AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1997
 
                                                       REGISTRATION NO. 333-
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
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                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
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                               OSI SYSTEMS, INC.
              (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
                                                             
       CALIFORNIA                         3674                       33-0238801
(STATE OR OTHER JURISDICTION OF  (PRIMARY STANDARD INDUSTRIAL     (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)    CLASSIFICATION CODE NUMBER)    IDENTIFICATION NO.)
-------------- (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- DEEPAK CHOPRA PRESIDENT AND CHIEF EXECUTIVE OFFICER OSI SYSTEMS, INC. 12525 CHADRON AVENUE HAWTHORNE, CALIFORNIA 90250 TEL. (310) 978-0516 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) -------------- COPIES TO: ISTVAN BENKO, ESQ. BERTRAM R. ZWEIG, ESQ. TROY & GOULD PROFESSIONAL CORPORATION JONES, DAY, REAVIS & POGUE 1801 CENTURY PARK EAST, SUITE 1600 555 WEST 5TH STREET, SUITE 4600 LOS ANGELES, CALIFORNIA 90067 LOS ANGELES, CALIFORNIA 90013-1025 TEL. (310) 553-4441 TEL. (213) 489-3939 FAX.(310) 201-4746 FAX. (213) 243-2539 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended ("Securities Act"), check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM AMOUNT OF AMOUNT MAXIMUM AGGREGATE OF TITLE OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------- Common Stock, no par value.................. 4,255,000 $14.00 $59,570,000 $18,052 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Includes 555,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated in accordance with Rule 457. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 13, 1997 [LOGO OF OPTO-SENSORS, INC.] 3,700,000 SHARES COMMON STOCK Of the 3,700,000 shares of Common Stock offered hereby, 3,330,000 shares are being sold by OSI Systems, Inc. (the "Company") and 370,000 shares are being sold by the Selling Shareholders. See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. Prior to this Offering, there has been no public market for the Common Stock of the Company. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has made application for inclusion of the Common Stock on the Nasdaq National Market under the symbol "OSIS." ---------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2) - -------------------------------------------------------------------------------- Per Share... $ $ $ $ - -------------------------------------------------------------------------------- Total(3).... $ $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated offering expenses of $ payable by the Company and $ payable by the Selling Shareholders. (3) Certain of the Selling Shareholders have granted to the Underwriters a 30- day option to purchase up to an additional 555,000 shares of Common Stock solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Selling Shareholders will be $ , $ and $ , respectively. See "Underwriting." ---------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY WILLIAM BLAIR & COMPANY VOLPE BROWN WHELAN & COMPANY The date of this Prospectus is , 1997. OSI Systems, Inc. is a vertically integrated worldwide provider of devices, subsystems and end-products based on optoelectronic technology. The Company designs and manufactures optoelectronic devices and value-added subsystems for original equipment manufacturers for use in a broad range of applications, including security, medical diagnostics, telecommunications, office automation, aerospace, computer peripherals and industrial automation. In addition, the Company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that it markets worldwide to end users under the "Rapiscan" brand name. These products are used to inspect baggage, cargo and other objects for weapons, explosives, drugs and other contraband. [PHOTOS OF] [RAPISCAN 119] [RAPISCAN 500 SERIES] [RAPISCAN 500 SERIES LARGE PALLET UNIT] [RAPISCAN 500 SERIES MOBILE UNIT] [IMAGES OF INSPECTED BAGGAGE USING EPX SYSTEM] [ART WORK] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 [TWO PAGE GATEFOLD] [PHOTOS OF A VARIETY OF OPTOELECTRONIC DEVICES AND SUBSYSTEMS MANUFACTURED BY THE COMPANY AND OF THE END-PRODUCTS IN WHICH SUCH DEVICES AND SUBSYSTEMS ARE USED] NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED OFFER AND SALE OF THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 4 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 14 Dividend Policy........................................................... 14 Capitalization............................................................ 15 Dilution.................................................................. 16 Selected Consolidated Financial Data...................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 18 Business.................................................................. 27 Management................................................................ 41 Certain Transactions...................................................... 49 Principal and Selling Shareholders........................................ 51 Description of Capital Stock.............................................. 54 Shares Eligible for Future Sale........................................... 55 Underwriting.............................................................. 56 Legal Matters............................................................. 58 Experts................................................................... 58 Additional Information.................................................... 58 Index to Consolidated Financial Statements................................ F-1
---------------- The Company intends to furnish its shareholders with annual reports containing consolidated audited financial statements and quarterly reports containing unaudited consolidated financial data for the first three quarters of each fiscal year. Rapiscan(TM) is a trademark of the Company. This Prospectus also contains trademarks and tradenames of other companies. The Company is a California corporation organized in 1987. In June 1997, the Company changed its name from Opto Sensors, Inc. to OSI Systems, Inc. The Company's principal subsidiaries are: UDT Sensors, Inc., a California corporation ("UDT Sensors"); Rapiscan Security Products (U.S.A.), Inc., a California corporation ("Rapiscan U.S.A."); Ferson Optics, Inc. ("Ferson"), a California corporation; Rapiscan Security Products Limited, a United Kingdom corporation ("Rapiscan UK"); Opto Sensors (Singapore) Pte Ltd, a corporation organized under the laws of Singapore ("OSI Singapore"); Opto Sensors (Malaysia) Sdn. Bhd., a Malaysian corporation ("OSI Malaysia"); and Advanced Micro Electronics AS, a Norwegian company ("AME"). The principal executive offices of the Company are located at 12525 Chadron Avenue, Hawthorne, California 90250. The Company's telephone number is (310) 978-0516. Unless otherwise indicated by the context, all references in this Prospectus to the "Company" are to OSI Systems, Inc. and to one or more, but not necessarily all of its consolidated subsidiaries. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." THE COMPANY OSI Systems, Inc. (the "Company") is a vertically integrated worldwide provider of devices, subsystems and end-products based on optoelectronic technology. The Company designs and manufactures optoelectronic devices and value-added subsystems for original equipment manufacturers ("OEMs") for use in a broad range of applications, including security, medical diagnostics, telecommunications, office automation, aerospace, computer peripherals and industrial automation. In addition, the Company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that it markets worldwide to end users under the "Rapiscan" brand name. These products are used to inspect baggage, cargo and other objects for weapons, explosives, drugs and other contraband. In the nine-month period ended March 31, 1997, revenues from the sale of optoelectronic devices and subsystems amounted to $31.7 million, or approximately 56.6%, of the Company's revenues, while revenues from sales of security and inspection products amounted to $24.3 million, or approximately 43.4%, of the Company's revenues. Optoelectronic Devices and Subsystems The Company manufactures a wide range of optoelectronic devices which it integrates into complex subsystems vital to various end products, including x- ray and computer tomography ("CT") imaging systems, industrial robotics, medical monitoring and diagnostic products, optical drives for computer peripherals, bar code scanners, and aviation gyroscopes. These optoelectronic devices operate by sensing light of varying wave lengths and converting the light into electronic signals. In addition to manufacturing optoelectronic devices, the Company produces optoelectronic subsystems and offers a range of vertically integrated services to its subsystem customers. These services include component design and customization, subsystem concept design and application engineering, product prototyping and development, pre-production, and short-run and high volume manufacturing. In the nine-month period ended March 31, 1997, the Company manufactured subsystems for use in more than 100 different applications, including those of approximately 50 major OEM customers such as Picker International, Honeywell Avionics, Eastman Kodak, Xerox, Johnson & Johnson, Bausch & Lomb, Texas Instruments, Boeing Aircraft Co. and Hewlett- Packard. During the nine-month period, no single OEM customer accounted for more than 10.0% of the Company's revenues and the top five customers collectively represented less than 20.0% of the Company's revenues. The Company believes that in recent years advances in technology and reductions in the cost of key components of optoelectronic systems, including computer processing power and memory, have broadened the market by enabling the use of optoelectronic devices in a greater number of applications. In addition, the Company believes that there is a trend among OEMs to increasingly outsource the design and manufacture of optoelectronic subsystems to fully integrated, independent manufacturers who may have greater specialization, broader expertise, and the ability and flexibility to respond in shorter time periods than the OEMs could accomplish in-house. The Company believes that its high level of vertical integration, substantial engineering resources, expertise in the use and application of optoelectronic technology, and low-cost international manufacturing operations, enable it to effectively compete in the market for optoelectronic devices and subsystems. Security and Inspection Products The Company manufactures a range of security and inspection products that are used for conventional security purposes including the detection of concealed weapons and contraband, as well as for a variety of non-security applications. The Company's security and inspection products utilize linear x-ray technology to create a two-dimensional image of the contents of the object being inspected. These products may function either as stand-alone systems or as components of an integrated security system. Locations where these products are currently used for security inspection purposes include airports, government offices, post offices, 4 courthouses, jails, embassies, commercial buildings and mail sorting facilities. Non-security inspection uses of these products include the detection of illegal narcotics, inspection of agricultural products, examination of cargo to mitigate the avoidance of import duties, and non- destructive product testing. The Company currently manufactures 16 models of products with different sizes, price points and imaging capabilities in order to appeal to the breadth of security and non-security applications for its products. Since entering the security and inspection market in 1993, the Company has shipped more than 2,000 units of its security and inspection products to over 50 countries. The Company believes that the growth in the market for security and inspection products will continue to be driven by the increased perception of threat fueled by recent terrorist incidents, increased government mandates and appropriations, and the emergence of a growing market for the non-security applications of its products. The Company's objectives are to be a leading provider of specialized optoelectronic products, to enhance its position in the international inspection and detection marketplace, and to leverage its expertise in the optoelectronic technology industry by integrating into new end-markets on a selective basis. Key elements of the Company's growth strategy include leveraging its expertise in optoelectronic design and manufacturing to address new applications, further penetrating existing security and inspections markets, capitalizing on its high-level of vertical integration and on its global presence, and selectively entering into new end-product markets. Since 1990, the Company has completed four acquisitions. The Company intends to continue to pursue additional acquisition opportunities that expand the Company's technological capabilities, increase the breadth of its product offerings, and increase its geographic presence. As with the security and inspection operations that the Company acquired in 1993, the Company seeks to make acquisitions in which: (i) the Company's core optoelectronic technology is a significant technology component; (ii) the market for the products offers favorable pricing dynamics; (iii) the competitive market dynamics provide for substantial growth in market share; and (iv) the Company's existing manufacturing, sales and service organization provide the acquired operations with a strategic and cost advantage. The Company currently manufactures its optoelectronic devices and subsystems at facilities in Hawthorne, California, in Ocean Springs, Mississippi, in Johor Bahru, Malaysia, and in Horten, Norway. Its security and inspection products are currently manufactured at facilities in Crawley, England, in Long Beach, California, and in Johor Bahru, Malaysia. As of March 31, 1997 the Company marketed its products worldwide through approximately 44 sales and marketing employees located in five countries, and through approximately 95 independent sales representatives. THE OFFERING Common Stock Offered by the Company. 3,330,000 shares Common Stock Offered by the Selling Shareholders....................... 370,000 shares Common Stock Outstanding after the Offering........................... 9,458,874 shares(1) Use of Proceeds..................... To repay certain indebtedness, to increase funds available for research and development, to enhance its sales and marketing capabilities, to pursue possible acquisitions, and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............................. OSIS
- -------------------- (1) Based on the number of shares outstanding on May 31, 1997. Excludes: (i) approximately 864,986 shares of Common Stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $7.32 per share; and (ii) up to 45,486 shares of Common Stock that may be issued after June 30, 1997 as additional consideration for the Company's purchase in November 1996 of certain minority shares of Rapiscan U.S.A. See "Certain Transactions." 5 SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except share and per share data)
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, --------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ----------- ------- (unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues............... $21,471 $27,225 $47,735 $49,815 $61,518 $44,994 $55,973 Cost of goods sold..... 16,581 20,591 36,037 37,818 45,486 33,638 40,380 ------- ------- ------- ------- ------- ------- ------- Gross profit........... 4,890 6,634 11,698 11,997 16,032 11,356 15,593 Operating expenses: Selling, general and administrative(1).... 2,914 4,014 7,974 7,601 9,757 6,745 8,183 Research and development.......... 847 1,034 1,451 1,591 1,663 1,280 1,737 Stock option compensation(2)...... -- -- -- -- -- -- 856 ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 3,761 5,048 9,425 9,192 11,420 8,025 10,776 ------- ------- ------- ------- ------- ------- ------- Income from operations. 1,129 1,586 2,273 2,805 4,612 3,331 4,817 Interest expense....... 650 471 710 1,251 1,359 1,026 900 ------- ------- ------- ------- ------- ------- ------- Income before income taxes and minority interest.............. 479 1,115 1,563 1,554 3,253 2,305 3,917 Provision for income taxes................. 148 462 814 413 1,111 787 983 ------- ------- ------- ------- ------- ------- ------- Income before minority interest.............. 331 653 749 1,141 2,142 1,518 2,934 Minority interest...... -- 6 38 17 117 28 -- ------- ------- ------- ------- ------- ------- ------- Net income............. $ 331 $ 659 $ 787 $ 1,158 $ 2,259 $ 1,546 $ 2,934 ======= ======= ======= ======= ======= ======= ======= Pro forma net income(3)............. $ 2,308 $ 1,643 $ 3,026 ======= ======= ======= Pro forma net income per share(3)(4)....... $ 0.37 $ 0.26 $ 0.48 ======= ======= ======= Pro forma weighted average shares outstanding(4)....... 6,308,126 6,304,158 6,327,234 MARCH 31, 1997 ---------------------- ACTUAL AS ADJUSTED(5) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash.................................................... $ 1,612 $33,027 Working capital......................................... 9,940 48,915 Total assets............................................ 44,314 75,729 Total debt.............................................. 11,387 1,594 Total shareholders' equity.............................. 14,982 56,190
- ------------------ (1) Fiscal 1994 includes a one-time charge of $1.5 million incurred in connection with the settlement of a governmental proceeding. See "Business--Legal Proceedings." (2) Represents a non-recurring, non-cash 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. Exclusive of the non-cash charge, income from operations, net income, pro forma net income, and pro forma net income per share would have been $5,673,000, $3,448,000, $3,540,000 and $0.56, respectively. (3) Gives effect to the conversion of certain subordinated debt into preferred stock and Common Stock in October and November 1996, and the issuance of Common Stock for the purchase of the remaining minority interests in certain subsidiaries in September and November 1996 as if such transactions occurred on July 1, 1995. Pro forma adjustments for the year ended June 30, 1996 and for each of the nine-month periods ended March 31, 1996 and 1997 consist of: (i) the elimination of interest expenses related to converted subordinated debt of $166,000, $125,000 and $92,000, net of income taxes, respectively; and (ii) the elimination of the minority interest in the net loss of subsidiaries of $117,000, $28,000 and $0, respectively. (4) Assumes the conversion of 2,568,750 shares of preferred stock into 3,853,125 shares of Common Stock as of July 1, 1995. (5) Adjusted to give effect to the sale of 3,330,000 shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $13.50 per share and after deducting underwriting discounts, commissions and estimated Offering expenses, and the application of the net proceeds therefrom. Unless otherwise indicated, all information in this Prospectus: (i) reflects a 1.5-for-1 stock split (the "Stock Split") of the Common Stock effected in June 1997; (ii) reflects the conversion of each outstanding share of the Company's preferred stock into 1.5 shares of the Common Stock concurrent with the Stock Split; and (iii) assumes the Underwriters' over-allotment is not exercised. All references to the Company's fiscal years refer to the periods ending June 30. 6 RISK FACTORS In addition to the other information in this Prospectus, investors should carefully consider the following risk factors when evaluating an investment in the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Prospectus. FLUCTUATIONS IN QUARTERLY RESULTS The Company's quarterly operating results have varied in the past and are likely to vary significantly in the future. These quarterly fluctuations are the result of a number of factors, including the volume and timing of orders received and shipments made during the period, variations in the Company's product mix, changes in demand for the Company's products, the timing and amount of expenditures made by the Company in anticipation of future sales, variability in selling price, and other competitive conditions. The Company's revenues, particularly from the sale of security and inspection products, are increasingly dependent upon larger orders of multiple units and upon the sale of products having higher average selling prices. The Company is unable to predict the timing of the receipt of such orders and, as a result, significant variations between forecasts and actual orders will often occur. Furthermore, the rescheduling of the shipment of any large order, or portion thereof, or any production difficulties or delays experienced by the Company, could have a material adverse effect on the Company's quarterly operating results. Due to the foregoing factors, it is possible that in future quarters the Company's operating results will not meet the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business -- Backlog." COMPETITION The markets in which the Company operates are highly competitive and are characterized by evolving customer needs and rapid technological change. The Company competes with a number of other manufacturers, many of whom have significantly greater financial, technical and marketing resources than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements, may have stronger customer relationships, may have greater name recognition, and may devote greater resources to the development, promotion and sale of their products than does the Company. In the optoelectronic device and subsystem market, competition is based primarily on factors such as expertise in the design and development of optoelectronic devices, product quality, timeliness of delivery, price, customer technical support, and on the ability to provide fully integrated services from application development and design through volume subsystem production. The Company believes that its major competitors in the optoelectronic device and subsystem market are EG&G Electro-Optics, a division of EG&G, Inc., Optek Technology Inc., Hamamatsu Corporation, and Honeywell Optoelectronics, a division of Honeywell, Inc. In the security and inspection market, competition is based primarily on such factors as product performance, functionality and quality, the over-all cost of the system, prior customer relationships, technological capabilities of the product, price, certification by government authorities, local market presence, and breadth of sales and service organization. The Company believes that its principal competitors in the market for security and inspection products are EG&G Astrophysics, a division of EG&G, Inc. ("EG&G Astrophysics") Heimann Systems GmbH, InVision Technologies, Inc., Vivid Technologies, American Science and Engineering, Inc., Barringer Technologies Inc., Control Screening L.L.C., and Thermedics Detection, Inc. In addition, the Company supplies optoelectronic devices and subsystems to certain OEMs which, in turn, manufacture end-products that compete with the Company's own products. There can be no assurance that these competing OEMs will continue to purchase 7 optoelectronic products from the Company. Competition could result in price reductions, reduced margins, and a decrease in the Company's market share. There can be no assurance that the Company will be able to compete successfully against any current or future competitors in either market or that future competitive pressures will not materially and adversely affect its business, financial condition and results of operations. See "Business-- Competition." LARGE ORDERS; LENGTHY SALES CYCLES Sales of the Company's security and inspection products have increasingly been characterized by large orders of multiple units or of products having higher average selling prices. The Company's inability to obtain such additional large orders could have a material adverse effect on the Company's business, financial condition and results of operations. Sales of security and inspection products depend in significant part upon the decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites and other security installations. Accordingly, a portion of the Company's sales of security inspection and detection products is often subject to delays associated with the lengthy approval processes that often accompany such capital expenditures. During these approval periods, the Company expends significant financial and management resources in anticipation of future orders that may not occur. A failure by the Company to receive an order after expending such resources could have a material adverse effect on its business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE The markets for all of the Company's products are subject to rapidly changing technology. As OEMs seek to develop and introduce new, technologically-advanced products and product enhancements, the Company is required to design, develop and manufacture optoelectronic devices and subsystems to meet these new and enhanced product requirements. Accordingly, the Company's performance as a designer and manufacturer of optoelectronic devices and subsystems is dependent upon its ability to keep pace with technological developments in both the optoelectronic market and in the numerous markets that its products serve. Any delay or failure in the Company's ability to design and manufacture the increasingly complex and technologically-advanced products that its customers demand will have a material adverse effect on the Company's business, financial condition and results of operations. In addition, technological changes and market forces continually affect the products sold by the Company's customers and thereby alter the demand for the Company's optoelectronic subsystems. The Company has in the past suddenly and unexpectedly lost orders for entire subsystem product lines due to technological changes that made the products sold by the Company's customers obsolete. The market for the Company's security and inspection products is also characterized by rapid technological change as the security industry seeks to develop new and more sophisticated products. New and enhanced security and inspection products are continuously being developed and introduced by the Company's competitors, including products that use advanced x-ray technologies, CT technology, or electro-magnetic and ultrasound technologies. The Company believes that its future success in the security and inspection industry will depend in large part upon its ability to enhance its existing product lines and to successfully develop new products that meet changing customer requirements. No assurance can be given that new industry standards or changing technology will not render the Company's existing security and inspection products obsolete. The failure of the Company's security and inspection product lines to meet new technological requirements or new industry standards will have a material adverse effect on the Company's business, financial condition and results of operations. AVAILABILITY OF RAW MATERIALS AND COMPONENTS The Company purchases certain raw materials and subcomponents from third parties pursuant to purchase orders placed from time to time. Purchase order terms range from three months to one year at fixed costs, but the Company has no guaranteed long-term supply arrangements with its suppliers. Any material interruption in the Company's ability to purchase necessary raw materials or subcomponents could have a material adverse effect on the Company's business, financial condition and results of operations. Silicon-based optoelectronic devices manufactured by the Company are critical components in most of the 8 Company's subsystems. Since 1987, the Company has purchased substantially all of the silicon wafers it uses to manufacture its optoelectronic devices from Wacker Siltronic Corp., a United States subsidiary of Wacker Siltronic AG, a German company. The Company's dependence on this single source of supply exposes the Company to several risks, including limited control over pricing, availability of material, and material delivery schedules. Although the Company has not experienced any significant shortages or material delays in obtaining silicon wafers from Wacker Siltronic Corp., a major interruption in the delivery of silicon wafers from Wacker Siltronic Corp. would materially disrupt the Company's operations and could have a material adverse effect on the Company's business, financial condition and results of operations. The inability of the Company to develop alternative sources for single or sole source components, or to obtain sufficient quantities of these components, would adversely affect the Company's operations. See "Business--Manufacturing and Materials Management." INTERNATIONAL BUSINESS; FLUCTUATION IN EXCHANGE RATES; RISKS OF CHANGES IN FOREIGN REGULATIONS In fiscal 1995 and 1996 and in the nine-month period ended March 31, 1997, revenues from shipments made outside of the United States accounted for approximately 32.0%, 38.0% and 39.3%, respectively, of the Company's revenues. Of the revenues generated during fiscal 1996 from shipments made outside of the United States, 12.0% represented sales from the United States to foreign customers, and the balance represented sales generated by the Company's foreign subsidiaries. The Company anticipates that international sales will continue to account for a material portion of the Company's revenues and that, accordingly, a major portion of the Company's business will be exposed to the risks associated with conducting international business operations, including unexpected changes in regulatory requirements, changes in foreign control legislation, possible foreign currency controls, currency exchange rate fluctuations or devaluations, tariffs, difficulties in staffing and managing foreign operations, difficulties in obtaining and managing vendors and distributors, potentially negative tax consequences, and difficulties in collecting accounts receivable. The Company is also subject to risks associated with laws regulating the import and export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or any other country in the future. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH MANAGING GROWTH AND ACQUISITIONS Since 1990, the Company has experienced significant growth through both internal expansion and through acquisitions. During this period, OSI Systems, Inc. established its Rapiscan U.S.A. operations and its Malaysian manufacturing facilities and acquired UDT Sensors, Rapiscan UK, Ferson and AME. This growth has placed, and may continue to place, significant demands on the Company's management, working capital and financial resources. Failure to continue to expand and enhance the Company's management and its financial control systems could adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company's current management and systems will be adequate to address any future expansion of the Company's business. An element of the Company's strategy is to pursue acquisitions that would complement its existing range of products, augment its market coverage or enhance its technological capabilities or that may otherwise offer growth opportunities. Such future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, and the amortization of expenses related to goodwill and other intangible assets, any of which could materially adversely affect the Company's business, financial condition and results of operations. Acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concerns, risks of entering markets in which the Company has no, or limited, prior experience and the potential loss of key employees of acquired organizations. No assurance can be given as to the ability of the Company to successfully integrate any acquired business, product, technology or personnel with the operations of the Company, and the failure of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. While the Company has no current agreement or negotiations underway with 9 respect to any such acquisition, the Company may make acquisitions of businesses, products or technologies in the future. See "Use of Proceeds." PROPRIETARY TECHNOLOGY; PENDING LITIGATION The Company believes that its principal competitive strength is its ability to design, develop and manufacture complex optoelectronic devices and subsystems for various industry segments. The Company does not rely upon any of its own patents or copyrights in the development or manufacture of its products. Accordingly, there are no legal barriers that prevent potential competitors from copying the Company's products, processes and technologies or from otherwise entering into operations in direct competition with the Company. The Company's Rapiscan U.S.A. subsidiary has entered into a non-exclusive patent license agreement with EG&G Inc. Under the license, Rapiscan U.S.A. is permitted to make, use and sell or otherwise dispose of security and inspection products that use an x-ray line scan system for baggage inspection purposes covered by EG&G Inc.'s patent. The patent, which expires in 2000, does not affect sales of the Company's security and inspection products manufactured and sold outside of the United States. The license may be terminated by EG&G in the event of a breach of the license agreement by Rapiscan U.S.A. The termination of the EG&G license would have a material adverse effect upon the Company's sales of its security and inspection products in the United States and upon the Company's business, financial condition and results of operations. In a lawsuit currently pending before the United States District Court for the Central District of California, Lunar Corporation ("Lunar") and the University of Alabama Research Foundation ("UAB") have alleged that OSI Systems, Inc., UDT Sensors and Rapiscan U.S.A. infringe United States Patent No. 4,626,688 (" '688 patent"). UAB owns the '688 patent and has granted an exclusive license to Lunar. The '688 patent is directed to a dual energy radiation detector. The lawsuit concerns those Rapiscan U.S.A.'s baggage scanner products which contain a dual energy detector, and detector components produced by UDT Sensors ("accused products"). Lunar and UAB are requesting that the court grant them damages in an unspecified amount and an injunction barring Rapiscan U.S.A. from making, using, selling or offering for sale, the accused products in the United States. Rapiscan U.S.A., UDT Sensors and OSI Systems, Inc. have alleged that the accused products do not infringe the '688 patent, that the '688 patent is invalid and that in any event, Lunar had previously agreed that Rapiscan U.S.A. and UDT Sensors did not infringe the '688 patent, so that Lunar's claim is estopped, limited by laches or that an implied license has been granted by Lunar. The Company believes it has meritorious defenses and claims in the lawsuit with Lunar and UAB. However, no assurance can be given that the Company will be successful in this lawsuit. In the event that the court determines that the accused products infringe the '688 patent and that Rapiscan U.S.A. and UDT Sensors do not have the right to use technology covered by the '688 patent, Rapiscan U.S.A. could be prevented from marketing most of its baggage scanner products in the United States and UDT Sensors could be prevented from marketing certain detector components. Rapiscan U.S.A. and UDT Sensors could also be required to pay a significant amount of damages. Any such outcome would have a material adverse effect upon the Company's business, financial condition and results of operations. The Company intends to vigorously pursue its legal remedies in this lawsuit. As a result, the Company will continue to expend significant financial and other resources in connection with this lawsuit. See "Business--Legal Proceedings." The Company may from time to time in the future receive communications from third parties alleging infringements by the Company of patents or other intellectual property rights owned by such third parties. If any of the Company's products are found to infringe a patent, a court may grant an injunction to prevent the Company from making, selling or using these products in the applicable country. Protracted litigation may be necessary to defend the Company against alleged infringement of others' rights. Irrespective of the validity or the success of such claims, the defense of such claims could result in significant costs to the Company and the diversion of time and effort by management, either of which by itself could have a material adverse effect on the business, financial condition and results of operations of the Company. Further, adverse determinations in such litigation could subject the Company to significant liabilities (including treble damages under certain 10 circumstances), or prevent the Company from selling certain of its products. If infringement claims are asserted against the Company, the Company may be forced to seek to obtain a license of such third party's intellectual property rights. No assurance can be given that the Company could enter into such a license agreement on terms favorable to the Company, or at all. The failure to obtain such a license agreement on reasonable terms could have an adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH MANUFACTURING The Company's ability to manufacture optoelectronic subsystems as well as security and inspection products is dependent upon the optoelectronic devices manufactured at the Company's Hawthorne, California facility. In addition, the Company's success also depends on its ability to manufacture its products at its various other facilities. Accordingly, any material disruption in the operations of any of its manufacturing facilities, and especially at its Hawthorne, California facility, would have a material adverse effect on the Company's business, financial condition and results of operations. Such interruption or disruption could occur due to the unavailability of parts, labor or raw materials, to political unrest, or to natural disasters, such as earthquakes or fires. The Company also believes that its long-term competitive position depends in part on its ability to increase manufacturing capacity. No assurance can be given that the Company will be able to increase its manufacturing capabilities in the future. The failure of the Company to build or acquire sufficient additional manufacturing capacity if and when needed could adversely impact the Company's relationships with its customers and materially adversely affect the Company's business, financial condition and results of operations. PRODUCT LIABILITY RISKS The Company's business exposes it to potential product liability risks, particularly with respect to its security and inspection products. There are many factors beyond the control of the Company that could lead to liability claims, including the failure of the products in which the Company's subsystems are installed, the reliability of the customer's operators of the inspection equipment, and the maintenance of the inspection units by the customers. There can be no assurance that the amount of product liability insurance that the Company carries will be sufficient to protect the Company from product liability claims. A product liability claim in excess of the amount of insurance carried by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent upon the continuing contributions of its key management, technical and product development personnel. In particular, the Company is dependent upon the services of Deepak Chopra, the Chairman of the Company's Board of Directors, its President and Chief Executive Officer. In addition, the loss of the services of any of the Company's other senior managerial, technical or product development personnel could materially adversely affect the Company's business, financial condition and results of operations. The Company has entered into a five-year employment agreement with Mr. Chopra and into shorter-term employment agreements with certain of the Company's senior managerial and technical personnel. The Company's future success depends on its continuing ability to attract, retain and motivate highly qualified managerial and technical personnel. Competition for qualified technical personnel is intense. There can be no assurance that these individuals will continue employment with the Company. The loss of certain key personnel could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Employees" and "Management." ENVIRONMENTAL REGULATION The Company is subject to various federal, state and local environmental laws, ordinances and regulations relating to the use, storage, handling and disposal of certain hazardous substances and wastes used or generated in the manufacturing and assembly of the Company's products. Under such laws, the Company may become liable for the costs of removal or remediation of certain hazardous substances or wastes that have 11 been or are being disposed of offsite as wastes or that have been or are being released on or in its facilities. Such laws may impose liability without regard to whether the Company knew of, or caused, the release of such hazardous substances or wastes. The Company believes that it is currently in compliance with all material environmental regulations in connection with its manufacturing operations, that it has obtained all necessary material environmental permits to conduct its business and has no knowledge of any offsite disposal or releases on site that could have a material adverse affect on the Company. However, there can be no assurance that any environmental assessments undertaken by the Company with respect to its facilities have revealed all potential environmental liabilities, that any prior operator of the properties did not create any material environmental condition not known to the Company, or that an environmental condition that could result in penalties, expenses, or liability for the Company does not otherwise exist in any one or more of the facilities. In addition, the amount of hazardous substances or wastes produced or generated by the Company may increase in the future depending on changes in the Company's operations. Any failure by the Company to comply with present or future regulations could subject the Company to the imposition of substantial fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure of the Company to control or properly manage the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject the Company to significant liabilities, including joint and several and retroactive liability under certain statutes. Furthermore, the presence of hazardous substances on a property or at certain offsite locations could result in the Company incurring substantial liabilities as a result of a claim by a private third party for personal injury or a claim by an adjacent property owner for property damage. The imposition of any of the foregoing liabilities could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Environmental Regulations." CONCENTRATION OF OWNERSHIP; CONTROL BY MANAGEMENT Upon successful completion of this Offering, the Company's principal shareholders, Scope Industries and Deepak Chopra, the President and Chief Executive Officer of the Company, will beneficially own approximately 18.3% and 16.2%, respectively, of the Company's Common Stock (17.4% and 14.3%, respectively, if the Underwriters' over-allotment option is exercised in full), and the present directors and executive officers of the Company (including Scope Industries, an affiliate of one of the directors) will, in the aggregate, beneficially own 40.9% of the outstanding Common Stock (36.9% if the Underwriters' over-allotment option is exercised in full). Meyer Luskin, the President, Chief Executive Officer, Chairman of the Board of Directors and principal shareholder of Scope Industries, is a director of the Company. Consequently, Scope Industries, together with the Company's directors and executive officers acting in concert, will have the ability to significantly affect the election of the Company's directors and have a significant effect on the outcome of corporate actions requiring shareholder approval. Such concentration may also have the effect of delaying or preventing a change of control of the Company. See "Principal and Selling Shareholders," and "Management." POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL ANTI- TAKEOVER PROVISIONS The Company's Amended and Restated Articles of Incorporation authorize the Company's Board of Directors to issue up to 10,000,000 shares of preferred stock in one or more series, to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of preferred stock, to fix the number of shares constituting any such series, and to fix the designation of any such series, without further vote or action by its shareholders. The terms of any series of preferred stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the rights of the holders of Common Stock and thereby reduce the value of the Common Stock. The Company has no present plans to issue shares of preferred stock. The issuance of preferred stock, coupled with the concentration of ownership in the directors and executive officers, could discourage certain types of transactions involving an actual or potential change in control of the Company, including transactions in which 12 the holders of Common Stock might otherwise receive a premium for their shares over then current prices, otherwise dilute the rights of holders of Common Stock, and may limit the ability of such shareholders to cause or approve transactions which they may deem to be in their best interests, all of which could have a material adverse effect on the market price of the Common Stock offered hereby. See "Description of Capital Stock--Preferred Stock." ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION Prior to this Offering there has been no public market for the Common Stock. The Company has filed an application to have the Common Stock approved for quotation on the Nasdaq National Market. However, there can be no assurance that an active trading market for the Common Stock will develop or be sustained after the Offering. The initial public offering price will be determined through negotiations between the Company and the representatives of the Underwriters. See "Underwriting." Additionally, the market price of the Common Stock could be subject to significant fluctuations in response to variations in actual and anticipated quarterly operating results and other factors, including announcements of new products or technical innovations by the Company or its competitors. Further, investors participating in the Offering will incur immediate and substantial dilution in the net tangible book value of their shares. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following this Offering could have an adverse effect on the market price of the Common Stock. Upon completion of this Offering, the Company will have outstanding approximately 9,458,874 shares of Common Stock, of which 3,700,000 shares offered hereby (4,255,000 shares if the Underwriters' over-allotment option is exercised in full), will be freely tradeable without restriction or further registration under the Securities Act. The remaining 5,758,874 shares of Common Stock outstanding upon completion of this Offering are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act ("Rule 144"). Pursuant to lock-up agreements between certain securityholders and representatives of the Underwriters, the securityholders have agreed not to sell approximately 5,731,000 shares of Common Stock (including any additional shares issued upon the exercise of any options) for 180 days following the date of this Prospectus. However, beginning 180 days after the date of this Prospectus, subject in certain cases to the volume restrictions of Rule 144, all 5,758,874 shares will become freely transferable and available for immediate sale in the public market. The existence of a large number of shares eligible for future sale could have an adverse impact on the Company's ability to raise additional equity capital or on the price at which such equity capital could by raised. LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER CALIFORNIA LAW The Company's Amended and Restated Articles of Incorporation provide that, pursuant to the California Corporations Code, the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by, or in the right of, the Company for breach of a director's duties to the Company or its shareholders. This provision does not eliminate the directors' fiduciary duty and does not apply for certain liabilities: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interest of the Company or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction from which a director derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders; (vi) with respect to certain transactions or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute for approval of certain improper distributions to shareholders or certain loans or guarantees. See "Management--Limitation on Directors' Liability." 13 USE OF PROCEEDS The net proceeds to the Company from its sale of 3,330,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be approximately $41.2 million. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders. The Selling Shareholders who own the 370,000 shares to be sold in this Offering will bear their pro rata share of all expenses incurred in connection with this Offering. The Company expects to use the net proceeds of this Offering to repay bank indebtedness, to increase the Company's research and development activities, to enhance its sales and marketing capabilities, to pursue possible acquisitions, and to increase the Company's funds available for general corporate purposes, including working capital purposes. Although a portion of the net proceeds may be used to pursue possible strategic acquisitions, the Company is not currently a party to any commitments or agreements, and is not currently involved in any negotiations with respect to any acquisitions. The Company intends to repay a total of approximately $9.8 million outstanding under various bank facilities as described below.
APPROXIMATE PRINCIPAL AMOUNT AT RATE BASIS RATE AT FACILITY MARCH 31, 1997 PER ANNUM(1) MARCH 31, 1997 MATURITY -------- -------------- ----------- -------------- -------- Revolving Credit $4,927,000 Variable rate plus 0.25% 8.75% November 1998 Term Loan 2,500,000 Variable rate plus 0.50% 9.00% March 2001 Revolving Credit 1,442,000 Variable rate plus 1.50% 10.00% On demand Term Loan 66,000 Variable rate plus 2.25% 10.75% November 1997 Revolving Credit 354,000 Variable rate 6.65% Evergreen Term Loan 504,000 5.75% 5.75% June 2001
- --------------------- (1) The term "variable rate" means the bank's prime rate or other published reference rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company is also considering exercising its option to purchase its headquarters and its engineering and manufacturing facilities in Hawthorne, California. See "Business--Facilities." If the Company elects to purchase the facilities, it may use a portion of the proceeds of this Offering to pay part or all of the approximately $3.0 million purchase price. Pending the foregoing uses, the Company intends to invest the net proceeds of this Offering in short-term, interest bearing, investment-grade securities. DIVIDEND POLICY The Company currently anticipates that it will retain any available funds for use in the operation of its business, and does not currently intend to pay any cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Board of Directors. The payment of cash dividends by the Company is restricted by certain of the Company's current bank credit facilities, and future borrowings may contain similar restrictions. 14 CAPITALIZATION The following table sets forth: (i) the actual short-term debt and capitalization of the Company as of March 31, 1997; (ii) the pro forma short- term debt and capitalization of the Company giving effect to the conversion of the Company's outstanding shares of preferred stock into 3,853,125 additional shares of Common Stock and the filing of the Amended and Restated Articles of Incorporation; and (iii) the pro forma capitalization as adjusted to give effect to the sale of the 3,330,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.50 per share and the application of the estimated net proceeds from the Offering.
MARCH 31, 1997 ----------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (In thousands, except share information) Short-term debt.................................. $ 8,324 $ 8,324 $ 764 ======= ======= ======= Long-term debt, less current portion............. 3,063 3,063 830 Shareholders' equity: Preferred Stock, $1.00 liquidation value; 3,000,000 shares authorized; 2,568,750 shares issued and outstanding, actual; none issued and outstanding, pro forma and pro forma as adjusted 4,014 -- -- Preferred Stock, no par value; 10,000,000 shares authorized, pro forma and pro forma as adjusted; none issued and outstanding................................... -- -- -- Common Stock, no par value(1); 4,500,000 shares authorized; 40,000,000 shares authorized, pro forma and pro forma as adjusted; 2,207,124 shares issued and outstanding, actual; 6,060,249 issued and outstanding, pro forma; 9,390,249 issued and outstanding, pro forma as adjusted...................................... 2,913 6,927 48,135 Retained earnings.............................. 7,928 7,928 7,928 Cumulative foreign currency translation adjustment.................................... 127 127 127 ------- ------- ------- Total shareholders' equity................... 14,982 14,982 56,190 ------- ------- ------- Total capitalization....................... $18,045 $18,045 $57,020 ======= ======= =======
- --------------------- (1) Excludes 499,125 shares of Common Stock issuable upon exercise of outstanding stock options as of March 31, 1997 and up to 45,486 shares of Common Stock that may be issuable as additional consideration for the Company's purchase in November 1996 of certain minority shareholdings in Rapiscan U.S.A. See "Certain Transactions." 15 DILUTION The net tangible book value of the Company at March 31, 1997 (giving effect to the conversion of preferred stock outstanding as of March 31, 1997 into 3,853,125 shares of Common Stock), was $13,230,000 or $2.18 per share. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total assets net of goodwill less total liabilities of the Company) by the number of shares of Common Stock outstanding (giving effect to the conversion of preferred stock outstanding as of March 31, 1997 into 3,853,125 shares of Common Stock). After giving effect to the sale of 3,330,000 shares offered by the Company hereby at an assumed initial public offering price of $13.50 per share (after deduction of estimated underwriting discounts and commissions and estimated offering expenses), the pro forma net tangible book value of the Company as of March 31, 1997 would have been $54,438,000, or $5.80 per share. This represents an immediate increase in the net tangible book value of $3.62 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $7.70 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price.......................... $13.50 Net tangible book value before Offering...................... $2.18 Increase in net tangible book value attributable to this Offering.................................................... 3.62 ----- Pro forma net tangible book value after Offering............... 5.80 ------ Dilution to new investors...................................... $ 7.70 ======
The following table sets forth on a pro forma basis as of March 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid, and the average price per share paid by the existing shareholders and by purchasers of the shares of Common Stock offered hereby (giving effect to the conversion of preferred stock outstanding as of March 31, 1997 into 3,853,125 shares of Common Stock and assuming the sale of 3,330,000 shares by the Company at an assumed initial public offering price of $13.50 per share, before deduction of underwriting discounts and commissions and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ----------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing shareholders.. 6,060,249 64.5% $ 6,927,000 13.4% $ 1.14 New public investors... 3,330,000 35.5 44,955,000 86.6 $13.50 --------- ----- ----------- ----- Total................. 9,390,249 100.0% $51,882,000 100.0% ========= ===== =========== =====
The foregoing table does not take into effect the exercise of outstanding options to purchase 68,625 shares of Common Stock for $66,750 subsequent to March 31, 1997. As of the date of this Prospectus, there are outstanding options to purchase an aggregate of 864,986 of Common Stock at a weighted average exercise price of approximately $7.32 per share. In addition, the Company may be obligated to issue up to an additional 45,486 shares of Common Stock after June 30, 1997 as additional consideration for the Company's purchase in November 1996 of certain minority shares in Rapiscan U.S.A. To the extent that options are exercised or additional shares are issued, there will be further dilution to new investors. See "Management--Stock Option Plans" and "Certain Transactions." 16 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth for the periods and the dates indicated certain financial data which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere herein. The statement of operations data for each of the three fiscal years in the period ended June 30, 1996 and for the nine months ended March 31, 1997, and the balance sheet data at June 30, 1995 and 1996 and March 31, 1997 are derived from the consolidated financial statements of the Company which have been audited by Deloitte & Touche, LLP, independent accountants, and are included elsewhere in this Prospectus. The statements of operations data for the years ended June 30, 1992 and 1993 and the balance sheet data at June 30, 1992, 1993, and 1994 are derived from audited financial statements not otherwise contained herein. The consolidated statement of operations data for the nine months ended March 31, 1996 are derived from unaudited financial statements of the Company included elsewhere herein. The unaudited financial statements have been prepared by the Company on a basis consistent with the Company's audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company's results of operations for the period. The results of operations for the nine months ended March 31, 1997 are not necessarily indicative of future results.
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, --------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ----------- ------- (In thousands, except share and per share data) (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues................ $21,471 $27,225 $47,735 $49,815 $61,518 $44,994 $55,973 Cost of goods sold...... 16,581 20,591 36,037 37,818 45,486 33,638 40,380 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 4,890 6,634 11,698 11,997 16,032 11,356 15,593 Operating expenses: Selling, general and administrative(1)..... 2,914 4,014 7,974 7,601 9,757 6,745 8,183 Research and development........... 847 1,034 1,451 1,591 1,663 1,280 1,737 Stock option compensation(2)....... -- -- -- -- -- -- 856 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 3,761 5,048 9,425 9,192 11,420 8,025 10,776 ------- ------- ------- ------- ------- ------- ------- Income from operations.. 1,129 1,586 2,273 2,805 4,612 3,331 4,817 Interest expense........ 650 471 710 1,251 1,359 1,026 900 ------- ------- ------- ------- ------- ------- ------- Income before income taxes and minority interest............... 479 1,115 1,563 1,554 3,253 2,305 3,917 Provision for income taxes.................. 148 462 814 413 1,111 787 983 ------- ------- ------- ------- ------- ------- ------- Income before minority interest............... 331 653 749 1,141 2,142 1,518 2,934 Minority interest....... -- 6 38 17 117 28 -- ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 331 $ 659 $ 787 $ 1,158 $ 2,259 $ 1,546 $ 2,934 ======= ======= ======= ======= ======= ======= ======= Pro forma net income(3). $ 2,308 $ 1,643 $ 3,026 ======= ======= ======= Pro forma net income per share(3)(4)............ $ 0.37 $ 0.26 $ 0.48 ======= ======= ======= Pro forma weighted average shares outstanding(4)........ 6,308,126 6,304,158 6,327,234 JUNE 30, MARCH 31, ---------------------------------- --------- 1992 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------ --------- (In thousands) CONSOLIDATED BALANCE SHEET DATA: Cash............................ $ 546 $ 941 $ 625 $ 1,405 $ 581 $ 1,612 Working capital................. 3,728 3,852 2,280 12,117 6,044 9,940 Total assets.................... 10,548 15,739 25,807 30,780 35,309 44,314 Total debt...................... 6,090 6,882 11,140 14,113 15,462 11,387 Total shareholders' equity...... 1,677 2,256 3,128 4,951 7,194 14,982
- ------------------ (1) Fiscal 1994 includes a one time charge of $1.5 million incurred in connection with the settlement of a governmental proceeding. See "Business--Legal Proceedings." (2) Represents a non-recurring, non-cash 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. (3) Gives effect to the conversion of certain subordinated debt into preferred stock and Common Stock in October and November 1996, and the issuance of Common Stock for the purchase of the remaining minority interests in certain subsidiaries in September and November 1996 as if such transactions occurred on July 1, 1995. Pro forma adjustments for the year ended June 30, 1996 and each of the nine-month periods ended March 31, 1996 and 1997 consist of: (i) the elimination of interest expenses related to converted subordinated debt of $166,000, $125,000 and $92,000, net of income taxes, respectively; and (ii) the elimination of the minority interest in the net loss of subsidiaries of $117,000, $28,000 and $0, respectively. (4) Assumes the conversion of 2,568,750 shares of preferred stock into 3,853,125 shares of Common Stock as of July 1, 1995. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a vertically integrated worldwide provider of devices, subsystems and end-products based on optoelectronic technology. The Company designs and manufactures optoelectronic devices and value added subsystems for OEMs for use in a broad range of applications, including security, medical diagnostics, telecommunications, office automation, aerospace, computer peripherals and industrial automation. In addition, the Company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that it markets worldwide to end users under the "Rapiscan" brand name. These products are used to inspect baggage, cargo and other objects for weapons, explosives, drugs and other contraband. In the nine month period ended March 31, 1997, revenues from the sale of optoelectronic devices and subsystems amounted to $31.7 million, or approximately 56.6% of the Company's revenues, while revenues from sales of security and inspection products amounted to $24.3 million, or approximately 43.4% of the Company's revenues. The Company was organized in May 1987. The Company's initial products were optoelectronic devices and subsystems sold to customers for use in the manufacture of x-ray scanners for carry-on airline baggage. In December 1987, the Company formed OSI Singapore to manufacture optoelectronic devices and subsystems. In April 1990, the Company acquired United Detector Technology's subsystem business. In February 1993, the Company acquired the Rapiscan UK security and inspection operations and, through Rapiscan U.S.A., commenced its operations as a provider of security and inspection products in the United States. In April 1993, the Company acquired Ferson, a U.S. manufacturer of passive optic components. In July 1994, the Company established OSI Malaysia to manufacture optoelectronic subsystems as well as security and inspection products. In March 1997, the Company acquired AME for the purpose of broadening its optoelectronic subsystem business in Europe. The Company currently owns all of the outstanding shares of each of these companies. In January 1994 the Company entered into a joint venture agreement with Electronics Corporation of India, Limited ("ECIL"), an unaffiliated Indian corporation, pursuant to which the Company and ECIL formed ECIL-Rapiscan Security Products Limited ("ECIL Rapiscan"). The joint venture was established for the purpose of manufacturing security and inspection products in India from kits sold to ECIL by the Company. The Company currently owns a 36.0% interest in ECIL Rapiscan. The Company engages in significant international operations. The Company currently manufactures its optoelectronic devices and subsystems at its facilities in Hawthorne, California, in Ocean Springs, Mississippi, in Johor Bahru, Malaysia, and in Horten, Norway. Its security and inspection products are manufactured at its facilities in Crawley, England, in Long Beach, California, and in Johor Bahru, Malaysia. The Company markets its products worldwide through approximately 44 sales and marketing employees located in five countries, and through approximately 95 independent sales representatives. Revenues from shipments made outside of the United States accounted for 32.0%, 38.0%, and 39.3% of revenues for the fiscal years 1995 and 1996 and for the nine months ended March 31, 1997, respectively. Information regarding the Company's operating income or loss and identifiable assets attributable to each of the Company's geographic areas is set forth in Note 14 in the Company's Consolidated Financial Statements. The effective income tax rate for the Company for fiscal 1995, fiscal 1996 and the nine-month period ended March 31, 1997 was 26.6%, 34.2% and 25.1%, respectively. Certain products manufactured in the United States and sold overseas are sold through a Foreign Sales Corporation ("FSC") organized by the Company in 1990. Export sales made through the FSC are subject to federal tax advantages. If the tax advantages derived from sales made through the FSC and certain existing state and federal tax credits remain in effect, and if certain future foreign tax benefits are received as anticipated, the Company believes that its effective income tax rate will be below 32.0% during the next three fiscal years. 18 The Company's products currently address two principal markets. The Company's optoelectronic devices and subsystems are designed and manufactured primarily for sale to OEMs, while the Company's security and inspection products are sold to end-users. Two principal customers of the Company's optoelectronic devices and subsystems are the Company's Rapiscan UK and Rapiscan U.S.A. subsidiaries. Revenues from the sale of the Company's optoelectronic devices and subsystems to these two subsidiaries are eliminated from the Company's reported revenues. Revenues from the Company's principal markets and intercompany eliminations are presented in the table below.
NINE MONTHS YEAR ENDED JUNE 30, ENDED MARCH 31, ------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (In thousands) Optoelectronic devices and subsystems....................... $34,729 $37,977 $45,007 $33,493 $36,228 (Inter-company eliminations)...... (1,257) (1,529) (6,392) (5,424) (4,551) ------- ------- ------- ------- ------- Unaffiliated optoelectronic devices and subsystems ......... 33,472 36,448 38,615 28,069 31,677 Security and inspection products.. 14,263 13,367 22,903 16,925 24,296 ------- ------- ------- ------- ------- Total revenues................... $47,735 $49,815 $61,518 $44,994 $55,973 ======= ======= ======= ======= ======= In recent years, the Company has experienced increased revenues from its security and inspection products, both in absolute dollars and as a percentage of total Company revenues, a trend which the Company believes will continue. The Company has recently initiated a program to produce larger security and inspection products, including those for use in inspecting cargo, which products are likely to have significantly higher selling prices than most of the Company's products sold to date. Sales of products with higher average selling prices may increase fluctuations in the Company's quarterly revenues and earnings. The Company recognizes revenues upon shipment. As the Company's product offerings change to include sales of significantly larger systems, such as cargo inspection products, the Company may adopt the percentage of completion method of revenue recognition for certain products. RESULTS OF OPERATIONS The following table sets forth certain income and expenditure items as a percentage of total revenues for the periods indicated: NINE MONTHS YEAR ENDED JUNE 30, ENDED MARCH 31, ------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................ 75.5 75.9 73.9 74.8 72.2 ------- ------- ------- ------- ------- Gross profit...................... 24.5 24.1 26.1 25.2 27.8 Operating expenses: Selling, general and administrative.................. 16.7 15.3 15.9 15.0 14.6 Research and development......... 3.0 3.2 2.7 2.8 3.1 Stock option compensation........ -- -- -- -- 1.5 ------- ------- ------- ------- ------- Total operating expenses........ 19.7 18.5 18.6 17.8 19.2 ------- ------- ------- ------- ------- Income from operations............ 4.8 5.6 7.5 7.4 8.6 Interest expense.................. 1.5 2.5 2.2 2.3 1.6 ------- ------- ------- ------- ------- Income before income taxes and minority interest................ 3.3 3.1 5.3 5.1 7.0 Provision for income taxes........ 1.7 0.8 1.8 1.7 1.8 ------- ------- ------- ------- ------- Income before minority interest... 1.6 2.3 3.5 3.4 5.2 Minority interest................. -- -- 0.2 -- -- ------- ------- ------- ------- ------- Net income........................ 1.6% 2.3% 3.7% 3.4% 5.2% ======= ======= ======= ======= =======
19 COMPARISON OF THE NINE-MONTH PERIOD ENDED MARCH 31, 1997 TO THE NINE-MONTH PERIOD ENDED MARCH 31, 1996 Revenues. Revenues consist of sales of optoelectronic devices and subsystems as well as of security and inspection products. Revenues are recorded net of all intercompany eliminations. For the nine-month period ended March 31, 1997, revenues increased by $11.0 million, or 24.4%, to $56.0 million from $45.0 million in the comparable period ended March 31, 1996. Revenue from the sale of optoelectronic devices and subsystems, net of inter-company eliminations, increased by $3.6 million, or 12.9%, to $31.7 million from $28.1 million in the comparable period ended March 31, 1996. The increase was the result of increased orders from existing customers, particularly in the medical diagnostics industry, and the expansion of the Company's product base. Revenue from the sale of security and inspection products increased by $7.4 million, or 43.6%, to $24.3 million from $16.9 million in the comparable 1996 period. The increase was due mainly to the continued acceptance of the Rapiscan Series 500 EPX System, which was introduced in 1995, and growth in sales of the Rapiscan 119 tabletop model. Gross Profit. Cost of goods sold consists of material, labor and manufacturing overhead. For the nine-month period ended March 31, 1997, gross profit increased by $4.2 million, or 37.3%, to $15.6 million from $11.4 in the comparable 1996 period. As a percentage of revenues, gross profit increased to 27.8% in the 1997 period from 25.2% in the comparable 1996 period. Gross margin increased as a result of the fact that fixed costs did not increase proportionally with the increase in revenues. In addition, gross profit improved as a result of the Company continuing to increase the production of product manufactured at its offshore facilities, thereby capitalizing on lower labor and other manufacturing costs. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of compensation paid to sales, marketing, and administrative personnel, professional service fees, and marketing expenses. For the nine-month period ended March 31, 1997, such expenses increased by $1.5 million, or 21.3%, to $8.2 million from $6.7 million in the comparable 1996 period. As a percentage of revenues, selling, general and administrative expenses decreased to 14.6% from 15.0%. The increase in expenses was due to increases in payroll expenses to support revenue growth as well as to increases in legal expenses. Research and Development. Research and development expenses include research related to new product development and product enhancement expenditures. For the nine-month period ended March 31, 1997, such expenses increased by $457,000, or 35.7%, to $1.7 million from $1.3 million in the comparable 1996 period. As a percentage of revenues, research and development expenses increased to 3.1% from 2.8%. The increase was due primarily to continued enhancement of the Rapiscan Series 500 EPX System and efforts to develop products for cargo scanning. In addition, the Company expensed all research and development expenses in the 1997 period as incurred, whereas certain of such expenses related to software products, the technological feasibility of which had been established, were capitalized in the 1996 period. Income from Operations. Income from operations for the nine-month period ended March 31, 1997 increased by $1.5 million, or 44.6%, to $4.8 million from $3.3 million for the comparable 1996 period. Excluding the non-recurring non- cash incentive compensation expense of $856,000 incurred in connection with the acceleration of the vesting period of stock options granted to certain employees during the 1997 period, income from operations increased by $2.3 million, or 70.3%, to $5.7 million from $3.3 million. As a percent of revenues, income from operations increased to 8.6% from 7.4%, and excluding the non-cash compensation expense referenced above, it would have increased to 10.1% from 7.4%. Interest Expense. Interest expense for the nine-month period ended March 31, 1997 decreased by $126,000, or 12.3%, to $900,000 from $1,026,000 during the comparable 1996 period. As a percentage of revenues, interest expense decreased to 1.6% from 2.3%. The decrease was due to the conversion of the Company's subordinated debt to preferred and common stock during the 1997 period, and to a decrease in the Company's borrowings outstanding under its lines of credit. 20 Provision for Income Taxes. Provision for income taxes for the nine-month period ended March 31, 1997 increased by $196,000, or 24.9%, to $983,000 from $787,000 during the comparable 1996 period. As a percentage of income before provision for income taxes and minority interest, provision for income taxes decreased to 25.1% from 34.2% in the comparable 1996 period. The decrease was a result of increases in the Company's export sales through its FSC, which has the effect of reducing the tax rate on revenues from foreign sales made from the United States, and the increased utilization of research and development and certain state tax credits. In addition, the Company has made the California Waters Edge election under California tax law, which has the effect of exempting its foreign subsidiaries from California taxes through fiscal 2003. Net Income. For the reasons outlined above, net income for the nine-month period ended March 31, 1997, increased $1.4 million, or 89.8%, to $2.9 million from $1.5 million in the comparable 1996 period. Excluding the non-cash compensation charge described above, net income would have increased by $1.9 million, or 123%, to $3.4 million from $1.5 million in the comparable 1996 period. COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1996 TO THE FISCAL YEAR ENDED JUNE 30, 1995 Revenues. Revenues for the fiscal year ended June 30, 1996 increased by $11.7 million, or 23.5%, to $61.5 million from $49.8 million for the fiscal year ended June 30, 1995. Revenues from the sale of optoelectronic devices and subsystems, net of intercompany eliminations, increased by $2.2 million, or 5.9%, to $38.6 million from $36.4 million for fiscal year 1995. The increase was the result of a 10.0% growth in sales of active optoelectronic devices and subsystems, offset in part by a decline in sales of lenses and other passive optic components. Revenues from the sale of security and inspection products increased by $9.5 million, or 71.3%, to $22.9 million from $13.4 million in the comparable 1995 period. The increase was due mainly to the increased penetration of the U.S. security and inspection market and to larger shipments made to two international customers. Gross Profit. Gross profit increased by $4.0 million, or 33.6%, to $16.0 million from $12.0 million for fiscal 1995. As a percentage of revenues, gross profit increased to 26.1% from 24.1%. Gross margin increased as a result of the Company more fully realizing the benefits of having established a manufacturing facility in Malaysia in fiscal 1995, which had the effect of decreasing labor rates. Selling, General and Administrative. Selling, general and administrative expenses increased by $2.2 million, or 28.4%, to $9.8 million from $7.6 million for fiscal 1995. As a percentage of revenues, selling, general and administrative expenses increased to 15.9% from 15.3%. The increase in expenses was due to increases in sales and marketing activities to support the growth in sales of security and inspection products in the United States, as well as general increases in payroll and administration to support sales growth. Research and Development. Research and development expenses increased by $72,000, or 4.5%, to $1.7 million from $1.6 million for fiscal 1995. As a percentage of revenues, research and development expenses decreased to 2.7% from 3.2%, as increased research and development expenses related to security and inspection products were offset in part by decreases in such expenses related to optoelectronic products. Income from Operations. Income from operations increased by $1.8 million, or 64.4%, to $4.6 million from $2.8 million for fiscal 1995. As a percent of revenues, income from operations increased to 7.5% from 5.6%. The increase was due to the reasons outlined above, as both cost of goods sold and selling, general, and administrative expenses did not increase as much as revenues during the period. Interest Expense. Interest expense increased by $108,000, or 8.6%, to $1.4 million from $1.3 million for fiscal 1995. The increase was due to an increase in borrowings outstanding under the Company's line of credit. As a percentage of revenues, interest expense decreased to 2.2% from 2.5%. 21 Provision for Income Taxes. Provision for income taxes increased by $698,000, or 169%, to $1.1 million from $413,000 in fiscal 1995. As a percentage of income before provision for income taxes and minority interest, provision for income taxes increased to 34.2% in fiscal 1996 from 26.6% for the prior fiscal year. The increase resulted primarily from a reduction in certain state income tax credits, the repeal of the federal research and development credits, and a lower tax benefit from the Company's FSC in fiscal 1996. Net Income. For the reasons outlined above, net income for the fiscal year ended June 30, 1996, increased $1.1 million, or 95.1%, to $2.3 million from $1.2 million for fiscal 1995. COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 1995 TO THE FISCAL YEAR ENDED JUNE 30, 1994 Revenues. Revenues for the fiscal year ended June 30, 1995 increased by $2.1 million, or 4.4%, to $49.8 million from $47.7 million for the fiscal year ended June 30, 1994. Revenues from the sale of optoelectronic devices and subsystems, net of inter-company eliminations, increased by $2.9 million, or 8.9%, to $36.4 million from $33.5 million in fiscal 1994. The increase was the result of increased sales of subsystems in most of the product markets served by the Company. Revenues from the sale of security and inspection products decreased by $896,000, or 6.3%, to $13.4 million from $14.3 million in fiscal 1994. The decrease was due mainly to the shipment of large orders to customers in fiscal year 1994 that were not repeated in fiscal year 1995. Aside from the timing of these large order shipments, base business in security and inspection products in fiscal 1995 increased over the prior fiscal year. Gross Profit. Gross profit increased by $299,000, or 2.6%, to $12.0 million from $11.7 million for fiscal 1994. As a percentage of revenues, gross profit decreased to 24.1% from 24.5%. Gross margin decreased because of the start-up expenses associated with the opening of the Company's Malaysian manufacturing facility during fiscal 1995. Selling, General and Administrative. Selling, general and administrative expenses decreased by $373,000, or 4.7%, to $7.6 million from $8.0 million for fiscal 1994. As a percentage of revenues, selling, general and administrative expenses decreased to 15.3% from 16.7%. Excluding a $1.5 million settlement with the U.S. government which occurred in fiscal 1994, selling, general, and administrative expenses increased by $1.1 million, or 17.4%. See "Business-- Legal Proceedings." Excluding this settlement, such expenses as a percentage of revenues would have increased during the year from 13.6% to 15.3%. The increase was due to increases in legal fees and other general increases associated with revenue growth. Research and Development. Research and development expenses increased by $140,000, or 9.6%, to $1.6 million from $1.5 million for fiscal 1994. As a percentage of revenues, research and development expenses increased to 3.2% from 3.0%. The increase in research and development expenses occurred primarily due to increased expenses related to the development of security and inspection products. Income from Operations. Income from operations increased by $532,000, or 23.4%, to $2.8 million from $2.3 million for fiscal 1994. As a percentage of revenues, income from operations increased to 5.6% from 4.8%. The increase was due to the decrease in selling, general, and administrative expenses in the context of modest revenue growth. Interest Expense. Interest expense increased by $541,000, or 76.2%, to $1.3 million from $710,000 in fiscal 1994. As a percentage of revenues, interest expense increased to 2.5% from 1.5%. The increase was due to increased borrowings under the Company's line of credit and interest on outstanding amounts owed under the government settlement. Provision for Income Taxes. Provision for income taxes decreased by $401,000, or 49.3%, to $413,000 from $814,000 in fiscal 1994. As a percentage of income before provision for income taxes and minority interest, provision for income taxes decreased to 26.6% from 52.1%. The decrease was principally the result of the non-deductible portion of the government settlement in fiscal 1994. 22 Net Income. For the reasons outlined above, net income for the fiscal year ended June 30, 1995 increased $371,000, or 47.1%, to $1.2 million from $787,000 for fiscal 1994. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain statement of operations data for the eleven consecutive quarters in the period ended March 31, 1997. This data is unaudited but, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of this information in accordance with generally accepted accounting principles. The operating results for any quarter are not necessarily indicative of results for any future period or for the entire fiscal year.
QUARTER ENDED ------------------------------------------------------------------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1994 1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 --------- -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- (In thousands) Revenues.......... $10,981 $12,584 $13,164 $13,086 $12,539 $15,119 $17,336 $16,524 $16,530 $18,563 $20,880 Cost of goods sold............. 8,500 9,537 10,104 9,677 9,657 11,382 12,599 11,848 11,884 13,286 15,210 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross profit...... 2,481 3,047 3,060 3,409 2,882 3,737 4,737 4,676 4,646 5,277 5,670 Operating expenses: Selling, general and administrative.. 1,598 1,984 1,875 2,144 1,879 2,126 2,740 3,012 2,737 2,686 2,760 Research and development..... 494 308 370 419 419 408 453 383 517 636 584 Stock option compensation.... -- -- -- -- -- -- -- -- -- -- 856 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses....... 2,092 2,292 2,245 2,563 2,298 2,534 3,193 3,395 3,254 3,322 4,200 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income from operations....... 389 755 815 846 584 1,203 1,544 1,281 1,392 1,955 1,470 Interest expense.. 244 268 353 386 336 345 345 333 360 331 209 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes and minority interest......... 145 487 462 460 248 858 1,199 948 1,032 1,624 1,261 Provision for income taxes..... 39 129 123 122 85 293 409 324 259 408 316 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before minority interest......... 106 358 339 338 163 565 790 624 773 1,216 945 Minority interest. 14 4 6 (7) 19 17 (8) 89 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income........ $ 120 $ 362 $ 345 $ 331 $ 182 $ 582 $ 782 $ 713 $ 773 $ 1,216 $ 945 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
23 The following table sets forth, as a percentage of revenues, certain consolidated statements of operations data for the four quarters in each of the years fiscal 1995 and 1996 and for the first three quarters of fiscal 1997.
QUARTER ENDED ----------------------------------------------------------------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1994 1994 1995 1995 1995 1995 1996 1996 1996 1996 1997 --------- -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- Revenues......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............ 77.4 75.8 76.8 73.9 77.0 75.3 72.7 71.7 71.9 71.6 72.8 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Gross profit..... 22.6 24.2 23.2 26.1 23.0 24.7 27.3 28.3 28.1 28.4 27.2 Operating expenses: Selling, general and administrative. 14.6 15.8 14.2 16.4 15.0 14.1 15.8 18.2 16.6 14.5 13.2 Research and development.... 4.5 2.4 2.8 3.2 3.3 2.7 2.6 2.3 3.1 3.4 2.8 Stock option compensation... -- -- -- -- -- -- -- -- -- -- 4.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses....... 19.1 18.2 17.0 19.6 18.3 16.8 18.4 20.5 19.7 17.9 20.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income from operations...... 3.5 6.0 6.2 6.5 4.7 7.9 8.9 7.8 8.4 10.5 7.1 Interest expense. 2.2 2.1 2.7 2.9 2.7 2.3 2.0 2.0 2.2 1.8 1.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes and minority interest........ 1.3 3.9 3.5 3.6 2.0 5.6 6.9 5.8 6.2 8.7 6.1 Provision for income taxes.... .4 1.0 .9 1.0 .7 1.9 2.3 2.0 1.6 2.2 1.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before minority interest........ 1.0 2.9 2.6 2.6 1.3 3.7 4.6 3.8 4.6 6.5 4.6 Minority interest........ 0.1 -- -- (0.1) 0.2 -- (0.1) 0.5 -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income....... 1.1% 2.9% 2.6% 2.5% 1.5% 3.7% 4.5% 4.3% 4.6% 6.5% 4.6% ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
The Company's quarterly operating results have varied in the past and are likely to vary significantly in the future. These quarterly fluctuations are the result of a number of factors, including the volume and timing of orders received and shipments made during the period, variations in the Company's product mix, changes in demand for the Company's products, the timing and amount of expenditures made by the Company in anticipation of future sales, variability in selling price, and other competitive conditions. The Company's revenues, particularly from the sale of security and inspection products, are increasingly dependent upon larger orders of multiple units and upon the sale of products having higher average selling prices. The Company is unable to predict the timing of the receipt of such orders and, as a result, significant variations between forecasts and actual orders will often occur. Furthermore, the rescheduling of the shipment of any large order, or portion thereof, or any production difficulties or delays experienced by the Company, could have a material adverse effect on the Company's quarterly operating results. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through cash provided by operations and through various term loans, discounting facilities, and revolving credit lines extended to its different subsidiaries worldwide. As of March 31, 1997, the Company's principal sources of liquidity consisted of $1.6 million in cash and several credit agreements described below. The Company's operations provided net cash of $5.1 million in the nine month period ended March 31, 1997. For the nine-month period ended March 31, 1997, the amount of net cash provided by operations reflects adjustments for depreciation and amortization and the increase in advances from customers and accrued expenses. Net cash provided by operations was offset in part by increases in receivables and inventories. Net cash used in investing activities was $1.7 million and $2.2 million in the nine-month period ended March 31, 1997 and fiscal 1996, respectively, in each case due primarily to purchases of property and equipment in the amount of approximately $1.5 million and $1.6 million, respectively. The Company expects to spend approximately $2.0 million for purchases of property 24 and equipment in fiscal 1998. In addition, the Company may spend approximately $3.0 million if it exercises its option to purchase its Hawthorne, California, facilities. The Company has no significant capital spending or purchase commitments other than normal purchase commitments and commitments under leases. Net cash used in financing activities for the nine-month period ended March 31, 1997 was $2.4 million due primarily to the repayment of debt. Net cash provided by financing activities in fiscal 1996 was $1.4 million due to increases in borrowings under the Company's lines of credit. The Company intends to use a portion of the net proceeds of this Offering to repay the amounts outstanding under the Company's lines of credit. In January 1997, OSI Systems, Inc. and its three U.S. subsidiaries entered into a credit agreement with Sanwa Bank California. The agreement provides for a $10.0 million line of credit, which includes revolving, letter of credit, acceptance and foreign exchange facilities. In addition, the Company has a $1.0 million equipment line of credit for capital purchases. At the borrowers' election, advances under both lines of credit bear interest at a rate equal to a variable bank reference rate plus 0.25% per annum or, at the Company's option, at a fixed rate above LIBOR. At the borrowers' election, advances under the equipment purchase facility bear interest at a variable bank reference rate plus 0.25% per annum or a fixed rate quoted by the bank. The agreement also provides for a term loan in a maximum amount of $2.5 million to refinance existing indebtedness. At the borrowers' election, the term loan may bear interest at a fixed or variable rate, as quoted by the bank. As of March 31, 1997, there was outstanding approximately $4.9 million under the $10.0 million line of credit, $2.5 million under the term loan, and approximately $154,000 under the letter of credit facility. As of March 31, 1997, there were no outstanding borrowings under the equipment line. Borrowings under the agreement are secured by liens on substantially all of the Company's assets. The agreement restricts the four borrowers from incurring certain additional indebtedness. In addition, the credit agreement requires that the Company maintain (on a consolidated basis) certain financial ratios and levels of tangible net worth and also prohibits OSI Systems, Inc. and these subsidiaries from making capital expenditures greater than $1.8 million in the U.S. in any fiscal year. In November 1996, OSI Systems, Inc. and its three U.S. subsidiaries entered into an agreement with Wells Fargo HSBC Trade Bank, N.A. Under the agreement Wells Fargo will provide the four borrowers with a revolving credit line of up to a maximum of $5.0 million to be used to pay obligations incurred in connection with export orders. The revolving credit lines bear interest at the bank's prime rate plus 0.25% per annum and are due in full with all interest on October 27, 1997. As of March 31, 1997, no amounts were outstanding under the facility. The agreement also provides for a letter of credit sub-facility up to an aggregate maximum of $4.0 million to be used for standby letters of credit in support of bid and performance bonds associated with specific foreign contracts, of which $2.0 million was used as of March 31, 1997. The facility terminates on October 27, 1997. Borrowings under the agreement are secured by liens on certain of the Company's assets. The agreement prohibits the Company from paying any dividends and restricts OSI Systems, Inc. and these subsidiaries from making capital expenditures greater than $1.8 million in the U.S. in any fiscal year. In December 1996, Midland Bank plc agreed to provide certain banking facilities to Rapiscan UK under two agreements. Under the first agreement, Midland agreed to provide Rapiscan UK with a pound sterling overdraft, maximum amount of 1.2 million pounds sterling (approximately $2.0 million at March 31, 1997) outstanding at any one time, which amounts are secured by certain assets of Rapiscan UK. Outstanding borrowings will bear interest at a base rate plus 2.00% per annum. The second agreement provides for a 750,000 pound sterling (approximately $1.2 million as of March 31, 1997) facility for purchase of accounts receivable at 1.85% over a base rate and a 500,000 pound sterling (approximately $820,000 as of March 31, 1997) facility for tender and performance bonds. These facilities are secured by certain assets of Rapiscan UK and OSI Systems, Inc. has guarantied Rapiscan UK's obligations under the performance bond facility. As of March 31, 1997, no amounts were outstanding under the line of credit and $134,000 was outstanding under the performance bond facility. The above facilities expire in December and November 1997, respectively. 25 OSI Singapore has a loan agreement with Indian Bank (Singapore), which provides for an accounts receivable discounting facility for borrowings of up to 2.6 million Singapore dollars (approximately $1.8 million at March 31, 1997). The agreement also provides for a term loan with borrowings of 434,000 Singapore dollars (approximately $300,000 at March 31, 1997). Borrowings under the line of credit bear interest at the bank's prime rate plus 1.50%. The line of credit is terminable at any time. As of March 31, 1997 there was approximately $1.4 million outstanding under the line of credit and approximately $66,000 was outstanding under the term loan. Borrowings under the line of credit are collateralized by certain assets of OSI Singapore. The borrowings under this line are guarantied by Messrs. Chopra, Mehra and Hickman, officers of the Company. Borrowings secured by intercompany receivables are guarantied by OSI Systems, Inc. AME has a loan agreement with Christiania Bank OG Kreditkasse which provides for a revolving line of credit for borrowings of up to 5.0 million Norwegian krone (approximately $741,000 at March 31, 1997), of which $354,000 was outstanding as of March 31, 1997. Borrowings under the line of credit bear interest at an annual variable rate of 6.65%. The agreement also provides for a term loan which matures in June 2001 and bears interest at an annual rate of 5.75%. At March 31, 1997 outstanding term loan borrowings totalled approximately 3.4 million Norwegian krone (approximately $504,000). OSI Malaysia has a bank guarantee line of credit for 2.5 million Malaysian ringgits (approximately $1,000,000) with the Hong Kong Bank Malaysia Berhad for performance bonds and standby letters of credit. This line expires in October 1997. The Company believes that the net proceeds from this offering together with cash from operations, existing cash and lines of credit will be sufficient to meet its cash requirements for the foreseeable future. FOREIGN CURRENCY TRANSLATION The accounts of the Company's operations in Singapore, Malaysia, England and Norway are maintained in Singapore dollars, Malaysian ringgits, U.K. pounds sterling and Norwegian krone, respectively. Foreign currency financial statements are translated into U.S. dollars at current rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. Gains and losses resulting from foreign currency transactions are included in income, while those resulting from translation of financial statements are excluded from income and accumulated as a component of shareholder's equity. Transaction (losses) gains of approximately ($19,000), $76,000, ($123,000), ($21,000), and $9,000 were included in income for fiscal 1994, 1995 and 1996 and for the nine-month period ended March 31, 1996 and 1997. INFLATION The Company does not believe that inflation has had a material impact on its results of operations. 26 BUSINESS GENERAL The Company is a vertically integrated worldwide provider of devices, subsystems and end-products based on optoelectronic technology. The Company designs and manufactures optoelectronic devices and value-added subsystems for OEMs for use in a broad range of applications, including security, medical diagnostics, telecommunications, office automation, aerospace, computer peripherals and industrial automation. In addition, the Company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that it markets worldwide to end users under the "Rapiscan" brand name. These products are used to inspect baggage, cargo and other objects for weapons, explosives, drugs and other contraband. In the nine month period ended March 31, 1997, revenues from the sale of optoelectronic devices and subsystems amounted to $31.7 million, or approximately 56.6%, of the Company's revenues, while revenues from sales of security and inspection products amounted to $24.3 million, or approximately 43.4% of the Company's revenues. INDUSTRY OVERVIEW The Company's products currently address two principal markets. The Company's optoelectronic devices and subsystems are designed and manufactured primarily for sale to OEMs, while the Company's security and inspection products are sold to end-users. Optoelectronic Devices and Subsystems. Optoelectronic devices consist of both active components, such as silicon photodiodes, that sense light of varying wavelengths and convert the light detected into electronic signals, and passive components, such as lenses, prisms, filters and mirrors. An optoelectronic subsystem typically consists of one or more optoelectronic devices that are combined with other electronic components for integration into an end-product. Optoelectronic devices and subsystems are used for a wide variety of applications ranging from simple functions, such as the detection of paper in the print path of a laser printer, to complex monitoring, measurement or positioning functions, such as in industrial robotics where the subsystem is used to detect the exact position, motion or size of another object. Because optoelectronic devices and subsystems can be used in a wide variety of measurement, control and monitoring applications, optoelectronics may be used in a broad array of industrial applications. The Company believes that in recent years advances in technology and reductions in the cost of key components of optoelectronic systems, including computer processing power and memory, have broadened the market by enabling the use of optoelectronic devices in a greater number of applications. In addition, the Company believes that there is a trend among OEMs to increasingly outsource the design and manufacture of optoelectronic subsystems to fully integrated, independent manufacturers who may have greater specialization, broader expertise, and the ability and flexibility to respond in shorter time periods than the OEM could accomplish in-house. The Company believes that its high level of vertical integration, substantial engineering resources, expertise in the use and application of optoelectronic technology, and low-cost international manufacturing operations enable it to effectively compete in the market for optoelectronic devices and subsystems. Security and Inspection Products. A variety of products are currently used worldwide in security and inspection applications. These products include single energy x-ray equipment, dual energy x-ray equipment, trace detection systems that detect particulate and chemical traces of explosive materials, and CT scanners. To date, most of these products have been deployed primarily at commercial airports worldwide. The Company believes that the growth in the market for security and inspection products will continue to be driven by the increased perception of threat fueled by recent terrorist incidents, increased government mandates and appropriations, and the emergence of a growing market for the non-security applications of its products. In the 1970s, principally in response to civilian airline hijackings, the U.S. Federal Aviation Administration ("FAA") established security standards by setting guidelines for the screening of carry-on baggage for weapons such as guns and knives. These standards were later mandated by the United Nations 27 for adoption by all of its member states. The Company believes that to date the imposition of these standards has resulted in the installation of over 10,000 x-ray inspection systems installed in airports worldwide. Additionally, the United Kingdom Department of Transport has required the United Kingdom's commercial airports to deploy systems for 100% screening of international checked baggage by the end of 1998, and the European Civil Aviation Conference, an organization of 33 member states, has agreed to implement 100% screening of international checked baggage by the year 2000. In the United States, largely in response to the explosion of Pan Am Flight 103 in December 1988, Congress enacted the Aviation Security Improvement Act of 1990 which, among other initiatives, directed the FAA to establish and implement strict security measures and to deploy advanced technology for the detection of various contraband, including explosives, drugs, and currency. In July 1996, President Clinton formed the White House Commission on Aviation Safety and Security (the "Gore Commission"), to review airline and airport security and to oversee aviation safety. In response to the initial report released by the Gore Commission, the United States enacted legislation that includes $144 million in appropriations for the initial deployment of advanced security and inspection technology at major U.S. airports. X-ray inspection equipment, such as that sold by the Company, is also increasingly being used for a number of purposes not related to security. Newer versions of x-ray inspection equipment combine x-ray inspection with computer image enhancement capabilities and can be applied to various non- security purposes such as the detection of narcotics, gold and currency, the inspection of agricultural products, and the inspection of cargo by customs officers and international shippers. The Company believes that the market for cargo inspection systems will increase significantly in the future. GROWTH STRATEGY The Company's objectives are to be a leading provider of specialized optoelectronic products, to enhance its position in the international inspection and detection marketplace and to leverage its expertise in the optoelectronic technology industry by entering into new end-product markets on a selective basis. Key elements of this strategy include: Leverage its Optoelectronic Design and Manufacturing Expertise to Address New Applications. The Company believes that one of its primary competitive strengths is its expertise in designing and manufacturing specialized optoelectronic subsystems for its OEM customers in a cost-effective manner. The Company currently designs and manufactures devices and subsystems for over 200 customers serving over 100 applications. The Company has developed this expertise in the past through internal research and development efforts and through selective acquisitions. In 1990, the Company acquired UDT Sensors to broaden its expertise and capabilities in developing and manufacturing optoelectronic devices and subsystems. Thereafter, in 1992, the Company acquired Ferson for its passive optic technologies, and AME in 1997 for AME's hybrid optoelectronic capabilities. The Company intends to continue to build this expertise in order to address a greater number of applications. By expanding the number of potential applications its products may serve, the Company intends to increase its business with existing customers and attract new customers. Further Penetrate Existing Security and Inspection Markets and Expand into Other Markets. For the nine-month period ended March 31, 1997, approximately 28.4% of the Company's security and inspection products were sold to airports or airlines for security purposes, with the remainder of these products being sold to other facilities for both security and nonsecurity related purposes. The Company intends to continue to expand its sales and marketing efforts both domestically and internationally to capitalize on opportunities in its existing markets for new installations as well as on opportunities to replace, service and upgrade existing security installations. In addition, through research and development and selective acquisitions, the Company intends to enhance and expand its current product offering to better address new applications including automatic bomb detection and cargo scanning. The Company believes that this strategy will enable it to take advantage of the growth its existing markets are experiencing and to benefit from additional growth that these new and enhanced products will provide. The Company believes that sales of its security and inspection products at locations other than at airports will constitute an increasingly larger portion of its sales in the future. 28 Capitalize on Vertical Integration. The Company believes it offers significant added value to its OEM customers by providing a full range of vertically integrated services including component design and customization, subsystem concept design and application engineering, product prototyping and development, and efficient pre-production, short-run and high volume manufacturing. The Company believes that its vertical integration differentiates it from many of its competitors and provides value to its OEM customers who can rely on the Company to be an integrated supplier of an optoelectronic subsystem. In addition, the Company's vertical integration provides several other advantages in both its optoelectronic devices and subsystems and security and detection product lines. These advantages include reduced manufacturing and delivery times, lower costs due to its access to competitive international labor markets and direct sourcing of raw materials, and superior quality control. The Company intends to continue to leverage its vertically integrated services to create greater value for its customers in the design and manufacturing of its products. The Company believes that this strategy better positions the Company for penetration into other end markets. Capitalize on Global Presence. The Company operates in three locations in the United States, three in Europe and two in Asia. The Company views its international operations as providing an important strategic advantage over competitors in both the optoelectronic device and subsystem market and the security and inspection market for three primary reasons. First, international manufacturing facilities allow the Company to take advantage of competitive labor rates in order to be a low cost producer. Second, its international offices strengthen its sales and marketing efforts and its ability to maintain and repair its systems by providing direct access to growing foreign markets and to its existing international customer base. Third, multiple manufacturing locations allow the Company to reduce delivery times to its global customer base. In the future, the Company intends to develop new sources of manufacturing and sales capabilities to maintain and enhance the benefits of its international presence. Selectively Enter New End Markets. The Company intends to selectively enter new end markets that complement its existing capabilities in designing, developing and manufacturing optoelectronic devices and subsystems. The Company believes that by manufacturing other end products which rely on the technological capabilities of the Company, it can leverage its existing integrated design and manufacturing infrastructure to capture greater margins and build a significant presence in new end markets which present attractive competitive market dynamics. The Company intends to achieve this strategy through internal growth or through selective acquisitions of end-product manufacturers. PRODUCTS AND TECHNOLOGY The Company designs, develops, manufactures and sells products based on its core optoelectronic technology. These products range from discrete devices to value-added subsystems to complete x-ray security and inspection products. Discrete Devices and Subsystems. Optoelectronic devices generally consist of both active and passive components. Active components sense light of varying wavelengths and convert the light detected into electronic signals, whereas passive components amplify, separate or reflect light. Active components manufactured by the Company consist of silicon photodiodes and hybrid photodetectors. Passive components include lenses, prisms, filters, mirrors and other precision optical products that are used by the Company in the manufacture of its optoelectronic products or are sold to others for use in telescopes, laser printers, copiers, microscopes and other detection and vision equipment. The devices manufactured by the Company are both standard products and products customized for specific applications. Most of the devices manufactured by the Company are incorporated by it into the subsystems that it manufactures. The Company does, however, also sell its discrete devices separately to OEMs. Direct sales of devices to third parties constituted less than 10.0% of the Company's revenues in the nine-month period ended March 31, 1997. In addition to the manufacture of discrete devices, the Company also specializes in designing and manufacturing customized optoelectronic subsystems for use in a wide range of products and equipment. An optoelectronic subsystem typically consists of one or more optoelectronic devices that are combined with other 29 electronic components and packaging for use in an end-product. The composition of a subsystem can range from a simple assembly of various optoelectronic devices that are incorporated into other subsystems (for example, a printed circuit board containing the Company's optoelectronic devices), to complete end-products (for example, medical pulse oximeter probes that are manufactured and packaged by the Company on behalf of the OEM customer and then shipped directly to the customer or the customer's distributors). Since the end of fiscal 1996, the Company has manufactured subsystems for a variety of applications, including the following: imaging electronics for medical CT scanners; disposable and reusable medical probes for use with medical pulse oximetry equipment; components and subsystems for laser gyroscopes used in military and commercial aviation; optoelectronic subsystems for slot machines; laser subsystems in military helicopter gun sighting equipment; positioning subassemblies for computer peripheral equipment; alignment subsystems for laser heads in optical disc players; and ultra-violet fire detection subsystems for submarines and surface ships. Security and Inspection Equipment. The Company manufactures and sells a range of security and inspection equipment that it markets under the "Rapiscan" brand name. To date, the security and inspection equipment has principally been used at airports to inspect carry-on and checked baggage for guns and knives. However, inspection products are increasingly being used for both security purposes at a wide range of facilities other than airports and for other non-security purposes. For fiscal years 1995 and 1996, approximately 28.7% and 33.1%, 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 believes that sales of its inspection products for use at non- airport locations will constitute an increasingly larger portion of future revenues. The Company's inspection and detection products combine the use of x-ray technology with the Company's core optoelectronic capabilities. The base models of its product line use single energy x-ray technology and are used for identifying weapons with distinct shapes, such as guns and knives. The Company's enhanced models combine dual- or multi-energy x-ray technology with computer enhanced imaging technology to facilitate the detection of materials such as explosives, narcotics, currency or other contraband. While all x-ray systems produce a two-dimensional image of the contents of the inspected material, the dual-energy x-ray systems also measure the x-ray absorption of the inspected materials' contents at two x-ray energies to determine the atomic number, mass and other characteristics of the object's contents. The different organic and non-organic substances in the inspected material are displayed in various colors. This information is then displayed to an operator of the inspection equipment who can identify and differentiate the objects in the inspected materials. Currently, all of the Company's inspection products require an operator to monitor the images produced by the inspection equipment. Depending on the model, the Company's products permit the operator to inspect the contents of packages at varying image modes and magnifications. The images range from the monochrome and pseudo-color images produced by single x-ray imaging systems, to high resolution, multi-color images in the Company's computer enhanced dual-energy models. The Company believes that its Rapiscan 500 Series provides one of the highest quality images currently available in the x-ray security and inspection industry. In order to monitor the performance of operators of the x-ray baggage screening systems that are used in the United States airports, the FAA has implemented a computer-based training and evaluation program known as the Screener Proficiency Evaluation And Reporting System ("SPEARS"). The Company's Rapiscan 500 Series EPX System is, to date, the only system that meets the FAA's SPEARS criteria. In order to test the proficiency and attentiveness of the operator, the Company's system is able to insert test threat images, such as weapons, into an actual parcel stream by use of computer images. 30 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:
MODEL (TECHNOLOGY) APPLICATIONS SELECTED INSTALLATIONS - ------------------------------------------------------------------------------- Rapiscan 19 (single en- Inspection of incoming package Embassies ergy) Rapiscan 119 (single en- Post offices ergy) Courthouses High risk office buildings Manufacturing companies - ------------------------------------------------------------------------------- Rapiscan 300 Series (160 Inspection of hand carried baggage Airports kV x-ray source, Prisons single energy and Government buildings dual energy) Nuclear facilities - ------------------------------------------------------------------------------- Rapiscan 500 Series- Airport hand carried and checked Airports Standard baggage Cruise ships Tunnel (single view and Pallet inspection Freight shippers dual Customs inspections Border crossings view 160 kV x-ray Agriculture inspection source, single energy and dual energy) - ------------------------------------------------------------------------------- Rapiscan 500 Series- Large pallet inspection Airports Large Tunnel Customs inspections Freight shippers (single view and dual Border crossings view High risk seaport locations 320-450 kV x-ray source) - ------------------------------------------------------------------------------- Rapiscan 500 Series-Mo- Mobile x-ray inspection Conventions and special events bile Airports Systems (x-ray van or Customs inspections trailer) Border crossing
In addition to its x-ray security and inspection products, the Company also markets three models of an archway walk-through metal detector and two models of a hand-held metal detector. These products are used to detect metal weapons such as guns and knives and are installed at airports and other locations, including prisons and schools. During the nine-month period ended March 31, 1997, sales of the walk-through and hand-held metal detectors constituted 1.8% of the Company's revenues. The Company's Rapiscan U.S.A. subsidiary has entered into a non-exclusive patent license agreement with EG&G Inc. Under the license, Rapiscan U.S.A. is permitted to make, use and sell or otherwise dispose of security and inspection products that use an x-ray line scan system for baggage inspection purposes covered by EG&G Inc.'s patent. The patent, which expires in 2000, does not affect sales of the Company's security and inspection products manufactured and sold outside of the United States. 31 MARKETS, CUSTOMERS AND APPLICATIONS Optoelectronic Devices and Subsystems. The Company's optoelectronic devices and subsystems are used in a broad range of products by a variety of customers. The following chart illustrates, for the twelve-month period ended March 31, 1997: (i) the major product categories for which the Company provided optoelectronic products; (ii) the percentage of revenues from the sale of optoelectronic devices and subsystems related to such categories; (iii) certain customers ("Major Customers") in each such category who purchased more than $100,000 of optoelectronic products; and (iv) the total number of Major Customers in each such category. The Company expects that the list of product categories, the amount of business derived from each such product category, and the composition of its major customers will vary from period to period.
PERCENTAGE OF REPRESENTATIVE OPTOELECTRONIC MAJOR APPROXIMATE NUMBER PRODUCT CATEGORY SALES CUSTOMERS OF MAJOR CUSTOMERS ---------------- -------------- ----------------------- ------------------ Computed Tomography and X-Ray Imaging 22.7% Picker International 7 Hologic, Inc. InVision Technologies Aerospace and Avionics 12.0% Kearfott Guidance 9 Honeywell Avionics Litton Systems Medical Monitoring 9.5% Datascope 11 BioChem International Criticare Systems Analytical and Medical Diagnostics Equipment 6.7% Johnson & Johnson 10 Leica Bausch & Lomb Office Automation and Computer Peripherals 6.3% Xerox 6 Eastman Kodak Hewlett-Packard Construction, Robotics and Industrial Automation 4.9% 3M 8 Spectra Physics Baumer Electric Military/Defense and Weapons Simulations 3.3% Lockheed Martin (Loral) 5 Hughes (HDOS) Texas Instruments Colorometry and Particle Analyzers 1.2% Coulter Electronics 3 CILAS Accuracy Microsensors Bar Code Scanners 1.1% Symbol Technologies 2 Intermec Gaming Industry 1.1% Bally Gaming 2 Dixie Narco
32 Security and Inspection Products. Since entering the security and inspection products market in 1993, the Company has shipped over 2,000 units to over 50 countries. The Company has sold 10 or more of its security and inspection products, or more than $100,000 of such products, in at least 26 countries. The following is a list of certain customers and/or installations that have purchased at least 10 units, or more than $100,000, of the Company's security and inspection products since January 1993: Nanjing Airport; People's Republic of China Ukraine Airports; Ukraine Prague Airport; Czech Republic United Kingdom Prison System; United Kingdom Gatwick Airport; England American Airlines; U.S.A Heathrow Airport; England Continental Airlines; U.S.A TNT Freight; England Delta Airlines; U.S.A. Finnish Customs; Finland Federal Courthouses; U.S.A. Malaysian Airport Board; Malaysia Federal Reserve Bank; U.S.A. New Zealand Customs; New Zealand JFK International Terminal; U.S.A. Pakistan Airports; Pakistan Los Angeles County Courthouse; U.S.A. Doha International Airport; Qatar Miami Airport; U.S.A. HAJ Terminal; Saudi Arabia Orlando Airport; U.S.A. Spanish Radio/Television; Spain USAir; U.S.A. Sri Lanka Government; Sri Lanka Japanese Embassies; Worldwide Dubai Airport; U.A.E.
Because the market for most security and inspection products developed in response to civilian airline hijackings, historically a large portion of the Company's security and inspection products were sold for use at airports. Recently, however, the Company's security and inspection products have been used for security purposes at locations other than airports, such as courthouses, government buildings, mail rooms, schools, prisons and at unique locations such as Buckingham Palace, England. In addition, the Company's security and inspections products are increasingly being used for non-security purposes, such as for cargo inspection to detect narcotics and contraband, prevention of pilferage at semiconductor manufacturing facilities, quality assurance for agricultural products, and the detection of gold and currency. 33 MARKETING, SALES AND SERVICE The Company markets and sells its optoelectronic devices and subsystems worldwide through both a direct sales and marketing staff of 23 employees and indirectly through a network of approximately 25 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 four independent sales representatives. The Company markets and sells its security and inspection products worldwide through a direct sales and marketing staff of approximately 21 employees located in the United States, the United Kingdom, Dubai, and Malaysia and through a network of over 70 independent sales representatives. Following this Offering, the Company intends to expand its direct sales force. The Company's optoelectronic products sales staff located in the United States and Norway is supported by an applications engineering group whose members are available to provide technical support. This support includes designing applications, providing custom tooling and process integration, defining solutions for customers and developing products that meet customer defined specifications. The security and inspection products sales staff is supported by a service organization of approximately 25 persons located primarily in the United States, the United Kingdom and Malaysia. The Company also supports these sales and customer relations efforts by providing operator training, computerized training and testing equipment, in-country service, software upgrades, service training for customer technicians and a newsletter on security issues. The Company considers its maintenance service operations to be an important element of its business. After the expiration of the standard one-year product warranty period, the Company is often engaged by its customers to provide maintenance services for its security and inspection products through annual maintenance contracts. The Company believes that its international maintenance service capabilities give it a competitive advantage in selling its security and inspection products. Furthermore, the Company believes that as its installed base of security and inspection products increases, revenues generated from such annual maintenance service contracts and from the sale of replacement parts will increase. In fiscal 1996, and for the nine-month period ended March 31, 1997, maintenance service revenues and replacement part sales collectively represented 3.3% and 3.1%, respectively, of the Company's revenues. RESEARCH AND DEVELOPMENT The Company's components and optoelectronic subsystems are designed and engineered at the Company's offices in either Hawthorne, California, or Horten, Norway. The subsystems that the Company manufactures are engineered by the Company to solve specific application needs of its OEM customers. The Company's customers typically request that the Company design custom optoelectronic solutions for their specific needs when standard components or subsystems are not available from other manufacturers of optoelectronic devices. After an end-product has been conceptualized by the OEM, the Company normally will involve its engineers to design the application, to establish the mechanical specifications for the application, to create the appropriate subsystem architecture for the application, and to design the development, production, and assembly process for the manufacture of the ultimate subsystem. However, because the Company has the engineering, tooling and manufacturing capabilities to design and manufacture entire subsystems, and not just a specific component, the Company typically also designs, manufactures and assembles the entire subsystem for the customer. Because the Company's engineers are able to provide additional value and services to its customers through the entire production process from concept to completion, the Company considers its engineering personnel to be an important extension of its core sales and marketing effort. 34 In addition to close collaboration with the Company's customers in the design and development of optoelectronics-based products, the Company maintains an active program for the development and introduction of new products and enhancements and improvements to its existing products, including the implementation of new applications of its technology. The Company seeks to further develop its research and development program and considers such program to be an important element of its business and operations. As of March 31, 1997, in addition to the engineers that the Company employed in manufacturing, process design and applications development, the Company engaged approximately 32 full-time engineers and technicians in research and development. During the fiscal 1994, 1995, 1996 and nine-month period ended March 31, 1997, the Company's research and development expenses were approximately $1.5 million, $1.6 million, $1.7 million and $1.7 million, respectively. In order to fulfill its strategy of increasing its security and inspection product lines and of enhancing the capabilities of its existing products, the Company intends to increase its research and development efforts in the future. MANUFACTURING AND MATERIALS MANAGEMENT The Company currently has manufacturing facilities in the United Kingdom, Malaysia and Norway in addition to its manufacturing facilities in Hawthorne, California, Long Beach, California, and Ocean Springs, Mississippi. The Company's principal manufacturing facility is in Hawthorne, California. However, most of the Company's high volume, labor intensive manufacturing and assembly is generally performed at its facilities in Malaysia. Since most of the Company's customers currently are located in Europe, Asia and the United States, the Company's ability to assemble its products in these markets and provide follow-on service from offices located in these regions is an important component of the Company's global strategy. The Company seeks to focus its subsystem manufacturing resources on its core competencies that enable it to provide value-added enhancements and distinctive value. The Company believes that its manufacturing organization has expertise in optoelectronic, electrical and mechanical manufacturing and assembly of products for commercial applications and for high reliability applications. High reliability devices and subsystems are those which are designed, manufactured, screened and qualified to function under exceptionally severe levels of environmental stress. See "Legal Proceedings." The manufacturing techniques include silicon wafer processing and fabrication, manufacture and assembly of photodiodes, SMT (surface mounting) and manual thru-hole assembly, thick-film ceramic processing, wire bonding, molding, assembly of components, testing, and packaging. The Company also has the ability to manufacture plastic parts and certain other parts that are either not available from third party suppliers or that can be more efficiently or cost-effectively manufactured in-house. The Company outsources certain manufacturing operations including its sheet metal fabrication. The manufacturing process for components and subsystems consists of manual tasks performed by skilled and semi-skilled workers as well as automated tasks. The number of subsystems that the Company manufacturers depends on the customers' needs and may range from a few subsystems (such as an optoelectronic sun sensor for use in a satellite) to many thousands (sensors used in laser printers and bar code readers). The principal raw materials and subcomponents used in producing the Company's optoelectronic devices and subsystems consist of silicon wafers, ceramics, electronic subcomponents, light emitting diodes, phototransistors, printed circuit boards, headers and caps, housings, cables, filters and packaging materials. For cost, quality control and efficiency reasons, the Company generally purchases raw materials and subcomponents only from single vendors with whom the Company has on-going relationships. The Company does, however, qualify second sources for all of its raw materials and subcomponents, or has identified alternate sources of supply. The Company purchases the materials pursuant to purchase orders placed from time to time in the ordinary course of business with procurement commitment terms ranging from three months to one year at fixed costs but has no guaranteed long-term supply arrangements with such suppliers. The silicon-based optoelectronic devices manufactured by the Company are critical components in most of its subsystems. Since 1987, the Company has purchased substantially all of the silicon wafers it uses to manufacture its optoelectronics devices from Wacker Siltronic Corp. Although to date the Company has not 35 experienced any significant shortages or material delays in obtaining any of its raw materials or subcomponents, there can be no assurance that the Company will not face such shortages or delays in one or more of these materials in the future. See "Risk Factors--Availability of Raw Materials and Components." Substantially all of the optoelectronic subsystems, circuit boards and x-ray generators used in the Company's inspection and detection systems are manufactured in-house. The metal shells of the x-ray inspection systems, and certain standard mechanical parts are purchased from various third-party unaffiliated providers. ENVIRONMENTAL REGULATIONS The Company is subject to various federal, state and local environmental laws, ordinances and regulations relating to the use, storage, handling, and disposal of certain hazardous substances and wastes used or generated in the manufacturing and assembly of the Company's products. Under such laws, the Company may become liable for the costs of removal or remediation of certain hazardous substances that have been or are being released on or in its facilities or that have been or are being disposed of off site as wastes. Such laws may impose liability without regard to whether the Company knew of, or caused, the release of such hazardous substances. In the past, the Company has conducted a Phase I environmental assessment report for each of the properties in the United States at which it currently manufactures products. The purpose of each such report was to identify, as of the date of that report, potential sources of contamination of the property. In certain cases, the Company has received a Phase II environmental assessment report consisting of further soil testing and other investigations deemed appropriate by an independent environmental consultant. The Company believes that it is currently in compliance with all material environmental regulations in connection with its manufacturing operations, and that it has obtained all environmental permits necessary to conduct its business. The amount of hazardous substances and wastes produced and generated by the Company may increase in the future depending on changes in the Company's operations. Any failure by the Company to comply with present or future regulations could subject the Company to the imposition of substantial fines, suspension of production, alteration of manufacturing process or cessation of operations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. For a discussion of the risks imposed upon the Company's business by environmental regulations, see "Risk Factors-- Environmental Regulation." COMPETITION The markets in which the Company operates are highly competitive and are characterized by evolving customers needs and rapid technological change. The Company competes with a number of other manufacturers, many of which have significantly greater financial, technical and marketing resources than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements, may have stronger customer relationships, may have greater name recognition, and may devote greater resources to the development, promotion and sale of their products than the Company. There can be no assurance that the Company will be able to compete successfully against any current or future competitors in either the optoelectronic devices and subsystem markets or the security and inspection markets or that future competitive pressures will not materially and adversely affect its business, financial conditions and results of operations. In the optoelectronic device and subsystem market, competition is based primarily on such factors as expertise in the design and development of optoelectronic devices, product quality, timeliness of delivery, price, customer technical support, and on the ability to provide fully integrated services from application development and design through volume subsystem production. The Company believes that its major competitors in the optoelectronic device and subsystem market are EG&G Electro-Optics, a division of EG&G, Inc., Optek Technology Inc., Hamamatsu Corporation, and Honeywell Optoelectronics, a division of Honeywell, Inc. Because the Company specializes in custom subsystems requiring a high degree of 36 engineering expertise, the Company believes that it generally does not compete to any significant degree with any other large United States, European or Far Eastern manufacturers of standard optoelectronic components. In the security and inspection market, competition is based primarily on such factors as product performance, functionality and quality, the over-all cost effectiveness of the system, prior customer relationships, technological capabilities of the products, price, local market presence, and breadth of sales and service organization. The Company believes that its principal competitors in the market for security and inspection products are EG&G Astrophysics, a division of EG&G, Inc., Heimann Systems GmbH, InVision Technologies, Inc., Vivid Technologies, American Science and Engineering, Inc., Barringer Technologies Inc., Control Screening L.L.C., and Thermedics Detection, Inc. Competition could result in price reductions, reduced margins, and loss of market share by the Company. In the airline and airport security and inspection market, particularly in the upgrade and replacement market, the Company also competes for potential customers based on existing relationships between its competitors and the customers. Certain of the Company's competitors have been manufacturing inspection systems since the 1980's and have established strong relationships with airlines and airport authorities. The Company believes that the image quality and resolution of certain of its security and inspection products is superior to the image quality offered by most of its competitors' x-ray based inspection products. Although the Company also has established relationships with a number of airport and airline customers, no assurance can be given that the Company will be able to successfully compete in the future with existing competitors or with new entrants. BACKLOG The Company measures its backlog as orders for which purchase orders or contracts have been signed, but which have not yet been shipped and for which revenues have not yet been recognized. The Company typically ships its optoelectronics devices and subsystems as well as its security and inspection products within one to three months after receiving an order. However, such shipments may be delayed for a variety of reasons including any special design or engineering requirements of the customer. In addition, large orders (more than 10 machines) of security and inspection products typically require more lead time. Large cargo scanning machines require six to twelve months lead time. At March 31, 1997, the Company's backlog products totalled approximately $57.7 million, compared to approximately $27.5 million at March 31, 1996. Substantially all of the Company's backlog as of March 31, 1997 is expected to be shipped during the fiscal year ending June 30, 1998. Any failure of the Company to meet an agreed upon schedule could lead to the cancellation of the related order. Variations in the size of the order, the product mix, and delivery requirements of the customer order may result in substantial fluctuations in backlog from period to period. Backlog as of any particular date should not be relied upon as indicative of the Company's revenues for any future period and cannot be considered a meaningful indicator of the Company's performance on an annual or quarterly basis. EMPLOYEES As of March 31, 1997, the Company employed approximately 730 people, of whom 570 were employed in manufacturing, 32 in research and development, 62 in finance and administration, 44 in sales and marketing, and 25 in its service organization. Of the total employees, approximately 470 were employed in the United States, 100 were employed in Europe, 160 were employed in Asia, and one employee was employed in the Middle East. Nine employees at AME are members of a union and have collective bargaining rights. Other than the employees of AME, none of the Company's other employees are unionized. There has never been a work stoppage or strike at the Company, and management believes that its relations with its employees are good. 37 FACILITIES The Company currently leases all of its facilities with remaining lease terms ranging from one to 14 years as reflected in the following table:
APPROXIMATE SQUARE LEASE LOCATION DESCRIPTION OF FACILITY FOOTAGE EXPIRATION - -------- ----------------------- ----------- ---------- Hawthorne, California Executive offices, manufacturing, 61,700 2005 engineering, sales and marketing Long Beach, California Manufacturing, engineering, sales 26,200 1998 and marketing and service Ocean Springs, Mississippi Manufacturing, engineering and 41,800 2001 sales and marketing Johor Bahru, Malaysia Manufacturing and sales 13,500 1997 Johor Bahru, Malaysia Manufacturing 10,500 1998 Horten, Norway Manufacturing, engineering, 18,200 1999 marketing and sales Singapore, Republic of Singapore Administrative and materials 3,000 2000 procurement Crawley, United Kingdom Manufacturing, engineering, sales 11,900 2011 and marketing Hayes, United Kingdom Service 3,900 2003
The Company believes its facilities are in good condition and are adequate to support its operations for the foreseeable future. The Company has an option to purchase the Hawthorne, California, facility for a base price of approximately $3.0 million. The option is exercisable by the Company upon prior written notice of six months to the landlord at any time during the term of the lease. After October 1999, the option purchase price will be increased each year by the percentage increase in the Consumer Price Index as calculated by the United States Department of Labor for urban consumers in the Los Angeles area. In addition to the option to purchase, the Company also has a right of first refusal to purchase the Hawthorne facility in the event that the landlord entertains a third party offer to buy the facility. LEGAL PROCEEDINGS OSI Systems, Inc., Rapiscan U.S.A. and UDT Sensors are currently involved in litigation with Lunar Corporation ("Lunar") and The University of Alabama Research Foundation ("UAB") pertaining to United States Patent No. 4,626,688 ("'688 patent") and related nonpatent claims. UAB owns the '688 patent and granted Lunar an exclusive license thereunder. On January 8, 1997, Lunar asserted that Rapiscan U.S.A.'s baggage scanners which used dual energy detectors infringe the '688 patent. On January 21, 1997, Rapiscan U.S.A. filed suit against Lunar in the United States District Court for the Central District of California. Rapiscan U.S.A. seeks a judicial declaration that the '688 patent is not infringed and is invalid, that Lunar is estopped from asserting the '688 patent against Rapiscan U.S.A., that Lunar's claim is barred or limited by laches, and that Rapiscan U.S.A. has acquired an implied license under the '688 patent. Rapiscan U.S.A. also asserts breach of an oral agreement, promissory estoppel and quantum meruit regarding Lunar's breach of an agreement whereby Lunar would compensate Rapiscan U.S.A. for assisting Lunar in its enforcement of the '688 patent. Rapiscan U.S.A. also asserts fraud 38 against Lunar for Lunar asserting that Rapiscan U.S.A. infringed its patent after Lunar accepted litigation assistance from Rapiscan U.S.A. and represented to Rapiscan U.S.A. that Rapiscan U.S.A. and UDT Sensors did not infringe its patent. Rapiscan U.S.A. seeks compensatory damages exceeding $100,000 and punitive damages. On January 23, 1997, Lunar and UAB filed suit against OSI Systems, Inc., Rapiscan U.S.A. and UDT Sensors in the United States District Court for the Western District of Wisconsin. Lunar and UAB asserted patent infringement, contributory infringement and inducement thereof. Lunar and UAB sought damages in an unspecified amount and an injunction preventing OSI Systems, Inc., Rapiscan U.S.A. and UDT Sensors from further making, using, selling and offering for sale products including the dual energy detector covered by the '688 patent. On April 21, 1997, the Western District of Wisconsin transferred that action to the Central District of California. Lunar and UAB have now counterclaimed in the Central District of California against OSI Systems, Inc., Rapiscan U.S.A. and UDT Sensors for the same claims previously pending in Wisconsin. The Company believes it has meritorious defenses and claims in the above-described action and intends to vigorously pursue its legal remedies in this lawsuit. Rapiscan U.S.A. is also involved in a dispute with Quantum Magnetics, Inc. ("Quantum"), EG&G Astrophysics, and EG&G Inc., which is EG&G Astrophysics' parent company. The dispute relates to Rapiscan U.S.A.'s July 5, 1996 agreement with Quantum to collaborate in the production and marketing of airport security and inspection scanners (the "July 5 Agreement"). On July 25, 1996, Quantum informed Rapiscan U.S.A. that Quantum was terminating the July 5 Agreement, although Rapiscan U.S.A. contends that this action constituted a breach of the July 5 Agreement. On August 5, 1996, EG&G Astrophysics filed suit against Rapiscan U.S.A. in the Superior Court of the State of California, County of Los Angeles. EG&G Astrophysics claims that by entering into the July 5 Agreement, Rapiscan U.S.A. interfered with EG&G Astrophysics' own pre-existing contractual right to market scanners with Quantum. EG&G Astrophysics also asserts that Rapiscan U.S.A. falsely represented that Rapiscan U.S.A.'s security and inspection scanners were just as effective as EG&G Astrophysics' scanners, and that replacing EG&G Astrophysics' scanners with Rapiscan U.S.A.'s security and inspection scanners would be cost efficient. EG&G Astrophysics' First Amended Complaint contains six causes of action: intentional inducement of breach of contract, intentional interference with contract, intentional interference with economic relations, negligent interference with economic relations, slander per se, and trade libel. EG&G Astrophysics seeks compensatory damages of an indeterminate amount, as well as punitive damages and attorneys' fees. On December 14, 1996, the Court dismissed EG&G Astrophysics' slander per se and trade libel claims, without leave to amend. The Company believes that the remaining claims of EG&G Astrophysics are without merit and has received an opinion from its litigation counsel that the Company will be able to defend the lawsuit without any liability to Rapiscan U.S.A. Rapiscan U.S.A. has filed a cross-complaint against Quantum, EG&G Astrophysics, and EG&G, Inc. Rapiscan U.S.A.'s First Amended Cross-Complaint asserts four causes of action against Quantum: breach of written contract, intentional misrepresentation, negligent misrepresentation and indemnity. Rapiscan U.S.A. alleges that Quantum made a series of misrepresentations in connection with the July 5 Agreement and that it failed to honor that agreement. With respect to EG&G Astrophysics and EG&G, Inc., Rapiscan U.S.A. seeks recovery for intentional interference with contractual relations, intentional interference with prospective economic advantage, slander per se, trade libel, and breach of written agreement. Rapiscan U.S.A. alleges that EG&G Astrophysics and EG&G, Inc. interfered with Rapiscan U.S.A.'s relationship with Quantum and made false representations concerning Rapiscan U.S.A.'s solvency and its ability to fulfill its obligations. In addition, Rapiscan U.S.A. asserts that EG&G, Inc. breached an agreement not to disclose information pertaining to the prior resolution of a patent dispute between Rapiscan U.S.A. and EG&G, Inc. 39 In October 1994, UDT Sensors, one of the Company's subsidiaries, entered into a Consent Judgment and a Criminal Plea and Sentencing Agreement (collectively, the "Consent Agreements") with the United States of America. The charges contained in the Consent Agreements relate to high-reliability optoelectronic subsystems that UDT Sensors manufactured for use in military aircraft, attack helicopters and submarines. In the Consent Agreements, UDT Sensors agreed that it had not tested 100% of these products as required by the applicable military specifications. Under the terms of the Consent Agreements, UDT Sensors agreed to pay a total of $1.5 million, plus interest, in five annual installments ending on March 31, 1999. UDT Sensors was placed on probation for the five-year period ending March 31, 1999 with respect to sales of optoelectronic subsystems for use by the U.S. Department of Defense. Probation does not, however, prohibit UDT Sensors from selling optoelectronic products to the United States, and UDT Sensors has, since the date of the Consent Agreements, continued to manufacture and sell the same optoelectronic products for use in military aircraft, attack helicopters and submarines. In addition, in order to ensure that UDT Sensors complies with all Federal procurement laws, UDT Sensors agreed to implement programs and practices to establish and monitor complying contracting procedures, and agreed to file periodic reports evidencing such practices and programs. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following sets forth certain information regarding the Company's executive officers and directors:
NAME AGE POSITION ---- --- -------- Deepak Chopra......... 46 Chairman of the Board, Chief Executive Officer and President Ajay Mehra............ 34 Vice President, Chief Financial Officer, Secretary and Director Andreas F. Kotowski... 42 President of U.S. Operations, Rapiscan U.S.A. Manoocher Mansouri Aliabadi............. 41 Vice President - Corporate Marketing, UDT Sensors Anthony S. Crane...... 43 Managing Director, Rapiscan UK Thomas K. Hickman..... 55 Managing Director, OSI Singapore and OSI Malaysia Steven C. Good(1)..... 54 Director Meyer Luskin(1)....... 71 Director Madan G. Syal(1)...... 70 Director
- --------------------- (1) Member of Audit Committee and Compensation Committee Deepak Chopra is the founder of the Company and has served as President, Chief Executive Officer and Director since the Company's inception in May 1987. He has served as the Company's Chairman of the Board since February 1992. Mr. Chopra also serves as the President and Chief Executive Officer of the Company's major subsidiaries, including UDT Sensors, Rapiscan U.S.A., Rapiscan UK, OSI Singapore and Ferson Optics, Inc. From 1976 to 1979 and from 1980 to 1987, Mr. Chopra held various positions with ILC Technology, Inc. ("ILC"), a publicly-held manufacturer of lighting products, including serving as Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer of its United Detector Technology Division. In 1990, the Company acquired certain assets of ILC's United Detector Technology Division. Mr. Chopra has held various positions with Intel Corporation, TRW Semiconductors and RCA Semiconductors. Mr. Chopra holds a B.S. in Electronics and a M.S. in Semiconductor Electronics. Messrs. Ajay Mehra and Madan G. Syal are the first cousin and father-in-law, respectively, of Mr. Chopra. Ajay Mehra joined the Company as Controller in 1989, has served as Vice President and Chief Financial Officer since November 1992, and became Secretary and a Director in March 1996. Mr. Mehra also serves as Vice President and Chief Financial Officer of the Company's major subsidiaries including UDT Sensors, Rapiscan U.S.A., Rapiscan UK, OSI Singapore, and Ferson Optics, Inc. Prior to joining the Company, Mr. Mehra held various financial positions with Thermador/Waste King, a household appliance company, Presto Food Products, Inc. and United Detector Technology. Mr. Mehra holds a B.A. from the School of Business of the University of Massachusetts, Amherst, and a M.B.A from Pepperdine University. Mr. Deepak Chopra is the first cousin of Mr. Mehra. Andreas F. Kotowski has served as the President of U.S. Operations, General Manager and a director of the Company's subsidiary, Rapiscan U.S.A., since January 1993. As General Manager of Rapiscan U.S.A., Mr. Kotowski is also responsible for the operations of Rapiscan UK, the subsidiary of Rapiscan U.S.A. From September 1989 to January 1993, Mr. Kotowski was self-employed as an Engineering Consultant providing technical and management consulting services to businesses in the explosive detection and medical imaging industries. In 1992, Mr. Kotowski was a director of Dextra Medical, Inc., a company that filed for bankruptcy in July of that year. From 1979 to 1989, Mr. Kotowski held various positions with EG&G Astrophysics, including Vice President of Engineering and Chief Engineer in which he was responsible for product planning, design, development and management. Prior to 1979, he worked as an Engineer at National Semiconductor Corporation and the Jet Propulsion Laboratory. Mr. Kotowski holds a B.S. in Electrical Engineering and a B.S. in Physics from California State Polytechnic University, Pomona, and a M.S. in Electrical Engineering from Stanford University. 41 Manoocher Mansouri Aliabadi has served as Vice President of Corporate Marketing for the Company's UDT Sensors subsidiary since March 1994. From March 1992 to November 1993, Mr. Mansouri served as Director of Sales and Marketing for UDT Sensors, and from 1990 to 1992, as a Division Director of the Aerospace and Defense Division of UDT Sensors. Mr. Mansouri joined United Detector Technology, the predecessor of UDT Sensors in 1982 as an Engineer and holds a B.S. in Electrical Engineering from the University of California, Los Angeles. Anthony S. Crane has served as Managing Director of the Company's subsidiary, Rapiscan UK, since March 1996. From March 1995 to March 1996, he served as Sales and Marketing Director for Rapiscan UK, and from February 1993 to March 1995, he served as Sales Director, Middle East, for Rapiscan UK. From November 1980 to January 1993, Mr. Crane held various positions at Rapiscan UK before it was acquired by the Company including Exports Business Manager, Sales Manager and Service Engineer. From May 1974 to November 1980, Mr. Crane served as Production Coordinator and Electrical and Electronic Inspector for Redifon Flight Simulation where he was responsible for production and customer relations. Thomas K. Hickman has served as Managing Director of the Company's subsidiaries, OSI Singapore and OSI Malaysia, since July 1995 and as the Managing Director of Rapiscan Consortium (M) Sdn. Bhd. since its formation in October 1996. From July 1993 to July 1995, Mr. Hickman served as Vice President of Operations and Director of Operations for Rapiscan U.S.A. and Rapiscan UK, respectively. From November 1992 to July 1993, Mr. Hickman served as Director of Materials for UDT Sensors and, from July through November 1992, provided service as an independent consultant to UDT Sensors. From 1985 through 1992, Mr. Hickman held various positions at Mouse Systems Corporation, a manufacturer of computer optical mouse systems, including that of Director of OEM Operations, Purchasing Manager and Representative Director of a joint venture. Prior to 1985, Mr. Hickman was the Director of Materials for Measurex Corporation, the Representative Director for Hitachi-Singer Corp. and a Product Line Manager for Singer Business Machines. Mr. Hickman holds a B.A. from Stetson University and a M.B.A. from the University of San Francisco. Steven C. Good has served as Director of the Company since September 1987. He is a Senior Partner in the accounting firm of Good Swartz & Berns, which he founded in 1974, and has been active in consulting and advisory services for businesses in various sectors including the manufacturing, garment, medical services and real estate development industries. Mr. Good is the founder and has served as Chairman of California United Bancorp, and was elected in 1997 as a Director of Arden Realty Group, Inc., a publicly-held Real Estate Investment Trust listed on the New York Stock Exchange. Mr. Good holds a B.S. in Business Administration from the University of California, Los Angeles. Meyer Luskin has served as Director of the Company since February 1990. Since 1961 Mr. Luskin has served as the President, Chief Executive Officer and Chairman of the Board of Scope Industries, a publicly-held company listed on the American Stock Exchange and engaged in the animal food and waste product business. Mr. Luskin has also served as Director of Scope Industries since 1958 and currently serves as Director of Stamet, Inc., an industrial solid pump manufacturer. Mr. Luskin holds a B.A. from the University of California, Los Angeles, and a M.B.A. from Stanford University. Madan G. Syal has served as Director of the Company since the Company's inception in May 1987. From May 1987 until February 1992, he served as Secretary of the Company. Mr. Syal is the sole proprietor of Pro Printers, a printing service business he founded in October 1984. Prior to 1984, Mr. Syal held various positions with Shell Oil Company, Exxon Corporation, Burmah Oil Company, C.F. Braun and Bechtel Group, Incorporated. Mr. Syal holds a B.S. from the American College in Lahore (now Pakistan) and a B.S.E. in Electrical and Mechanical Engineering from London University. Mr. Deepak Chopra is the son-in-law of Mr. Syal. 42 There are currently five members of the Board of Directors. After the completion of the Offering, the management of the Company intends to increase the number of independent directors of the Company by increasing the number of directors constituting the Board of Directors. No nominees for the additional Board seats have yet been identified. The Directors serve until the next annual meeting of shareholders or until successors are elected and qualified. The Company's executive officers are appointed by, and serve at the discretion of, the Board of Directors of the Company. The Board of Directors has established an Audit Committee and a Compensation Committee. The functions of the Audit Committee include recommending to the Board the selection and retention of independent auditors, reviewing the scope of the annual audit undertaken by the Company's independent auditors and the progress and results of their work, and reviewing the financial statements of the Company and its internal accounting and auditing procedures. The functions of the Compensation Committee include establishing the compensation of the Chief Executive Officer, reviewing and approving executive compensation policies and practices, reviewing salaries and bonuses for certain executive officers of the Company, administering the Company's employee stock option plans, and considering such other matters as may, from time to time, be delegated to the Compensation Committee by the Board of Directors. Each non-employee Director currently receives a cash fee of $1,250 per Board meeting attended and an additional $1,250 per Board committee meeting attended if such committee meeting is held on a day different from that of the Board meeting. During the fiscal year ended June 30, 1996, each non-employee Director received, as additional director compensation, options to purchase 11,250 shares of Common Stock at an exercise price of $2.00 per share. The Directors are reimbursed for expenses incurred in connection with the performance of their services as Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended June 30, 1996, all of the outside Directors, Steven C. Good, Meyer Luskin and Madan G. Syal, served on the Board's compensation committee. Certain transactions between the Company and the members of the compensation committee include the following: Mr. Good is a senior partner of Good Swartz & Berns, an accounting firm that provided services to the Company. The Good Swartz & Berns Pension Fund, in which Mr. Good participates, exercised certain warrants to purchase stock of the Company by applying the outstanding principal amount under certain promissory notes issued to the pension fund by the Company. Mr. Luskin is the President, Chief Executive Officer and Chairman of Scope Industries which provided consultation services to the Company for a fee in the amount of $100,000. Scope Industries also exercised certain warrants to purchase stock of the Company by applying the outstanding principal amount under a promissory note issued by the Company to Scope Industries. Mr. Syal owns Pro Printers, a printing service company that provides printing services to the Company. For additional information regarding these direct or indirect transactions between the outside Directors, see "Certain Transactions." Mr. Syal is the father-in-law of Deepak Chopra, the President, Chief Executive Officer and Chairman of the Company. The Company believes that each of the foregoing transactions was on terms at least as favorable to the Company as those that could have been obtained from nonaffiliated third parties. The Company currently intends that any future transactions with affiliates of the Company will be on terms at least as favorable to the Company as those that can be obtained from nonaffiliated third parties. 43 EXECUTIVE COMPENSATION The following table sets forth certain compensation earned during the fiscal year ended June 30, 1996, by the Company's Chief Executive Officer and the four other most highly compensated executive officers whose total salary and bonus during such year exceeded $100,000 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION COMPENSATION ---------------- ------------ SECURITIES NAME AND PRINCIPAL UNDERLYING POSITION SALARY BONUS OPTIONS (#) - ------------------ -------- ------- ------------ Deepak Chopra(1)........ $317,107 $25,000 0 Chief Executive Officer Ajay Mehra ............. 150,342 8,000 0 Chief Financial Officer Andreas F. Kotowski .... 113,357 0 0 President of U.S. Operation, Rapiscan U.S.A. Manoocher Mansouri Aliabadi............... 95,075 5,000 0 Vice President-- Corporate Marketing, UDT Sensors Thomas K. Hickman ...... 125,466 0 15,000 Managing Director, OSI Malaysia and OSI Singapore
- --------------------- (1) The Company paid aggregate insurance premiums of approximately $23,000 for two universal life insurance policies of Mr. Chopra. Mr. Chopra or his estate is obligated to repay to the Company all amounts paid by it on behalf of Mr. Chopra upon the death or termination of employment of Mr. Chopra. The value of such benefit is not susceptible to precise determination. The Company has entered into an employment agreement with Deepak Chopra, with a term of five years commencing on April 1, 1997, pursuant to which he serves as President, Chief Executive Officer and Chairman of the Board of the Company. The employment agreement provides for a base salary of $450,000 per year, with annual raises to be determined by the Compensation Committee. Pursuant to the employment agreement, Mr. Chopra is also entitled to receive at least one-third of the amount of the aggregate bonus pool established by the Company for its officers and employees. Mr. Chopra is eligible to participate in certain incentive compensation and other employee benefit plans established by the Company from time to time. The Company has also entered into employment agreements with Ajay Mehra, Andreas F. Kotowski, Manoocher Mansouri Aliabadi and Thomas K. Hickman, each of which became effective on April 1, 1997. The terms of the employment agreements with Messrs. Mehra, Kotowski, Mansouri and Hickman are for three, two, two and one years, respectively. The employment agreements provide for base salaries of $200,000, $140,000, $120,000 and $125,000 per year, for Messrs. Mehra, Kotowski, Mansouri and Hickman, respectively, with annual raises to be determined by the Company's Chief Executive Officer. The Company has also entered into a one-year employment agreement with Anthony S. Crane, the Managing Director of Rapiscan UK. Pursuant to these employment agreements, Messrs. Mehra, Kotowski, Mansouri, Hickman and Crane are also eligible for certain bonus payments and to participate in incentive compensation and other employee benefit plans established by the Company from time to time. Each of the employment agreements contains confidentiality provisions and provides that the employee shall assign and the Company shall be entitled to any inventions or other proprietary rights developed by the employee under certain circumstances during his employment. 44 Pursuant to an incentive compensation agreement entered into in December 1996 by the Company and Andreas F. Kotowski, Mr. Kotowski is entitled to receive as additional incentive compensation, 10.0% of the consolidated pre- tax earnings of Rapiscan U.S.A. and Rapiscan UK in excess of certain pre- determined amounts. Such incentive compensation may not exceed $150,000 for any fiscal year and is based on earnings of Rapiscan U.S.A. and Rapiscan UK for the 1997, 1998 and 1999 fiscal years. The management of the Company allocates bonuses to officers and employees of the Company under a bonus plan that has been in effect since the Company's inception. The amount of bonus for each officer or employee is determined by comparing the profits of the subsidiary or division in which such person performed services against the budget profit goals for such subsidiary or division as determined before the start of the fiscal year. Bonuses were distributed to over 100 officers and employees in August 1996 based on their performances during the fiscal year ended June 30, 1996. Option Grants. The following table sets forth certain information concerning grants of options to the Named Executive Officers during the year ended June 30, 1996: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(1) OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------- NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) ---- ----------- -------------- --------- ---------- ----------- ----------- Thomas K. Hickman(2).... 15,000 87.0% 2.50 6/3/01 $ 10,361 $ 22,894
- --------------------- (1) Sets forth potential option gains based on assumed annualized rates of stock price appreciation from the exercise price at the date of grant of 5.0% and 10.0% (compounded annually) over the full term of the grant with appreciation determined as of the expiration date. The 5.0% and 10.0% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission, and do not represent the Company's estimate or projection of future Common Stock prices. (2) This grant was made in June 1996. One half of the total number of options granted was exercisable on the first anniversary of the grant date; one quarter is exercisable on each of the second and third anniversary dates. Option Exercises and Fiscal Year-End Values. The following table sets forth certain information regarding option exercises by the Named Executive Officers during the fiscal year 1996 and held by them on June 30, 1996: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT FISCAL YEAR- THE-MONEY OPTIONS AT END (#) FISCAL YEAR END ($)(1) ------------------------- ------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------------ ----------- ------------- ----------- ------------- Deepak Chopra........... 0 -- 0 0 0 0 Ajay Mehra.............. 2,250 $27,375 46,500 7,500 532,850 83,750 Andreas F. Kotowski..... 0 -- 0 0 0 0 Manoocher Mansouri Aliabadi............... 3,000 $36,500 12,750 1,500 150,125 17,250 Thomas K. Hickman....... 0 -- 10,500 19,500 119,175 216,125
- --------------------- (1) Amounts are shown as the positive spread between the exercise price and fair market value (based on an estimated initial offering price of $13.50 per share). 45 STOCK OPTION PLANS 1987 Incentive Stock Option Plan. In May 1987, the Board of Directors adopted the Incentive Stock Option Plan (the "1987 Plan"). The 1987 Plan provides for the grant of options to directors, officers and other key employees of the Company to purchase up to an aggregate of 1,050,000 shares of Common Stock. The purpose of the 1987 Plan is to provide participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The 1987 Plan is administered by the Board of Directors which has discretion to select optionees and to establish the terms and conditions of each option, subject to the provisions of the 1987 Plan. Pursuant to the 1987 Plan, the Company has from time to time granted its directors, officers and employees options to purchase shares of the Company's Common Stock at exercise prices determined by the Board of Directors. The stock options generally expire either on the fifth or tenth anniversary of the date of grant of the option. All stock options are non- transferrable by the grantee and may be exercised only by the optionee during his service to the Company as a director, officer or employee. The aggregate number of options issuable under the 1987 Plan, number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends. As of May 31, 1997, 384,375 shares had been issued upon the exercise of stock options under the 1987 Plan, stock options to purchase an aggregate of 430,500 shares were outstanding under the 1987 Plan at exercise prices ranging from $0.17 to $3.33 per share, and 235,125 shares remained available for grant. As of such date, stock options to purchase 381,188 shares of Common Stock were exercisable. No stock options may be granted under the 1987 Plan after December 31, 1998. 1997 Stock Option Plan. In May 1997, the Board of Directors adopted the Company's 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan, which was approved by the Company's shareholders in May 1997, provides for the grant of options to directors, officers, other employees and consultants of the Company to purchase up to an aggregate of 850,000 shares of Common Stock. No eligible person may be granted options during any 12-month period covering more than 425,000 shares of Common Stock. The purpose of the 1997 Plan is to provide participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The 1997 Plan is to be administered by the Board of Directors, or a committee of the Board, which has discretion to select optionees and to establish the terms and conditions of each option, subject to the provisions of the 1997 Plan. Options granted under the 1997 Plan may be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified options. The exercise price of incentive stock options may not be less than 100% of the fair market value of Common Stock as of the date of grant (110% of the fair market value if the grant is to an employee who owns more than 10.0% of the total combined voting power of all classes of capital stock of the Company). The Code currently limits to $100,000 the aggregate value of Common Stock that may be acquired in any one year pursuant to incentive stock options under the 1997 Plan or any other option plan adopted by the Company. Nonqualified options may be granted under the 1997 Plan at an exercise price of not less than 85.0% of the fair market value of the Common Stock on the date of grant. Nonqualified options may be granted without regard to any restriction on the amount of Common Stock that may be acquired pursuant to such options in any one year. Options may not be exercised more than ten years after the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10.0% of the total combined voting power of all classes of capital stock of the Company). Options granted under the 1997 Plan generally are nontransferable, but transfers may be permitted under certain circumstances in the discretion of the administrator. Shares subject to options that expire unexercised under the 1997 Plan will once again become available for future grant under the 1997 Plan. The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock splits or stock dividends. The 1997 Plan is effective for ten years, unless sooner terminated or suspended. In May 1997, the Board of Directors of the Company authorized grants of options to purchase 434,486 shares of Common Stock available for issuance under the 1997 Plan to certain directors, officers and 46 employees of the Company. Of these options, 125,000 are exercisable at a price of $13.50 per share and 309,486 are exercisable at $11.50 per share. The options generally will be subject to vesting and will become exercisable over a period of four years from the date of grant, subject to the optionee's continuing employment with the Company. In general, upon termination of employment of an optionee, all options granted to such person which were not exercisable on the date of such termination will immediately terminate, and any options that are exercisable will terminate not more than three months (six months in the case of termination by reason of death or disability) following termination of employment. To the extent nonqualified options are granted under the 1987 Plan and the 1997 Plan after the Offering, the Company intends to issue such options with an exercise price of not less than the market price of the Common Stock on the date of grant. EMPLOYEE BENEFIT PLAN, PENSION PLANS In 1991, the Company established a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of its employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the annual limit prescribed by statute ($9,500 in 1997) and contribute the amount of such reduction to the 401(k) Plan. The 401(k) Plan allows for matching contributions to the 401(k) Plan by the Company, such matching and the amount of such matching to be determined at the sole discretion of the Board of Directors. To date, no such matching contributions have been made with respect to the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in numerous investment options. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees to the 401(k) Plan, and income earned on plan contributions, are not taxable until withdrawn, and so that the contributions by employees will be deductible by the Company when made. Rapiscan UK and AME each have a pension plan in effect for certain of their employees. As of the date hereof, approximately 50 employees are covered by these plans. LIMITATION ON DIRECTORS' LIABILITY The Company's Amended and Restated Articles of Incorporation ("Amended Articles") provide that, pursuant to the California Corporations Code, the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by, or in the right of, the Company for breach of a director's duties to the Company or its shareholders. This provision in the Amended Articles does not eliminate the directors' fiduciary duty and does not apply for certain liabilities: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interest of the Company or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction from which a director derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders; (vi) with respect to certain transactions or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute for approval of certain improper distributions to shareholders or certain loans or guarantees. This provision also does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The Company's Amended and Restated Bylaws require the Company to indemnify its officers and directors under certain circumstances Among other things, the Bylaws require the Company to indemnify directors and officers against 47 certain liabilities that may arise by reason of their status or service as directors and officers and allows the Company to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that it is the position of the Commission that insofar as the foregoing provision may be invoked to disclaim liability for damages arising under the Securities Act, the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. Such limitation of liability also does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company intends to enter into indemnification agreements ("Indemnification Agreement(s)") with each of its directors and executive officers prior to the consummation of the Offering. Each such Indemnification Agreement will provide that the Company will indemnify the indemnitee against expenses, including reasonable attorneys' fees, judgements, penalties, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any civil or criminal action or administrative proceeding arising out of the performance of his duties as a director or officer, other than an action instituted by the director or officer. Such indemnification is available if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action, had no reasonable cause to believe his conduct was unlawful. The Indemnification Agreements will also require that the Company indemnify the director or executive officer in all cases to the fullest extent permitted by applicable law. Each Indemnification Agreement will permit the director or officer that is party thereto to bring suit to seek recovery of amounts due under the Indemnification Agreement and to recover the expenses of such a suit if he is successful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. The Company believes that its Amended Articles of Incorporation and Bylaw provisions are necessary to attract and retain qualified persons as directors and officers. 48 CERTAIN TRANSACTIONS In 1993, the Company formed Rapiscan U.S.A. for the purpose of acquiring most of the capital stock of Rapiscan UK. As of October 1996, the Company owned 85.5% of the outstanding capital stock of Rapiscan U.S.A., and 14.5% (the "Option Shares") was owned by executive officers or employees of the Company, including Ajay Mehra, Andreas F. Kotowski, Anthony S. Crane and Thomas K. Hickman. See "Management--Executive Officers and Directors." In connection with the formation of Rapiscan U.S.A., the Company was granted an option to purchase all of the Option Shares. In November 1996, the Company exercised its option to acquire the Option Shares. The aggregate consideration paid for the Option Shares consisted of the following: (i) the issuance of a total of 159,201 shares of Common Stock valued at $6.67 per share; (ii) the issuance of options to purchase a total of 45,486 shares of Common Stock at a purchase price of $11.50 per share; and (iii) an agreement by the Company to issue to the holders of the Option Shares up to 45,486 additional shares of Common Stock based on the net income before taxes of Rapiscan U.S.A. and Rapiscan UK combined for the fiscal year ending June 30, 1997. The number of shares to be issued after June 30, 1997 cannot yet be accurately established. Until September 1996, the Company owned approximately 95.9% of the outstanding capital stock of Ferson Optics, Inc., and certain employees and officers of the Company owned the remaining shares. In September 1996, the Company purchased all of the remaining shares of Ferson from the minority shareholders in exchange for a total of 19,755 shares of Common Stock. The Common Stock was valued at $6.67 per share. Ajay Mehra and Thomas K. Hickman, the Managing Director of OSI Singapore and OSI Malaysia, were shareholders of Ferson Optics, Inc. and received 12,500 and 750 shares of Common Stock, respectively, in connection with the foregoing exchange. In June 1989, April 1990 and February 1993 the Company, as part of its plan of financing, issued subordinated promissory notes in the aggregate principal amounts of approximately $385,000, $3,520,000 and $575,000, respectively, with related warrants or conversion rights to purchase capital stock of the Company. The purchasers of the subordinated notes included certain of the Company's directors, executive officers, principal shareholders and members of their families (collectively, the "Related Parties"). The June 1989 promissory notes bore interest at a fixed rate of 11.00% per annum while the April 1990 and February 1993 promissory notes bore interest at a variable rate based on certain banks' prime rate plus 1.50% per annum. The promissory notes, warrants and conversion rights provided that the note holders were entitled to exercise the warrants or convert the notes into capital stock of the Company by cancelling the appropriate amounts of the outstanding principal amount and accrued interest of such promissory notes. The exercise price of the warrants issued in June 1989 and April 1990 was $1.33 per share, whereas the exercise price of the warrants and convertible notes issued in February 1993 was $1.87 per share. During fiscal 1995, fiscal 1996 and the nine-month period ended March 31, 1997, all amounts outstanding under the promissory notes were either paid in full by the Company to the note holders or applied towards the exercise of the related warrants or conversion rights at the election of the note holders. The Company paid in cash the outstanding principal amount of $530,000 and all interest due thereon to one principal shareholder, Sally F. Chamberlain, in satisfaction of the promissory notes held by her personally and as trustee of the Edward P. Fleischer and Sally F. Fleischer Family Trust. The other Related Parties elected to exercise their warrants and conversion rights by purchasing the Company's capital stock with the outstanding principal amounts of their promissory notes. As a result, certain Related Parties who were collectively owed $2,710,000 under the promissory notes, were issued an aggregate of 2,030,358 shares of Common Stock in lieu of the repayment of the principal amount of their promissory notes. Other Related Parties included Scope Industries, Ajay Mehra, members of Mr. Mehra's family, members of Mr. Chopra's family, and the Good Swartz & Berns Pension Fund. Scope Industries is a principal shareholder of the Company, and Meyer Luskin is a director of the Company and is the President, director and a major shareholder of Scope Industries. Steve C. Good is a director of the Company and a participant in the Good Swartz & Berns Pension Fund. 49 The Company, Mr. Chopra and Mr. Mehra, each currently owns a 36.0%, 10.5% and 4.5% interest, respectively, in ECIL Rapiscan. Mr. Chopra is the Chairman, President and Chief Executive Officer of the Company. The remaining 49.0% interest in ECIL Rapiscan is owned by ECIL, an unaffiliated Indian company. The Company sells the security and inspection kits to ECIL at a price no less favorable to the Company than the price the Company charges unaffiliated third parties for such products. To date the Company's portion of the earnings of ECIL Rapiscan have been insignificant. Pursuant to a Consulting Agreement entered into in July 1996, the Company hired Scope Industries to provide planning and financial consulting services to the Company including advice regarding the valuation of the Company and certain of its subsidiaries. Upon the completion of the consulting services in December 1996, the Company paid Scope Industries a fee in the amount of $100,000 as full payment for such services. From time to time the Company contracts for automobile rental and messenger services from a business that is owned by Deepak Chopra and his wife. The Company paid the business approximately $83,000 for such services during fiscal 1996 and approximately $87,000 for such services during the nine-month period ended March 31, 1997. The Company also contracts for printing services from a business owned by Madan G. Syal, a director of the Company. The Company paid the business approximately $63,000 for such services during fiscal 1996 and approximately $64,000 for such services during the nine-month period ended March 31, 1997. The Company believes that each of the foregoing transactions was on terms at least as favorable to the Company as those that could have been obtained from nonaffiliated third parties. The Company currently intends that any future transactions with affiliates of the Company will be on terms at least as favorable to the Company as those that can be obtained from nonaffiliated third parties. 50 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth the beneficial ownership of Common Stock as of May 31, 1997, and as adjusted to reflect the sale of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), by: (i) each person known by the Company to beneficially own 5.0% or more of the outstanding shares of Common Stock; (ii) each director of the Company; (iii) each Named Executive Officer of the Company; (iv) the Selling Shareholders; and (v) all directors and executive officers of the Company as a group. Footnotes (2) and (3) to the table also set forth certain information with respect to the beneficial ownership of the Selling Shareholders, assuming the Underwriters exercise their over-allotment option in full. The information set forth in the table and accompanying footnotes has been furnished by the named beneficial owners.
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) OFFERING(1)(3) ----------------- ----------------- NUMBER OF SHARES BEING NAME AND BENEFICIAL OWNERS NUMBER PERCENT OFFERED(2) NUMBER PERCENT -------------------------- --------- ------- ---------- --------- ------- Scope Industries(4)(5).......... 1,875,000 30.6% 148,148 1,726,852 18.3% Sally F. Chamberlain(6)(7)...... 1,170,375 19.1 47,593 1,122,782 11.9 Deepak Chopra(6)(8)............. 1,539,484 25.0 0 1,539,484 16.2 Ajay Mehra(9)................... 193,413 3.1 0 193,413 2.0 Andreas F. Kotowski(10)......... 110,852 1.8 0 110,852 1.2 Manoocher Mansouri Aliabadi(11). 73,607 1.2 0 73,607 * Thomas K. Hickman(12)........... 27,000 * 0 27,000 * Steven C. Good(13).............. 40,500 * 21,896 18,604 * Madan G. Syal(14)............... 241,125 3.9 25,926 215,199 2.3 Meyer Luskin(15)................ 20,625 * 0 20,625 * Good Swartz & Berns Pension Fund(16)....................... 148,125 2.4 3,000 145,125 1.5 Leila and Birender Mehra........ 25,500 * 3,704 21,796 * Zev and Elaine Edelstein Trust.. 77,679 1.3 9,259 68,420 * Mohinder and Ranjana Chopra..... 75,000 1.2 9,259 65,741 * Glenn P. Sorenson............... 75,000 1.2 9,259 65,741 * Charles and Kiran M. Kerpelman.. 65,357 1.1 9,259 56,098 * Martha B. Holmes................ 60,000 * 9,259 50,741 * Taheri and Durriya Rangwala..... 45,000 * 7,407 37,593 * Cynthia G. Fleischer............ 15,750 * 15,750 0 -- Gary F. Fleischer............... 14,625 * 14,625 0 -- Cathleen A. Fleischer........... 14,625 * 14,625 0 -- Mark and Penny Berns Trust...... 9,732 * 5,982 3,750 * Arnold and Hope Anisgarten...... 9,287 * 5,709 3,578 * Rajiv Mehra..................... 1,607 * 450 1,157 * Surendra and Kala Jain(17)...... 13,393 * 5,186 8,207 * Renu Jivrajka................... 11,250 * 1,852 9,398 * Amita Jivrajka.................. 7,500 * 1,852 5,648 * All executive officers and directors as a group (9 persons).................... 2,259,106 35.9 47,822 2,211,284 23.0
- --------------------- * Less than 1.0%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable, or exercisable within 60 days of May 31, 1997, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. 51 (2) Excludes shares of Common Stock to be offered by the Selling Shareholders if the over-allotment option granted to the Underwriters is exercised. The following Selling Shareholders will sell the following number of additional shares of Common Stock if the Underwriters' over-allotment option is exercised in full: Scope Industries (79,260); Sally F. Chamberlain (49,630); Deepak Chopra (185,185); Ajay Mehra (33,333); Andreas F. Kotowski (18,519); Manoocher Mansouri Aliabadi (14,815); Thomas K. Hickman (3,704); Steven C. Good (15,604); Madan G. Syal (18,519); Meyer Luskin (9,259); Good Swartz & Berns Pension Fund (3,309); Leila and Birender Mehra (3,704); Zev and Elaine Edelstein Trust (9,259); Mohinder and Ranjana Chopra (11,111); Glenn P. Sorenson (11,111); Charles and Kiran M. Kerpelman (9,259); Martha B. Holmes (9,259); Taheri and Durriya Rangwala (7,407); Susan Sutherland (7,407); Anuj Wadhawan (7,407); Bette Moore (7,407); Robert Kephart (5,556); Phillip M. Wascher (7,407); Charan Dewan (3,704); Jack Kimbro (1,111); Narayan Taneja (1,481); Dennis Noble (741); Peter Bui (741); Allan J. and Pamela Barnard (1,481); Christine Williams (741); Christopher Chin (926); Anthony S. and Suzie B. Crane (1,481); Khai Li (741); Mark and Penny Berns Trust (1,518); Arnold and Hope Anisgarten (1,791); Surendra and Kala Jain (5,926); Neil Jivrajka (740); Renu Jivrajka (1,482); Amita Jivrajka (1,482); Louis S. and Linda O. Peters (741); Lincoln Gladden (741). Susan Sutherland, Anuj Wadhawan, Bette Moore, Robert Kephart, Phillip M. Wascher, Charan Dewan, Jack Kimbro, Narayan Taneja, Dennis Noble, Peter Bui, Allan J. Barnard, Christine Williams, Christopher Chin, Khai Li, Louis Peters and Lincoln Gladden are employees of the Company or its affiliates. Anthony S. Crane is the Managing Director of Rapiscan UK. See "Management." (3) Assuming the Underwriters' over-allotment option is exercised in full, the number and percent of the shares beneficially owned after the Offering by the Selling Shareholders will be as follows: Scope Industries (1,647,592, 17.4%); Sally F. Chamberlain (1,073,152, 11.3%); Deepak Chopra (1,354,299, 14.3%); Ajay Mehra (160,080, 1.7%); Andreas F. Kotowski (92,333); Manoocher Mansouri Aliabadi (58,792); Thomas K. Hickman (23,296); Steven C. Good (3,000); Madan G. Syal (196,680, 2.1%); Good Swartz & Berns Pension Fund (141,816, 1.5%); Leila and Birender Mehra (18,092); Zev and Elaine Edelstein Trust (59,161); Mohinder and Ranjana Chopra (54,630); Glenn P. Sorenson (54,630); Charles and Kiran M. Kerpelman (46,839); Martha B. Holmes (41,482); Taheri and Durriya Rangwala (30,186); Susan Sutherland (35,343); Anuj Wadhawan (29,835); Bette Moore (28,218); Robert Kephart (22,944); Phillip M. Wascher (19,593); Charan Dewan (16,171); Jack Kimbro (15,389); Narayan Taneja (23,698); Dennis Noble (11,446); Peter Bui (7,884); Allan J. and Pamela Barnard (8,382); Christine Williams (6,384); Christopher Chin (6,199); Anthony S. and Suzie B. Crane (11,019); Khai Li (8,409); Mark and Penny Berns Trust (2,232); Arnold and Hope Anisgarten (1,787); Surendra and Kala Jain (2,281); Neil Jivrajka (10,510); Renu Jivrajka (7,916); Amita Jivrajka (4,166); Louis S. and Linda O. Peters (6,510); Lincoln Gladden (4,134). Except as otherwise indicated in this footnote the percentage of Common Stock beneficially owned by the Selling Shareholders after this Offering if the over-allotment option is exercised in full is less than 1.0% for each person listed in this footnote. (4) The address of Scope Industries is 233 Wilshire Boulevard, Suite 310, Santa Monica, California 90401. (5) Does not include shares beneficially owned by Meyer Luskin. Mr. Luskin is the President, Chief Executive Officer, Chairman of the Board and a principal shareholder of Scope Industries. (6) The address of such shareholder is c\\o OSI Systems, Inc., 12525 Chadron Avenue, Hawthorne, California 90250. (7) Such shares are held by Sally F. Chamberlain as Trustee of the Edward P. Fleischer and Sally F. Fleischer Family Trust dated June 3, 1991. (8) Includes 254,951 shares and 254,951 shares owned by The Deepika Chopra Trust UDT dated July 17, 1987 and The Chandini Chopra Trust UDT dated July 17, 1987, respectively. Deepak Chopra is the co-trustee of both irrevocable trusts. Also includes 10,179 shares and 10,179 shares owned by Deepika Chopra and Chandini Chopra, respectively, who are the daughters of Mr. Chopra. Of the balance of such shares, 960,099 shares are held jointly by Mr. Chopra and his wife, Nandini Chopra, and 49,125 shares are held individually by Mr. Chopra. 37,500 shares of the 49,125 shares are issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Chopra is the President, Chief Executive Officer and Chairman of the Board of the Company. See "Management." (9) Includes 75,000 shares issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Mehra is the Vice President, Chief Financial Officer, Secretary and Director of the Company. See "Management." (10) Includes 7,500 shares issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Kotowski is the President of U.S. Operations of Rapiscan U.S.A. See "Management." (11) Includes 13,500 shares issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Mansouri is the Vice President-Corporate Marketing of UDT Sensors. See "Management." (12) Includes 15,187 shares issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Hickman is the Managing Director of OSI Singapore and OSI Malaysia. See "Management." (13) Includes 22,500 shares held by the Steve Cary Good & Bari Anne Good Trust and 18,000 shares held individually by Mr. Good. Does not include shares beneficially owned by the Good Swartz & Berns Pension Fund. Mr. Good is a Director of the Company. See "Management." 52 (14) Includes 217,500 shares held jointly by Mr. Syal and his wife, Mohini Syal. Mr. Syal is a Director of the Company. See "Management." (15) Includes 15,000 shares held by the Meyer and Doreen Luskin Family Trust. Does not include shares beneficially owned by Scope Industries. Includes 5,625 shares issuable pursuant to options exercisable within 60 days of May 31, 1997. Mr. Luskin is the President, Chief Executive Officer, Chairman of the Board and a principal shareholder of Scope Industries. (16) Does not include shares beneficially owned by Steven C. Good. (17) Includes 6,429 shares held by Surendra Jain M.D. Inc. 53 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company currently consists of 40,000,000 shares of Common Stock and 10,000,000 shares of preferred stock. COMMON STOCK As of May 31, 1997, 6,128,874 shares of Common Stock were outstanding, held of record by 73 shareholders. After completion of the Offering, there will be 9,458,874 shares of Common Stock outstanding. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. The holders of Common Stock are entitled to cumulative voting rights with respect to the election of directors so long as at least one shareholder has given notice at the meeting of shareholders prior to the voting of that shareholder's desire to cumulate votes. Subject to preferences that may be applicable to any shares of preferred stock issued in the future, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefore. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share ratably with the holders of any then outstanding preferred stock in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has authority to issue up to 10,000,000 shares of preferred stock, no par value, and to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any future vote or action by the shareholders. The rights of the holders of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such preferred stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. The Company has no present plans to issue shares of preferred stock. No shares of preferred stock are currently outstanding. STOCK TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is U.S. Stock Transfer Corporation. 54 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 9,458,874 shares of Common Stock outstanding (assuming no exercise of stock options after May 31, 1997). Of these shares, the 3,700,000 shares sold in this Offering (4,255,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or registration under the Securities Act unless they are purchased by "affiliates" of the Company as that term is defined under Rule 144. The remaining 5,758,874 shares will be "restricted securities" as defined in Rule 144 ("Restricted Shares"). Of such Restricted Shares, approximately 5,731,000 Restricted Shares (or approximately 5,176,000 if the Underwriters' over-allotment option is exercised in full) are subject to lock-up agreements with the Underwriters. See "Underwriting." Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices and adversely affect the Company's ability to raise additional capital in the capital markets at a time and price favorable to the Company. As a result of the lock-up agreements and the provisions of Rule 144(k), Rule 144 and Rule 701, all currently outstanding shares will be available for sale in the public market upon expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the provisions of Rule 144 and Rule 701. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1.0% of the then outstanding shares of the Company's Common Stock (approximately 94,589 shares immediately after this Offering) or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and availability of current public information about the Company. A person who is not an affiliate, has not been an affiliate within three months prior to the sale and has beneficially owned the Restricted Shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers between May 20, 1988, the effective date of Rule 701, and the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission (the "Commission") has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act (including options granted before May 20, 1988, if made in accordance with the Rule had it been in effect), along with the shares acquired upon exercise of such options beginning May 20, 1988 (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, such securities may be sold: (i) by persons other than Affiliates, subject only to the manner of sale provisions of Rule 144; and (ii) by Affiliates under Rule 144 without compliance with its minimum holding period requirements. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the shares of Common Stock reserved for issuance under the 1987 Plan and the 1997 Plan or previously issued upon the exercise of options, thus permitting the resale of shares issued under such plans by non-affiliates in the public market without restriction under the Securities Act. The registration statement is expected to be filed within 90 days after the date of this Prospectus and will automatically become effective upon filing. Prior to this Offering, there has been no public market for the Common Stock of the Company, and any sale of substantial amounts of Common Stock in the open market may adversely affect the market price of Common Stock offered hereby. 55 UNDERWRITING The Underwriters (the "Underwriters") named below, acting through their representatives, Robertson, Stephens & Company LLC, William Blair & Company, L.L.C. and Volpe Brown Whelan & Company, LLC (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement by and among the Company, the Selling Shareholders and the Underwriters, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all of such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES - ----------- --------- Robertson, Stephens & Company LLC..................................... William Blair & Company, L.L.C........................................ Volpe Brown Whelan & Company, LLC..................................... --------- Total............................................................... 3,700,000 =========
The Representatives have advised the Company and the Selling Shareholders that the Underwriters propose to offer the shares of Common Stock at the offering price set forth on the cover page of this Prospectus: (i) to the public; and (ii) to certain dealers who will be offered a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the consummation of this Offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company or the Selling Shareholders as set forth on the cover page of this Prospectus. The Underwriters have been granted an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 555,000 additional shares of Common Stock from certain Selling Shareholders at the same price per share as the Company and the Selling Shareholders will receive for the 3,700,000 shares that the Underwriters have agreed to purchase in the Offering. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it set forth in the above table bears to the total number of shares of Common Stock listed in such table. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Shareholders against certain civil liabilities, including liabilities under the Securities Act. Pursuant to the terms of certain lock-up agreements, officers and directors of the Company, the Selling Shareholders and certain other shareholders holding collectively approximately 5,731,000 shares of the Company's Common Stock outstanding prior to the Offering, have agreed with the Representatives that except for the 3,700,000 shares being offered in this Offering, or the shares sold pursuant to the over-allotment option, without the prior written consent of Robertson, Stephens & Company LLC or as a gift or distribution to one who agrees to be bound by these restrictions, until 180 days after the effective date of this Prospectus (the "lock-up period"), they will not offer to sell, contract to sell or otherwise dispose of any shares of Common Stock, including shares issuable under options or warrants exercisable during the 180 days after the date of this Prospectus, any options or warrants to purchase shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock owned directly by such holders or with respect to which they have the power of disposition. Approximately 5,731,000 shares of Common Stock subject to the lock-up agreements will become eligible for immediate public sale following expiration of the lock-up period, subject to the provisions of the Securities Act and the Rules promulgated thereunder. Robertson, Stephens & Company LLC may, in its sole discretion, and at any time without notice, release all or a portion of the securities subject to the lock-up agreements. See "Shares Eligible for Future Sale." In addition, the Company 56 has agreed that until the expiration of the lock-up period, the Company will not, without the prior written consent of Robertson, Stephens & Company LLC, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase Common Stock or any securities convertible into or exchangeable for shares of Common Stock, other than the Company's sales of shares in this Offering, the issuance of shares of Common Stock upon the exercise of outstanding stock options, and the grant of options to purchase shares or the issuance of shares of Common Stock under the Company's 1997 Plan. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters in connection with the Offering. The Underwriters may also cover all or a portion of such short position, by exercising the Underwriters' over-allotment option referred to above. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the Offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Representatives have advised the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to this Offering, there has been no public market for the Company's securities. The initial public offering price of the Common Stock was determined by negotiation among the Company, the Selling Shareholders and the Representatives. Among the factors considered in such negotiations were prevailing market conditions, the results of operations of the Company in recent periods, market valuations of publicly traded companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development, the current state of the industry and the economy as a whole, and any other factors deemed relevant. 57 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Troy & Gould Professional Corporation, Los Angeles, California. Certain legal matters with respect to this Offering will be passed upon for the Underwriters by Jones, Day, Reavis & Pogue, Los Angeles, California. As of the date of this Prospectus, Troy & Gould Professional Corporation and certain of its members collectively own 52,500 shares of the Company's Common Stock. EXPERTS The consolidated financial statements included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission in Washington, D.C., a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock being offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, and such exhibits and schedules. A copy of the Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, and at the Commissions regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon payment of the fees prescribed by the Commission. In addition, the Registration Statement may be accessed at the Commission's site on the World Wide Web located at http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 58 OSI SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets as of June 30, 1995, 1996, and March 31, 1997. F-3 Consolidated Statements of Operations for the Years Ended June 30, 1994, 1995 and 1996 and the Nine Months Ended March 31, 1996 (Unaudited) and 1997..................................................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1994, 1995 and 1996 and the Nine Months Ended March 31, 1997......... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and 1996 and the Nine Months Ended March 31, 1996 (Unaudited) and 1997..................................................................... F-6 Notes to Consolidated Financial Statements................................ F-8
F-1 REPORT OF INDEPENDENT AUDITORS OSI Systems, Inc.: We have audited the accompanying consolidated balance sheets of OSI Systems, Inc. (the "Company") and its subsidiaries as of March 31, 1997 and June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the nine months ended March 31, 1997 and the years ended June 30, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OSI Systems, Inc. and its subsidiaries as of March 31, 1997 and June 30, 1996 and 1995, and the results of their operations and their cash flows for the nine months ended March 31, 1997 and the years ended June 30, 1996, 1995 and 1994 in conformity with generally accepted accounting principles. Deloitte & Touche llp Los Angeles, California June 12, 1997 F-2 OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
JUNE 30, --------------- MARCH 31, 1995 1996 1997 ------- ------- --------- ASSETS (NOTE 4) Current Assets: Cash............................................... $ 1,405 $ 581 $ 1,612 Accounts receivable, net of allowance for doubtful accounts of $53, $276 and $294 at June 30, 1995, June 30, 1996 and March 31, 1997, respectively (Note 1).......................................... 12,841 13,295 15,450 Other receivables (Note 2)......................... 589 783 1,643 Inventory (Note 1)................................. 10,069 13,642 15,472 Prepaid expenses................................... 388 633 665 Deferred income taxes (Notes 1 and 7).............. 490 700 1,127 ------- ------- ------- Total current assets............................. 25,782 29,634 35,969 ------- ------- ------- Property and Equipment, Net (Notes 1 and 4):......... 4,257 4,454 5,654 Intangible and Other Assets, Net (Notes 1, 2 and 3).. 741 1,221 2,691 ------- ------- ------- Total............................................ $30,780 $35,309 $44,314 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank lines of credit (Note 4)...................... $ 1,452 $ 7,783 $ 6,723 Current portion of long-term debt (Note 6 and 13).. 1,232 1,491 1,601 Current portion of senior subordinated debt (Note 5)................................................ 2,500 Accounts payable................................... 6,402 6,522 7,665 Accrued payroll and related expenses............... 960 1,667 1,587 Income taxes payable............................... 147 799 1,759 Advances from customers............................ 36 219 2,733 Other accrued expenses and current liabilities..... 3,436 2,609 3,961 ------- ------- ------- Total current liabilities........................ 13,665 23,590 26,029 Bank Line of Credit (Note 4)......................... 4,829 Senior Subordinated Debt (Note 5).................... 3,075 575 Long-Term Debt (Note 6 and 13)....................... 3,525 3,113 3,063 Deferred Income Taxes (Notes 1 and 7)................ 629 827 240 Minority Interest (Note 1)........................... 106 10 ------- ------- ------- Total liabilities................................ 25,829 28,115 29,332 Commitments and Contingencies (Notes 8 and 13) Shareholders' Equity (Notes 4, 5, 9 and 10): Preferred stock, voting shares, no par value; authorized, 3,000,000 shares; issued and outstanding, 1,318,750 shares at June 30, 1995 and 1996 and 2,568,750 shares at March 31, 1997 (Note 10)............................................... 1,514 1,514 4,014 Common stock, no par value; authorized, 4,500,000 shares; issued and outstanding, 1,842,007, 1,858,132 and 2,207,124 shares at June 30, 1995 and 1996 and March 31, 1997, respectively......... 543 560 2,913 Retained earnings.................................. 2,735 4,994 7,928 Cumulative foreign currency translation adjustment (Note 1).......................................... 159 126 127 ------- ------- ------- Total shareholders' equity....................... 4,951 7,194 14,982 ------- ------- ------- Total............................................ $30,780 $35,309 $44,314 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------- -------------------------- 1994 1995 1996 1996 1997 ------- ------- --------- ----------- ------------- (Unaudited) Revenues................. $47,735 $49,815 $ 61,518 $ 44,994 $ 55,973 Cost of goods sold....... 36,037 37,818 45,486 33,638 40,380 ------- ------- --------- ----------- --------- Gross profit............. 11,698 11,997 16,032 11,356 15,593 Operating expenses: Selling, general and administrative expenses (Note 11 and 12)....... 7,974 7,601 9,757 6,745 8,183 Research and development (Note 1)............... 1,451 1,591 1,663 1,280 1,737 Stock option compensation (Note 9).. 856 ------- ------- --------- ----------- --------- Total operating expenses. 9,425 9,192 11,420 8,025 10,776 ------- ------- --------- ----------- --------- Income from operations... 2,273 2,805 4,612 3,331 4,817 Interest expense (Notes 4, 5, 6 and 11)......... 710 1,251 1,359 1,026 900 ------- ------- --------- ----------- --------- Income before provision for income taxes and minority interest....... 1,563 1,554 3,253 2,305 3,917 Provision for income taxes (Notes 1 and 7)... 814 413 1,111 787 983 ------- ------- --------- ----------- --------- Income before minority interest in net loss of subsidiaries............ 749 1,141 2,142 1,518 2,934 Minority interest in net loss of subsidiaries (Note 1)................ 38 17 117 28 -- ------- ------- --------- ----------- --------- Net income............... $ 787 $ 1,158 $ 2,259 $ 1,546 $ 2,934 ======= ======= ========= =========== ========= Historical net income.... $ 2,259 $ 1,546 $ 2,934 Interest on subordinated debt, net of income taxes................... 166 125 92 Minority interest in net loss of subsidiaries.... (117) (28) -- --------- ----------- --------- Pro forma net income..... $ 2,308 $ 1,643 $ 3,026 ========= =========== ========= Pro forma net income per share (Note 1).......... $ 0.37 $ 0.26 $ 0.48 ========= =========== ========= Weighted average common shares used in the calculation of pro forma net income per share.... 6,308,126 6,304,158 6,327,234
See accompanying notes to consolidated financial statements. F-4 OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
CUMULATIVE PREFERRED COMMON FOREIGN ---------------- ---------------- CURRENCY NUMBER OF NUMBER OF RETAINED TRANSLATION SHARES AMOUNT SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL --------- ------ --------- ------ -------- ----------- ------- BALANCE, JULY 1, 1993... 1,123,750 $1,124 1,628,257 $ 335 $ 790 $ 6 $ 2,255 Exercise of stock options.............. -- -- 75,000 28 -- -- 28 Translation adjustment........... -- -- -- -- -- 58 58 Net income............ -- -- -- -- 787 -- 787 --------- ------ --------- ------ ------ ---- ------- BALANCE, JUNE 30, 1994.. 1,123,750 1,124 1,703,257 363 1,577 64 3,128 Exercise of stock options.............. 35,000 70 60,000 75 -- -- 145 Conversion of debt.... 160,000 320 78,750 105 -- -- 425 Translation adjustment........... -- -- -- -- -- 95 95 Net income............ -- -- -- -- 1,158 -- 1,158 --------- ------ --------- ------ ------ ---- ------- BALANCE, JUNE 30, 1995.. 1,318,750 1,514 1,842,007 543 2,735 159 4,951 Exercise of stock options.............. -- -- 16,125 17 -- -- 17 Translation adjustment........... -- -- -- -- -- (33) (33) Net income............ -- -- -- -- 2,259 -- 2,259 --------- ------ --------- ------ ------ ---- ------- BALANCE, JUNE 30, 1996.. 1,318,750 1,514 1,858,132 560 4,994 126 7,194 Exercise of stock options.............. -- -- 49,500 79 -- -- 79 Conversion of debt.... 1,250,000 2,500 120,536 225 -- -- 2,725 Minority interest acquisitions......... -- -- 178,956 1,193 -- -- 1,193 Stock option compensation......... -- -- -- 856 -- -- 856 Translation adjustment........... -- -- -- -- -- 1 1 Net income............ -- -- -- -- 2,934 -- 2,934 --------- ------ --------- ------ ------ ---- ------- BALANCE, MARCH 31, 1997. 2,568,750 $4,014 2,207,124 $2,913 $7,928 $127 $14,982 ========= ====== ========= ====== ====== ==== =======
See accompanying notes to consolidated financial statements. F-5 OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ----------- ------- (Unaudited) Cash flows from operating activities: Net income.................. $ 787 $ 1,158 $ 2,259 $ 1,546 $ 2,934 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Minority interest in net loss of subsidiaries...... (38) (17) (117) (28) Provision for losses on accounts receivable....... 150 (70) 404 346 97 Depreciation and amortization.............. 1,074 1,551 2,014 1,426 1,686 Stock option compensation.. 856 Deferred income taxes...... (150) 240 (12) -- (1,014) Gain on sale of property and equipment............. (22) (11) (13) -- Changes in operating assets and liabilities, net of business acquisition: Accounts receivable...... (7,289) (1,239) (858) (397) (1,582) Other receivables........ (541) 226 (194) (800) (827) Inventory................ (2,059) (2,599) (4,068) (4,113) (1,444) Prepaid expenses......... 28 (139) (245) (253) (32) Accounts payable......... 2,973 221 120 1,657 980 Accrued payroll and related expenses........ (232) 191 707 36 (80) Income taxes payable..... 113 (217) 652 595 960 Advances from customers.. (22) 9 183 (3) 1,771 Other accrued expenses and current liabilities............. 3,470 (87) (827) (1,214) 806 ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities............ (1,758) (783) 5 (1,202) 5,111 ------- ------- ------- ------- ------- Cash flows from investing activities: Proceeds from sale of property and equipment..... 70 142 120 Additions to property and equipment.................. (1,459) (1,396) (1,612) (1,287) (1,530) Cash paid for business acquisition, net of cash acquired................... (302) Cash paid for minority interest................... (160) Other assets................ (14) (662) (688) (273) 135 ------- ------- ------- ------- ------- Net cash used in investing activities.. (1,403) (2,076) (2,180) (1,560) (1,697) ------- ------- ------- ------- ------- Cash flows from financing activities: Net proceeds from (repayment of) bank lines of credit... 2,227 2,668 1,502 2,382 (1,363) Payments on senior subordinated debt.......... (700) (350) Payments on junior subordinated debt.......... (280) Payments on long-term debt.. (660) (1,095) (1,250) (1,000) (3,399) Proceeds from issuance of long-term debt............. 1,191 2,806 1,097 558 2,646 Proceeds from exercise of stock options and warrants. 28 145 17 17 79 Proceeds from issuance of minority interest.......... 1 21 20 ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities............ 2,787 3,544 1,387 1,977 (2,387) ------- ------- ------- ------- ------- Effect of exchange rate changes on cash.............. 58 95 (36) -- 4 ------- ------- ------- ------- ------- Net (decrease) increase in cash......................... (316) 780 (824) (785) 1,031 Cash, beginning of period..... 941 625 1,405 1,405 581 ------- ------- ------- ------- ------- Cash, end of period........... $ 625 $11,405 $ 581 $ 620 $ 1,612 ======= ======= ======= ======= ======= Supplemental disclosures of cash flow information--Cash paid during the period for: Interest.................... $ 691 $ 1,229 $ 1,346 $ 992 $ 902 Income taxes................ $ 620 $ 82 $ 377 $ 368 $ 1,261
See accompanying notes to consolidated financial statements. F-6 - -------- SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995, certain related parties converted $105 and $320 of junior and senior subordinated debt into 78,750 and 160,000 shares of common and preferred stock, respectively. During 1995, the Company refinanced $1,244 in long-term debt obligations through a new financing arrangement with a bank. During the nine months ended March 31, 1997, certain related parties converted $225 and $2,500 of senior subordinated debt into 120,536 and 1,250,000 shares of common and preferred stock, respectively. During the nine months ended March 31, 1997, the Company acquired the minority interest of its two majority-owned subsidiaries through the issuance of 178,956 shares of common stock. The excess of the fair value of the common stock of $1,193 over the book value of the minority interests of $12 has been recorded as goodwill. In 1997, the Company acquired all of the capital stock of Advanced Micro Electronics AS. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired........................................ $2,350 Goodwill............................................................. 588 Cash paid for the capital stock...................................... (370) Liability incurred................................................... (546) ------ Liabilities assumed.................................................. $2,022 ======
See accompanying notes to consolidated financial statements. F-7 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General -- OSI Systems, Inc. (formerly Opto Sensors, Inc.) and its subsidiaries (collectively, the "Company") is a vertically integrated, worldwide provider of devices, subsystems and end-products based on optoelectronic technology. The Company designs and manufactures optoelectronic devices and value-added subsystems for original equipment manufacturers ("OEMs") in a broad range of applications, including security, medical diagnostics, telecommunications, office automation, aerospace, computer peripherals and industrial automation. In addition, the Company utilizes its optoelectronic technology and design capabilities to manufacture security and inspection products that it markets worldwide to end users under the "Rapiscan" brand name. These products are used to inspect baggage, cargo and other objects for weapons, explosives, drugs and other contraband. Consolidation -- The consolidated financial statements include the accounts of OSI Systems, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In September and November 1996 the Company purchased the minority interests of its two majority-owned subsidiaries by exchanging 178,956 shares of common stock for the minority shares of the subsidiaries. The excess of the fair value of the common stock issued of $1,193,000 over the carrying value of the minority interest of $12,000 has been recorded as goodwill and is being amortized over a period of 20 years. The Company also agreed to issue additional shares of the Company's common stock to the selling shareholders of one of the subsidiaries. The number of shares, if any, to be issued is based upon the net income of the subsidiary for the year ended June 30, 1997, not to exceed 45,486 shares. Unaudited Interim Financial Information -- The accompanying consolidated statements of income and of cash flows for the nine months ended March 31, 1996 have been prepared in accordance with generally accepted accounting principles for interim periods and are unaudited; however, in management's opinion, they include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of results for such interim periods. Concentrations of Credit Risk -- The Company's financial instruments that are exposed to credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition and provides an allowance for potential credit losses. The concentration of credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their geographic dispersion. Inventory -- Inventory is stated at the lower of cost or market; cost is determined on the first-in, first-out method. Inventory at June 30, 1995 and 1996 and March 31, 1997 consisted of the following (in thousands):
JUNE 30, --------------- MARCH 31, 1995 1996 1997 ------- ------- --------- Raw materials...................................... $ 5,004 $ 7,795 $ 9,122 Work-in-process.................................... 2,597 3,114 4,300 Finished goods..................................... 2,468 2,733 2,050 ------- ------- ------- Total............................................ $10,069 $13,642 $15,472 ======= ======= =======
F-8 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property and Equipment -- Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line and accelerated methods over lives ranging from three to ten years. Amortization of leasehold improvements is calculated on the straight-line basis over the shorter of the useful life of the asset or the lease term. Property and equipment at June 30, 1995 and 1996 and March 31, 1997 consisted of the following (in thousands):
JUNE 30, -------------- MARCH 31, 1995 1996 1997 ------ ------- --------- Equipment........................................... $5,247 $ 6,280 $ 7,438 Leasehold improvements.............................. 1,426 1,601 1,963 Tooling............................................. 1,397 1,558 1,775 Furniture and fixtures.............................. 626 488 570 Computer equipment.................................. 1,025 1,283 1,639 Vehicles............................................ 122 93 152 ------ ------- ------- Total............................................. 9,843 11,303 13,537 Less accumulated depreciation and amortization...... 5,586 6,849 7,883 ------ ------- ------- Property and equipment, net......................... $4,257 $ 4,454 $ 5,654 ====== ======= =======
Intangibles and Other Assets -- Intangible and other assets at June 30, 1995 and 1996 and March 31, 1997 consisted of the following (in thousands):
JUNE 30, ----------- MARCH 31, 1995 1996 1997 ---- ------ --------- Software development costs............................. $494 $ 588 $ 588 Goodwill............................................... -- -- 1,769 Deposits............................................... 168 262 227 Other.................................................. 111 524 426 ---- ------ ------ Total................................................ 773 1,374 3,010 Less accumulated amortization.......................... 32 153 319 ---- ------ ------ Intangible and other assets, net....................... $741 $1,221 $2,691 ==== ====== ======
Goodwill in the amount of $1,181,000 resulting from the acquisition of minority interests and $588,000 resulting from the acquisition of Advanced Micro Electronics AS (see Note 3) is being amortized, on a straight-line basis, over a period of twenty years. Software development costs incurred in the research and development of software products are expensed as incurred until the technological feasibility of the product has been established. After technological feasibility is established, certain software development costs are capitalized. The software, once developed, is a component which is included in X-ray security machines when they are sold to customers. The Company amortizes these costs on a straight-line basis over a two-year period. No software development costs were capitalized during the nine months ended March 31, 1997. Impairment of Long-Lived Assets -- The Company reviews long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the carrying amount of the asset, the Company recognizes an impairment loss based on the estimated fair value of the asset. F-9 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes -- Deferred income taxes are provided for temporary differences between the financial statement and income tax bases of the Company's assets and liabilities, based on enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Fair Value of Financial Instruments -- The Company's financial instruments consist primarily of cash accounts receivable, accounts payable, and debt instruments. The carrying values of financial instruments other than debt instruments, are representative of their fair values due to their short-term maturities. The carrying values of the Company's long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current rates offered to the Company. The fair value of the Company's senior subordinated debt cannot be determined due to the related-party nature of the obligations. Foreign Currency Translation -- The accounts of the Company's operations in Singapore, Malaysia, Norway and the United Kingdom are maintained in Singapore dollars, Malaysian ringgits, Norwegian Krone and U.K. pounds sterling, respectively. Foreign currency financial statements are translated into U.S. dollars at current rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. Gains and losses resulting from foreign currency transactions are included in income, while those resulting from translation of financial statements are excluded from income and accumulated as a component of shareholders' equity. Transaction (losses) gains of approximately ($19,000), $76,000, ($123,000), ($21,000), and $9,000 were included in income for the years ended June 30, 1994, 1995, and 1996 and for the nine months ended March 31, 1996, (unaudited) and 1997, respectively. Earnings Per Share -- Historical net income per share is not presented because it is not indicative of the ongoing operations of the Company. Pro forma net income and net income per share has been presented to reflect the effect of the conversion of certain subordinated debt into preferred stock and the subsequent conversion of the preferred stock into shares of the Company's common stock (see Notes 5 and 10). Pro forma earnings per share information is computed using the weighted average number of shares of common stock outstanding and dilutive common equivalent shares from convertible debt and stock options using the treasury stock method. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin Topic 4D, common stock and stock options issued or granted during the twelve month period prior to the date of the initial filing of the Company's Form S-1 Registration Statement have been included in the calculation of the pro forma weighted average number of common and common equivalent shares using the treasury stock method as if they were outstanding for each period for which pro forma earnings per share is presented. Recently Issued Accounting Pronouncements -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The statement is effective for interim periods and fiscal years ending after December 15, 1997. The Company does not expect that the statement will have a material effect on the Company's consolidated financial statements. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. INVESTMENT IN JOINT VENTURE In January 1995, the Company, together with an unrelated company, formed ECIL-Rapiscan Security Products Limited, a joint venture organized under the laws of India. The Company, the Company's chairman and the Company's chief financial officer have a 36.0%, 10.5% and 4.5% ownership interest, respectively, in the joint venture. The Company's investment of approximately $108,000 at March 31, 1997 is included in other assets in the accompanying financial statements and the Company's equity in the earnings of the joint venture, since its inception, have been insignificant. The joint venture was formed for the purpose of the manufacture, assembly, service and testing of X-ray security and other products. One of the Company's subsidiaries is a supplier to the joint venture partner, who in turn manufactures and sells the resulting products to the joint venture utilizing technology received from the subsidiary. The agreement provides for technology transfer between the Company and the joint venture, subject to certain restrictions. During the year ended June 30, 1995 and the nine months ended March 31, 1997, the Company earned a technical fee from the joint venture in the amount of $200,000 and $115,000, respectively. At March 31, 1997, $100,000 was unpaid and included in other receivables in the accompanying consolidated financial statements. 3. ACQUISITIONS On March 3, 1997, the Company acquired the capital stock of Advanced Micro Electronics AS ("AME") headquartered in Horten, Norway, from Industriinvestor ASA. The purchase price of $916,000 consisted of cash of $370,000 with the balance of $546,000 payable by June 15, 1997. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired of $2,350,000, and liabilities assumed of $2,022,000, based on the estimated fair values of the assets and liabilities at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired is being amortized over a period of 20 years. The results of operations of AME are included in the Company's consolidated financial statements from the date of acquisition. Had the acquisition occurred as of July 1, 1993, pro forma consolidated sales for the years ended June 30, 1994, 1995 and 1996 and for the nine months ended March 31, 1996 (unaudited) and 1997 would have been $50,735,000, $53,338,000, $65,371,000, $47,827,000 and $58,557,000, respectively. Consolidated pro forma net income and net income per share would not have been materially different than the amounts reported for the respective periods. 4. BANK AGREEMENTS At June 30, 1995 and 1996 and March 31, 1997, line of credit borrowings consisted of the following (in thousands):
JUNE 30, ------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Line of credit -- U.S................................ $4,829 $6,361 $4,927 Line of credit -- Singapore.......................... 1,452 1,422 1,442 Line of credit -- Norway............................. 354 ------ ------ ------ Total bank lines of credit......................... $6,281 $7,783 $6,723 ====== ====== ======
F-11 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company maintains a senior loan agreement with a U.S. bank, which provides for a $10,000,000 revolving line of credit, a $2,500,000 term loan, a $1,000,000 equipment line and a $1,500,000 stock purchase facility (see Note 6). Total borrowings under the agreement are not to exceed $15,000,000. Borrowings under the line of credit bear interest at the bank's prime rate (8.5% at March 31, 1997) plus .25% or, at the Company's option, at 2.25% above the LIBOR rate for specific advances and terms. Interest is payable monthly, and the line expires in November 1998. Borrowings under the senior loan agreement are collateralized by substantially all of the assets of the Company. 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 March 31, 1997 approximately $154,000 was issued and outstanding under letters of credit. Covenants in connection with the agreement impose restrictions and requirements related to, among other things, maintenance of certain financial ratios, limitations on outside indebtedness, rental expense and capital expenditures. The Company has a credit agreement with a U.S. bank, which provides for a $5,000,000 revolving line of credit and a $4,000,000 letter of credit sub- facility. Total borrowings under the agreement may not exceed $5,000,000. Borrowings under the line of credit bear interest at the bank's prime rate (8.5% at March 31, 1997) plus .25%. Interest is payable monthly, and the line expires in October 1997. Borrowings under the current agreement are secured by certain of the Company's assets. No amounts were outstanding under this agreement at March 31, 1997. The agreement also provides a commitment for letters of credit up to $5,000,000. At March 31, 1997 approximately $1,997,000 was issued and outstanding under letters of credit. Covenants in connection with the agreement impose restrictions and requirements related to, among other things, maintenance of certain financial ratios, limitations on outside indebtedness, profitability, and capital expenditures. Opto Sensors Pte. Ltd. ("OSP") has a loan agreement with a Singapore bank, which provides for revolving line of credit borrowings up to 2,600,000 Singapore dollars (approximately $1,800,000 at March 31, 1997). The agreement also has a term note feature providing for borrowings up to approximately $300,000 (see Note 6). Borrowings under the line of credit bear interest at the bank's prime rate (8.5% at March 31, 1997) plus 1.5%. Interest is payable monthly, and borrowings are due on demand. Borrowings under the line of credit are collateralized by certain OSP assets and are guaranteed by the Company and certain officers of the Company. AME has a loan agreement with a Norwegian bank, which provides for revolving line of credit borrowings up to 5,000,000 Norwegian Krone (approximately $741,000 at March 31, 1997). Borrowings under the line of credit bear interest at a variable rate, which was 6.65% at March 31, 1997. Interest is payable quarterly. The loan agreement has no expiration date. Borrowings under the line of credit are collateralized by certain AME assets. A subsidiary has loan agreements with a U.K. bank, which provide for overdraft borrowings of up to 1,250,000 pound sterling (approximately $2,050,000 at March 31, 1997), line of credit borrowings up to 750,000 pound sterling (approximately $1,230,000 at March 31, 1997) and a 500,000 pound sterling (approximately $820,000 at March 31, 1997) borrowing facility for tender and performance bonds. Borrowings under the overdraft facility bear interest at a base rate (6.0% at March 31, 1997) plus 2%. Borrowings under the line of credit bear interest at the base rate plus 1.85%. Interest is payable monthly. Borrowings under this agreement are secured by certain assets of the subsidiary and are guaranteed by the Company. Approximately $134,000 was outstanding under performance bonds at March 31, 1997. F-12 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A subsidiary has a loan agreement with a Malaysian bank, which provides for revolving line of credit borrowings up to 2,500,000 Malaysian ringgits (approximately $1,000,000 at March 31, 1997) for performance bonds and standby letter of credits. This line expires in October 1997. No amounts were outstanding under this agreement at March 31, 1997. 5. SENIOR SUBORDINATED DEBT The Company has issued convertible notes payable to non affiliates and certain related parties. Under the terms of the various agreements, certain debt contained nondetachable warrants to convert the related debt into shares of the Company's preferred stock at $2.00 per share. Certain other notes provided for the conversion of the debt into shares of the Company's preferred stock at $2.80 per share at the option of the holder. The remaining debt, at the option of the holder, provided for conversion of the debt into shares of the Company's common stock at $1.87 per share. During the nine months ended March 31, 1997, all of the debt outstanding under the various agreements was repaid or converted as summarized in the following table (in thousands):
JUNE 30, ------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Convertible note payable to a related party, interest due quarterly at a bank's prime rate (8.25% at June 30, 1996) plus 1.5%, principal due on April 24, 1997 converted into 1,250,000 shares of preferred stock on November 27, 1996.................................... $2,500 $2,500 $-- Convertible notes payable, (including $50,000 to a related party) interest due quarterly at a bank'sprime rate (8.25% at June 30, 1996) plus 1.5%, principal due on February 19, 1998, paid in full as of October 28, 1996.................................. 350 350 -- Convertible notes payable to directors, interest due quarterly at a bank's prime rate (8.25% at June 30, 1996) plus 1.5%, principal due on February 19, 1998, converted into 26,786 shares of common stock on October 31, 1996..................................... 50 50 -- Convertible notes payable, interest due quarterly at a bank's prime rate (8.25% at June 30, 1996) plus 1.5%, principal due on February 19, 1998 converted into 93,750 shares of common stock on October 31, 1996.... 175 175 -- ------ ------ ---- Total senior subordinated debt........................ 3,075 3,075 -- Less current portion.................................. -- 2,500 -- ------ ------ ---- Total long-term portion............................... $3,075 $ 575 $-- ====== ====== ====
F-13 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LONG-TERM DEBT At June 30, 1995 and 1996 and March 31, 1997, long-term debt consisted of the following (in thousands):
JUNE 30, ------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Term loan payable to a bank, interest due monthly at the bank's prime rate (8.25% at June 30, 1996) plus 0.25%, principal due in monthly installments of $52,083. The term loan was repaid in January 1997.... $2,240 $1,667 -- Term loan payable to a bank, interest due mothly at the bank's prime rate (8.25% at June 30, 1996) plus 0.25%, principal due in equal monthly installments of $16,666. The term loan was repaid in January 1997.... 950 750 -- Equipment line note payable to a bank, interest due monthly at the bank's prime rate (8.25% at June 30, 1996) plus 0.25%, principal due in monthly installments of $11,623. The term loan was repaid in January 1997......................................... -- 511 -- Term loan payable to a bank, interest due monthly at the bank's prime rate (8.5% at March 31, 1997) plus 0.50%, principal due in monthly installments of $52,083 until paid in full on March 31, 2001......... -- -- $2,500 Term loan payable to a Norwegian bank, interest due quarterly at a rate of 5.75% principal due in monthly installments of $12,148 until paid in full on June 1, 2001................................................. -- -- 504 Term loan payable, interest accrued monthly at 8.00%, paid in full on April 2, 1997........................ -- -- 296 Term loan payable to a bank, interest due monthly at the bank's prime rate (8.5% at March 31, 1997) plus 2.25%, principal due in monthly installments of $8,333 until paid in full on November 30, 1997....... 242 141 62 Liability under settlement agreements, interest computed at the 52 week treasury bill rate (5.66% at March 31, 1997), principal due $300,000 in 1998, and $400,000 in 1999..................................... 1,300 1,000 700 Other................................................. 25 535 602 ------ ------ ------ 4,757 4,604 4,664 Less current portion of long-term debt................ 1,232 1,491 1,601 ------ ------ ------ Long-term portion of debt............................. $3,525 $3,113 $3,063 ====== ====== ======
Fiscal year principal payments of long-term debt as of March 31, 1997 are as follows (in thousands): 1997 (3 months)....................................................... $ 555 1998.................................................................. 1,278 1999.................................................................. 1,317 2000.................................................................. 896 2001.................................................................. 618 ------ Total............................................................... $4,664 ======
F-14 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES For financial reporting purposes, income before provision for income taxes and minority interest includes the following components (in thousands):
NINE MONTS ENDED YEAR ENDED JUNE 30, MARCH 31, -------------------- ------------------ 1994 1995 1996 1996 1997 ------ ------ ------ ----------- ------ (Unaudited) Pretax income: United States...................... $ 547 $1,277 $1,965 $1,053 $1,904 Foreign............................ 1,016 277 1,288 1,252 2,013 ------ ------ ------ ------ ------ Total pretax income.............. $1,563 $1,554 $3,253 $2,305 $3,917 ====== ====== ====== ====== ======
The Company's provision for income taxes is comprised of the following (in thousands):
YEAR ENDED JUNE NINE MONTS ENDED 30, MARCH 31, ------------------ ------------------- 1994 1995 1996 1996 1997 ----- ---- ------ ----------- ------- (Unaudited) Current: Federal........................... $ 487 $ 43 $ 510 $364 $ 1,286 State............................. 139 3 21 16 54 Foreign........................... 338 127 592 407 657 ----- ---- ------ ---- ------- 964 173 1,123 787 1,997 Deferred............................ (150) 240 (12) -- (1,014) ----- ---- ------ ---- ------- Total provision................. $ 814 $413 $1,111 $787 $ 983 ===== ==== ====== ==== =======
Deferred income tax assets (liabilities) at June 30, 1995 and 1996 and March 31, 1997 consisted of the following (in thousands):
JUNE 30, -------------- MARCH 31, 1995 1996 1997 ----- ------- --------- Expenses not currently deductible.................. $ 518 $ 873 $ 1,491 State income taxes................................. 49 -- -- Other.............................................. 143 -- 411 ----- ------- ------- Total deferred income tax assets................. 710 873 1,902 ----- ------- ------- Depreciation....................................... (309) (145) (82) Capitalized software development costs............. (158) (214) (154) State income taxes................................. (173) (365) Revitalization zone deductions..................... (182) (278) (354) Other.............................................. (200) (190) (60) ----- ------- ------- Total deferred income tax liabilities............ (849) (1,000) (1,015) ----- ------- ------- Net deferred income taxes.......................... $(139) $ (127) $ 887 ===== ======= =======
F-15 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to the following:
YEAR ENDED NINE MONTS ENDED JUNE 30, MARCH 31, ------------------ ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ----------- ---- (Unaudited) Provision for income taxes at federal statutory rate............. 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % State income taxes (credits), net of federal benefit.................... 1.3 (2.6) 0.2 0.2 (5.2) Nontaxable earnings of FSC.......... (3.8) (7.1) (5.7) (5.7) (5.8) Research and development tax credits............................ -- (2.8) -- -- (2.3) Foreign income subject to tax at other than federal statutory rate.. 3.2 0.7 1.1 1.1 0.2 Government settlement............... 16.8 -- -- -- -- Other............................... (0.4) 3.4 3.6 3.6 3.2 ---- ---- ---- ---- ---- Effective income tax rate........... 52.1 % 26.6 % 34.2 % 34.2 % 25.1 % ==== ==== ==== ==== ====
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 March 31, 1997 undistributed earnings of the foreign subsidiaries amounted to $3,022,000. It is not practicable to determine the amount of income or withholding tax that would be payable upon the remittance of those earnings. 8. COMMITMENTS AND CONTINGENCIES The Company leases its production and office facilities and certain equipment under various operating leases. Most of these leases provide for increases in rents based on the Consumer Price Index and include renewal options ranging from two to ten years. The lease for the production and office facilities in Hawthorne, California expires in 2005, and the Company is currently considering exercising its option to purchase the facilities for approximately $3,000,000. Future minimum lease payments under such leases as of March 31, 1997 are as follows: (3 months) 1997, $280,000; 1998, $1,046,000; 1999, $826,000; 2000, $684,000; 2001, $658,000; 2002, $401,000; and thereafter, $2,561,000. Total rent expense included in the accompanying consolidated financial statements was $825,000, $959,000, $901,000, $725,000, and $670,000 for the years ended June 30, 1994, 1995, and 1996 and the nine months ended March 31, 1996 (unaudited) and 1997, respectively. The Company is involved in various claims and legal proceedings arising out of the conduct of its business, principally related to patent rights and related licensing issues. The principal litigation involves claims that certain technology used in the Company's scanners infringes on certain existing patents and seeks damages in an unspecified amount and an injunction barring the Company from making, using, selling or offering for sale certain of its security and inspection products in the United States. The Company has alleged that its security products do not infringe the patents, and that the plaintiffs in the suit had previously granted the Company the right to market its security and inspection products. In the event it is determined that the Company's products infringe upon the rights of the plaintiffs and that the Company does not have the right to use the technology in its products, the Company could be prevented from marketing most of its security and inspection products in the United States and could be required to pay a significant amount of damages. Additional litigation involves claims that the Company interfered with pre- existing contractual rights of the plaintiff, who is claiming breach of contract and interference with contract, and is seeking compensatory damages of an indeterminate amount, as well as punitive damages and attorneys' fees. The Company has filed F-16 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) a cross-complaint claiming breach of contract and misrepresentation and seeks recovery for intentional interference with contractual relations, intentional interference with prospective economic advantage, slander per se, trade libel, and breach of written agreement. The Company has been informed by its counsel that the Company will be able to defend the lawsuit without any liability to the Company. Management of the Company believes that the resolution of the above noted litigation and other legal proceedings will not have a material adverse effect on the Company's consolidated financial statements. 9. STOCK OPTIONS The Company has two stock option plans. Under the 1987 plan, 1,050,000 shares of common stock have been reserved for the issuance of incentive stock options to key employees, directors and officers of the Company. The price, terms and conditions of each issuance are determined by the Board of Directors. The 1997 plan was established in April 1997 and authorizes the grant of up to 850,000 shares of the Company's common stock in the form of incentive and nonqualified options. Employees, officers and directors are eligible under this plan, which is administered by the Board of Directors who determine the terms and conditions of each grant. The exercise price of nonqualified options may not be less than 85% of the fair market value of the Company's common stock at the date of grant. The exercise price of incentive stock options may not be less than the fair market value of the Company's common stock at the date of grant. The exercise price of incentive stock options granted to individuals that own greater than ten percent of the Company's voting stock may not be less than 110% of the fair market value of the Company's common stock at the date of grant. Exercise periods for incentive and nonqualified options granted under this plan may not exceed ten years from the grant date. In November and December 1996, the Company granted stock options for the purchase of 235,125 shares of the Company's common stock to certain employees at prices below the $6.67 estimated fair market value at the date grant. The options were accelerated to vest immediately and accordingly, the Company has recorded compensation expense for the nine months ended March 31, 1997, representing the excess of the fair value of the Company's common stock at the date of grant over the option exercise price. F-17 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following summarizes stock option activity for the years ended June 30, 1994, 1995 and 1996 and for the nine months ended March 31, 1997:
OPTION PRICE NUMBER ------------------- OF WEIGHTED OPTIONS AVERAGE TOTAL ------- -------- ---------- Outstanding, July 1, 1993...................... 355,125 $1.10 $ 390,000 Granted........................................ 37,500 2.33 88,000 Exercised...................................... (75,000) 0.37 (28,000) Canceled....................................... (9,750) 1.03 (10,000) ------- ---------- Outstanding, July 1, 1994...................... 307,875 1.43 440,000 Granted........................................ 69,000 2.00 138,000 Exercised...................................... (60,000) 1.25 (75,000) Canceled....................................... (19,500) 1.77 (34,000) ------- ---------- Outstanding, July 1, 1995...................... 297,375 1.57 469,000 Granted........................................ 51,000 2.17 111,000 Exercised...................................... (16,125) 1.06 (17,000) Canceled....................................... (13,500) 1.60 (22,000) ------- ---------- Outstanding, June 30, 1996..................... 318,375 1.70 541,000 Granted........................................ 235,125 2.98 701,000 Exercised...................................... (49,500) 1.60 (79,000) Canceled....................................... (5,250) 2.00 (10,000) ------- ---------- Outstanding, March 31, 1997.................... 499,125 $2.31 $1,153,000 ======= ==========
The following summarizes pricing and term information for options outstanding as of March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ----------------------- WEIGHTED WEIGHTED NUMBER WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE EXERCISE PRICES MARCH 31, 1997 CONTRACTUAL LIFE PRICE MARCH 31, 1997 PRICE - --------------- -------------- ---------------- -------- -------------- -------- $0.17 to 0.67........... 58,500 0.8 years $0.45 58,500 $0.45 1.87 to 2.00........... 150,750 2.3 1.95 118,688 1.94 2.33 to 3.33........... 289,875 4.1 2.87 272,625 2.89 ------- ------- $0.17 to 3.33........... 499,125 3.2 $2.31 449,813 $2.32 ======= =======
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." The estimated fair value of options granted during 1996 and for the nine months ended March 31, 1997 pursuant to SFAS 123 was approximately $19,000 and $1,045,000, respectively. Had the Company adopted SFAS 123, pro forma net income would have been $2,297,000 and $2,913,000, and pro forma net income per share would have been $0.36 and $0.46 for 1996 and for the nine months ended March 31, 1997, respectively. The fair value of each option grant was estimated using the Black-Scholes option- pricing model with the following weighted average assumptions: dividend yield and volatility of zero, a risk free interest rate of 6.28% and expected option lives of 5 years. 10. STOCKHOLDERS' EQUITY In May 1997, the Company's Board of Directors authorized a 1.5 for 1 stock split of the outstanding common stock. All share and per share numbers have been adjusted to retroactively reflect the common stock split. F-18 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preferred stock is entitled to the same one vote per share as common stock and has a liquidation preference of $1.00 per preferred share. In June 1997 holders of the preferred stock converted each preferred share into 1.5 shares of common stock. In connection with the acquisition of the minority interest of a subsidiary in November 1996 (see Note 1), the Company granted the selling shareholders options to purchase 45,486 shares of the Company's common stock at $11.50 per share. The options vest over four years from the date of grant. If the Company does not successfully complete an underwritten public offering of its common stock by December 31, 1997, the options revert back to the Company. 11. RELATED PARTY TRANSACTIONS The Company contracts with entities affiliated by common ownership to provide messenger service and auto rental and printing services. The Company also contracts for professional services from a firm that has a partner serving as a member of the Company's Board of Directors. Included in selling, general and administrative expenses for the years ended June 30, 1994, 1995, and 1996 and for the nine months ended March 31, 1996 (unaudited) and 1997 are approximately $61,000, $77,000, $83,000, $65,000, and $87,000 for messenger service and auto rental; $68,000, $78,000, $63,000, $42,000 and $64,000 for printing services; and $10,000, $23,000, $7,000, $7,000 and $3,000 for professional services, respectively. During the nine months ended March 31, 1997, the Company paid a one time consulting fee amounting to $100,000 to an entity that is a shareholder of the Company. Shareholders and other parties related to the Company have made loans to the Company under agreements subordinating such loans to the Company's bank borrowings (see Notes 4, 5 and 6). Interest expense related to such borrowings was approximately $302,000, $315,000, $263,000, $197,000 and $146,000 for the years ended June 30, 1994, 1995, 1996 and the nine months ended March 31, 1996 (unaudited) and 1997, respectively. 12. GOVERNMENT SETTLEMENT During 1994, a subsidiary of the Company was notified that the U.S. Department of Justice was conducting an investigation regarding the testing of certain products that were sold by a subsidiary under government contracts. A settlement of $1,500,000 was agreed to, and was accrued and included in selling, general and administrative expense in the accompanying statement of operations for the year ended June 30, 1994. The settlement is being paid in five increasing installments, with the unpaid principal balance bearing interest at the 52-week Treasury bill rate. At March 31, 1997, the unpaid balance of this settlement was $700,000 (see Note 6). 13. EMPLOYEE BENEFIT PLANS OSI Systems, Inc. has a qualified employee retirement savings plan. The plan provides for a contribution by the Company, which is determined annually by the Board of Directors. In addition, the plan permits voluntary salary reduction contributions by employees. The Company made no contributions to the plan for the nine months ended March 31, 1997 and 1996 (unaudited) or for the years ended June 30, 1996, 1995 and 1994. During 1995, a subsidiary in the U.K. ("Rapiscan") transferred its existing employees from their former owner's plan to a new plan, the Rapiscan defined benefit plan, which covers certain Rapiscan employees. The benefits under this plan are based on years of service and the employee's highest 12 months' compensation during the last five years of employment. Rapiscan's funding policy is to make the minimum annual contributions required by applicable regulations based on an independent actuarial valuation sufficient F-19 OSI SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to provide for benefits accruing after that date. Pension expense for the years ended June 30, 1994, 1995, and 1996 and for the nine months ended March 31, 1996 (unaudited) and 1997 was approximately $89,000, $111,000, $91,000, $67,000 and $64,000, respectively. 14. SEGMENT INFORMATION The Company's operating locations include the United States, Europe (United Kingdom and Norway) and Asia (Singapore and Malaysia). The Company's operations and identifiable assets by geographical area are as follows (in thousands):
YEAR ENDED JUNE 30, 1994 ------------------------------------------------ UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED ------- ------- ------ ------------ ------------ Revenues...................... $29,788 $13,624 $4,323 $47,735 Transfer between geographical areas........................ 1,551 742 882 $ (3,175) -- ------- ------- ------ -------- ------- Net revenues.................. $31,339 $14,366 $5,205 $ (3,175) $47,735 ======= ======= ====== ======== ======= Operating income.............. $ 1,028 $ 564 $ 653 $ 28 $ 2,273 ======= ======= ====== ======== ======= Identifiable assets........... $29,266 $ 9,629 $2,923 $(16,011) $25,807 ======= ======= ====== ======== =======
YEAR ENDED JUNE 30, 1995 ------------------------------------------------ UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED ------- ------- ------ ------------ ------------ Revenues...................... $33,158 $11,341 $5,316 $49,815 Transfer between geographical areas........................ 1,698 788 3,831 $ (6,317) -- ------- ------- ------ -------- ------- Net revenues.................. $34,856 $12,129 $9,147 $ (6,317) $49,815 ======= ======= ====== ======== ======= Operating income.............. $ 1,996 $ 485 $ 267 $ 57 $ 2,805 ======= ======= ====== ======== ======= Identifiable assets........... $36,751 $10,832 $4,839 $(21,642) $30,780 ======= ======= ====== ======== =======
YEAR ENDED JUNE 30, 1996 ------------------------------------------------- UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED ------- ------- ------- ------------ ------------ Revenues..................... $42,403 $15,346 $ 3,769 $61,518 Transfer between geographical areas....................... 6,304 3,092 10,974 $(20,370) -- ------- ------- ------- -------- ------- Net revenues................. $48,707 $18,438 $14,743 $(20,370) $61,518 ======= ======= ======= ======== ======= Operating income............. $ 2,641 $ 1,278 $ 890 $ (197) $ 4,612 ======= ======= ======= ======== ======= Identifiable assets.......... $42,932 $10,179 $ 5,986 $(23,788) $35,309 ======= ======= ======= ======== =======
NINE MONTHS ENDED MARCH 31, 1997 ------------------------------------------------- UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED ------- ------- ------- ------------ ------------ Revenues..................... $41,241 $12,388 $ 2,344 $55,973 Transfer between geographical areas....................... 5,691 3,461 9,091 $(18,243) -- ------- ------- ------- -------- ------- Net revenues................. $46,932 $15,849 $11,435 $(18,243) $55,973 ======= ======= ======= ======== ======= Operating income............. $ 2,691 $ 1,040 $ 1,190 $ (104) $ 4,817 ======= ======= ======= ======== ======= Identifiable assets.......... $47,836 $13,362 $ 8,262 $(25,146) $44,314 ======= ======= ======= ======== =======
F-20 [INSIDE BACK PAGE] [MAP OF MAJOR INSTALLATIONS OF THE COMPANY'S SECURITY AND INSPECTION PRODUCTS, WITH INSERTS OF CERTAIN SPECIFIC INSTALLATIONS] The Company's security and inspection products are used for security purposes at locations such as airports, courthouses, government buildings, nuclear facilities, mail rooms, schools and prisons. In addition, the security and inspections products are also 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. [LOGO OF OPTO-SENSORS, INC.] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an itemized statement of all expenses to be incurred in connection with the issuance and distribution of the securities that are the subject of this Registration Statement other than underwriting discounts and commissions. All expenses incurred with respect to the distribution will be paid by the Company, and such amounts, other than the Securities and Exchange Commission registration fee and the NASD filing fee, are estimates only. Securities and Exchange Commission registration fee............... $ 18,052 NASD filing fee................................................... 6,457 Nasdaq National Market System listing fee......................... 26,275 Printing and engraving expenses................................... 100,000 Transfer agent and registrar fees................................. 2,000 Legal fees and expenses........................................... 175,000 Accounting fees and expenses...................................... 150,000 "Blue sky" fees and expenses...................................... 15,000 Other expenses.................................................... 167,216 -------- Total........................................................... $660,000* ========
- --------------------- * The Selling Shareholders will pay their pro rata share of all expenses incurred with respect to the distribution of the Common Stock, which amount is currently estimated to be approximately $60,000. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Articles of Incorporation ("Amended Articles") provide that, pursuant to the California Corporations Code, the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by, or in the right of, the Company for breach of a director's duties to the Company or its shareholders. This provision in the Amended Articles does not eliminate the directors' fiduciary duty and does apply for certain liabilities: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interest of the Company or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction from which a director derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders; (vi) with respect to certain transactions or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute for approval of certain improper distributions to shareholders or certain loans or guarantees. This provision also does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The Company's Amended and Restated Bylaws require the Company to indemnify its officers and directors under certain circumstances. Among other things, the Bylaws require the Company to indemnify directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers and allows the Company to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Section 317 of the California Corporations Code ("Section 317") provides that a California corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than II-1 action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 317 also provides that a California corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect to any claim, issue or matter as to which such persons shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 317 provides further that to the extent a director or officer of a California corporation has been successful in the defense of any action, suit or proceeding referred to in the previous paragraphs or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses actually and reasonably incurred by him in connection therewith; that indemnification authorized by Section 317 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 317. In May 1994, the Company entered into indemnification agreements with Deepak Chopra, Ajay Mehra and Thomas K. Hickman in connection with certain personal guarantees provided by them to a Singapore financial institution that provided a loan to OSI Singapore, a subsidiary of the Company. The indemnification agreements provide that the Company shall indemnify Messrs. Chopra, Mehra and Hickman against all debts, liabilities, damages, claims, expenses and costs including attorneys' fees incurred by them in connection with OSI Singapore's inability to fulfill its obligations under the loan and their respective guarantees of such loan. Messrs. Chopra, Mehra and Hickman are directors and/or executive officers of the Company. In connection with certain settlements entered into pursuant to the Consent Agreements, the Company's subsidiary, UDT Sensors, agreed to pay the United States government a total of $1,500,000 in five annual installments ending on March 31, 1999. In order to ensure the full payment, Deepak Chopra personally guaranteed the payment of $750,000 of the foregoing amount. The Company entered into an indemnification agreement with Mr. Chopra pursuant to which the Company shall indemnify Mr. Chopra against all debts, liabilities, damages, claims, expenses and costs including attorneys' fees incurred by him in connection with his guarantee of the payment of $750,000. In addition, the Company intends to enter into indemnification agreements ("Indemnification Agreement(s)") with each of its directors and executive officers prior to the consummation of the Offering. Each such Indemnification Agreement will provide that the Company will indemnify the indemnitee against expenses, including reasonable attorneys' fees, judgements, penalties, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any civil or criminal action or administrative proceeding arising out of the performance of his duties as a director or officer, other than an action instituted by the director or officer. Such indemnification is available if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect II-2 to any criminal action, had no reasonable cause to believe his conduct was unlawful. Each Indemnification Agreement will permit the director or officer that is party thereto to bring suit to seek recovery of amounts due under the Indemnification Agreement and to recover the expenses of such a suit if he is successful. The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Company and its officers and directors for certain liabilities arising under the Securities Act or otherwise. The Company believes that it is the position of the Commission that insofar as the foregoing provisions may be invoked to disclaim liability for damages arising under the Securities Act, the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. Such limitation of liability also does not affect the availability of equitable remedies such as injunctive relief or rescission. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES As of May 31, 1997, the Company had outstanding 2,568,750 shares of Preferred stock which had the same rights, preferences, privileges and restrictions as the Common Stock except for a liquidation preference entitling each holder of Preferred Stock to receive $1.00 per share of Preferred Stock prior to any payment to holders of Common Stock upon any liquidation, dissolution or winding up of the Company. The then outstanding shares of Preferred Stock were held by 29 investors including certain directors, executive officers and principal shareholders of the Company. On June 12, 1997, in connection with the Stock Split, each outstanding share of Preferred Stock was converted into one and one-half shares of Common Stock (the "Preferred Stock Conversion"). As a result, all of the shares of Preferred Stock were converted into 3,853,125 shares of Common Stock. No Preferred Stock is currently outstanding. In June 1989, April 1990 and February 1993 the Company issued and sold (without payment of any selling commission to any person) subordinated promissory notes in the aggregate principal amounts of approximately $385,000, $3,520,000 and $575,000, respectively, with related warrants or conversion rights to purchase capital stock of the Company. The purchasers of the subordinated notes consisted of a financial institution and certain of the Company's directors, executive officers, principal shareholders and their family members, friends and acquaintances. The promissory notes, warrants and conversion rights provided that the note holders were entitled to exercise the warrants or convert the notes into capital stock of the Company by cancelling the appropriate amounts of the outstanding principal amount and accrued interest of such promissory notes. The exercise price of the warrants issued in June 1989 and April 1990 was $1.33 per share (after giving effect to the Stock Split), whereas the exercise price of the warrants and convertible notes issued in February 1993 was $1.87 per share (after giving effect to the Stock Split). During the period from March 1995 to November 1996, an aggregate principal amount of $3,150,000 underlying the subordinated notes were converted into 132,858 shares of Common Stock and 1,410,000 shares of Preferred Stock (before giving effect to the Preferred Stock Conversion and the Stock Split) as a result of the exercise of the warrants and conversion rights. As a result of the Preferred Stock Conversion and the Stock Split, the former note holders that exercised their warrants and conversion rights currently hold 2,314,287 shares of Common Stock. In April 1990, the Company issued warrants to purchase 35,000 shares of Preferred Stock to Troy & Gould Professional Corporation ("Troy & Gould") in consideration for legal services rendered by Troy & Gould. In April 1995, Troy & Gould and certain principals thereof exercised such warrants by acquiring an aggregate of 35,000 shares of Preferred Stock for a total exercise price of $70,000. As a result of the Preferred Stock Conversion, Troy & Gould and certain of its principals currently hold 52,500 shares of Common Stock. Since June 1, 1994, the Company sold an aggregate of 194,250 shares of Common Stock for an aggregate purchase price of $238,075 to various employees pursuant to the exercise of options granted under the Company's 1987 Incentive Stock Option Plan. Since June 1, 1994, the Company has issued options to purchase a total of 789,611 shares of its Common Stock to a total of 89 officers, directors and employees of the Company. The exercise price of the foregoing options granted by the Company ranged from $2.00 to $13.50 per share. II-3 In November 1996, the Company issued 159,201 shares of its Common Stock to 10 officers and key employees of the Company in exchange for all of the shares of capital stock of Rapiscan U.S.A., one of the Company's subsidiaries, then owned by such officers and employees. The shares of Common Stock were valued at $6.67 per share. In September 1996, the Company issued 19,755 shares of its Common Stock to six officers and key employees of the Company in exchange for all of the shares of capital stock of Ferson Optics, Inc., one of the Company's subsidiaries, then owned by such officers and employees. The shares of Common Stock were valued at $6.67 per share. The Company believes that the issuances of securities pursuant to the foregoing transactions were exempt from registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as transactions not involving public offerings. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits, which are furnished with this Registration Statement or incorporated herein by reference, are filed as a part of this Registration Statement:
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 4.1 Specimen Common Stock Certificate.* 5.1 Opinion of Troy & Gould Professional Corporation.* 10.1 1987 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement. 10.2 1997 Stock Option Plan and forms of Stock Option Agreements. 10.3 Employment Agreement dated April 1, 1997 between the Company and Deepak Chopra. 10.4 Employment Agreement dated April 1, 1997 between the Company and Ajay Mehra. 10.5 Employment Agreement dated April 1, 1997 between the Company and Andreas F. Kotowski. 10.6 Employment Agreement dated April 1, 1997 between the Company and Manoocher Mansouri Aliabadi. 10.7 Employment Agreement dated April 1, 1997 between the Company and Anthony S. Crane. 10.8 Employment Agreement dated April 1, 1997 between the Company and Thomas K. Hickman. 10.9 Incentive Compensation Agreement dated December 18, 1996 between the Company and Andreas F. Kotowski. 10.10 Form of Indemnification Agreement for directors and executive officers of the Company.* 10.11 Joint Venture Agreement dated January 4, 1994 among the Company, Electronics Corporation of India, Limited and ECIL-Rapiscan Security Products Limited ("ECIL-Rapiscan").* 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. 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).* 10.14 Lease Agreement dated January 17, 1997 by and between Artloon Supplies Sdn. Bhd. and Opto Sensors (M) Sdn. Bhd. 10.15 Credit Agreement entered into on January 24, 1997, by and between Sanwa Bank California and Opto Sensors, Inc., UDT Sensors, Inc., Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc.
II-4
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.16 Credit Agreement entered into on November 1, 1996 by and between Opto Sensors, Inc., UDT Sensors, Inc., Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc., and Wells Fargo HSBC Trade Bank. 10.17 License Agreement made and entered into as of December 19, 1994, by and between EG&G Inc. and Rapiscan Security Products, Inc. 10.18 Stock Purchase Agreement dated March 5, 1997 between Industriinvestor ASA and Opto Sensors, Inc. 11.1 Statement regarding computation of earnings per share. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).* 24.1 Power of Attorney (contained in Part II). 27.1 Financial Data Schedule. 99.1 Criminal Plea and Sentencing Agreement between UDT Sensors, Inc. and U.S. Attorney's Office.* 99.2 Agreement between UDT Sensors, Inc. and Department of Navy.*
- -------- * To be filed by amendment. (b) The following schedules supporting the financial statements are included herein: Schedule II--Valuation and Qualifying Accounts All other schedules are omitted, since the required information is not present in amounts sufficient to require submission of schedules or because the information required is included in the Registrant's financial statements and notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hawthorne, State of California, on June 12, 1997. OSI SYSTEMS, INC. /s/ DEEPAK CHOPRA By: ___________________________________ Deepak Chopra Chairman, Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Deepak Chopra and Ajay Mehra, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ DEEPAK CHOPRA Chairman, Chief June 12, 1997 - ------------------------------------- Executive Officer Deepak Chopra and President (Principal Executive Officer) /s/ AJAY MEHRA Vice President, June 12, 1997 - ------------------------------------- Chief Financial Ajay Mehra Officer, Secretary and Director (Principal Financial and Accounting Officer) /s/ STEVEN C. GOOD Director June 12, 1997 - ------------------------------------- Steven C. Good /s/ MEYER LUSKIN Director June 12, 1997 - ------------------------------------- Meyer Luskin /s/ MADAN G. SYAL Director June 12, 1997 - ------------------------------------- Madan G. Syal II-6 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS --------------------- BALANCE (2) BALANCE AT (1) CHARGED CHARGED DEDUCTIONS-- AT END BEGINNING TO COSTS AND TO OTHER WRITE-OFFS OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (RECOVERIES) PERIOD - ----------- --------- ------------ -------- ------------ ------- Allowance for doubtful accounts: Year Ended June 30, 1994................... $ 38 $150 -- (15) $203 ==== ==== === === ==== Year Ended June 30, 1995................... $203 (70) -- 80 $ 53 ==== ==== === === ==== Year Ended June 30, 1996................... $ 53 $404 -- 181 $276 ==== ==== === === ==== Nine Months Ended March 31, 1997............... $276 $ 97 -- 79 $294 ==== ==== === === ====
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 4.1 Specimen Common Stock Certificate.* 5.1 Opinion of Troy & Gould Professional Corporation.* 10.1 1987 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement. 10.2 1997 Stock Option Plan and forms of Stock Option Agreements. 10.3 Employment Agreement dated April 1, 1997 between the Company and Deepak Chopra. 10.4 Employment Agreement dated April 1, 1997 between the Company and Ajay Mehra. 10.5 Employment Agreement dated April 1, 1997 between the Company and Andreas F. Kotowski. 10.6 Employment Agreement dated April 1, 1997 between the Company and Manoocher Mansouri Aliabadi. 10.7 Employment Agreement dated April 1, 1997 between the Company and Anthony S. Crane. 10.8 Employment Agreement dated April 1, 1997 between the Company and Thomas K. Hickman. 10.9 Incentive Compensation Agreement dated December 18, 1996 between the Company and Andreas F. Kotowski. 10.10 Form of Indemnification Agreement for directors and executive officers of the Company.* 10.11 Joint Venture Agreement dated January 4, 1994 among the Company, Electronics Corporation of India, Limited and ECIL-Rapiscan Security Products Limited ("ECIL-Rapiscan").* 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. 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).* 10.14 Lease Agreement dated January 17, 1997 by and between Artloon Supplies Sdn. Bhd. and Opto Sensors (M) Sdn. Bhd. 10.15 Credit Agreement entered into on January 24, 1997, by and between Sanwa Bank California and Opto Sensors, Inc., UDT Sensors, Inc., Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc. 10.16 Credit Agreement entered into on November 1, 1996 by and between Opto Sensors, Inc., UDT Sensors, Inc. Rapiscan Security Products (U.S.A.), Inc. and Ferson Optics, Inc. and Wells Fargo HSBC Trade Bank. 10.17 License Agreement made and entered into as of December 19, 1994, by and between EG&G Inc. and Rapiscan Security Products, Inc. 10.18 Stock Purchase Agreement dated March 5, 1997 between Industriinvestor ASA and Opto Sensors, Inc. 11.1 Statement regarding computation of earnings per share. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).* 24.1 Power of Attorney (contained in Part II). 27.1 Financial Data Schedule. 99.1 Criminal Plea and Sentencing Agreement between UDT Sensors, Inc. and U.S. Attorney's Office.* 99.2 Agreement between UDT Sensors, Inc. and Department of Navy.*
- -------- * To be filed by amendment.

 
                                                                     EXHIBIT 1.1

 
                              3,700,000 Shares/1/

                               OSI SYSTEMS, INC.

                                  Common Stock

                        FORM OF UNDERWRITING AGREEMENT
                        ------------------------------



                                                          ________________, 1997


ROBERTSON, STEPHENS & COMPANY LLC
WILLIAM BLAIR & COMPANY, L.L.C.
VOLPE BROWN WHELAN & COMPANY LLC
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104

Ladies and Gentlemen:

          OSI SYSTEMS, INC., a California corporation (the "Company"), and
certain shareholders of the Company named in Schedules B and C hereto (hereafter
called the "Selling Shareholders") address you as the Representatives of each of
the persons, firms and corporations listed in Schedule A hereto (herein
collectively called the "Underwriters") and hereby confirm their respective
agreements with the several Underwriters as follows:

          1.  Description of Shares.  The Company proposes to issue and sell
              ---------------------                                    
3,330,000 shares of its authorized and unissued common stock, no par value,
to the Underwriters.  The Selling Shareholders, acting severally and not
jointly, propose to sell an aggregate of 370,000 shares of the Company's issued
and outstanding common stock, no par value, to the several Underwriters.  The
3,330,000 shares of common stock, no par value, of the Company to be sold by the
Company are hereinafter called the "Company Shares" and the 370,000 shares of
common stock, no par value, to be sold by the Selling Shareholders are
hereinafter called the "Selling

- ---------------
/1/ Plus an option to purchase up to 555,000 additional shares from certain
    shareholders of the Company to cover over-allotments.


 
Shareholder Shares."  The Company Shares and the Selling Shareholder Shares are
hereinafter collectively referred to as the "Firm Shares."  Certain Selling
Shareholders also propose to grant, severally and not jointly, to the
Underwriters, an option to purchase up to 555,000 additional shares of the
Company's common stock, no par value (the "Option Shares"), as provided in
Section 8 hereof.  As used in this Agreement, the term "Shares" shall include
the Firm Shares and the Option Shares.  All shares of the Company's common
stock, no par value, outstanding after giving effect to the sales contemplated
hereby, including the Shares, are hereinafter referred to as "Common Stock."

          2.  Representations, Warranties and Agreements of the Company.  The
              ---------------------------------------------------------      
Company represents and warrants to and agrees with each Underwriter and each
Selling Shareholder that:

          (a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the offer and sale of the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
prescribed by the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") prescribed by the
Securities and Exchange Commission (the "Commission") pursuant to the Act and
has been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared and
filed with the Commission; and the Company will file such additional amendments
to such registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related prospectus
subject to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.

          If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
in reliance upon Rule 430A(a) or, if Robertson, Stephens & Company LLC, on
behalf of the Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) of the Rules and Regulations pursuant to
subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as
part of a post-effective amendment to the registration statement (including a
final form of prospectus).  If the registration statement relating to the Shares
has not been declared effective under the Act by the Commission, the Company
will prepare and promptly file an amendment to the registration statement,
including a final form of prospectus, or, if Robertson, Stephens & Company LLC,
on behalf of the Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) of the Rules and Regulations.  The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it was or is, as the case may be, declared effective (including, if the
Company omitted information from the registration statement in reliance upon
Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and
Regulations, the information deemed

                                      -2-

 
to be a part of the registration statement at the time it was declared effective
pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in
the event of any amendment thereto or the filing of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations after the
effective date of such registration statement, shall also mean (from and after
the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together with
any such abbreviated registration statement.  The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares as included in
the Registration Statement at the time it is declared effective (including, if
the Company omitted information from the Registration Statement in reliance upon
Rule 430A(a) of the Rules and Regulations, the information deemed to be a part
of the Registration Statement pursuant to Rule 430A(b) of the Rules and
Regulations as of the time it was declared effective; provided, however, that if
                                                      --------  -------         
in reliance on Rule 434 of the Rules and Regulations and with the written
consent of Robertson, Stephens & Company LLC, acting on behalf of the
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) prior to the time that a confirmation is sent or given
for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean
the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules
and Regulations) last provided to the Underwriters by the Company and circulated
by the Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement pursuant to Rule
434(d) of the Rules and Regulations) at the time the Registration Statement was
declared effective.  Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, acting on behalf of the Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) prior to the time that a confirmation is sent or given for purposes of
Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will
not be materially different from the prospectus in the Registration Statement.

          (b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement was or is, as the case may be, declared effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make

                                      -3-

 
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
                      --------  -------                                      
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter, furnished to the Company by
such Underwriter specifically for use in the preparation thereof.

          (c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification; no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification; each of the Company and its subsidiaries is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect as of the date hereof; neither the Company
nor any of its subsidiaries is in violation of its respective incorporating
charter or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge.  The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than Rapiscan Security Products (U.S.A.), Inc., a California corporation,
Rapiscan Security Products Limited, a private company formed under the laws of
the United Kingdom and registered in England, Ferson Optics, Inc., a California
corporation, UDT Sensors, Inc., a California corporation, [Ecil Rapiscan
Security Products Limited], a limited liability joint stock corporation
organized under the laws of India, Advanced Micro Electronics AS ("AME"), a
company incorporated under Norwegian law, Opto Sensors (Singapore) Pte Ltd, a
private company limited by shares and incorporated in the Republic of Singapore,
Opto Sensors (Malaysia) Sdn. Bhd., a private company limited by shares and
incorporated in Malaysia, OSI Electronics, a California corporation, and
Rapiscan Consortium (M) Sdn. Bhd., a private company limited by shares and
incorporated in Malaysia.

          (d) The Company has full legal right, power and authority to enter
into this Agreement and to perform the transactions contemplated hereby.  This
Agreement has been

                                      -4-

 
duly authorized, executed and delivered by the Company and is a valid and
binding agreement on the part of the Company, enforceable in accordance with its
terms, except as rights to indemnification hereunder may be limited by
applicable law and except to the extent that the enforcement hereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound, (ii) the charter or
bylaws of the Company or any of its subsidiaries, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties.  No
consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties is required for the execution and delivery of this
Agreement and the consummation by the Company or any of its subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (if
applicable), or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.

          (e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) may result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or may materially and adversely affect their properties, assets or
rights, (ii) may prevent consummation of the transactions contemplated hereby or
(iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.

          (f) All outstanding shares of capital stock of the Company (including
the Selling Shareholder Shares) have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" and conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and

                                      -5-

 
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Shares have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right, co-
sale right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Shares or the sale thereof or the
issuance of the Company Shares other than those that have been expressly waived
prior to the date hereof and those that will automatically expire upon and will
not apply to the consummation of the transactions contemplated on the Closing
Date.  No further approval or authorization of any shareholder, the Board of
Directors of the Company or others is required for the issuance and sale or
transfer of the Shares except as may be required under the Act, the Exchange Act
or under state or other securities or Blue Sky laws.  All issued and outstanding
shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive right, or other rights to
subscribe for or purchase shares and are owned by the Company free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations.  The description in the Prospectus of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted and exercised thereunder, accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.

          (g) Deloitte & Touche LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, for the nine months ended March 31, 1997 and for each of the years in the
three (3) fiscal years ended June 30, 1996 filed with the Commission as a part
of the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein.  The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein.  No other
financial statements or schedules are required to be included in the
Registration Statement.

                                      -6-

 
          (h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.

          (i) Except as set forth in the Registration Statement and Prospectus,
(i) each of the Company and its subsidiaries has good and marketable title to
all properties and assets described in the Registration Statement and Prospectus
as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company or any of
its subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company and its subsidiaries
(as applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) the Company and each of its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.  Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.

          (j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiaries.

          (k) The Company and its subsidiaries maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts generally
deemed adequate

                                      -7-

 
for their respective businesses and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company or its subsidiaries, against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.

          (l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers,
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.  Except for with respect to the employees of AME, no collective
bargaining agreement exists with any of the Company's or its subsidiaries'
employees and, to the best of the Company's knowledge, no such agreement is
imminent.

          (m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.

          (n) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.

          (o) The Company has been advised as to the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such

                                      -8-

 
a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.

          (p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.

          (q) Neither the Company nor any of its subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.

          (r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.

          (s) Each officer and director of the Company, each Selling Shareholder
and each beneficial owner shares of Common Stock as reflected on Exhibit A
attached hereto has agreed in writing that such person will not, for a period of
180 days from the date that the Registration Statement is declared effective by
the Commission (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC.  The foregoing restriction
has been expressly agreed to preclude the holder of the Securities from engaging
in any hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-up Period,
even if such Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities.  Furthermore, such person has
also agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.  The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company and the number

                                      -9-

 
and type of securities held by each securityholder.  The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and shareholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby.  The Company hereby represents and warrants that it
will not release any of its officers, directors or other shareholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Robertson, Stephens & Company LLC.

          (t) Except as set forth in the Registration Statement and Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise
                                                       -- ----               
designated as a contaminated site under applicable state or local law.

          (u) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

          (v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.

          (w) [IF ANY SHARES ARE TO BE SOLD TO RETAIL INVESTORS IN FLORIDA:  The
Company has complied with all provisions of Section 517.075, Florida Statutes
relating to doing business with the Government of Cuba or with any person or
affiliate located in Cuba.]

          3.  Representations and Warranties of the Selling Shareholders.  Each
              ----------------------------------------------------------       
Selling Shareholder, severally and not jointly, represents and warrants to and
agrees with each Underwriter and the Company that:

          (a) Such Selling Shareholder now has and on the Closing Date, and on
any later date on which Option Shares are purchased, will have, valid marketable
title to the Shares to be sold by such Selling Shareholder, free and clear of
any pledge, lien, security interest,

                                      -10-

 
encumbrance, claim or equitable interest other than pursuant to this Agreement;
and upon delivery of such Shares hereunder and payment of the purchase price as
herein contemplated, each of the Underwriters will obtain valid marketable title
to the Shares purchased by it from such Selling Shareholder, free and clear of
any pledge, lien, security interest pertaining to such Selling Shareholder or
such Selling Shareholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Shareholder.

          (b) Such Selling Shareholder has duly authorized (if applicable)
executed and delivered, in form heretofore furnished to the Representatives, an
Irrevocable Custody Agreement and Power of Attorney (the "Power of Attorney and
Custody Agreement") appointing Deepak Chopra as attorney-in-fact (the
"Attorney") with Deepak Chopra as custodian (the "Custodian"); each Power of
Attorney and Custody Agreement constitutes a valid and binding agreement on the
part of such Selling Shareholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles; and
each of such Selling Shareholders' Attorney, acting alone, is authorized to
execute and deliver this Agreement and the certificate referred to in Section
7(h) hereof on behalf of such Selling Shareholder, to determine the purchase
price to be paid by the several Underwriters to such Selling Shareholder as
provided in Section 4 hereof, to authorize the delivery of the Selling
Shareholder Shares and the Option Shares to be sold by such Selling Shareholder
under this Agreement and to duly endorse (in blank or otherwise) the certificate
or certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Shareholder in connection with this Agreement.

          (c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Shareholder of the Power of Attorney
and Custody Agreement, the execution and delivery by or on behalf of such
Selling Shareholder of this Agreement and the sale and delivery of the Selling
Shareholder Shares and the Option Shares to be sold by such Selling Shareholder
under this Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the Commission),
the issuance of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been obtained
and are in full force and effect; such Selling Shareholder, if other than a
natural person, has been duly organized and is validly existing in good standing
under the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and such Selling Shareholder has full legal right, power
and authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Shareholder under this Agreement.

          (d) Such Selling Shareholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Shareholder or with respect to which such Selling
Shareholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof

                                      -11-

 
agree in writing to be bound by this restriction, (ii) as a distribution to
partners or shareholders of such Selling Shareholder, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC.  The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the Selling Shareholder.  Such prohibited hedging or
other transactions would including, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities.  Such Selling Shareholder also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by such Selling Shareholder except in compliance
with this restriction.

          (e) Certificates in negotiable form for all Shares to be sold by such
Selling Shareholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Shareholder, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.

          (f) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling Shareholder,
or any Selling Shareholder Shares or any Option Shares to be sold by such
Selling Shareholder hereunder, may be bound or, to the best of such Selling
shareholders' knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having  jurisdiction over such
Selling Shareholder or over the properties of such Selling Shareholder, or, if
such Selling Shareholder is other than a natural person, result in any violation
of any provisions of the charter, bylaws or other organizational documents of
such Selling Shareholder.

          (g) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.

                                      -12-

 
          (h) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.

          (i) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling Shareholder
Shares that is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney and Custody
Agreement or set forth in the Registration Statement or the Prospectus is, and
at the time the Registration Statement became or becomes, as the case may be,
effective, and at all times subsequent thereto through the Closing Date, and on
any later date on which Option Shares are to be purchased, was or will be, true,
correct and complete, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto through the Closing Date (hereinafter defined), and on any later date on
which Option Shares are to be purchased, will not, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make such information not misleading.

          (j) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise its Attorney and Robertson, Stephens & Company LLC prior to the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, if any statement to be made on behalf of such Selling
Shareholder in the certificate contemplated by Section 7(h) would be inaccurate
if made as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be.

          (k) Such Selling Shareholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right, in order to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Shareholders to the Underwriters
pursuant to this Agreement; such Selling Shareholder does not have, or has
waived prior to the date hereof, any registration right or other similar right,
in order to participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of such
Selling Shareholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Shareholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.

          (l) Such Selling Shareholder is not aware (with respect to Selling
Shareholders who are not officers or directors of the Company, without having
conducted any investigation or inquiry) that any of the representations and
warranties of the Company set forth in Section 2 above is untrue or inaccurate
in any material respect.

                                      -13-

 
          4.  Purchase, Sale and Delivery of Shares.
              ------------------------------------- 

              (a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and the Selling Shareholders agree, severally and not jointly, to sell
to the Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Shareholders, respectively, at a
purchase price of $______ per share, the respective number of Company Shares as
hereinafter set forth and Selling Shareholder Shares set forth opposite the
names of the Selling Shareholders in Schedule B hereto.  The obligation of each
Underwriter to the Company and to each Selling Shareholder shall be to purchase
from the Company and such Selling Shareholder that number of Company Shares or
Selling Shareholder Shares, as the case may be, which (as nearly as practicable,
as determined by you) is in the same proportion to the number of Company Shares
or Selling Shareholder Shares, as the case may be, set forth opposite the name
of the Company or such Selling Shareholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such Underwriter in Schedule
A hereto (subject to adjustment as provided in Section 11) is to the total
number of Firm Shares to be purchased by all the Underwriters under this
Agreement.

              (b) The certificates in negotiable form for the Selling
Shareholder Shares have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Shareholder agrees that the
certificates for the Selling Shareholder Shares of such Selling Shareholder so
held in custody are subject to the interests of the Underwriters hereunder, that
the arrangements made by such Selling Shareholder for such custody, including
the Power of Attorney, is to that extent irrevocable and that the obligations of
such Selling Shareholder hereunder shall not be terminated by the act of such
Selling Shareholder or by operation of law, whether by the death or incapacity
of such Selling Shareholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Shareholder should die or be incapacitated, or if any other such event should
occur before the delivery of the certificates for the Selling Shareholder Shares
hereunder, the Selling Shareholder Shares to be sold by such Selling Shareholder
shall, except as specifically provided herein or in the Custody Agreement, be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not occurred,
regardless of whether the Custodian shall have received notice of such death or
other event.

              (c) Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from the Company, and
to the order of the Custodian for the respective accounts of the Selling
Shareholders with regard to the Shares being purchased from such Selling
Shareholders (and the Company and such Selling Shareholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn, and not to take any other action with the purpose or effect of
receiving immediately available funds, until the business day following the date
of its delivery to the Company or the Custodian, as the case may be, and, in the
event of any breach of the foregoing, the Company or the Selling Shareholders,

                                      -14-

 
as the case may be, shall reimburse the Underwriters for the interest lost and
any other expenses borne by them by reason of such breach), at the offices of
Troy & Gould, 1801 Century Park East, 16th Floor, Los Angeles, California  90067
(or at such other place as may be agreed upon among the Representatives and the
Company and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third
(3rd) full business day following the first day that Shares are traded, (b) if
this Agreement is executed and delivered after 1:30 P.M., San Francisco time,
the fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than seven
(7) full business days following the first day that Shares are traded as the
Representatives and the Company and the Attorneys may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 11 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
                           --------  -------                                  
available to the Representatives copies of the Prospectus within the time
provided in Section 5(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives.  The
certificates for the Firm Shares to be so delivered will be made available to
you for examination at such office or such other location including, without
limitation, in Chicago, as you may reasonably request, at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date.  If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.

          (d) It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.

          (e) After the Registration Statement is declared effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 12 hereof) of the Firm Shares at an initial public offering
price of $_____ per share.  After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.

          (f) The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the ____ and ____ paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf of
the respective Underwriters, represent and warrant to the Company and the
Selling Shareholders that the statements made therein do not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

                                      -15-

 
          5.  Further Agreements of the Company.  The Company agrees with the
              ---------------------------------                              
several Underwriters that:

              (a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement, has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c) of the Rules and Regulations, as applicable, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed with the Commission
within the time period prescribed; the Company will notify you promptly of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; promptly upon your
request, the Company will prepare and file with the Commission any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
Underwriters; the Company will promptly prepare and file with the Commission,
and promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
the event that any Underwriter is required to deliver a prospectus nine (9)
months or more after the effective date of the Registration Statement in
connection with the sale of the Shares, the Company will prepare promptly upon
request, but at the expense of such Underwriter, such amendment or amendments to
the Registration Statement and such prospectus or prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act; and the Company will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you

                                      -16-

 
shall reasonably object in writing, subject, however, to compliance with the Act
and the Rules and Regulations and the provisions of this Agreement.

          (b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.

          (c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue the effectiveness of such qualifications for so long
as may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith, or as a condition
thereof, to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction in which it is not otherwise required to
be so qualified or to so execute a general consent to service of process.  In
each jurisdiction in which the Shares shall have been qualified as above
provided, the Company will make and file such statements and reports in each
year as are or may be required by the laws of such jurisdiction.

          (d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you, in such
quantities as you may from time to time reasonably request.

          (e) The Company will make generally available to its securityholders
as soon as practicable, but in no event later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.

          (f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of  the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company

                                      -17-

 
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the National Association of
Securities Dealers, Inc. ("NASD"), (v) every material press release and every
material news item or article in respect of the Company or its affairs which was
generally released to shareholders or prepared by the Company or any of its
subsidiaries, and (vi) any additional information of a public nature concerning
the Company or its subsidiaries, or its business which you may reasonably
request.  During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.

          (g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.

          (h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.

          (i) The Company will file Form SR in conformity with the requirements
of the Act and Rule 463 of the Rules and Regulations.

          (j) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Shareholder to perform any agreement on their respective parts to be
performed hereunder, or to fulfill any condition of the Underwriters'
obligations hereunder, or if the Company shall terminate this Agreement pursuant
to Section 12(a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 12(b)(i), the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including fees and disbursements of
Underwriters' Counsel) incurred by the Underwriters in investigating, or
preparing to market, or marketing the Shares.

          (k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to, or amendment of, the Prospectus), the Company
will, after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.

                                      -18-

 
              (l) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Company Shares and the Company's issuance of options or Common Stock under
the Company's presently authorized __________ (the "Option Plan").

              (m) During a period of ninety (90) days from the effective date of
the Registration Statement, the Company will not file a registration statement
registering the offer and sale of shares under the Option Plan or any other
employee benefit plan.

          6.  Expenses.
              -------- 

              (a) The Company and the Selling Shareholders agree with each
Underwriter that:

                  (i) The Company and the Selling Shareholders will pay and bear
     all costs and expenses in connection with the preparation, printing and
     filing of the Registration Statement (including financial statements,
     schedules and exhibits), Preliminary Prospectuses and the Prospectus and
     any amendments or supplements thereto; the printing of this Agreement, the
     Agreement Among Underwriters, the Selected Dealer Agreement, the
     Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
     Underwriters' Questionnaire and Power of Attorney, and any instruments
     related to any of the foregoing; the issuance and delivery of the Shares
     hereunder to the several Underwriters, including transfer taxes, if any,
     the cost of all certificates representing the Shares and transfer agents'
     and registrars' fees; the fees and disbursements of counsel for the
     Company; all fees and other charges of the Company's independent public
     accountants; the cost of furnishing to the several Underwriters copies of
     the Registration Statement (including appropriate exhibits), Preliminary
     Prospectus and the Prospectus, and any amendments or supplements to any of
     the foregoing; NASD filing fees and the cost of qualifying the Shares under
     the laws of such jurisdictions as you may designate (including filing fees
     and fees and disbursements of Underwriters' Counsel in connection with such
     NASD filings and Blue Sky qualifications); and all other expenses directly
     incurred by the Company and the Selling Shareholders in connection with the
     performance of their obligations hereunder.  Any additional expenses
     incurred as a result of the sale of the Shares by the Selling Shareholders
     will be borne collectively by the Company and the Selling Shareholders.
     The provisions of this Section 6(a)(i) are intended to relieve the
     Underwriters from the payment of the expenses and costs which the Selling
     Shareholders and the Company hereby agree to pay, but shall not affect any
     agreement which the Selling Shareholders and the Company may make, or may
     have made, for the sharing of any of such expenses and costs.  Such
     agreements shall not impair the obligations of the Company and the Selling
     Shareholders hereunder to the several Underwriters.

                  (ii) In addition to its other obligations under Section 9(a)
     hereof, the Company agrees that, as an interim measure during the pendency
     of any claim, action, investigation, inquiry or other proceeding described
     in Section 9(a) hereof, it will reimburse the Underwriters on a monthly
     basis for all reasonable legal or other expenses

                                      -19-

 
     incurred in connection with investigating or defending any such claim,
     action, investigation, inquiry or other proceeding, notwithstanding the
     absence of a judicial determination as to the propriety and enforceability
     of the Company's obligation to reimburse the Underwriters for such expenses
     and the possibility that such payments might later be held to have been
     improper by a court of competent jurisdiction.  To the extent that any such
     interim reimbursement payment is so held to have been improper, the
     Underwriters shall promptly return such payment to the Company together
     with interest, compounded daily, determined on the basis of the prime rate
     (or other commercial lending rate for borrowers of the highest credit
     standing) set forth from time to time in The Wall Street Journal which
     represents the base rate on corporate loans posted by at least seventy-five
     percent (75%) of the nation's thirty (30) largest banks (the "Prime Rate").
     Any such interim reimbursement payments which are not made to the
     Underwriters within thirty (30) days of a request for reimbursement shall
     bear interest at the Prime Rate from the date of such request.

                  (iii) In addition to their other obligations under Section
     9(b) hereof, each Selling Shareholder agrees that, as an interim measure
     during the pendency of any claim, action, investigation, inquiry or other
     proceeding described in Section 9(b) hereof relating to such Selling
     Shareholder, it will reimburse the Underwriters on a monthly basis for all
     reasonable legal or other expenses incurred in connection with
     investigating or defending any such claim, action, investigation, inquiry
     or other proceeding, notwithstanding the absence of a judicial
     determination as to the propriety and enforceability of such Selling
     Shareholder's obligation to reimburse the Underwriters for such expenses
     and the possibility that such payments might later be held to have been
     improper by a court of competent jurisdiction. To the extent that any such
     interim reimbursement payment is so held to have been improper, the
     Underwriters shall promptly return such payment to the Selling
     Shareholders, together with interest, compounded daily, determined on the
     basis of the Prime Rate. Any such interim reimbursement payments which are
     not made to the Underwriters within thirty (30) days of a request for
     reimbursement shall bear interest at the Prime Rate from the date of such
     request.

              (b) In addition to their other obligations under Section 9(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 9(c) hereof, they will reimburse the
Company and each Selling Shareholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Shareholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Shareholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Shareholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.

                                      -20-

 
              (c) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 6(a)(ii),
6(a)(iii) and 6(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 6(a)(ii), 6(a)(iii)
and 6(b) hereof and will not resolve the ultimate propriety or enforceability of
the obligation to indemnify for expenses which is created by the provisions of
Sections 9(a), 9(b) and 9(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 9(e) hereof.

          7.  Conditions of Underwriters' Obligations.  The obligations of the
              ---------------------------------------                         
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:

              (a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.

              (b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.

              (c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,

                                      -21-

 
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.

              (d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company and the Selling Shareholders, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:

                  (i) The Company and each Significant Subsidiary (as that
          term is defined in Regulation S-X promulgated under the Act) has been
          duly incorporated and is validly existing as a corporation in good
          standing under the laws of the jurisdiction of its incorporation;

                  (ii) The Company and each Significant Subsidiary has the
          corporate power and authority to own, lease and operate its properties
          and to conduct its business as described in the Prospectus;

                  (iii)  The Company and each Significant Subsidiary is duly
          qualified to do business as a foreign corporation and is in good
          standing in each jurisdiction, if any, in which the ownership or
          leasing of its properties or the conduct of its business requires such
          qualification, except where the failure to be so qualified or be in
          good standing would not have a material adverse effect on the
          condition (financial or otherwise), earnings, operations or business
          of the Company and its subsidiaries considered as one enterprise.  To
          such counsel's knowledge, the Company does not own or control,
          directly or indirectly, any corporation, association or other entity
          other than Rapiscan Security Products (U.S.A.), Inc., Rapiscan
          Security Products Limited, Ferson Optics, Inc., UDT Sensors, Inc.,
          [Ecil Rapiscan Security Products Limited], AME, Opto Sensors
          (Singapore) Pte Ltd, Opto Sensors (Malaysia) Sdn. Bhd., [OSI
          Electronics and Rapiscan Consortium (M) Sdn. Bhd.];

                  (iv) The authorized, issued and outstanding capital stock of
          the Company is as set forth in the Prospectus under the caption
          "Capitalization" as of the dates stated therein, the issued and
          outstanding shares of capital stock of the Company (including the
          Selling Shareholder Shares) have been duly and validly issued and are
          fully paid and nonassessable, and, to such counsel's knowledge, have
          not been issued in violation of or subject to any preemptive right,
          co-sale right, registration right, right of first refusal or other
          similar right;

                  (v) All issued and outstanding shares of capital stock of
          each Significant Subsidiary of the Company have been duly authorized
          and validly issued and are fully paid and nonassessable, and, to such
          counsel's knowledge, have not been issued in violation of or subject
          to any preemptive right, co-sale right, registration right, right of
          first refusal or other similar right and are owned

                                      -22-

 
          by the Company free and clear of any pledge, lien, security interest,
          encumbrance, claim or equitable interest;

                  (vi) The Firm Shares to be issued by the Company and the
          Firm Shares and Option Shares to be purchased from the Selling
          Shareholders pursuant to the terms of this Agreement have been duly
          authorized and, upon issuance and delivery against payment therefor in
          accordance with the terms hereof, will be duly and validly issued and
          fully paid and nonassessable, and will not have been issued in
          violation of or subject to any preemptive right, co-sale right,
          registration right, right of first refusal or other similar right.

                  (vii)  The Company has the corporate power and authority to
          enter into this Agreement and to issue, sell and deliver to the
          Underwriters the Shares to be issued and sold by it hereunder;

                  (viii)  This Agreement has been duly authorized by all
          necessary corporate action on the part of the Company and has been
          duly executed and delivered by the Company and, assuming due
          authorization, execution and delivery by you, is a valid and binding
          agreement of the Company, enforceable in accordance with its terms,
          except insofar as indemnification provisions may be limited by
          applicable law and except as enforceability may be limited by
          bankruptcy, insolvency, reorganization, moratorium or similar laws
          relating to or affecting creditors' rights generally or by general
          equitable principles;

                  (ix) The Registration Statement has become effective under
          the Act and, to such counsel's knowledge, no stop order suspending the
          effectiveness of the Registration Statement has been issued and no
          proceedings for that purpose have been instituted or are pending or
          threatened under the Act;

                  (x) The Registration Statement and the Prospectus, and each
          amendment or supplement thereto (other than the financial statements
          (including supporting schedules) and financial data derived therefrom
          as to which such counsel need express no opinion), as of the effective
          date of the Registration Statement, complied as to form in all
          material respects with the requirements of the Act and the applicable
          Rules and Regulations;

                  (xi) The information in the Prospectus under the caption
          "Description of Capital Stock," to the extent that it constitutes
          matters of law or legal conclusions, has been reviewed by such counsel
          and is a fair summary of such matters and conclusions; and the forms
          of certificates evidencing the Common Stock and filed as exhibits to
          the Registration Statement comply with California law;

                  (xii)  The description in the Registration Statement and the
          Prospectus of the charter and bylaws of the Company and of statutes
          are accurate

                                      -23-

 
          and fairly present the information required to be presented by the Act
          and the applicable Rules and Regulations;

                  (xiii)  To such counsel's knowledge, there are no
          agreements, contracts, leases or documents to which the Company is a
          party of a character required to be described or referred to in the
          Registration Statement or Prospectus or to be filed as an exhibit to
          the Registration Statement which are not described or referred to
          therein or filed as required;

                  (xiv)  The performance of this Agreement and the
          consummation of the transactions herein contemplated (other than
          performance of the Company's indemnification obligations hereunder,
          concerning which no opinion need be expressed) will not (a) result in
          any violation of the Company's charter or bylaws or (b) to such
          counsel's knowledge, result in a material breach or violation of any
          of the terms and provisions of, or constitute a default under, any
          bond, debenture, note or other evidence of indebtedness, or any lease,
          contract, indenture, mortgage, deed of trust, loan agreement, joint
          venture or other agreement or instrument known to such counsel to
          which the Company is a party or by which its properties are bound, or
          any applicable statute, rule or regulation known to such counsel or,
          to such counsel's knowledge, any order, writ or decree of any court,
          government or governmental agency or body having jurisdiction over the
          Company or any of its subsidiaries, or over any of their properties or
          operations;

                  (xv) No consent, approval, authorization or order of or
          qualification with any court, government or governmental agency or
          body having jurisdiction over the Company or any of its subsidiaries,
          or over any of their properties or operations is necessary in
          connection with the consummation by the Company of the transactions
          herein contemplated, except such as have been obtained under the Act
          or such as may be required under state or other securities or Blue Sky
          laws in connection with the purchase and the distribution of the
          Shares by the Underwriters;

                  (xvi)  To such counsel's knowledge, there are no legal or
          governmental proceedings pending or threatened against the Company, or
          any of its subsidiaries, of a character required to be disclosed in
          the Registration Statement or the Prospectus by the Act or the Rules
          and Regulations other than those described therein;

                  (xvii)  To such counsel's knowledge, neither the Company nor
          any of its subsidiaries is presently (a) in material violation of its
          respective charter or bylaws, or (b) in material breach of any
          applicable statute, rule or regulation known to such counsel or, to
          such counsel's knowledge, any order, writ or decree of any court or
          governmental agency or body having jurisdiction over the Company or
          any of its subsidiaries, or over any of their properties or
          operations;

                                      -24-

 
                  (xviii) To such counsel's knowledge, except as set forth in
          the Registration Statement and Prospectus, no holders of Common Stock
          or other securities of the Company have registration rights with
          respect to the offer and sale of any securities of the Company and,
          except as set forth in the Registration Statement and Prospectus, all
          prior holders of such registration rights have waived such rights or
          such rights have expired by reason of lapse of time following
          notification of the Company's intent to file the Registration
          Statement or have included securities in the Registration Statement
          pursuant to the exercise, and in full satisfaction, of such rights;

                  (xix)  Each Selling Shareholder which is not a natural
          person has full right, power and authority to enter into and to
          perform its obligations under the Power of Attorney and Custody
          Agreement to be executed and delivered by it in connection with the
          transactions contemplated herein; the Power of Attorney and Custody
          Agreement of each Selling Shareholder that is not a natural person has
          been duly authorized by all necessary action on the part of such
          Selling Shareholder; the Power of Attorney and Custody Agreement of
          each Selling Shareholder has been duly executed and delivered by or on
          behalf of such Selling Shareholder; and the Power of Attorney and
          Custody Agreement of each Selling Shareholder constitutes the valid
          and binding agreement of such Selling Shareholder, enforceable in
          accordance with its terms, except as the enforcement thereof may be
          limited by bankruptcy, insolvency, reorganization, moratorium or other
          similar laws relating to or affecting creditors' rights generally or
          by general equitable principles;

                  (xx) Each of the Selling Shareholders has full right, power
          and authority to enter into and to perform its obligations under this
          Agreement and to sell, transfer, assign and deliver the Shares to be
          sold by such Selling Shareholder hereunder;

                  (xxi)  This Agreement has been duly authorized by each
          Selling Shareholder that is not a natural person and has been duly
          executed and delivered by or on behalf of each Selling Shareholder;
          and

                  (xxii)  Upon the delivery of, and payment for, the Shares as
          contemplated by this Agreement, each of the Underwriters will receive
          valid marketable title to the Shares purchased by it from such Selling
          Shareholder, free and clear of any pledge, lien, security interest,
          encumbrance, claim or equitable interest.  In rendering such opinion,
          such counsel may assume that the Underwriters are without notice of
          any defect in the title of the Shares being purchased from the Selling
          Shareholders.

          In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and Prospectus and related matters were

                                      -25-

 
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements, including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

          Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Shareholders or officers of
the Selling Shareholders (when the Selling Shareholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate.  Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.

          (e) You shall have received on the Closing Date and on any later date
on which Option Shares to be purchased, as the case may be, an opinion of Jones,
Day, Reavis & Pogue, in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.

          (f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Deloitte & Touche LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the

                                      -26-

 
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information.  The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus.  The
Original Letter from Deloitte & Touche LLP shall be addressed to or for the use
of the Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their examination of the consolidated balance sheet of the
Company at June 30, 1996 and 1995 and March 31, 1997 and related consolidated
statements of operations, shareholders' equity, and cash flows for the twelve
(12) months ended June 30, 1996, 1995 and 1994 and the nine (9) months ended
March 31, 1997, [(iii) state that Deloitte & Touche LLP has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of Deloitte &
Touche LLP, as described in SAS 71 on the financial statements for each of the
quarters in the three-quarter period ended March 31, 1997 (the "Quarterly
Financial Statements"),] (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and (v) address other matters
agreed upon by Deloitte & Touche LLP and you.  In addition, you shall have
received from Deloitte & Touche LLP a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements at June 30, 1996 and 1995 and March 31, 1997,
did not disclose any weaknesses in internal controls that they considered to be
material weaknesses.

          (g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:

                  (i) The representations and warranties of the Company in
          this Agreement are true and correct, as if made on and as of the
          Closing Date or any later date on which Option Shares are to be
          purchased, as the case may be, and the Company has complied with all
          the agreements and satisfied all the conditions on its part to be
          performed or satisfied at or prior to the Closing Date or any later
          date on which Option Shares are to be purchased, as the case may be;

                  (ii) No stop order suspending the effectiveness of the
          Registration Statement has been issued and no proceedings for that
          purpose have been instituted or are pending or threatened under the
          Act;

                                      -27-

 
                  (iii) When the Registration Statement became effective and at
          all times subsequent thereto up to the delivery of such certificate,
          the Registration Statement and the Prospectus, and any amendments or
          supplements thereto, contained all material information required to be
          included therein by the Act and the Rules and Regulations and in all
          material respects conformed to the requirements of the Act and the
          Rules and Regulations, the Registration Statement, and any amendment
          or supplement thereto, did not and does not include any untrue
          statement of a material fact or omit to state a material fact required
          to be stated therein or necessary to make the statements therein not
          misleading, the Prospectus, and any amendment or supplement thereto,
          did not and does not include any untrue statement of a material fact
          or omit to state a material fact necessary to make the statements
          therein, in the light of the circumstances under which they were made,
          not misleading, and, since the effective date of the Registration
          Statement, there has occurred no event required to be set forth in an
          amended or supplemented Prospectus which has not been so set forth;
          and

                  (iv) Subsequent to the respective dates as of which
          information is given in the Registration Statement and Prospectus,
          there has not been (a) any material adverse change in the condition
          (financial or otherwise), earnings, operations, business or business
          prospects of the Company and its subsidiaries considered as one
          enterprise, (b) any transaction that is material to the Company and
          its subsidiaries considered as one enterprise, except transactions
          entered into in the ordinary course of business, (c) any obligation,
          direct or contingent, that is material to the Company and its
          subsidiaries considered as one enterprise, incurred by the Company or
          its subsidiaries, except obligations incurred in the ordinary course
          of business, (d) any change in the capital stock or outstanding
          indebtedness of the Company or any of its subsidiaries that is
          material to the Company and its subsidiaries considered as one
          enterprise, (e) any dividend or distribution of any kind declared,
          paid or made on the capital stock of the Company or any of its
          subsidiaries, or (f) any loss or damage (whether or not insured) to
          the property of the Company or any of its subsidiaries which has been
          sustained or will have been sustained which has a material adverse
          effect on the condition (financial or otherwise), earnings,
          operations, business or business prospects of the Company and its
          subsidiaries considered as one enterprise.

          (h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorney for each Selling
Shareholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:

                  (i) The representations and warranties made by such Selling
          Shareholder herein are not true or correct in any material respect on
          the Closing Date or on any later date on which Option Shares are to be
          purchased, as the case may be; or

                                      -28-

 
                  (ii) Such Selling Shareholder has not complied with any
          obligation or satisfied any condition which is required to be
          performed or satisfied on the part of such Selling Shareholder at or
          prior to the Closing Date or any later date on which Option Shares are
          to be purchased, as the case may be.

          (i) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company, each Selling Shareholder and each
beneficial owner of shares of Common Stock as reflected on Exhibit A attached
hereto in writing prior to the date hereof that such person will not, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
Robertson, Stephens & Company LLC.  The foregoing restriction shall have been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the such holder.
Such prohibited hedging or other transactions would including, without
limitation, any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any Securities or with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from Securities.  Furthermore, such person
will have also agreed and consented to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the Securities held by
such person except in compliance with this restriction.

          (j) The Company and the Selling Shareholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Shareholders or
officers of the Selling Shareholders (when the Selling Shareholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Shareholders herein, as to the performance by the
Company and the Selling Shareholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.

          All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel.  The Company and the Selling Shareholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.

          8.   Option Shares.
               ------------- 

               (a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholders set forth on Schedule C hereto hereby grant to
the several Underwriters, for the purpose of covering

                                      -29-

 
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 555,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
4 hereof.  The number of Option Shares to be purchased from each Selling
Shareholder listed on Schedule C shall be in the same proportion that the number
of shares listed across from each such Selling Shareholder's name bears to the
total number of Shares listed on Schedule C.  Such option may be exercised by
the Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company and the Custodian.  The number of Option Shares to
be purchased by each Underwriter from each of such Selling Shareholders set
forth on Schedule C upon the exercise of such option shall be in the same
proportion as the number of Firm Shares purchased by such Underwriter (set forth
in Schedule A hereto) bears to the total number of Firm Shares purchased by the
several Underwriters (set forth in Schedule A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.

          Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 8 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Custodian (and the
Custodian agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Custodian).  In the event of any breach of the foregoing, the
Selling Stockholders set forth on Schedule C, severally and not jointly, shall
reimburse the Underwriters for the interest lost and any other expenses borne by
them by reason of such breach.  Such delivery and payment shall take place at
the offices of Troy & Gould, 1801 Century Park East, 16th Floor, Los Angeles,
California 90067, or at such other place as may be agreed upon among the
Representatives, the Company and the Custodian (i) on the Closing Date, if
written notice of the exercise of such option is received by the Company and the
Custodian at least two (2) full business days prior to the Closing Date, or (ii)
on a date which shall not be later than the third (3rd) full business day
following the date the Company and Custodian receive written notice of the
exercise of such option, if such notice is received by the Company and Custodian
less than two (2) full business days prior to the Closing Date.

          The certificates for the Option Shares to be so delivered will be made
available to you for examination at such office or such other location
including, without limitation, in Chicago, as you may reasonably request at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery.  If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.

          It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been

                                      -30-

 
received by you prior to the date of payment and delivery for the Option Shares
to be purchased by such Underwriter or Underwriters.  Any such payment by you
shall not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder.

              (b) Upon exercise of any option provided for in Section 8(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Shareholders herein, to the accuracy of the statements of the Company, the
Selling Shareholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder, to the conditions set forth in Section 7
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Shareholders or
the satisfaction of any of the conditions herein contained.

          9.  Indemnification and Contribution.
              -------------------------------- 

              (a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
                             --------  -------
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
             -------- -------                                               
Section 9(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person

                                      -31-

 
asserting any losses, claims, damages, liabilities or actions based upon any
untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 5(d)
hereof.

          The indemnity agreement in this Section 9(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act.  This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.

          (b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 9(b) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Shareholder, directly or through such Selling Shareholder's
representatives, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
                             --------  -------                              
provided in this Section 9(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 5(d) hereof.

          The indemnity agreement in this Section 9(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls

                                      -32-

 
any Underwriter within the meaning of the Act or the Exchange Act.  This
indemnity agreement shall be in addition to any liabilities which such Selling
Shareholder may otherwise have.

          (c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Shareholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 9(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.

          The indemnity agreement in this Section 9(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Shareholder and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act or the Exchange
Act.  This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.

          (d) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 9, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 9.  In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
                   --------  -------                                           
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal

                                      -33-

 
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties.  Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 9 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 9(a),
9(b) or 9(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.  In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
                                                        --------          
consent shall not be unreasonably withheld.  No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.

          (e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 9
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 9(f) hereof, the Underwriters severally and not jointly are
responsible pro-rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Shareholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- --------  -------                                                             
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.  The contribution agreement in this Section 9(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.

          (f) The liability of each Selling Shareholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the

                                      -34-

 
provisions of this Section 9 shall be limited to an amount equal to the initial
public offering price of the Selling Shareholder Shares sold by such Selling
Shareholder to the Underwriters minus the amount of the underwriting discount
paid thereon to the Underwriters by such Selling Shareholder.  The Company and
such Selling Shareholders may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible.

              (g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.

          10. Representations, Warranties, Covenants and Agreements to Survive
              ----------------------------------------------------------------
Delivery.  All representations, warranties, covenants and agreements of the
- --------                                                                   
Company, the Selling Shareholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 9 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Shareholder, or
any of their officers, directors or controlling persons within the meaning of
the Act, or the Exchange Act, and shall survive the delivery of the Shares to
the several Underwriters hereunder or termination of this Agreement.

          11. Substitution of Underwriters.  If any Underwriter or Underwriters
              ----------------------------                                     
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.

          If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase.  If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company.  If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the

                                      -35-

 
Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase.  If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation.  If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.

          In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, neither the Company nor any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 6
and 9 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 6 and 9 hereof).

          The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter pursuant to the terms of this Section 11.

          12. Effective Date of this Agreement and Termination.
              ------------------------------------------------ 

          (a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective.  The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur.  By giving notice as set
forth in Section 13 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 5(j), 6 and 9 hereof.

          (b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior

                                      -36-

 
to the Closing Date or on or prior to any later date on which Option Shares are
to be purchased, as the case may be, (i) if the Company or any Selling
Shareholder shall have failed, refused or been unable to perform any agreement
on its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled, including,
without limitation, any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus.  In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 5(j), 6 and 9 hereof.  Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 6 and 9 hereof.

          If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter.  If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.

          13. Notices.  All notices or communications hereunder, except as
              -------                                                     
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to 12525 Chadron Avenue, Hawthorne,
California 90250, telecopier number (310) 644-1727, Attention: Deepak Chopra,
Chief Executive Officer; if sent to one or more of the Selling Shareholders,
such notice shall be sent mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to Deepak Chopra, as Attorney-
in-Fact for the Selling Shareholders, at 12525 Chadron Avenue, Hawthorne,
California 90250, telecopier number (310) 644-1727.

                                      -37-

 
          14. Parties.  This Agreement shall inure to the benefit of and be
              -------                                                      
binding upon the several Underwriters and the Company and the Selling
Shareholders and their respective executors, administrators, successors and
assigns.  Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or entity, other than the parties hereto and
their respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 9 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity.  No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.

          In all dealings with the Company and the Selling Shareholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Shareholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.

          15. Applicable Law.  This Agreement shall be governed by, and
              --------------                                           
construed in accordance with, the laws of the State of California without regard
to principles of conflict of law.

          16. Counterparts.  This Agreement may be signed in several
              ------------                                          
counterparts, each of which will constitute an original.

                                      -38-

 
          If the foregoing correctly sets forth the understanding among the
Company, the Selling Shareholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Shareholders
and the several Underwriters.

                                       Very truly yours,                     
                                                                             
                                                                             
                                       OPTO SENSORS, INC.                    
                                                                             
                                                                             
                                                                             
                                       By:________________________________   
                                       Name:______________________________   
                                       Its:_______________________________   
                                                                             
                                                                             
                                       SELLING SHAREHOLDERS                  
                                                                             
                                                                             
                                                                             
                                       By:_________________________________  
                                          Attorney-in-Fact for the Selling   
                                          Shareholders named in Schedules B  
                                          and C hereto                        


Accepted as of the date first above written:

ROBERTSON, STEPHENS & COMPANY LLC
WILLIAM BLAIR & COMPANY, L.L.C.
VOLPE BROWN WHELAN & COMPANY LLC

On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.


By: ROBERTSON, STEPHENS & COMPANY LLC

By: ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.


By:________________________________
Name:______________________________
Its:_______________________________

                                      -39-

 
                                   SCHEDULE A

Number of Firm Shares To Be Underwriters Purchased ------------ ----------- Robertson, Stephens & Company LLC......................... __________ William Blair & Company, L.L.C............................ __________ Volpe Brown Whelan & Company LLC.......................... __________ Total..................................................... __________ __________
-1- SCHEDULE B Firm Shares
Number of Company Company Shares To Be Sold ------- ----------------- ________ ________ Total...................................................... ________ ________ Number of Selling Shareholder Name of Selling Shareholder Shares To Be Sold --------------------------- ----------------- Scope Industries............................................ 148,148 Sally Chamberlain Trustee, Ed and Sally Fleischer Trust..... 47,593 Cynthia G. Fleischer........................................ 15,750 Gary F. Fleischer........................................... 14,625 Cathleen A. Fleischer....................................... 14,625 Madan and Mohini Syal....................................... 25,926 Good Swartz Berns Pension Fund.............................. 3,000 Steve Cary Good and Anne Good Trust......................... 13,831 Steve Good.................................................. 8,065 Mark & Penny Berns Trust.................................... 5,982 Arnold & Hope Anisgarten.................................... 5,709 Rajiv Mehra................................................. 450 Zev and Elaine Edelstein Trust.............................. 9,259 Glen Sorenson............................................... 9,259 Mohinder and Ranjana Chopra................................. 9,259 Charles/Kiran Kerpelman..................................... 9,259 Martha Holmes............................................... 9,259 Tehari & Durya Rangawala.................................... 7,407 Leila/Birendra Mehra........................................ 3,704 Surendra Jain M.D., Inc..................................... 5,186 Renu Jivrajka............................................... 1,852 Amita Jivrajka.............................................. 1,852 Total.................................................. 370,000
-2- SCHEDULE C Option Shares
Number of Shareholder Name of Selling Shareholder Shares To Be Sold --------------------------- ----------------- Scope Industries............................................ 79,260 Sally Chamberlain Trustee, Ed and Sally Fleischer Trust..... 49,630 Deepak and Nandini Chopra................................... 185,185 Madan and Mohini Syal....................................... 18,519 Ajay Mehra.................................................. 33,333 Good Swartz Berns Pension Fund.............................. 3,309 Steve Cary Good and Anne Good Trust......................... 8,669 Steve Good.................................................. 6,935 Mark & Penny Berns Trust.................................... 1,518 Arnold & Hope Anisgarten.................................... 1,791 Andreas Kotowski............................................ 18,519 Zev and Elaine Edelstein Trust.............................. 9,259 Glen Sorenson............................................... 11,111 Mohinder and Ranjana Chopra................................. 11,111 Manoocher Mansouri.......................................... 14,815 Charles/Kiran Kerpelman..................................... 9,259 Martha Holmes............................................... 9,259 Tehari & Durya Rangawala.................................... 7,407 Sue Sutherland.............................................. 7,407 Anuj Wadhawan............................................... 7,407 Bette Moore................................................. 7,407 Thomas Hickman.............................................. 3,704 Robert Kephart.............................................. 5,556 Phillip M. Wascher.......................................... 7,407 Narayan Taneja.............................................. 1,481 Leila/Birendra Mehra........................................ 3,704 Charan Dewan................................................ 3,704 Jack Kimbro................................................. 1,111 Surendra Jain M.D., Inc..................................... 1,243 Surendra and Kala Jain...................................... 4,683 Meyer & Doreen Luskin Trustee of Meyer & Doreen Luskin Family Trust...................................... 9,259 Denis Noble................................................. 741 Anthony S. Crane & Suzie B. Crane........................... 1,481 Neil Jivrajka............................................... 740 Renu Jivrajka............................................... 1,482 Amita Jivrajka.............................................. 1,482
-3-
Number of Shareholder Name of Selling Shareholder Shares To Be Sold --------------------------- ----------------- Alan J. Bernard & Pamela Barnard............................ 1,481 Peter Bui................................................... 741 Chris Williams.............................................. 741 Chris Chin.................................................. 926 Louis S. and Linda O. Peters................................ 741 Khai Le..................................................... 741 Lincoln Gladden............................................. 741 Total....................................................... 555,000
-4-

 
                                                                     EXHIBIT 3.1

                         CERTIFICATE OF AMENDMENT AND
                                 RESTATEMENT OF
                           ARTICLES OF INCORPORATION

                                       OF

                               OPTO SENSORS, INC.

     Deepak Chopra and Ajay Mehra certify that:

     1.  They are the duly appointed and acting President and Secretary,
respectively, of Opto Sensors, Inc., a California corporation (the
"Corporation").

     2.  The Articles of Incorporation of the Corporation are hereby amended and
restated in their entirety as set forth on Exhibit A attached hereto.

     3.  The amendments herein set forth have been duly approved by the Board of
Directors.

     4.  The amendments herein set forth have been duly approved by the required
vote of the shareholders in accordance with Sections 902 and 903 of the
California Corporations Code.  The Corporation has two classes of shares
outstanding, each of which is entitled to vote with respect to the amendments
herein.  The total number of outstanding shares of the Corporation entitled to
vote with respect to the amendments are 2,568,750 shares of Preferred Stock and
1,517,161 shares of Common Stock.  The number of shares voting in favor of the
amendments equaled or exceeded the vote required.  The percentage vote required
was (i) a majority of the voting power of the outstanding shares of Preferred
Stock and (ii) a majority of the voting power of the outstanding shares of
Common Stock.

 
     We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.


Dated:  June 12, 1997
                               /s/ Deepak Chopra
                              _______________________________
                              Deepak Chopra, President


                               /s/ Ajay Mehra
                              _______________________________
                              Ajay Mehra, Secretary


                                      2.

 
                                   EXHIBIT A

                 AMENDED AND RESTATED ARTICLES OF INCORPORATION
                                       OF
                               OSI SYSTEMS, INC.



                                       I.

     The name of this corporation is OSI Systems, Inc.

                                      II.

     The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.

                                      III.

     A.   The total number of shares of stock which this corporation shall have
authority to issue is 50,000,000, consisting of 40,000,000 shares of Common
Stock and 10,000,000 shares of Preferred Stock.

     B.   Each share of Preferred Stock outstanding as of the effective date of
filing of this Amended and Restated Articles of Incorporation shall, upon the
filing of this Amended and Restated Articles of Incorporation, automatically and
without further action be converted into one and one-half (1.5) outstanding
shares of Common Stock.

     C.   Each share of Common Stock outstanding as of the effective date of
filing of this Amended and Restated Articles of Incorporation shall, upon the
filing of this Amended and Restated Articles of Incorporation, automatically and
without further action be split into one and one-half (1.5) outstanding shares
of Common Stock.

     D.   Shareholders who would otherwise receive a fractional share of Common
Stock after giving effect to the conversion of the Preferred Stock as set forth
in Paragraph B above and the stock split as set forth in Paragraph C above,
shall receive, in lieu of such fractional share, one whole share of Common
Stock.

     E.   The Board of Directors is hereby empowered, by resolution or
resolutions adopted from time to time, to authorize the issuance of one or more
series of Preferred Stock, to fix the number of shares of any series of
Preferred


                                      1.

 
Stock, and to determine the designation of any such series of Preferred Stock.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any such series subsequent to the issuance of shares of that
series.

                                      IV.

     The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.

                                      V.

     This corporation is authorized to indemnify the agents (as defined in
Section 317 of the Corporations Code) of this corporation to the fullest extent
permissible under California law.  Any amendment, repeal or modification of any
provision of this Article V shall not adversely affect the right or protection
of an agent of this corporation existing at the time of such amendment, repeal
or modification.


                                      2.

 
                                                                     EXHIBIT 3.2

                          AMENDED AND RESTATED BYLAWS

                                       OF

                               OSI SYSTEMS, INC.



                                   ARTICLE I

                                    OFFICES

          Section 1.  PRINCIPAL OFFICES.  The board of directors shall fix the
                      -----------------                                       
location of the principal executive office of the corporation at any place
within or outside the State of California.  If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the board of directors shall fix and designate a principal
business office in the State of California.

          Section 2.  OTHER OFFICES.  The board of directors or officers of the
                      -------------                                            
corporation may at any time establish branch or subordinate offices at any place
or places where the corporation is qualified to do business.


                                   ARTICLE II

                            MEETINGS OF SHAREHOLDERS

          Section 1.  PLACE OF MEETINGS.  Meetings of shareholders shall be held
                      -----------------                                         
at any place within or outside the State of California designated by the board
of directors.  In the absence of any such designation, shareholders' meetings
shall be held at the principal executive office of the corporation.

          Section 2.  ANNUAL MEETING.  The annual meeting of shareholders shall
                      --------------                                           
be held each year on a date and at a time designated by the board of directors.
At each annual meeting directors shall be elected, and any other proper business
may be transacted.

          Section 3.  SPECIAL MEETING.  A special meeting of the shareholders
                      ---------------                                        
may be called at any time by the board of directors, or by the chairman of the
board, or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than l0% of the votes at that meeting.

          If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered

                                       1

 
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president, or
the secretary of the corporation.  The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 4 and 5 of this Article II, that a meeting will
be held at the time requested by the person or persons calling the meeting, not
less than thirty-five (35) nor more than sixty (60) days after the receipt of
the request.  If the notice is not given within twenty (20) days after receipt
of the request, the person or persons requesting the meeting may give the
notice.  Nothing contained in this paragraph of this section 3 shall be
construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.

          Section 4.  NOTICE OF SHAREHOLDERS' MEETINGS.  All notices of meetings
                      --------------------------------                          
of shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting.  The notice shall specify the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving the notice, intends
to present for action by the shareholders.  The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, management intends to present for election.

          If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of that Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that proposal.

          Section 5.  MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.  Notice of
                      --------------------------------------------            
any meeting of shareholders shall be given either personally or by first-class
mail or telegraphic or other written communication, charges prepaid, addressed
to the shareholder at the address of that shareholder appearing on the books of
the corporation or given by the shareholder to the corporation for the purpose
of notice.  If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located.

                                       2

 
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.

          If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.

          An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.

          Section 6.  QUORUM.  The presence in person or by proxy of the holders
                      ------                                                    
of a majority of the shares entitled to vote at any meeting of shareholders
shall constitute a quorum for the transaction of business.  The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.

          Section 7.  ADJOURNED MEETING; NOTICE.  Any shareholders' meeting,
                      -------------------------                             
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the shares represented at that
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at that meeting, except as provided in Section 6 of
this Article II.

          When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the board of directors shall
set a new record date.  Notice of any such adjourned meeting shall be given to
each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 4 and 5 of this Article II.  At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.

          Section 8.  VOTING.  The shareholders entitled to vote at
                      ------                                       

                                       3

 
any meeting of shareholders shall be determined in accordance with the
provisions of Section 11 of this Article II, subject to the provisions of
Sections 702 to 704, inclusive, of the Corporations Code of California (relating
to voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).  The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder before the voting has begun.  On any matter other than elections of
directors, any shareholder may vote part of the shares in favor of the proposal
and refrain from voting the remaining shares or vote them against the proposal,
but, if the shareholder fails to specify the number of shares which the
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares that the shareholder
is entitled to vote.  If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting and entitled to vote on any
matter (other than the election of directors) shall be the act of the
shareholders, unless the vote of a greater number of voting by classes is
required by California General Corporation Law or by the articles of
incorporation.

          At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
                                                 ----                          
candidates a number of votes greater than the number of shareholder's shares)
unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes.  If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit.  The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.

          Section 9.  WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS.  The
                      --------------------------------------------------      
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes.  The waiver of notice or consent need not specify either the business
to be transacted or the purpose of any annual or special meeting of
shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section 4
of this Article II, the waiver of notice or consent shall state the general
nature of the proposal.  All such waivers,

                                       4

 
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.

          Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.

          Section 10.  SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
                       -------------------------------------------------------  
Any action which may be taken at any annual or special meeting of shareholders
may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take that action at a meeting at which all shares
entitled to vote on that action were present and voted.  In the case of election
of directors, such a consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy on the
board of directors that has not been filled by the directors, by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors.  All such consents shall be filed with the
secretary of the corporation and shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares or a personal representative of the shareholder or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.

          If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II.  In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of that Code, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.

                                       5

 
          Section 11.  RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
                       ------------------------------------------------------
CONSENTS.  For purposes of determining the shareholders entitled to notice of
- --------                                                                     
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the California General
Corporation Law.

     If the board of directors does not so fix a record date:

          (a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.

          (b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the date on which the first written
consent is given, or (ii) when prior action of the board has been taken, shall
be at the close of business on the date on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
action, whichever is later.

          Section 12.  PROXIES.  Every person entitled to vote for directors or
                       -------                                                 
on any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation.  A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the shareholder or the
shareholder's attorney-in-fact.  A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy.  The revocability of a proxy that states
on its face that is irrevocable shall be governed by the provisions of Sections
705(e) and 705(f) of the Corporations Code of California.

                                       6

 
     Section 13.  INSPECTORS OF ELECTION.  Before any meeting of shareholders, 
                  ----------------------                        
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (l) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (l) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.

     These inspectors shall:

          (a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;

          (b) Receive votes, ballots, or consents;

          (c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;

          (d) Count and tabulate all votes or consents;

          (e) Determine when the polls shall close;

          (f) Determine the result; and

          (g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.

     Section 14.  NOMINATIONS FOR DIRECTOR; SHAREHOLDER PROPOSALS.
                  ----------------------------------------------- 

          (a) Nomination of Directors.  Nominations for election of members of
              -----------------------                                         
the board of directors may be made by the board of directors or by any
shareholder of any outstanding class of voting stock of the corporation entitled
to vote for the election of directors in accordance with this Section 14.

          (b) Other Proposals.  Any shareholder of the corporation entitled to
              ---------------                                                 
vote at any annual or special meeting of shareholders may make nominations for
the election of directors and other proposals for inclusion on the agenda of any
such meeting provided such shareholder complies with the timely notice
provisions set forth in this Section 14 (as well as any additional requirements
under any applicable law or regulation).

                                       7

 
          (c) Timely Notice by Shareholders.  A shareholder's notice shall be
              -----------------------------                                  
delivered to or mailed and received at the principal executive offices of the
corporation (i) in the case of any special meeting and of the first annual
meeting held after the effective date of these Amended and Restated Bylaws, not
less than thirty (30) days nor more than sixty (60) days prior to the meeting
date specified in the notice of such meeting; provided, however, that if less
                                              --------                       
than forty (40) days' notice or prior public disclosure of the date of such
meeting is given or made to shareholders, notice by shareholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of such meeting was mailed or
such public disclosure was made, and (ii) in the case of any subsequent annual
meeting, not less than ninety (90) days prior to the day and month on which, in
the immediately preceding year, the annual meeting for such year had been held.
Such shareholder's notice shall set forth (A) as to each person whom the
shareholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, the class and number of
shares of the corporation which are beneficially owned by such person that are
required to be disclosed in solicitations of the proxies with respect to
nominees for election as directors, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, without limitation, such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director, if elected); (B) as to each action item required to be
included on the agenda, a description, in sufficient detail, of the purpose and
effect of the proposal to the extent necessary to properly inform all
shareholders entitled to vote thereon prior to any such vote; and (C) as to the
shareholder giving the notice, (i) the name and address, as they appear on the
corporation's books, of such shareholder and (ii) the class and number of shares
of the corporation which are beneficially owned by such shareholder.

          (d) Failure to Provide Timely Notice, Etc.  No person nominated by a
              -------------------------------------                           
shareholder shall be elected as a director of the corporation unless nominated
in accordance with the procedures set forth in this Section 14.  The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination or other proposal by a shareholder was not properly brought
before the meeting, and, if the Chairman shall so determine, he shall so declare
to the meeting and such nomination or other proposal shall be disregarded.


                                  ARTICLE III

                                   DIRECTORS

     Section 1.  POWERS.  Subject to the provisions of the California General 
                 ------                                              
Corporation Law and any limitations in the articles of incorporation and these
bylaws relating to action

                                       8

 
required to be approved by the shareholders or by the outstanding shares, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.

     Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:

          (a) Select and remove all officers, agents, and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the articles of incorporation, and with these bylaws; fix their
compensation; and require from them security for faithful service.

          (b) Change the principal executive office or the principal business
office in the State of California from one location to another; cause the
corporation to be qualified to do business in any other state, territory,
dependency, or country and conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting, or meetings, including annual
meetings.

          (c) Adopt, make and use a corporation seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates.

          (d) Authorize the issuance of shares of stock of the corporation on
any lawful terms, in consideration of money paid, labor done, services actually
rendered, debts or securities canceled, or tangible or intangible property
actually received.

          (e) Borrow money and incur indebtedness on behalf of the corporation,
and cause to be executed and delivered for the corporation's purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities.

     Section 2.  NUMBER OF DIRECTORS.
                 ------------------- 

          (a) The authorized number of directors shall be not less than five nor
more than nine.  The exact number of directors shall be fixed from time to time
by resolution of the Board of Directors, except that in the absence of any such
designation, such number shall be five.

          (b) The maximum or minimum authorized number of directors may only be
changed by an amendment of this Section approved by the vote or written consent
of a majority of the outstanding shares entitled to vote; provided, however,
that an amendment reducing the minimum number to a number less than five shall
not be adopted if the votes cast against its adoption at a meeting (or the
shares not consenting in the case of action by written consent) exceed 16-2/3%
of such outstanding shares; and

                                       9

 
provided further, that in no case shall the stated maximum authorized number of
directors exceed two times the stated minimum number of authorized directors
minus one.

          Section 3.  ELECTION AND TERM OF OFFICE OF DIRECTORS.  Directors shall
                      ----------------------------------------                  
be elected at each annual meeting of the shareholders to hold office until the
next annual meeting.  Each director, including a director elected to fill a
vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.

          Section 4.  VACANCIES.  Vacancies in the board of directors may be
                      ---------                                             
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote.  Each director so elected shall hold office until the next annual meeting
of the shareholders and until a successor has been elected and qualified.

          A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation, or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting.

          The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.

          Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary, or the board of directors,
unless the notice specifies a later time for that resignation to become
effective.  If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.

          No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.

          Section 5.  PLACE OF MEETING AND MEETINGS BY TELEPHONE.  Regular
                      ------------------------------------------          
meetings of the board of directors may be held at any place within or outside
the State of California that has been designated from time to time by resolution
of the board.  In the absence of

                                       10

 
such a designation, regular meetings shall be held at the principal executive
office of the corporation.  Special meetings of the board shall be held at any
place within or outside the State of California that has been designated in the
notice of the meeting or, if not stated in the notice or there is no notice, at
the principal executive office of the corporation.  Any meeting, regular or
special, may be held by conference telephone or similar communication equipment,
so long as all directors participating in the meeting can hear one another, and
all such directors shall be deemed to be present in person at the meeting.

          Section 6.  ANNUAL MEETING.  Immediately following each annual meeting
                      --------------                                            
of shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business.  Notice of this meeting shall not be required.

          Section 7.  OTHER REGULAR MEETINGS.  Other regular meetings of the
                      ----------------------                                
board of directors shall be held without call at such time as shall from time to
time be fixed by the board of directors.  Such regular meetings may be held
without notice.

          Section 8.  SPECIAL MEETINGS.   Special meetings of the board of
                      ----------------                                    
directors for any purpose or purposes may be called at any time by the chairman
of the board or the president or any vice president or the secretary or any two
directors.

          Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation.  In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting.  In case the notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting.  Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director.  The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.

          Section 9.  QUORUM.  A majority of the authorized number of directors
                      ------                                                   
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III.  Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors, subject to
the provisions of Section 310 of the Corporations Code of California (as to
approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of that Code (as to
appointment of committees), and

                                       11

 
Section 317(e) of that Code (as to indemnification of directors).  A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for that meeting.

          Section 10.  WAIVER OF NOTICE.  The transaction of any meeting of the
                       ----------------                                        
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes.  The waiver of notice or consent need not
specify the purpose of the meeting.  All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.  Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting, before or at its commencement, the lack
of notice to that director.

          Section 11.  ADJOURNMENT.  A majority of the directors present,
                       -----------                                       
whether or not constituting a quorum, may adjourn any meeting to another time
and place.

          Section 12.  NOTICE OF ADJOURNMENT.  Notice of the time and place of
                       ---------------------                                  
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of the adjournment.

          Section 13.  ACTION WITHOUT MEETING.  Any action required or permitted
                       ----------------------                                   
to be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action.  Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors.  Such written consent or
consents shall be filed with the minutes of the proceedings of the board.

          Section 14.  FEES AND COMPENSATION OF DIRECTORS.  Directors and
                       ----------------------------------                
members of committees may receive such compensation, if any, for their services,
and such reimbursement of expenses, as may be fixed or determined by resolution
of the board of directors.  This Section 14 shall not be construed to preclude
any director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.

                                       12

 
                                  ARTICLE IV

                                  COMMITTEES

     Section 1.  COMMITTEES OF DIRECTORS.  The board of directors may, by
                 -----------------------                                 
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board.  The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee.  Any committee, to the extent provided
in the resolution of the board, shall have all the authority of the board,
except with respect to:

          (a) the approval of any action which, under the General Corporation
Law of California, also requires shareholder's approval or approval of the
outstanding shares;

          (b) the filling of vacancies on the board of directors or in any
committee;

          (c) the fixing of compensation of the directors for serving on the
board or on any committee;

          (d) the amendment or repeal of bylaws or the adoption of new bylaws;

          (e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;

          (f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or

          (g) the appointment of any other committees of the board of directors
or the members of these committees.

     Section 2.  MEETINGS AND ACTION OF COMMITTEES.  Meetings and action of
                 ---------------------------------                         
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee; special meetings of the committees may also be called by
resolution of the board of directors; and notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee.  The board of directors may adopt
rules for the government of any committee not

                                       13

 
inconsistent with the provisions of these bylaws.


                                   ARTICLE V

                             OFFICERS AND EMPLOYEES

          Section 1.  OFFICERS.  The officers of the corporation shall be a
                      --------                                             
president, a secretary, and a chief financial officer.  The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V.  Any number of offices may
be held by the same person.

          Section 2.  ELECTION OF OFFICERS.  The officers of the corporation,
                      --------------------                                   
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of an officer under any contract of employment.

          Section 3.  SUBORDINATE OFFICERS.  The board of directors may appoint,
                      --------------------                                      
and may empower the president to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the bylaws or as
a board of directors may from time to time determine.

          Section 4.  REMOVAL AND RESIGNATION OF OFFICERS.  Subject to the
                      -----------------------------------                 
rights, if any, of an officer under any contract of employment, any officer may
be removed, either with or without cause, by the board of directors, at any
regular or special meeting of the board, or, except in case of an officer chosen
by the board of directors, by an officer upon whom such power of removal may be
conferred by the board of directors.

          Any officer may resign at any time by giving written notice to the
corporation.  Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective.  Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.

          Section 5.  VACANCIES IN OFFICES.  A vacancy in any office because of
                      --------------------                                     
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.

          Section 6.  CHAIRMAN OF THE BOARD.  The chairman of the board, if such
                      ---------------------                                     
an officer be elected, shall preside at meetings of

                                       14

 
the board of directors and exercise and perform such other powers and duties as
from time to time may be assigned to him by the board of directors or prescribed
by these bylaws.  If there is no president, the chairman of the board shall in
addition be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 7 of this Article V.

          Section 7.  PRESIDENT.  Subject to such supervisory powers, if any, as
                      ---------                                                 
may be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation.  He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors.  He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or the bylaws.

          Section 8.  VICE PRESIDENTS.  In the absence or disability of the
                      ---------------                                      
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president.  The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, the chairman of the board, the president or the bylaws.

          Section 9.  SECRETARY.  The secretary shall keep or cause to be kept,
                      ---------                                                
at the principal executive office or such other place as the board of directors
may direct, a book of minutes of all meetings and actions of directors,
committees of directors, and shareholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice given,
the names of those present at directors' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.

          The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.

          The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required

                                       15

 
by the bylaws or by law to be given, and he shall keep the seal of the
corporation if one be adopted, in safe custody, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
by the bylaws.

          Section 10.  CHIEF FINANCIAL OFFICER.  The chief financial officer
                       -----------------------                              
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and shares.
The books of account shall at all reasonable times be open to inspection by any
directors.

          The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors.  He shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or the bylaws.


                                   ARTICLE VI

                    INDEMNIFICATION OF DIRECTORS, OFFICERS,

                          EMPLOYEES, AND OTHER AGENTS

          Section 1.  AGENTS, PROCEEDINGS, AND EXPENSES.  For the purposes of
                      ---------------------------------                      
this Article, "agent" means any person who is or was a director, officer,
employee, or other agent of this corporation, or is or was serving at the
request of this corporation as a director, officer, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise, or was a director, officer, employee, or agent of a foreign or
domestic corporation which was a predecessor corporation of this corporation or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative, or investigative; and "expenses"
includes, without limitation, attorneys' fees and any expenses of establishing a
right to indemnification under Section 4 or Section 5(c) of this Article.

          Section 2.  ACTIONS OTHER THAN BY THE CORPORATION.  Subject to the
                      -------------------------------------                 
provisions of Section 5, Section 8 and Section 9 of this Article, this
corporation shall indemnify any person who was or is a party, or is threatened
to be made a party, to any proceeding (other than an action by or in the right
of this corporation) by reason of the fact that such person is or was an agent
of this

                                       16

 
corporation, against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with such proceeding if that
person acted in good faith and in a manner that person reasonably believed to be
in the best interests of this corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe the conduct of that person was
unlawful.  The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of this
corporation or that the person had reasonable cause to believe that the person's
conduct was unlawful.

     Section 3.  ACTIONS BY THE CORPORATION.  Subject to the provisions of
                 --------------------------                               
Section 5, Section 8 and Section 9 of this Article, this corporation shall
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action by or in the right of this
corporation to procure a judgment in its favor by reason of the fact that person
is or was an agent of this corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of that
action if that person acted in good faith, in a manner that person believed to
be in the best interests of this corporation and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances.  No indemnification shall be made under this
Section 3:

          (a) In respect of any claim, issue or matter as to which that person
shall have been adjudged to be liable to this corporation in the performance of
that person's duty to this corporation, unless and only to the extent that the
court in which that action was brought shall determine upon application that, in
view of all the circumstances of the case, that person is fairly and reasonably
entitled to indemnity for the expenses which the court shall determine;

          (b) Of amounts paid in settling or otherwise disposing of a threatened
or pending action, without court approval; or

          (c) Of expenses incurred in defending a threatened or pending action
which is settled or otherwise disposed of without court approval.

     Section 4.  SUCCESSFUL DEFENSE BY AGENT.  To the extent that an agent of
                 ---------------------------                              
this corporation has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article, or in defense of any claim,
issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.

                                       17

 
     Section 5.  REQUIRED APPROVAL.  Except as provided in Section 4 of this 
                 -----------------                                     
Article, any indemnification under this Article shall be made by this
corporation only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article, by:

          (a) A majority vote of a quorum consisting of directors who are not
parties to the proceeding;

          (b) Approval by the affirmative vote of a majority of the shares of
this corporation entitled to vote represented at a duly held meeting at which a
quorum is present or by the written consent of holders of a majority of the
outstanding shares entitled to vote.  For this purpose, the shares owned by the
person to be indemnified shall not be considered outstanding or entitled to vote
thereon; or

          (c) The court in which the proceeding is or was pending, on
application made by this corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by this
corporation.

     Section 6.  ADVANCE OF EXPENSES.  Expenses incurred in defending any
                 -------------------                                     
proceeding may be advanced by this corporation before the final disposition of
the proceeding on receipt of an undertaking by or on behalf of the agent to
repay the amount if it shall be determined ultimately that the agent is not
entitled to be indemnified as authorized in this Article.

     Section 7.  OTHER CONTRACTUAL RIGHTS.  Nothing contained in this Article 
                 ------------------------                            
shall affect any right to indemnification to which persons other than directors
and officers of this corporation or any subsidiary hereof may be entitled by
contract or otherwise.

     Section 8.  LIMITATIONS.  No indemnification or advance shall be made 
                 -----------                                              
under this Article, except as provided in Section 4 or Section 5(c), in any
circumstance where it appears:

          (a) That it would be inconsistent with a provision of the articles, a
resolution of the shareholders, or an agreement in effect at the time of the
accrual of the alleged cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which prohibits or otherwise
limits indemnification; or

          (b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.

     Section 9.  INSURANCE.  Upon and in the event of a determination by the
                 ---------                                              
board of directors of this corporation to purchase such insurance, this
corporation shall purchase and

                                       18

 
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or insured by the agent in such capacity or arising
out of the agent's status as such whether or not this corporation would have the
power to indemnify the agent against that liability under the provisions of this
section.

          Section 10.  FIDUCIARIES OF CORPORATION EMPLOYEE BENEFIT PLAN.  This
                       ------------------------------------------------       
Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in that person's
capacity as such, even though that person may also be an agent of the
corporation as defined in Section 1 of this Article.  Nothing contained in this
Article shall limit any right to indemnification to which such a trustee,
investment manager, or other fiduciary may be entitled by contract or otherwise,
which shall be enforceable to the extent permitted by applicable law other than
this Article.


                                  ARTICLE VII
 
                              RECORDS AND REPORTS

          Section 1.  MAINTENANCE AND INSPECTION OF SHARE REGISTER.  The
                      --------------------------------------------      
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the board of directors, a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of shares held
by each shareholder.

          A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and share holdings during usual business hours on five (5) days prior
written demand on the corporation and (ii) obtain from the transfer agent of the
corporation, on written demand and on the tender of such transfer agent's usual
charges for such list, a list of the shareholders' names and addresses, who are
entitled to vote for the election of directors, and their share holdings, as of
the most recent record date for which that list has been compiled or as of a
date specified by the shareholder after the date of demand.  This list shall be
made available to any such shareholder by the transfer agent on or before the
later of five (5) days after the demand is received or the date specified in the
demand as the date as of which the list is to be compiled.  The record of
shareholders shall also be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate.  Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making the demand.

                                       19

 
          Section 2.  MAINTENANCE AND INSPECTION OF BYLAWS.  The corporation
                      ------------------------------------                  
shall keep at its principal executive office, or if its principal executive
office is not in the State of California, at its principal business office in
this state, the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during office
hours.  If the principal executive office of the corporation is outside the
State of California and the corporation has no principal business office in this
state, the Secretary shall, upon the written request of any shareholder, furnish
to that shareholder a copy of the bylaws as amended to date.

          Section 3.  MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
                      -----------------------------------------------------  
The accounting books and records and minutes of proceedings of the shareholders
and the board of directors and any committee or committees of the board of
directors shall be kept at such place or places designated by the board of
directors, or, in the absence of such designation, at the principal executive
office of the corporation.  The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.  The minutes and
accounting books and records shall be open to inspection upon the written demand
of any shareholder or holder of a voting trust certificate, at any reasonable
time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.  The inspection may be made in person or by an agent or attorney,
and shall include the right to copy and make extracts.  These rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.

          Section 4.  INSPECTION BY DIRECTORS.  Every director shall have the
                      -----------------------                                
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations.  This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.

          Section 5.  ANNUAL REPORT TO SHAREHOLDERS.  The annual report to
                      -----------------------------                       
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as they consider appropriate.

          Section 6.  FINANCIAL STATEMENTS.  A copy of any annual financial
                      --------------------                                 
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each period, that has been prepared by the corporation shall be kept
on file in the principal executive office of the corporation for twelve (12)
months and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such

                                       20

 
statement or a copy shall be mailed to any such shareholder.

          If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request.  If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.

          The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual, or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.

          The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.

          Section 7.  ANNUAL STATEMENT OF GENERAL INFORMATION.  The corporation
                      ---------------------------------------                  
shall, within the statutorily required time period, file with the Secretary of
State of the State of California, on the prescribed form, a statement setting
forth the authorized number of directors, the names and complete business or
residence addresses of all incumbent directors, the names and complete business
or residence addresses of the chief executive officer, secretary, and chief
financial officer, the street address of its principal executive office or
principal business office in this state, and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.


                                  ARTICLE VIII

                           GENERAL CORPORATE MATTERS

          Section 1.  RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
                      -----------------------------------------------------  
For purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any

                                       21

 
other lawful action (other than action by shareholders by written consent
without a meeting), the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days before any such action, and in that
case only shareholders of record on the date so fixed are entitled to receive
the dividend, distribution, or allotment of rights or to exercise the rights, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided in the
California General Corporation Law.

          If the board of directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60) day before the date of that action, whichever is later.

          Section 2.  CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.  All checks,
                      -----------------------------------------              
drafts, or other orders for payment of money, notes, or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the board of directors.

          Section 3.  CORPORATION CONTRACTS AND INSTRUMENTS; HOW EXECUTED.  The
                      ---------------------------------------------------      
board of directors, except as otherwise provided in these bylaws, may authorize
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and this
authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent, or employee shall have the power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.

          Section 4.  CERTIFICATES FOR SHARES.  A certificate or certificates
                      -----------------------                                
for shares of the capital stock of the corporation shall be issued to each
shareholder when any of these shares are fully paid, and the board of directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state the amount of the consideration to be paid
for them and the amount paid.  All certificates shall be signed in the name of
the corporation by the chairman of the board or vice chairman of the board or
the president or vice president and by the chief financial officer or an
assistant treasurer or the secretary or any assistant secretary, certifying the
number of shares and the class or series of shares owned by the shareholder.
Any or all of the signatures on the certificate may be facsimile.  In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on a certificate shall have ceased to be that officer,
transfer agent, or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent, or registrar at the date of issuance.

                                       22

 
          Section 5.  LOST CERTIFICATES.  Except as provided in this Section 5,
                      -----------------                                        
no new certificates for shares shall be issued to replace an old certificate
unless the latter is surrendered to the corporation and canceled at the same
time.  The board of directors may, in case any share certificate or certificate
for any other security is lost, stolen, or destroyed, authorize the issuance of
a replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.

          Section 6.  REPRESENTATION OF SHARES OF OTHER CORPORATIONS.  The
                      ----------------------------------------------      
chairman of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation.  The authority granted to these
officers to vote or represent on behalf of the corporation any and all shares
held by the corporation in any other corporation or corporations may be
exercised by any of these officers in person or by any person authorized to do
so by a proxy duly executed by these officers.

          Section 7.  CONSTRUCTION AND DEFINITIONS.  Unless the context requires
                      ----------------------------                              
otherwise, the general provisions, rules of construction, and definitions in the
California General Corporation Law shall govern the construction of these
bylaws.  Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.


                                  ARTICLE IX

                                  AMENDMENTS

          Section 1.  AMENDMENT BY SHAREHOLDERS.  New bylaws may be adopted or
                      -------------------------                               
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote except as
otherwise provided by law or by the articles of incorporation.

          Section 2.  AMENDMENT BY DIRECTORS.  Subject to the rights of the
                      ----------------------                               
shareholders as provided in Section I of this Article IX, bylaws, other than a
bylaw or an amendment of a bylaw changing the authorized number of directors,
may be adopted, amended, or repealed by the board of directors.

                                       23

 
                                                                    EXHIBIT 10.1

                          INCENTIVE STOCK OPTION PLAN
                          ---------------------------
                                       OF
                                       --
                               OPTO SENSORS, INC.
                               ------------------


1.   PURPOSE AND EFFECT.
     ------------------ 

     The purpose of this Incentive Stock Option Plan ("Plan") of Opto Sensors,
Inc., a California corporation ("Company"), is to promote the interests of the
Company and its stockholders by providing a method whereby certain officers,
directors and key employees of the Company may be encouraged to invest in the
Company's Common Stock and thereby increase their proprietary interest in its
business, encourage them to remain in the employ of the Company and increase
their personal interest in its continued success and progress.

2.   ADMINISTRATION.
     -------------- 

     (a) The Company's Board of Directors ("Board") shall have full power and
authority, not inconsistent with the provisions of the Plan, to interpret the
provisions and supervise the administration of the Plan.  All determinations by
the Board shall be made by the affirmative vote of a majority of its members,
but any determination reduced to writing and signed by a majority of the members
shall be fully as effective as if it had been made by a majority vote at a
meeting duly called and held.

     (b) Each option shall be evidenced by an option agreement which shall
contain such terms and conditions as may be approved by the Board and shall be
signed by an officer of the Company and the optionee.

     (c) Subject to any applicable provisions of the Company's By-Laws, all
decisions made by the Board shall be final, conclusive and binding on all
persons, including the Company, stockholders, employees, and optionees.

3.   SHARES SUBJECT TO THE PLAN.
     -------------------------- 

     (a) The shares to be delivered upon exercise of options granted under the
Plan shall be made available, at the discretion of the Board, either from the
authorized but unissued shares of the Company's Common Stock or from shares of
the Company's Common Stock reacquired by the Company.

     (b) Subject to adjustments made pursuant to the provisions of paragraph (c)
of this Section 3, the aggregate number of shares to be delivered upon exercise
of all options which may be granted under this Plan shall not exceed 700,000
shares.  If an option granted under the Plan shall expire or terminate for any
reason during the term of the Plan, the shares subject to but not delivered
under such option shall be available for other options.


 
     (c) In the event of a merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Company's Common Stock, such adjustment shall be made in the
aggregate number of shares subject to the Plan, and the number and option price
of shares subject to options granted under the Plan as may be determined to be
appropriate by the Board.

4.   ELIGIBILITY AND PARTICIPATION.
     ----------------------------- 

     The persons eligible to receive options under the Plan shall consist of
officers, directors and key employees of the Company.  Subject to the
limitations of the Plan, the Board shall select the persons to be granted
options, determine the number and option price of the shares subject to each
option, and determine the time when each option shall be granted.  More than one
option may be granted to the same person.

5.   TERM OF PLAN AND OPTION PERIOD.
     ------------------------------ 

     The last day which options may be granted under the Plan shall expire on
December 31, 1998.  Subject to the provisions of the Plan with respect to death,
retirement and termination of employment, the maximum period during which each
option may be exercised shall in no event exceed five years.

6.   OPTION PRICE.
     ------------ 

     The price at which shares may be purchased upon exercise of a particular
option shall be determined by the Board and may vary from time to time.

7.   EXERCISE OF OPTIONS.
     ------------------- 

     (a) No portion of any option granted under this Plan may be exercised until
the optionee has been an officer, director or employee of the Company for at
least one year immediately following the date the option is granted and, except
in case of death, retirement or termination of employment as hereinafter
provided, only during the continuance of the optionee's relationship with the
Company as an officer, director or employee.  Subject to the foregoing
limitations and the terms and conditions of the option agreement, each option
shall be exercisable as follows:

          (i) After one year of a continuous relationship as an director or
     employee, no more than fifty percent (50%) of the shares subject to the
     option.

          (ii) After two years of a continuous relationship as an officer,
     director or employee, no more than seventy-five percent (75%) of the shares
     subject to the option.

                                       2


 
          (iii)  After three years of a continuous relationship as an officer,
     director or employee, the remaining balance of the shares subject to the
     option which have not been exercised.

     (b) No shares shall be delivered pursuant to the exercise of any option, in
whole or in part, until qualified for delivery under such laws and regulations
as may be deemed by the Board to be applicable thereto and until payment in full
of the option price therefor is received by the Company.  No optionee shall be
or deemed to be a holder of any shares subject to such option unless and until
the certificate or certificates therefor have been issued.

8.   TRANSFERABILITY OF OPTIONS.
     -------------------------- 

     An option granted under the Plan may not be transferred and may be
exercised only by the optionee during this lifetime and during his relationship
as an officer, director or employee of the Company.

9.   DEATH, RETIREMENT AND TERMINATION OF EMPLOYMENT.
     ----------------------------------------------- 

     Any option, the period of which has not theretofore expired, shall
terminate at the time of the death of the optionee or of the termination for any
reason of such optionee's relationship with the Company as an officer, director
or employee (for any reason whatsoever, with or without cause), and no shares
may thereafter be delivered pursuant to such option.

     If, during the three year period immediately following the date that an
optionee first receives a grant of options under the Plan (such date is referred
to as the "Optionee's Initial Grant Date"), said optionee dies, retires or has
his relationship with the Company terminated by either the Company or him (for
any reason whatsoever, with or without cause), the Company shall have the right,
but shall not be obligated, to purchase such shares from the optionee or his
estate at a purchase price equal to the amount paid by the optionee to the
Company for such shares.  In order to exercise the aforesaid right, the Company
must notify the optionee or his estate within ninety (90) days after death,
retirement or termination, whichever is the case.  The Company shall have no
right under the Plan to purchase shares from an optionee or his estate if the
optionee's death, retirement or termination of relationship with the Company
occurs more than three (3) years after the Optionee's Initial Grant Date.

                                       3


 

                        INCENTIVE STOCK OPTION AGREEMENT
                        --------------------------------


     THIS INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is made and entered
into this day of ____________, 19__, by and between OPTO SENSORS, INC.
("Company"), a California corporation, and ________________ ("Optionee").

     WHEREAS, the Company has adopted an Incentive Stock Option Plan ("Plan")
for the granting to the Company's officers, directors and key employees of
options to purchase shares of Common Stock from the Company in order to
encourage stock ownership in the Company by such persons; and

     WHEREAS, pursuant to the Plan, the Company's Board of Directors ("Board")
has approved the execution of this Agreement to evidence the grant to the
Optionee of the right and option to purchase shares of the Common Stock of the
Company upon the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual
obligations herein contained, it is agreed as follows:

     1.   Granting and Exercising of Option.
          --------------------------------- 

     The Company grants, as of the date set forth above, to the Optionee the
right and option to purchase, on the terms and conditions hereinafter set forth,
all or any part of an aggregate of ____________ shares of the Company's no par
value Common Stock ("Shares") at the purchase price of $________________ per
Share, exercisable in the amount and at the times set forth in this paragraph
below:

          (a) No portion of any option granted under this Agreement may be
exercised until the Optionee has been an officer, director or employee of the
Company for at least one year immediately following the date the option is
granted and, except death, retirement or termination of employment as
hereinafter provided, only during the continuance of the Optionee's relationship
with the Company as an officer, director or employee. Subject to the foregoing
limitations and the terms and conditions of the Plan, each option shall be
exercisable as follows:

              (i) After one year of a continuous relationship as an officer,
director or employee, no more than fifty percent (50%) of the Shares subject to
the option.

              (ii) After two years of a continuous relationship as an officer,
director or employee, no more than seventy-five percent (75%) of the Shares
subject to the option.

              (iii) After three years of a continuous relationship as an
officer, director or employee, the remaining balance of the Shares subject to
the option which have not been exercised.

                                       1

 
          (b) No Shares shall be delivered pursuant to the exercise of any
option, in whole or in part, until qualified for delivery under such laws and
regulations as may be deemed by the Board to be applicable thereto and until
payment in full of the option price therefor is received by the Company.  No
Optionee shall be or deemed to be a holder of any Shares subject to such option
unless and until the certificate or certificates therefor have been issued.

     Notwithstanding anything provided herein to the contrary, any option
granted shall terminate at the close of business on the date preceding the fifth
anniversary of the date of grant.

     2.   Manner of Exercise.
          ------------------ 

     Each exercise of this option shall be by means of a written notice of
exercise delivered to the Secretary of the Company, specifying the number of
Shares to be purchased and accompanied by payment in cash or by certified or
cashier's check payable to the order of the Company of the full purchase price
of the Shares to be purchased. In addition, each notice of exercise shall be
accompanied by a representation and agreement in writing, signed by the
Optionee, that the Shares being acquired are being acquired in good faith for
investment, and not for sale or distribution, and shall not be pledged or
hypothecated, nor sold or transferred, in the absence of an effective
registration statement for the Shares under the Securities Act of 1933, or an
opinion of counsel of the Company that registration is not required under said
Act, and that the Company may attach to the Shares a legend to that effect.

     3.   Death, Retirement and Termination of Employment.
          ----------------------------------------------- 

     Any option, the period of which has not theretofore expired, shall
terminate at the time of the death of the Optionee or of the termination for any
reason of such Optionee's relationship with the Company as an officer, director
or employee (for any reason whatsoever, with or without cause), and no Shares
may thereafter be delivered pursuant to such option.

     If, during the three year period immediately following the earlier of the
execution of this Agreement or a similar Incentive Stock Option Agreement
between Company and Optionee, the Optionee acquires any Shares under the option
and thereafter dies, retires or has his relationship with the Company terminated
by either the Company or him (for any reason whatsoever, with or without cause)
during said three year period, the Company shall have the right, but shall not
be obligated to, purchase such Shares from the Optionee or his estate at a
purchase price equal to the amount paid by the Optionee to the Company for such
Shares.  In order to exercise the aforesaid right, the Company must notify the
Optionee or his estate within ninety (90) days after death, retirement or
termination, whichever is the case.  The Company shall have no right under this
Agreement to purchase shares from the Optionee or his estate if the Optionee's
death, retirement or termination of relationship with the Company occurs more
than three (3) years

                                       2

 
after the date the Optionee first receives a grant of options under the Plan.

     4.   Transfer of Stock on Exercise.
          ----------------------------- 

     As soon as practicable after any exercise of this option in accordance with
the foregoing provisions, the Company shall, without transfer or issue tax or
other incidental expense to the Optionee, deliver to the Optionee at the
principal office of the Company or at such other place as may be mutually
acceptable to the Company and to the Optionee, a certificate or certificates
representing the Shares as to which this option has been exercised.

     5.   Purchase for Investment.
          ----------------------- 

     By accepting this option, the Optionee agrees that any and all Shares
purchased upon the exercise of this option shall be acquired for investment and
not for resale or for distribution. Upon each exercise of any portion of this
option, the person entitled to exercise the same shall furnish evidence
satisfactory to the Company (including a written and signed representation) to
the effect that the Shares are being acquired in good faith for investment and
not for resale or distribution.

     6.   No Hypothecation or Transfer.
          ---------------------------- 

     This option and the rights and privileges granted hereby shall not be
transferred, assigned, pledged or hypothecated in any way whether by operation
of law or otherwise.  Upon any attempt so to transfer, assign, pledge,
hypothecate or otherwise dispose of this option or any right or privilege
granted hereby contrary to the provisions hereof, this option and said rights
and privileges shall immediately become null and void.

     7.   Adjustments of Option Stock; Reorganization; Stock Dividends.
          ------------------------------------------------------------ 

          (a) In the event of a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the Company's Common Stock, such adjustment shall be made in the
number and option price of Shares subject to options granted under this
Agreement as may be determined to be appropriate by the Board.

          (b) Notwithstanding anything hereinabove to the contrary, upon the
occasion of a merger or consolidation of the Company with any other corporation,
any options theretofore granted under this Agreement which shall not have been
exercised (whether or not then capable of exercise) shall be deemed canceled,
unless the surviving corporation shall assume the options under this Agreement,
or shall issue substitute options in place thereof.

                                       3

 
     8.   Liquidation.
          ----------- 

     Upon the liquidation of the Company, any unexercised options theretofore
granted under this Agreement shall be deemed canceled, except as otherwise
provided in Paragraph 7 above on the occasion of a merger or consolidation.

     9.   Requirement of Issuance.
          ----------------------- 

     The Optionee shall not be entitled to exercise any of the rights or
privileges of a stockholder of the Company in respect of any Shares issuable
upon any exercise of this option unless and until a certificate or certificates
representing such Shares shall have been actually issued and delivered to him.

     10.  Notice.
          ------ 

     Any notice to the Company provided for in this Agreement shall be in
writing addressed to it in care of its Secretary at its principal corporate
office, and any notice to the Optionee shall be in writing addressed to him at
the address then appearing for him on the personnel records of the Company.
Either party may designate to the other a different address for the purpose of
this paragraph by a written notice given in accordance herewith.

     11.  Plan Incorporated Herein.
          ------------------------ 

     The option hereby granted is subject to, and the Company and the Optionee
agree to be bound by, all of the terms and conditions of the Plan, a copy of
which is attached hereto and made a party hereof.  The Plan shall control in the
event there is any conflict between the Plan and this Agreement and on matters
not contained in this Agreement.

     12.  Appointment of Secretary.
          ------------------------ 

     The Optionee hereby appoints the Secretary of the Company at the time in
office his agent and attorney-in-fact, with power of substitution, in his name
and on his behalf to accept delivery and receipt for any certificate or
certificates, representing any Shares purchased by the Optionee hereunder, and
to hold the same for the account of the Optionee subject to any further written
instructions from the Optionee, and delivery to said agent and attorney-in-fact
of any such certificates shall for all purposes be deemed delivered to the
Optionee.

     13.  Disputes.
          -------- 

     Any dispute or disagreement which shall arise under or as a result of this
Agreement, or which shall relate to the interpretation or construction of this
Agreement, shall be determined by the Board.  The determination of the Board
shall be final, binding and conclusive for all purposes.

                                       4

 
     14.  Date of Grant; Applicable Law.
          ----------------------------- 

     This Option has been granted, executed and delivered the day and year first
above written, and the interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of California.

                                 OPTO SENSORS, INC.



                                 By:___________________________
                                    President



                                 ------------------------------
                                 OPTIONEE

                                       5

                                                                    EXHIBIT 10.2

                            1997 STOCK OPTION PLAN
                                       OF
                               OSI SYSTEMS, INC.


1.   PURPOSES OF THE PLAN
     --------------------

     The purposes of the 1997 Stock Option Plan (the "Plan") of OSI Systems,
Inc., a California corporation (the "Company"), are to:

          (a) Encourage selected employees, directors and consultants to improve
operations and increase profits of the Company;

          (b) Encourage selected employees, directors and consultants to accept
or continue employment or association with the Company or its Affiliates; and

          (c) Increase the interest of selected employees, directors and
consultants in the Company's welfare through participation in the growth in
value of the common stock of the Company (the "Common Stock").

     Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"), or "nonqualified options" ("NQOs").

2.   ELIGIBLE PERSONS
     ----------------

     Every person who at the date of grant of an Option is an employee of the
Company or of any Affiliate (as defined below) of the Company is eligible to
receive NQOs or ISOs under this Plan.  Every person who at the date of grant is
a consultant to, or non-employee director of, the Company or any Affiliate (as
defined below) of the Company is eligible to receive NQOs under this Plan.  The
term "Affiliate" as used in the Plan means a parent or subsidiary corporation as
defined in the applicable provisions (currently Sections 424(e) and (f),
respectively) of the Code.  The term "employee" includes an officer or director
who is an employee of the Company.  The term "consultant" includes persons
employed by, or otherwise affiliated with, a consultant.

3.   STOCK SUBJECT TO THIS PLAN; MAXIMUM NUMBER OF GRANTS
     ----------------------------------------------------

     Subject to the provisions of Section 6.1.1 of the Plan, the total number of
shares of stock which may be issued under Options granted pursuant to this Plan
shall not exceed 850,000 shares of Common Stock (which gives effect to a 1.5-
for-1 stock split of the Common Stock (the "Stock Split") to be effected in June
1997).  The shares covered by the portion of any grant under the Plan which
expires unexercised shall become available again for grants under the Plan.  No
eligible person shall be granted Options during any twelve-month period covering
more than 425,000 shares (which gives effect to the Stock Split to be effected
in June 1997).

 
4.   ADMINISTRATION
     --------------

          (a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") or by a committee (the "Committee") to which
administration of the Plan, or of part of the Plan, is delegated by the Board
(in either case, the "Administrator").  The Board shall appoint and remove
members of the Committee in its discretion in accordance with applicable laws.
If necessary in order to comply with Rule 16b-3 under the Exchange Act and
Section 162(m) of the Code, the Committee shall, in the Board's discretion, be
comprised solely of "non-employee directors" within the meaning of said Rule
16b-3 and "outside directors" within the meaning of Section 162(m) of the Code.
The foregoing notwithstanding, the Administrator may delegate nondiscretionary
administrative duties to such employees of the Company as it deems proper and
the Board, in its absolute discretion, may at any time and from time to time
exercise any and all rights and duties of the Administrator under the Plan.

          (b) Subject to the other provisions of this Plan, the Administrator
shall have the authority, in its discretion: (i) to grant Options; (ii) to
determine the fair market value of the Common Stock subject to Options; (iii) to
determine the exercise price of Options granted; (iv) to determine the persons
to whom, and the time or times at which, Options shall be granted, and the
number of shares subject to each Option; (v) to interpret this Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to this Plan; (vii)
to determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) the exercise
date of any Option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an Option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of
this Plan.  The Administrator may delegate nondiscretionary administrative
duties to such employees of the Company as it deems proper.

          (c) All questions of interpretation, implementation, and application
of this Plan shall be determined by the Administrator.  Such determinations
shall be final and binding on all persons.

                                       2.

 
5.   GRANTING OF OPTIONS; OPTION AGREEMENT
     -------------------------------------

                  (a) No Options shall be granted under this Plan after 10 years
from the date of adoption of this Plan by the Board.

                  (b) Each Option shall be evidenced by a written stock option
agreement, in form satisfactory to the Administrator, executed by the Company
and the person to whom such Option is granted.

                  (c) The stock option agreement shall specify whether each
Option it evidences is an NQO or an ISO.

                  (d) Subject to Section 6.3.3 with respect to ISOs, the
Administrator may approve the grant of Options under this Plan to persons who
are expected to become employees, directors or consultants of the Company, but
are not employees, directors or consultants at the date of approval, and the
date of approval shall be deemed to be the date of grant unless otherwise
specified by the Administrator.

6.   TERMS AND CONDITIONS OF OPTIONS
     -------------------------------

     Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1. NQOs shall be also subject to the terms and
conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.

     6.1  Terms and Conditions to Which All Options Are Subject.  All Options
          -----------------------------------------------------              
granted under this Plan shall be subject to the following terms and conditions:

          6.1.1   Changes in Capital Structure.  Subject to Section 6.1.2, if
                  ----------------------------                               
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments shall be made by the Board in (a) the number and class
of shares of stock subject to this Plan and each Option outstanding under this
Plan, and (b) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a result of
any such adjustments.  Each such adjustment shall be subject to approval by the
Board in its sole discretion.

          6.1.2   Corporate Transactions.  In the event of the proposed
                  ----------------------                               
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action.  To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action; provided, however, that the Administrator,
in the exercise of his sole discretion, may permit exercise of any Options prior
to their termination, even if such Options were not otherwise exercisable.  In
the event of a merger or consolidation of the Company with or into another
corporation or entity in which the Company does not survive, or in

                                       3.

 
the event of a sale of all or substantially all of the assets of the Company in
which the shareholders of the Company receive securities of the acquiring entity
or an affiliate thereof, all Options shall be assumed or equivalent options
shall be substituted by the successor corporation (or other entity) or a parent
or subsidiary of such successor corporation (or other entity); provided,
however, that if such successor does not agree to assume the Options or to
substitute equivalent options therefor, the Administrator, in the exercise of
its sole discretion, may permit the exercise of any of the Options prior to
consummation of such event, even if such Options were not otherwise exercisable.

          6.1.3   Time of Option Exercise.  Subject to Section 5 and Section
                  -----------------------                                   
6.3.4, Options granted under this Plan shall be exercisable (a) immediately as
of the effective date of the stock option agreement granting the Option, or (b)
in accordance with a schedule as may be set by the Administrator (in any case,
the "Vesting Base Date") and specified in the written stock option agreement
relating to such Option. In any case, no Option shall be exercisable until a
written stock option agreement in form satisfactory to the Company is executed
by the Company and the optionee.

          6.1.4   Option Grant Date.  The date of grant of an Option under this
                  -----------------                                            
Plan shall be the date as of which the Administrator approves the grant.

          6.1.5   Nontransferability of Option Rights.  Except with the express
                  -----------------------------------                          
written approval of the Administrator which approval the Administrator is
authorized to give only with respect to NQOs, no Option granted under this Plan
shall be assignable or otherwise transferable by the optionee except by will or
by the laws of descent and distribution.  During the life of the optionee, an
Option shall be exercisable only by the optionee.

          6.1.6   Payment.  Except as provided below, payment in full, in cash,
                  -------                                                      
shall be made for all stock purchased at the time written notice of exercise of
an Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company.  The Administrator, in the exercise of its
absolute discretion after considering any tax, accounting and financial
consequences, may authorize any one or more of the following additional methods
of payment:

                  (a) Acceptance of the optionee's full recourse promissory note
for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed), which promissory note may be either secured or unsecured in
such manner as the Administrator shall approve (including, without limitation,
by a security interest in the shares of the Company);

                  (b) Subject to the discretion of the Administrator and the
terms of the stock option agreement granting the Option, delivery by the
optionee of shares of Common Stock already owned by the optionee for all or part
of the Option

                                       4.

 
price, provided the fair market value (determined as set forth in Section
6.1.10) of such shares of Common Stock is equal on the date of exercise to the
Option price, or such portion thereof as the optionee is authorized to pay by
delivery of such stock; and

                  (c) Subject to the discretion of the Administrator, through
the surrender of shares of Common Stock then issuable upon exercise of the
Option, provided the fair market value (determined as set forth in Section
6.1.10) of such shares of Common Stock is equal on the date of exercise to the
Option price, or such portion thereof as the optionee is authorized to pay by
surrender of such stock.

                  (d) By means of so-called cashless exercises as permitted
under applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board.

          6.1.7   Termination of Employment.  If for any reason other than death
                  -------------------------                                     
or permanent and total disability, an optionee ceases to be employed by the
Company or any of its Affiliates (such event being called a "Termination"),
Options held at the date of Termination (to the extent then exercisable) may be
exercised in whole or in part at any time within three months of the date of
such Termination, or such other period of not less than 30 days after the date
of such Termination as is specified in the Option Agreement or by amendment
thereof (but in no event after the Expiration Date); provided, however, that if
such exercise of the Option would result in liability for the optionee under
Section 16(b) of the Exchange Act, then such three-month period automatically
shall be extended until the tenth day following the last date upon which
optionee has any liability under Section 16(b) (but in no event after the
Expiration Date).  If an optionee dies or becomes permanently and totally
disabled (within the meaning of Section 22(e)(3) of the Code) while employed by
the Company or an Affiliate or within the period that the Option remains
exercisable after Termination, Options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, at any time
within six months after the death or six months after the permanent and total
disability of the optionee or any longer period specified in the Option
Agreement or by amendment thereof (but in no event after the Expiration Date).
For purposes of this Section 6.1.7, "employment" includes service as a director
or as a consultant.  For purposes of this Section 6.1.7, an optionee's
employment shall not be deemed to terminate by reason of sick leave, military
leave or other leave of absence approved by the Administrator, if the period of
any such leave does not exceed 90 days or, if longer, if the optionee's right to
reemployment by the Company or any Affiliate is guaranteed either contractually
or by statute.

                                       5.

 
          6.1.8  Withholding and Employment Taxes.  At the time of exercise of
                 --------------------------------                             
an Option and as a condition thereto, or at such other time as the amount of
such obligations becomes determinable (the "Tax Date"), the optionee shall remit
to the Company in cash all applicable federal and state withholding and
employment taxes.  Such obligation to remit may be satisfied, if authorized by
the Administrator in its sole discretion, after considering any tax, accounting
and financial consequences, by the optionee's (i) delivery of a promissory note
in the required amount on such terms as the Administrator deems appropriate,
(ii) tendering to the Company previously owned shares of Stock or other
securities of the Company with a fair market value equal to the required amount,
or (iii) agreeing to have shares of Common Stock (with a fair market value equal
to the required amount) which are acquired upon exercise of the Option withheld
by the Company.

          6.1.9   Other Provisions.  Each Option granted under this Plan may
                  ----------------                                          
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.

          6.1.10  Determination of Value.  For purposes of the Plan, the fair
                  ----------------------                                     
market value of Common Stock or other securities of the Company shall be
determined as follows:

                  (a) If the stock of the Company is regularly quoted by a
recognized securities dealer, and selling prices are reported, its fair market
value shall be the closing price of such stock on the date the value is to be
determined, but if selling prices are not reported, its fair market value shall
be the mean between the high bid and low asked prices for such stock on the date
the value is to be determined (or if there are no quoted prices for the date of
grant, then for the last preceding business day on which there were quoted
prices).

                  (b) In the absence of an established market for the stock, the
fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry, the Company's management, and the values of
stock of other corporations in the same or a similar line of business.

          6.1.11  Option Term.  Subject to Section 6.3.4, no Option shall be
                  -----------                                               
exercisable more than 10 years after the date of grant, or such lesser period of
time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").

                                       6.

 
     6.2  Terms and Conditions to Which Only NQOs Are Subject.  Options granted
          ---------------------------------------------------                  
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:

          6.2.1   Exercise Price.  The exercise price of a NQO shall be not less
                  --------------                                                
than 85% of the fair market value (determined in accordance with Section 6.1.10)
of the stock subject to the Option on the date of grant.

     6.3  Terms and Conditions to Which Only ISOs Are Subject. Options granted
          ---------------------------------------------------                 
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:

          6.3.1   Exercise Price.  (a) Except as set forth in Section 6.3.1(b),
                  --------------                                               
the exercise price of an ISO shall be determined in accordance with the
applicable provisions of the Code and shall in no event be less than the fair
market value (determined in accordance with Section 6.1.10) of the stock covered
by the Option at the time the Option is granted.

                  (b) The exercise price of an ISO granted to any person who
owns, directly or by attribution under the Code (currently Section 424(d)),
stock possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Affiliate (a "Ten Percent
Shareholder") shall in no event be less than 110% of the fair market value
(determined in accordance with Section 6.1.10) of the stock covered by the
Option at the time the Option is granted.

          6.3.2   Disqualifying Dispositions.  If stock acquired by exercise of
                  --------------------------                                   
an ISO granted pursuant to this Plan is disposed of in a "disqualifying
disposition" within the meaning of Section 422 of the Code (a disposition within
two years from the date of grant of the Option or within one year after the
transfer such stock on exercise of the Option), the holder of the stock
immediately before the disposition shall promptly notify the Company in writing
of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.

          6.3.3   Grant Date.  If an ISO is granted in anticipation of
                  ----------                                          
employment as provided in Section 5(d), the Option shall be deemed granted,
without further approval, on the date the grantee assumes the employment
relationship forming the basis for such grant, and, in addition, satisfies all
requirements of this Plan for Options granted on that date.

          6.3.4   Term.  Notwithstanding Section 6.1.11, no ISO granted to any
                  ----                                                        
Ten Percent Shareholder shall be exercisable more than five years after the date
of grant.

                                       7.

 
7.   MANNER OF EXERCISE
     ------------------

          (a) An optionee wishing to exercise an Option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise price and withholding taxes as provided in Sections 6.1.6 and
6.1.8. The date the Company receives written notice of an exercise hereunder
accompanied by payment of the exercise price will be considered as the date such
Option was exercised.

          (b) Promptly after receipt of written notice of exercise of an Option
and the payments called for by Section 7(a), the Company shall, without stock
issue or transfer taxes to the optionee or other person entitled to exercise the
Option, deliver to the optionee or such other person a certificate or
certificates for the requisite number of shares of stock.  An optionee or
permitted transferee of the Option shall not have any privileges as a
shareholder with respect to any shares of stock covered by the Option until the
date of issuance (as evidenced by the appropriate entry on the books of the
Company or a duly authorized transfer agent) of such shares.

8.   EMPLOYMENT OR CONSULTING RELATIONSHIP
     -------------------------------------

     Nothing in this Plan or any Option granted hereunder shall interfere with
or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.

9.   CONDITIONS UPON ISSUANCE OF SHARES
     ----------------------------------

     Shares of Common Stock shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Securities Act").

10.  NONEXCLUSIVITY OF THE PLAN
     --------------------------

     The adoption of the Plan shall not be construed as creating any limitations
on the power of the Company to adopt such other incentive arrangements as it may
deem desirable, including, without limitation, the granting of stock options
other than under the Plan.

11.  MARKET STANDOFF
     ---------------

     Each optionee, if so requested by the Company or any representative of the
underwriters in connection with any registration of the offering of any
securities of the Company under the Securities Act, shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following

                                       8.

 
the effective date of a registration statement of the Company filed under the
Securities Act; provided, however, that such restriction shall apply only to the
first registration statement of the Company to become effective under the
Securities Act after the date of adoption of this Plan which includes securities
to be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act.  The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restriction
until the end of such 180-day period.

12.  AMENDMENTS TO PLAN
     ------------------

     The Board may at any time amend, alter, suspend or discontinue this Plan.
Without the consent of an optionee, no amendment, alteration, suspension or
discontinuance may adversely affect outstanding Options except to conform this
Plan and ISOs granted under this Plan to the requirements of federal or other
tax laws relating to incentive stock options.  No amendment, alteration,
suspension or discontinuance shall require shareholder approval unless (a)
shareholder approval is required to preserve incentive stock option treatment
for federal income tax purposes or (b) the Board otherwise concludes that
shareholder approval is advisable.

13.  EFFECTIVE DATE OF PLAN
     ----------------------

     This Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the shareholders of the Company, or approval of shareholders of the Company
voting at a validly called shareholders' meeting, is obtained within twelve
months after adoption by the Board.  If such shareholder approval is not
obtained within such time, Options granted hereunder shall terminate and be of
no force and effect from and after expiration of such twelve-month period.
Options may be granted and exercised under this Plan only after there has been
compliance with all applicable federal and state securities laws.

                                       9.

 
                               OSI SYSTEMS, INC.
                        INCENTIVE STOCK OPTION AGREEMENT



     THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), is made as of the
___ day of _________ 19__ by and between OSI Systems, Inc., a California
corporation (the "Company"), and __________________________ ("Optionee").

                                 R E C I T A L

     Pursuant to the 1997 Stock Option Plan (the "Plan") of the Company, the
Board of Directors of the Company or a committee to which administration of the
Plan is delegated by the Board of Directors (in either case, the
"Administrator") has authorized the granting to Optionee of an incentive stock
option to purchase the number of shares of Common Stock of the Company specified
in Paragraph 1 hereof, at the price specified therein, such option to be for the
term and upon the terms and conditions hereinafter stated.

                               A G R E E M E N T

     NOW, THEREFORE, in consideration of the promises and of the undertakings of
the parties hereto contained herein, it is hereby agreed:

     1.  Number of Shares; Option Price.  Pursuant to said action of the
         ------------------------------                                 
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase, upon and subject to the terms and conditions of the Plan,
_______________ shares of Common Stock of the Company ("Shares") at the price of
$_________ per share.

     2.  Term.  This Option shall expire on the day before the ________
         ----                                                          
anniversary (fifth anniversary if Optionee owns more than 10% of the voting
stock of the Company or an Affiliate of the Company on the date of this
Agreement) of the date hereof (the "Expiration Date") unless such Option shall
have been terminated prior to that date in accordance with the provisions of the
Plan or this Agreement.  The term "Affiliate" as used herein shall have the
meaning as set forth in the Plan.

     3.  Shares Subject to Exercise.  Shares subject to exercise shall be 25% of
         --------------------------                                             
such Shares on and after the first anniversary of the date hereof, 50% of such
Shares on and after the second anniversary of the date hereof, 75% of such
Shares on and after the third anniversary of the date hereof and 100% of such
Shares on and after the fourth anniversary of the date hereof.  All Shares shall
thereafter remain subject to exercise for the term specified in Paragraph 2
hereof, provided that Optionee is then and has continuously been in the employ
of the Company, or its Affiliate, subject, however, to the provisions of
Paragraph 6 hereof.

                                      10.

 
     4.  Method and Time of Exercise.  The Option may be exercised by written
         ---------------------------                                         
notice delivered to the Company at its principal executive office stating the
number of shares with respect to which the Option is being exercised, together
with:

         (A) a check or money order made payable to the Company in the amount of
the exercise price and any withholding tax, as provided under Paragraph 5
hereof; or

         (B) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the tender to the Company
of shares of the Company's Common Stock owned by Optionee having a fair market
value, as determined by the Administrator, not less than the exercise price,
plus the amount of applicable federal, state and local withholding taxes; or

         (C) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the Optionee's full
recourse promissory note in a form approved by the Company; or

         (D) if any other method such as cashless exercise is expressly
authorized in writing by the Administrator, in its sole discretion, at the time
of the Option exercise, the tender of such consideration having a fair market
value, as determined by the Administrator, not less than the exercise price,
plus the amount of applicable federal, state and local withholding taxes.

Not less than 100 shares may be purchased at any one time unless the number
purchased is the total number purchasable under such Option at the time.  Only
whole shares may be purchased.

     5.  Tax Withholding.  In the event that this Option shall lose its
         ---------------                                               
qualification as an incentive stock option, as a condition to exercise of this
Option, the Company may require Optionee to pay over to the Company all
applicable federal, state and local taxes which the Company is required to
withhold with respect to the exercise of this Option.  At the discretion of the
Administrator and upon the request of Optionee, the minimum statutory
withholding tax requirements may be satisfied by the withholding of shares of
Common Stock of the Company otherwise issuable to Optionee upon the exercise of
this Option.

     6.  Exercise on Termination of Employment.  If for any reason other than
         -------------------------------------                               
death or permanent and total disability, Optionee ceases to be employed by the
Company or any of its Affiliates (such event being called a "Termination"), this
Option (to the extent then exercisable) may be exercised in whole or in part at
any time within three months of the date of such Termination, but in no event
after the Expiration Date; provided, however, that if such exercise of this
Option would result in liability for Optionee under Section 16(b) of the
Securities Exchange Act of 1934, then such three-month period automatically
shall be extended until the tenth day following the last date upon which
Optionee has any liability under Section 16(b), but in no event after the
Expiration Date.  If Optionee dies or becomes permanently and totally disabled
(as defined in the Plan) while employed by the Company or an Affiliate or within
the period that this Option remains exercisable after Termination, this Option
(to the extent then exercisable) may be exercised, in whole or in part, by
Optionee, by Optionee's personal

                                      11.

 
representative or by the person to whom this Option is transferred by devise or
the laws of descent and distribution, at any time within six months after the
death or six months after the permanent and total disability of Optionee, but in
no event after the Expiration Date.  In the event this Option is treated as a
nonqualified stock option, then and to that extent, "employment" would include
service as a director or as a consultant.  For purposes of this Paragraph 6,
Optionee's employment shall not be deemed to terminate by reason of sick leave,
military leave or other leave of absence approved by the Administrator, if the
period of any such leave does not exceed 90 days or, if longer, if Optionee's
right to reemployment by the Company or any Affiliate is guaranteed either
contractually or by statute.

     7.  Nontransferability.  This Option may not be assigned or transferred
         ------------------                                                 
except by will or by the laws of descent and distribution, and may be exercised
only by Optionee during his lifetime and after his death, by his personal
representative or by the person entitled thereto under his will or the laws of
intestate succession.

     8.  Optionee Not a Shareholder.  Optionee shall have no rights as a
         --------------------------                                     
shareholder with respect to the Common Stock of the Company covered by this
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of this Option.  No adjustment will be made for dividends
or other rights for which the record date is prior to the date such stock
certificate or certificates are issued.

     9.  No Right to Employment.  Nothing in the Option granted hereby shall
         ----------------------                                             
interfere with or limit in any way the right of the Company or of any of its
Affiliates to terminate Optionee's employment or consulting at any time, nor
confer upon Optionee any right to continue in the employ of, or consult with,
the Company or any of its Affiliates.

     10. Modification and Termination.  The rights of Optionee are subject to
         ----------------------------                                        
modification and termination in certain events as provided in Sections 6.1 and
6.3 of the Plan.

     11. Restrictions on Sale of Shares.  Optionee represents and agrees that,
         ------------------------------                                       
upon his exercise of this Option, in whole or in part, unless there is in effect
at that time under the Securities Act of 1933 a registration statement relating
to the Shares issued to him, he will acquire the Shares issuable upon exercise
of this Option for the purpose of investment and not with a view to their resale
or further distribution, and that upon each exercise thereof he shall furnish to
the Company a written statement to such effect, satisfactory to the Company in
form and substance.  Optionee agrees that any certificates issued upon exercise
of this Option may bear a legend indicating that their transferability is
restricted in accordance with applicable state or federal securities law.  Any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 5 and 6 hereof shall, upon each exercise of this Option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.

     12. Plan Governs.  This Agreement and the Option evidenced hereby are made
         ------------                                                          
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms

                                      12.

 
and provisions of the Plan, as it may be construed by the Administrator.  It is
intended that this Option shall qualify as an incentive stock option as defined
by Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and this Agreement shall be construed in a manner which will enable this Option
to be so qualified.  Optionee hereby acknowledges receipt of a copy of the Plan.

     13.  Notices.  All notices to the Company shall be addressed to the Chief
          -------                                                             
Financial Officer at the principal executive office of the Company at 12525
Chadron Avenue, Hawthorne, California 90250, and all notices to Optionee shall
be addressed to Optionee at the address of Optionee on file with the Company or
its subsidiary, or to such other address as either may designate to the other in
writing.  A notice shall be deemed to be duly given if and when enclosed in a
properly addressed sealed envelope deposited, postage prepaid, with the United
States Postal Service.  In lieu of giving notice by mail as aforesaid, written
notices under this Agreement may be given by personal delivery to Optionee or to
the Chief Financial Officer (as the case may be).

     14.  Sale or Other Disposition.  Optionee understands that, under current
          -------------------------                                           
law, beneficial tax treatment resulting from the exercise of this Option will be
available only if certain requirements of the Code are satisfied, including
without limitation, the requirement that no disposition of Shares acquired
pursuant to exercise of this Option be made within two years from the grant date
or within one year after the transfer of Shares to him or her.  If Optionee at
any time contemplates the disposition (whether by sale, gift, exchange, or other
form of transfer) of any such Shares, he or she will first notify the Company in
writing of such proposed disposition and cooperate with the Company in complying
with all applicable requirements of law, which, in the judgment of the Company,
must be satisfied prior to such disposition.  In addition to the foregoing,
Optionee hereby agrees that before Optionee disposes (whether by sale, exchange,
gift, or otherwise) of any Shares acquired by exercise of this Option within two
years of the grant date or within one year after the transfer of such Shares to
Optionee upon exercise of this Option, Optionee shall promptly notify the
Company in writing of the date and terms of the proposed disposition and shall
provide such other information regarding the Option as the Company may
reasonably require immediately before such disposition.  Said written notice
shall state the date of such proposed disposition, and the type and amount of
the consideration to be received for such Share or Shares by Optionee in
connection therewith.  In the event of any such disposition, the Company shall
have the right to require Optionee to immediately pay the Company the amount of
taxes (if any) which the Company is required to withhold under federal and/or
state law as a result of the granting or exercise of the Option and the
disposition of the Shares.

                                      13.

 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.

                                             OSI SYSTEMS, INC.


                                             By ________________________
                                                Name:
                                                Title:

                                             OPTIONEE


                                             ___________________________
                                             Name:


                                             Address:

                                             ___________________________
                                             ___________________________
                                             ___________________________

                                      14.

 
                               OSI SYSTEMS, INC.
                      NONQUALIFIED STOCK OPTION AGREEMENT



     THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement"), is made as of
the _____ day of ______________, 19___ by and between OSI Systems, Inc., a
California corporation (the "Company"), and ____________________ ("Optionee").

                                 R E C I T A L

     Pursuant to the 1997 Stock Option Plan (the "Plan") of the Company, the
Board of Directors of the Company or a committee to which administration of the
Plan is delegated by the Board of Directors (in either case, the
"Administrator") has authorized the granting to Optionee of a nonqualified stock
option to purchase the number of shares of Common Stock of the Company specified
in Paragraph 1 hereof, at the price specified therein, such option to be for the
term and upon the terms and conditions hereinafter stated.

                               A G R E E M E N T

     NOW, THEREFORE, in consideration of the promises and of the undertakings of
the parties hereto contained herein, it is hereby agreed:

     1.   Number of Shares; Option Price.  Pursuant to said action of the
          ------------------------------                                 
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase, upon and subject to the terms and conditions of the Plan, ________
shares of Common Stock of the Company ("Shares") at the price of $________ per
share.

     2.   Term.  This Option shall expire on the day before the ________
          ----                                                          
anniversary of the date hereof (the "Expiration Date") unless such Option shall
have been terminated prior to that date in accordance with the provisions of the
Plan or this Agreement.  The term "Affiliate" as used herein shall have the
meaning as set forth in the Plan.

     3.   Shares Subject to Exercise.  Shares subject to exercise shall be 25%
          --------------------------                                          
of such Shares on and after the first anniversary of the date hereof, 50% of
such Shares on and after the second anniversary of the date hereof, 75% of such
Shares on and after the third anniversary of the date hereof and 100% of such
Shares on and after the fourth anniversary of the date hereof.  All Shares shall
thereafter remain subject to exercise for the term specified in Paragraph 2
hereof, provided that Optionee is then and has continuously been in the employ
of or providing services to the Company, or its Affiliate, subject, however, to
the provisions of Paragraph 6 hereof.

                                      15.

 
     4.   Method and Time of Exercise.  The Option may be exercised by written
          ---------------------------                                         
notice delivered to the Company at its principal executive office stating the
number of shares with respect to which the Option is being exercised, together
with:

          (A) a check or money order made payable to the Company in the amount
of the exercise price and any withholding tax, as provided under Paragraph 5
hereof; or

          (B) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the tender to the Company
of shares of the Company's Common Stock owned by Optionee having a fair market
value, as determined by the Administrator, not less than the exercise price,
plus the amount of applicable federal, state and local withholding taxes; or

          (C) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the Optionee's full
recourse promissory note in a form approved by the Company; or

          (D) if any other method such as cashless exercise is expressly
authorized in writing by the Administrator, in its sole discretion, at the time
of the Option exercise, the tender of such consideration having a fair market
value, as determined by the Administrator, not less than the exercise price,
plus the amount of applicable federal, state and local withholding taxes.

Not less than 100 shares may be purchased at any one time unless the number
purchased is the total number purchasable under such Option at the time.  Only
whole shares may be purchased.

     5.   Tax Withholding.  As a condition to exercise of this Option, the
          ---------------                                                 
Company may require Optionee to pay over to the Company all applicable federal,
state and local taxes which the Company is required to withhold with respect to
the exercise of this Option. At the discretion of the Administrator and upon the
request of Optionee, the minimum statutory withholding tax requirements may be
satisfied by the withholding of shares of Common Stock of the Company otherwise
issuable to Optionee upon the exercise of this Option.

     6.   Exercise on Termination of Employment.  If for any reason other than
          -------------------------------------                               
death or permanent and total disability, Optionee ceases to be employed by the
Company or any of its Affiliates (such event being called a "Termination"), this
Option (to the extent then exercisable) may be exercised in whole or in part at
any time within three months of the date of such Termination, but in no event
after the Expiration Date; provided, however, that if such exercise of this
Option would result in liability for Optionee under Section 16(b) of the
Securities Exchange Act of 1934, then such three-month period automatically
shall be extended until the tenth day following the last date upon which
Optionee has any liability under Section 16(b), but in no event after the
Expiration Date.  If Optionee dies or becomes permanently and totally disabled
(as defined in the Plan) while employed by the Company or an Affiliate or within
the period that this Option remains exercisable after Termination, this Option
(to the extent then exercisable) may be exercised, in whole or in part, by
Optionee, by Optionee's personal

                                      16.

 
representative or by the person to whom this Option is transferred by devise or
the laws of descent and distribution, at any time within six months after the
death or six months after the permanent and total disability of Optionee, but in
no event after the Expiration Date.  For purposes of this Paragraph 6,
"employment" includes service as a director or as a consultant.  For purposes of
this Paragraph 6, Optionee's employment shall not be deemed to terminate by
reason of sick leave, military leave or other leave of absence approved by the
Administrator, if the period of any such leave does not exceed 90 days or, if
longer, if Optionee's right to reemployment by the Company or any Affiliate is
guaranteed either contractually or by statute.

     7.   Nontransferability.  Except with the express written approval of the
          ------------------                                                  
Administrator, this Option may not be assigned or transferred except by will or
by the laws of descent and distribution, and may be exercised only by Optionee
during his lifetime and after his death, by his personal representative or by
the person entitled thereto under his will or the laws of intestate succession.

     8.   Optionee Not a Shareholder.  Optionee shall have no rights as a
          --------------------------                                     
shareholder with respect to the Common Stock of the Company covered by this
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of this Option.  No adjustment will be made for dividends
or other rights for which the record date is prior to the date such stock
certificate or certificates are issued.

     9.   No Right to Employment.  Nothing in the Option granted hereby shall
          ----------------------                                             
interfere with or limit in any way the right of the Company or of any of its
Affiliates to terminate Optionee's employment or consulting at any time, nor
confer upon Optionee any right to continue in the employ of, or consult with,
the Company or any of its Affiliates.

     10. Modification and Termination.  The rights of Optionee are subject to
         ----------------------------                                        
modification and termination in certain events as provided in Sections 6.1 and
6.2 of the Plan.

     11. Restrictions on Sale of Shares.  Optionee represents and agrees that
         ------------------------------                                      
upon his exercise of this Option, in whole or in part, unless there is in effect
at that time under the Securities Act of 1933 a registration statement relating
to the Shares issued to him, he will acquire the Shares issuable upon exercise
of this Option for the purpose of investment and not with a view to their resale
or further distribution, and that upon such exercise thereof he will furnish to
the Company a written statement to such effect, satisfactory to the Company in
form and substance.  Optionee agrees that any certificates issued upon exercise
of this Option may bear a legend indicating that their transferability is
restricted in accordance with applicable state and federal securities law.  Any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 5 and 6 hereof shall, upon each exercise of this Option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.

                                      17.

 
     12.  Plan Governs.  This Agreement and the Option evidenced hereby are made
          ------------                                                          
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan, as it may be construed by the
Administrator.  Optionee hereby acknowledges receipt of a copy of the Plan.

     13.  Notices.  All notices to the Company shall be addressed to the Chief
          -------                                                             
Financial Officer at the principal executive office of the Company at 12525
Chadron Avenue, Hawthorne, California 90250, and all notices to Optionee shall
be addressed to Optionee at the address of Optionee on file with the Company or
its subsidiary, or to such other address as either may designate to the other in
writing.  A notice shall be deemed to be duly given if and when enclosed in a
properly addressed sealed envelope deposited, postage prepaid, with the United
States Postal Service.  In lieu of giving notice by mail as aforesaid, written
notices under this Agreement may be given by personal delivery to Optionee or to
the Chief Financial Officer (as the case may be).

     14.  Sale or Other Disposition.  If Optionee at any time contemplates the
          -------------------------                                           
disposition (whether by sale, gift, exchange, or other form or transfer) of any
Shares acquired by exercise of this Option, he or she shall first notify the
Company in writing of such proposed disposition and cooperate with the Company
in complying with all applicable requirements of law, which, in the judgment of
the Company, must be satisfied prior to such disposition.

                                      18.

 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.

                               OSI SYSTEMS, INC.



                               By__________________________
                                 Name:
                                 Title:


                               OPTIONEE



                               By__________________________
                                 Name:


                               Address:

                               ____________________________
                               ____________________________
                               ____________________________

                                      19.

 
                                                                    EXHIBIT 10.3
                             EMPLOYMENT AGREEMENT
                             --------------------  


          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between OPTO SENSORS, INC. ("Company"), a
California corporation, and DEEPAK CHOPRA ("Employee"), with reference to the
following facts:

          A.   Employee has been serving Company as President in a satisfactory
and capable manner pursuant to an oral agreement between Employee and Company.

          B.   Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                              
Employee hereby accepts continued employment as President, Chief Executive
Officer and Chairman of the Board of Company. Employee shall report to the Board
of Directors of Company and perform the services and duties customarily incident
to such office and as otherwise decided upon by the Board of Directors.

               1.2  Devotion of Services.  Employee shall devote his entire
                    --------------------                 
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation). Employee shall
perform and discharge well and faithfully those duties assigned him by Company.
Employee shall perform his services under this Agreement in Los Angeles County, 
California, or such other location as is acceptable to Employee.

          2.   TERM.  Subject to Section 6 herein, the term of this Agreement
               ----                                        
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of five (5) years. However, in the event that
Company thereafter continues to employ Employee, this Agreement shall be deemed
automatically renewed upon the same terms and conditions set forth herein except
(a) that the parties may mutually agree to revise any of the terms set forth
herein, and (b) the employment relationship will be on an "at will" basis, which
means that, subject to Section 6.4 herein, either Company or Employee may elect
to terminate the employment relationship at any time for any reason whatsoever,
with or without cause. Employee acknowledges that no representation has been
made


 
by Company as to any minimum or specified term or length of employment following
the term set forth above.

          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus.  In consideration of the services to be
                    ----------------                      
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a)  A salary in the amount of $450,000.00 per annum, which
salary shall be reviewed no less frequent than annually by the Company's Board
of Directors. The Board of Directors may increase Employee's salary but, in no
event, may Employee's salary be reduced during the term of this Agreement.

               (b)  The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes. The Employee shall be entitled to receive at least one-
third (1/3) of the amount of the total bonuses.

               (c)  All payments to Employee shall be subject to the 
regular withholding requirements of all appropriate governmental taxing
authorities.

               (d)  If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee shall consider in
good faith granting a reasonable amount of options to Employee.

               3.2  Other Benefits.  Employee shall be entitled to participate
                    -------------- 
in any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3  Expenses.  Company will advance to or reimburse Employee
                    --------                             
for all reasonable travel and entertainment required by Company and other
reasonable expenses incurred by Employee in connection with the performance of
his services under this Agreement in accordance with Company policy as
established from time to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions.  Employee agrees that any discoveries,
                    -------------------                  
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with

                                       2

 
Company, that are made with Company's equipment, supplies, facilities, trade
secrets or time; or that relate, at the time of conception of or reduction to
practice, to the business of Company or Company's actual or demonstrably
anticipated research or development; or that result from any work performed by
Employee for Company, shall belong to Company. Employee also agrees that Company
shall have the right to keep any such Inventions as trade secrets, if Company so
chooses. In order to permit Company to claim rights to which it may be entitled,
Employee agrees to disclose to Company in confidence all Inventions that
Employee makes during the course of his employment and all patent applications
filed by Employee within three (3) years after termination of his employment.
Employee shall (a) assist Company in obtaining patents on all Inventions deemed
patentable by Company in the United States and in all foreign countries and (b)
execute all documents and do all things necessary to obtain letters patent to
vest Company with full and extensive titles thereto and to protect the same
against infringement by others. For the purposes of this Agreement, an Invention
is deemed to have been made during the period of Employee's employment if the
Invention was conceived or first actually reduced to practice during that
period, and Employee agrees that any patent application filed within three (3)
years after termination of his employment with the Company shall be presumed to
relate to an Invention made during the term of Employee's employment unless
Employee can provide evidence to the contrary.

               4.2  Assignment of Inventions and Patents.  In furtherance of,
                    ------------------------------------  
and not in contravention, limitation and/or in place of, the provisions of
Section 4.1 above, Company hereby notifies Employee of California Labor Code
Section 2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable

                                       3

 
or not, which Employee alone, or with others, conceives or makes during his
employment with Company or as is otherwise required and set forth under Section
4.1 above.  Company shall hold said information in strict confidence to
determine the applicability of California Labor Code Section 2870 to said
Invention and, to the extent said Section 2870 does not apply, Employee hereby
assigns and agrees to assign all his right, title and interest in and to those
Inventions which relate to business of the Company and Employee agrees not to
disclose any of these Inventions to others without the prior written express
consent of Company.  Employee agrees to notify Company in writing prior to
making any disclosure or performing any work during the term of his employment
with Company which may conflict with any proprietary rights or technical know-
how claimed by Employee as his property.  In the event Employee fails to give
Company notice of such conflict, Employee agrees that Employee shall have no
further right or claim with respect to any such conflicting proprietary rights
or technical know-how.

          5.   CONFIDENTIALITY.
               --------------- 

               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------  
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business. Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information"). All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company. Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2  Non-Interference.  Employee recognizes that Company has
                    ----------------                                     
invested substantial effort in assembling its present employees and in
developing its customer base. As a result, and particularly because of Company's
many types of confidential business information, Employee understands that any
solicitation of a customer or employee of Company, in an effort to get them to
change business affiliations, would presumably involve a misuse of

                                       4

 
Company's confidences, Trade Secrets and Confidential Information. Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with Company for any reason whatsoever
or the receipt by Employee of any compensation paid to Employee by Company,
Employee will not influence, or attempt to influence, existing employees or
customers of Company in an attempt to divert, either directly or indirectly,
their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1  Termination by Company.  Company may terminate Employee's
                    ----------------------                               
employment hereunder at any time for cause without payment of severance or
similar benefits. For purposes of this Section 6.1, "cause" shall mean the
following events: (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company. Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2  Termination by Employee.  Employee may terminate his
                    -----------------------                             
employment hereunder at any time for cause. For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to the Company's Board of Directors describing such breach. If the breach
is not so cured within such thirty (30) days after delivery of such notice, the
termination of employment shall become effective after the expiration of such
cure period.

               6.3  Death or Disability.  Employee's employment with Company
                    -------------------                                  
shall cease upon the date of his death. In the event Employee becomes physically
or mentally disabled so as to become unable for more than one hundred eighty
(180) days in the aggregate in any twelve (12) month period to perform his
duties on a full-time basis with reasonable accommodations, Company may, at its
sole discretion, terminate this Agreement and Employee's employment.

               6.4  Termination Following Automatic Renewal.  In the event that
                    ---------------------------------------     
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

                                       5

 
               6.5  Effect of Termination.  Upon the termination of Employee's 
                    --------------------- 
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or expiration, and (b) notwithstanding anything to the
contrary contained herein, the rights and obligations of each party under
Paragraphs 4, 5 and 8 herein shall survive such termination or expiration.
Notwithstanding anything to the contrary contained in this Agreement if, prior
to the end of the initial five (5) year term, Employer terminates this Agreement
without cause, Employee shall continue to be entitled to receive all of the
compensation and other benefits provided for in Paragraph 3 for the remainder of
said five (5) year term without any deduction or offset for any compensation
earned or received by Employee from any other sources.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company 
               --------------------------     
to execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1  Injunctive Relief.  Employee acknowledges and agrees that
                    -----------------    
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law. Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages. Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove. Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement. In the event
of any judicial determination that any of the covenants set forth in Paragraphs
4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2  Specific Enforcement. Employee agrees and acknowledges that
                    --------------------
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or

                                       6

 
adequately compensated in damages in an action at law. Therefore, in addition to
other remedies provided by law, Company shall have the right, during the term of
this Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief against the performance of service elsewhere by Employee
during the term of this Agreement.

          9.   GENERAL.
               ------- 

               9.1  Entire Agreement.  This Agreement contains the entire
                    ----------------                                     
 understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them.

               9.2  Amendment.  This Agreement may not be modified, amended,
                    ---------      
altered or supplemented except by written agreement between Employee and
Company.

               9.3  Counterparts.  This Agreement may be executed in two (2)
                    ------------     
or more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4  Jurisdiction.  Each party hereby consents to the exclusive 
                    ------------              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               9.5  Expenses.  In the event an action at law or in equity is
                    -------- 
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6  Interpretation.  The headings herein are inserted only as
                    --------------         
a matter of convenience and reference, and in no way define, limit or describe
the scope of this Agreement or the intent of any provisions thereof. No
provision of this document is to be interpreted for or against any party because
that party or party's legal representative drafted it.

               9.7  Successors and Assigns.  This Agreement shall be binding 
                    ----------------------                         
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives. As used herein, the successors
of Company shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of its assets or similar
reorganization.

                                       7

 
In no event may Employee assign any rights or duties under this Agreement.

               9.8  Controlling Law; Severability.  The validity and
                    -----------------------------                   
construction of this Agreement or of any of its provisions shall be determined
under the laws of the State of California. Should any provision of this
Agreement be invalid either due to the duration thereof or the scope of the
prohibited activity, such provision shall be limited by the court to the extent
necessary to make it enforceable and, if invalid for any other reason, such
invalidity or unenforceability shall not affect or limit the validity and
enforceability of the other provisions hereof.

               9.9  Notices.  Any notice required or permitted to be given
                    -------    
under this Agreement shall be sufficient if in writing and if personally
received by the party to whom it is sent or delivered, or if sent by registered
or certified mail, postage prepaid, to Employee's residence in the case of
notice to Employee, or to its principal office if to Company. A notice is deemed
received or delivered on the earlier of the day received or three (3) days after
being sent by registered or certified mail in the manner described in this
Section.

               9.10 Waiver of Breach.  The waiver by any party hereto of a
                    ----------------   
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    OPTO SENSORS, INC.



                                    By: /s/ Deepak Chopra
                                       ------------------------------ 
 
                                    Its: Chief Executive Officer
                                        -----------------------------


                                     /s/ Deepak Chopra 
                                    ---------------------------------
                                    DEEPAK CHOPRA

                                       8

 
                                                                    EXHIBIT 10.4
                             EMPLOYMENT AGREEMENT
                             --------------------


          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between OPTO SENSORS, INC. ("Company"), a
California corporation, and AJAY MEHRA ("Employee"), with reference to the
following facts:

          A.  Employee has been serving Company as Chief Financial Officer in a
satisfactory and capable manner pursuant to an oral agreement between Employee
and Company.

          B.  Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                              
Employee hereby accepts continued employment as Chief Financial Officer of
Company. Employee shall report to the Chief Executive Officer of Company and
perform the services and duties customarily incident to such office and as
otherwise decided upon by the Chief Executive Officer or the Board of Directors.

               1.2  Devotion of Services. Employee shall devote his entire
                    --------------------
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation). Employee shall
perform and discharge well and faithfully those duties assigned him by Company. 
Employee shall perform his services under this Agreement in Los Angeles County, 
California, or such other location as is acceptable to Employee.

          2.   TERM.  Subject to Section 6 herein, the term of this Agreement
               ----
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of three (3) years. However, in the event
that Company thereafter continues to employ Employee, this Agreement shall be
deemed automatically renewed upon the same terms and conditions set forth herein
except (a) that the parties may mutually agree to revise any of the terms set
forth herein, and (b) the employment relationship will be on an "at will" basis,
which means that, subject to Section 6.4 herein, either Company or Employee may
elect to terminate the employment relationship at any time for any reason
whatsoever, with or without cause. Employee acknowledges that no representation
has been made by Company as to any minimum or specified term or length of
employment following the term set forth above.

                                       1

 
          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus. In consideration of the services to be
                    ----------------
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a) A salary in the amount of $200,000.00 per annum, which salary
shall be reviewed no less frequent than annually by the Company. The Company may
increase Employee's salary but, in no event, may Employee's salary be reduced
during the term of this Agreement.

               (b) The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes.  At the sole discretion of the Board of Directors,
Employee may be entitled to participate therein.

               (c) All payments to Employee shall be subject to the regular
withholding requirements of all appropriate governmental taxing authorities.

               (d) If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee shall consider in
good faith granting a reasonable amount of options to Employee.

               3.2  Other Benefits. Employee shall be entitled to participate in
                    --------------
any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3  Expenses. Company will advance to or reimburse Employee for
                    --------
all reasonable travel and entertainment required by Company and other reasonable
expenses incurred by Employee in connection with the performance of his services
under this Agreement in accordance with Company policy as established from time
to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions. Employee agrees that any discoveries,
                    -------------------
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with Company, that are made with Company's equipment, supplies,
facilities, trade secrets or time; or that relate, at the time of conception of
or reduction to practice, to the business of Company

                                       2

 
or Company's actual or demonstrably anticipated research or development; or that
result from any work performed by Employee for Company, shall belong to Company.
Employee also agrees that Company shall have the right to keep any such
Inventions as trade secrets, if Company so chooses.  In order to permit Company
to claim rights to which it may be entitled, Employee agrees to disclose to
Company in confidence all Inventions that Employee makes during the course of
his employment and all patent applications filed by Employee within three (3)
years after termination of his employment.  Employee shall (a) assist Company in
obtaining patents on all Inventions deemed patentable by Company in the United
States and in all foreign countries and (b) execute all documents and do all
things necessary to obtain letters patent to vest Company with full and
extensive titles thereto and to protect the same against infringement by others.
For the purposes of this Agreement, an Invention is deemed to have been made
during the period of Employee's employment if the Invention was conceived or
first actually reduced to practice during that period, and Employee agrees that
any patent application filed within three (3) years after termination of his
employment with the Company shall be presumed to relate to an Invention made
during the term of Employee's employment unless Employee can provide evidence to
the contrary.

               4.2  Assignment of Inventions and Patents. In furtherance of, and
                    ------------------------------------
not in contravention, limitation and/or in place of, the provisions of Section
4.1 above, Company hereby notifies Employee of California Labor Code Section
2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable or not, which
Employee alone, or with others, conceives or makes during his employment with
Company or as is otherwise required and set forth under Section 4.1 above.
Company shall hold said

                                       3

 
information in strict confidence to determine the applicability of California
Labor Code Section 2870 to said Invention and, to the extent said Section 2870
does not apply, Employee hereby assigns and agrees to assign all his right,
title and interest in and to those Inventions which relate to business of the
Company and Employee agrees not to disclose any of these Inventions to others
without the prior written express consent of Company.  Employee agrees to notify
Company in writing prior to making any disclosure or performing any work during
the term of his employment with Company which may conflict with any proprietary
rights or technical know-how claimed by Employee as his property.  In the event
Employee fails to give Company notice of such conflict, Employee agrees that
Employee shall have no further right or claim with respect to any such
conflicting proprietary rights or technical know-how.

          5.   CONFIDENTIALITY.
               --------------- 

               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------         
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business.  Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information").  All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company.  Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2  Non-Interference.  Employee recognizes that  Company has
                    ----------------                                        
invested substantial effort in assembling its present employees and in
developing its customer base.  As a result, and particularly because of
Company's many types of confidential business information, Employee understands
that any solicitation of a customer or employee of Company, in an effort to get
them to change business affiliations, would presumably involve a misuse of
Company's confidences, Trade Secrets and Confidential Information.  Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with

                                       4

 
Company for any reason whatsoever or the receipt by Employee of any compensation
paid to Employee by Company, Employee will not influence, or attempt to
influence, existing employees or customers of Company in an attempt to divert,
either directly or indirectly, their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1  Termination by Company.  Company may terminate Employee's
                    ----------------------                                   
employment hereunder at any time for cause without payment of severance or
similar benefits. For purposes of this Section 6.1, "cause" shall mean the
following events: (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company. Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2  Termination by Employee.  Employee may terminate his
                    -----------------------                             
employment hereunder at any time for cause.  For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to Company describing such breach.  If the breach is not so cured within
such thirty (30) days after delivery of such notice, the termination of
employment shall become effective after the expiration of such cure period.

               6.3  Death or Disability.  Employee's employment with Company
                    -------------------                                     
shall cease upon the date of his death.  In the event Employee becomes
physically or mentally disabled so as to become unable for more than one hundred
eighty (180) days in the aggregate in any twelve (12) month period to perform
his duties on a full-time basis with reasonable accommodations, Company may, at
its sole discretion, terminate this Agreement and Employee's employment.

               6.4  Termination Following Automatic Renewal.  In the event that
                    ---------------------------------------                    
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

               6.5  Effect of Termination.  Upon the termination of Employee's
                    ---------------------                                     
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or

                                       5

 
expiration, and (b) notwithstanding anything to the contrary contained herein,
the rights and obligations of each party under Paragraphs 4, 5 and 8 herein
shall survive such termination or expiration.  Notwithstanding anything to the
contrary contained in this Agreement if, prior to the end of the initial three
(3) year term, Employer terminates this Agreement without cause, Employee shall
continue to be entitled to receive all of the compensation and other benefits
provided for in Paragraph 3 for the remainder of said three (3) year term
without any deduction or offset for any compensation earned or received by
Employee from any other sources.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company to
               --------------------------                                  
execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1  Injunctive Relief.  Employee acknowledges and agrees that
                    -----------------                                        
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law.  Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages.  Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove.  Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement.  In the
event of any judicial determination that any of the covenants set forth in
Paragraphs 4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2  Specific Enforcement.  Employee agrees and acknowledges that
                    --------------------                                        
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or adequately
compensated in damages in an action at law.  Therefore, in addition to other
remedies provided by law, Company shall have the right, during the term of this
Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief

                                       6

 
against the performance of service elsewhere by Employee during the term of this
Agreement.

          9.   GENERAL.
               ------- 

               9.1  Entire Agreement.  This Agreement contains the entire
                    ----------------                                     
understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them.

               9.2  Amendment.  This Agreement may not be modified, amended,
                    ---------                                               
altered or supplemented except by written agreement between Employee and
Company.

               9.3  Counterparts.  This Agreement may be executed in two (2) or
                    ------------                                               
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4  Jurisdiction.  Each party hereby consents to the exclusive
                    ------------                                              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               9.5  Expenses.  In the event an action at law or in equity is
                    --------                                                
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6  Interpretation.  The headings herein are inserted only as a
                    --------------                                             
matter of convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof.  No provision
of this document is to be interpreted for or against any party because that
party or  party's legal representative drafted it.

               9.7  Successors and Assigns.  This Agreement shall be binding
                    ----------------------                                  
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives.  As used herein, the
successors of Company shall include, but not be limited to, any successor by way
of merger, consolidation, sale of all or substantially all of its assets or
similar reorganization.  In no event may Employee assign any rights or duties
under this Agreement.

               9.8  Controlling Law; Severability.  The validity and
                    -----------------------------                   
construction of this Agreement or of any of its provisions

                                       7

 
shall be determined under the laws of the State of California.  Should any
provision of this Agreement be invalid either due to the duration thereof or the
scope of the prohibited activity, such provision shall be limited by the court
to the extent necessary to make it enforceable and, if invalid for any other
reason, such invalidity or unenforceability shall not affect or limit the
validity and enforceability of the other provisions hereof.

               9.9  Notices.  Any notice required or permitted to be given under
                    -------                                                     
this Agreement shall be sufficient if in writing and if personally received by
the party to whom it is sent or delivered, or if sent by registered or certified
mail, postage prepaid, to Employee's residence in the case of notice to
Employee, or to its principal office if to Company.  A notice is deemed received
or delivered on the earlier of the day received or three (3) days after being
sent by registered or certified mail in the manner described in this Section.

               9.10 Waiver of Breach.  The waiver by any party hereto of a
                    ----------------                                      
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    OPTO SENSORS, INC.



                                    By: /s/ Deepak Chopra
                                       --------------------------------
                                    Its: Chief Executive Officer
                                        -------------------------------

                                     /s/ Ajay Mehra
                                    -----------------------------------
                                    AJAY MEHRA

                                       8

 
                                                                    EXHIBIT 10.5


                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between RAPISCAN SECURITY PRODUCTS (U.S.A.), INC.
("Company"), a California corporation, and ANDREAS F. KOTOWSKI ("Employee"),
with reference to the following facts:

          A.   Employee has been serving Company in a satisfactory and capable
manner pursuant to a written or oral agreement between Employee and Company.

          B.   Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                                                  
Employee hereby accepts continued employment as President of U.S. Operations and
General Manager of Company.  Employee shall report to the Chief Executive
Officer of Company and perform the services and duties customarily incident to
such office and as otherwise decided upon by the Chief Executive Officer or the
Board of Directors.

               1.2  Devotion of Services.  Employee shall devote his entire
                    --------------------                                   
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation).  Employee shall
perform and discharge well and faithfully those duties assigned him by Company.

          2.   TERM. Subject to Section 6 herein, the term of this Agreement
               ----
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of two (2) years. However, in the event that
Company thereafter continues to employ Employee, this Agreement shall be deemed
automatically renewed upon the same terms and conditions set forth herein except
(a) that the parties may mutually agree to revise any of the terms set forth
herein, and (b) the employment relationship will be on an "at will" basis, which
means that, subject to Section 6.4 herein, either Company or Employee may elect
to terminate the employment relationship at any time for any reason whatsoever,
with or without cause. Employee acknowledges that no representation has been
made

                                       1

 
by Company as to any minimum or specified term or length of employment following
the term set forth above.

          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus.  In consideration of the services to be
                    ----------------                                         
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a) A salary in the amount of $140,000.00 per annum, which salary
shall be reviewed no less frequent than annually by the Company's Board of
Directors.  The Board of Directors may increase Employee's salary but, in no
event, may Employee's salary be reduced during the term of this Agreement.

               (b) The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes.  At the sole discretion of the Board of Directors,
Employee may be entitled to participate therein.

               (c) All payments to Employee shall be subject to the regular
withholding requirements of all appropriate governmental taxing authorities.

               (d) If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee may, in its sole
discretion, consider granting options to Employee.

               3.2  Other Benefits. Employee shall be entitled to participate in
                    --------------
any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3  Expenses. Company will advance to or reimburse Employee for
                    --------
all reasonable travel and entertainment required by Company and other reasonable
expenses incurred by Employee in connection with the performance of his services
under this Agreement in accordance with Company policy as established from time
to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions.  Employee agrees that any discoveries,
                    -------------------                                        
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with

                                       2

 
Company, that are made with Company's equipment, supplies, facilities, trade
secrets or time; or that relate, at the time of conception of or reduction to
practice, to the business of Company or Company's actual or demonstrably
anticipated research or development; or that result from any work performed by
Employee for Company, shall belong to Company.  Employee also agrees that
Company shall have the right to keep any such Inventions as trade secrets, if
Company so chooses.  In order to permit Company to claim rights to which it may
be entitled, Employee agrees to disclose to Company in confidence all Inventions
that Employee makes during the course of his employment and all patent
applications filed by Employee within three (3) years after termination of his
employment.  Employee shall (a) assist Company in obtaining patents on all
Inventions deemed patentable by Company in the United States and in all foreign
countries and (b) execute all documents and do all things necessary to obtain
letters patent to vest Company with full and extensive titles thereto and to
protect the same against infringement by others.  For the purposes of this
Agreement, an Invention is deemed to have been made during the period of
Employee's employment if the Invention was conceived or first actually reduced
to practice during that period, and Employee agrees that any patent application
filed within three (3) years after termination of his employment with the
Company shall be presumed to relate to an Invention made during the term of
Employee's employment unless Employee can provide evidence to the contrary.

               4.2  Assignment of Inventions and Patents. In furtherance of, and
                    ------------------------------------
not in contravention, limitation and/or in place of, the provisions of Section
4.1 above, Company hereby notifies Employee of California Labor Code Section
2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable

                                       3

 
or not, which Employee alone, or with others, conceives or makes during his
employment with Company or as is otherwise required and set forth under Section
4.1 above.  Company shall hold said information in strict confidence to
determine the applicability of California Labor Code Section 2870 to said
Invention and, to the extent said Section 2870 does not apply, Employee hereby
assigns and agrees to assign all his right, title and interest in and to those
Inventions which relate to business of the Company and Employee agrees not to
disclose any of these Inventions to others without the prior written express
consent of Company.  Employee agrees to notify Company in writing prior to
making any disclosure or performing any work during the term of his employment
with Company which may conflict with any proprietary rights or technical know-
how claimed by Employee as his property.  In the event Employee fails to give
Company notice of such conflict, Employee agrees that Employee shall have no
further right or claim with respect to any such conflicting proprietary rights
or technical know-how.

          5.   CONFIDENTIALITY.
               --------------- 

               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business.  Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information").  All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company.  Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2   Non-Interference. Employee recognizes that Company has
                     ----------------
invested substantial effort in assembling its present employees and in
developing its customer base. As a result, and particularly because of Company's
many types of confidential business information, Employee understands that any
solicitation of a customer or employee of Company, in an effort to get them to
change business affiliations, would presumably involve a misuse of

                                       4

 
Company's confidences, Trade Secrets and Confidential Information.  Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with Company for any reason whatsoever
or the receipt by Employee of any compensation paid to Employee by Company,
Employee will not influence, or attempt to influence, existing employees or
customers of Company in an attempt to divert, either directly or indirectly,
their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1   Termination by Company.  Company may terminate Employee's
                     ----------------------                                   
employment hereunder at any time for cause without payment of severance or
similar benefits.  For purposes of this Section 6.1, "cause" shall mean the
following events:  (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company.  Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2   Termination by Employee.  Employee may terminate his
                     -----------------------                             
employment hereunder at any time for cause.  For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to Company describing such breach.  If the breach is not so cured within
such thirty (30) days after delivery of such notice, the termination of
employment shall become effective after the expiration of such cure period.

               6.3   Death or Disability.  Employee's employment with Company
                     -------------------                                     
shall cease upon the date of his death.  In the event Employee becomes
physically or mentally disabled so as to become unable for more than one hundred
eighty (180) days in the aggregate in any twelve (12) month period to perform
his duties on a full-time basis with reasonable accommodations, Company may, at
its sole discretion, terminate this Agreement and Employee's employment.

               6.4   Termination Following Automatic Renewal.  In the event that
                     ---------------------------------------
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

                                       5

 
               6.5  Effect of Termination.  Upon the termination of Employee's
                    ---------------------                                     
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or expiration, and (b) notwithstanding anything to the
contrary contained herein, the rights and obligations of each party under
Paragraphs 4, 5 and 8 herein shall survive such termination or expiration.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company to
               --------------------------                                  
execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1   Injunctive Relief.  Employee acknowledges and agrees that
                     ----------------
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law. Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages. Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove. Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement. In the event
of any judicial determination that any of the covenants set forth in Paragraphs
4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2   Specific Enforcement. Employee agrees and acknowledges that
                     --------------------
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, Company shall have the right, during the term of this
Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief against the performance of service elsewhere by Employee
during the term of this Agreement.

                                       6

 
          9.   GENERAL.
               ------- 

               9.1   Entire Agreement.  This Agreement contains the entire
                     ----------------                                     
understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them, including but not limited to
that certain Employment Agreement dated March 1, 1993.

               9.2   Amendment.  This Agreement may not be modified, amended,
                     ---------                                               
altered or supplemented except by written agreement between Employee and
Company.

               9.3   Counterparts.  This Agreement may be executed in two (2) or
                     ------------                                               
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4   Jurisdiction.  Each party hereby consents to the exclusive
                     ------------                                              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               Employee hereby waives any and all rights that Employee may have
to request and/or demand a jury trial.

               9.5   Expenses.  In the event an action in law or in equity is
                     --------                                                
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6   Interpretation.  The headings herein are inserted only as a
                     --------------                                             
matter of convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof.  No provision
of this document is to be interpreted for or against any party because that
party or  party's legal representative drafted it.

               9.7   Successors and Assigns.  This Agreement shall be binding
                     ----------------------                                  
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives.  As used herein, the
successors of Company shall include, but not be limited to, any successor by way
of merger, consolidation, sale of all or substantially all of its assets or
similar reorganization.  In no event may Employee assign any rights or duties
under this Agreement.

               9.8   Controlling Law; Severability. The validity and
                     -----------------------------
construction of this Agreement or of any of its provisions shall be determined
under the laws of the State of California.

                                       7

 
Should any provision of this Agreement be invalid either due to the duration
thereof or the scope of the prohibited activity, such provision shall be limited
by the court to the extent necessary to make it enforceable and, if invalid for
any other reason, such invalidity or unenforceability shall not affect or limit
the validity and enforceability of the other provisions hereof.

               9.9   Notices. Any notice required or permitted to be given under
                     -------
 this Agreement shall be sufficient if in writing and if personally received by
 the party to whom it is sent or delivered, or if sent by registered or
 certified mail, postage prepaid, to Employee's residence in the case of notice
 to Employee, or to its principal office if to Company. A notice is deemed
 received or delivered on the earlier of the day received or three (3) days
 after being sent by registered or certified mail in the manner described in
 this Section.

               9.10  Waiver of Breach.  The waiver by any party hereto of a
                     ----------------                                      
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    EMPLOYER



                                    By:  /s/ Deepak Chopra
                                        ----------------------------------------

                                    Its: Chief Executive Officer
                                        ----------------------------------------
                                            


                                    EMPLOYEE


                                     /s/ Andreas F. Kotowski
                                    --------------------------------------------
                                    ANDREAS F. KOTOWSKI

                                       8

 
                                                                    EXHIBIT 10.6

                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between UDT SENSORS, INC. ("Company"), a
California corporation, and MANOOCHER MANSOURI ALIABADI ("Employee"), with
reference to the following facts:

          A.   Employee has been serving Company in a satisfactory and capable
manner pursuant to a written or oral agreement between Employee and Company.

          B.   Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                                                  
Employee hereby accepts continued employment as Vice President of Corporate
Marketing of Company.  Employee shall report to the Chief Executive Officer of
Company and perform the services and duties customarily incident to such office
and as otherwise decided upon by the Chief Executive Officer or the Board of
Directors.

               1.2  Devotion of Services.  Employee shall devote his entire
                    --------------------                                   
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation). Employee shall
perform and discharge well and faithfully those duties assigned him by Company.

          2.   TERM.  Subject to Section 6 herein, the term of this Agreement
               ----                                   
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of two (2) years. However, in the event that
Company thereafter continues to employ Employee, this Agreement shall be deemed
automatically renewed upon the same terms and conditions set forth herein except
(a) that the parties may mutually agree to revise any of the terms set forth
herein, and (b) the employment relationship will be on an "at will" basis, which
means that, subject to Section 6.4 herein, either Company or Employee may elect
to terminate the employment relationship at any time for any reason whatsoever,
with or without cause. Employee acknowledges that no representation has been
made

 
by Company as to any minimum or specified term or length of employment following
the term set forth above.

          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus.  In consideration of the services to be
                    ----------------                                         
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a) A salary in the amount of $120,000.00 per annum, which salary
shall be reviewed no less frequent than annually by the Company's Board of
Directors.  The Board of Directors may increase Employee's salary but, in no
event, may Employee's salary be reduced during the term of this Agreement.

               (b) The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes.  At the sole discretion of the Board of Directors,
Employee may be entitled to participate therein.

               (c) All payments to Employee shall be subject to the regular
withholding requirements of all appropriate governmental taxing authorities.

               (d) If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee may, in its sole
discretion, consider granting options to Employee.

               3.2  Other Benefits.  Employee shall be entitled to participate
                    --------------                              
in any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3  Expenses.  Company will advance to or reimburse Employee for
                    --------
all reasonable travel and entertainment required by Company and other reasonable
expenses incurred by Employee in connection with the performance of his services
under this Agreement in accordance with Company policy as established from time
to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions.  Employee agrees that any discoveries,
                    -------------------                                        
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with

                                       2

 
Company, that are made with Company's equipment, supplies, facilities, trade
secrets or time; or that relate, at the time of conception of or reduction to
practice, to the business of Company or Company's actual or demonstrably
anticipated research or development; or that result from any work performed by
Employee for Company, shall belong to Company. Employee also agrees that Company
shall have the right to keep any such Inventions as trade secrets, if Company so
chooses. In order to permit Company to claim rights to which it may be entitled,
Employee agrees to disclose to Company in confidence all Inventions that
Employee makes during the course of his employment and all patent applications
filed by Employee within three (3) years after termination of his employment.
Employee shall (a) assist Company in obtaining patents on all Inventions deemed
patentable by Company in the United States and in all foreign countries and (b)
execute all documents and do all things necessary to obtain letters patent to
vest Company with full and extensive titles thereto and to protect the same
against infringement by others. For the purposes of this Agreement, an Invention
is deemed to have been made during the period of Employee's employment if the
Invention was conceived or first actually reduced to practice during that
period, and Employee agrees that any patent application filed within three (3)
years after termination of his employment with the Company shall be presumed to
relate to an Invention made during the term of Employee's employment unless
Employee can provide evidence to the contrary.

               4.2  Assignment of Inventions and Patents. In furtherance of, and
                    ------------------------------------          
not in contravention, limitation and/or in place of, the provisions of Section
4.1 above, Company hereby notifies Employee of California Labor Code Section
2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable

                                       3

 
or not, which Employee alone, or with others, conceives or makes during his
employment with Company or as is otherwise required and set forth under Section
4.1 above. Company shall hold said information in strict confidence to determine
the applicability of California Labor Code Section 2870 to said Invention and,
to the extent said Section 2870 does not apply, Employee hereby assigns and
agrees to assign all his right, title and interest in and to those Inventions
which relate to business of the Company and Employee agrees not to disclose any
of these Inventions to others without the prior written express consent of
Company. Employee agrees to notify Company in writing prior to making any
disclosure or performing any work during the term of his employment with Company
which may conflict with any proprietary rights or technical know-how claimed by
Employee as his property. In the event Employee fails to give Company notice of
such conflict, Employee agrees that Employee shall have no further right or
claim with respect to any such conflicting proprietary rights or technical know-
how.

          5.   CONFIDENTIALITY.
               --------------- 

               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------         
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business. Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information"). All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company. Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2  Non-Interference.  Employee recognizes that  Company has
                    ----------------                                        
invested substantial effort in assembling its present employees and in
developing its customer base. As a result, and particularly because of Company's
many types of confidential business information, Employee understands that any
solicitation of a customer or employee of Company, in an effort to get them to
change business affiliations, would presumably involve a misuse of

                                       4

 
Company's confidences, Trade Secrets and Confidential Information. Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with Company for any reason whatsoever
or the receipt by Employee of any compensation paid to Employee by Company,
Employee will not influence, or attempt to influence, existing employees or
customers of Company in an attempt to divert, either directly or indirectly,
their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1  Termination by Company.  Company may terminate Employee's
                    ----------------------                                   
employment hereunder at any time for cause without payment of severance or
similar benefits. For purposes of this Section 6.1, "cause" shall mean the
following events: (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company. Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2  Termination by Employee.  Employee may terminate his
                    -----------------------                             
employment hereunder at any time for cause. For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to Company describing such breach. If the breach is not so cured within
such thirty (30) days after delivery of such notice, the termination of
employment shall become effective after the expiration of such cure period.

               6.3  Death or Disability.  Employee's employment with Company
                    -------------------                                     
shall cease upon the date of his death. In the event Employee becomes physically
or mentally disabled so as to become unable for more than one hundred eighty
(180) days in the aggregate in any twelve (12) month period to perform his
duties on a full-time basis with reasonable accommodations, Company may, at its
sole discretion, terminate this Agreement and Employee's employment.

               6.4  Termination Following Automatic Renewal.  In the event that
                    ---------------------------------------                    
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

                                       5

 
               6.5  Effect of Termination.  Upon the termination of Employee's
                    ---------------------                                     
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or expiration, and (b) notwithstanding anything to the
contrary contained herein, the rights and obligations of each party under
Paragraphs 4, 5 and 8 herein shall survive such termination or expiration.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company to
               --------------------------                                  
execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1  Injunctive Relief.  Employee acknowledges and agrees that
                    -----------------                                        
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law. Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages. Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove. Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement. In the event
of any judicial determination that any of the covenants set forth in Paragraphs
4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2  Specific Enforcement.  Employee agrees and acknowledges that
                    --------------------                                        
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, Company shall have the right, during the term of this
Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief against the performance of service elsewhere by Employee
during the term of this Agreement.

                                       6

 
          9.   GENERAL.
               ------- 

               9.1  Entire Agreement.  This Agreement contains the entire
                    ----------------                                     
understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them.

               9.2  Amendment.  This Agreement may not be modified, amended,
                    ---------                                               
altered or supplemented except by written agreement between Employee and
Company.

               9.3  Counterparts.  This Agreement may be executed in two (2) or
                    ------------                                               
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4  Jurisdiction.  Each party hereby consents to the exclusive
                    ------------                                              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               Employee hereby waives any and all rights that Employee may have
to request and/or demand a jury trial.

               9.5  Expenses.  In the event an action in law or in equity is
                    --------                                                
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6  Interpretation.  The headings herein are inserted only as a
                    --------------                                             
matter of convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof. No provision of
this document is to be interpreted for or against any party because that party
or party's legal representative drafted it.

               9.7  Successors and Assigns.  This Agreement shall be binding
                    ----------------------                                  
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives. As used herein, the successors
of Company shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of its assets or similar
reorganization. In no event may Employee assign any rights or duties under this
Agreement.

               9.8  Controlling Law; Severability. The validity and construction
                    -----------------------------                   
of this Agreement or of any of its provisions shall be determined under the laws
of the State of California. Should any provision of this Agreement be invalid
either due to the duration thereof or the scope of the prohibited activity, such

                                       7

 
provision shall be limited by the court to the extent necessary to make it
enforceable and, if invalid for any other reason, such invalidity or
unenforceability shall not affect or limit the validity and enforceability of
the other provisions hereof.

               9.9  Notices.  Any notice required or permitted to be given under
                    -------                                                     
this Agreement shall be sufficient if in writing and if personally received by
the party to whom it is sent or delivered, or if sent by registered or certified
mail, postage prepaid, to Employee's residence in the case of notice to
Employee, or to its principal office if to Company.  A notice is deemed received
or delivered on the earlier of the day received or three (3) days after being
sent by registered or certified mail in the manner described in this Section.

               9.10 Waiver of Breach.  The waiver by any party hereto of a
                    ----------------                                      
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    EMPLOYER


                                    By: /s/ Deepak Chopra
                                       ----------------------------
 
                                    Its: Chief Executive Officer
                                        ---------------------------



                                    EMPLOYEE

                                    /s/ Manoocher Mansouri Aliabadi
                                    ------------------------------- 
                                    MANOOCHER MANSOURI ALIABADI

                                       8

 
                                                                    EXHIBIT 10.7

                             EMPLOYMENT AGREEMENT
                             --------------------


          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between RAPISCAN SECURITY PRODUCTS LTD.
("Company"), a United Kingdom corporation, and ANTHONY S. CRANE ("Employee"),
with reference to the following facts:

          A.   Employee has been serving Company in a satisfactory and capable
manner pursuant to a written or oral agreement between Employee and Company.

          B.   Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                                                  
Employee hereby accepts continued employment as Managing Director of Company.
Employee shall report to the Chief Executive Officer of Company and perform the
services and duties customarily incident to such office and as otherwise decided
upon by the Chief Executive Officer or the Board of Directors.

               1.2  Devotion of Services.  Employee shall devote his entire
                    --------------------                                   
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation). Employee shall
perform and discharge well and faithfully those duties assigned him by Company.

          2.   TERM.  Subject to Section 6 herein, the term of this Agreement
               ----                                   
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of one (1) year. However, in the event that
Company thereafter continues to employ Employee, this Agreement shall be deemed
automatically renewed upon the same terms and conditions set forth herein except
(a) that the parties may mutually agree to revise any of the terms set forth
herein, and (b) the employment relationship will be on an "at will" basis, which
means that, subject to Section 6.4 herein, either Company or Employee may elect
to terminate the employment relationship at any time for any reason whatsoever,
with or without cause. Employee acknowledges that no representation has been
made

 
by Company as to any minimum or specified term or length of employment following
the term set forth above.

          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus.  In consideration of the services to be
                    ----------------                                         
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a) A salary in the amount of (Pounds)48,000 (U.K.) per annum,
which salary shall be reviewed no less frequent than annually by the Company's
Board of Directors. The Board of Directors may increase Employee's salary but,
in no event, may Employee's salary be reduced during the term of this Agreement.

               (b) The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes.  At the sole discretion of the Board of Directors,
Employee may be entitled to participate therein.

               (c) All payments to Employee shall be subject to the regular
withholding requirements of all appropriate governmental taxing authorities.

               (d) If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee may, in its sole
discretion, consider granting options to Employee.

               3.2  Other Benefits. Employee shall be entitled to participate in
                    --------------
any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3  Expenses.  Company will advance to or reimburse Employee for
                    --------
all reasonable travel and entertainment required by Company and other reasonable
expenses incurred by Employee in connection with the performance of his services
under this Agreement in accordance with Company policy as established from time
to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions.  Employee agrees that any discoveries,
                    -------------------                                        
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with

                                       2

 
Company, that are made with Company's equipment, supplies, facilities, trade
secrets or time; or that relate, at the time of conception of or reduction to
practice, to the business of Company or Company's actual or demonstrably
anticipated research or development; or that result from any work performed by
Employee for Company, shall belong to Company. Employee also agrees that Company
shall have the right to keep any such Inventions as trade secrets, if Company so
chooses. In order to permit Company to claim rights to which it may be entitled,
Employee agrees to disclose to Company in confidence all Inventions that
Employee makes during the course of his employment and all patent applications
filed by Employee within three (3) years after termination of his employment.
Employee shall (a) assist Company in obtaining patents on all Inventions deemed
patentable by Company in the United States and in all foreign countries and (b)
execute all documents and do all things necessary to obtain letters patent to
vest Company with full and extensive titles thereto and to protect the same
against infringement by others. For the purposes of this Agreement, an Invention
is deemed to have been made during the period of Employee's employment if the
Invention was conceived or first actually reduced to practice during that
period, and Employee agrees that any patent application filed within three (3)
years after termination of his employment with the Company shall be presumed to
relate to an Invention made during the term of Employee's employment unless
Employee can provide evidence to the contrary.

               4.2  Assignment of Inventions and Patents. In furtherance of, and
                    ------------------------------------  
not in contravention, limitation and/or in place of, the provisions of Section
4.1 above, Company hereby notifies Employee of California Labor Code Section
2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable

                                       3

 
or not, which Employee alone, or with others, conceives or makes during his
employment with Company or as is otherwise required and set forth under Section
4.1 above.  Company shall hold said information in strict confidence to
determine the applicability of California Labor Code Section 2870 to said
Invention and, to the extent said Section 2870 does not apply, Employee hereby
assigns and agrees to assign all his right, title and interest in and to those
Inventions which relate to business of the Company and Employee agrees not to
disclose any of these Inventions to others without the prior written express
consent of Company.  Employee agrees to notify Company in writing prior to
making any disclosure or performing any work during the term of his employment
with Company which may conflict with any proprietary rights or technical know-
how claimed by Employee as his property.  In the event Employee fails to give
Company notice of such conflict, Employee agrees that Employee shall have no
further right or claim with respect to any such conflicting proprietary rights
or technical know-how.

          5.   CONFIDENTIALITY.
               --------------- 
  
               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------         
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business. Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information"). All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company. Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2  Non-Interference.  Employee recognizes that  Company has
                    ----------------                                        
invested substantial effort in assembling its present employees and in
developing its customer base. As a result, and particularly because of Company's
many types of confidential business information, Employee understands that any
solicitation of a customer or employee of Company, in an effort to get them to
change business affiliations, would presumably involve a misuse of

                                       4

 
Company's confidences, Trade Secrets and Confidential Information. Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with Company for any reason whatsoever
or the receipt by Employee of any compensation paid to Employee by Company,
Employee will not influence, or attempt to influence, existing employees or
customers of Company in an attempt to divert, either directly or indirectly,
their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1  Termination by Company.  Company may terminate Employee's
                    ----------------------                                   
employment hereunder at any time for cause without payment of severance or
similar benefits. For purposes of this Section 6.1, "cause" shall mean the
following events: (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company. Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2  Termination by Employee.  Employee may terminate his
                    -----------------------                             
employment hereunder at any time for cause. For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to Company describing such breach. If the breach is not so cured within
such thirty (30) days after delivery of such notice, the termination of
employment shall become effective after the expiration of such cure period.

               6.3  Death or Disability.  Employee's employment with Company
                    -------------------                                     
shall cease upon the date of his death. In the event Employee becomes physically
or mentally disabled so as to become unable for more than one hundred eighty
(180) days in the aggregate in any twelve (12) month period to perform his
duties on a full-time basis with reasonable accommodations, Company may, at its
sole discretion, terminate this Agreement and Employee's employment.

               6.4  Termination Following Automatic Renewal.  In the event that
                    ---------------------------------------                    
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

                                       5

 
               6.5  Effect of Termination.  Upon the termination of Employee's
                    ---------------------                                     
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or expiration, and (b) notwithstanding anything to the
contrary contained herein, the rights and obligations of each party under
Paragraphs 4, 5 and 8 herein shall survive such termination or expiration.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company to
               --------------------------                                  
execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1  Injunctive Relief.  Employee acknowledges and agrees that
                    -----------------                                        
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law. Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages. Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove. Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement. In the event
of any judicial determination that any of the covenants set forth in Paragraphs
4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2  Specific Enforcement.  Employee agrees and acknowledges that
                    --------------------                                        
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, Company shall have the right, during the term of this
Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief against the performance of service elsewhere by Employee
during the term of this Agreement.

                                       6

 
          9.   GENERAL.
               ------- 

               9.1  Entire Agreement.  This Agreement contains the entire
                    ----------------                                     
understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them.

               9.2  Amendment.  This Agreement may not be modified, amended,
                    ---------                                               
altered or supplemented except by written agreement between Employee and
Company.

               9.3  Counterparts.  This Agreement may be executed in two (2) or
                    ------------                                               
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4  Jurisdiction.  Each party hereby consents to the exclusive
                    ------------                                              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               Employee hereby waives any and all rights that Employee may have
to request and/or demand a jury trial.

               9.5  Expenses.  In the event an action in law or in equity is
                    --------                                                
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6  Interpretation.  The headings herein are inserted only as a
                    --------------                                             
matter of convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof. No provision of
this document is to be interpreted for or against any party because that party
or party's legal representative drafted it.

               9.7  Successors and Assigns.  This Agreement shall be binding
                    ----------------------                                  
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives. As used herein, the successors
of Company shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of its assets or similar
reorganization. In no event may Employee assign any rights or duties under this
Agreement.

               9.8  Controlling Law; Severability.  The validity and 
                    -----------------------------                   
construction of this Agreement or of any of its provisions shall be determined
under the laws of the State of California. Should any provision of this
Agreement be invalid either due to the duration thereof or the scope of the
prohibited activity, such

                                       7

 
provision shall be limited by the court to the extent necessary to make it
enforceable and, if invalid for any other reason, such invalidity or
unenforceability shall not affect or limit the validity and enforceability of
the other provisions hereof.

               9.9  Notices.  Any notice required or permitted to be given under
                    -------                                                     
this Agreement shall be sufficient if in writing and if personally received by
the party to whom it is sent or delivered, or if sent by registered or certified
mail, postage prepaid, to Employee's residence in the case of notice to
Employee, or to its principal office if to Company. A notice is deemed received
or delivered on the earlier of the day received or three (3) days after being
sent by registered or certified mail in the manner described in this Section.

               9.10 Waiver of Breach.  The waiver by any party hereto of a
                    ----------------                                      
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    EMPLOYER



                                    By: /s/ Deepak Chopra
                                       -------------------------- 

                                    Its: Chief Executive Officer
                                        -------------------------


                                    EMPLOYEE

                                    /s/ Anthony S. Crane
                                    -----------------------------
                                    ANTHONY S. CRANE

                                       8

 
                                                                    EXHIBIT 10.8

                             EMPLOYMENT AGREEMENT
                             --------------------


          THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of April, 1997, by and between OPTO SENSORS, INC. ("Company"), a
California corporation, and THOMAS K. HICKMAN ("Employee"), with reference to
the following facts:

          A.   Employee has been serving Company in a satisfactory and capable
manner pursuant to a written or oral agreement between Employee and Company.

          B.   Company has requested that Employee enter into a written
employment agreement with Company with respect to matters relating to continued
employment with Company, and Employee has agreed to do so, upon the terms and
conditions set forth herein.

          NOW, THEREFORE, in consideration of the terms and conditions and the
mutual agreements and covenants set forth herein, the parties hereto agree as
follows:

          1.   SCOPE OF EMPLOYMENT.
               ------------------- 

               1.1  Capacity.  Company hereby continues to employ Employee and
                    --------                                                  
Employee hereby accepts continued employment as Managing Director of OSI
Malaysia and OSI Singapore. Employee shall report to the Chief Executive Officer
of Company and perform the services and duties customarily incident to such
office and as otherwise decided upon by the Chief Executive Officer or the Board
of Directors.

               1.2  Devotion of Services.  Employee shall devote his entire
                    --------------------                                   
productive time, ability and attention exclusively to the business of Company
during the term of this Agreement, except for passive investments, charitable
and non-profit enterprises and any other business investments which do not
interfere with his duties hereunder and which are not competitive with
Employer's activities (except as the owner of less than 2% of the issued and
outstanding capital stock of a publicly traded corporation). Employee shall
perform and discharge well and faithfully those duties assigned him by Company.

          2.   TERM.  Subject to Section 6 herein, the term of this Agreement
               ----                                   
shall commence as of the date of this Agreement and shall continue and remain in
full force and effect for a period of one (1) year. However, in the event that
Company thereafter continues to employ Employee, this Agreement shall be deemed
automatically renewed upon the same terms and conditions set forth herein except
(a) that the parties may mutually agree to revise any of the terms set forth
herein, and (b) the employment relationship will be on an "at will" basis, which
means that, subject to Section 6.4 herein, either Company or Employee may elect
to terminate the employment relationship at any time for any reason whatsoever,
with or without cause. Employee acknowledges that no representation has been
made

 
by Company as to any minimum or specified term or length of employment following
the term set forth above.

          3.   COMPENSATION.
               ------------ 

               3.1  Salary and Bonus.  In consideration of the services to be
                    ----------------                                         
rendered by Employee hereunder, including without limitation any services
rendered as an officer or director of Company or any subsidiary or affiliate
thereof, during the term of this Agreement Company shall pay to Employee the
following:

               (a) A salary in the amount of $125,000.00 per annum, which salary
shall be reviewed no less frequent than annually by the Company's Board of
Directors.  The Board of Directors may increase Employee's salary but, in no
event, may Employee's salary be reduced during the term of this Agreement.

               (b) The Company presently intends to continue its policy of
establishing a fiscal year end bonus pool for members of management of Company
and/or its subsidiaries, which may be up to ten percent (10%) of the Company's
net income before taxes.  At the sole discretion of the Board of Directors,
Employee may be entitled to participate therein.

               (c) All payments to Employee shall be subject to the regular
withholding requirements of all appropriate governmental taxing authorities.

               (d) If the Company's Board of Directors and/or any committee
thereof grants options to senior members of management of the Company and/or its
subsidiaries, the Board of Directors and/or such committee may, in its sole
discretion, consider granting options to Employee.

               3.2  Other Benefits. Employee shall be entitled to participate in
                    --------------
any medical and insurance plan which Company is presently providing or may
provide to its senior executives. Employee acknowledges that the terms of such
plans may change from time to time. Furthermore, Employee shall be entitled to
receive the same automobile, life insurance policy and all other benefits which
he presently is receiving.

               3.3 Expenses. Company will advance to or reimburse Employee for
                   --------  
all reasonable travel and entertainment required by Company and other reasonable
expenses incurred by Employee in connection with the performance of his services
under this Agreement in accordance with Company policy as established from time
to time.

          4.   INVENTIONS.
               ---------- 

               4.1  Right to Inventions.  Employee agrees that any discoveries,
                    -------------------                                        
inventions or improvements of whatever nature (collectively "Inventions") made
or conceived by Employee, solely or jointly with others, during the term of his
employment with

                                       2

 
Company, that are made with Company's equipment, supplies, facilities, trade
secrets or time; or that relate, at the time of conception of or reduction to
practice, to the business of Company or Company's actual or demonstrably
anticipated research or development; or that result from any work performed by
Employee for Company, shall belong to Company. Employee also agrees that Company
shall have the right to keep any such Inventions as trade secrets, if Company so
chooses. In order to permit Company to claim rights to which it may be entitled,
Employee agrees to disclose to Company in confidence all Inventions that
Employee makes during the course of his employment and all patent applications
filed by Employee within three (3) years after termination of his employment.
Employee shall (a) assist Company in obtaining patents on all Inventions deemed
patentable by Company in the United States and in all foreign countries and (b)
execute all documents and do all things necessary to obtain letters patent to
vest Company with full and extensive titles thereto and to protect the same
against infringement by others. For the purposes of this Agreement, an Invention
is deemed to have been made during the period of Employee's employment if the
Invention was conceived or first actually reduced to practice during that
period, and Employee agrees that any patent application filed within three (3)
years after termination of his employment with the Company shall be presumed to
relate to an Invention made during the term of Employee's employment unless
Employee can provide evidence to the contrary.

               4.2  Assignment of Inventions and Patents. In furtherance of, and
                    ------------------------------------
not in contravention, limitation and/or in place of, the provisions of Section
4.1 above, Company hereby notifies Employee of California Labor Code Section
2870, which provides:

          "Any provision in an employment agreement which provides that an
     employee shall assign or offer to assign any of his or her rights in an
     invention to his or her employer shall not apply to an invention for which
     no equipment, supplies, facility, or trade secret information of the
     employer was used and which was developed entirely on the employee's own
     time, and (a) which does not relate (1) directly or indirectly to the
     business of the employer or (2) to the employer's actual or demonstrably
     anticipated research or development, or (b) which does not result from any
     work performed by the employee for the employer.  Any provision which
     purports to apply to such an invention is to that extent against the public
     policy of this state and is to that extent void and unenforceable."

          Employee acknowledges that he has been notified by the Company of this
law, and understands that this Agreement does not apply to Inventions which are
otherwise fully protected under the provisions of said Labor Code Section 2870.
Therefore, Employee agrees to promptly disclose in writing to the Company all
Inventions, whether Employee personally considers them patentable

                                       3

 
or not, which Employee alone, or with others, conceives or makes during his
employment with Company or as is otherwise required and set forth under Section
4.1 above. Company shall hold said information in strict confidence to determine
the applicability of California Labor Code Section 2870 to said Invention and,
to the extent said Section 2870 does not apply, Employee hereby assigns and
agrees to assign all his right, title and interest in and to those Inventions
which relate to business of the Company and Employee agrees not to disclose any
of these Inventions to others without the prior written express consent of
Company. Employee agrees to notify Company in writing prior to making any
disclosure or performing any work during the term of his employment with Company
which may conflict with any proprietary rights or technical know-how claimed by
Employee as his property. In the event Employee fails to give Company notice of
such conflict, Employee agrees that Employee shall have no further right or
claim with respect to any such conflicting proprietary rights or technical know-
how.

          5.   CONFIDENTIALITY.
               --------------- 

               5.1  Restrictions on Use of Trade Secrets and Records.  During
                    ------------------------------------------------         
the term of his employment, Employee will have access to and become acquainted
with various trade secrets of Company, consisting of formulas, patterns,
devices, secret Inventions, processes, compilations of information, records and
specifications (collectively "Trade Secrets"), all of which are owned by Company
and used in the operation of Company's business. Additionally, Employee will
have access to and may become acquainted with various files, records, customer
lists, documents, drawings, specifications, equipment and similar items relating
to the business of Company (collectively "Confidential Information"). All such
Trade Secrets and Confidential Information, whether they are designed, conceived
or prepared by Employee or come into Employee's possession or knowledge in any
other way, are and shall remain the exclusive property of Company and shall not
be removed from the premises of Company under any circumstances whatsoever
without the prior written consent of Company. Employee promises and agrees that
he will not use for himself or for others, or divulge or disclose to any other
person or entity, directly or indirectly, either during the term of his
employment by Company or at any time thereafter, for his own benefit or for the
benefit of any other person or entity or for any reason whatsoever, any of the
Trade Secrets or Confidential Information described herein, which he may
conceive, develop, obtain or learn about during or as a result of his employment
by Company unless specifically authorized to do so in writing by Company.

               5.2  Non-Interference.  Employee recognizes that  Company has
                    ----------------                                        
invested substantial effort in assembling its present employees and in
developing its customer base.  As a result, and particularly because of
Company's many types of confidential business information, Employee understands
that any solicitation of a customer or employee of Company, in an effort to get
them to change business affiliations, would presumably involve a misuse of

                                       4

 
Company's confidences, Trade Secrets and Confidential Information. Employee
therefore agrees that, for a period of one (1) year from the later of the date
of termination of Employee's employment with Company for any reason whatsoever
or the receipt by Employee of any compensation paid to Employee by Company,
Employee will not influence, or attempt to influence, existing employees or
customers of Company in an attempt to divert, either directly or indirectly,
their services or business from Company.

          6.   TERMINATION OF AGREEMENT.
               ------------------------ 

               6.1  Termination by Company.  Company may terminate Employee's
                    ----------------------                                   
employment hereunder at any time for cause without payment of severance or
similar benefits. For purposes of this Section 6.1, "cause" shall mean the
following events: (a) any willful breach of duty by Employee in the course of
his employment, (b) the breach of any provision of this Agreement or any
misrepresentation by Employee hereunder, (c) misconduct, neglect or negligence
in the performance of Employee's duties and obligations, (d) disloyal,
dishonest, willful misconduct, illegal, immoral or unethical conduct by
Employee, (e) such carelessness or inefficiency in the performance of his duties
that Employee is unfit to continue in the service of Company, (f) failure of
Employee to comply with the policies or directives of Company and/or failure to
take direction from Company's Board of Directors, or (g) such other conduct
which is substantially detrimental to the best interests of Company. Any such
termination shall become effective upon delivery of written notice to Employee.

               6.2  Termination by Employee.  Employee may terminate his
                    -----------------------                             
employment hereunder at any time for cause. For purposes of this Section 6.2,
"cause" shall mean the breach of any provision of this Agreement by Company
which is not cured within thirty (30) days after Employee delivers written
notice to Company describing such breach. If the breach is not so cured within
such thirty (30) days after delivery of such notice, the termination of
employment shall become effective after the expiration of such cure period.

               6.3  Death or Disability.  Employee's employment with Company
                    -------------------                                     
shall cease upon the date of his death. In the event Employee becomes physically
or mentally disabled so as to become unable for more than one hundred eighty
(180) days in the aggregate in any twelve (12) month period to perform his
duties on a full-time basis with reasonable accommodations, Company may, at its
sole discretion, terminate this Agreement and Employee's employment.

               6.4  Termination Following Automatic Renewal.  In the event that
                    ---------------------------------------                    
this Agreement is automatically renewed pursuant to Paragraph 2 herein, either
Company or Employee may terminate Employee's employment hereunder at any time
and for any reason whatsoever, with or without cause, upon thirty (30) days
prior written notice delivered to the other party.

                                       5

 
               6.5  Effect of Termination.  Upon the termination of Employee's
                    ---------------------                                     
employment hereunder or the expiration or termination of the Agreement, (a)
Company shall pay Employee all compensation accrued and outstanding as of the
date of such termination or expiration, and (b) notwithstanding anything to the
contrary contained herein, the rights and obligations of each party under
Paragraphs 4, 5 and 8 herein shall survive such termination or expiration.

          7.   EMPLOYEE'S REPRESENTATIONS.  As an inducement for Company to
               --------------------------                                  
execute this Agreement, Employee represents and warrants to Company that the
negotiation, execution and delivery of this Agreement by Employee together with
the performance of his obligations hereunder does not breach or give rise to a
breach under any employment, confidentiality, non-disclosure, non-competition or
any other agreement, written or oral, to which Employee is a party.

          8.   EQUITABLE REMEDIES.
               ------------------ 

               8.1  Injunctive Relief.  Employee acknowledges and agrees that
                    -----------------                                        
the covenants set forth in Paragraphs 4 and 5 herein are reasonable and
necessary for protection of Company's business interests, that irreparable
injury will result to Company if Employee breaches any of the terms of said
covenants and that, in the event of Employee's actual or threatened breach of
said covenants, Company will have no adequate remedy at law. Employee
accordingly agrees that in the event of actual or threatened breach of any of
such covenants, Company shall be entitled to immediate injunctive and other
equitable relief, without bond and without the necessity of showing actual
monetary damages. Nothing contained herein shall be construed as prohibiting
Company from pursuing any other remedies available to it for such breach or
threatened breach, including the recovering of any damages which it is able to
prove. Each of the covenants in Paragraphs 4 and 5 shall be construed as
independent of any other covenants or provisions of this Agreement. In the event
of any judicial determination that any of the covenants set forth in Paragraphs
4 and 5 herein or any other provisions of the Agreement are not fully
enforceable, it is the intention and desire of the parties that the court treat
said covenants as having been modified to the extent deemed necessary by the
court to render them reasonable and enforceable and that the court enforce them
to such extent.

               8.2  Specific Enforcement.  Employee agrees and acknowledges that
                    --------------------                                        
he is obligated under this Agreement to render services of a special, unique,
unusual, extraordinary and intellectual character, thereby giving this Agreement
peculiar value, so that the loss thereof could not be reasonable or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, Company shall have the right, during the term of this
Agreement, to obtain specific performance hereof by Employee and to obtain
injunctive relief against the performance of service elsewhere by Employee
during the term of this Agreement.

                                       6

 
          9.   GENERAL.
               ------- 

               9.1   Entire Agreement.  This Agreement contains the entire
                     ----------------                                     
understanding between the parties hereto and supersedes all other oral and
written agreements or understandings between them.

               9.2   Amendment.  This Agreement may not be modified, amended,
                     ---------                                               
altered or supplemented except by written agreement between Employee and
Company.

               9.3   Counterparts.  This Agreement may be executed in two (2) or
                     ------------                                               
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

               9.4   Jurisdiction.  Each party hereby consents to the exclusive
                     ------------                                              
jurisdiction of the state and federal courts sitting in Los Angeles County,
California, in any action on a claim arising out of, under or in connection with
this Agreement or the transactions contemplated by this Agreement. Each party
further agrees that personal jurisdiction over him may be effected by service of
process by registered or certified mail addressed as provided in Section 9.9
herein, and that when so made shall be as if served upon him personally within
the State of California.

               Employee hereby waives any and all rights that Employee may have
to request and/or demand a jury trial.

               9.5  Expenses.  In the event an action in law or in equity is
                    --------                                                
required to enforce or interpret the terms and conditions of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs in
addition to any other relief to which that party may be entitled.

               9.6  Interpretation.  The headings herein are inserted only as a
                    --------------                                             
matter of convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof. No provision of
this document is to be interpreted for or against any party because that party
or party's legal representative drafted it.

               9.7  Successors and Assigns.  This Agreement shall be binding
                    ----------------------                                  
upon, and inure to the benefit of, the parties hereto and their heirs,
successors, assigns and personal representatives. As used herein, the successors
of Company shall include, but not be limited to, any successor by way of merger,
consolidation, sale of all or substantially all of its assets or similar
reorganization. In no event may Employee assign any rights or duties under this
Agreement.

               9.8  Controlling Law; Severability.  The validity and 
                    -----------------------------                   
construction of this Agreement or of any of its provisions shall be determined
under the laws of the State of California. Should any provision of this
Agreement be invalid either due to the duration thereof or the scope of the
prohibited activity, such

                                       7

 
provision shall be limited by the court to the extent necessary to make it
enforceable and, if invalid for any other reason, such invalidity or
unenforceability shall not affect or limit the validity and enforceability of
the other provisions hereof.

               9.9  Notices.  Any notice required or permitted to be given under
                    -------                                                     
this Agreement shall be sufficient if in writing and if personally received by
the party to whom it is sent or delivered, or if sent by registered or certified
mail, postage prepaid, to Employee's residence in the case of notice to
Employee, or to its principal office if to Company.  A notice is deemed received
or delivered on the earlier of the day received or three (3) days after being
sent by registered or certified mail in the manner described in this Section.

               9.10 Waiver of Breach.  The waiver by any party hereto of a
                    ----------------                                      
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

                                    EMPLOYER


                                    By: /s/ Deepak Chopra
                                       ---------------------------- 

                                    Its: Chief Executive Officer
                                        ---------------------------


                                    EMPLOYEE


                                    /s/ Thomas K. Hickman
                                    -------------------------------
                                    THOMAS K. HICKMAN

                                       8

 
                                                                    EXHIBIT 10.9

                              M E M O R A N D U M



TO:       ANDY KOTOWSKI

FROM:     DEEPAK CHOPRA

DATE:     December 18, 1996

SUBJECT:  Incentive Compensation

- --------------------------------------------------------------------------------

     You shall be entitled to receive incentive compensation for the fiscal
years ended June 30, 1997, 1998 and 1999, upon the following terms and
conditions.

     1.   If the consolidated pre-tax earnings of Rapiscan Security Products
(U.S.A.), Inc. and Rapiscan Security Products (U.K.) Ltd. ("Rapiscan Earnings")
for the fiscal year ended June 30, 1997 exceeds $1,700,000.00, then you shall
receive an amount equal to ten percent (10%) of such excess.

     2.   For the fiscal year ended June 30, 1998, if the Rapiscan Earnings for
such fiscal year exceeds $1,700,000.00 and the cumulative Rapiscan Earnings for
                                       ---                                     
the June 30, 1997 and 1998 fiscal years exceed $3,400,000.00, then you shall
receive an amount equal to ten percent (10%) of the lesser of (i) that portion
of the Rapiscan Earnings for the June 30, 1998 fiscal year which exceeds
$1,700,000.00 or (ii) that portion of the cumulative Rapiscan Earnings for the
June 30, 1997 and 1998 fiscal years which exceeds $3,400,000.00.

     3.   For the fiscal year ended June 30, 1999, if the Rapiscan Earnings for
such fiscal year exceeds $1,700,000.00 and the cumulative Rapiscan Earnings for
                                       ---                                     
the June 30, 1997, 1998 and 1999 fiscal years exceed $5,100,000.00, then you
shall receive an amount equal to ten percent (10%) of the lesser of (i) that
portion of the Rapiscan Earnings for the June 30, 1999 fiscal year which exceeds
$1,700,000.00 or (ii) that portion of the cumulative Rapiscan Earnings for the
June 30, 1997, 1998 and 1999 fiscal years which exceeds $5,100,000.00.

 
     4.   For example purposes only:
June 30, 1997 June 30, 1998 June 30, 1999 ------------- ------------- ------------- Rapiscan Earnings Per Year 1,700,000.00 1,700,000.00 1,700,000.00 Incentive Compensation -0- -0- -0- Rapiscan Earnings Per Year 1,200,000.00 2,000,000.00 2,000,000.00 Incentive Compensation -0- -0- 10,000.00 Rapiscan Earnings Per Year 3,200,000.00 3,400,000.00 3,600,000.00 Incentive Compensation 150,000.00 150,000.00 150,000.00 Rapiscan Earnings Per Year 5,000,000.00 1,700,000.00 2,000,000.00 Incentive Compensation 150,000.00 -0- 30,000.00
5. In no event shall this incentive compensation exceed $150,000.00 for any fiscal year. 6. Your incentive compensation shall be paid within 120 days after the end of the fiscal year and shall be determined by OSI's independent certified public accountants in accordance with generally accepted accounting principles consistently applied to practices for prior periods. 7. You must be employed by Rapiscan for the entire fiscal year in order to receive incentive compensation for such year. 8. The foregoing incentive compensation shall be in addition to that which you may be entitled under the general bonus plan for management. 9. You agree to keep the terms of this agreement strictly confidential. /s/ Deepak Chopra ________________________________________ Deepak Chopra, Chief Executive Officer AGREED TO AND ACCEPTED: /s/ Andy Kotowski ________________________________ Andy Kotowski

 
                                                                   EXHIBIT 10.12
 
                         AMENDMENT NUMBER TWO TO LEASE


     This Amendment Number Two to Lease, dated October 24, 1995, (the
"Amendment"), for reference purposes only, is hereby made a part of that certain
lease dated January 1, 1989, by an between KB Management Company, as "Lessor",
and UDT Sensors, Inc., successor in interest United Detector Technology, a
division of ILC Technology, as "Lessee", for that certain Premises being two
single story and free standing buildings of office and warehouse space and
surrounding parking areas commonly known as 12515 Chadron Avenue (north
building) and 12525 Chadron Avenue (south building), Hawthorne, California
containing approximately 21,000 and 37,500 square feet respectively, (the
"Lease").

     1.   Effective Date.  Notwithstanding the date first set forth above, the
          --------------                                                      
effective date of this Amendment will be July 1, 1995, (the "Effective Date").

     2.   Parties.  Lessor's name is hereby amended to A & R Management and
          -------                                                          
Development Co., a California general partnership, and Stanley Black and Joyce
Black, (the "Lessor").  Lessee's name is here amended to UDT Sensors, Inc., a
California corporation.

     3.   Insurance.  In accordance with First Amendment to Lease Paragraph 1,
          ---------                                                           
Lessee is the Insuring Party for the Premises.  Lessee shall maintain property
insurance and liability insurance in accordance with Paragraph 8, and name
Lessor on Lessee's insurance policies as follows:

          3.01  Property Insurance.  In accordance with Lease Paragraph 8.3,
                ------------------                                          
Lessee shall maintain property insurance which will equal to the full
replacement cost of the Premises, as the same shall exist from time to time.
Lessor and Lessee hereby agree that the amount of replacement cost insurance
that Lessee is to maintain for 12515 Chadron is currently $1,155,000.00 and for
                                                          -------------        
12525 Chadron is currently $2,062,500.00 exclusive of Lessee's Personal
                           -------------                               
Property, Lessee's Tenant Improvements, Lessee Owned Alterations and Utility
Installations.  Further, in accordance with Lease Paragraph 8.3(b) Lessee shall
maintain Rental Value insurance.

          Lessee will name A & R Management and Development Co., a California
general partnership, Stanley Black and Joyce Black as additional insureds as
their interest may appear, and as loss payees as their interest may appear.

          3.02  Liability Insurance.  Lessee will name additional insureds as
                -------------------                                          
follows:

          A & R Management and Development Co., a California general
partnership, Stanley Black and Joyce Black as "Owners", and Charles Dunn
Company, as "Managing Agent".

     4.   Term.  In accordance with the Lease and Addendum Number One, the Term
          ----                                                                 
of the Lease is January 1, 1989 through October 31, 1995.  Lessor and Lessee
hereby agree to extend the Term by ten (I years commencing July 1, 1995 through
June 30, 2005, (the "Extension Period").  Lessee's option to extend the Lease in
Addendum Number One for a five (5) year period commencing November 1, 1995
through October 31, 2000 is hereby canceled and of no further force and effect.

     5.   Base Rent.  Lessee shall pay monthly Base Rent for the Premises in
          ---------                                                         
advance on the first day of each month of the Extension Period as follows:

                                       1

 
          Year 1: (July 1, 1995 - June 30, 1996) $26,000.00 triple net (NNN) per
month.  Each year thereafter, fixed 3.0% annual increases over the prior year's
Base Rent.

     6.   Option to Extend Lease Term (One (1) five (5) Year Option).
          ---------------------------------------------------------- 

          6.01 Option to Extend.  Providing Lessee is not in default under the
               ----------------                                               
terms and conditions of the Lease, and/or any addendum or any amendments
attached thereto, Lessee is hereby granted one (1) five (5) year option (the
"Option Period") to further extend the Term.  Lessee shall provide written
notice to Lessor not later than six (6) months prior to the expiration of the
Extension Period of Lessee's intention to exercise said option, time being of
essence.  Said Option Period shall be under the same terms, conditions, and
provisions as set forth in the Lease and this Amendment, except that the Base
Rent for the Option Period shall be adjusted as outlined herein below.

          6.02 Rent for Option Period.  Upon Lessor's receipt of Lessee's notice
               ----------------------                                           
of intention to exercise said option, Lessor and Lessee shall meet to mutually
agree upon the fair market value rental rate for the Option Period by no later
than three (3) months prior to the expiration of the Extension Period.  In the
event Lessor and Lessee cannot agree on the rental rate, the Option Period shall
be of no force and effect.

     7.   Tenant Improvements.  Lessor and Lessee agree that Lessor and Lessee
          -------------------                                                 
and/or their representatives have inspected the Premises together and in
consideration of Lessee executing this Amendment, Lessor shall perform certain
tenant improvements at Lessor's sole cost and expense, (the "Tenant
Improvements") on a one time basis only as follows:

     Building #1 12525 Chadron (south building)
     Building #2 12515 Chadron (north building)

          1.   Remove one (1) underground storage tank from parking lot.
          2.   Repair existing roofs on buildings #1 and 2.
          3.   Perform general repairs at emergency exit located at the
northeast comers of buildings #1 and 2.
               a)  Cover open sump at the northeast corners of buildings #1 and
2 and perform related minor repairs as required.
          4.   Pave easement at rear of building #1.
          5.   Renovate 2 restrooms in building #1 and 2 restrooms in building
#2 as follows:
               a)  Remove existing toilets and replace with new toilets (Kohler
model no.  K3520 elongated bowls or equivalent).
               b.)  Replace existing sinks, tile, walls, stalls and light
fixtures.
          6.   Encapsulate asbestos tile in receiving area.

          7.   Build new lunch room in building #2 with 2 restrooms, including
one shower in each restroom.  Size and scope to be in accordance with City of
Hawthorne requirements. See Exhibit "A"- Lunch Room Plan attached hereto.

          8.   Touch up exterior paint on both buildings.
          9.   Touch up paint on interior doors and halls in both buildings.
          10.  Repair and stripe parking lots for both buildings including
parking areas in front of both buildings.
          11.  Repair chain link fence and gate at the parking lot commonly
known as 12605 Chadron.

          12.  Lessor shall give Lessee an allowance of UP TO $13,000.00 for
purposes of installing drainage and/or sensing systems in the "wafer room"
located in building #1.  Said allowance shall be given

                                       2

 
to Lessee within 30 days of Lessee completing its work and presenting paid
invoices and lien releases of up to $13,000.00 to Lessor.

          13.  Install a fire sprinkler system in building #2.  Said sprinkler
system shall be a "Group 3" ordinary hazard system suitable for office or
warehouse use.  Pendent heads in office area shall be semi-recessed throughout.

          14.  Raise walkway between buildings allowing for drainage.
          15.  Repair west side of street (Chadron Avenue).  Fill pot holes and
resurface only.
          16.  Provide covered walkway between the buildings if allowed by
governing agency.
          17.  Remodel main lobby.  Maximum allowance $5,000.00.

     8.   Cabinet Work.  In addition to the Tenant Improvements above, Lessor
          ------------                                                       
shall also furnish and install cabinets and rough plumbing and electrical for
same in the new lunch room (the "Cabinet Work"); however, Lessee will reimburse
Lessor for the cost of the Cabinet Work in tile form of a tenant improvement
loan payable to Lessor in equal monthly payments commencing effective July 1,
1995 along with the Base Rent under the same terms and conditions as paying Base
Rent under the Lease.  The cost of the Cabinet Work will be amortized over ten
(10) years at nine percent (9%) interest.
For example ----------- Cost of Cabinet Work $15,000.00 Number of months in extension period 120 Interest rate 2Y2 Monthly payment $ 188.60
Lessor and Lessee hereby agree that the Cabinet Work is limited to furnishing and installing the cabinets including the rough plumbing and electrical for same, and does not include any appliances. Lessee shall furnish, and pay for the cost of any and all appliances directly to the supplier at Lessee's sole cost and expense, and Lessor will install such appliances. 9. Construction. ------------ Lessor hereby warrants that Lessor will diligently pursue obtaining building permits once this Amendment is fully executed. Further, Lessor warrants that Lessor will commence construction of the work to be performed by Lessor hereinabove within ten (10) days of Lessor obtaining all applicable building permits and will diligently pursue construction (as prescribed by such building permits) to substantial completion within four (4) months of obtaining the permits. Lessor will not be required to perform any work that does not comply with the governing agencies requirements. Lessor and Lessee hereby agree that construction shall be performed to the mutual reasonable satisfaction of both Lessor and Lessee. If the building permits for the lunch room are not obtained within six (6) months of the full execution date of this Amendment, then at the end of said six (6) month period the lease terms will be renegotiated. Lessor hereby recognizes that there are certain work areas of the Premises that contain clean rooms or other specialized rooms in which there cannot be any construction performed during Lessee's normal business day hours (i.e. Monday through Friday 7:00 a.m. - 4:00 p.m.). Therefore, in terms of installing the fire sprinkler system and for availability of the parking lot for performing work, Lessor will endeavor to perform such work during a mutually convenient time during Lessee's normal business day hours or at such other mutually agreed times after Lessee's normal business day hours so as to cause the least amount of disruption as possible in those two (2) areas. However, as to performing work in the bathrooms and general 3 office areas Lessor will make an effort to keep dust and noise at a minimum to avoid disturbance during Lessee's normal business hours. Lessee will not be responsible to pay the cost of any overtime or premium time. Lessor will give Lessee at least five (5) days prior notice of the commencement of the scope of work to be accomplished. Such prior notice will be verbally agreed to by Lessor's and Lessee's respective construction representatives, and Lessor shall follow up with a written confirmation to Lessee by either fax or mail. Lessor and Lessee hereby agree that their respective construction representative's are Fred Posner, and Tim Scroggins, or their assignees. Force Majeure - ------------- Notwithstanding any provision contained in this Lease to the contrary relative to all work to be completed by Lessor under this Lease, if Lessor shall be delayed at any time in the process of obtaining building permits, or in the construction of the work to be performed by Lessor by Acts of God, extra work or by changes ordered in the construction by Lessee, by labor trouble, or shortage, arbitration proceedings, acts of public utilities, public bodies or inspectors, unusual delay in transportation, unavailability of materials (whether simply unavailable or unavailable at normal prices), unavoidable casualties, rain or stormy weather conditions, act of Lessee or Lessee's agents, or by any other cause beyond the reasonable control of Lessor, then, the four (4) month time period set forth above that Lessor has to substantially complete construction will be extended by the period of such delay. 10. Purchase Option. --------------- 10.01 Purchase Option. Providing Lessee is not in default under the --------------- terms and conditions of the Lease, and/or any addendum or any amendments attached thereto, Lessee and/or Deepak Chopra, Ajay Mehra, or another nominee of Lessee's choice, shall have the right to purchase the Premises upon six (6) months prior written notice to Lessor. The purchase price will be a base purchase price of two million eight-hundred thousand dollars ($2,800,000.00) plus the unamortized balances of the cost of the Tenant Improvements and the Cabinet Work. The base purchase price of $2,800,000.00 will be fixed for the first four (4) years of the Extension Period, each year thereafter the base purchase price will be increased by the Consumer Price Index (CPI) over the prior year. For purposes of calculating the unamortized balance of tile cost of the Tenant Improvements, the cost will be amortized over ten (10) years at no interest on a straight-line basis. Lessor and Lessee hereby agree that the cost of the Tenant Improvement work is $200,000.00, and the cost of the Cabinet Work is $15,000.00. The following example illustrates how the purchase price would be calculated if Lessee were to purchase the Premises at the commencement of the fourth (4) year of the Extension Period.
An example: ----------- Cost of Tenant Improvements $ 200,000.00 Number of months in Extension Period /1 20=$1,666.67 per mo. Number of months remaining x 84 ---------------------- Unamortized balance of cost of Tenant Improvements = 140,000.00 Cost of Cabinet Work $ 15,000.00 Monthly payment 188.60 Number of months remaining x 84 Unamortized balance of cost of Cabinet Work $ 11,868.24 (i.e. the present value at end of 36th month)
4 Base purchase price $2,800,000.00 Cost of Tenant Improvements balance 140,000.00 Cost of Cabinet Work balance 11,868,14 Total Purchase Price $2,951,868.24
10.02 Right of First Refusal to Purchased. Providing Lessee is not ----------------------------------- in default under the terms and conditions of the Lease, and/or any addendum or any amendments attached thereto, Lessee and/or Deepak Chopra, Ajay Mehra or another nominee of Lessee's choice, shall have a right of first refusal to purchase the Premises by advising Lessor in writing within ten (10) days after Lessee receives Lessor's notice of Lessor's acceptance of an offer to purchase, which notice shall include a copy of the offer to purchase accepted by Lessor. Throughout the Extension Period, Lessor shall forward to Lessee, copies of each and every offer to purchase accepted by Lessor as required herein. Lessor's and Lessee's notices to the other shall be sent by certified mail return receipt requested. Lessee's purchase shall be on the same terms and conditions as the offer to purchase Lessor receives, but not to exceed the amount as specified in paragraph 10.01 hereinabove. Within five (5) days of Lessor receiving Lessee's notice, Lessor and Lessee shall open an escrow with an escrow company of Lessor's choice. Upon opening of escrow Lessee shall deposit $100,000.00 in cash with the escrow company. If Lessee fails to deposit said sum upon opening of escrow, Lessee's right of first refusal shall be of no further force and effect. This amount shall also serve as liquidating damages if Lessee (buyer) does not complete said transaction. 10.03 Consumer Price Index. As used herein the Term CPI shall mean -------------------- the Consumer Price Index of the US Department of Labor All Urban Consumers, Los Angeles-Anaheim-Long Beach (1982-84=100) All Items. In the event the CPI shall be discontinued, then Lessor and Lessee shall agree on using the index most nearly the same as the CPI, or any such other index mutually agreed upon by Lessor and Lessee. 11. Damage or Destruction (See Lease Paragraph 9). --------------------------------------------- 11.01 Total Destructions. Notwithstanding any other provision of the ------------------ Lease, in the event the "wafer room" located in building #1 is more than fifty percent (50%) destroyed and it is impossible to substantially repair or replace the related equipment, then upon providing reasonable evidence to Lessor that repair or replacement is not possible, Lessee may cancel this Lease as it pertains to building #1 only. Lessee shall provide Lessor a prior written notice of Lessee's intention to cancel the Lease. As a condition to Lessee's right to cancel the Lease, Lessee shall pay to Lessor at the same time as providing Lessee's notice, six (6) months of the then applicable scheduled rent as of the effective date of the cancellation of the Lease plus the unamortized portion of the cost of the Tenant Improvements as of the effective date of the cancellation of the Lease. 11. Damage or Destruction (Continued): The applicable scheduled rent for --------------------------------- both buildings as of the Effective Date of the Extension Period is allocated as follows: Building #1 (37,500 sq. ft.) allocation $15,000.00 Building #2 (21,000 sq. ft.) allocation $11,000.00 ---------- Total Base Rent for both building at commencement of Extension Period $26,000.00
In addition, Lessee shall turn building #1 back to Lessor in a broom-clean condition with all of Lessee's equipment and personal property removed, and any and all damage repaired to building #1 related to the removal of Lessee's equipment and personal property. 5 11.02 Partial Damage. In the event of Partial Damage which is an -------------- Insured Loss, Lessor warrants that Lessor will diligently pursue obtaining building permits within ten (10) days of the loss. Further, Lessor warrants that Lessor will commence construction of the repair work within ten (10) days of Lessor obtaining all applicable building permits and will diligently pursue the required repairs (as prescribed by such building permits) to completion. If Lessor fails to perform as required in this paragraph hereinabove, Lessee shall have the right to terminate the Lease if, and only if, Lessor continues to fail to perform within ten (10) days after Lessor receives a written notice from Lessee advising Lessor's failure to perform. 12. Use. Notwithstanding anything to the contrary set forth in the Lease, --- Lessee hereby agrees to use the Premises in accordance with the following: a) "Hazardous Materials" shall mean any substance, material, waste, gas or particulate matter which is regulated by any local, state or federal authority including, but not limited to, petroleum; radioactive, nuclear or toxic waste or materials; asbestos; polychiorinated biplienyl's (PCB's); urea formaldehyde foam insulation; freon or freon-containing equipment, which is or becomes regulated; any material or substance designated or defined as a "Hazardous Substance", "Toxic Substance" or Hazardous Waste" in Section 25117 of the Health and Safety Code of the State of California or under any successor section or other provision of California law; Section 311 of the Clean Water Act (33 U.S.C., Section 1251 et seq.); the Comprehensive Environmental Response, -- --- Compensation and Liability Act of 1980; the Resource Conservation and Recovery Act of 1976; the Hazardous Materials Transportation Act; and any other laws and ordinances governing similar matter now or hereinafter enacted or any regulations adopted or publications promulgated pursuant thereto (hereinafter collectively referred to as the "Regulations"). "Hazardous Materials Activities" shall mean the use, generation, storage, disposal and/or transportation of Hazardous Materials by Lessee or Lessee's employees, agents, contractors, licensees and/or invitees. b) Lessor and Lessee hereby acknowledge and agree that Lessee shall be allowed to conduct or cause to be conducted any Hazardous Materials Activities related to Lessee's business on, under or about the Premises, the property, and/or the building without receiving Lessor's prior written consent. Lessee shall conduct all Hazardous Materials Activities in strict compliance (at Lessee's sole cost and expense) with all applicable Regulations using all necessary and appropriate precautions. Lessee shall, within five (5) days after Lessee's execution of this Amendment, and at other times within five (5) days after receipt of Lessor's written request, provide Lessor with copies of ail documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with all applicable Regulations. c) Lessee shall indemnify, protect, defend (with counsel reasonably acceptable to Lessor) and hold harmless Lessor from and against any and all claims, damages, costs and liabilities (including reasonable attorney's fees and costs, and court costs) arising out of any Hazardous Material Activities. Lessor, and Lessor's representatives and employees, may enter the Premises, at an), time during the Extension Period (including any renewal terms, as and if applicable) upon reasonable prior written notice to Lessee, in order to inspect Lessee's compliance herewith. The indemnification of Lessor by Lessee set forth in this Paragraph 12 shall survive the expiration or any earlier termination of the Lease. 13. Broker's Fees. Lessor and Lessee acknowledge and agree that neither ------------- party is represented by a broker and shall hold harmless and indemnify the other party from any commission fees and any and all related costs and fees that may arise out of this Amendment or any extension of the term thereof. 6 14. Notices. Any notice or notices required of or given by either Lessor ------- or Lessee shall be in writing and shall be deemed received when sent in accordance with Lease paragraph 23 addressed to Lessor and addressed to Lessee as follows: To Lessor: with a copy to: --------- -------------- A & R Management, et al. A & R Management, et al. c/o Charles Dunn Company 9350 Wilshire Blvd., Suite 302 800 West Sixth Street, 6th Floor Beverly Hills, CA 90212 Los Angeles, CA 90017 Attn: Michael Kaplan To Lessee: --------- UDT Sensors, Inc. 12525 Chadron Avenue Hawthorne, CA 90250 Attn. Ajay Mehra 15. Limitation of Lessor's Liability. Notwithstanding anything to the -------------------------------- contrary set forth in the Lease, the obligations of Lessor, as individuals, and Lessor's partners (either general or limited) under the Lease do not constitute personal obligations. Lessee, and Lessee's successors and assigns, hereby agree not to seek recourse against the personal assets of Lessor, including any individuals and/or Lessor's partners (either general or limited) for the satisfaction of any actual or alleged liability of Lessor to Lessee under the Lease, but Lessee shall look only to Lessor's interest in the Premises for the satisfaction of any liability of Lessor to Lessee hereunder. 16. Counterparts. This Amendment may be signed by any number of ------------ counterparts with the same effect as if the signatures to any counterpart were upon the same instrument. 17. Signatories. The signatories herein below represent that s/he has the ----------- authority of her/his respective corporation or partnership to enter into this Amendment. 18. Lease to Remain in Full Force and Effect. Except as set forth in this ---------------------------------------- Amendment, all terms, conditions, provisions and covenants of the Lease shall remain unchanged and in full force and effect. AGREED AND ACCEPTED: LESSOR: LESSEE: A & R Management and Development Co., UDT Sensors, Inc., a California general partnership, a California corporation Stanley Black and Joyce Black By: /s/ By: /s/ ----------------------------------- ---------------------------- Title: Title: -------------------------------- ------------------------- Date: Date: --------------------------------- -------------------------- 7

 
                                 EXHIBIT 10.14



                    DATED THIS 17TH DAY OF JANUARY   , 1997



                                    BETWEEN



                     ARTLOON SUPPLIERS SDN. BHD. (170818-K)

                                               . . . LANDLORD



                                      AND



                     OPTO SENSORS (M) SDN. BHD. (307669-T)

                                               . . . TENANT



                               TENANCY AGREEMENT



REF.:  ASSB/OSSB/97/GPB


PREMISES
- --------

NO. 18, JALAN FIRMA 2/2
KAWASAN PERINDUSTRIAN TEBRA I
8110 JOHOR BAHRU

 
     THIS AGREEMENT is made the day and year stated in Section 1 of the FIRST
SCHEDULE hereto Between the Landlord whose name and description are stated in
Section 2 of the FIRST SCHEDULE hereto (hereinafter referred to as "the
Landlord") of the one part And the Tenant whose name and description are stated
in Section 3 of the FIRST SCHEDULE hereto (hereinafter referred to as "the
Tenant") of the other part.

     WHEREAS the Landlord has agreed to let and the Tenant has agreed to take
all the property more particularly described in the SECOND SCHEDULE HERETO
(hereinafter referred to as "the Demised Premises") on the terms and conditions
hereinafter appearing.

                   NOW THIS AGREEMENT WITNESSETH as follows:

     1.   The Landlord lets and the Tenant takes all the Demised Premises for
the period stated in Section 1 of the THIRD SCHEDULE hereto at the monthly
rental stated in Section 2 of the THIRD SCHEDULE hereto payable in advance on
the first day of each and every succeeding month, the first payment to be made
upon the commencement of the tenancy hereby created.

     2.   Upon the execution of this Agreement the Tenant shall deposit with the
Landlord the sum stated in Section 3 of the THIRD SCHEDULE hereto (hereinafter
referred to as "the said Deposit" and the receipt whereof the Landlord hereby
acknowledges) as security for the due performance and observance by the Tenant
of all and singular the several covenants stipulations terms and conditions on
the part of the Tenant herein contained.  The said Deposit less such sum or sums
as may be due to the Landlord shall be refunded to the Tenant without interest
on the expiration of this Agreement.  PROVIDED ALWAYS that the said Deposit
shall not in any circumstances be treated as payment of rent in advance.

     3.   THE TENANT HEREBY COVENANTS WITH THE LANDLORD as follows:

          (a) To pay the reserved rent on the day and in the manner aforesaid.

          (b) To pay all existing and future charges for supply of electricity
and water including deposit thereof in respect of the Demised Premises.

          (c) To keep in good and tenantable repair and condition the Demised
Premises fair wear and tear excepted.

          (d) To permit the Landlord and his agent(s) with or without workmen
and others at all reasonable times but with prior reasonable notice to enter
upon or examine the condition of the Demised Premises and to execute repairs to
the same.

          (e) To comply with all rules, regulations and by-laws of the local
authorities concerned in respect of the Demised Premises.

          (f) Not to do or permit to be done on the Demised Premises any thing
which will or may infringe any of the laws, by-laws or regulations in force or
which may be a nuisance or annoyance to or in any way interfere with the quite
and comfort of the occupants of neighboring premises.

          (g) Not to make or permit to be made any alteration or addition to the
said Demised Premises without previous consent in writing of the Landlord and
upon such consent

                                      1.

 
having been granted the Tenant shall cause plans and drawings of the alterations
or additions to the Demised Premises to be drawn and submitted to the relevant
authorities for approval and the costs and expenses incurred thereby shall be
borne by the Tenant and all alterations, additions and all fixtures and fittings
so attached or affixed to the Demised Premises shall belong to the Landlord
without any claim by the Tenant for compensation or other claims whatsoever.

          (h) Not to do or permit or suffer to be done anything whereby the
policy or policies of insurance on the premises against any loss or damage by
fire for the time being subsisting may become void or voidable or whereby the
rate of premium there on may be increased and to indemnify and keep indemnified
the Landlord any increase in the said premium and all expenses incurred by the
Landlord on or about any renewal of such policy or policies rendered necessary
by a breach or non-observance of this covenant.

          (i) Not to permit or suffer any sale by auction to be held on the
Demised Premises.

          (j) At the expiration or sooner determination of the term hereby
created to yield up the Demised Premises in good and tenantable repair and
conditions (fair wear and tear only accepted).

          (k) Not at any time to use or permit or suffer the said Demised
Premises or any part thereof to be used for illegal or immoral purposes.

          (l) Not to keep or permit to be kept upon the said Demised Premises or
any part thereof any materials of a dangerous, explosive or noxious nature or
the keeping of which may contravene any statute regulation or by-laws currently
applicable.

          (m) Not to carry on any trade or business as an undertaker or relating
to funeral parlous or the sale or purchase of coffin.

          (n) The Tenant shall use the Demised Premises for the purpose as
permitted under Section 6 of the Third Schedule.

     4.   THE LANDLORD HEREBY COVENANTS WITH THE TENANT as follows:

          (a) To pay all quit rent assessments and other outgoings upon the
Demised Premises and payable by the Landlord.

          (b) That the Tenant paying the rent hereby reserved and observing and
performing the several covenants hereby on his part contained shall peacefully
hold and enjoy the Demised Premises during the said term without any claim
through under or in trust for them.

          (c) To refund to the Tenant without interest thereon the Deposit in
the sum stated in Section 3 of the THIRD SCHEDULE hereto on the due expiration
of this tenancy or such extended term or terms less such sum or sums which may
be due and owing to the Landlord for any breach of covenant on the part of the
Tenant to be performed.

          (d) At the determination of the term hereby granted to allow the
Tenant to remove all his own fittings subject to the Tenant paying reasonable
compensation for any damage caused by such removal.

                                      2.

 
     5.   PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED BETWEEN THE PARTIES
HERETO as follows:

          (a) If at any time the monthly rent hereby covenant to be paid by the
Tenant to the Landlord or any part thereof shall remain unpaid for seven (7)
days after becoming due and payable whether formally demanded or not, or if the
covenants on the Tenant's part herein contained shall not be performed or
observed or if the Tenant shall become wound-up or suffer any distress or
execution to be levied against the assets of the Tenant then in any such case it
shall be lawful for the Landlord at any time thereafter without notice to re-
enter upon the Demised Premises or any part thereof in the name of the whole and
thereupon this Tenancy shall absolutely determine but without prejudice to the
right of action of the Landlord in respect of any antecedent breach of the
Tenant's covenant hereinbefore contained.

          (b) If the Tenant shall be desirous of extending the Tenancy hereby
crated for a further term the Tenant shall not more than (2) months before the
expiration of the term hereby created give to the Landlord notice in writing of
such his desire and if he (the Tenant) shall have performed and observed the
several stipulations herein contained and on his part to be performed and
observed up to the termination of the tenancy hereby created then the Landlord
will let the Demised Premises to the Tenant for the further term stated in
Section 4 of the THIRD SCHEDULE hereto from the expiration of the term hereby
created at the rental described in Section 5 of the THIRD SCHEDULE hereto and
subject in all other respects to the same stipulations as herein contained
except this clause for renewal.

          (c) In the event that the Demised Premises or any part thereof shall
at any time during the said term be destroyed or damaged by fire, earthquake,
the enemies of the Government of Malaysia, civil commotion or other disaster so
as to render the Demised Premises or a part thereof unfit for occupation and use
the rent hereby reserved or a fair portion thereof according to the nature and
extend of the damage sustained shall be suspended until the Demised Premises or
such part thereof shall again be rendered fit occupation or use provided that in
case of fire where such fire has been caused by the default or negligence of the
Tenant or the Tenant's servant or agent, invitees or licensees the Tenant shall
still remain liable for the payment of the rent in full for the period in which
the said premises shall remain unfit for use.

          (d) Should this tenancy be determined by the Tenant at any time before
the expiry of the term hereby created either voluntarily or by virtue of Clause
5(a) herein the said Deposit stated in Clause 2 shall the be absolutely
forfeited to the Landlord without prejudice to any right of action the Landlord
may have against the Tenant in respect of the unpaid rents or any antecedent
breach of the terms of the tenancy.

          (e) It is hereby expressly agreed by the Parties that the "SPECIAL
CONDITIONS" shall prevail over the term or terms contained in Clause 1 to 5(d)
aforesaid.

          (f) Time wherever stated herein shall be of the essence.

          (g) Any notice to be given under this Agreement shall be in writing
and shall be sufficiently served on the Landlord if sent to him by prepaid
registered post addressed to him at his address herein stated or to his last
known address in West Malaysia and any notice to the Tenant shall be in writing
and shall be sufficiently served to the Tenant if sent to him at his address
herein stated or to his last known address in West Malaysia and any notice sent
aforesaid shall be deemed to have been received in the ordinary course of post.

                                      3.

 
          (h) In this Agreement wherever the context admits the expressions the
"Landlord" and the "Tenant" shall mean and include their respective heirs-at-
law, personal ___________ representative, ____________ executors,
administrators, successors-in-title and permitted assigns as the case may be and
when two (2) or more persons are included in the expression their liabilities
under this Agreement shall be joint and several.  Words importing the masculine
gender shall be deemed and takes to include the feminine and neuter genders and
the singular to include the plural and vice versa.

          (i) The Tenant shall bear and pay the stamp duties on this Agreement.

          (j) In the event of the Landlord being rendered necessary to take
steps to defend any actions or claims that may be taken against the Landlord
arising from any default or neglect or action or non-action on the part of the
Tenant to be performed by virtue of the Landlord being the registered owner of
the Demised Premises and in the event of the Landlord having to issue out and
serve upon the Tenant any notice of demand or legal process for the recovery of
rent or any money payable to the Landlord under this Agreement then in any of
such event the Tenant shall bear and pay the Landlord all costs and expense (and
in the case where the Landlord engages a solicitor such solicitor's fee on a
solicitor and client basis) besides such money payable to the Landlord upon
demand.

                      THE FIRST SCHEDULE ABOVE REFERRED TO
Section No. Item Particulars - ------- ------------------------------------ ------------------------------ 1. The day and year of this Agreement This 17th day of January 1997 2. Name and Description of the Landlord ARTLOON SUPPLIERS SDN. BHD. (170818-K) No. 46-02 Jalan Tun Abdul Razak, Sunsur 1, 80000 Johor Bahru 3. Name and Description of the Tenant OPTO SENSORS (M) SDN. BHD. (307669-T) No. 8 Jalan Firma 2/2 Kawasan Perindustrian Tebra I, 81100 Johor Bahru
THE SECOND SCHEDULE ABOVE REFERRED TO The Ground Floor of that Demised Premises known as No. 18, Jalan Firma 2/2, Kawasan Perindustrian Tebrau I, 81100 Johor Bahru. 4. THE THIRD SCHEDULE ABOVE REFERRED TO
Section No. Item Particulars - ------- ---------------------------------------- ------------------------------------ 1. Period of Tenancy ONE (1) year commencing from the 1st day of January 1997 to the 31st day of December 1997 2. The monthly rental in respect of the Ringgit Malaysia: THIRTEEN Demised Premises THOUSAND (RM13,000.00) ONLY. 3. Deposit paid upon signing of this Ringgit Malaysia: TWENTY-SIX Agreement THOUSAND (RM26,000.00) ONLY. 4. Period of extension of tenancy ONE (1) YEAR. 5. Rental in respect of extension of TO BE AGREED UPON tenancy 6. Permitted use of the Demised Premises MANUFACTURING OF OPTICAL MICE, OPTICAL SENSORS, MUSICAL INTERFACE DEVICES, X-RAY SCANNER/SYSTEMS AND PULSE OXIMETERS
5. THE FOURTH SCHEDULE ABOVE REFERRED TO (THE "SPECIAL CONDITIONS" REFERRED TO IN CLAUSE 5(E) HEREIN) 1. The Tenant shall within the last two (2) months of the Tenancy permit the Landlord or his agent(s) to affix without interference upon the Demised Premises a notice to let or for sale the Demised Premises and to permit any person duly authorized by the Landlord or his agent(s) during reasonable times of the day to view the Demised Premises. 2. The Tenant shall pay a sum of RM1,000.00 (Ringgit Malaysia One Thousand Only) being deposit for water (hereinafter called "the Water Deposit") the receipt of which is hereby acknowledged by the Landlord. Upon termination of the Tenancy hereby crated the Landlord shall refund the Water Deposit to the Tenant subject to the Landlord deducting such sum or sums for outstanding bills to be paid to the relevant authorities if the sum or sums is not paid by the Tenant. 3. The Tenant shall apply directly to the relevant authorities for the supply of electricity to the Demised Premises. 4. All equipment, machinery and etceteras and public liabilities (third party claims) insurance shall be insured by the Tenant. 5. The Tenant hereby agree to permit/share with the tenant of the First Floor of the Demised Premises the right of access the compound around the Demised Premises in the manner as indicated in Appendix I attached hereto. 6. In the event the Landlord has a potential tenant for the first floor of the Demised Premises, the Landlord shall grant the Tenant i.e. Opto Sensors (M) Sdn. Bhd. the first right of refusal valid for seven (7) days from the date of notice. IN WITNESSES WHEREOF the parties hereto have hereunto set their hands the day and year first above written. SIGNED and DELIVERED by /s/ the above named Landlord in the presence of: SIGNED and DELIVERED by /s/ the above named Tenant in the presence of: 6.

 
                                                                   EXHIBIT 10.15

                               CREDIT AGREEMENT


     This Credit Agreement (the "Agreement") is made and entered into this 24
day of January, 1997, by and between SANWA BANK CALIFORNIA (the "Bank") and OPTO
SENSORS, INC., UDT SENSORS, INC. RAPISCAN SECURITY PRODUCTS (U.S.A.), INC. and
FERSON OPTICS, INC. (each a "Borrower" and together, the "Borrowers"), on the
terms and conditions that follow:


                                   SECTION 1.

                                  DEFINITIONS

     1.01  Certain Defined Terms:  Unless elsewhere defined in this Agreement,
the following terms shall have the following meanings (such meanings to be
generally applicable to the singular and plural forms of the terms defined):

     (a) "ADVANCE": shall mean an advance to any Borrower under the Line of
Credit.

     (b) "BUSINESS DAY":  shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business in California.

     (c) "COLLATERAL":  shall mean the property described in Section 3.01,
together with any other personal or real property in which the Bank may be
granted a lien or security interest to secure payment of the Obligations.

     (d) "DEBT":  shall mean all liabilities of each Borrower less Subordinated
Debt.

     (e) "EFFECTIVE TANGIBLE NET WORTH":  shall mean each Borrower's stated net
worth plus Subordinated Debt but less the book value of all intangible assets of
such Borrower (i.e., goodwill, trademarks, patents, copyrights, organization
expense and similar intangible items including, but not limited to investments
in and all amounts due from affiliates, officers or employees).

     (f) "ERISA":  shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.

     (g) "EQUIPMENT":  shall mean equipment as defined in the California Uniform
Commercial Code.

     (h) "EVENT OF DEFAULT":  shall have the meaning set forth in Section 7.

     (i) "EXPIRATION DATE":  shall mean November 30, 1998 or the date of
termination of the Bank's commitment to lend under this Agreement pursuant to
Section 8, whichever shall occur first.

     (j) "INDEBTEDNESS":  shall mean, with respect to each Borrower, (i) all
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which any Borrower is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which Borrower
otherwise assures a creditor against loss and (ii) obligations under leases
which shall have been or should be,

                                       1

 
in accordance with generally accepted accounting principles, reported as capital
leases in respect of which any Borrower is liable, contingently or otherwise, or
in respect of which any Borrower otherwise assures a creditor against loss.

     (k) "LINE OF CREDIT":  shall mean the credit facility described in Section
2.01.

     (l) "OBLIGATIONS": shall mean all amounts owing by each Borrower to the
Bank pursuant to this Agreement including, but not limited to, the unpaid
principal amount of Advances.

     (m) "PERMITTED LIENS":  shall mean:  (i) liens and security interests
securing indebtedness owed by each Borrower to the Bank; (ii) liens for taxes,
assessments or similar charges either not yet due or being contested in good
faith; (iii)liens of materialmen, landlords, mechanics, warehousemen, or
carriers or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (iv) purchase money liens or
purchase money security interests upon or in any property acquired or held by
each Borrower in the ordinary course of business to secure Indebtedness
outstanding on the date hereof or permitted to be incurred under Section 6.10
hereof; (v) liens and security interests which, as of the date hereof, have been
disclosed to and approved by the Bank in writing; and (vi) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of each Borrower's
assets; (vii) liens against UDT Sensors, Inc. ("UDI") which may hereafter be
granted in favor of the United States of America as set forth in that certain
Stipulation for Consent Judgment referred to in and executed pursuant to that
certain Criminal Plea and Sentencing Agreement between UDT and the United States
Attorney's Office for the Central District of California, provided that such
liens, if granted to the United States of America, shall be subordinated to
those of the Bank pursuant to a subordination agreement in form and substance
satisfactory to the Bank.

     (n) "REFERENCE RATE": shall mean an index for a variable interest rate
which is quoted, published or announced from time to time by the Bank as its
reference rate and as to which loans may be made by the Bank at, below or above
such reference rate.

     (o) "SUBORDINATED DEBT": shall mean such liabilities of each Borrower which
have been subordinated to those owed to the Bank in a manner acceptable to the
Bank.

     (p) "VALUE":  shall mean the lesser of: the invoice cost of the Equipment
(including taxes, license fees, transportation costs, insurance premiums, and
installation and connection expenses, fees and costs); or the book value of the
Equipment; or the liquidation value of the Equipment as reasonably determined by
the Bank.

     1.02  Accounting Terms:  All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financial statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and, except where otherwise specified, all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.

     1.03  Other Terms:  Other terms not otherwise defined shall have the
meanings attributed to such terms in the California Uniform Commercial Code.

                                       2

 
                                  SECTION 2.

                              THE LINE OF CREDIT

          2.01  The Line of Credit:  On terms and conditions as set forth
herein, the Bank agrees to make Advances to each Borrower from time to time from
the date hereof to the Expiration Date, provided the aggregate amount of such
Advances outstanding at any time does not exceed $10,000,000 (the "Line of
Credit").  Within the foregoing limits, each Borrower may borrow, partially or
wholly prepay, and reborrow under this Section 2.01.

          (a) Making Line Advances:  Each Advance shall be conclusively deemed
to have been made at the request of and for the benefit of any Borrower (i) when
credited to any deposit account of either Borrower maintained with the Bank or
(ii) when paid in accordance with such Borrower's written instructions.

          (b) Line Account:  The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the Line of Credit
(the "Line Account").  The Bank shall provide the Borrowers with a monthly
statement of the Borrowers' Line Account, which statement shall be considered to
be correct and conclusively binding on the Borrowers unless any Borrower
notifies the Bank to the contrary within 18 months after such Borrower's receipt
of any such statement which it deems to be incorrect.  Each Borrower hereby
authorizes the Bank, if and to the extent payment owed to the Bank under the
Line of Credit is not made when due, to charge, from time to time, against any
or all of any Borrower's deposit accounts with the Bank any amount so due.

          (c) Mandatory Repayments:  On the Expiration Date, each Borrower
hereby jointly and severally promises and agrees to pay to the Bank in full the
aggregate unpaid principal amount of all Advances then outstanding, together
with all accrued and unpaid interest thereon.

          (d) Interest on Advances:  Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as quoted by the
Bank and as elected by any Borrower below:

          1.  Variable Rate Advances:  A variable rate per annum equivalent to
              ----------------------                                          
the Reference Rate plus .25% (the "Variable Rate").  Interest shall be adjusted
concurrently with any change in the Reference Rate.  An Advance based upon the
Variable Rate is hereinafter referred to as a "Variable Rate Advance".

          2.  LIBOR Advances:  A fixed rate quoted by the Bank for 1, 2, 3, or 6
              --------------                                                    
months or for such other period of time that the Bank may quote and offer
(provided that any such period of time does not extend beyond the Expiration
Date) [the "LIBOR" Interest Period"] for Advances in the minimum amount of
$500,000 and in $100,000 increments thereafter.  Such interest rate shall be a
percentage approximately equivalent to 2.25% in excess of the Bank's LIBOR Rate
which is that rate determined by the Bank's Treasury Desk as being the
arithmetic mean (rounded upwards, if necessary, to the nearest whole multiple of
one-sixteenth of one percent (1/16%) of the U.S. dollar London Interbank Offered
Rates for such period appearing on page 3750 (or such other page as may replace
page 3750) of the Telerate screen at or about 11:00 a.m. (London time) on the
second Business Day prior to the first days of such period (adjusted for any and
all assessments, surcharges and reserve requirements) [the "LIBOR" Rate"].  An
Advance based upon the LIBOR Rate is hereinafter referred to as a "LIBOR
Advance".

          Interest on any Advance shall be computed on the basis of 360 days per
year, but charged on the

                                       3

 
actual number of days elapsed.

          Interest on Variable Rate Advances and LIBOR Advances shall be paid
monthly commencing on the first day of the month following the date of the first
such Advance and continuing on the first day of each month thereafter.

          (e) Notice of Borrowing:  Upon telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a Business Day,
each Borrower may borrow under the Line of Credit by requesting:


          1.  A Variable Rate Advance.  A Variable Rate Advance may be made on
the day notice is received by the Bank; provided, however, that if the Bank
shall not have received notice at or before 2:00 p.m. on the day such Advance is
requested to be made, such Variable Rate Advance may, at the Bank's option, be
made on the next Business Day.

          2.  A LIBOR Advance.  Notice of any LIBOR Advance shall be received by
the Bank no later than two Business Days prior to the day (which shall be a
Business Day) on which the Borrower requests such LIBOR Advance to be made.

          (f) Notice of Election to Adjust Interest Rate: The Borrowers may
elect:

          1.  That interest on a Variable Rate Advance shall be adjusted to
accrue at the LIBOR Rate; provided, however, that such notice shall be received
by the Bank no later than two Business Days prior to the day (which shall be a
Business Day) on which any Borrower requests that interest be adjusted to accrue
at the LIBOR Rate.

          2.  That interest on a LIBOR Advance shall continue to accrue at a
newly quoted LIBOR Rate or shall be adjusted to commence to accrue at the
Variable Rate; provided, however, that such notice shall be received by the Bank
no later than two Business Days prior to the last day of the LIBOR Interest
Period pertaining to such LIBOR Advance.  If the Bank shall not have received
notice (as prescribed herein) of any Borrower's election that interest on any
LIBOR Advance shall continue to accrue at the newly quoted LIBOR Rate, such
Borrower shall be deemed to have elected that interest thereon shall be adjusted
to accrue at the Variable Rate upon the expiration of the LIBOR Interest Period
pertaining to such Advance.

          (g) Prepayment.  The Borrowers may prepay any Advance under the Line
of Credit in whole or in part, at any time and without penalty, provided,
however, that: (i) any Partial prepayment shall first be applied, at the Bank's
option, to accrued and unpaid interest and next to the outstanding principal
balance under the Line of Credit; and (ii) during any period of time in which
interest is accruing on any Advance on the basis of the LIBOR Rate, no
prepayment shall be made except on a day which is the last day of the LIBOR
Interest Period pertaining thereto.  If the whole or any part of any LIBOR
Advance is prepaid by reason of acceleration or otherwise, the Borrowers shall,
jointly and severally, upon the Bank's request, promptly pay to and indemnify
the Bank for all costs, expenses and any loss (including loss of future interest
income) actually incurred by the Bank and any loss (including loss or profit
resulting from the re-employment of funds) deemed sustained by the Bank as a
consequence of such prepayment.

          The Bank shall be entitled to fund all or any portion of its Advances
in any manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded all
Advances through the purchase of dollar deposits in the London Interbank Market
in the

                                       4

 
amount of the relevant Advance and in maturities corresponding to the date of
such purchase to the Expiration Date hereunder.

          (h) Indemnification of LIBOR Rate Costs:   During any period of time
in which interest on any Advance is accruing on the basis of the LIBOR Rate, the
Borrowers shall, jointly and severally, upon the Bank's request, promptly pay to
and reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment reserve, deposit or similar requirement or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any future directive or requirement of any regulatory authority
pertaining or relating to funds used by the Bank in quoting and determining the
LIBOR Rate.

          (i) Conversion from LIBOR Rate to Variable Rate:  In the event that
the Bank shall at any time determine that the accrual of interest on the basis
of the LIBOR Rate (i) is infeasible because the Bank is unable to determine the
LIBOR Rate due to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the amount of the
relevant Advance and for a period of time approximately equal to relevant LIBOR
Interest Period or (ii) is or has become unlawful or infeasible by reason of the
Bank's compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation, guideline or order,
then the Bank shall give telephonic notice thereof (confirmed in writing) to the
Borrowers, in which event any Advance bearing interest at the LIBOR Rate, shall
thereafter be deemed to be a Variable Rate Advance and interest shall thereupon
immediately accrue at the Variable Rate.

          2.02  Letters of Credit: The Bank agrees to issue commercial and
stand-by letters of credit (each a "Letter of Credit") on behalf of the
Borrower, provided, however, at no time shall the total face amount of all
Letters of Credit outstanding less any partial draws paid by the Bank and not
reimbursed by the Borrower exceed the sum of $10,000,000.00, and provided
further, at no time shall the total undrawn amount of all Letters of Credit
outstanding plus any partial draws paid by the Bank and not reimbursed by the
Borrowers, together with the total principal amount of all Advances outstanding
exceed the Line of Credit.

          (a) Upon the Bank's request, each Borrower shall, jointly and
severally, promptly pay to the Bank issuance fees and such other fees,
commissions, costs and any out-of-pocket expenses charged or incurred by the
Bank with respect to any Letter of Credit.

          (b) The commitment by the Bank to issue Letters of Credit shall unless
earlier terminated in accordance with the terms of the Agreement, automatically
terminate on the Expiration Date and no Letter of Credit shall expire on a date
which is after the Expiration Date.

          (c) Each Letter of Credit shall be in form and substance and in favor
of beneficiaries satisfactory to the Bank, provided that the Bank may refuse to
issue a Letter of Credit due to the nature of the transaction or its terms or in
connection with any transaction where the Bank, due to the beneficiary or the
nationality or residence of the beneficiary, would be prohibited by any
applicable law, regulation or order from issuing such Letter of Credit.

          (d) Prior to the issuance of each Letter of Credit but in no event
later than 9:00 a.m. (California time) on the day such Letter of Credit is to be
issued (which shall be a Business Day), the relevant Borrower shall deliver to
the Bank International Department a duly executed form of the Bank's standard
form of application for issuance of letter of credit with proper insertions.

          (e) The Borrowers shall, jointly and severally, upon the Bank's
request, promptly pay

                                       5

 
to and reimburse the Bank for all costs incurred and payments made by the Bank
by reason of any future assessment, reserve, deposit or similar requirement or
any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any future directive or requirement of any regulatory authority
pertaining or relating to any Letter of Credit.

          2.03  Acceptance Facility:  Any Borrower may from time to time request
the Bank to accept one or more drafts drawn on the Bank for the account of the
Borrowers (each an "Acceptance").  At no time, however, shall the total
principal balance of all Acceptances outstanding, together with the total face
amount of all outstanding Letters of Credit less any partial draws paid by the
Bank and the total principal balance of all Advances outstanding, exceed the
Line of Credit.

          (a) Requests for Acceptances:  Each request for an Acceptance shall be
made in writing or by telephone confirmed in writing (each a "Request"), shall
be irrevocable, and shall involve one or more drafts as described below.  Each
Request shall be delivered or communicated to the Bank no later than 12:00 p.m.
(California time) on the day (which shall be a business day) on which the
creation of an Acceptance is requested.  By making any such Request, the
Borrower agrees that all matters relating to each such Acceptance shall be
governed by the terms hereof and the Borrower restates all warranties and
representations made by the Borrower herein as if made on the date of the
Request and on the date that the Acceptance is created.

          (b) Acceptances:  Each Acceptance shall be created upon a Request by
the Bank's acceptance of a draft in form and substance satisfactory to the Bank
(each a "Draft").  Each Draft shall: (i) be drawn on the Bank by or on behalf or
for the account of the Borrowers in accordance with the provisions hereof, (ii)
have a minimum face amount of $100,000; (iii) be for the purpose of financing
only those transactions permitted by paragraph 7 of Section 13 of the Federal
Reserve Act, as amended from time to time; and (iv) mature not more than 90 days
after the date thereof (provided that, if such date is not a business day, the
maturity shall be extended to the next succeeding business day).  However, no
Draft shall mature more than 90 days after the Expiration Date.  Each Borrower
hereby warrants that any Acceptances relating to the importation or exportation
of goods or relating to the domestic shipment of goods shall: (i) not have a
term in excess of the period of time which is usual and reasonably necessary to
finance transactions of the character of the underlying import or export
transaction or the underlying domestic shipment; (ii) not, together with all
other Acceptances relating to any such shipment have an aggregate face amount
exceeding the CIF value of such shipment; and (iii) not be created more than 30
days after the date of shipment of goods to which such Acceptance relates.
Acceptances relating to the storage of goods shall be subject to the further
conditions that: (i) at the time such Acceptance is created, the goods being
stored are covered by a warehouse receipt issued by a bonded warehouse
independent of the Borrower and acceptable to the Bank; (ii) the goods covered
by the warehouse receipt are readily marketable staples (as such term is defined
in Section 13 of the Federal Reserve Act by the Board of Governors of the
Federal Reserve System or by Federal Reserve Bulletins) held pending a
reasonably immediate sale, distribution or shipment; and (iii) the face amount
of the Acceptance relating to such goods does not exceed the fair market value
of the goods.

          (c) Acceptance Liability:  Each Borrower is obligated, and hereby
jointly and severally promises and agrees to pay the Bank, on the maturity date
of each Acceptance or on such earlier date as may be required pursuant hereto,
the face amount of each such Acceptance.

          (d) Acceptance Commissions:  Each Borrower agrees, jointly and
severally, upon acceptance by the Bank of each Draft and as a condition
precedent to such Acceptance, to pay to the Bank a fee (the "Commission") in an
amount equal to 1.5% per annum of the face amount of each Acceptance calculated
on the basis of 360 days per year for the actual number of days (including the
first day but

                                       6

 
excluding the last day) during the period which is for the term of the Draft.

          (e) Discount of Acceptances:  The Bank agrees to discount any
Acceptance that is created and presented to the Bank for discount at a rate
quoted by the Bank at the time the Acceptance is presented to the Bank for
discount and for a similar dollar amount and a similar maturity as the Draft
being presented to the Bank by the Borrower for acceptance (the "Acceptance
Discount Rate").  On the date any such Acceptance is presented for discount, the
Bank shall: (i) cause the aggregate discounted amount (less any Commission then
payable by the Borrowers to the Bank hereunder) to be made available to the
Borrowers by crediting such amount to any Borrower's demand deposit account
maintained with the Bank, unless the Acceptance is created by a beneficiary
under a Letter of Credit, in which event the Bank will cause the amount to be
paid to such beneficiary and will notify the Borrowers as to the creation of the
Acceptance; and (ii) advise the Borrowers of the Acceptance Discount Rate at
which the Bank discounted such Acceptance.  The Bank shall have the right, in
its sole discretion, to sell, rediscount, hold or otherwise deal with or dispose
of any such Acceptance discounted by it.

          (f) Acceptance Collateral:  Each Draft accepted by the Bank in
accordance with the above shall be secured by a security interest in the goods
(as defined in the California Uniform Commercial Code) involved in the
transaction out of which the Acceptance arose to the extent that such a security
interest is either required by the Bank or in order that the relevant Acceptance
conform to the requirements of Section 13 of the Federal Reserve Act.

          (g) Reserves:  Each Borrower shall, jointly and severally, upon the
Bank's request promptly pay to and reimburse the Bank for all costs incurred and
payments made by the Bank by reason of any future assessment, reserve, deposit
or similar requirement or any surcharge, tax or fee imposed upon the Bank or as
a result of the Bank's compliance with any future directive or requirement of
any regulatory authority pertaining or relating to any Acceptance.

          2.04  Foreign Exchange Faculty:  The Borrowers may from time to time
request Bank to purchase or sell foreign currency in a specified amount, at a
fixed price, and for delivery at a future date no greater than 365 days from the
date of purchase (each a "Foreign Exchange Contract").  At no time, however,
shall 10% of the aggregate of the settlement price of all Foreign Exchange
Contracts outstanding exceed $750,000 as determined by Bank at the time of
entering into each Foreign Exchange Contract, and provided further, that all
outstanding Advances, Letters of Credit and Acceptances and 10% of the aggregate
of the settlement price of the Foreign Exchange Contracts outstanding may not
exceed the Line of Credit.

          (a) Requests for Foreign Exchange Contracts:  Each request for a
Foreign Exchange Contract shall be made by telephone or rapifax, confirmed in
writing (each a "Request").  Each Request shall be delivered or communicated to
the Bank no later than 3:00 p.m. (California time) on the day (which shall be a
business day) on which the Foreign Exchange Contract is requested.  By making
any such Request, each Borrower agrees that all matters relating to each such
Foreign Exchange Contract shall be governed hereby and each Borrower restates
all warranties and representations made by Borrower herein as if made on the
date the Foreign Exchange Contract is entered into.

          (b) Expiration Date:  The commitment by the Bank to enter into Foreign
Exchange Contracts shall, unless earlier terminated in accordance with this
Agreement, automatically terminate on the Expiration Date and no Foreign
Exchange Contract shall expire on a date which is after the Expiration Date.

          (c) Availability:  Bank may refuse to enter into a Foreign Exchange
Contract with the Borrower where the Bank, in its sole discretion, determines
that such foreign currency is unavailable, or

                                       7

 
where Bank would be prohibited by any applicable law, regulation or order from
purchasing such foreign currency.

          (d) Purpose: The Foreign Exchange Contract shall be used to hedge
foreign exchange exposure and/or risk.

          (e) Payment:  Payment is due on the settlement date of any Foreign
Exchange Contract (the "Payment Date"). Bank is hereby authorized by each
Borrower to charge the full settlement price of any Foreign Exchange Contract
against the depository account or accounts maintained by each Borrower with Bank
on the Payment Date.

          (f) Reserves:  The Borrowers shall, jointly and severally, upon the
Bank's request, promptly pay to and reimburse the Bank for all costs incurred
and payments made by the Bank by reason of any future assessment, reserve,
deposit, capital maintenance or similar requirement or any surcharge, tax or fee
imposed upon the Bank or as a result of the Bank's compliance with any future
directive or requirement of any regulatory authority pertaining or relating to
any Foreign Exchange Contract.

          2.05  Equipment Purchase Facility:  The Bank hereby agrees to make
loans and Advances to assist each Borrower in purchasing items of Equipment,
upon a written request therefor made by any Borrower to the Bank prior to
November 30, 1997 (the "Equipment Purchase Facility").  Each Advance made
hereunder shall be in an amount not to exceed 80% of the Value of the item(s) of
Equipment being purchased; provided, however, that at no time shall the total
aggregate outstanding principal amount of Advances made hereunder exceed the sum
of $1,000,000; and provided further that the amount of any Advance made
hereunder which is repaid in whole or in part, may not be reborrowed.

          (a) Equipment Account:  The Bank shall maintain on its books a record
of account in which the Bank shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the Equipment
Purchase Facility (the "Equipment Account").  The Bank shall provide the
Borrowers with a monthly statement of the Borrowers' Equipment Account, which
statement shall be considered to be correct and conclusively binding on the
Borrower unless any Borrower notifies the Bank to the contrary within 18 months
after such Borrower's receipt of any such statement which it deems to be
incorrect.

          (b) Interest on Advances:  Interest shall accrue from the date of each
Advance under the Equipment Purchase Facility at one of the following rates, as
quoted by the Bank and as elected by any Borrower below:

          1.  Variable Rate Advances:  A variable rate per annum equivalent to
              ----------------------                                          
the Variable Rate plus .25% ("Equipment Variable Rate").  Interest shall be
adjusted concurrently with any change in the Reference Rate.  An Advance based
upon the Variable Rate plus .25% is hereinafter referred to as an Equipment
Variable Rate Advance".

          2.  Fixed Rate Advances:  A fixed rate quoted by the Bank for at least
              -------------------                                               
30 days or for such other period of time that the Bank may quote and offer
(provided that any such period of time does not extend beyond November 30, 1997)
[the "Interest Period"] for Advances in the minimum amount of $100,000.  Such
interest rate shall be a percentage approximately equivalent to 2.5% per annum
in excess of the rate which the Bank determines in its sole and absolute
discretion to be equal to the Bank's cost of acquiring funds (adjusted for any
and all assessments, surcharges and reserve requirements pertaining to the
borrowing or purchase by the Bank of such funds) in an amount approximately
equal to the amount of the

                                       8

 
relevant Advance and for a period of time approximately equal to the relevant
Interest Period (the "Fixed Rate").  Advances based upon the Fixed Rate are
hereinafter referred to as "Fixed Rate Advances".

          Interest on any Advance shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.

          Interest on Equipment Variable Rate Advances and Fixed Rate Advances
shall be paid in monthly installments commencing on the first day of the month
following the date of the first such Advance and continuing on the first day of
each month thereafter.

          (c) Notice of Borrowing:  Upon telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a business day,
each Borrower may borrow under the Equipment Purchase Facility by requesting an
Equipment Variable Rate Advance or a Fixed Rate Advance.  An Equipment Variable
Rate Advance or a Fixed Rate Advance may be made on the day notice is received
by the Bank; provided, however, that if the Bank shall not have received notice
at or before 2:00 p.m. on the day such Advance is requested to be made, such
Equipment Variable Rate Advance or Fixed Rate Advance may, at the Bank's option,
be made on the next Business Day.

          (d) Notice of Election to Adjust Interest Rate: The Borrowers may
elect:

          1.  That interest on a Equipment Variable Rate Advance shall be
adjusted to accrue at the Fixed Rate, provided, however, that such notice shall
be received by the Bank no later than 2:00 p.m. on the Business Day on which
such Borrower requests that interest be adjusted to accrue at the Fixed Rate.

          2.  That interest on a Fixed Rate Advance shall continue to accrue at
a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the
Equipment Variable Rate; provided, however, that such notice shall be received
by the Bank no later than 2:00 p.m. on the last day of the Interest Period
pertaining to such Fixed Rate Advance.  If the Bank shall not have received
notice (as prescribed herein) of any Borrower's election that interest on any
Fixed Rate Advance shall continue to accrue at the newly quoted Fixed Rate such
Borrower shall be deemed to have elected that interest thereon shall be adjusted
to accrue at the Equipment Variable Rate upon the expiration of the Interest
Period pertaining to such Advance.

          (e) Prepayment: The Borrowers may prepay any Advance under the
Equipment Purchase Facility in whole or in part, at any time and without
penalty, provided, however, that: (i) any partial prepayment shall first be
applied, at the Bank's option, to accrued and unpaid interest and next to the
outstanding principal balance under the Equipment Purchase facility, and (ii)
during any period of time in which interest is accruing on any Advance on the
basis of the Fixed Rate, no prepayment shall be made except on a day which is
the last day of the Interest Period pertaining thereto.  If the whole or any
part of any Fixed Rate Advance is prepaid by reason of acceleration or
otherwise, each Borrower shall, jointly and severally, upon the Bank's request,
promptly pay to and indemnify the Bank for all costs, expenses and any loss
(including loss of future interest income) actually incurred by the Bank and any
loss (including loss of profit resulting from the re-employment of funds) deemed
sustained by the Bank as a consequence of such prepayment.

          The Bank shall be entitled to fund all or any portion of its Advances
in any manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded all
Advances through the purchase of dollar deposits earning interest at a rate
equal to the

                                       9

 
interest rate payable on U.S. Treasury securities in the amount of the relevant
Advance and in maturities corresponding to the date of such purchase to November
30, 1997.

          (f) Indemnification for Fixed Rate Costs:  During any period of time
in which interest on any Advance is accruing on the basis of the Fixed Rate each
Borrower shall, jointly and severally, upon the Bank's request, promptly pay to
and reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment, reserve, deposit or similar requirement or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any future directive or requirement of any regulatory authority
pertaining or relating to funds used by the Bank in quoting and determining the
Fixed Rate.

          (g) Conversion from Fixed Rate to Equipment Variable Rate:  In the
event that the Bank shall at any time determine that the accrual of interest on
the basis of the Fixed Rate (i) is infeasible because the Bank is unable to
determine the Fixed Rate due to the unavailability of U.S. dollar deposits,
contracts or certificates of deposit in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately equal to
the relevant Interest Period or (ii) is or has become unlawful or infeasible by
reason of the Bank's compliance with any new law, rule, regulation, guideline or
order, or any new interpretation of any present law, rule, regulation, guideline
or order, then the Bank shall give telephonic notice thereof (confirmed in
writing) to the Borrowers, in which event any Advance bearing interest at the
Fixed Rate, shall thereafter be deemed to be a Equipment Variable Rate Advance
and interest shall thereupon immediately accrue at the Equipment Variable Rate.

          (h) Maturity:  On November 30, 1997, each Borrower hereby jointly and
severally promises and agrees to pay to the Bank in full the aggregate unpaid
principal amount of all Advances then outstanding under the Equipment Purchase
Facility, together with all accrued and unpaid interest thereon.

          (i) Conversion to Term Loan:  It is hereby agreed that the Borrowers
may at least 15 days prior to November 30, 1997, convert the principal balance
of all Advances outstanding hereunder as of November 30, 1997 to be payable on a
term loan basis.  The term loan shall be in the amount of such outstanding
principal balance and shall be evidenced by a promissory note in form and
substance of the promissory note attached hereto as Exhibit "1" (the "Term
Note").  Accrued and unpaid interest hereunder shall be paid to the Bank
concurrently with the Borrowees execution of the Term Note.  Interest shall
accrue and principal and interest shall be paid in accordance with the terms and
provisions of the Term Note, provided however that principal shall be payable
over a period of up to 60 months if the term loan conversion is elected.

          2.06  Term Loan:  The Bank agrees to lend to the Borrowers, upon the
Borrowers' request made prior to January __, 1997, up to the maximum amount of
$2,500,000 (the "Term Loan").

          (a) Purpose: Proceeds from the Term Loan shall be used to refinance
existing Indebtedness.

          (b) Term Loan Account:  The Bank shall maintain on its books a record
of account in which the Bank shall make entries setting forth all payments made,
the application of such payments to interest and principal, accrued and unpaid
interest (if any) and the outstanding principal balance under the Term Loan (the
"Term Loan Account").  The Bank shall provide the Borrowers with a monthly
statement of the Borrowers' Term Loan Account, which statement shall be
considered to be correct and conclusively binding on the Borrower unless any
Borrower notifies the Bank to the contrary within 18 months after such Borrowees
receipt of any such statement which it deems to be incorrect.

                                       10

 
          (c) Interest:  Interest shall accrue on the Term Loan at one of the
following rates, as quoted by the Bank and as elected by any Borrower below.

          1.  Variable Rate Balances:  The outstanding principal balance or a
portion thereof of the Term Loan ("Term Balance") shall bear interest at a rate
per annum equal to the Equipment Variable Rate.  A Term Balance bearing interest
at the Equipment Variable Rate is hereinafter referred to as a Variable Rate
Balance.

          2.  Fixed Rate Balances:  At the Fixed Rate for such period of time
that the Bank may quote and offer, provided that any such period of time shall
be for the Interest Period as defined hereinabove and provided further that any
such period of time does not extend beyond the maturity date of the Term Loan.
The Term Balance bearing interest at the Fixed Rate is hereinafter referred to
as "Fixed Rate Balances".

          Each Borrower hereby jointly and severally promises and agrees to pay
interest on any Fixed Rate Balances and any Variable Rate Balance in arrears on
the first calendar day of each month.  Interest shall be calculated on the basis
of a year of 360 days for actual days elapsed.

          (d) Notice of Election to Adjust Interest Rate:  Upon telephonic
notice which shall be received by the Bank at or before 2:00 p.m. (California
time) on a Business Day, the Borrowers may elect:

          (1) That interest on a Variable Rate Balance shall be adjusted to
accrued at the Fixed Rate; provided, however, that such notice shall be received
by the Bank no later than two Business Days prior to the day (which shall be a
Business Day) on which any Borrower requests that interest be adjusted to accrue
at the Fixed Rate.

          (2) That interest on a Fixed Rate Balance shall continue to accrue at
a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the
Equipment Variable Rate; provided, however that such notice shall be received by
the Bank no later than two Business Days prior to the last day of the Interest
Period pertaining to such Fixed Rate Balance.  If the Bank shall not have
received notice as prescribed herein of such Borrower's election that interest
on any Fixed Rate Balance shall continue to accrue at the Fixed Rate, such
Borrower shall be deemed to have elected that interest thereon shall be adjusted
to accrue at the Equipment Variable Rate upon the expiration of the Interest
Period pertaining to such Term Balance.

          (e) Prohibition Against Prepayment of Fixed Rate Balances:  The
Borrowers may prepay the Term Loan in whole or in part, at any time and without
penalty, provided, however, that: (i) any partial prepayment shall first be
applied, at the Bank's option, to accrued and unpaid interest and next to the
outstanding principal balance under the Term Loan; and (ii) during any period of
time in which interest is accruing on any Term Balance on the basis of the Fixed
Rate, no prepayment shall be made except on a day which is the last day of the
Interest Period pertaining thereto.  If the whole or any part of any Fixed Rate
Balance is prepaid by reason of acceleration or otherwise, each Borrower shall,
jointly and severally, upon the Bank's request, promptly pay to and indemnify
the Bank for all costs, expenses and any loss (including loss of future interest
income) actually incurred by the Bank and any loss (including loss of profit
resulting from the re-employment of funds) deemed sustained by the Bank as a
consequence of such prepayment.

          The Bank shall be entitled to fund all or any portion of its Term Loan
in any manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded the
Term Loan through the purchase of dollar deposits earning interest at a rate
equal to the

                                       11

 
interest rate payable on U.S. Treasury securities in the amount of the relevant
Term Loan Balance and in maturities corresponding to the date of such purchase
to the maturity date of the Term Loan.

          (f) Indemnification for Fixed Rate Costs:  During any period of time
in which interest on any Term Balance is accruing on the basis of the Fixed
Rate, each Borrower shall, jointly and severally, upon the Bank's request,
promptly pay to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or similar
requirements or any surcharge, tax or fee imposed upon the Bank or as a result
of the Bank's compliance with any future directive or requirement of any
regulatory authority pertaining or relating to funds used by the Bank in quoting
and determining the Fixed Rate.

          (g) Conversion from Fixed Rate to Equipment Variable Rate:  In the
event that the Bank shall at any time determine that the accrual of interest on
the basis of the Fixed Rate (i) is infeasible because the Bank is unable to
determine the Fixed Rate due to the unavailability of U.S. dollar deposits,
contracts or certificates of deposit in an amount approximately equal to the
amount of the relevant Term Balance and for a period of time approximately equal
to the relevant Interest Period; or (ii) is or has become unlawful or infeasible
by reason of the Banks compliance with any new law, rule, regulation, guideline
or order, or any new interpretation of any present law, rule, regulation,
guideline or order, then the Bank shall give telephonic notice thereof
(confirmed in writing) to the Borrowers, in which event any Fixed Rate Balance
shall thereafter be deemed to be a Variable Rate Balance and interest shall
thereupon immediately accrue at the Equipment Variable Rate.

          (h) Principal:  Each Borrower hereby jointly and severally promises
and agrees to pay principal in 47 equal installments of $52,083 per installment
commencing on April 1, 1997, and continuing on the ___________________ day of
each month thereafter up to and including ________________________, 2001.  On
_____________________, 2001, each Borrower hereby jointly and severally promises
and agrees to pay to the Bank the entire unpaid principal balance, together with
accrued and unpaid interest.

          2.07  Stock Purchase Facility:  The Bank hereby agrees to make loans
and Advances to assist the Borrowers in the repurchase of  the stock of Opto
Sensors, Inc., upon a written request therefor made by the Borrowers to the Bank
prior to June 30, 1997 (the "Stock Purchase Facility").  At no time shall the
total aggregate outstanding principal amount of Advances made hereunder exceed
the sum of $1,500,000; and provided further that the amount of any Advance made
hereunder which is repaid, in whole or in part, may not be reborrowed.

          (a) Stock Account:  The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the Stock Purchase
Facility (the "Stock Account").  The Bank shall provide the Borrowers with a
monthly statement of the Borrower's Stock Account, which statement shall be
considered to be correct and conclusively binding on the Borrower unless the
Borrower notifies the Bank to the contrary within 18 months after any Borrower's
receipt of any such statement which it deems to be incorrect.

          (b) Interest on Advances:  Interest shall accrue from the date of each
Advance under the Equipment Purchase Facility at one of the following rates, as
quoted by the Bank and as elected by the Borrower below:

          1.  Stock Variable Rate Advances:  A variable rate per annum
              ----------------------------                            
equivalent to the Variable Rate plus .75% ("Stock Variable Rate").  Interest
shall be adjusted concurrently with any change in the Reference Rate.  An
Advance based upon the Stock Variable Rate is hereinafter referred to as an
"Stock

                                       12

 
Variable Rate Advance".

          2.  Stock Fixed Rate Advances:  A fixed rate quoted by the Bank for at
              -------------------------                                         
least 30 days or for such other period of time that the Bank may quote and offer
(provided that any such period of time does not extend beyond June 30, 1997)
[the "Stock Interest Period"] for Advances in the minimum amount of $100,000.
Such interest rate shall be a percentage approximately equivalent to 3% per
annum in excess of the rate which the Bank determines in its sole and absolute
discretion to be equal to the Bank's cost of acquiring funds (adjusted for any
and all assessments, surcharges and reserve requirements pertaining to the
borrowing or purchase by the Bank of such funds) in an amount approximately
equal to the amount of the relevant Advance and for a period of time
approximately equal to the relevant Stock Interest Period (the "Stock Fixed
Rate").  Advances based upon the Stock Fixed Rate are hereinafter referred to as
"Stock Fixed Rate Advances.

          Interest on any Advance shall be computed on the basis of 360 days per
year, but charged on the actual number of days elapsed.

          Interest on Stock Variable Rate Advances and Stock Fixed Rate Advances
shall be paid in monthly installments commencing on the first day of the month
following the date of the first such Advance and continuing on the first day of
each month thereafter.

          (c) Notice of Borrowing:  Upon telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a business day,
each Borrower may borrow under the Stock Purchase Facility by requesting a Stock
Variable Rate Advance or a Stock Fixed Rate Advance.  An Stock Variable Rate
Advance or a Stock Fixed Rate Advance may be made on the day notice is received
by the Bank; provided, however, that if the Bank shall not have received notice
at or before 2:00 p.m. on the day such Advance is requested to be made, such
Stock Variable Rate Advance or Stock Fixed Rate Advance may, at the Bank's
option, be made on the next Business Day.

          (d) Notice of Election to Adjust Interest Rate: The Borrowers may
elect:

          1.  That interest on a Stock Variable Rate Advance shall be adjusted
to accrue at the Stock Fixed Rate, provided, however, that such notice shall be
received by the Bank no later than 2:00 p.m. on the Business Day on which such
Borrower requests that interest be adjusted to accrue at the Stock Fixed Rate.

          2.  That interest on a Stock Fixed Rate Advance shall continue to
accrue at a newly quoted Stock Fixed Rate or shall be adjusted to commence to
accrue at the Stock Variable Rate; provided, however, that such notice shall be
received by the Bank no later than 2:00 p.m. on the last day of the Stock
Interest Period pertaining to such Stock Fixed Rate Advance.  If the Bank shall
not have received notice (as prescribed herein) of any Borrower's election that
interest on any Stock Fixed Rate Advance shall continue to accrue at the newly
quoted Stock Fixed Rate such Borrower shall be deemed to have elected that
interest thereon shall be adjusted to accrue at the Stock Variable Rate upon the
expiration of the Stock Interest Period pertaining to such Advance.

          (e) Prepayment:  The Borrowers may prepay any Advance under the Stock
Purchase Facility in whole or in part, at any time and without penalty,
provided, however, that: (i) any partial prepayment shall first be applied, at
the Bank's option, to accrued and unpaid interest and next to the outstanding
principal balance under the Stock Purchase Facility, and (ii) during any period
of time in which interest is accruing on any Advance on the basis of the Stock
Fixed Rate, no prepayment shall be made except

                                       13

 
on a day which is the last day of the Stock Interest Period pertaining thereto.
If the whole or any part of any Stock Fixed Rate Advance is prepaid by reason of
acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly
pay to and indemnify the Bank for all costs, expenses and any loss (including
loss of future interest income) actually incurred by the Bank and any loss
(including loss of profit resulting from the re-employment of funds) deemed
sustained by the Bank as a consequence of such prepayment.

          The Bank shall be entitled to fund all or any portion of its Advances
in any manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded all
Advances through the purchase of dollar deposits earning interest at a rate
equal to the interest rate payable on U.S. Treasury securities in the amount of
the relevant Advance and in maturities corresponding to the date of such
purchase to June 30, 1997.

          (f) Indemnification for Stock Fixed Rate Costs:  During any period of
time in which interest on any Advance is accruing on the basis of the Stock
Fixed Rate each Borrower shall, jointly and severally, upon the Bank's request,
promptly pay to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a result of
the Bank's compliance with any future directive or requirement of any regulatory
authority pertaining or relating to funds used by the Bank in quoting and
determining the Stock Fixed Rate.

          (g) Conversion from Stock Fixed Rate to Stock Variable Rate:  In the
event that the Bank shall at any time determine that the accrual of interest on
the basis of the Stock Fixed Rate (i) is infeasible because the Bank is unable
to determine the Stock Fixed Rate due to the unavailability of U.S. dollar
deposits, contracts or certificates of deposit in an amount approximately equal
to the amount of the relevant Advance and for a period of time approximately
equal to the relevant Stock Interest Period or (ii) is or has become unlawful or
infeasible by reason of the Bank's compliance with any new law, rule,
regulation, guideline or order, or any new interpretation of any present law,
rule, regulation, guideline or order, then the Bank shall give telephonic notice
thereof (confirmed in writing) to the Borrowers, in which event any Advance
bearing interest at the Stock Fixed Rate, shall thereafter be deemed to be a
Stock Variable Rate Advance and interest shall thereupon immediately accrue at
the Stock Variable Rate.

          (h) Maturity:  On June 30, 1997, each Borrower hereby jointly and
severally promises and agrees to pay to the Bank in full the aggregate unpaid
principal amount of all Advances then outstanding, together with all accrued and
unpaid interest thereon.

          (i) Conversion to Term Loan:  It is hereby agreed that the Borrowers
may at least 2 days prior to June 30, 1997, convert the principal balance of all
Advances outstanding hereunder as of June 30, 1997 to be payable on a term loan
basis.  The term loan shall be in the amount of such outstanding principal
balance and shall be evidenced by a promissory note in the form of the Term
Note.  Accrued and unpaid interest hereunder shall be paid to the Bank
concurrently with the Borrowers' execution of the Term Note.  Interest shall
accrue and principal and interest shall be paid in accordance with the terms and
provisions of the Term Note, provided however that principal shall be payable
over a period of up to 36 months if the term loan conversion is elected.

          2.08  Late Payment:  If any payment of principal (other than a
principal payment due on the Expiration Date) or interest, or any portion
thereof, under this Agreement is not paid within ten (10) calendar days after it
is due, a late payment charge equal to five percent (5%) of such past due
payment may be assessed and shall be immediately payable.

                                       14

 
          2.09  Joint Liability:  Notwithstanding that Advances may be made to a
particular Borrower, each Borrower is jointly and severally liable for the
repayment to Bank of any and all monies, together with interest thereon,
disbursed under this Agreement.  By each Borrower's respective execution of this
Agreement, each such Borrower, jointly and severally. unconditionally and
irrevocably promises to pay and guarantees the obligation for repayment of all
indebtedness incurred hereunder.


                                  SECTION 3.

                                  COLLATERAL

          3.01  The Collateral:  To secure payment and performance of all each
Borrower's Obligations under this Agreement and all other liabilities, loans,
guarantees, covenants and duties owed by the Borrower to the Bank, whether or
not evidenced by this or by any other agreement, absolute or contingent, due or
to become due, now existing or hereafter and howsoever created, each Borrower
hereby grants the Bank a security interest in and to all of the following
property (the "Collateral"):

          (a) All goods now owned or hereafter acquired by each Borrower or in
which any Borrower now has or may hereafter acquire any ownership interest,
including, but not limited to, all machinery, equipment, furniture, furnishings,
fixtures, tools, supplies and motor vehicles of every kind and description, and
all additions, accessions, improvements, replacements and substitutions thereto
and thereof.

          (b) All inventory now owned or hereafter acquired by either Borrower,
including, but not limited to, all raw materials, work in process, finished
goods, merchandise, parts and supplies of every kind and description, including
inventory temporarily out of either Borrower's custody or possession, together
with all returns on accounts.

          (c) All accounts, contract rights and general intangibles now owned or
hereafter created or acquired by either Borrower, including, but not limited to,
all receivables, goodwill, trademarks, trade styles, trade names, patents,
patent applications, software, customer lists and business records.

          (d) All documents, instruments and chattel paper now owned or
hereafter acquired by either Borrower.

          (e) All monies, deposit accounts, certificates of deposit and
securities of each Borrower now or hereafter in the Bank's or its agents'
possession, excluding the securities and stock of any Borrower's foreign
affiliates or subsidiaries.

          The Bank's security interest in the Collateral shall be a continuing
lien and shall include the proceeds and products of the Collateral including,
but not limited to, the proceeds of any insurance thereon.


                                   SECTION 4.

                             CONDITIONS OF LENDING

          4.01  Conditions Precedent to the Initial Advance:  The obligation of
the Bank to make the initial Advance and the flat extension of credit to or on
account of any Borrower hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such initial Advance and such
first

                                       15

 
extension of credit all of the following, in form and substance satisfactory to
the Bank:

          (a) Evidence that the execution, delivery and performance by each
Borrower of this Agreement and any document, instrument or agreement required
hereunder have been duty authorized.

          (b) Continuing guaranty in favor of the Bank executed by Deepak Chopra
for $1,500,000 for the Stock Purchase Facility.

          (c) Executed UCC-1 financing statement(s) describing the Collateral,
together with evidence of the recordation of such statement(s).

          (d)  A loan fee of $10,000.

          (e) The executed intercreditor agreement by and between Bank and Wells
Fargo HSBC Trade Bank, National Association.

          (f) Such other evidence as the Bank may request to establish the
consummation of the transaction contemplated hereunder and compliance with the
conditions of this Agreement.

          4.02  Conditions Precedent to All Advances:  The obligation of the
Bank to make each Advance and each other extension of credit to or on account of
either Borrower (including the initial Advance and the flat extension of credit)
shall be subject to the further conditions precedent that, on the date of each
Advance or each extension of credit and after the making of such Advance or
extension of credit:

          (a) The Bank shall have received such supplemental approvals, opinions
or documents as the Bank may reasonably request

          (b) The representations contained in Section 5 and in any other
document, instrument or certificate delivered to the Bank hereunder are correct.

          (c) No event has occurred and is continuing which constitutes, or,
with the lapse of time or giving of notice or both, would constitute an Event of
Default.

          (d) The security interest in the Collateral has been duly authorized,
created and perfected and is in full force and effect.

          Each Borrower's acceptance of the proceeds of any Advance or the
Borrower's execution of any document or instrument evidencing or creating any
Obligation hereunder shall be deemed to constitute such Borrower's
representation and warranty that all of the above statements are true and
correct.


                                   SECTION 5.

                         REPRESENTATIONS AND WARRANTIES

Each Borrower hereby makes the following representations and warranties to the
Bank, which representations and warranties are continuing:

          5.01  Status:   Each Borrower is a corporation, duly organized and
validly existing under the laws

                                       16

 
of the State of California and is properly licensed and is qualified to do
business and in good standing in, and, where necessary to maintain each
Borrower's rights and privileges, has complied with the fictitious name statute
of every jurisdiction in which the Borrower is doing business.

          5.02  Authority:  The execution, delivery and performance by each
Borrower of this Agreement and any instrument, document or agreement required
hereunder have been duly authorized and do not and will not: (i) violate any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having application to either
Borrower; (ii) result in a breach of or constitute a default under any material
indenture or loan or credit agreement or other material agreement, lease or
instrument to which either Borrower is a party or by which it or its properties
may be bound or affected; or (iii) require any consent or approval of its
stockholders or violate any provision of its articles of incorporation or by-
laws.

          5.03  Legal Effect:  This Agreement constitutes, and any instrument,
document or agreement required hereunder when delivered hereunder will
constitute, legal, valid and binding obligations of each Borrower enforceable
against such Borrower in accordance. with their respective terms.

          5.04  Fictitious Trade Styles:  There are no fictitious trade styles
used by any Borrower in connection with its business operations.  Each Borrower
shall notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.

          5.05  Financial Statements:  All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrowers to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the financial condition or, as
applicable, the other information disclosed therein.  Since the most recent
submission of such financial information or data to the Bank each Borrower
represents and warrants that no material adverse change in such Borrower's
financial condition or operations has occurred which has not been fully
disclosed to the Bank in writing.

          5.06  Litigation:  Except as have been disclosed to the Bank in
writing, there are no actions, suits or proceedings pending or, to the,
knowledge of each Borrower, threatened against or affecting any Borrower or any
Borrower's properties before any court or administrative agency which, if
determined adversely to such Borrower, would have a material adverse effect on
such Borrower's financial condition or operations or on the Collateral.

          5.07  Title to Assets:  Each Borrower has good and marketable title to
all of its assets (including, but not limited to, the Collateral) and the same
are not subject to any security interest, encumbrance, lien or claim of any
third person except for Permitted Liens.

          5.08  ERISA.  If any Borrower has a pension, profit sharing or
retirement plan subject to ERISA, such plan has been and will continue to be
funded in accordance with its terms and otherwise complies with and continues to
comply with the requirements of ERISA.

          5.09  Taxes:  Each Borrower has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than such taxes which are currently payable without penalty or
interest or those which are being duly contested in good faith.

          5.10  Margin Stock:  The proceeds of any Advance will not be used to
purchase or carry margin

                                       17

 
stock as such term is defined under Regulation U of the Board of Governors of
the Federal Reserve System.

          5.11  Environmental Compliance:  Each Borrower has implemented and
complied in all material respects with all applicable federal, state and local
laws, ordinances, statutes and regulations with respect to hazardous or toxic
wastes, substances or related materials, industrial hygiene or environmental
conditions.  There are no suits, proceedings, claims or disputes pending or, to
the knowledge of any Borrower, threatened against or affecting any Borrower or
its property claiming violations of any federal, state or local law, ordinance,
statute or regulation relating to hazardous or toxic wastes, substances or
related materials.

                                   SECTION 6.

                                   COVENANTS

Each Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as either Borrower is indebted to the Bank under this
Agreement, the Borrower will, unless the Bank shall otherwise consent in
writing:

          6.01  Preservation of Existence; Compliance with Applicable Laws:
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business and operations in
accordance with all applicable laws, rules and regulations.

          6.02  Maintenance of Insurance:  Maintain insurance in such amounts
and covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which each
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank.  All such insurance shall be in form and amount and with
companies satisfactory to the Bank.  With respect to insurance covering
properties in which the Bank maintains a security interest or lien, such
insurance shall name the Bank as loss payee pursuant to a loss payable
endorsement satisfactory to the Bank and shall not be altered or canceled except
upon 10 days' prior written notice to the Bank.  Upon the Bank's request, each
Borrower shall furnish the Bank with the original policy or binder of all such
insurance.

          6.03  Maintenance of Collateral and Other Properties:  Except for
Permitted Liens, keep and maintain the Collateral free and clear of all levies,
liens, encumbrances and security interests (including, but, not limited to, any
lien of attachment, judgment or execution) and defend the Collateral against any
such levy, lien encumbrance or security interest; comply with all laws, statutes
and regulations pertaining to the Collateral and its use and operation; execute,
file and record such statements, notices and agreements, take such actions and
obtain such certificates and other documents as necessary to perfect, evidence
and continue the Bank's security interest in the Collateral and the priority
thereof, maintain accurate and complete records of the Collateral which show all
sales, claims and allowances; and properly care for, house, store and maintain
the Collateral in good condition, free of misuse, abuse and deterioration, other
than normal wear and tear.  Each Borrower shall also maintain and preserve all
its properties in good working order and condition in accordance with the
general practice of other businesses of similar character and size, ordinary
wear and tear excepted.

          6.04  Payment of Obligations and Taxes:  Make timely payment of all
assessments and taxes and all of its liabilities and obligations including, but
not limited to, trade payables, unless the same are being contested in good
faith by appropriate proceedings with the appropriate court or regulatory
agency.  For purposes hereof, any Borrower's issuance of a check, draft or
similar instrument without delivery to the intended payee shall not constitute
payment.

                                       18

 
          6.05  Inspection Rights:  At any reasonable time and from time to
time, permit the Bank or any representative thereof to examine and make copies
of the records and visit the properties of any Borrower and discuss the business
and operations of such Borrower with any employee or representative thereof.  If
any Borrower shall maintain any records (including, but not limited to, computer
generated records or computer programs for the generation of such records) in
the possession of a third party, each Borrower hereby agrees to notify such
third party to permit the Bank free access to such records at all reasonable
times and to provide the Bank with copies of any records which it may request,
all at the Borrowers' expense, the amount of which shall be payable immediately
upon demand.  In addition, the Bank may, at any reasonable time and from time to
time, conduct inspections and audits of the Collateral and each Borrower's
accounts payable, the cost and expenses of which shall be paid by the Borrowers
to the Bank upon demand.

          6.06  Reporting and Certification Requirements:  Deliver or cause to
be delivered to the Bank in form and detail satisfactory to the Bank:

          (a) Not later than 120 days after the end of each Borrower's fiscal
year, a copy of the annual audited consolidated financial report of the
Borrowers for such year, prepared by a firm of certified public accountants
acceptable to Bank.

          (b) Not later than 30 days after the end of the first three fiscal
quarters of each year, the Borrowers' consolidated and consolidating financial
statement for such quarter.

          (c) Upon the Bank's request, such other information pertaining to the
Borrower, the Collateral or any guarantor hereunder as the Bank may reasonably
request.

          6.07  Redemption or Repurchase of Stock: Not redeem or repurchase
any class of each Borrower's stock now or hereafter outstanding other than stock
repurchased under the Stock Purchase Facility.

          6.08  Additional Indebtedness:  Except as otherwise provided herein,
not, after the date hereof, create, incur or assume, directly or indirectly, any
additional Indebtedness other than (i) indebtedness owed or to be owed to the
Bank or (ii) indebtedness to trade creditors incurred in the ordinary course of
any Borrower's business or (iii) indebtedness owed or to be owed to the Wells
Fargo HSBC Trade Bank.

          6.09  Loans:  Not make any loans or advances or extend credit to any
third person, including, but not limited to, directors, officers, partners, or
employees of any Borrower, except for credit extended in the ordinary course of
each Borrower's business as presently conducted and except credit extended to
any Borrower's affiliated entities and subsidiaries.

          6.10  Liens and Encumbrances:  Not create, assume or permit to exist
any security interest, encumbrance, mortgage, deed of trust, or other lien
(including, but not limited to, a lien of attachment, judgment or execution)
affecting any of each Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any of such properties,
except for Permitted Liens or as otherwise provided in this Agreement.

          6.11  Transfer Assets:  Not, after the date hereof, sell, contract for
sale, convey, transfer, assign, lease or sublet any of its assets (including,
but not limited to, the Collateral) except in the ordinary course of business as
presently conducted by each Borrower and, then, only for full, fair and
reasonable consideration.

          6.12  Change in Nature of Business:  Not make any material change in
the nature of its business as existing or conducted as of the date hereof.

                                       19

 
          6.13 Financial Condition: Maintain at all times on a consolidated
basis:

          (a) A minimum Effective Tangible Net Worth of at least $10,000,000
through March 31, 1997 and $11,000,000 thereafter.

          (b) A ratio of Debt to Effective Tangible Net Worth of not more than
3.25 to 1 through March 31, 1997 and 3.00 to 1 thereafter.

          (c) A ratio of current assets to current liabilities of not less than
1.20 to 1.

          (d) A ratio of the sum of cash, cash equivalents and accounts
receivable to current liabilities of not less than .50 to 1 at March 31, 1997
and .60 to 1 thereafter.

          6.14  Compensation of Employees:  Compensate its employees for
services rendered at an hourly rate at least equal to the minimum hourly rate
prescribed by any applicable federal or state law or regulation.

          6.15  Rentals:  Not incur liability (in addition to that incurred as
of the date of this Agreement) for the payment of, or pay, rentals for the
renting, leasing or use of real or personal property in an amount greater than
$1,100,000 in any one fiscal year.

          6.16  Capital Expense:  Not make any fixed capital expenditure or any
commitment therefor, including, but not limited to, incurring liability for
leases which would be, in accordance with generally accepted accounting
principles, reported as capital leases, or purchase any real or personal
property in an amount greater than $1,750,000 in any one fiscal year.

          6.17  Notice:  Give the Bank prompt written notice of any and all (i)
Events of Default; (ii) litigation, arbitration or administrative proceedings to
which either Borrower is a party and in which the claim or liability exceeds
$150,000.00 or which affects the Collateral; and (iii) other matters which have
resulted in, or might result in a material adverse change in the Collateral or
the financial condition or business operations of any Borrower.

          6.18 Environmental Compliance. Each Borrower shall:

          (a) Implement and comply in all material respects with all applicable
federal, state and local laws, ordinances, statutes and regulations with respect
to hazardous or toxic wastes, substances or related materials, industrial
hygiene or to environmental conditions.

          (b) Not own, use, generate, manufacture, store, handle, treat, release
or dispose of any hazardous or toxic wastes, substances or related materials
except in the ordinary course of the Borrower's business.

          (c) Give prompt written notice of any discovery of or suit,
proceeding, claim, dispute, threat, inquiry or filing respecting hazardous or
toxic wastes, substances or related materials.

          (d) At all times indemnify and hold harmless Bank from and against any
and all liability arising out of the use, generation, manufacture, storage,
handling, treatment, disposal or presence of hazardous or toxic wastes,
substances or related materials.

                                       20

 
                                  SECTION 7.

                               EVENTS OF DEFAULT

Any one or more of the following described events shall constitute an event of
default (an 'Event of Default') under this Agreement:

          7.01 Non-Payment: Any Borrower shall fail to pay any Obligations
within 2 days of when due.

          7.02  Performance Under This Agreement:  Any Borrower shall fail in
any material respect to perform or observe any term, covenant or agreement
contained in this Agreement or in any document, instrument or agreement relating
to this Agreement and any such failure shall continue unremedied for more than
30 days after the occurrence thereof.

          7.03  Other Agreements:  If there is a default under any agreement to
which any Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in excess of $250,000.

          7.04  Representations and Warranties; Financial Statements:  Any
representation or warranty made by each Borrower under or in connection with
this Agreement or any financial statement given by such Borrower or any
guarantor shall prove to have been incorrect in any material respect when made
or given or when deemed to have been made or given.

          7.05  Insolvency.  Any Borrower shall:  (i) become insolvent or be
unable to pay its debts as they mature; (ii) make an assignment for the benefit
of creditors or to an agent authorized to liquidate any substantial amount of
its properties and assets; (iii) file a voluntary petition in bankruptcy or
seeking reorganization or to effect a plan or other arrangement with creditors;
(iv) file an answer admitting the material allegations of an involuntary
petition relating to bankruptcy or reorganization or join in any such petition;
(v) become or be adjudicated a bankrupt; (vi) apply for or consent to the
appointment of, or consent that an order be made, appointing any receiver,
custodian or trustee, for itself or any of its properties, assets or businesses;
or (vii) any receiver, custodian or trustee shall have been appointed for all or
substantially all of its properties, assets or businesses and shall not be
discharged within 60 days after the date of such appointment.

          7.06  Execution:  Any writ of execution or attachment or any judgment
lien shall be issued against any property of any Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien in excess of $100,000.

          7.07  Revocation or Limitation of Guaranty.  Any guaranty shall be
revoked or limited or its enforceability or validity shall be contested by any
guarantor, by operation of law, legal proceeding or otherwise or any guarantor
who is a natural person shall die.

          7.08  Suspension:  Any Borrower shall voluntarily suspend the
transaction of business or allow to be suspended terminated, revoked or expired
any permit, license or approval of any governmental body necessary to conduct
such Borrowers business as now conducted.

          7.09  Change in Ownership:  There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary), or an agreement
shall be entered into to do so, with respect to more than 10% of the issued and
outstanding capital stock of any Borrower owned by Deepak Chopra.

                                       21

 
                                  SECTION 8.

                              REMEDIES ON DEFAULT

Upon the occurrence of any Event of Default, the Bank may, at its sole and
absolute election, without demand and only upon such notice as may be required
by law:

          8.01  Acceleration:  Declare any or all of the Borrowers' indebtedness
owing to the Bank, whether under this Agreement or any other document,
instrument or agreement, immediately due and payable, whether or not otherwise
due and payable.

          8.02  Cease Extending Credit:  Cease making Advances or otherwise
extending credit to or for the account of each Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between any
Borrower and the Banks

          8.03  Termination:  Terminate this Agreement as to any future
obligation of the Bank without affecting the Borrowers' obligations to the Bank
or the Bank's rights and remedies under this Agreement or under any other
document instrument or agreement.

          8.04  Notification of Account Debtors:

          (a) Notify any Account Debtor, any buyers or transferee of the
Collateral or any other persons of the Bank's interest in the Collateral and the
proceeds thereof.

          (b) Sign any Borrower's name (which authority each Borrower hereby
irrevocably and unconditionally grants to the Bank) on any invoice or bill of
lading relating to accounts or other drafts against the Account Debtors, not
post office authorities to change the address for delivery of mail addressed to
such Borrower to such address as the Bank may designate and take possession of
and open mail addressed to any Borrower and remove therefrom, proceeds of and
payments on the Collateral, and demand, receive and endorse payment and give
receipts, releases and satisfactions for and sue for all money payable to any
Borrower.

          (c) Require each Borrower to indicate on the face of all invoices (or
such other documentation as may be specified by the Bank relating to the
services giving rise to the Account) that the Account has been assigned to the
Bank and that all payments are to be made directly to the Bank at such address
as the Bank may designate.

          8.05  Protection of Security Interest:  Make such payments and do such
acts as the Bank, in its sole judgment, considers necessary and reasonable to
protect its security interest or Hen in the Collateral.  Each Borrower hereby
irrevocably authorizes the Bank to pay, purchase, contest or compromise any
encumbrance, lien or claim which the Bank, in its sole judgment, deems to be
prior or superior to its security interest.  Further, each Borrower hereby
agrees to pay to the Bank, upon demand therefor, all expenses and expenditures
(including attorneys' fees) incurred in connection with the foregoing.

          8.06  Foreclosure:  Enforce any security interest or lien given or
provided for under this Agreement or under any security agreement, mortgage,
deed of trust or other document, in such manner and such order, as to all or any
part of the properties subject to such security interest or lien, as the Bank,
in its sole judgment, deems to be necessary or appropriate and each Borrower
hereby waives any and all rights, obligations or defenses now or hereafter
established by law relating to the foregoing.  In the enforcement of

                                       22

 
its security interest or lien, the Bank is authorized to enter upon the premises
where any Collateral is located and take possession of the Collateral or any
part thereof, together with each Borrower's records pertaining thereto, or the
Bank may require each Borrower to assemble the Collateral and records pertaining
thereto and make such Collateral and records available to the Bank at a place
designated by the Bank.  The Bank may sell the Collateral or any portions
thereof, together with all additions, accessions and accessories thereto, giving
only such notices and following only such procedures as are required by law, at
either a public or private sale, or both, with or without having the Collateral
present at the time of the sale, which sale shall be on such terms and
conditions and conducted in such manner as the Bank determines in its sole
judgment to be commercially reasonable.  Any deficiency which exists after the
disposition or liquidation of the Collateral shall be a continuing liability of
each Borrowers to the Bank and shall be immediately paid by each Borrower,
jointly and severally, to the Bank.

          8.07  Letters of Credit and Acceptances:  Require the Borrowers,
jointly and severally, to pay immediately to the Bank, for application against
drawings under any outstanding Letters of Credit and Acceptances, the
outstanding principal amount of any such Letters of Credit which have not
expired and the principal amount of any Acceptances which have not matured.  Any
portion of the amount so paid to the Bank which is not applied to satisfy draws
under any such Letters of Credit or repayments on any such matured Acceptances
or any other obligations of the Borrower to the Bank shall be repaid to the
Borrowers without interest.

          8.08  Foreign Exchange Contracts:  Require the Borrowers, jointly and
severally, to pay immediately to the Bank, for application against the future
settlement price under any outstanding Foreign Exchange Contracts, the
outstanding face amount of any such Foreign Exchange Contracts which have not
matured or settled and Borrower hereby grants to Bank a security interest in and
to such funds.  Any portion of the amount so paid to the Bank which is not
subsequently applied to satisfy repayment on any such matured Foreign Exchange
Contracts or any other obligations of the Borrower to the Bank shall be repaid
to the Borrowers without interest.

          8.09  Non-Exclusivity of Remedies:  Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between each Borrower and the Bank, or otherwise.

          8.10  Application of Proceeds:  All amounts received by the Bank as
proceeds from the disposition or liquidation of the Collateral shall be applied
to the Borrowers' indebtedness to the Bank as follows: first, to the costs and
expenses of collection, enforcement, protection and preservation of the Bank's
lien in the Collateral, including court costs and reasonable attorneys' fees,
whether or not suit is commenced by the Bank; next, to those costs and expenses
incurred by the Bank in protecting, preserving, enforcing, collecting,
liquidating, selling or disposing of the Collateral; next, to the payment of
accrued and unpaid interest on all of the Obligations; next, to the payment of
the outstanding principal balance of the Obligations; and last, to the payment
of any other indebtedness owed by any Borrower to the Bank.  Any excess
Collateral or excess proceeds existing after the disposition or liquidation of
the Collateral will be returned or paid by the Bank to the Borrowers.

                                  SECTION 9.

                                 MISCELLANEOUS

          9.01  Amounts Payable on Demand.  If any Borrower shall fail to pay on
demand any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without

                                       23

 
waiving any default occasioned by the Borrower having so failed to pay such
amount, create an Advance under the Line of Credit in an amount equal to the
amount so payable, which Advance shall thereafter bear interest as provided
under the Line of Credit.

          9.02  Default Interest Rate:  If an Event of Default, or an event
which, with notice or passage of time could become an Event of Default, has
occurred and is continuing, each Borrower, jointly and severally, shall pay to
the Bank interest on any Indebtedness or amount payable under this Agreement at
a rate which is 3% in excess of the rate or rates then in effect under this
Agreement.

          9.03  Disposal of Invoices:  All documents, schedules, invoices or
other papers received by the Bank from the Borrowers may be destroyed or
disposed of 6 months after receipt by the Bank, unless any Borrower requests in
writing the return thereof, which shall be done at the Borrowers' expense.

          9.04  Waiver of Jury Trial.  EACH BORROWER AND THE BANK EACH WAIVE
THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS,
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR
OTHERWISE.  EACH BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE
OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY.  WITHOUT LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF.  THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.

          9.05  Reliance:  Each warranty, representation, covenant, obligation
and agreement contained in this Agreement shall be conclusively presumed to have
been relied upon by the Bank regardless of any investigation made or information
possessed by the Bank and shall be cumulative and in addition to any other
warranties, representations, covenants and agreements which each Borrower now or
hereafter shall give, or cause to be given, to the Bank.

          9.06  Attorneys' Fees:  Each Borrower, jointly and severally, shall
pay to the Bank all costs and expenses, including but not limited to reasonable
attorneys fees, incurred by Bank in connection with the administration,
enforcement or any refinancing or restructuring in the nature of a "work-out",
of this Agreement or any document, instrument or agreement executed with respect
to, evidencing or securing the indebtedness hereunder.

          9.07  Notices:  All notices, payments, requests, information and
demands which either party hereto may desire, or may be required to give or make
to the other party hereto, shall be given or made to such party by hand delivery
or through deposit in the United States mail, postage prepaid, or by Western
Union telegram, addressed as set forth below or to such other address as may be
specified from time to time in writing by either party to the other.

                                       24

 
To the Borrowers:                        To the Bank:
 
OPTO SENSORS, INC.                       SANWA BANK CALIFORNIA
 
 
/s/ Illegible                            /s/JANICE UPTON
- --------------------------------------   --------------------------------------
                                         Janice Upton, Vice President
- -------------------------------------- 


UDT SENSORS, INC.


/s/ Illegible
- --------------------------------------

- --------------------------------------


RAPISCAN SECURITY PRODUCTS (U.S.A.), INC.


/s/ Illegible
- --------------------------------------

- --------------------------------------


FERSON OPTICS, INC.

/s/ Illegible
- --------------------------------------


     9.08 Waiver:  Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any other document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise of
any other right; nor shall any waiver of any right or default hereunder, or
under any other document, instrument or agreement mentioned herein, constitute a
waiver of any other right or default or constitute a waiver of any other default
of the same or any other term or provision.

     9.09 Conflicting Provisions:  To the extent the provisions contained in
this Agreement are inconsistent with those contained in any other document,
instrument or agreement executed pursuant hereto, the terms and provisions
contained herein shall control.  Otherwise, such provisions shall be considered
cumulative.

                                       25

 
     9.10 Binding Effect; Assignment:  This Agreement shall be binding upon and
inure to the benefit of each Borrower and the Bank and their respective
successors and assigns, except that no Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Bank.  The Bank may sell. assign or grant participation in all or
any portion of its rights and benefits hereunder.  Each Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to any Borrower and any guarantor.

     9.11 Jurisdiction:   This Agreement, any notes issued hereunder, the rights
of the parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein shall be governed by
and construed according to the laws of the State of California, to the
jurisdiction of whose courts the parties hereby submit.

     9.12 No Guaranty or Surety.  If any Borrower hereunder is deemed to be a
surety or guarantor due to its joint and several liability hereunder such
Borrower hereby unconditionally and irrevocably acknowledges and agrees to the
matters set forth below:

          (a) Each Borrower waives any defense based upon any Borrower's loss of
a right against any other Borrower(s) arising from the Bank's election of a
remedy on any indebtedness under bankruptcy or other debtor relief laws or under
any other laws, including, but not limited to, those purporting to reduce the
Bank's right against any Borrower in proportion to the principal obligation of
any indebtedness (as presently contained in Section 2809 of the California Civil
Code and as it may be amended or superseded in the future).

          (b) Each Borrower waives the benefit of the statute of limitations
affecting such Borrower's liability hereunder or the enforcement hereof.

          (c) Each Borrower waives all right to require the Bank to:  (i)
proceed against any other Borrower(s), any endorser, cosigner, other guarantor
or other person liable on any indebtedness; (ii) join any endorser, cosigner,
other guarantor or other person liable on any indebtedness in any action or
actions that may be brought and prosecuted by the Bank solely and separately
against any Borrower(s) on any indebtedness; (iii) proceed against any item or
items of collateral securing any indebtedness or any guaranty thereof, or (iv)
pursue or refrain from pursuing any other remedy whatsoever in the Bank's power.

          (d) Each Borrower waives any defense arising by reason of any
disability or other defense of any other Borrower(s), successors or any
endorser, cosigner, other guarantor or other person liable on any indebtedness.
Until all indebtedness has been paid in full, each Borrower shall not have any
right of subrogation and each Borrower waives any benefit of and right to
participate in any collateral now or hereafter held by the Bank.  Each Borrower
waives all presentments, demands for performance, notices of nonperformance,
protests, notices of protest, notices of dishonor, notices of sale of any
collateral securing any indebtedness or any guaranty thereof, and notice of the
existence, creation or incurring of new or additional indebtedness.

     9.13 Headings:  The headings herein set forth are solely for the purpose of
identification and have no legal significance.

     9.14 Entire Agreement:  This Agreement and all documents, instruments and
agreements mentioned herein constitute the entire and complete understanding of
the parties with respect to the

                                       26

 
transactions contemplated hereunder.  All previous conversations, memoranda and
writings between the parties pertaining to the transactions contemplated
hereunder not incorporated or referenced in this Agreement or in such documents,
instruments and agreements are superseded hereby.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first hereinabove written.

BANK:                                    BORROWER:
 
SANWA BANK CALIFORNIA                    OPTO SENSORS, INC.
 
 
By: /s/JANICE UPTON                      By: /s/ AJAY MEHRA
    ----------------------------------       -------------------------------
Janice Upton, Vice President             Ajay Mehra, Chief Financial Officer
 
 
                                         UDT SENSORS, INC.
 
 
                                         By: /s/ AJAY MEHRA
                                             ------------------------------- 
                                         Ajay Mehra, Chief Financial Officer
 
 
                                         RAPISCAN SECURITY PRODUCTS (U.S.A.),
                                         INC.
 
 
                                         By: /s/ AJAY MEHRA
                                             -------------------------------
                                         Ajay Mehra, Chief Financial Officer
 
 
                                         FERSON OPTICS, INC.
 
 
                                         By: /s/ AJAY MEHRA
                                             -------------------------------
                                         Ajay Mehra, Chief Financial Officer

                                       27

 
                                                                   EXHIBIT 10.16

               __________________________________________________
               __________________________________________________


                                CREDIT AGREEMENT

                                 by and between


                  OPTO SENSORS, INC., a California corporation
                  UDT SENSORS, INC., a California corporation
      RAPISCAN SECURITY PRODUCTS (U.S.A.), INC., a California corporation
                 FERSON OPTICS, INC., a California corporation


                                      and


                       WELLS FARGO HSBC TRADE BANK, N.A.



                                  Dated as of

                                November 1, 1996


               __________________________________________________
               __________________________________________________

                   Exhibit A - Revolving Line of Credit Note
                     Exhibit B - Borrowing Base Certificate
             Exhibit C - Country Limitation Schedule of Ex-Im Bank
                   Exhibit D - Ex-Im Bank Borrower Agreement
                        Exhibit E - Facility Supplements
                        Exhibit F - Unsecured Guarantees


                             Collateral Documents:
                             -------------------- 

      Intercreditor Agreement with Wells Fargo Bank, National Association
                          ("Intercreditor Agreement")
  Security Agreement in Rights to Payment and Inventory ("Security Agreement")
   Subordination Agreement with Scope Industries ("Subordination Agreement")
                          UCC-I Financing Statement(s)

                                       

 
                          WELLS FARGO HSBC TRADE BANK

     OPTO SENSORS, INC., a California corporation, UDT SENSORS, INC., a
California corporation, RAPISCAN SECURITY PRODUCTS (U.S.A.), INC., a California
corporation and FERSON OPTICS, INC., a California corporation (each
individually, a "Borrower" and together, the "Borrowers"), and WELLS FARGO HSBC
TRADE BANK, N.A. ("Trade Bank"), have entered into this CREDIT AGREEMENT as of
November 1, 1996 ("Effective Date").


                                       I
                               CREDIT FACILITIES
                               -----------------

     1.1  The Facilities.  Subject to the terms and conditions of this
          --------------                                              
Agreement, Trade Bank will make available to Borrower each of those credit
facilities ("Facilities") for which a Facility Supplement ("Supplement") is
attached as Exhibit E hereto.  Additional terms for each individual Facility
(and each subfacility thereof ("Subfacility")) are set forth in the Supplement
for that Facility.  Each Facility will be available from the Closing Date until
the Facility Termination Date for that Facility.  Collateral and credit support
required for each Facility are also set forth in the Supplement for each
Facility.  Definitions for those capitalized terms not otherwise defined are
contained in Article 8 below.

     1.2  Credit Extension Limits.  The aggregate outstanding amount of all
          -----------------------                                          
Credit Extensions may at no time exceed the lesser of (a) Two Million Dollars
                                                          -------------------
($2,000,000), or (b) the Available Export Order Credit Limit as then in effect.
- ------------                                                                    
In addition to the foregoing, the aggregate outstanding amount of all Revolving
Credit Loans and unreimbursed drawings under Standby Credits plus twenty-five
percent (25%) of the aggregate undrawn face amount of all unexpired Standby
Credits may at no time exceed the Borrowing Base as then in effect.  The
aggregate outstanding amount of all Credit Extensions outstanding at any time
under any Facility may not exceed that amount specified as the "Credit Limit" in
the Supplement for that Facility, and the aggregate outstanding amount of all
Credit Extensions outstanding at any time under each Subfacility (or any
subcategory thereof) may not exceed that amount specified as the "Credit
Sublimit" in the Supplement for the relevant Facility.  Except as otherwise
specifically set forth herein, an amount equal to one hundred percent (100%) of
the undrawn face amount of each Standby Credit shall be used in calculating the
outstanding amount of Credit Extensions under this Agreement.

     1.3  Repayment; Interest and Fees.  Each funded Credit Extension shall be
          ----------------------------                                        
repaid by Borrower, and shall bear interest from the date of disbursement at
those per annum rates and such interest shall be paid, at the times specified in
the applicable Supplement, Note or Facility Document.  With respect to each
Facility, Borrower agrees to pay to Trade Bank the fees specified in the related
Supplement as well as those fees specified in the relevant Facility Document(s).
Interest and fees will be calculated on the basis of a 360 day year, actual days
elapsed.  Any overdue payments of principal (and interest to the extent
permitted by law) shall bear interest at a per annum floating rate equal to the
Prime Rate plus 3%.

     1.4  Prepayments.  Credit Extensions under any Facility may only be prepaid
          -----------                                                           
in accordance with the terms of the related Supplement.  At the time of any
prepayment (including, but not limited to, any prepayment which is a result of
the occurrence of an Event of Default and an acceleration of the Obligations)
Borrower will pay to Trade Bank all interest accrued on the amount so prepaid to
the date of such prepayment and all costs, expenses and fees specified in the
Loan Documents.

                                       1

 
                                      II
                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

     Borrowers represent and warrant to Trade Bank that the following
representations and warranties are true and correct:

     2.1  Legal Status.  Borrowers are duly organized and existing and in good
          ------------                                                        
standing under the laws of the state in which they are incorporated, and are
qualified or licensed to do business in all jurisdictions in which such
qualification or licensing is required and in which the failure to so qualify or
to be so licensed could have a material adverse affect on Borrowers.

     2.2  Authorization and Validity.  The execution, delivery and performance
          --------------------------                                          
of this Agreement, and all other Loan Documents to which Borrowers are a party,
have been duly and validly authorized, executed and delivered by Borrowers and
constitute legal, valid and binding agreements of Borrowers, enforceable against
Borrowers in accordance with their respective terms.

     2.3  Financial Condition and Statements.  All financial statements of
          ----------------------------------                              
Borrowers delivered to Trade Bank have been prepared in conformity with GAAP,
and completely and accurately reflect the financial condition of Borrowers (and
any consolidated Subsidiaries) at the times and for the periods stated in such
financial statements.  Neither Borrowers nor any Subsidiary has any material
contingent liability not reflected in the aforesaid financial statement.  Since
the date of the financial statements delivered to Trade Bank for the last fiscal
periods of Borrowers to end before the Effective Date, there have been no
material adverse changes in the financial condition, business or prospects of
Borrowers.  Borrowers are solvent.

     2.4  Litigation.  Except as disclosed in writing to Trade Bank prior to the
          ----------                                                            
Effective Date, there is no action, claim, suit, litigation, proceeding or
investigation pending or (to best of Borrowers' knowledge) threatened by or
against or affecting Borrowers or any Subsidiary in any court or before any
governmental authority, administrator or agency which may result in (a) any
material adverse change in the financial condition or business of Borrowers, or
(b) any material impairment of the ability of Borrowers to carry on their
business in substantially the same manner as it is now being conducted.

     2.5  No Defaults.  No Event of Default, and no event which with the giving
          -----------                                                          
of notice or the passage of time or both would constitute an Event of Default,
has occurred and is continuing.

     2.6  Ex-Im Bank Guarantee.  The Obligations are, and shall continue to be
          --------------------                                                
until all the Obligations have been paid in full, guaranteed as to 90% of the
amount thereof by Ex-Im Bank.  Every statement, representation and warranty of
Borrowers in (a) the Borrowers Agreement between Ex-Im Bank and Borrowers
("Borrowers Agreement") and (b) the U.S. Small Business Administration/Ex-Im
Bank Joint Application for Working Capital Guarantee ("Joint Application") and
(c) each other document pertaining to the Facility shall be true and correct as
of the date hereof.


                                      III
                       CONDITIONS TO EXTENDING FACILITIES
                       ----------------------------------

     3.1  Conditions to Initial Credit Extension.  The obligation of Trade Bank
          --------------------------------------                               
to make the first Credit Extension is subject to Trade Bank having received, in
form and substance satisfactory to Trade Bank, the following documents duly
executed, dated the Closing Date and in full force and effect:

                                       2

 
          (a) a corporate borrowing resolution and incumbency certificate;

          (b) the Facility Documents for each Facility, including, but not
limited to, note(s) ("Notes") for any Revolving Credit Facility, and Trade
Bank's standard Continuing Standby Letter of Credit Agreement;

          (c)  each Collateral Document;

          (d) an audit inspection report of Borrowers' books, records and
property by Wells Fargo or another auditor or inspector acceptable to Trade Bank
reflecting values and property conditions satisfactory to Trade Bank, the cost
of which shall not exceed $2,000 for the account of Borrowers;

          (e) the Ex-Im Bank Borrower Agreement required by Ex-Im Bank together
with the U.S. Small Business Administration/Export-Import Bank of the United
States "Joint Application For Working Capital Guarantee" and the latest "Country
Limitation Schedule of Ex-Im Bank";

          (f) executed copies of financing statements (UCC-1) for filing in
California and all other jurisdictions in which the Trade Bank believes
desirable to perfect its security interest in the Collateral;

          (g) financial statements of Borrowers as of, and for the fiscal
quarter ending September 28, 1996;
               ------------------ 

          (h) such other documents as Trade Bank may reasonably require.

     3.2  Conditions to Making Each Credit Extension.  The obligation of Trade
          ------------------------------------------                          
Bank to make each Credit Extension is subject to the fulfillment to Trade Bank's
satisfaction of the following conditions:

          (a) Representations and Warranties.  The representations and
              ------------------------------                          
warranties contained in this Agreement, the Facility Documents and the
Collateral Documents will be true and correct on and as of the date of the
Credit Extension with the same effect as though such representations and
warranties had been made on and as of such date; and

          (b) Documentation.  Trade Bank must have received, in form and
              -------------                                             
substance satisfactory to Trade Bank:

               (1) a Borrowing Base Certificate dated within five Business Days
of the date of the Credit Extension, demonstrating compliance with the
requirements for such Credit Extension. Each Certificate will include:

                    (i) an inventory collateral report showing the types,
locations and dollar values of all the inventory collateral;

                    (ii) an aged listing of accounts receivables;

                    (iii)  an aged listing of accounts payable;

               (2) a copy of each Export Order against which Borrowers are
requesting a Credit Extension; and

                                       3

 
          (3) if the Credit Extension is the issuance of a Standby Letter of
Credit, Trade Bank's standard "Application for Standby Letter of Credit" or
standard "Application and Agreement for Standby Letter of Credit".


                                       IV
                             AFFIRMATIVE COVENANTS
                             ---------------------

     Borrowers covenant that so long as Trade Bank remains committed to make
Credit Extensions to Borrowers, and until payment of all Obligations and Credit
Extensions, Borrowers will comply with each of the following covenants:

     4.1  Punctual Payments.  Punctually pay all principal, interest, fees and
          -----------------                                                   
other Obligations due under this Agreement or under any other Loan Document at
the time and place and in the manner specified herein or therein.

     4.2  Notification to Trade Bank.  Promptly, but in no event more than five
          --------------------------                                           
(5) business days after the occurrence of each such event, provide written
notice in reasonable detail of each of the following:

          (a) Occurrence of a Default.  The occurrence of any Event of Default
              -----------------------                                         
or any event which with the giving of notice or the passage of time or both
would constitute an Event of Default;

          (b) Borrowers' Trade Names; Place of Business.  Any change of
              -----------------------------------------                
Borrowers' (or any Subsidiary's) name, trade name or place of business, or chief
executive officer;

          (c) Litigation.  Any action, claim, proceeding, litigation or
              ----------                                               
investigation threatened or instituted by or against or affecting Borrowers (or
any Subsidiary) in any court or before any government authority, administrator
or agency which may materially and adversely affect Borrowers' (or any
Subsidiary's) financial condition or business or Borrowers' ability to carry on
their business in substantially the same manner as it is now being conducted;

          (d) Uninsured or Partially Uninsured Loss.  Any uninsured or partially
              -------------------------------------                             
uninsured loss through liability or property damage or through fire, theft or
any other cause affecting Borrowers' (or any Subsidiary's) property in excess of
an aggregate amount of Fifty Thousand Dollars ($50,000.00) for all Borrowers and
Subsidiaries combined.

     4.3  Books and Records.  Maintain at Borrowers' address books and records
          -----------------                                                   
in accordance with GAAP, and permit any representative of Trade Bank, at any
time during customary business hours, to inspect, audit and examine such books
and records, to make copies of them, and to inspect the properties of Borrowers.
Borrowers shall further permit Bank or an entity approved by Bank to conduct, at
least once each calendar year a filed audit for the purpose of inspecting and
valuing the Collateral.

     4.4  Tax Returns and Payments.  Timely file all tax returns and reports
          ------------------------                                          
required by foreign, federal, state and local law, and timely pay all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrowers.  Borrowers may, however, defer payment of any contested taxes,
provided that Borrowers (i) in good faith contests Borrowers' obligation to pay
the taxes by appropriate proceedings promptly instituted and diligently
conducted, (ii) notifies Trade Bank in writing of the commencement of, and any
material development in, the proceedings, (iii) posts bonds or takes any other
steps required to keep the contested taxes from becoming a lien upon any of the
Collateral, and (iv) makes

                                       4

 
provision, to Trade Bank's satisfaction, for eventual payment of such taxes in
the event Borrowers are obligated to make such payment.

     4.5  Compliance with Laws.  Comply in all material respects with the
          --------------------                                           
provisions of all foreign, federal, state and local laws and regulations
relating to Borrowers, including, but not limited to, those relating to
Borrowers' ownership of real or personal property, the conduct and licensing of
Borrowers' business, and health and environmental matters.

     4.6  Insurance.  Maintain and keep in force insurance of the types and in
          ---------                                                           
amounts customarily carried in lines of business similar to that of Borrowers,
including, but not limited to, fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance to be in
amounts satisfactory to Trade Bank and to be carried with companies approved by
Trade Bank before such companies are retained, and deliver to Trade Bank from
time to time at Trade Bank's request schedules setting forth all insurance then
in effect.  All insurance policies shall name Trade Bank as an additional loss
payee, and shall contain a lenders loss payee endorsement in form reasonably
acceptable to Trade Bank.  If Borrowers fails to provide or pay for any
insurance, Trade Bank may, but is not obligated to, obtain the insurance at
Borrowers' expense.

     4.7  Further Assurances.  At Trade Bank's request and in form and substance
          ------------------                                                    
satisfactory to Trade Bank, execute all documents and take all such actions at
Borrowers' expense as Trade Bank may deem reason ably necessary or useful to
perfect and maintain Trade Bank's perfected security interest in the Collateral
and in order to fully consummate all of the transactions contemplated by the
Loan Documents.

     4.8  Reports.  Furnish the following information or deliver the following
          -------                                                             
reports to Trade Bank at the times indicated below:

          (a) Annual Financial Statements.  Not later than ninety (90) calendar
              ---------------------------                  -----------         
days after and as of the end of each of Borrowers' fiscal years, (i) an annual
audited consolidated and consolidating financial statement of Borrowers and
Affiliates, prepared by a certified public accountant acceptable to Trade Bank
to include a balance sheet, an income statement and a cash flow statement and
applicable schedules and footnotes, with a copy of the letter from such
certified public accountant to the management of Opto Sensors, Inc. with regard
to such financial statements, and (ii) a consolidated and consolidating
projected financial plan, including a balance sheet and income statement.

          (b) Quarterly Financial Statements.  Not later than forty-five (45)
              ------------------------------                  ---------------
calendar days after and as of the end of each of Borrowers' fiscal quarters, a
consolidated and consolidating financial statement of Borrowers and Affiliates,
prepared by Borrowers, to include a balance sheet, an income statement and a
cash flow statement and all applicable schedules and footnotes.

          (c) Certificate of Accuracy and No Event of Default.  At the time each
              -----------------------------------------------                   
financial statement of Borrowers and Affiliates required above is delivered to
Trade Bank, a certificate of the president or chief financial officer of Opto
Sensors, Inc. that said financial statements are accurate and that there exists
no Event of Default under this Agreement nor any condition, act or event which
with the giving of notice or the passage of time or both would constitute an
Event of Default, together with a reconciliation of all intercompany loans.

          (d) Federal Income Tax Returns.  Not later than 10 calendar days after
              --------------------------                                        
filing, but in no event later than 120 calendar days after the end of each of
Borrowers' tax years, a copy of each Borrowers' filed federal income tax returns
for such year.

                                       5

 
          (e) Borrowing Base Certificate.  Not later than twenty-five (25)
              --------------------------                  ----------------
calendar days after and as of the end of each month:

               (1)  a Borrowing Base Certificate;

               (2) an inventory report showing the types, locations and dollar
values of all the inventory collateral;

               (3) an aged history of accounts receivable.

     4.9  Financial Covenants.  Maintain the following (if Borrowers have any
          -------------------                                                
Affiliates which must be consolidated under GAAP, the following applies to
Borrowers and the consolidated Affiliates):

          (a) Current Ratio.  Not at any time less than 1.15 to 1.0 ("Current
              -------------                             -----------          
Ratio" means total current assets divided by total current liabilities, and
"current assets" and "current liabilities" have the meanings given to them in
accordance with GAAP; provided, however, that "current liabilities" will include
indebtedness which is subordinated to the Obligations in a manner satisfactory
to Trade Bank.)

          (b) Total Liabilities divided by Tangible Net Worth.  Not at any time
              -----------------------------------------------                  
greater than 2.5 to 1.0 ("Tangible Net Worth" means the aggregate of total
             ----------                                                   
stockholders' equity including indebtedness which is subordinated to the
Obligations pursuant to documentation satisfactory to Trade Bank and excluding
any intangible assets, and "Total Liabilities" means the aggregate of current
liabilities and non-current liabilities, less indebtedness which is subordinated
                                         ----                                   
to the Obligations pursuant to documentation satisfactory to Trade Bank.)

          (c) EBITDA Coverage Ratio.  Not at any time less than 2.0 to 1.0,
              ---------------------                             ---------- 
calculated at each fiscal quarter end on a rolling four fiscal quarter basis for
the immediately preceding four fiscal quarters.  "EBITDA Coverage Ratio" means
EBITDA divided by the aggregate of total interest expense plus the current
maturity of long-term debt and the current maturity of subordinated debt, and
"EBITDA" means net profit before tax plus the non-cash portion of the $1,500,000
obligation of UDT Sensors, Inc. to the United States of America, plus interest
expense (net of capitalized interest expense), depreciation expense and
amortization expense.

          (d) Maximum Funded Debt to EBITDA Ratio.  Not at any time greater than
              -----------------------------------                               
2.5 to 1.0, calculated at each fiscal quarter end.  "Funded Debt" means all
- ----------                                                                 
obligations related to borrowed money (exclusive of subordinated debt), letter
of credit reimbursement obligations and contingent liabilities, and with
"EBITDA" having the meaning given above and calculated on a rolling four-quarter
basis as set forth above.

          (e) Net Income After Taxes.  Profitable on an annual basis determined
              ----------------------                                           
as of each fiscal year end.

          (f) Pre-Tax Profit.  Not less than $1,500,000 on an annual basis,
              --------------                                               
determined as of each fiscal year end, and $1 on a quarterly basis, determined
as of each fiscal quarter end.

     4.10 Judgments and Liens.  Satisfy all material judgments and liens.
          -------------------                                            

                                       6

 
                                       V
                               NEGATIVE COVENANTS
                               ------------------

     Each of the Borrowers covenants and agrees that so long as Trade Bank
remains committed to make any Credit Extensions to Borrowers and until all
Obligations have been paid, such Borrower will not, without the prior written
consent of Trade Bank:

     5.1  Merge or Consolidation, Transfer of Assets.  Merge into or consolidate
          ------------------------------------------                            
with, or permit any Subsidiary to merge into or consolidate with, any other
entity except for Permitted Mergers (as defined below); make, or permit any
Subsidiary to make, any substantial change in the nature of its business as
conducted as of the date hereof, acquire, or permit any Subsidiary to acquire,
all or substantially all of the assets of any other entity for a purchase price
in excess of $150,000 in the aggregate for all such purchases combined; sell,
lease, transfer, or otherwise dispose of, or permit any Subsidiary to sell,
lease, transfer, or otherwise dispose of, all or a substantial or material
portion of its assets except in the ordinary course of business ness and except
for a Permitted Merger. As used herein, a "Permitted Merger" shall mean a merger
of any of the Borrowers or Subsidiaries with any of the other Borrowers or
Subsidiaries so long as all of the following conditions are satisfied: (a) in
the case of a merger of a Subsidiary with a Borrower, the Borrower is the
survivor of the merger, (b) the merger is consummated in compliance with
applicable law and to the extent the consent of any governmental agency would be
required in connection therewith, such consent is obtained, (c) Borrowers give
Trade Bank at least ten (10) business days prior notice of Borrowers' intention
to so merge, (d) Borrowers furnish Trade Bank with copies of such documents
related to the merger as Trade Bank may request, and (e) Borrowers reimburse
Trade Bank upon demand for all costs and expenses, including reasonable
attorneys' fees (to include without limitation the allocated cost of Trade
Bank's in-house counsel) incurred by Trade Bank in connection with a reasonable
review by Trade Bank of the merger and the negotiation and preparation of any
documents which may reasonably be required by Trade Bank in connection
therewith.

     5.2  Liens.  Except for Permitted Liens, mortgage, pledge, grant or permit
          -----                                                                
to exist, a security interest in, or lien upon, all or any portion of its assets
now owned or hereafter acquired.

     5.3  Use of Proceeds.  Use the proceeds of any Credit Extension except for
          ---------------                                                      
the express purpose(s) permitted in the particular Facility Supplement under
which the subject Credit Extension is made.

     5.4  Dividends, Distributions of Capital and Stock Redemptions.  Declare or
          ---------------------------------------------------------             
pay, or permit any Subsidiary to declare or pay, any dividend or distribution
either in cash, stock or any other property on its stock now or hereafter
outstanding; or redeem, retire, repurchase or otherwise acquire any shares of
any class of its stock now or hereafter outstanding, or permit any Subsidiary to
do so; provided, however, that (a) Rapiscan UK may pay cash dividends to
Rapiscan Security Products (U.S.A.), Inc. ("Rapiscan"), (b) each Borrower (other
than Opto-Sensors, Inc.) and each Subsidiary (other than Rapiscan UK) may pay
cash dividends to its shareholders so long as cash dividends paid to minority
shareholders do not exceed $50,000 in the aggregate, (c) notwithstanding
anything herein to the contrary, neither Opto-Sensors, Inc. nor any successor
thereto, whether by merger or otherwise, shall pay any dividends to its
shareholders, (d) Rapiscan may redeem its stock owned by its employees not to
exceed $40,000 per year, (e) Opto-Sensors, Inc. may redeem its stock owned by
its employees, other than Deepak Chopra and his immediate family members, not to
exceed $ 100,000 per year, and (f) Ferson Optics, Inc. may redeem its stock
owned by its employees not to exceed $40,000 per year.

     5.5  Loans to Stockholders.  Make, or permit any Subsidiary to make, any
          ---------------------                                              
loans to any stock holder or any Affiliate of any Borrowers.  As used in this
Section 5.5, "Affiliate" means any person or entity

                                       7

 
which directly or indirectly controls, is controlled by, or is under common
control with one or more Borrowers.

     5.6  Capital Expenditures.  Make, or permit any Subsidiary to make, without
          --------------------                                                  
the prior written con sent of Trade Bank, any additional investments in fixed
assets in any fiscal year in an aggregate amount in excess of $1,750,000 for all
Borrowers and Subsidiaries combined; provided, however, that for the purpose of
calculating compliance with the foregoing limitation on additional investments
in fixed assets, there shall be excluded investments in fixed assets that are
acquired in replacement of fixed assets that had been lost or destroyed and that
are financed by insurance proceeds paid under insurance policies covering such
loss or destruction.

     5.7  Guarantees.  Guarantee or become liable, or permit any Subsidiary to
          ----------                                                          
guarantee or become liable, in any way as surety, endorser (other than as
endorser of negotiable instruments for deposit or collection in the ordinary
course of business), accommodation endorser or otherwise for, nor pledge or
hypothecate, any of its assets as security for, any liabilities or obligations
of any other person or entity, except (a) indebtedness or liabilities to Trade
Bank, (b) those unsecured guarantees, if any, in existence on the date hereof
which are listed on Exhibit "F" attached hereto, (c) indebtedness on account of
loans made after the date hereof by any one or more persons or entities other
than Borrowers or Subsidiaries to Opto Singapore or Opto Malaysia not exceeding
$3,500,000 in the aggregate on a combined basis, and (d) indebtedness to Wells
Fargo under credit facilities existing, and at credit availability levels
existing, as of the date hereof.

     5.8  Loans and Investments.  Make, or permit any Subsidiary to make, any
          ---------------------                                              
loans or advances to, or investments in, any person or entity except for (a)
loans hereafter from any borrower or Subsidiary to Rapiscan Security Products
(U.S.A.), Inc. ("Rapiscan") or Rapiscan UK not to exceed $4,500,000 in the
aggregate on a combined basis, (b) loans made after the date hereof from any
Borrower or Subsidiary to any other person or entity not to exceed $150,000 in
the aggregate for all such loans combined, and (c) loans between and among any
Borrowers and/or Affiliates existing as of the date hereof and disclosed on
Borrowers' and Affiliates' financial statements dated as of September 28, 1996.
                                                            ------------------  
Trade receivables and trade payables created in the ordinary course of
Borrowers' business shall not be considered loans, advances or investments
hereunder.

     5.9  Indebtedness For Borrowed Money.  Create, incur, assume or permit to
          -------------------------------                                     
exist, or permit any Subsidiary to create, incur, assume or permit to exist, any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) indebtedness or liabilities to Trade Bank, (b)
indebtedness or liabilities subordinated to the Obligations by an instrument or
agreement in form and substance acceptable to Trade Bank, (c) indebtedness or
liabilities of any Borrower or any Subsidiary existing as of, and disclosed to
Trade Bank in writing prior to, the date hereof, (d) indebtedness on account of
loans made after the date hereof from any one or more Borrowers or Subsidiaries
to Rapiscan or Rapiscan UK not exceeding $4,500,000 in the aggregate on a
combined basis, (e) indebtedness on account of loans made after the date hereof
by any one or more persons or entities other than Borrowers or Subsidiaries to
Opto Singapore or Opto Malaysia not exceeding $3,500,000 in the aggregate on a
combined basis, and (f) indebtedness to Wells Fargo under credit facilities
existing, and at credit availability levels existing, as of the date hereof.
Trade receivables and trade payables created in the ordinary course of business
shall not be considered borrowings, loans, or advances hereunder.

     5.10 Lease Expenditures.  Incur, or permit any Subsidiary to incur, new
          ------------------                                                
obligations for the lease or hire of real or personal property requiring
payments in any fiscal year in excess or an aggregate of $500,000 for all
Borrowers and Subsidiaries combined; provided, however, that for the purpose of
calculating

                                       8

 
such limit on new obligations for the lease or hire of real or personal
property, the renewal or replacement of an existing lease shall not be
considered a new obligation except to the extent there is an increase in the
required payments thereunder.


                                       VI
                         EVENTS OF DEFAULT AND REMEDIES
                         ------------------------------

     6.1  Events of Default.  The occurrence of any of the following shall
          -----------------                                               
constitute an "Event of Default":

          (a) Failure to Make Payments When Due.  Borrowers' failure to comply
              ---------------------------------                               
with any obligation to pay principal, interest, fees or other amounts when due
under any Loan Document, provided, however, that in the case of interest and
fees, Borrowers shall have a two Business Day grace period following the due
date thereof before Borrowers' failure to pay such interest or fees when due
shall constitute an Event of Default.

          (b) Failure to Perform Obligations.  Any failure by Borrowers to
              ------------------------------                              
comply with any covenant or obligation in this Agreement or in any Loan Document
(other than those referred to in subsections (a), (c) and (d) hereof), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of thirty (30) calendar days from its occurrence.

          (c) Untrue or Misleading Warranty or Statement.  Any warranty,
              ------------------------------------------                
representation, financial statement, report or certificate made or delivered by
Borrowers under any Loan Document is untrue or misleading in any material
respect when made or delivered.

          (d) Defaults under Ex-Im Bank Borrower Agreement.  Any Borrower fails
              --------------------------------------------                     
to comply with any covenant, agreement or condition set forth in the Ex-Im Bank
Borrower Agreement.

          (e) Defaults Under Other Loan Documents.  Any default in the payment
              -----------------------------------                             
or performance of any obligation, or any defined event of default, occurs under
any of the Loan Documents other than this Agreement, which is not cured within
any cure period applicable thereto; the Ex-Im Bank Guaranty referenced in
Section 2.6 of this Agreement is no longer in full force and effect (or any
claim thereof made by Ex-Im Bank); or any breach of the provisions of any
Subordination Agreement or Intercreditor Agreement by any party other than the
Trade Bank.

          (f) Defaults Under Other Agreements or Instruments.  Any default in
              ----------------------------------------------                 
the payment or performance of any obligation, or the occurrence of any event of
default, under the terms of any other agree ment or instrument pursuant to which
any Borrower or any Subsidiary has incurred any debt or other material liability
to any person or entity, AND THE INDEBTEDNESS OR OBLIGATION TO WHICH THE DEFAULT
APPLIES EXCEEDS $100,000, INDIVIDUALLY OR IN THE AGGREGATE FOR ALL SUCH DEFAULTS
BY BORROWERS AND SUBSIDIARIES COMBINED.

          (g) Judgments and Levies Against Borrowers.  The filing of a notice of
              --------------------------------------                            
judgment lien against Borrowers, or the recording of any abstract of judgment
against Borrowers, in any county in which Borrowers have an interest in real
property, or the service of a notice of levy and/or of a writ of attachment or
execution, or other like process, against the assets of any Borrower or
Subsidiary, or the entry of a judgment against any Borrower or Subsidiary;
PROVIDED, HOWEVER, THAT SUCH JUDGMENTS, LIENS, LEVIES, WRITS, EXECUTIONS AND
OTHER PROCESS INVOLVE DEBTS OF OR CLAIMS AGAINST ANY BORROWER OR ANY SUBSIDIARY
IN EXCESS OF $100,000, INDIVIDUALLY OR IN THE AGGREGATE FOR ALL SUCH JUDGMENTS,
LIENS, LEVIES, WRITS, EXECUTIONS AND

                                       9

 
OTHER PROCESS AGAINST BORROWERS AND SUBSIDIARIES COMBINED, AND WITHIN TWENTY
(20) DAYS AFTER THE CREATION THEREOF, OR AT LEAST TEN (10) DAYS PRIOR TO THE
DATE ON WHICH ANY ASSETS COULD BE LAWFULLY SOLD IN SATISFACTION THEREOF, SUCH
DEBT OR CLAIM IS NOT SATISFIED, OR STAYED PENDING APPEAL AND INSURED AGAINST IN
A MANNER SATISFACTORY TO BANK.

          (h) Voluntary Insolvency.  Borrowers, any Subsidiary or any Guarantor
              --------------------                                             
(i) becomes insolvent, (ii) suffers or consents to or applies for the
appointment of a receiver, trustee, custodian or liquidator of itself or any of
its property, (iii) generally fails to pay its debts as they become due, (iv)
makes a general assignment for the benefit of creditors, or (v) files a
voluntary petition in bankruptcy, or seeks reorganization, in order to effect a
plan or other arrangement with creditors or any other relief under the
Bankruptcy Reform Act, Title 11 of the United States Code, as amended or
recodified from time to time ("Bankruptcy Code"), or under any state or Federal
law granting relief to debtors, whether now or hereafter in effect.

          (i) Involuntary Insolvency.  Any involuntary petition or proceeding
              ----------------------                                         
pursuant to the Bankruptcy Code or any other applicable state or federal law
relating to bankruptcy, reorganization or other relief for debtors is filed or
commenced against any Borrower or any Subsidiary, and such involuntary petition
or proceeding is unopposed or is not dismissed within sixty (60) days of its
commencement; or any Borrower or any Subsidiary shall file an answer admitting
the jurisdiction of the court and the material allegations of any involuntary
petition; or any Borrower or any Subsidiary shall be adjudicated a bankrupt, or
an order for relief shall be entered by any court of competent jurisdiction
under said Bankruptcy Code or any other applicable state, federal or other law
relating to bankruptcy, reorganization or other relief for debtors.

          (j) Change in Ownership.  Any change in ownership DURING THE TERM OF
              -------------------                                             
THIS AGREEMENT OF AN AGGREGATE OF TWENTY-FIVE PERCENT (25%) OR MORE OF THE
COMMON STOCK OF BORROWER OR ANY SUBSIDIARY, EXCEPT FOR A CHANGE IN OWNERSHIP TO
WHICH TRADE BANK EXPRESSLY CONSENTS IN WRITING.

     6.2  Remedies. Upon the occurrence of any Event of Default, or at any time
          --------                                                             
thereafter, Trade Bank, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrowers), may do any one or more
of the following: (a) terminate Trade Bank's obligation to make Advances or to
make available to Borrowers the Facilities or other financial accommodations;
(b) accelerate and declare all or any part of the Obligations to be immediately
due, payable, and performable, notwithstanding any deferred or installment
payments allowed by any instrument evidencing or relating to any Advance; and/or
(c) exercise all its rights, powers and remedies available under the Loan
Documents, or accorded by law, including, but not limited to, the right to
resort to any or all Collateral or other security for any of the Obligations and
to exercise any or all of the rights of a beneficiary or secured party pursuant
to applicable law.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT,
IF ANY EVENT OF DEFAULT SET OUT IN SUBSECTIONS (H) OR (I) OF SECTION 6.1 ABOVE
SHALL OCCUR, THEN ALL THE REMEDIES SPECIFIED IN CLAUSES (A) AND (B) OF THE
PRECEDING SENTENCE SHALL AUTOMATICALLY TAKE EFFECT WITHOUT NOTICE OR DEMAND OF
ANY KIND (ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY BORROWERS) WITH RESPECT TO
ANY AND ALL OBLIGATIONS.  All rights, powers and remedies of Trade Bank may be
exercised at any time by Trade Bank and from time to time after the occurrence
of an Event of Default, are cumulative and not exclusive, and shall be in
addition to any other rights, powers or remedies provided by law or equity.

                                      10

 
                                      VII
                               GENERAL PROVISIONS
                               ------------------

     7.1  Notices.  All notices to be given under this Agreement shall be in
          -------                                                           
writing and shall be given personally or by regular first-class mail, by
certified mail return receipt requested, by a private delivery service which
obtains a signed receipt, or by facsimile transmission addressed to Trade Bank
or Borrowers at the address indicated after their signature to this Agreement,
or at any other address designated in writing by one party to the other party.
Trade Bank is hereby authorized by Borrowers to act on such instructions or
notices sent by facsimile transmission or telecommunications device which Trade
Bank believes come from Borrowers.  All notices shall be deemed to have been
given upon delivery, in the case of notices personally delivered or delivered by
private delivery service, upon the expiration of 3 calendar days following the
deposit of the notices in the United States mail, in the case of notices
deposited in the United States mail with postage prepaid, or upon receipt, in
the case of notices sent by facsimile transmission.

     7.2  Waivers.  No delay or failure of Trade Bank in exercising any right,
          -------                                                             
power or remedy under any of the Loan Documents shall affect or operate as a
waiver of such right, power or remedy; nor shall any single or partial exercise
of any such right, power or remedy preclude, waive or otherwise affect any other
or further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, consent or approval by Trade Bank under any of the Loan Documents
must be in writing and shall be effective only to the extent set out in such
writing.

     7.3  Benefit of Agreement.  The provisions of the Loan Documents shall be
          --------------------                                                
binding upon and inure to the benefit of the respective successors, assigns,
heirs, executors, administrators, beneficiaries and legal representatives of
Borrowers and Trade Bank; provided, however, that Borrowers may not assign or
transfer any of their rights under any Loan Document without the prior written
consent of Trade Bank, and any prohibited assignment shall be void.  No consent
by Trade Bank to any assignment shall release Borrowers from their liability for
the Obligations unless such release is specifically given by Trade Bank to
Borrowers in writing.  Trade Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Trade Bank's rights and benefits under each of the Loan Documents.  In
connection therewith, Trade Bank may disclose any information relating to the
Facilities, Borrowers or their business, or any Guarantor or its business.

     7.4  No Third Party Beneficiaries. This Agreement is made and entered into
          ----------------------------                                         
for the sole protection and benefit of Borrowers and Trade Bank and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, any of the Loan Documents to which it is not a
party.

     7.5  Joint and Several Liability.
          --------------------------- 

          (a) Each Borrower has determined and represents to Trade Bank that it
is in its best interest and in pursuance of its legitimate business purposes
to induce Trade Bank to extend credit pursuant to this Agreement.  Each Borrower
acknowledges and represents that its business is related to the business of the
other Borrowers, the availability of the commitments provided for herein
benefits each Borrower, and Credit Extensions made hereunder will be for and
inure to the benefit of Borrowers, individually and as a group.

          (b) Each Borrower has determined and represents to Trade Bank that it
has, and after giving effect to the transactions contemplated by this Agreement
will have, assets having a fair saleable value in excess of its debts, after
giving effect to any rights of contribution or subrogation which may be
available

                                      11

 
to such Borrower, and each Borrower has, and will have, access to adequate
capital for the conduct of its business and the ability to pay its debts as such
debts mature.

          (c) Each Borrower promises to repay to Trade Bank all Advances
disbursed to or Letters of Credit issued for its account or to or for the
account of any of the other Borrowers under any of the Facilities, together with
interest thereon and costs and expenses incurred by Trade Bank in connection
therewith, all in accordance with this Agreement.  The obligations of Borrowers
hereunder are joint and several, and a separate action may be brought against
any Borrower whether action is brought against any of the other Borrowers or any
other person, or whether any of the other Borrowers or any other person is
joined in any such action.  Each Borrower waives any right to require Trade Bank
to (i) proceed against any person, including any of the other Borrowers, (ii)
proceed against any or exhaust any security held from any Borrower or any other
person, or (iii) disclose any information about any Borrower.  Each Borrower
waives any defense based upon (i) any defense of any of the other Borrowers,
(ii) the cessation or limitation from any cause, other than payment in full, of
the indebtedness of any of the other Borrowers, (iii) the release of any
security for the indebtedness of any Borrower, (iv) the application of payments
received by Trade Bank from any of the other Borrowers to indebtedness of any of
such Borrowers to indebtedness of such Borrowers unrelated to the Facilities,
(v) the release of any of the other Borrowers of any liability to Trade Bank,
(vi) the compromise or modification with any of the other Borrowers of Trade
Bank's claims against any of such Borrowers, (vii) any election of remedies by
Trade Bank which adversely affects or destroys a Borrower's subrogation rights
or rights to proceed against any of the other Borrowers for reimbursement.  Each
Borrower agrees that it will not seek to exercise any rights of contribution
which it may have as a matter of law or otherwise as against the other Borrowers
hereunder or under any of the other Loan Documents until all indebtedness
arising under or in connection herewith shall have been indefeasibly paid in
full, and if by law any right of contribution may not be postponed, then such
right shall be subordinate to the rights of Trade Bank under this Agreement and
the other Loan Documents.  Until all indebtedness arising under or in connection
with this Agreement shall have been indefeasibly paid in full, no Borrower shall
be subrogated in whole or in part to the rights of Trade Bank, and if by law any
Borrower is so subrogated, such right shall be subordinate and junior to the
rights of Trade Bank hereunder and under the other Loan Documents until the
indefeasib