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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, 2000;
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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12525 Chadron Avenue Hawthorne, California 90250
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 978-0516
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
-------------------------- -----------------------------------------
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 20, 2000, was
$77,571,084.
The number of shares of the registrant's Common Stock outstanding as of
September 20, 2000 was 9,354,803.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
2000 Annual Meeting of Stockholders (to be filed subsequently) are
incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
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Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 16
Item 3. Legal Proceedings...................................................................... 17
Item 4. Submission on Matters to a Vote of Security Holders.................................... 18
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................... 19
Item 6. Selected Financial Data................................................................ 20
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..................................... 33
Item 11. Executive Compensation................................................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 33
Item 13. Certain Relationships and Related Transactions......................................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 34
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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, fiber optics,
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. In the medical field, the Company manufactures and
sells bone densitometers, which are used to provide bone loss measurements in
the diagnosis of osteoporosis.
In fiscal 2000, revenues from the sale of optoelectronic and silicon
pressure-sensor devices and subsystems and medical imaging systems amounted to
$63.8 million, or approximately 57.5% of the Company's revenues, while
revenues from sales of security and inspection products amounted to $47.1
million, or approximately 42.5% of the Company's revenues. Further information
concerning market segments is available in Note 15 to the Company's financial
statements, at page F-23.
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. Optoelectronic
devices also are key components in the telecommunications and fiber optics
market.
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.
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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 automotive, medical,
and industrial markets. Typical applications include pressure sensing in fuel
vapor systems, engine controls, respiration and anaesthesia 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 Company's 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.
The Company formed RapiTec, Inc., a majority-owned subsidiary, in fiscal
2000 which has enabled the Company to further penetrate the worldwide weapons
simulation market through system engineering, product development, rapid
prototyping, and volume manufacturing for state-of-the-art, laser-based
training systems for the defense industry.
The Company recently has developed high-speed silicon photodiodes for use
in fiber optic systems such as Gigabit Ethernet and Fiber Channel systems.
These products can replace Gallium Arsenide products at about half the cost. A
recent product developed by the Company is a silicon-based fiber optic
detector which can achieve a 2.5 Gigabit/second data rate using 3.3 volts bias
voltage. In order to further develop and market fiber optic products, the
Company has recently formed a new subsidiary, OSI Fibercomm, Inc., which has
launched a new family of Indium Gallium Arsenide photodetectors for use in a
variety of network applications and long-haul communications applications,
together with light speed silicon-based detectors combined with transimpedence
amplifiers ("TIA").
Medical Diagnostic and Imaging Systems. The Company has expanded into
medical diagnostic and imaging systems. The Company manufactures and
distributes 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 ultrasound scanner using imaging capability for the
diagnosis of osteoporosis. The DTU-One has not previously been available for
sale in the United States, but in September, 2000, the Company received pre-
market approval ("PMA") from the FDA, and is now authorized to sell the DTU-
One in the United States.
The Company has also acquired majority ownership of TFT Medical, Inc.,
which has been renamed "OSI Medical, Inc." ("OSI Medical"), which is currently
developing new-generation pulse oximeter instruments and probes for use in the
medical field. The Company also has five-year warrants (subject to earlier
termination upon the occurrence of certain events) to acquire up to 1,110,000
additional OSI Medical shares at a purchase price of $1.35 per share. The
warrants are first exercisable commencing on April 12, 2001. In August 1998,
the Company acquired a 16% interest in Square One Inc., which develops and
manufactures infrared-based patient monitoring medical subsystems, and in
August 2000, the Company acquired substantially all of the assets of Square
One.
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,
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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
explosives. 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.
In April 2000, the Company was awarded a contract by the Federal Aviation
Administration ("FAA") to provide x-ray screening systems at selected airports
throughout the United States. The initial purchase under the contract is for
approximately 100 carry-on baggage x-ray screening systems. Under the
contract, the FAA has the right to purchase up to 800 systems, for which the
purchase price would be approximately $40 million.
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 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. 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, in
August 1999 the Company decided to close the operations of Osteometer in
Denmark, and relocate certain of these operations to the
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Company's U.S. facilities. In the quarter ended September 30, 1999, the
Company recorded estimated restructuring costs of $1.9 million related to the
closure of the Osteometer facility in Denmark. These costs were associated
primarily with the termination of certain employees, commitments and other
facility closure costs. During the quarter ended March 31, 2000, the Company
completed the closure of the Osteometer facility in Denmark and the relocation
of the operations to the United States. The market for osteoporosis diagnostic
equipment 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 $739,000), in lieu of contingent payments of up to $1.5
million, based on future sales. The acquisition of Metorex Security brought 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. As of June
30, 2000, per the purchase agreement, the Company may be required to pay up to
an additional $2.4 million in cash, at a later date, based on sales made
subsequent to the purchase. To date, the Company has not been required to make
any such payments, and it does not anticipate that the circumstances will
require it to do so in the future. 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%, and in August 2000, the Company acquired
substantially all of its assets for consideration of $228,000 in cash, future
royalties, and return of the Square One stock held by the Company. The
acquired business is the development and manufacturing of infrared-based
patient monitoring medical subsystems.
During fiscal 1999, the Company invested $1.0 million, including
professional fees associated with the acquisition, in OSI Medical for an
equity share of approximately 40%. OSI Medical develops new generation pulse
oximeter instruments and probes for use in the medical field. Pursuant to an
agreement entered into as of October 4, 1999 (the "OSI Medical Agreement") the
Company acquired an additional equity interest, representing approximately 16%
of the stock ownership of OSI Medical for $1.2 million, including professional
fees associated with the acquisition. With this additional equity investment,
the Company increased its equity share in OSI Medical to approximately 56%. On
April 12, 2000, also pursuant to the OSI Medical Agreement and in connection
with certain amounts loaned or to be loaned by the Company to OSI Medical
thereunder, the Company also acquired five-year warrants (subject to earlier
termination upon the occurrence of certain events) to acquire up to 1,110,000
additional OSI Medical shares at a purchase price of $1.35 per share. The
warrants are first exercisable commencing on April 12, 2001, and, if fully
exercised, would result in the Company's share
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in OSI Medical being increased to over 60%, based upon the number of shares
presently outstanding. Also, pursuant to the OSI Medical Agreement, under
certain circumstances the Company has an option, which expires in December 31,
2002, to acquire all of OSI Medical.
The Company intends to continue to build its 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 by attracting new customers.
Further Penetrate Existing Security and Inspection Markets and Expand into
Other Markets. During the fiscal year ended June 30, 2000, 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. Similar to the Company's expansion
during fiscal 1998 into optoelectronic products for medical diagnostic
applications, the Company intends to selectively enter new end markets that
complement its existing capabilities in designing, developing and
manufacturing optoelectronic devices and subsystems. The Company believes that
by manufacturing other end products which rely on the technological
capabilities of the Company, it can leverage its existing integrated design
and manufacturing infrastructure to capture greater margins and build a
significant presence in new end markets which present attractive competitive
market dynamics. The Company intends to achieve this strategy through internal
growth and through selective acquisitions of end-product manufacturers.
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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 into the subsystems
manufactured by the Company. 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,
1999 and 2000.
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: fiber
optics, 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 started manufacturing and shipping high-speed silicon
based photodetectors and detector-amplifier hybrids serving the fiber-optics
and telecommunications market in SAN, LAN, 1.25 Gbps and 2.5 Gbps
applications. In addition to Silicon , the company has started shipping Indium
Gallium Arsenide photodetectors serving a wide variety of storage, local,
metropolitan and wide area networks (SAN, LAN, MAN, WAN) and other long haul
telecommunications marketplace.
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 has not previously been available for sale in the United States, but in
September, 2000, the Company received pre-market approval ("PMA") from the
FDA, and is now authorized to sell the DTU-One in the United States.
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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 1998, 1999 and 2000, approximately 22.0%, 20.5% and 26.1%, 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 Company's
products 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.
With the acquisition of Metorex Security, the Company acquired walk-through
metal detection systems which utilize pulse induced magnetic fields combined
with microprocessor based electronics, which provide uniform detection of
ferrous and non-ferrous metallic objects. The technologies range from dual
channel crossed magnetic fields to multi-zone coil configuration.
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 personal scanning. 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. In April 2000, the Company was awarded a contract by the
Federal Aviation Administration ("FAA") to provide x-ray screening systems at
selected airports throughout the United States. The initial purchase under the
contract is for 100 carry-on baggage x-ray screening systems. Under the
contract, the FAA has the right to purchase up to 800 systems, for which the
purchase price would be approximately $40 million.
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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:
<TABLE>
<CAPTION>
SELECTED
MODEL (Technology) APPLICATIONS INSTALLATIONS
---------------------------- ------------------------ ----------------------------
<C> <S> <C>
Rapiscan 519 Inspection of incoming Embassies
package Post offices
Courthouses
High risk office buildings
Manufacturing companies
Rapiscan 500 Series Airport hand carried and Airports
-Standard Tunnel (single checked baggage Prisons
view and dual view 160 kV Pallet inspection Government buildings
x-ray source, single energy Customs inspections Nuclear facilities
and dual energy) Agriculture inspection Cruise ships
Freight shippers
Border crossings
Rapiscan 500 Series Large pallet inspection Airports
-Large Tunnel (single view Customs inspections Freight shippers
and dual view 320-450 kV Border crossings
x-ray source) High risk seaport locations
Rapiscan 500 Series Mobile x-ray inspection Conventions and special
-Mobile Systems (x-ray van events
or trailer) Airports
Customs inspections
Border crossings
Rapiscan Series 2000 Cargo Fixed Site Cargo Airports
Inspection Systems Inspection Systems Freight Shippers
Border Crossings
Metor 100 Series Walk-through metal Airports
detection Courthouses
Government buildings
Conventions and special
events
Metor 200 Series Multi-zone walk-through Airports
metal detection Prisons
Nuclear facilities
Government buildings
Courthouses
SECURE 1000 (non-intrusive High Security Personnel Prisons
personal screening system) Inspection Military Facilities
Border crossings
Customs
Threat Image Projection Performance Monitoring Majority of Rapiscan
("TIP") 500 Series Systems
</TABLE>
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
table illustrates, for the year ended June 30, 2000: (i) the major product
categories for which the
8
<PAGE>
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.
<TABLE>
<CAPTION>
Representative Major
Product Category Customers
------------------------------------------------------ ----------------------------
<C> <S>
Computed Tomography and X-Ray Imaging Picker International
InVision Technologies
Aerospace and Avionics Cubic Defense Systems
Allied Signal
Honeywell Avionics
Litton Systems
Medical Monitoring Datascope
BCI
Analytical, Medical Diagnostics and Particle Analyzers Abaxis
Coulter Corporation
Office Automation and Computer Peripherals Xerox
Eastman Kodak
Dr. Johannes Heidenhain
Construction, Industrial Automation and Exploration 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
Fiber Optics/Telecommunications JDS Uniphase
SDL
</TABLE>
In August 2000, the Company formed OSI Fibercomm, Inc., a wholly-owned
subsidiary, to advance the Company's fiber optic business. Fibercomm will
undertake the sales and marketing of the Company's Indium Gallium Arsenide and
silicon photodetectors and other fiber optic products developed by the
Company's subsidiary UDT Sensors, Inc.
9
<PAGE>
Security and Inspection Products. Since entering the security and
inspection products market in 1993, the Company has shipped approximately
4,500 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>
Prague Airport, Czech Republic Major U.S. Airlines
Gatwick Airport, England Bush Intercontinental Airport
Heathrow Airport, England Federal Courthouses
TNT Freight, England Federal Reserve Bank
Japanese Embassies, worldwide JFK International Airport
Malaysian Airport Board, Malaysia Los Angeles County Courthouse
HAJ Terminal, Saudi Arabia Los Angeles International Airport
Dubai Airport, U.A.E. Miami Airport
United Kingdom Prison System, United Orlando Airport
Kingdom Ronald Reagan National Airport
INFRAERO, airports, Brazil U.S. Government
Chek Lap Kok International Airport, California Department of Corrections
Hong Kong U.S. Department of Corrections
Pudong Shanghai International Airport, Empire State Building
P.R. China World Trade Center
Kremlin, Russia
New Zealand Customs, New Zealand
Vatican
2000 Summer Olympics, Sydney,
Australia
Narita Airport, Tokyo
</TABLE>
The market for most security and inspection products developed in response
to civilian airline highjackings. Consequently, 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.
In September 1998, the Company entered into an agreement with the Federal
Aviation Administration for advanced contraband detection systems with 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.
Systems were shipped during fiscal 2000 and continue to be shipped during
fiscal 2001. 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. has supplied,
installed and will continue to maintain approximately 150 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.
10
<PAGE>
During fiscal 2000, 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.
During the second quarter of fiscal 2000, the Company received and
completed a security system order in excess of $1.5 million from the Vatican.
In the second quarter of fiscal 2000, the Company entered into a contract
with a branch of the Mexican government for approximately $2.2 million for
multiple Secure 2000 body scanners.
In April 2000, the Company was awarded a contract by the Federal Aviation
Administration ("FAA") to provide x-ray screening systems at selected airports
throughout the United States. The initial purchase under the contract is for
100 carry-on baggage x-ray screening systems. Under the contract, the FAA has
the right to purchase up to 800 systems, for which the total contract might be
as high as approximately $40 million.
In June 2000, the Company was awarded a contract to supply two Rapiscan
2000 Series Large Vehicle Cargo X-ray Systems to the government of Hong Kong.
The price of these units is approximately $9 million.
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 45 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
35 employees located in the United States, Finland, Canada, the United
Kingdom, Dubai, and Malaysia and through a network of approximately 135
independent sales representatives.
The Company's optoelectronic and silicon pressure-sensor products and
medical imaging systems sales staff, located in the United States and Norway,
is supported by an applications engineering group whose members are available
to provide technical support. This support includes designing applications,
providing custom tooling and process integration, defining solutions for
customers and developing products that meet customer defined specifications.
The security and inspection and medical imaging products sales staff is
supported by a service organization of approximately 35 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, 1999 and 2000, maintenance service revenues and
replacement part sales collectively represented 3.5%, 3.6% 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
11
<PAGE>
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, 2000, in addition to the engineers that the Company employed in
manufacturing, process design and applications development, the Company
engaged approximately 70 full-time engineers and technicians in research and
development. During fiscal 2000 and 1999, the Company's research and
development expenses were approximately $7.7 million and $5.7 million,
respectively. A significant portion of the increase in research and
development in fiscal 2000 is the result of acquisitions during fiscal 1999
and 2000. 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 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 and Norway, in addition to its manufacturing
facilities in Hawthorne and Fremont, California and Ocean Springs,
Mississippi. The Company's principal manufacturing facility is in Hawthorne,
California. However, most of the Company's high volume, labor intensive
manufacturing and assembly is generally performed at its facilities 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
12
<PAGE>
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.
Patents and Trademarks
In June 1999, as part of the settlement of an arbitration, the Company
entered into a fully paid-up, nonexclusive patent license agreement with
PerkinElmer, Inc., formerly known as EG&G, Inc. ("EG&G") for U.S. Patent No.
4,366,382. The patent expires in September 2000. Subsequent to the end of the
patent term, the Company will be free to use the technology without patent or
license restriction. Under the license, for which the Company 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 license may require
the Company to make additional, contingent royalty payments of up to $350,000
based on shipment of certain products which incorporate the licensed
technology.
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. In July 2000,
13
<PAGE>
Rapiscan was awarded U.S. Patent No. 6,094,472 for an X-ray Backscatter
Imaging System relating to improvement of the SECURE(TM) product line. This
patent expires in 2018.
Rapiscan Security Products utilize the trademarks Rapiscan(R) and
SECURE(TM).
SMI owns: U.S. Patent No. 5,812,047, expiring in 2017, pertaining to the
manufacture of silicon pressure-sensor devices; U.S. Patent No. 6,089, 099,
expiring in 2018, pertaining to method and application for forming a bonded
silicon-glass pressure sensors; U.S. Patent No. 6,093,579, expiring in 2018,
pertaining to low pressure sensors and the method of manufacture; and U.S.
Patent No. 6,107,170, expiring in 2018, pertaining to silicon sensor contact
with platinum silicide, titanium/tungsten and gold. 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. 4,605,898; 5,121,105;
5,047,718; 4,894,619) 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.
Osteometer owns U.S. Patent No. 6,058,151, expiring 2018, for new region of
interest for monitoring medical treatment for osteoporosis, and U.S. Patent
No. 6,086,538, expiring 2018, for placement of the region of interest based on
an anatomical feature in the calcaneus for ultrasound technology.
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 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 material 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
14
<PAGE>
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 markets 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 PerkinElmer, Inc.'s Electro-
Optics division, 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
Measurement Specialties , Inc., Novasensor Division of Lucas Controls, Sensym
ICT, and Motorola Semiconductor group.
In the fiber optics market, the Company has many competitors, both domestic
and foreign.
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 the
Astrophysics and Vivid Technologies divisions of PerkinElmer, Inc., Heimann
Systems GmbH, InVision Technologies, Inc., American Science and Engineering,
Inc., Barringer Technologies Inc., Control Screening L.L.C., CEIA, SpA,
Garrett Electronics, Inc. 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 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. Additionally, the Company's true multi-zone
technology provides the ability to detect small metallic objects and offer
higher levels of discrimination in weapons-screening applications. 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.
15
<PAGE>
Large cargo scanning machines require six to thirty 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.
At June 30, 2000, the Company's backlog products totaled approximately
$54.3 million, compared to approximately $44.1 million at June 30, 1999 and
$46.9 million at June 30, 1998. Most of the Company's backlog as of June 30,
2000, with the exception of a majority of an order for large cargo-scanning
machines valued at approximately $9 million, is expected to be shipped during
the fiscal year ending June 30, 2001. 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, 2000, the Company employed approximately 995 people, of whom
720 were employed in manufacturing, 70 were employed in research and
development, 85 were employed in finance and administration, 65 were employed
in sales and marketing, and 55 were employed in its service organization. Of
the total employees, approximately 497 were employed in the United States, 15
in Canada, 158 were employed in Europe, and 325 were employed in Asia, 22
employees at AME and 10 Metorex Security employees in Finland are members of a
union and have collective bargaining rights. Other than the employees of AME
and 10 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.
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, 2000, 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
Walnut, California Manufacturing, engineering, sales and
marketing 6,350 2003
Ocean Springs, Mississippi Manufacturing, engineering and sales
and 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 15,700 2000
Johor Bahru, Malaysia Manufacturing 21,000 2001
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Approximate Lease
Location Description of Facility Square Footage Expiration
-------- ----------------------- -------------- ----------
<S> <C> <C> <C>
Johor Bahru, Malaysia Manufacturing 7,000 2001
Singapore, Republic of Administrative and materials
Singapore procurement 3,000 2003
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
</TABLE>
Subsequent to June 30,2000, the Company moved from its 22,000 square foot
facility in Georgetown, Canada to a facility of approximately 2,200 square
feet.
The lease of the 15,700 square foot facility at Johor Bahru, Malaysia
expired in August 2000. The Company is presently negotiating the renewal of
the lease and expects it will be renewed on similar terms.
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 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.
On March 30, 2000, Gail Marie Harrington-Wisely and Joyce Garland filed a
class action suit, case number BC 227373, in the Superior Court of California,
County of Los Angeles, naming Rapiscan Security Products, a subsidiary of the
Company, and others as defendants. The plaintiffs are the wives of men
incarcerated in California prisons. The plaintiffs allege that while
attempting to visit their husbands in prison, as a condition to such visits
prison personnel have have subjected them to scans by the Company's Secure
1000, strip searches, and body cavity searches, all of which plaintiffs allege
to have been illegal searches and have caused them emotional injuries. The
other defendants in the action include the State of California, the Governor
of California, the California Department of Corrections, its Director and
other Department of Corrections personnel. The
17
<PAGE>
complaint, in essence, asserts that these types of searches are illegal and
intrusive and have caused emotional injury to the plaintiffs. In addition to
alleging the Company is somehow responsible for illegal searches conducted by
prison personnel, with respect to Rapiscan Security Products, the complaint
alleges that the Company was negligent because it knew or should have known
that the Secure 1000 would be used by prison personnel to conduct illegal
searches of prison visitors, that the Secure 1000 is defective in design and
manufacture because of alleged inconsistent and false-positive results, that
the Company has failed to properly train the prison personnel using the Secure
1000 as to how to interpret the scans, and that the Company has failed to warn
subjects that they might be subjected to illegal searches using the Secure
1000 and that the scans are more intrusive than frisk searches. Plaintiffs
have prayed for general, special and punitive damages in unspecified amounts
and declaratory relief against illegal searches. We believe that these claims
against the Company have no merit and we intend to vigorously defend this
suit. However, due to the inherent uncertainties of all litigation, we can
make no prediction about the outcome of this litigation.
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.
18
<PAGE>
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"
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 year ended June 30, 2000.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
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
2000:
Quarter ended September 30, 1999............................... $ 5.75 $3.44
Quarter ended December 31, 1999................................ $ 5.63 $3.00
Quarter ended March 31, 2000................................... $28.44 $4.75
Quarter ended June 30, 2000.................................... $14.25 $5.25
</TABLE>
As of September 20, 2000, there were approximately 99 holders of record of
the Company's Common Stock. This number does not include beneficial owners
holding shares through a nominee or in "street" name.
Dividend Policy
The Company has not paid any cash 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.
19
<PAGE>
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, 2000 and is
derived from the Consolidated Financial Statements of the Company. The
consolidated financial statements as of June 30, 1999 and June 30, 2000, and
for each of the years in the three-year period ended June 30, 2000, 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,
---------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations
Data:
Revenues............... $ 61,518 $ 77,628 $ 93,918 $ 101,763 $ 110,938
Cost of goods sold..... 45,486 56,174 66,952 72,633 80,598
--------- --------- --------- --------- ---------
Gross profit........... 16,032 21,454 26,966 29,130 30,340
Operating expenses:
Selling, general and
administrative...... 9,757 11,265 12,670 17,728 19,828
Research and
development......... 1,663 2,504 3,790 5,711 7,712
Stock option
compensation(1)..... -- 856 -- -- --
Goodwill
Amortization........ -- 39 106 595 529
Asset impairment
charge(2)........... -- -- -- 3,985 --
In process research
and development(3).. -- -- -- 2,579 --
Restructuring
costs(4)............ -- -- -- 458 1,898
--------- --------- --------- --------- ---------
Total operating
expenses.......... 11,420 14,664 16,566 31,056 29,967
--------- --------- --------- --------- ---------
Income (loss) from
operations.............. 4,612 6,790 10,400 (1,926) 373
Gain on Marketable
Securities.............. -- -- -- -- 309
Other Income............. -- -- -- -- 126
Interest expense
(income)................ 1,359 1,197 (600) (102) 721
--------- --------- --------- --------- ---------
Income (loss) before
income taxes and
minority Interest 3,253 5,593 11,000 (1,824) 87
Provision (benefit) for
income taxes............ 1,111 1,416 2,752 (2,565) (151)
--------- --------- --------- --------- ---------
Income before minority
interest................ 2,142 4,177 8,248 741 238
Minority interest........ 117 -- -- -- 389
--------- --------- --------- --------- ---------
Net income............... $ 2,259 $ 4,177 $ 8,248 $ 741 $ 627
========= ========= ========= ========= =========
Net income available to
common shareholders(5) $ 2,308 $ 4,269 $ 8,248 $ 741 $ 627
========= ========= ========= ========= =========
Net income per
share(5)(6) $ 0.38 $ 0.68 $ 0.92 $ 0.08 $ 0.07
========= ========= ========= ========= =========
Weighted average shares
outstanding(6).......... 6,134,669 6,263,963 8,955,919 9,828,971 9,409,407
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ 581 $ 553 $ 22,447 $ 7,241 $ 10,892
Working capital.......... 6,044 10,800 52,417 41,468 45,899
Total assets............. 35,309 47,333 86,822 93,371 103,023
Total debt............... 15,462 13,180 1,243 9,087 16,418
Total shareholders'
equity.................. $ 7,194 $ 16,809 $ 65,915 $ 65,782 $ 64,207
</TABLE>
20
<PAGE>
--------
(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.
(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
$3,985,000, $1,256,000 and $1,256,000 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 and restructuring certain
subsidiaries. For the year ended June 30, 1999, 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.
For the year ended June 30, 2000, the charge had the effect of decreasing
by $1,898,000 each of income from operations, net income and income
available to common shareholders.
(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, 1995. Adjustments in each of the five years ended June
30, 2000 consist of: (i) the elimination of interest expense related to
converted subordinated debt of $166,000, $92,000, $0, $0, and $0 net of
income taxes, respectively; and (ii) the elimination of the minority
interest in the net loss of subsidiaries of $117,000, $0, $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, 1995. 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.
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
21
<PAGE>
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 2000, revenues from the sale of optoelectronic and
silicon pressure-sensor devices and subsystems and medical imaging systems
amounted to $63.8 million, or approximately 57.5% of the Company's revenues,
while revenues from sales of security and inspection products amounted to
$47.1 million, or approximately 42.5% 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 Senors' 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, during the quarter ended March 31, 2000, the Company
closed Osteometer's manufacturing facilities in Denmark and relocated the
facilities to the United States. The osteoporosis device industry is currently
weak and is expected to remain so for at least the near-term.
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%, and in August 2000, the Company acquired substantially all
of its assets and returned the stock it had previously held in Square One. The
business so acquired develops and manufactures infrared-based patient
monitoring medical subsystems.
During fiscal 1999, the Company invested $1.0 million including
professional fees associated with the acquisition, in OSI Medical for an
equity share of approximately 40%. OSI Medical develops new generation pulse
oximeter instruments and probes for use in the medical field. Pursuant to an
agreement entered into as of October 4, 1999 (the "OSI Medical Agreement") the
Company acquired an additional equity interest, representing approximately 16%
of the stock ownership of OSI Medical for $1.2 million, including professional
fees associated with the acquisition. With this additional equity investment,
the Company increased its equity share in OSI Medical to approximately 56%. On
April 12, 2000, also pursuant to the OSI Medical Agreement and in connection
with certain amounts loaned or to be loaned by the Company to OSI Medical
thereunder, the Company also acquired five-year warrants (subject to earlier
termination upon the occurrence of certain events) to acquire up to 1,110,000
additional OSI Medical shares at a purchase price of $1.35 per share. The
warrants are first exercisable commencing on April 12, 2001, and, if fully
exercised, would result in the Company's share in OSI Medical being increased
to over 60%, based upon the number of shares presently outstanding. Also,
pursuant to the OSI Medical Agreement, under certain circumstances the Company
has an option, which expires in December 31, 2002, to acquire all of OSI
Medical.
22
<PAGE>
To broaden its product base, in fiscal 1999, the Company acquired SMI. 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.
Also, in fiscal 1999, the Company purchased Metorex Security. The
acquisition of Metorex Security brought 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.
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;
and Horten, Norway. 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, 2000, the Company marketed its
products worldwide through approximately 65 sales and marketing employees
located in seven countries, and through approximately 180 independent sales
representatives. Revenues from shipments made outside of the United States
accounted for 49.4%, 48.5% and 55.8% of revenues for the fiscal years 1998,
1999 and 2000, 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 of the Company has varied because of a mix of
income from U.S. and foreign operations and utilization of previously
unrealized net operating losses, and will continue to vary in the future. 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. However, in April 2000, the
Company was awarded a contract by the Federal Aviation Administration ("FAA")
to provide x-ray screening systems at selected airports throughout the United
States. The initial purchase under the contract is for 100 carry-on baggage x-
ray screening systems. Under the contract, the FAA has the right to purchase
up to 800 systems, for which the purchase price would be approximately $40
million.
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 and to outside parties.
Because of 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.
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.
23
<PAGE>
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,
---------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Revenues.............................................. 100.0 % 100.0 % 100.0 %
Cost of goods sold.................................... 71.3 71.4 72.7
----- ----- -----
Gross profit.......................................... 28.7 28.6 27.3
Operating expenses:
Selling, general and administrative................. 13.5 17.4 17.9
Research and development............................ 4.0 5.6 6.9
Good will amortization.............................. 0.1 0.6 0.5
Asset impairment charge............................. -- 3.9 --
In process research and development................. -- 2.5 --
Restructuring Costs................................. -- 0.5 1.7
----- ----- -----
Total operating expenses.......................... 17.6 30.5 27.0
----- ----- -----
Income (loss) from operations......................... 11.1 (1.9) 0.3
Gain on sale of marketable securities................. -- -- 0.3
Other income.......................................... -- -- 0.1
Interest (income) expense............................. (0.6) (0.1) 0.6
----- ----- -----
Income (loss) before income taxes and minority
interest............................................. 11.7 (1.8) 0.1
Provision (benefit) for income taxes.................. 2.9 (2.5) (0.1)
----- ----- -----
Net Income before minority interest................... 8.8 0.7 0.2
Minority interest..................................... -- -- 0.4
----- ----- -----
Net Income............................................ 8.8 0.7 0.6
</TABLE>
Comparison of Fiscal Year Ended June 30, 2000 to Fiscal Year Ended June 30,
1999
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 intercompany eliminations.
Revenues for the fiscal year ended June 30, 2000, increased by $9.2 million or
9.0% to $110.9 million from $101.8 million for the fiscal year ended June 30,
1999. Revenues for the sale of optoelectronics and silicon pressure sensor
devices, subsystems and medical imaging systems, net of intercompany
eliminations, increased by $8.3 million, or 15.0% to $63.8 million from $55.5
million for fiscal 1999. The increase was primarily due to increased sales of
silicon pressure sensors through the recent acquisition of SMI and sales
through the introduction of new product for the data/video projection market
and was partially offset by a decrease in sales to the oil exploration
industry. Revenues from the sale of security and inspection products increased
$853,000, or 1.8% to $47.1 million from $46.3 million for fiscal 1999. The
increase was primarily due to increased sales of people scanners and sales of
walk-through metal detection systems through the recent acqusition of Metorex
Security. Also for the year ended June 30, 1999, the Company had large
shipments of cargo scanning machines, which were not repeated in fiscal 2000.
Gross Profit. Cost of goods sold consist of material, labor and
manufacturing overhead. Gross profit increased by $1.2 million or 4.1% to
$30.3 million from $29.1 million for fiscal 1999. As a percent of revenues,
gross profit decreased to 27.3% in fiscal 2000 from 28.6% in fiscal 1999. The
increase in gross profit was due to an increase in revenues and a decrease in
gross profit as a percentage of revenues was due to a change in product mix
and introduction of a new product line for the sale of data/video projectors,
which has a lower gross margin.
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
24
<PAGE>
expenses. For the year ended June 30, 2000, such expenses increased by $2.1
million or 11.8% to $19.8 million from $17.7 million in fiscal 1999. As a
percentage of revenues, selling, general and administrative expenses increased
to 17.9% in fiscal 2000 from 17.4% in fiscal 1999. The increase in expenses
was due primarily to the inclusion of entire years selling, general and
administrative expenses of recent acquisitions, increased administrative
expenses, increased marketing expenses for the sales of medical products and
was offset in part by proceeds from the settlement of certain litigation. Also
for the fiscal 1999, the Company had exchange rate losses of $743,000,
compared to $156,000 in fiscal 2000.
Research and Development. Research and development expenses include
research related to new product development and product enhancement
expenditures. For the year ended June 30, 2000, such expenses increased by
$2.0 million, or 35.0%, to $7.7 million from $5.7 million in fiscal 1999. As a
percentage of revenues, research and development expenses increased to 6.9% in
fiscal 2000 from 5.6% in fiscal 1999. The increase in expenses was primarily
due to the increase in personnel cost resulting from the Company's recently
acquired subsidiaries, continued enhancement of Rapiscan x-ray systems, and
introduction of new products.
Goodwill Amortization. Amortization of goodwill decreased to $529,000 in
fiscal 2000 from $595,000 in fiscal 1999. The decrease in amortization of
goodwill was the net result of a one time write-off of goodwill due to the
closure of the Company's Denmark facility and partially offset by the
inclusion of goodwill associated with the acquisition of OSI Medical and
additional payment associated with the acquisition of Metorex Security.
Restructuring Costs. In August 1999, the Company decided to close the
operation of Osteometer Denmark, and relocate certain of these operation to
the Company's U.S. facilities. For the year ended June 30, 2000, the Company
recorded restructuring costs of $1.9 million related to the closure of the
Osteometer facility in Denmark. These costs were associated primarily with the
termination of certain employees, commitments and other facility closure
costs. The Company has completed the closure of Osteometer facility in
Denmark. Of that amount, $1.8 million was paid in the year ended June 30, 2000
and $52,000 was included in other accrued expenses and current liabilities as
of June 30, 2000. Based on the current estimates, the Company anticipates that
the current restructuring accruals are sufficient.
Income (loss) from operations. For the year ended June 30, 2000, income
from operations was $373,000 compared to a loss of $1.9 million in fiscal
1999. Excluding the non-recurring restructuring costs of $1.9 million in the
year ended June 30, 2000 and $458,000 for the year ended June 30, 1999 and a
non-recurring in process research and development charge of $2.6 million and
an asset impairment charge of $4.0 million in the year ended June 30, 1999,
income from operations decreased to $2.3 million for the year ended June 30,
2000 compared to $5.1 million in fiscal 1999. Income from operations decreased
primarily due to increased selling, general and administrative expenses,
increased research and development expenses.
Interest expense (income). For the year ended June 30, 2000, the Company
had a net interest expense of $721,000 compared to net interest income of
$102,000 for fiscal 1999. The net interest expense 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.
Gain on Sale of Marketable Securities. Gain on marketable securities for
the year ended June 30, 2000, consisted of realized gain on the sale of
marketable securities available for sale.
Other Income. Other income for the year ended June 30, 2000, consisted of a
debt settled for less than its recorded amount.
Provision (benefit) for income taxes. For the year ended June 30, 2000, the
Company had an income tax benefit of $151,000 compared to $2.6 million for
fiscal 1999. Excluding, the non-recurring restructuring costs for the year
ended June 30, 2000 and non-recurring in process research and development
charge and restructuring costs for the year ended June 30, 1999, benefit for
income taxes for the year ended June 30, 2000, was $151,000, compared to
provision for income taxes of $231,000 for fiscal 1999. The reduction in the
Company's effective
25
<PAGE>
tax rate was primarily due to a mix in income from U.S. and foreign operations
and utilization of previously unrealized net operating losses.
Net Income. For the reasons outlined above, the net income for the year
ended June 30, 2000 was $627,000 compared to $741,000 for the year ended June
30, 1999. Excluding non-recurring restructuring costs for the year ended June
30, 2000 and non-recurring in process research and development charge, asset
impairment charge, and restructuring costs for the year ended June 30, 1999,
net income for fiscal 2000 decreased by 49.1% to $2.5 million compared to $5.0
million for fiscal 1999.
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 in
the foreseeable future. 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.
Gross Profit. Cost of goods sold consist of material, labor and
manufacturing overhead. Gross profit increased by $2.2 million, or 8.0%, to
$29.1 million from $27.0 million for fiscal 1998. As a percent of revenues,
gross profit decreased to 28.6% 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 $5.0 million, or
39.9%, to $17.7 million from $12.7 million in fiscal 1998. As a percentage of
revenues, selling, general and administrative expenses increased to 17.4% 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.
26
<PAGE>
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 operations of Osteometer in Denmark. For the year ended June 30, 1999,
the asset impairment charge was $4.0 million, which includes the write off of
$3.7 million of goodwill and $250,000 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 relocation to the United States,
which will be recorded in the 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
$739,000), 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.
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 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 $7.0 million, income from
operations for the year ended June 30, 1999 decreased by $5.3 million or
50.9%, to $5.1 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
27
<PAGE>
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.
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 public
offering. As of June 30, 2000, the Company's principal source of liquidity
consisted of $10.9 million in cash and several credit agreements described
below.
The Company's operations used net cash of $902,000 during fiscal 2000,
compare to net cash provided of $80,000 in fiscal 1999. The amount of net cash
used by operations reflects increases in accounts receivable and inventory and
reductions in advances from customers, accrued warranty and other accrued
expenses and current liabilities. Net cash used in operations was offset in
part by an increase in accounts payable, income taxes payable, and reduction
in income taxes receivable. The increase in accounts receivable is mainly due
to the increased sales, timing of shipments and increase in inventory is due
to increase in shipments and product mix.
Net cash used in investing activities was $1.3 million and $23.4 million
for fiscal 2000 and 1999, respectively. In fiscal 2000, net cash used in
investing activities reflects primarily cash used in business acquisitions and
the purchase of property and equipment and was offset in part by the sale of
marketable securities. In fiscal 1999, the net cash used in investing
activities reflects primarily cash used in business acquisitions, cash used in
equity investments, the purchase of property and equipment, and purchase of
marketable securities.
Net cash provided by financing activities was $5.7 million and $7.5 million
for fiscal 2000 and 1999, respectively. In fiscal 2000, net cash provided by
financing activities resulted primarily from borrowings under the Company's
term loan was offset in part by the purchase of treasury stock and repayment
of working capital lines of credit.
In October 1999, the Company borrowed $3.0 million from its term loan
facility with Sanwa Bank. The term loan amortizes over seven years and is
payable monthly over five years. The balance is due in one balloon payment
after five years. In November 1999, the Company converted $8.5 million of
borrowings from its acquisition line of credit to a term loan, for a period of
48 months. In fiscal 1999, net cash provided by financing activities resulted
primarily from the Company's working capital 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 shares of its common stock. Through September 27, 2000, the Company
repurchased 490,500 shares at an average price $4.60
28
<PAGE>
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 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 (9.5% at June 30, 2000) or, at the Company's option, at a fixed rate as
quoted by the bank upon request for specific advances. As of June 30, 2000
there was $5.4 million outstanding under the line of credit, $7.4 million was
outstanding under the acquisition line of credit, $2.8 million outstanding
under the term loan and no amount was outstanding under the equipment line of
credit. As of June 30, 2000, $630,000 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, except for the purchase of real property to
be occupied by the borrowers. 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, 2000, which was
subsequently waived by the bank.
The Company and three of its U.S. subsidiaries entered into an agreement
with Wells Fargo HSBC Trade Bank, N.A. The agreement has been renewed
periodically, and in February 2000 it was extended until May 31, 2001. As
currently in effect, the agreement provides for letters of credit for a
specific customer up to $250,000. As of June 30, 2000, there was outstanding
approximately $250,000 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.
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 $3.0 million at June 30, 2000) outstanding at any one
time, which amounts are secured by certain assets of Rapiscan U.K. At June 30,
2000, no amounts were outstanding under the overdraft facility. Outstanding
borrowings bear interest at a base rate (6% at June 30, 2000) plus 1.5% per
annum. The agreement also provides for a 1.0 million Pounds Sterling
(approximately $1.5 million at June 30, 2000) facility for tender and
performance bonds and a 1.0 million Pounds Sterling (approximately $1.5
million at June 30, 2000) 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, 2000, $785,000 was outstanding under the
performance bond facility and Rapiscan U.K. had purchased forward exchange
contracts in the amount of $1,000. The above facilities expire in January 2001
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,
2000). Borrowings under the line of credit bear interest at the bank's prime
rate (9.5% at June 30, 2000) plus 2.25%. The line of credit is terminable at
any time. As of June 30, 2000 there were no amounts outstanding under the line
of credit. Borrowings under the line of credit are collateralized by certain
assets of
29
<PAGE>
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 10.0 million
Norwegian kroner (approximately $1.2 million at June 30, 2000). As of June 30,
2000, no amounts were outstanding under this line of credit. Borrowings under
the line of credit bear interest at a variable rate, which was 8.0% at June
30, 2000.
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, 2000) for performance bonds and a
1.0 million Malaysian ringgits overdraft facility (approximately $263,000 at
June 30, 2000). Borrowings under the overdraft facility bear interest at the
bank's base lending rate (6.8% at June 30, 2000) plus 1.75%. At June 30, 2000,
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 2000 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, 2000). Borrowings under the line of
credit bear interest at the bank's base lending rate (6.8% at June 30, 2000)
plus 2.25%. As of June 30, 2000,1.4 million Malaysian ringgits (approximately
$384,000 at June 30, 2000) 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 expired in February 2000
and the Company is operating the line on a month-to-month basis. 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 provides for
a foreign currency overdraft facility up to 3.0 million Finnish markka
(approximately $483,000 at June 30, 2000). At June 30, 2000, approximately
$331,000 was outstanding under the overdraft facility. The agreement also
provides for 1.0 million Finnish Marks (approximately $161,000 at June 30,
2000) for tender and performance bonds. At June 30, 2000 approximately
$123,000 was outstanding under the tender and performance bonds facility.
Borrowings under these facilities bear interest rate at the bank's prime
lending rate (4.5% at June 30, 2000) plus 0.75%. The above facilities expire
in February 2001, and the Company believes that they will be renewed on the
same or 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.
New Accounting Pronouncements
In June 1999, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133 (an amendment of FASB Statement No. 133). Under the provisions of this
Statement, the effective date of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133"), is deferred to fiscal years beginning after June 15, 2000. The
Company is currently evaluating the impact of adopting SFAS No. 133, and does
not expect it to have a material impact on the Company's financial statements
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will
adopt SAB 101 as required in the first quarter of fiscal 2001. The Company is
currently evaluating the impact of adopting SAB 101, and does not expect it to
have a material impact on the Company's financial statements or results of
operations.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Currency Translation
The accounts of the Company's operations in Singapore, Malaysia, England,
Finland, Norway and Canada are maintained in Singapore dollars, Malaysian
ringgits, Pounds Sterling, 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 $743,000 and $156,000 were included in
income for fiscal 1999 and 2000, 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,
2000, 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. Due to
its overseas investments and the necessity of dealing with local currencies in
its foreign business transactions, the Company is at risk with respect to
foreign currency fluctuations.
Inflation
The Company does not believe that inflation has had a material impact on
its results of operations.
Interest Rate Risks
All highly liquid investments with a maturity of three months or less are
classified as cash equivalent and recorded in the balance sheet at fair value.
We do not use derivative instruments to hedge our interest rate risk.
The carrying amount, principal maturity and estimated value of our
investment portfolio and long-term debt exposure as of June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Carrying
Amount Maturity
-------- --------------------------
Fair
1999 2000 2001 2002 2003 2004 Value
-------- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments
Cash and cash equivalents.......... $ 7,241 -- -- -- -- -- $7,241
Average interest rate.............. 4.49% -- -- -- -- -- --
Long-Term Debt
Secured long term loan............. 409 292 117 -- -- -- 409
Average interest rate.............. 9.0% 9.0% 9.0%
</TABLE>
31
<PAGE>
The carrying amount, principal maturity and estimated value of our
investment portfolio and long-term debt exposure as of June 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Carrying
Amount Maturity
-------- ---------------------------------
Fair
2000 2001 2002 2003 2004 2005 Value
-------- ----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments
Cash and cash
equivalents............. $ 10,892 -- -- -- -- -- $10,892
Average interest rate.... 5.51% -- -- -- -- -- --
Long-Term Debt
Secured long term loan... 10,339 2,641 2,609 2,554 1,499 1,036 10,339
Average interest rate.... 8.75% 9.50% 9.50% 9.50% 9.50% 9.50%
</TABLE>
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 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, 2000 and had a fair value of
approximately $508,000, which closely approximates their carrying value at
June 30, 2000.
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-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
32
<PAGE>
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 2000 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 16, 2000.
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 2000 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 16, 2000.
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 2000 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 16, 2000.
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 2000 Annual
Meeting of Stockholders, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about October 16, 2000.
33
<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>
Report of Independent Accountants F-1
Consolidated Balance Sheets at June 30, 1999 and 2000 F-2
Consolidated Statements of Operations for the years ended June 30, 1998,
1999 and 2000 F-3
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1999 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1999 and 2000 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,
2000.
34
<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 27, 2000 /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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Deepak Chopra Chairman of the Board, September 27, 2000
______________________________________ President and Chief
Deepak Chopra Executive Officer
(Principal Executive
Officer)
/s/ Ajay Mehra Vice President, Chief September 27, 2000
______________________________________ Financial Officer
Ajay Mehra (Principal Financial and
Accounting Officer),
Secretary and Director
/s/ Steven C. Good Director September 27, 2000
______________________________________
Steven C. Good
/s/ Meyer Luskin Director September 27, 2000
______________________________________
Meyer Luskin
/s/ Madan G. Syal Director September 27, 2000
______________________________________
</TABLE> Madan G. Syal
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
OSI Systems, Inc.:
We have audited the accompanying consolidated balance sheets of OSI
Systems, Inc. and its subsidiaries (the "Company") as of June 30, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June
30, 2000. Our audits also included the financial schedules listed at Item 14.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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,
2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Los Angeles, California
September 25, 2000
F-1
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
1999 2000
------- --------
<S> <C> <C>
ASSETS (Note 4)
---------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1)........................ $ 7,241 $ 10,892
Investment securities available for sale (Note 1)......... 1,708
Accounts receivable, net of allowance for doubtful
accounts of $860 and $855 at June 30, 1999 and 2000,
respectively (Note 1).................................... 29,330 29,890
Other receivables (Note 2)................................ 1,862 2,184
Inventory (Note 1)........................................ 24,481 30,920
Prepaid expenses.......................................... 1,018 821
Deferred income taxes (Notes 1 and 6)..................... 1,108 1,807
Income taxes receivable (Notes 1 and 6)................... 1,853 193
------- --------
Total current assets.................................... 68,601 76,707
------- --------
PROPERTY AND EQUIPMENT, Net (Notes 1 and 4)................. 14,486 14,248
INTANGIBLE AND OTHER ASSETS, Net (Notes 1, 2, and 3)........ 8,581 9,052
DEFERRED INCOME TAXES (Notes 1 and 6)....................... 1,703 3,016
------- --------
TOTAL................................................... $93,371 $103,023
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank lines of credit (Note 4)............................. $ 8,678 $ 6,079
Current portion of long-term debt (Notes 1, 4, and 5)..... 292 2,641
Accounts payable (Note 1)................................. 9,145 12,728
Accrued payroll and related expenses...................... 2,399 2,270
Income taxes payable (Notes 1 and 6)...................... 717 1,586
Advances from customers................................... 996 558
Accrued warranties........................................ 1,984 1,805
Other accrued expenses and current liabilities............ 2,922 3,141
------- --------
Total current liabilities............................... 27,133 30,808
------- --------
LONG-TERM DEBT (Notes 1, 4, and 5).......................... 117 7,698
DEFERRED INCOME TAXES (Notes 1 and 6)....................... 339 164
MINORITY INTEREST (Note 3).................................. 146
------- --------
Total liabilities....................................... 27,589 38,816
------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7)
SHAREHOLDERS' EQUITY (Notes 8, 9, and 10):
Preferred stock, no par value; authorized, 10,000,000
shares; no shares issued or outstanding at June 30, 1999
and 2000
Common stock, no par value; authorized, 40,000,000 shares;
issued and outstanding, 9,647,415 and 9,349,750 shares at
June 30, 1999 and 2000, respectively (Note 10)........... 48,792 47,357
Retained earnings......................................... 18,160 18,787
Accumulated other comprehensive income (Note 1)........... (1,170) (1,937)
------- --------
Total shareholders' equity.............................. 65,782 64,207
======= ========
TOTAL................................................... $93,371 $103,023
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1999, AND 2000
(Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
1998 1999 2000
------- -------- --------
<S> <C> <C> <C>
REVENUES (Note 1)................................ $93,918 $101,763 $110,938
COST OF GOODS SOLD............................... 66,952 72,633 80,598
------- -------- --------
GROSS PROFIT..................................... 26,966 29,130 30,340
------- -------- --------
OPERATING EXPENSES:
Selling, general, and administrative expenses
(Notes 11 and 12)............................. 12,670 17,728 19,828
Research and development (Note 1).............. 3,790 5,711 7,712
Goodwill amortization (Note 1)................. 106 595 529
Asset impairment charge (Note 3)............... 3,985
In-process research and development (Note 3)... 2,579
Restructuring costs (Notes 1 and 3)............ 458 1,898
------- -------- --------
Total operating expenses..................... 16,566 31,056 29,967
------- -------- --------
INCOME (LOSS) FROM OPERATIONS.................... 10,400 (1,926) 373
GAIN ON SALE OF MARKETABLE SECURITIES (Note 1)... 309
OTHER INCOME (Note 1)............................ 126
INTEREST (INCOME) EXPENSE (Notes 4 and 5)........ (600) (102) 721
------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST........................... 11,000 (1,824) 87
PROVISION (BENEFIT) FOR INCOME TAXES (Notes 1 and
6).............................................. 2,752 (2,565) (151)
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY (Note
3).............................................. 389
------- -------- --------
NET INCOME....................................... $ 8,248 $ 741 $ 627
======= ======== ========
EARNINGS PER COMMON SHARE (Note 1)............... $ 0.94 $ 0.08 $ 0.07
======= ======== ========
EARNINGS PER COMMON SHARE--Assuming dilution
(Note 1)........................................ $ 0.92 $ 0.08 $ 0.07
======= ======== ========
</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, 1998, 1999, AND 2000
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Preferredd Common Accumulated
---------------- ------------------ Other
Number of Number of Retained Comprehensive Comprehensive
Shares Amount Shares Amount Earnings Income Income Total
--------- ------ --------- ------- -------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997.. -- $ -- 6,156,528 $ 7,367 $ 9,171 $ 271 $16,809
Initial public offering
(Note 10)............. 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.. 9,647,415 48,792 18,160 (1,170) 65,782
Exercise of stock
options............... 97,161 319 319
Tax benefit of stock
options exercised..... 20 20
Shares purchased under
the employee stock
purchase program (Note
9).................... 10,674 46 46
Treasury stock
purchased............. (405,500) (1,820) (1,820)
Comprehensive income:
Net income............ 627 $ 627 627
Other comprehensive
income--translation
adjustment........... (1,253) (1,253) (1,253)
Unrealized loss on
available for sale
securities........... 486 486 486
-------
Comprehensive income
(loss)................ $ (140)
----- ----- --------- ------- ------- ------- ======= -------
BALANCE, JUNE 30, 2000.. -- $ -- 9,349,750 $47,357 $18,787 $(1,937) $64,207
===== ===== ========= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1999, AND 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 8,248 $ 741 $ 627
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for losses on accounts receivable....... 122 86 459
In-process research and development............... 2,579
Depreciation and amortization..................... 2,330 3,681 4,039
Asset impairment charge........................... 3,985
Gain on sale of marketable securities............. (309)
Deferred income taxes............................. (314) (1,384) (2,187)
(Gain) loss on sale of property and equipment..... (13) (498) 59
Changes in operating assets and liabilities, net
of business acquisition:
Accounts receivable.............................. (9,481) (3,997) (1,869)
Other receivables................................ 462 (570) (82)
Inventory........................................ (3,995) 533 (7,583)
Prepaid expenses................................. (325) (194) 115
Accounts payable................................. 1,352 318 3,774
Accrued payroll and related expenses............. 840 (660) 15
Income taxes payable............................. 884 (1,775) 889
Advances from customers.......................... (603) (928) (424)
Income taxes receivable.......................... (1,853) 1,724
Accrued warranty................................. 989 (26) (172)
Other accrued expenses and current liabilities... (932) 42 23
------- -------- -------
Net cash (used in) provided by operating
activities..................................... (436) 80 (902)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investment securities
available for sale............................... (2,194) 2,503
(Increase) decrease in equity investments......... (1,202) 29
Proceeds from sale of property and equipment...... 46 861 305
Additions to property and equipment............... (7,487) (4,607) (2,967)
Cash paid for business acquisition, net of cash
acquired......................................... (750) (16,041) (1,309)
Other assets...................................... 194 (188) 148
------- -------- -------
Net cash used in investing activities........... (7,997) (23,371) (1,291)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) proceeds from bank lines of
credit........................................... (8,797) 8,495 (2,579)
(Payments) proceeds on long-term debt............. (2,411) (669) 10,081
Increase in minority interest..................... (389)
Proceeds from initial public offering and exercise
of stock options and warrants.................... 41,764 99 385
Treasury stock.................................... (438) (1,820)
------- -------- -------
Net cash provided by financing activities....... 30,556 7,487 5,678
------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (229) 598 166
------- -------- -------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS........ 21,894 (15,206) 3,651
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....... 553 22,447 7,241
------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR............. $22,447 $ 7,241 $10,892
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--
Cash paid (received) during the year for:
Interest.......................................... $ 452 $ 572 $ 688
Income taxes...................................... $ 1,869 $ 2,475 $ (594)
</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, 1998, 1999, AND 2000
(Dollars in Thousands)
In 1998, the Company acquired the "Secure" product line from ThermoSpectra
Corporation ("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>
In July 1999, the Company paid an additional $739,000 related to the
acquisition of Metorex Security. The payment was made in lieu of contingent
payments, based upon future sales.
In October 1999, the Company increased its holding in OSI Medical, Inc.
("OSI Medical"), formerly TFT Medical, Inc., from 40.3% to 55.6% and changed
the method of accounting for the investment from the equity method, to the
purchase method of accounting. In conjunction with the change in accounting,
and additional investment, the assets acquired and liabilities assumed were as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................... $ 662
Goodwill........................................................ 1,151
Liabilities assumed............................................. (110)
Minority interest............................................... (535)
Initial net equity investment................................... (598)
------
Cash paid, net of cash acquired................................. $ 570
======
</TABLE>
See accompanying notes to consolidated financial statements.
(Concluded)
F-6
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1998, 1999, and 2000
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, fiber
optics 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. In the medical field, the Company manufactures
and sells bone densitometers, which are used to provide bone loss measurements
in the diagnosis of osteoporosis.
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.
Cash Equivalents--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. Unrealized gains and losses on
equity securities are included in accumulated other comprehensive income.
During the year ended June 30, 2000, the Company sold the investments for a
gain of $309,000.
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, 2000, approximately 58
percent 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.
Inventory at June 30, 1999 and 2000 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Raw materials................................................ $11,963 $16,877
Work-in-process.............................................. 8,000 6,619
Finished goods............................................... 4,518 7,424
------- -------
Total...................................................... $24,481 $30,920
======= =======
</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.
F-7
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999, and 2000
Property and equipment at June 30, 1999 and 2000 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Land and buildings.......................................... $ 4,211 $ 4,211
Equipment................................................... 11,969 12,790
Leasehold improvements...................................... 4,133 4,284
Tooling..................................................... 2,198 2,213
Furniture and fixtures...................................... 1,107 1,218
Computer.................................................... 3,042 3,667
Vehicles.................................................... 200 194
------- -------
Total....................................................... 26,860 28,577
Less accumulated depreciation and amortization.............. 12,374 14,329
------- -------
Property and equipment, net................................. $14,486 $14,248
======= =======
Intangibles and Other Assets--Intangible and other assets at June 30, 1999
and 2000 consisted of the following (in thousands):
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Purchased software.......................................... $ $ 474
Software development costs.................................. 588 588
Goodwill and identified intangible assets................... 6,942 8,374
Joint venture and equity investments........................ 1,311 579
Deposits.................................................... 102 121
Other....................................................... 721 558
------- -------
Total....................................................... 9,664 10,694
Less accumulated amortization............................... 1,083 1,642
------- -------
Intangible and other assets, net............................ $ 8,581 $ 9,052
======= =======
At June 30, 1999 and 2000, goodwill and identified intangible assets
consisted of the following as a result of the following acquisitions (in
thousands):
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Acquisition of minority interests........................... $ 1,554 $ 1,554
Acquisition of Advanced Micro Electronics AS ("AME")........ 588 588
Acquisition of Metorex Security............................. 3,193 3,474
Acquisition of SMI.......................................... 1,470 1,470
Acquisition of Corrigan..................................... 110 110
Acquisition of Aristo....................................... 27 27
Acquisition of OSI Medical.................................. 1,151
------- -------
$ 6,942 $ 8,374
======= =======
</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
F-8
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999, and 2000
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 to five year period, once it is put into use. No software development costs
were capitalized during the three years ended June 30, 2000.
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.
Other Income--Other income consists of a debt settled with the Danish
Government for less than its recorded amount.
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.
Foreign Exchange Instruments--The Company's use of derivatives is limited to
the purchase of foreign exchange contracts in order to attempt to reduce
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, 2000, there was
approximately $508,000 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, 2000.
Revenue Recognition--The Company recognizes revenue upon shipment of its
products. Concurrent with the shipment of the product the Company accrues
estimated product return reserves and warranty expenses.
Foreign Currency Translation--The accounts of the Company's operations in
Singapore, Malaysia, Norway, Finland, Canada, and the United Kingdom are
maintained in Singapore dollars, Malaysian ringgits, Norwegian 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 accumulated other comprehensive
income. Transaction losses of approximately $39,000, $743,000, and $156,000
were included in income for the years ended June 30, 1998, 1999 and 2000,
respectively.
Restructuring Costs--The Company adopted a restructuring plan in the quarter
ended March 31, 1999. In August 1999, the Company decided to close the
operations of Osteometer in Denmark, and to relocate certain of these
operations to the Company's U.S. facilities. The Company recorded $458,000 and
$1,898,000 of
F-9
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999, and 2000
restructuring costs for the years ending June 30, 1999 and 2000, respectively,
associated primarily with the termination of certain employees, lease
commitments, and other facility closure costs. Of that amount, $52,000 was
unpaid at June 30, 2000, and is included in other accrued expenses. Based on
current estimates, the Company anticipates that the current restructuring
accruals approximate the ultimate restructuring unpaid amounts.
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, calculated using the
treasury stock method.
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, 1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Earnings per common share
Income available to common shareholders... $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 shareholders... $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 shareholders... $ 741,000 9,706,218 $0.08
Effect of dilutive securities
Options, treasury stock method............ 122,753
---------- --------- -----
Earnings per common share--assuming
dilution
Income available to common shareholders... $ 741,000 9,828,971 $0.08
========== ========= =====
<CAPTION>
Year Ended June 30, 2000
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Earnings per common share
Income available to common shareholders... $ 627,000 9,375,491 $0.07
Effect of dilutive securities
Options, treasury stock method............ 33,916
---------- --------- -----
Earnings per common share--assuming
dilution
Income available to common shareholders... $ 627,000 9,409,407 $0.07
========== ========= =====
</TABLE>
F-10
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
New Accounting Pronouncements--In June 1999, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133 (an amendment of FASB Statement No. 133). Under the
provisions of this statement, the effective data of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS No. 133"), is
deferred to fiscal years beginning after June 15, 2000. The Company is
currently evaluating the impact of adopting SFAS No. 133, and does not expect
it to have a material impact on the Company's financial position or result of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will
adopt SAB 101 as required in the first quarter of fiscal 2001. The Company is
currently evaluating the impact of adopting SAB 101, and does not expect it to
have a material impact on the Company's financial position or result 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.
Reclassifications--Certain reclassifications have been made to prior-year
amounts to conform to the current year's presentation.
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 percent, 10.5 percent, and 4.5 percent ownership
interest, respectively, in the joint venture. The Company's initial investment
was $108,000. For the years ended June 30, 1999 and 2000 the Company's equity
in the earnings of the joint venture amounted to $75,000 and $122,000,
respectively and is included in selling, general and administrative expenses.
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, 1999 and 2000, the Company earned a
technical fee from the joint venture in the amount of $144,000, $107,000 and
$150,000, respectively. At June 30, 2000, $257,000 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 share in the losses of the investment for the years ended
June 30 1999 and 2000, amounted to $1,000 and
F-11
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
$39,000, respectively and is included in selling, general and administrative
expenses. Square One, Inc. develops and manufactures infrared-based patient
monitoring medical devices and subsystems.
3. ACQUISITIONS
During fiscal 1998, the Company acquired the "Secure" product line from
ThermoSpectra. 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 densitometer 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 densitometer market. As a result of the aforementioned circumstances, the
Company recorded an asset impairment charge of $3,985,000, which included the
write-off of $3,735,000 of goodwill and $250,000 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. During the
year ended June 30, 2000, the Company decided to close the manufacturing
facilities of Osteometer in Denmark, relocating certain of these operations to
the U.S. facilities of the Company. The Company incurred additional costs
related to this closure and relocation in fiscal 2000 which are included in
restructuring costs.
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 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. The Company paid an additional $739,000 in cash, during July
1999, in lieu of contingent payments of up to $1,500,000, based on future
sales.
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. As of June 30, 2000 the Company may pay up to
an additional $2,400,000 in cash, at a later date, based on future sales. To
date the Company has not made any such payments. 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.
F-12
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
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 value of the assets acquired is
being amortized over a period of 20 years.
During the year ended June 30, 1999, the Company invested $1,002,000,
including professional fees associated with the acquisition, in OSI Medical for
an initial equity share of 40.3 percent. The Company's initial investment,
including goodwill of $740,000, is accounted for under the equity method for
the year ended June 30, 1999. 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.
In October 2000, the Company acquired an additional 15.3 percent equity
interest in OSI Medical for $1,225,000, including professional fees associated
with the acquisition. The additional equity investment increased the Company's
equity share in OSI Medical to 55.6 percent, which includes total goodwill of
$1,151,000. The excess of the purchase price over the fair value of the net
assets acquired is being amortized over 20 years. The Company's equity in the
losses for the three months ended September 30, 1999 is $89,000 and is included
in selling, general, and administrative expenses. The Company changed the
method of accounting for OSI Medical from the equity to the purchase method of
accounting in October 1999. During April 2000, the Company also received five-
year warrants (subject to earlier termination upon the occurrence of certain
events) to acquire up to 1,110,000 additional OSI Medical shares at a purchase
price of $1.35 per share. The warrants are first exercisable commencing on
April 12, 2001. Had the acquisition occurred as of July 1, 1998 pro forma
consolidated sales, net income and net income per share would not have been
materially different than the amounts reported for the periods presented.
4. BANK AGREEMENTS
At June 30, 1999 and 2000, line-of-credit borrowings consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
------ ------
<S> <C> <C>
Line of credit--United States............................... $8,500 $5,364
Line of credit--Malaysia.................................... 384
Line of credit--Finland..................................... 178 331
------ ------
Total bank lines of credit................................ $8,678 $6,079
====== ======
</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 (9.5 percent at June 30, 2000) 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, 2000, there was $5,364,000 outstanding under the revolving line of credit,
no amount outstanding under the equipment line of credit, $7,438,000
outstanding under the acquisition line of credit, and $2,786,000 outstanding
under the term loan. 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, 2000, approximately $630,000 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
F-13
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
ratios, limitations on outside indebtedness, rental expense, and capital
expenditures. The Company was in violation of a covenant for the year ended
June 30, 2000. The covenant was subsequently waived by the bank for the year
ended June 30, 2000. The above facilities expire in November 2000, and the
Company believes that it will be renewed on the same or similar terms.
The Company has a credit agreement with a U.S. bank that provides for
letters of credit for a specific customer up to $250,000. At June 30, 2000,
approximately $250,000 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 May 31,
2001.
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 U.S. $1,676,000 at June 30, 2000). Borrowings under the line of
credit bear interest at the bank's prime rate (9.5 percent at June 30, 2000)
plus 2.25 percent. 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, 2000, 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 10,000,000 Norwegian kroner (approximately
U.S. $1,170,000 at June 30, 2000). Borrowings under the line of credit bear
interest at a variable rate, which was 8 percent at June 30, 2000. Interest is
payable quarterly. Borrowings under the line of credit are collateralized by
certain AME assets. At June 30, 2000, 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 U.S. $3,020,000 at June 30, 2000) outstanding at any one time,
which amounts are secured by certain assets of Rapiscan U.K. At June 30, 2000,
no amounts were outstanding under the overdraft facility. Outstanding
borrowings bear interest at a base rate (6 percent at June 30, 2000) plus 1.5
percent per annum. The agreement also provides for a 1,000,000 pounds sterling
(approximately U.S. $1,510,000 at June 30, 2000) facility for tender and
performance bonds and a 1,000,000 pounds sterling (approximately U.S.
$1,510,000 at June 30, 2000) 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, 2000, $785,000 was outstanding under
the performance bond facility. The above facilities expire in January 2001,
and the Company believes that they will be renewed on the same or similar
terms.
Opto Malaysia has a loan agreement with a Malaysian bank that provides for
a revolving line of credit up to 1,500,000 Malaysian ringgits (approximately
U.S. $395,000 at June 30, 2000). Borrowings under the line of credit bear
interest at the bank's base lending rate (6.8 percent at June 30, 2000) plus
2.25 percent. Interest is payable monthly. At June 30, 2000, approximately
$1,400,000 Malaysian ringgits (approximately U.S. $384,000) was outstanding
under this facility. Borrowings under this agreement are secured by certain
assets of the subsidiary. The above facility expired in February 2000, and the
Company is currently operating the facility on a month-to-month basis. The
Company believes that it will be renewed on the same or similar terms.
Opto Malaysia has a loan agreement with a Malaysian bank that provides for
performance bonds of 2,500,000 Malaysian ringgits (approximately U.S. $658,000
at June 30, 2000). As of June 30, 2000, $310,000 was outstanding under the
loan agreement. The agreement also provides for overdraft borrowings up to
1,000,000
F-14
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
Malaysian ringgits (approximately U.S. $263,000 at June 30, 2000). Borrowings
under the overdraft facility bear interest at the bank's base lending rate (6.8
percent at June 30, 2000) plus 1.75 percent. At June 30, 2000, 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 2000, 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 3,000,000 Finnish
markka (approximately U.S. $483,000 at June 30, 2000). At June 30, 2000,
approximately $331,000 was outstanding under the overdraft facility. The
agreement also provides for 1,000,000 Finnish markka (approximately U.S.
$161,000 at June 30, 2000) for tender and performance bonds. At June 30, 2000,
approximately $123,000 was outstanding under the tender and performance bonds
facility. Borrowings under the facility bear interest at the bank's prime
lending rate (4.5 percent at June 30, 2000) plus 0.75 percent. The above
facilities expire in February 2001, and the Company believes that they will be
renewed on the same or similar terms.
5. LONG-TERM DEBT
At June 30, 1999 and 2000, long-term debt consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 2000
---- -------
<S> <C> <C>
Four-year term loan payable in monthly installments of $177,083
until paid in full on November 1, 2003. Interest is due monthly
at a rate of 9.5%............................................... $ 7,438
Five-year term loan payable in monthly installments of $35,714
until October 1, 2004 and a balloon payment of $892,874 on
November 1, 2004. Interest is due monthly at a rate of 9.5%..... 2,786
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%.................................................... $158 53
Interest-free subsidy payable to a Danish government institution,
based on future product sales of a particular product........... 174 22
Other............................................................ 77 40
---- -------
409 10,339
Less current portion of long-term debt........................... 292 2,641
---- -------
Long-term portion of debt........................................ $117 $ 7,698
==== =======
</TABLE>
Fiscal year principal payments of long-term debt as of June 30, 2000 are as
follows (in thousands):
<TABLE>
<S> <C>
2001............................................................... $ 2,641
2002............................................................... 2,609
2003............................................................... 2,554
2004............................................................... 1,499
2005............................................................... 1,036
-------
Total............................................................ $10,339
=======
</TABLE>
F-15
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
6. INCOME TAXES
For financial reporting purposes, income before provision for income taxes
and minority interest includes the following components (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Pre-tax income (loss):
United States................................. $ 4,505 $ 1,838 $(3,915)
Foreign....................................... 6,495 (3,662) 4,002
------- ------- -------
Total pre-tax income (loss)................. $11,000 $(1,824) $ 87
======= ======= =======
</TABLE>
The Company's provision for income taxes is composed of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $1,729 $(1,946) $ 973
State.......................................... 246 290 (3)
Foreign........................................ 1,091 475 1,066
------ ------- -------
3,066 (1,181) 2,036
Deferred....................................... (314) (1,384) (2,187)
------ ------- -------
Total provision.............................. $2,752 $(2,565) $ (151)
====== ======= =======
</TABLE>
The Company does not provide for U.S. income taxes on the undistributed
earnings of the foreign subsidiaries, as it is the Company's intention to
utilize those earnings in the foreign operations for an indefinite period of
time. At June 30, 2000, undistributed earnings of the foreign subsidiaries
amounted to approximately $19,192,000. 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, 1999 and 2000
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Deferred income tax assets:
State income tax credit carryforwards.................. $ 781 $ 936
Federal income tax credit carryforwards................ 358 980
Net operating loss carryforwards....................... 1,208 766
Revitalization zone deductions......................... 1,111 1,111
Allowance for doubtful accounts........................ 125 225
Inventory reserve...................................... 174 430
Other assets........................................... 1,184 2,511
------- -------
Total deferred income tax assets......................... 4,941 6,959
Valuation allowance...................................... (690)
------- -------
Net deferred income tax assets..................... 4,941 6,269
------- -------
Deferred income tax liabilities:
Depreciation........................................... (406) (377)
Capitalized software development costs................. (217) (217)
State income taxes..................................... (772) (913)
Other liabilities...................................... (1,074) (103)
------- -------
Total deferred income tax liabilities.................... (2,469) (1,610)
------- -------
Net deferred income taxes................................ $ 2,472 $ 4,659
======= =======
</TABLE>
F-16
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
As of June 30, 2000, the Company has federal and state net operating loss
carryforwards of approximately $1,472,000 and $2,835,000, respectively. The
Company's federal and state net operating losses will begin to expire in the
tax years ending June 30, 2020 and 2004, respectively.
The Company also has federal and state credit carryforwards of
approximately $980,000 and $2,047,000, respectively. The Company's federal and
state credit carryforwards will begin to expire in tax years ending June 30,
2019 and 2014, respectively.
The Company has established a valuation allowance in accordance with the
provisions of SFAS No. 109. The valuation allowance primarily relates to the
net operating loss of a subsidiary subject to Separate Return Limitation Year
rules and State Revitalization Zone credit carryforwards. The Company
continually reviews the adequacy of valuation allowances and releases the
allowances when it is determined that is more likely than not that the
benefits will be realized.
The consolidated effective income tax rate differs from the federal
statutory income tax rate due primarily to the following:
<TABLE>
<CAPTION>
1998 1999 2000
----- ------ -------
<S> <C> <C> <C>
Provision for income taxes at federal statutory
rate.............................................. 35.0 % (35.0)% (35.0)%
State income tax and credits, net of federal
benefit........................................... (1.1) (19.6) 299.6
Nontaxable earnings of foreign sales corporation... (1.3) (13.6) (91.4)
Research and development tax credits............... (1.7) (11.8) (95.5)
Foreign income subject to tax at other than federal
statutory rate.................................... (10.5) (96.9) 1,020.2
Foreign losses with no foreign tax benefit......... 26.1
In-process research and development................ 7.9
Nondeductible expenses............................. 0.6 4.9 (144.8)
Other.............................................. 4.0 (1.2) (4.2)
Change in valuation allowance...................... (778.5)
----- ------ -------
Effective income tax rate.......................... 25.0 % (139.2)% 170.4 %
===== ====== =======
</TABLE>
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, 2000 are as follows:
<TABLE>
<S> <C>
2001............................................................ $1,405,000
2002............................................................ 943,000
2003............................................................ 812,000
2004............................................................ 596,000
2005............................................................ 578,000
2006 and thereafter............................................. 1,989,000
----------
Total....................................................... $6,323,000
==========
</TABLE>
F-17
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
Total rent expense included in the accompanying consolidated financial
statements was $1,013,000, $1,968,000, and $2,010,000 for the years ended June
30, 1998, 1999, and 2000, 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 an 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 percent 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 percent of the Company's voting stock may not be less
than 110 percent 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.
The following summarizes stock option activity for the years ended June 30,
1998, 1999 and 2000:
<TABLE>
<CAPTION>
Option Price
-------------------
Number of Weighted
Options Average Total
--------- -------- ----------
<S> <C> <C> <C>
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
Granted....................................... 365,750 7.91 2,894,000
Exercised..................................... (97,161) 3.29 (319,000)
Canceled...................................... (23,188) 8.23 (191,000)
--------- ----- ----------
Outstanding, June 30, 2000...................... 1,053,263 9.06 $9,546,000
========= ===== ==========
</TABLE>
F-18
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
The following summarizes pricing and term information for options
outstanding as of June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Number Average Weighted- Weighted-
Outstanding Remaining Average Exercisable Average
Range of at June 30, Contractual Exercise at June 30, Exercise
Exercise Prices 2000 Life Price 2000 Price
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.33 to $ 3.33 85,251 1.2 $ 2.67 85,251 $ 2.67
6.56 to 7.00 237,450 3.9 6.95 25,519 5.36
7.7 to 9.48 234,750 4.7 8.42
10.00 to 11.01 145,250 3.0 10.11 71,750 10.11
11.50 to 13.50 350,562 2.0 12.04 262,920 12.04
--------- -------
$2.33 to $13.50 1,053,263 3.1 $ 9.06 445,440 $ 9.56
========= =======
</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 1998, 1999, and 2000 pursuant to SFAS No. 123 was approximately
$768,000, $1,272,000, and $867,000 respectively. Had the Company adopted SFAS
No. 123, pro forma net income (loss) would have been $7,787,000, $(213,000),
and $23,000, and pro forma net income (loss) per share would have been $0.87,
$(0.02), and $0.00 for 1998, 1999, and 2000, 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 109 percent in fiscal 2000 (1999 and 1998, 71 percent and 44
percent, respectively), a risk-free interest rate of 6.39 percent in fiscal
2000 (1999 and 1998, 5.67 percent and 5.47 percent, respectively) and expected
option lives of five years.
9. EMPLOYEE STOCK PURCHASE PROGRAM
In August 1998, the board of directors adopted the Company's Employee Stock
Purchase Plan (the "1998 Plan"). The 1998 Plan, which was approved by the
Company's shareholders in November 1998, provides persons who have been
regular employees of the Company or its U.S. subsidiaries for at least six
months, and who meet certain other criteria, the opportunity to purchase
through regular payroll deductions up to an aggregate of 200,000 shares of
common stock. The 1998 Plan is administered by the board of directors, or a
committee of the board. The 1998 Plan qualifies as an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code.
To participate in the 1998 Plan, eligible employees submit a form to the
Company's payroll office authorizing payroll deductions in an amount between 1
percent and 10 percent of the employee's regular annual pay. At the end of
each offering period, initially set at six months duration, the aggregate
amount deducted from each participating employee's paycheck is applied to the
purchase of a whole number of shares of common stock, with any sums remaining
being returned to the employee. No interest accrues on payroll deductions. The
purchase price of the common stock is 85 percent of the lesser of the fair
market value of the common stock (as determined by the board of directors) on
the first day or the last day of the offering period. If the aggregate number
of shares of common stock that all participants elect to purchase during any
offering period is greater than the number of shares remaining available for
issuance under the 1998 Plan, the remaining shares will be allocated pro-rata
among participants. Not withstanding any of the foregoing, no employee may
purchase common stock under the 1998 Plan if (i) after any such purchase, the
employee would own 5 percent or more of the total combined voting power or
value of all classes of the Company's stock on a consolidated basis, or
(ii) the rights to purchase common stock under the 1998 Plan and all other
qualified employee stock purchase plans of the Company or any of its
subsidiaries granted to that employee would exceed $25,000 per calendar year.
F-19
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
A participant may elect to withdraw from the 1999 Plan at any time up to
the last day of an offering period by filing a form to such effect. Upon
withdrawal, the amount contributed to the employee will be refunded in cash,
without interest. Any person withdrawing may not participate again in the 1998
Plan until the end of one complete offering period. Termination of a
participant's employment for any reason shall be treated as a withdrawal.
The Plan purchased 10,674 shares of common stock, for a total of $46,000
during the year ended June 30, 2000. No shares of common stock were purchased
under the Plan for the year ended June 30, 1999. The Company's liability to
the Plan was $36,000 and $23,000 at July 30, 1999 and 2000, respectively.
10. SHAREHOLDERS' EQUITY
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. The Company purchased 85,000 shares at a cost of $438,000 during
fiscal 1999, and an additional 405,500 shares for $1,820,000 during fiscal
2000. During fiscal 2000, the Company retired the treasury shares. The shares
are disclosed as a deduction from common shares in the accompanying financial
statements.
11. RELATED-PARTY TRANSACTIONS
The Company contracts with entities affiliated by common ownership to
provide messenger service and auto rental and printing services. The Company
also contracts for professional services from a firm that has a partner
serving as a member of the Company's board of directors. Included in cost of
sales, selling, general, and administrative expenses for the years ended June
30, 1998, 1999, and 2000 are approximately $99,000, $103,000, and $90,000 for
messenger service and auto rental; $186,000, $76,000, and $46,000 for printing
services; and $13,000, $4,000, and $9,000 for professional services,
respectively.
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 employee. The Company made no contributions to the
plan for the years ended June 30, 2000, 1999 and 1998.
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, 2000, 1999, and 1998 was approximately $125,000,
$138,000, and $106,000, respectively. Additional information about the plan is
not disclosed as the plan is not considered to be material.
F-20
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
During 2000, AME established a defined contribution plan. The plan provides
for contributions by AME at a fixed percentage of employee salaries.
Contributions made during the year ended June 30, 2000 by AME were
approximately $130,151.
13. SUBSEQUENT EVENTS
On July 31, 2000, the board of directors declared a dividend distribution
of one preferred share purchase right on each outstanding share of its common
stock. The rights will be exercisable only if a person or group acquires 20
percent or more of OSI Systems, Inc.'s common stock or announces a tender
offer, the consummation of which would result in ownership by a person or
group of 20 percent or more of the common stock. Each right will entitle
shareholders to buy one one-thousandth of a share of a new series of
participating preferred stock at an exercise price of $100. If a person or
group acquires 20 percent or more of OSI Systems, Inc.'s outstanding common
stock, each right will entitle its holder (other than such person or members
of such group) to purchase, at the right's then-current exercise price, a
number of the Company's common shares having a market value of twice such
price. In addition, if OSI Systems, Inc. is acquired in a merger or other
business-combination transactions after a person has acquired 20 percent or
more of the Company's outstanding common stock, each right will entitle its
holder to purchase, at the right's then-current exercise price, a number of
the acquiring company's common shares having a market value of twice such
price. The acquiring person will not be entitled to exercise these rights.
Prior to the acquisition by a person or group of beneficial ownership of 20
percent or more of the Company's common stock, the rights are redeemable for
$.001 per right at the option of the board of directors. The board of
directors is also authorized to reduce the 20 percent thresholds referred to
above to not less than 10 percent. The dividend distribution was made on
August 17, 2000, payable to shareholders of record on that date, and is not
taxable to shareholders. The rights will expire on July 31, 2010.
Subsequent to year-end, the Company announced the formation of OSI
Fibercomm Inc., a wholly owned subsidiary of the Company dedicated to
advancing OSI Systems, Inc.'s fiber optic business.
In August 2000, the Company acquired substantially all of the assets of
Square One for $228,000 in cash, a $30,000 advance on future royalties, the
return of the Square One stock held by the Company, and an agreement to pay
royalties equal to 10 percent of net sales of the Square One products in the
next 5 years, up to a maximum of $1,000,000.
F-21
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
14. UNAUDITED QUARTERLY RESULTS
The following table presents unaudited quarterly financial information for
the four quarters ended June 30, 1999 and 2000.
<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 23,122
------- ------- ------- -------
Gross profit.................... 6,416 7,423 7,507 7,784
------- ------- ------- -------
Operating expenses:
Selling, general, and
administrative............... 3,363 3,386 5,104 5,875
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....... 3,985
Restructuring costs........... 458
------- ------- ------- -------
Total operating expenses.... 4,413 7,686 7,302 11,655
------- ------- ------- -------
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>
F-22
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Quarter Ended (In Thousands)
--------------------------------------------
June
September 30, December 31, March 31, 30,
1999 1999 2000 2000
------------- ------------ --------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues......................... $24,955 $26,507 $31,776 $27,700
Costs of goods sold.............. 17,759 19,441 23,427 19,971
------- ------- ------- -------
Gross profit..................... 7,196 7,066 8,349 7,729
------- ------- ------- -------
Operating expenses:
Selling, general, and
administrative................ 5,183 5,055 4,928 4,662
Research and development....... 1,637 1,872 2,091 2,112
Goodwill amortization.......... 127 137 134 131
Restructuring costs............ 1,898
------- ------- ------- -------
Total operating expenses..... 8,845 7,064 7,153 6,905
------- ------- ------- -------
(Loss) income from operations.... (1,649) 2 1,196 824
Gain on sale of marketable
securities...................... 309
Other income..................... 126
------- ------- ------- -------
(Loss) income from operations.... (1,649) 311 1,196 950
Interest expense, net............ 123 176 201 221
------- ------- ------- -------
(Loss) income before (benefit)
provision for income taxes and
minority interest............... (1,772) 135 995 729
(Benefit) provision for income
taxes........................... (391) 78 284 (122)
Minority interest in net loss of
subsidiary...................... 98 130 161
------- ------- ------- -------
Net (loss) income................ $(1,381) $ 155 $ 841 $ 1,012
======= ======= ======= =======
Earnings (loss) per common
share........................... $ (0.15) $ 0.02 $ 0.09 $ 0.11
Earnings (loss) per common
share--assuming dilution........ $ (0.15) $ 0.02 $ 0.09 $ 0.11
</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, a) optoelectronic and silicon pressure-
sensor devices and subsystems, medical imaging systems, and b) security and
inspection products. For the years ended June 30 1998, 1999, and 2000, external
revenues from optoelectronic and silicon pressure-sensor devices, subsystems,
and medical imaging systems were $50,120, $55,469, and $63,791, respectively.
Revenues from security and inspection systems were $43,798, $46,294, and
$47,147 for the years ended June 30 1998, 1999, and 2000, 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, meaningful information is
not available by industry or product segment.
F-23
<PAGE>
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1998, 1999 and 2000
The Company's operating locations include the North America (United States
and Canada), Europe (United Kingdom, 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, 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
======== ======= ======= ========= ========
<CAPTION>
Year Ended June 30, 2000
----------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................. $ 64,013 $38,641 $ 8,284 $110,938
Transfer between
geographical areas...... 7,709 4,679 20,687 $ (33,075)
-------- ------- ------- --------- --------
Net revenues............. $ 71,722 $43,320 $28,971 $ (33,075) $110,938
======== ======= ======= ========= ========
Operating (loss) income.. $ (3,156) $ (927) $ 5,362 $ (906) $ 373
======== ======= ======= ========= ========
Identifiable assets...... $164,384 $31,195 $21,221 $(113,777) $103,023
======== ======= ======= ========= ========
Capital expenditure...... $ 1,926 $ 404 $ 637 $ $ 2,967
======== ======= ======= ========= ========
Depreciation............. $ 2,321 $ 445 $ 325 $ $ 3,091
======== ======= ======= ========= ========
</TABLE>
F-24
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------------
Balance (2)
at (1) Charged Charges Deduction- Balance
beginning to costs of to other write-offs at end of
Description of period expenses accounts (Recoveries) period
----------- --------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance for doubtful
accounts:
Year Ended June 30,
1998.................. $586 $122 -- $157 $551
==== ==== ==== ==== ====
Year Ended June 30,
1999.................. $551 $ 86 $295 $ 72 $860
==== ==== ==== ==== ====
Year Ended June 30,
2000.................. $860 $459 -- $464 $855
==== ==== ==== ==== ====
</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)
4.2 Rights Agreement(9)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Description
------ -------------------
<C> <S>
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.(8)
10.23* Employment Agreement dated September 1, 2000 between the Company and
Ajay Mehra.
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>
--------
* 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.
(7) 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, 1999.
(8) 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, 1999.
(9) Previously filed with the Company's Registration Statement on Form 8-A
filed August 1, 2000.
