured for not
less than its full replacement value against all risks of loss and damage,
other than earthquake insurance, and maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which
each Borrower operates and maintain such other insurance and coverages as
may be required by the Bank. All such insurance shall be in form and amount
and with companies satisfactory to the Bank.
With respect to insurance covering properties in which the Bank maintains a
security interest or lien, such insurance shall name the Bank as loss payee
pursuant to a loss payable endorsement satisfactory to the Bank and shall
not be altered or canceled except upon 10 days' prior written notice to the
Bank. Upon the Bank's request, the Borrowers shall furnish the Bank with
the original policy or binder of all such insurance.
6.6 Maintenance of Collateral and Other Properties: Except for Permitted Liens,
keep and maintain the Collateral free and clear of all levies, liens,
encumbrances and security interests (including, but not limited to, any
lien of attachment, judgment or execution) and defend the Collateral
against any such levy, lien, encumbrance or security interest; comply with
all laws, statutes and regulations pertaining to the Collateral and its use
and operation; execute, file and record such statements, notices and
agreements, take such actions and obtain such certificates and other
documents as necessary to perfect, evidence and continue the Bank's
security interest in the Collateral and the priority thereof; maintain
accurate and complete records of the Collateral which show all sales,
claims and allowances; and properly care for, house, store and maintain the
Collateral in good condition, free of misuse, abuse and deterioration,
other than normal wear and tear. Each Borrower shall also maintain and
preserve all its properties in good working order and condition in
accordance with the general practice of other businesses of similar
character and size, ordinary wear and tear excepted.
6.7 Payment of Obligations and Taxes: Make timely payment of all assessments
and taxes and all of its liabilities and obligations including, but not
limited to, trade payables, unless the same are being contested in good
faith by appropriate proceedings with the appropriate court or regulatory
agency. For purposes hereof, any Borrower's issuance of
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a check, draft or similar instrument without delivery to the intended
payee shall not constitute payment.
6.8 Inspection Rights and Accounting Records: Each Borrower will maintain
adequate books and records in accordance with generally accepted
accounting principals consistently applied and in a manner otherwise
acceptable to Bank, and, at any reasonable time and from time to time,
permit the Bank or any representative thereof to examine and make copies
of the records and visit the properties of each Borrower and discuss the
business and operations of each Borrower with any employee or
representative thereof. If any Borrower shall maintain any records
(including, but not limited to, computer generated records or computer
programs for the generation of such records) in the possession of a third
party, such Borrower hereby agrees to notify such third party to permit
the Bank free access to such records at all reasonable times and to
provide the Bank with copies of any records which it may request, all at
such Borrower's expense, the amount of which shall be payable immediately
upon demand.
6.9 Payment of Dividends: Not declare or pay any dividends on any class of
stock now or hereafter outstanding except dividends payable solely in
each Borrower's capital stock.
6.10 Redemption or Repurchase of Stock: Not redeem or repurchase any class of
each Borrower's stock now or hereafter outstanding, except stock in an
amount of up to $12,000,000.00 in any one fiscal year.
6.11 Loans: Not make any loans or advances or extend credit to any third
person, including, but not limited to, directors, officers, shareholders,
partners, employees of any Borrower, except for credit extended in the
Ordinary Course of Business as presently conducted and except up to
$350,000.00 in any one fiscal year.
6.12 Additional Indebtedness: Not, after the date hereof, create, incur or
assume, directly or indirectly, any additional Indebtedness other than
(i) Indebtedness owed or to be owed to the Bank or (ii) Indebtedness to
trade creditors incurred in the ordinary course of the Borrower's
business or (iii) Indebtedness presently owed to Wells Fargo HSBC Trade
Bank or (iv) Indebtedness owed by foreign subsidiaries.
6.13 Liens and Encumbrances: Not create, assume or permit to exist any
security interest, encumbrance, mortgage, deed of trust, or other lien
(including, but not limited to, a lien of attachment, judgment or
execution) affecting any of the Borrower's properties, or execute or
allow to be filed any financing statement or continuation thereof
affecting any of such properties, except for Permitted Liens or as
otherwise provided in this Agreement and except liens in favor of the
Borrower's foreign subsidiaries and Wells Fargo HSBC Trade Bank.
6.14 Capital Expense: Not make any fixed capital expenditure or any commitment
therefor, including, but not limited to, incurring liability for leases
which would be, in accordance with generally accepted accounting
principles, reported as capital leases, or purchase any real or personal
property in an aggregate amount exceeding $5,000,000 in any one fiscal
year, excluding assets acquired as the result of any acquisition.
6.15 Transfer Assets: Not, after the date hereof, sell, contract for sale,
convey, transfer, assign, lease or sublet, any of its assets (including,
but not limited to, the Collateral) except
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in the Ordinary Course of Business and, then, only for full, fair and
reasonable consideration or except as such might occur between or among
the Borrowers.
6.16 Change in Nature of Business: Not make any material change in each of
their financial structure or the nature of each of their business as
existing or conducted as of the date hereof.
6.17 Compensation of Employees: Compensate its employees for services rendered
at an hourly rate at least equal to the minimum hourly rate prescribed by
any applicable federal or state law or regulation.
6.18 Notice: Give the Bank prompt written notice of any and all (i) Events of
Default; (ii) litigation, arbitration or administrative proceedings to
which any Borrower is a party and in which the claim or liability exceeds
$500,000.00 or which affects the Collateral; (iii) other matters which
have resulted in, or might result in a material adverse change in the
Collateral or the financial condition or business operations of any
Borrower, and (iv) any enforcement, cleanup, removal or other
governmental or regulatory actions instituted, completed or threatened
against any Borrower or any of its properties.
6.19 Environmental Compliance: Each Borrower shall conduct its operations and
keep and maintain all of its property in material compliance with all
Environmental Laws and, upon the written request of the Bank, the
Borrowers shall submit to the Bank, at the Borrowers' sole cost and
expense, at reasonable intervals, a report providing the status of any
environmental, health or safety compliance, hazard or liability.
6.20 Inventory:
(i) Except as provided herein below, the Borrowers' inventory shall,
at all times, be in each Borrower's physical possession, shall
not be held by others on consignment, sale on approval, or sale
or return and shall be kept only at: 12515,12525,12533,and 12605
Chadron Ave, Hawthorne, California 90250; 3232 West El Segundo
Blvd., Hawthorne, California 90250; 2006 Government Street,
Ocean Springs, Mississippi 39564; 9305 W. National, West Allis,
Wisconsin 53227; 250 Phillips Boulevard, Ewing, New Jersey,
08618; and 46583 Fremont Boulevard, Fremont, California 94538.
(ii) Each Borrower shall keep correct and accurate records.
(iii) The inventory shall not at any time or times hereafter be stored
with a bailee, warehouseman or similar party without the Bank's
prior written consent and, in such event, the Borrowers will
concurrently therewith cause any such bailee, warehouseman or
similar party to issue and deliver to the Bank, in form
acceptable to the Bank, warehouse receipts in the Bank's name
evidencing the storage of inventory.
(iv) At any reasonable time and from time to time, allow Bank to have
the right, upon demand, to inspect and examine inventory and to
check and test the same as to quality, quantity, value and
condition and each Borrower agrees to reimburse the Bank for the
Bank's reasonable costs and expenses in so doing.
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6.21 Year 2000 Compliant. Borrower shall perform all acts reasonably necessary
to ensure that Borrower becomes Year 2000 Compliant in a timely manner.
Such acts shall include performing a review and assessment of all of
Borrower's systems and adopting a plan with a budget for the remediation
and testing of such systems. For the purposes hereof, "Year 2000
Compliant" shall mean that all software, hardware, firmware, equipment,
goods or systems, utilized by and material to the business operations or
financial condition of the Borrower, will properly perform date sensitive
functions before, during and after the Year 2000. Borrower shall use its
best efforts to remain informed as to whether its major customers,
suppliers and vendors are Year 2000 Compliant. Borrower shall, upon the
Bank's request, provide Bank with such certifications or other evidence of
Borrower's compliance with the terms hereof as Bank may from time to time
require
6.22 Location and Maintenance of Equipment.:
(i) The Equipment shall at all times, be in each Borrower's physical
possession, shall not be held by others on consignment, sale on
approval, or sale or return and shall be kept only at:
12515,12525,12533,and 12605 Chadron Ave, Hawthorne, California
90250; 3232 West El Segundo Blvd., Hawthorne, California 90250;
2006 Government Street, Ocean Springs, Mississippi 39564; 9305
W. National, West Allis, Wisconsin 53227; 250 Phillips
Boulevard, Ewing, New Jersey, 08618; and 46583 Fremont
Boulevard, Fremont, California 94538.
(ii) Each Borrower shall not secrete, abandon or remove, or permit
the removal of, the Equipment, or any part thereof, from the
location(s) shown above or remove or permit to be removed any
accessories now or hereafter placed upon the Equipment.
(iii) Upon the Bank's demand, each Borrower shall provide the Bank
with a complete and accurate description of the Equipment
including, as applicable, the make, model, identification number
and serial number of each item of Equipment. In addition, each
Borrower shall notify the Bank of the acquisition of any new or
additional Equipment or the replacement of any existing
Equipment and shall supply the Bank with a complete description
of any such additional or replacement Equipment.
(iv) The Borrowers shall, at the Borrowers' sole cost and expense,
keep and maintain the Equipment in a good state of repair and
shall not destroy, misuse, abuse, illegally use or be negligent
in the care of the Equipment or any part thereof. The Borrowers
shall not remove, destroy, obliterate, change, cover, paint,
deface or alter the name plates, serial numbers, labels or other
distinguishing numbers or identification marks placed upon the
Equipment or any part thereof by or on behalf of the
manufacturer, any dealer or rebuilder thereof, or the Bank. Each
Borrower shall not be released from any liability to the Bank
hereunder because of any injury to or loss or destruction of the
Equipment. The Borrowers shall allow the Bank and its
representatives free access to and the right to inspect the
Equipment at all times and shall comply with the terms and
conditions of any leases covering the real property on which the
Equipment is located and any orders, ordinances, laws,
regulations or rules of any federal, state or municipal agency
or authority having jurisdiction of such real property or
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the conduct of the business of the persons having control or
possession of the Equipment.
(v) The Equipment is not now and shall not at any time hereafter be
so affixed to the real property on which it is located as to
become a fixture or a part thereof. The Equipment is now and
shall at all times hereafter be and remain personal property of
the Borrowers.
SECTION
7
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event
of default (an "Event of Default") under this Agreement:
7.1 Non-Payment: Any Borrower shall fail to pay the principal amount of any
Obligations when due or interest on the Obligations within 5 days of when
due.
7.2 Performance Under This Agreement: The Borrowers shall fail in any material
respect to perform or observe any term, covenant or agreement contained in
this Agreement or in any document, instrument or agreement relating to this
Agreement or any other document or agreement executed by the Borrowers with
or in favor of Bank and any such failure shall continue unremedied for more
than 30 days after written notice from the Bank to the Borrowers of the
existence and character of such Event of Default.
7.3 Representations and Warranties; Financial Statements: Any representation or
warranty made by any of the Borrowers under or in connection with this
Agreement or any financial statement given by any of the Borrowers or any
guarantor shall prove to have been incorrect in any material respect when
made or given or when deemed to have been made or given.
7.4 Other Agreements: If there is a default under any other agreement with Bank
or under an agreement to which any of the Borrowers is a party with the
Bank or with a third party or parties resulting in a right by the Bank or
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of $250,000.00.
7.5 Insolvency: Any of the Borrowers or any guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an
assignment for the benefit of creditors or to an agent authorized to
liquidate any substantial amount of its properties and assets; (iii) file a
voluntary petition in bankruptcy or seeking reorganization or to effect a
plan or other arrangement with creditors; (iv) file an answer admitting the
material allegations of an involuntary petition relating to bankruptcy or
reorganization or join in any such petition; (v) become or be adjudicated a
bankrupt; (vi) apply for or consent to the appointment of, or consent that
an order be made, appointing any receiver, custodian or trustee, for itself
or any of its properties, assets or businesses; or (vii) in an involuntary
proceeding, any receiver, custodian or trustee shall have been appointed
for all or substantial part of such
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Borrower's or guarantor's properties, assets or businesses and shall not be
discharged within 30 days after the date of such appointment.
7.6 Execution: Any writ of execution or attachment or any judgment lien shall
be issued against any property of any of the Borrowers in an amount in
excess of $250,000.00 and shall not be discharged or bonded against or
released within 30 days after the issuance or attachment of such writ or
lien.
7.7 Suspension: Any of the Borrowers shall voluntarily suspend the transaction
of business or allow to be suspended, terminated, revoked or expired any
permit, license or approval of any governmental body necessary to conduct
such Borrower's business as now conducted.
7.8 Change in Ownership: There shall occur a sale, transfer, disposition or
encumbrance (whether voluntary or involuntary), or an agreement shall be
entered into to do so, with respect to more than 25% of the issued and
outstanding capital stock of any Borrower owned by Deepak Chopra without
the prior written consent of the Bank.
SECTION
8
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole and
absolute election, without demand and only upon such notice as may be required
by law:
8.1 Acceleration: Declare any or all of the Borrowers' indebtedness owing to
the Bank, whether under this Agreement or any other document, instrument or
agreement, immediately due and payable, whether or not otherwise due and
payable.
8.2 Cease Extending Credit: Cease making Advances or otherwise extending credit
to or for the account of the Borrowers under this Agreement or under any
other agreement now existing or hereafter entered into between any of the
Borrowers and the Bank.
8.3 Termination: Terminate this Agreement as to any future obligation of the
Bank without affecting the Borrowers' obligations to the Bank or the Bank's
rights and remedies under this Agreement or under any other document,
instrument or agreement.
8.4 Letters of Credit: Require the Borrowers to pay immediately to the Bank,
for application against drawings under any outstanding Letters of Credit,
the outstanding principal amount of any such Letters of Credit which have
not expired. Any portion of the amount so paid to the Bank which is not
applied to satisfy draws under any such Letters of Credit or any other
obligations of the Borrower to the Bank shall be repaid to the Borrowers.
8.5 Acceptances: Require the Borrower to pay immediately to the Bank, for
application against outstanding Acceptances, the outstanding principal
amount of any such Acceptances which have not matured. Any portion of the
amount so paid to the Bank which is not applied to repayments on any such
matured Acceptances or any other obligations of the Borrower to the Bank
shall be repaid to the Borrower.
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8.6 Close-Out and Liquidation: Close-out and liquidate each outstanding FX
Transaction so that each FX Transaction is canceled in accordance with the
following:
(i) Closing Value. The Bank shall calculate value of such canceled
FX Transaction by converting (1) in the case of a FX Transaction
whose Settlement Date is the same as or later than the Close-Out
Date, the amount of Foreign Currency into US dollars at a rate
of exchange at which the Bank can buy or sell US dollars with or
against the Foreign Currency for delivery on the Settlement Date
of the relevant FX Transaction; or (2) in the case of a FX
Transaction whose Settlement Date precedes the Close-Out Date,
the amount of the Foreign Currency adjusted by adding interest
with respect thereto at the Variable Rate from the Settlement
Date to the Close-Out Date, into US Dollars at a rate of
exchange at which the Bank can buy or sell US dollars with or
against the Foreign Currency for delivery on the Close-Out Date.
(ii) Closing Gain or Loss. (1) For a FX Transaction for which the
Bank agreed to purchase a Foreign Currency, the amount by which
the Closing Value exceeds the Notional Value shall be a Closing
Loss and the amount by which the Closing Value is less than the
Notional Value shall be a Closing Gain; and (2) For a FX
Transaction for which the Bank agreed to sell a Foreign
Currency, the amount by which the Closing Value exceeds the
Notional Value shall be a Closing Gain and the amount by which
the Closing Value is less than the Notional Value shall be a
Closing Loss.
(iii) Net Present Value. The Closing Gain or Closing Loss for each
Settlement Date falling after the Close-out Date will be
discounted by the Bank to it net present value.
(iv) Payment. To the extent that the net amount of the aggregate
Closing Gains exceeds the Closing Losses, such amount shall be
payable by the Bank to the applicable Borrower. To the extent
that the aggregate net amount of the Closing Losses exceeds the
Closing Gains, such amount shall be payable by such Borrower to
the Bank.
8.7 Protection of Security Interest: Make such payments and do such acts as the
Bank, in its sole judgment, considers necessary and reasonable to protect
its security interest or lien in the Collateral. Each of the Borrowers
hereby irrevocably authorizes the Bank to pay, purchase, contest or
compromise any encumbrance, lien or claim which the Bank, in its sole
judgment, deems to be prior or superior to its security interest. Further,
the Borrowers hereby agree to pay to the Bank, upon demand therefor, all
expenses and expenditures (including attorneys' fees) incurred in
connection with the foregoing.
8.8 Foreclosure: Enforce any security interest or lien given or provided for
under this Agreement or under any security agreement, mortgage, deed of
trust or other document, in such manner and such order, as to all or any
part of the properties subject to such security interest or lien, as the
Bank, in its sole judgment, deems to be necessary or appropriate and the
Borrowers hereby waive any and all rights, obligations or defenses now or
hereafter established by law relating to the foregoing. In the enforcement
of its security interest or lien, the Bank is authorized to enter upon the
premises where any Collateral is located and take possession of the
Collateral or any part thereof, together
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with the Borrower's records pertaining thereto, or the Bank may require
any Borrower to assemble the Collateral and records pertaining thereto and
make such Collateral and records available to the Bank at a place
designated by the Bank. The Bank may sell the Collateral or any portions
thereof, together with all additions, accessions and accessories thereto,
giving only such notices and following only such procedures as are
required by law, at either a public or private sale, or both, with or
without having the Collateral present at the time of the sale, which sale
shall be on such terms and conditions and conducted in such manner as the
Bank determines in its sole judgment to be commercially reasonable. Any
deficiency which exists after the disposition or liquidation of the
Collateral shall be a continuing liability of the Borrowers to the Bank
and shall be immediately paid by the Borrowers to the Bank.
8.9 Non-Exclusivity of Remedies: Exercise one or more of the Bank's rights set
forth herein or seek such other rights or pursue such other remedies as
may be provided by law, in equity or in any other agreement now existing
or hereafter entered into between any of the Borrowers and the Bank, or
otherwise.
8.10 Application of Proceeds: All amounts received by the Bank as proceeds from
the disposition or liquidation of the Collateral shall be applied to the
Borrowers' indebtedness to the Bank as follows: first, to the costs and
expenses of collection, enforcement, protection and preservation of the
Bank's lien in the Collateral, including court costs and reasonable
attorneys' fees, whether or not suit is commenced by the Bank; next, to
those costs and expenses incurred by the Bank in protecting, preserving,
enforcing, collecting, liquidating, selling or disposing of the
Collateral; next, to the payment of accrued and unpaid interest on all of
the Obligations; next, to the payment of the outstanding principal balance
of the Obligations; and last, to the payment of any other indebtedness
owed by the Borrowers to the Bank. Any excess Collateral and excess
proceeds existing after the disposition or liquidation of the Collateral
will be returned or paid by the Bank to the Borrowers.
SECTION
9
MISCELLANEOUS
9.1 Amounts Payable on Demand: If the Borrowers shall fail to pay on demand
any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default
occasioned by the Borrowers having so failed to pay such amount, create an
Advance under this Agreement in an amount equal to the amount so payable,
which Advance shall thereafter bear interest as provided hereunder.
9.2 Default Interest Rate: If an Event of Default, or an event which, with
notice or passage of time could become an Event of Default, has occurred
or is continuing, the Borrowers shall pay to the Bank interest on any
Indebtedness or amount payable under this Agreement at a rate which is 3%
in excess of the rate or rates then in effect under this Agreement.
9.3 Reliance and Further Assurances: Each warranty, representation, covenant,
obligation and agreement contained in this Agreement shall be conclusively
presumed to have been relied upon by the Bank regardless of any
investigation made or information possessed by the Bank and shall be
cumulative and in addition to any other warranties, representations,
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covenants and agreements which any of the Borrowers now or hereafter shall
give, or cause to be given, to the Bank. The Borrowers agree to execute
all documents and instruments and to perform such acts as the Bank may
reasonably deem necessary to confirm and secure to the Bank all rights and
remedies conferred upon the Bank by this agreement and all other documents
related thereto.
9.4 No Guaranty or Surety: If any Borrower hereunder is deemed to be a surety
or guarantor due to its joint and several liability hereunder such
Borrower hereby unconditionally and irrevocably acknowledges and agrees to
the matters set forth below:
(i) Each Borrower waives its rights of subrogation, reimbursement,
indemnification and contribution and any other rights and
defenses that are or may become available to such Borrower by
reason of Sections 2787 to 2855, inclusive, of the California
Civil Code and as they may be amended or superseded in the
future. Without limiting the generality of the foregoing, each
Borrower(s) arising from the Bank's election of a remedy on any
indebtedness under bankruptcy or other debtor relief laws or
under any other laws, including, but not limited to those
purporting to reduce the Bank rights against any Borrower in
proportion to the principal obligation of any indebtedness (as
presently contained in Section 2809 of the California Civil Code
and as it may be amended or superseded in the future).
(ii) Each Borrower waives all rights and defenses that such Borrower
may have because the Borrower's debt is secured by real
property. This means, among other things:
(1) The Bank may collect from such Borrower without first
foreclosing on any real property or personal property
collateral pledged by the Borrower(s);
(2) If the Bank forecloses on any real property collateral
pledged by the Borrowers:
(i) The amount of the debt may be reduced only by the price
for which that collateral is sold at the foreclosure sale,
even if the collateral is worth more than the sale price.
(ii) The Bank may collect from the Borrower(s) even if the
Bank, by foreclosing on such real property collateral, has
destroyed any right such Borrower(s) may have to collect
from any other Borrower(s).
This is an unconditional and irrevocable waiver of any rights and defenses the
Borrower(s) may have because the Borrowers' debt is secured by real property.
These rights and defenses include, but are not limited to, any rights or
defenses based upon Sections 580 a, 580b, 580d and 726 of the California Code of
Civil Procedure.
(iii) Each Borrower waives all rights and defenses arising out of an
election of remedies by the Bank, even though that election of
remedies, such as a nonjudicial foreclosure with respect to
security for the Borrowers' indebtedness, has destroyed such
Borrowers' rights of subrogation and
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reimbursement against any other Borrower(s) by the operation of Section
580d of the California Code of Civil Procedure or otherwise.
(iv) Each Borrower waives any defense arising by reason of:
(1) The cessation from any cause whatsoever, other than payment in
full, of the Borrowers' indebtedness;
(2) The application by the Borrowers of the proceeds of any Advance
for purposes other than purposes represented by the Borrowers to the
Bank intended or understood by the Bank or such Borrower;
(3) Any act or omission by the Bank which directly or indirectly
results in or aids the discharge of the Borrowers or any Borrowers'
indebtedness by operation of law or otherwise; or
(4) Any modification of the Borrowers' indebtedness, in any form
whatsoever, including, but not limited to, any renewal, extension,
acceleration or other change in the time for payment of such
indebtedness or other change in the terms of such indebtedness or any
part thereof including, but not limited to, increase or decrease of
the rate of interest thereon.
(v) Each Borrower waives the benefit of the statute of limitations affecting
such Borrower's liability hereunder or the enforcement hereof.
(vi) Each Borrower waives all right to require the Bank to: (i) proceed
against any other Borrower(s), any endorser, cosigner, other guarantor or
other person liable on any indebtedness; (ii) join any endorser,
cosigner, other guarantor on any indebtedness in any action or actions
that may be brought and prosecuted by the Bank solely and separately
against any Borrower(s) on any indebtedness; (iii) proceed against any
item or items of collateral securing any indebtedness or any guaranty
thereof; (iv) give notice of the terms, time and place of any public or
private sale of personal property held from Borrowers or any person or
comply with Section 9504 of the California Uniform Commercial Code; or
(v) pursue or refrain from pursuing any other remedy whatsoever in the
Bank's power.
(vii) Each Borrower waives any defense arising by reason of any disability or
other defense of any other Borrower(s), successors or any endorser,
cosigner, other guarantor or other person liable on any indebtedness.
Until all indebtedness has been paid in full, each Borrower shall not
have any right of subrogation and each Borrower waives any benefit of and
right to participate in any collateral now or hereafter held by the Bank.
Each Borrower waives all presentments, demands for performance, notices
or nonperformance, protests, notices of protest, notices of dishonor,
notices of sale of any collateral securing any indebtedness or any
guaranty thereof, and notice of the existence, creation or incurring of
new or additional indebtedness.
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9.5 Communications from Borrowers; Joint and Several Liability; Extent of
Obligations. The obligations of the Borrowers to repay the Obligations
shall not be affected in any way or to any extent by any failure by the
Bank to obtain direction from all the Borrowers in any given case (it being
expressly agreed and understood that each of the Borrowers is empowered to
act on behalf of all the Borrowers with respect to all matters relating to
this Agreement and the credit facility evidenced hereby). The liability of
the Borrowers hereunder is joint and several. The Borrowers hereby: (1)
acknowledge and agree that the Bank shall have no obligation to proceed
against any Borrower before proceeding against any other Borrower or
Borrowers or any of the guarantors under their respective guaranties, (2)
waive any defense to their obligations under this Agreement based upon or
arising out of the disability or other defense or cessation of liability of
any Borrower versus any other or of any other Person, and (3) waive any
right of subrogation or ability to proceed against any Person or to
participate in any security for the Obligations until the Obligations have
been paid and reformed in full.
9.6 Attorneys' Fees: The Borrowers shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred
by Bank in connection with the administration, enforcement, including any
bankruptcy, appeal or the enforcement of any judgment or any refinancing or
restructuring of this Agreement or any document, instrument or agreement
executed with respect to, evidencing or securing the indebtedness
hereunder.
9.7 Notices: All notices, payments, requests, information and demands which
either party hereto may desire, or may be required to give or make to the
other party hereto, shall be given or made to such party by hand delivery
or through deposit in the United States mail, postage prepaid, or by
facsimile delivery, or to such other address as may be specified from time
to time in writing by either party to the other.
To the Borrowers: To the Bank:
FERSON OPTICS, INC
UDT SENSORS, INC. SANWA BANK CALIFORNIA
RAPISCAN SECURITY PRODUCTS, INC. Rosemead Office (CBC)
OSI SYSTEMS, INC. 9000 East Valley Boulevard
METOREX SECURITY PRODUCTS, INC. Rosemead, CA 91770
SILICON MICROSTRUCTURES, INC. Attn: C. Ross Mossler
ARISTO MEDICAL PRODUCTS, INC. FAX: (626)312-5751
12525 Chadron Ave.
Hawthorne, CA 90250
Attn: Ajay Mehra
FAX: (310) 978-3898
Allan Duboff, Esq.
Richman, Lawrence, Mann, Chizever & Phillips
9601 Wilshire Blvd., Penthouse
Beverly Hills, CA 90210
9.8 Waiver: Neither the failure nor delay by the Bank in exercising any right
hereunder or under any document, instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise
of any right hereunder or under any other document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise
of any other right; nor shall any waiver of any right or default
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hereunder, or under any other document, instrument or agreement mentioned
herein, constitute a waiver of any other right or default or constitute a
waiver of any other default of the same or any other term or provision.
9.9 Conflicting Provisions: To the extent the provisions contained in this
Agreement are inconsistent with those contained in any other document,
instrument or agreement executed pursuant hereto, the terms and provisions
contained herein shall control. Otherwise, such provisions shall be
considered cumulative.
9.10 Binding Effect; Assignment: This Agreement shall be binding upon and inure
to the benefit of the Borrowers and the Bank and their respective
successors and assigns, except that the Borrowers shall not have the right
to assign their rights hereunder or any interest herein without the prior
written consent of the Bank. The Bank may sell, assign or grant
participation in all or any portion of its rights and benefits hereunder.
The Borrowers agree that, in connection with any such sale, grant or
assignment, the Bank may deliver to the prospective buyer, participant or
assignee financial statements and other relevant information relating to
the Borrower and any guarantor.
9.11 Jurisdiction: This Agreement, any notes issued hereunder, the rights of
the parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein shall be
governed by and construed according to the laws of the State of California
without regard to conflict of law principles, to the jurisdiction of whose
courts the parties hereby submit.
9.12 Judgment Currency: If for the purposes of obtaining judgment in any court
it is necessary to convert a sum due hereunder in any currency (the
"Original Currency") into another currency (the "Other Currency") the
parties hereto agree, to the fullest extent that they may effectively do
so, that the rate of exchange used shall be that at which in accordance
with normal banking procedures the Bank could purchase the Original
Currency with the Other Currency at Los Angeles on the second Business Day
preceding that on which final judgment is given.
The obligation of the Borrower in respect of any sum due in the Original
Currency from it to Bank shall, notwithstanding any judgment in any Other
Currency, be discharged only to the extent that on the Business Day
following receipt by Bank of any sum adjudged to be so due in such Other
Currency Bank may in accordance with normal banking procedures purchase
Dollars with such Other Currency; if the amount of the Original Currency
so purchased is less than the sum originally due to the Bank, the Borrower
agrees, as a separate obligation and notwithstanding any such judgment, to
indemnify Bank against such loss, and if the amount of the Original
Currency so purchased exceeds the sum originally due to Bank in the
Original Currency, Bank agrees to remit to Borrower such excess.
9.13 Waiver of Jury Trial: EACH OF THE BORROWERS AND THE BANK WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY
ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. EACH OF THE BORROWERS AND THE
BANK AGREE THAT ANY
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SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION
AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE
OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
9.14 Telephone Recording: The Borrowers agree that the Bank may electronically
record all telephone conversations between the Borrowers and the Bank
solely with respect to any FX Transaction and that any such recording may
be submitted in evidence in any arbitration or other legal proceeding.
Such recording shall be deemed to be conclusive evidence as to the terms
of any FX Transaction in the event of a dispute.
9.15 Counterparts: This Agreement may be executed in any number of counterparts
and all such counterparts taken together shall be deemed to constitute one
and the same instrument.
9.16 Headings: The headings herein set forth are solely for the purpose of
identification and have no legal significance.
9.17 Entire Agreement and Amendments: This Agreement and all documents,
instruments and agreements mentioned herein constitute the entire and
complete understanding of the parties with respect to the transactions
contemplated hereunder. All previous conversations, memoranda and writings
between the parties pertaining to the transactions contemplated hereunder
not incorporated or referenced in this Agreement or in such documents,
instruments and agreements are superseded hereby. This Agreement may be
amended only by an instrument in writing signed by the Borrower and the
Bank.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first hereinabove written.
BANK: BORROWERS:
SANWA BANK CALIFORNIA OSI SYSTEMS, INC.
BY: /s/ C. Ross Mossler BY: /s/ Ajay Mehra
------------------------------------- -----------------------------
C. Ross Mossler, Vice President Ajay Mehra, CFO
UDT SENSORS, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
FERSON OPTICS, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
RAPISCAN SECURITY PRODUCTS, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
METOREX SECURITY PRODUCTS, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
SILICON MICROSTRUCTURES, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
ARISTO MEDICAL PRODUCTS, INC.
BY: /s/ Ajay Mehra
-----------------------------
Ajay Mehra, CFO
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CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, OSI SYSTEMS, INC. (the "Corporation") has made application to
SANWA BANK CALIFORNIA (the "Bank") for credit accommodations which may consist
of but shall in no way be limited to the following: the renewal, continuation or
extension of an existing obligation; the extension of a new loan, line of credit
or commitment; the issuance of letters of credit or banker's acceptances; or the
purchase or sale through Bank of foreign currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer is authorized, in the
name of and on behalf of the Corporation to:
(a) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(b) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein authorized.
(c) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(d) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(e) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(f) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(g) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of monies by check, drafts, cable,
letter or otherwise for any purpose incidental to the foregoing, and
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<PAGE>
authorize or direct charges to the depository account or accounts of the
Corporation for the cost of any foreign currencies so purchased through the
Bank.
(h) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(i) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of OSI SYSTEMS,
INC., a California corporation, and I do hereby further certify that the
foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of August, 1999, at which meeting a majority of
the Board of Directors of the Corporation was present and voted in favor of the
resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
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<PAGE>
Deepak Chopra /s/ Deepak Chopra
-----------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
-----------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of
September, 1999.
NAME OF CORPORATION: OSI SYSTEMS, INC.
BY: /s/ Ajay Mehra
-----------------------------
NAME: Ajay Mehra, SECRETARY
-3-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, UDT SENSORS, INC. (the "Corporation") has made application to
SANWA BANK CALIFORNIA (the "Bank") for credit accommodations which may consist
of but shall in no way be limited to the following: the renewal, continuation or
extension of an existing obligation; the extension of a new loan, line of credit
or commitment; the issuance of letters of credit or banker's acceptances; or the
purchase or sale through Bank of foreign currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer of the Corporation, is
authorized, in the name of and on behalf of the Corporation to:
(a) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(b) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein authorized.
(c) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(d) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(e) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(f) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(g) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of monies by check, drafts, cable,
letter or otherwise for any purpose incidental to the foregoing, and
-1-
<PAGE>
authorize or direct charges to the depository account or accounts of the
Corporation for the cost of any foreign currencies so purchased through the
Bank.
(h) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(i) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of UDT SENSORS,
INC., a California corporation, and I do hereby further certify that the
foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of August, 1999, at which meeting a majority of
the Board of Directors of the Corporation was present and voted in favor of the
resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
-2-
<PAGE>
Deepak Chopra /s/ Deepak Chopra
-----------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
----------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: UDT SENSORS, INC.
BY: /s/ Ajay Mehra
-----------------------------------
NAME: Ajay Mehra , SECRETARY
-3-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, FERSON OPTICS, INC. (the "Corporation") has made application to
SANWA BANK CALIFORNIA (the "Bank") for credit accommodations which may consist
of but shall in no way be limited to the following: the renewal, continuation or
extension of an existing obligation; the extension of a new loan, line of credit
or commitment; the issuance of letters of credit or banker's acceptances; or the
purchase or sale through Bank of foreign currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer of the Corporation, is
authorized, in the name of and on behalf of the Corporation to:
(a) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(b) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein authorized.
(c) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(d) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(e) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(f) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(g) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s)
-1-
<PAGE>
authorized herein may deem appropriate, and give any instructions for transfers
or deposits of monies by check, drafts, cable, letter or otherwise for any
purpose incidental to the foregoing, and authorize or direct charges to the
depository account or accounts of the Corporation for the cost of any foreign
currencies so purchased through the Bank.
(h) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(i) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of FERSON OPTICS,
INC., a California corporation, and I do hereby further certify that the
foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of August, 1999, at which meeting a majority of
the Board of Directors of the Corporation was present and voted in favor of the
resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective
-2-
<PAGE>
offices appearing below their names, and that the signatures appearing opposite
their names are the genuine signatures of such persons.
Deepak Chopra /s/ Deepak Chopra
----------------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
----------------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: FERSON OPTICS, INC.
BY: /s/ Ajay Mehra
-----------------------------------
NAME: Ajay Mehra, SECRETARY
-3-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, RAPISCAN SECURITY PRODUCTS, INC. (the "Corporation") has made
application to SANWA BANK CALIFORNIA (the "Bank") for credit accommodations
which may consist of but shall in no way be limited to the following: the
renewal, continuation or extension of an existing obligation; the extension of a
new loan, line of credit or commitment; the issuance of letters of credit or
banker's acceptances; or the purchase or sale through Bank of foreign
currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer of the Corporation, is
authorized, in the name of and on behalf of the Corporation to:
(a) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(b) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein
authorized.
(c) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(d) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(e) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(f) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(g) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of
-1-
<PAGE>
monies by check, drafts, cable, letter or otherwise for any purpose incidental
to the foregoing, and authorize or direct charges to the depository account or
accounts of the Corporation for the cost of any foreign currencies so purchased
through the Bank.
(h) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(i) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra the Secretary of RAPISCAN SECURITY
PRODUCTS, INC., a California corporation, and I do hereby further certify that
the foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of September, 1999, at which meeting a majority
of the Board of Directors of the Corporation was present and voted in favor of
the resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
-2-
<PAGE>
Deepak Chopra /s/ Deepak Chopra
---------------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
---------------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: RAPISCAN SECURITY PRODUCTS, INC.
BY: /s/ Ajay Mehra
-----------------------------------
NAME: Ajay Mehra, SECRETARY
-3-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, METOREX SECURITY PRODUCTS, INC. (the "Corporation") has made
application to SANWA BANK CALIFORNIA (the "Bank") for credit accommodations
which may consist of but shall in no way be limited to the following: the
renewal, continuation or extension of an existing obligation; the extension of a
new loan, line of credit or commitment; the issuance of letters of credit or
banker's acceptances; or the purchase or sale through Bank of foreign
currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer is authorized, in the
name of and on behalf of the Corporation to:
(j) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(k) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein
authorized.
(l) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(m) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(n) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(o) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(p) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of
-4-
<PAGE>
monies by check, drafts, cable, letter or otherwise for any purpose incidental
to the foregoing, and authorize or direct charges to the depository account or
accounts of the Corporation for the cost of any foreign currencies so purchased
through the Bank.
(q) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or
more individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(r) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of METOREX SECURITY
PRODUCTS, INC., a California corporation, and I do hereby further certify that
the foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of September, 1999, at which meeting a majority
of the Board of Directors of the Corporation was present and voted in favor of
the resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
-5-
<PAGE>
Deepak Chopra /s/ Deepak Chopra
---------------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
---------------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: METOREX SECURITY PRODUCTS, INC.
BY: /s/ Ajay Mehra
-----------------------------------
NAME: Ajay Mehra, SECRETARY
-6-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, SILICON MICROSTRUCTURES, INC. (the "Corporation") has made
application to SANWA BANK CALIFORNIA (the "Bank") for credit accommodations
which may consist of but shall in no way be limited to the following: the
renewal, continuation or extension of an existing obligation; the extension of a
new loan, line of credit or commitment; the issuance of letters of credit or
banker's acceptances; or the purchase or sale through Bank of foreign
currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer is authorized, in the
name of and on behalf of the Corporation to:
(s) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(t) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein
authorized.
(u) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(v) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(w) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(x) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(y) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of
-1-
<PAGE>
monies by check, drafts, cable, letter or otherwise for any purpose incidental
to the foregoing, and authorize or direct charges to the depository account or
accounts of the Corporation for the cost of any foreign currencies so purchased
through the Bank.
(z) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(aa) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of SILICON
MICROSTRUCTURES, INC., a California corporation, and I do hereby further certify
that the foregoing is a true copy of the resolutions of the Board of Directors
of the Corporation adopted and approved at a meeting which was duly called and
held in accordance with all applicable provisions of law and the Articles and
By-Laws of the Corporation, on the 3rd day of August, 1999, at which meeting a
majority of the Board of Directors of the Corporation was present and voted in
favor of the resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
-2-
<PAGE>
Deepak Chopra /s/ Deepak Chopra
---------------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
---------------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: SILICON MICROSTRUCTURES, INC.
BY: /s/ Ajay Mehra
-----------------------------------
NAME: Ajay Mehra, SECRETARY
-3-
<PAGE>
CERTIFIED CORPORATE RESOLUTION TO BORROW
WHEREAS, ARISTO MEDICAL PRODUCTS, INC. (the "Corporation") has made
application to SANWA BANK CALIFORNIA (the "Bank") for credit accommodations
which may consist of but shall in no way be limited to the following: the
renewal, continuation or extension of an existing obligation; the extension of a
new loan, line of credit or commitment; the issuance of letters of credit or
banker's acceptances; or the purchase or sale through Bank of foreign
currencies.
RESOLVED, that: Deepak Chopra, as the Chief Executive Officer of the
Corporation, or Ajay Mehra as the Chief Financial Officer is authorized, in the
name of and on behalf of the Corporation to:
(bb) Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $33 million exclusive of any interest,
fees, attorneys' fees and other costs and expenses related to the indebtedness.
(cc) Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein authorized.
(dd) Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
(ee) Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
(ff) Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
(gg) Apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment.
(hh) Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of
-1-
<PAGE>
monies by check, drafts, cable, letter or otherwise for any purpose incidental
to the foregoing, and authorize or direct charges to the depository account or
accounts of the Corporation for the cost of any foreign currencies so purchased
through the Bank.
(ii) To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
(1) request advances under lines of credit extended by the Bank to the
Corporation;
(2) apply for letters of credit or seek the issuance of banker's acceptances
under which the Corporation shall be liable to the Bank for repayment;
(3) make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
(4) make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
(5) purchase and sell foreign currencies.
(jj) Transact any other business with the Bank incidental to the powers
hereinabove stated.
RESOLVED FURTHER, that all such evidences of indebtedness, agreements,
security instruments and other documents executed in the name of and on behalf
of the Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
RESOLVED FURTHER, that any resolution set forth herein is in addition to
and does not supersede any resolutions previously given by the Corporation to
the Bank.
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
I do hereby certify that I am Ajay Mehra, the Secretary of ARISTO MEDICAL
PRODUCTS, INC. a California corporation, and I do hereby further certify that
the foregoing is a true copy of the resolutions of the Board of Directors of the
Corporation adopted and approved at a meeting which was duly called and held in
accordance with all applicable provisions of law and the Articles and By-Laws of
the Corporation, on the 3rd day of August, 1999, at which meeting a majority
of the Board of Directors of the Corporation was present and voted in favor of
the resolutions.
I hereby further certify that such resolutions are presently in full force
and effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
-2-
<PAGE>
Deepak Chopra /s/ Deepak Chopra
---------------------------------
Chief Executive Officer (SIGNATURE)
Ajay Mehra /s/ Ajay Mehra
---------------------------------
Chief Financial Officer (SIGNATURE)
IN WITNESS WHEREOF, this document is executed as of the 2 day of September,
1999.
NAME OF CORPORATION: ARISTO MEDICAL PRODUCTS, INC.
BY: /s/ Ajay Mehra
-------------------------------
NAME: Ajay Mehra, SECRETARY
-3-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<S> <C>
UDT Sensors, Inc. California
Rapiscan Security Products (U.S.A.), Inc. California
Ferson Optics, Inc. California
Rapiscan Security Products Limited United Kingdom
Opto Sensors (Singapore) Pte Ltd Singapore
Opto Sensors (Malaysia) Sdn. Bhd. Malaysia
Rapiscan Consortium (M) Sdn. Bhd. Malaysia
Advanced Micro Electronics AS Norway
Osteometer MediTech A/S Denmark
Metorex Security Products OY Finland
Aristo Medical Products, Inc. California
Corrigan Canada Ltd. Canada
Silicon Microstructures, Inc. California
Rapiscan Asia Pte Ltd. Singapore
Metorex Security Products, Inc. California
Opto Sensors--FSC, Inc. U.S. Virgin Islands
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-45049 of OSI Systems, Inc. and Subsidiaries on Form S-8 of our report dated
September 23, 1999, appearing in this Annual Report on Form 10-K of OSI Systems
Inc. and Subsidiaries for the year ended June 30, 1999.
Deloitte & Touche LLP
Los Angeles, California
September 23, 1999
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,241
<SECURITIES> 1,708
<RECEIVABLES> 29,330
<ALLOWANCES> 0
<INVENTORY> 24,481
<CURRENT-ASSETS> 68,601
<PP&E> 14,486
<DEPRECIATION> 0
<TOTAL-ASSETS> 93,371
<CURRENT-LIABILITIES> 27,133
<BONDS> 117
0
0
<COMMON> 48,792
<OTHER-SE> 16,990
<TOTAL-LIABILITY-AND-EQUITY> 93,371
<SALES> 101,763
<TOTAL-REVENUES> 101,763
<CGS> 71,705
<TOTAL-COSTS> 71,705
<OTHER-EXPENSES> 31,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (102)
<INCOME-PRETAX> (1,824)
<INCOME-TAX> (2,565)
<INCOME-CONTINUING> 741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
