UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
__________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-23125
___________________________________
OSI SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0238801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 978-0516
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X NO
--- ---
As of November 10, 1998 there were 9,711,040 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1998 3
and June 30, 1998 (Unaudited)
Consolidated Statements of Operations for the three months 4
ended September 30, 1998 and September 30, 1997
(Unaudited)
Consolidated Statements of Cash Flows for the three months 5
ended September 30, 1998 and September 30, 1997
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 14
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
September 30, June 30,
1998 1998
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $17,498 $22,447
Marketable securities available for sale 1,598
Accounts receivable, net of allowance for
doubtful accounts of $1,072 and $551
at September 30, 1998 and June 30, 1998,
respectively 23,736 24,254
Other receivables 2,592 1,990
Inventory 25,888 21,705
Prepaid expenses 1,191 841
Deferred income taxes 1,381 1,381
------- -------
Total current assets 73,884 72,618
Property and Equipment, Net 12,983 11,466
Intangible and Other Assets, Net 9,625 2,738
------- -------
Total $96,492 $86,822
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $ 6,600 $ 198
Current portion of long-term debt 571 633
Accounts payable 8,802 8,560
Accrued payroll and related expenses 2,058 2,400
Income taxes payable 2,681 2,517
Advances from customers 1,558 1,808
Accrued warranties 1,925 1,948
Other accrued expenses and current liabilities 3,552 2,137
------- -------
Total current liabilities 27,747 20,201
Long-Term Debt 166 412
Deferred Income Taxes 296 294
------- -------
Total liabilities 28,209 20,907
Shareholders' Equity
Preferred stock, no par value; authorized,
10,000,000 shares; none issued and outstanding
at September 30, 1998 and June 30, 1998,
respectively
Common stock, no par value; authorized,
40,000,000 shares; issued and outstanding
9,694,915 and 9,691,915 shares at September 30,
1998 and June 30, 1998, respectively 49,140 49,131
Retained earnings 19,079 17,419
Unrealized gain on marketable securities available
for sale 167
Cummulative foreign currency translation adjustment (103) (635)
------- -------
Total shareholders' equity 68,283 65,915
------- -------
Total $96,492 $86,822
======= =======
See accompanying notes to consolidated financial statements
-3-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
------------- ---------------
Revenues $21,404 $22,961
Cost of goods sold 14,988 16,649
------------- ---------------
Gross profit 6,416 6,312
Operating expenses:
Selling, general and administrative 3,389 3,099
Research and development 1,024 827
------------- ---------------
Total operating expenses 4,413 3,926
------------- ---------------
Income from operations 2,003 2,386
Interest (income)/expense, net (167) 411
------------- ---------------
Income before provision for income taxes 2,170 1,975
Provision for income taxes 510 534
------------- ---------------
Net income $ 1,660 $ 1,441
============= ===============
Earnings per common share $ 0.17 $ 0.23
============= ===============
Earnings per common share, assuming dilution $ 0.17 $ 0.22
============= ===============
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended September 30,
--------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 1,660 $ 1,441
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 645 597
Changes in operating assets and liabilities:
Accounts receivable 2,384 (2,780)
Other receivables (487) (191)
Inventory (1,837) (1,006)
Prepaid expenses (335) (409)
Accounts payable (54) 772
Accrued payroll and related expenses (912) (377)
Income taxes payable 112 312
Advances from customers (280) (128)
Accrued warranty (115)
Other accrued expenses and current liabilities 340 509
-------- -------
Net cash provided by (used in) operating activities 1,141 (1,260)
-------- -------
Cash flows from investing activities:
Additions to property and equipment (1,584) (620)
Addition to marketable securities available for sale (1,431)
Cash paid for business acquisitions, net of cash acquired (8,663)
Other assets (487) 71
-------- -------
Net cash used in investing activities (12,175) (549)
-------- -------
Cash flows from financing activities:
Net proceeds from bank lines of credits 6,400 3,551
Payments on long-term debt (356) (275)
Proceeds from exercise of stock options and warrants 9 245
-------- -------
Net cash provided by financing activities 6,053 3,521
-------- -------
Effect of exchange rate changes on cash 24 (80)
-------- -------
Net (decrease) increase in cash (4,957) 1,632
Cash or cash equivalents, beginning of period 22,455 553
-------- -------
Cash or cash equivalents, end of period $ 17,498 $ 2,185
======== =======
Supplemental disclosures of cash flow information - Cash (received)/paid during
the period for:
Interest $ (239) $ 372
Income taxes $ 394 $ 344
During the period ended September 30, 1997 the company acquired property and
equipment under extended financing terms in the amount of $708,000.
In September 1998, the Company acquired all of the capital stock of Osteometer
MediTech A/S. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $ 4,087
Goodwill and intangible assets 5,387
Cash paid for the capital stock (7,750)
--------
Liabilities assumed $ 1,724
========
See accompanying notes to consolidated financial statements
-5-
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - OSI Systems, 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 in a broad range of applications, including security,
medical diagnostics, telecommunications, gaming, office automation, aerospace,
computer peripherals and industrial automation. In addition, the Company
utilizes its optoelectronic technology and design capabilities to manufacture
security and inspection products that it markets worldwide to end users under
the "Rapiscan" and "Secure" brand names. These products are used to inspect
people, 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.
The consolidated balance sheet as of September 30, 1998, the consolidated
statements of operations and the consolidated statements of cash flows for the
three-month periods ended September 30, 1998 and 1997 have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
all adjustments, consisting of only normal and recurring adjustments, necessary
for a fair presentation of the financial position and the results of operations
for the periods presented have been included. These consolidated financial
statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements and accompanying notes for the fiscal
year ended June 30, 1998 included in the Company's Annual Report on Form 10K as
filed with the Commission on September 28, 1998. The results of operations for
the three months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the fiscal year ending June 30, 1999.
Recent Developments - On September 2, 1998, the Company acquired all the
outstanding capital stock of Osteometer MediTech A/S ("Osteometer"), a Danish
manufacturer of densitometers used for scanning osteoporosis, for $7.75 million
in cash. During the quarter ended September 30, 1998, the Company also made
investments in the aggregate amount of approximately $800,000 in two other
businesses.
-6-
Subsequent to the quarter ended September 30, 1998, the Company purchased a
security products business unit from Metorex International Oy of Espoo, Finland
for approximately $6.0 million, $4.5 million of which was paid at the closing
and up to $1.5 million of which may be paid at a later date, based on future
sales.
Intangible And Other Assets, Net - The Company paid $7.75 million for the
acquisition of Osteometer, a Danish company, in September 1998. Costs in excess
of net tangible assets acquired of $5.4 million have been included in Intangible
and Other Assets on the accompanying balance sheet pending completion of a
valuation study. The Company believes that a significant portion of this amount
relates to in-process research and development, which will be charged to expense
after the valuation has been completed, currently expected to be in the second
quarter.
Foreign Exchange Instruments - The Company's use of derivatives is limited to
the purchase of foreign exchange contracts in order to minimize foreign exchange
transaction gains and losses. The Company purchases forward contracts to hedge
commitments to acquire inventory for sale and does not use the contracts for
trading purposes. Realized gains and losses on these contracts are recognized in
the same period as the hedged transactions. The forward exchange contracts
related to inventory purchases are recognized as adjustments to the bases of the
underlying assets. As of September 30, 1998 and June 30, 1998 there was
approximately $988,000 and $973,000, respectively, in outstanding foreign
exchange contracts. At September 30, 1998 and June 30, 1998, there were no
carrying amounts related to foreign currency contracts on the consolidated
balance sheets. The fair values of foreign exchange contracts are estimated by
obtaining quotes from brokers. At September 30, 1998 and June 30, 1998, the
carrying amount and fair value of these contracts were not material to the
consolidated financial statements.
Inventory - Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method.
Inventory at September 30, 1998 and June 30, 1998 consisted of the following (in
thousands):
SEPTEMBER 30, JUNE 30,
1998 1998
Raw Materials.......................... $15,273 $12,200
Work-in-process........................ 7,024 6,030
Finished goods......................... 3,591 3,475
------- -------
Total............................... $25,888 $21,705
======= =======
Earnings Per Share - Earnings per common share is computed using the weighted
average number of shares outstanding during the period. Earnings per common
share, assuming dilution, is computed using the weighted average number of
shares outstanding during the period and dilutive common stock equivalents from
the Company's stock option plans.
The following table reconciles the numerator and denominator used in calculating
earnings per common share and earnings per common share, assuming dilution.
-7-
For the Quarter ended September 30, 1998
-------------------------------------------------------
1998 1997
------------------- ------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to common stockholders $1,660,000 9,693,165 $0.17 $1,441,000 6,181,028 $0.23
========= =========
Effect of Dilutive Securities
Options, treasury stock method 153,506 291,011
-------------------------- --------------------------
Earnings per common share assuming dilution
Income available to common
stockholder, assuming dilution $1,660,000 9,846,671 $0.17 $1,441,000 6,472,039 $0.22
==================================================================================
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 130 "Reporting for
Comprehensive Income" (SFAS No. 130), which the Company adopted in the first
quarter of fiscal 1999. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is computed as follows (in
thousands):
For the Quarter ended September 30, 1998
----------------------------------------
1998 1997
------- -------
Net income $1,660 $1,441
------- -------
Other comprehensive income, net of taxes:
Foreign currency translation adjustments (103) (193)
Unrealized gains on marketable securities
available for sale 167
------- -------
Other comprehensive income 64 (193)
------- -------
Comprehensive income $1,724 $1,248
======= =======
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT
STATEMENTS IN THIS REPORT THAT ARE FORWARD-LOOKING ARE BASED ON CURRENT
EXPECTATIONS, AND ACTUAL RESULTS MAY DIFFER MATERIALLY. FORWARD-LOOKING
STATEMENTS INVOLVE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THE POSSIBILITIES
THAT THE DEMAND FOR THE COMPANY'S PRODUCTS MAY DECLINE AS A RESULT OF POSSIBLE
CHANGES IN GENERAL AND INDUSTRY SPECIFIC ECONOMIC CONDITIONS AND THE EFFECTS OF
COMPETITIVE PRICING AND SUCH OTHER RISKS AND UNCERTAINTIES AS ARE DESCRIBED IN
THIS REPORT ON FORM 10-Q AND OTHER DOCUMENTS PREVIOUSLY FILED OR HEREAFTER FILED
BY THE COMPANY FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
Revenues. Revenues consist of sales of optoelectronic devices and subsystems and
security and inspection products. Revenues are recorded net of all inter-company
eliminations. Revenues for the three months ended September 30, 1998 decreased
by $1.6 million, or 6.8%, to $21.4 million from $23.0 million for the three
months ended September 30, 1997. Revenues for the three months ended September
30, 1998 from security and inspection products were $7.8 million or
approximately 36.4% of the Company revenues, and revenues from sales of
optoelectronic devices and subsystems were $13.6 million or approximately 63.6%
of the Company's revenues. Revenues from sales of optoelectronic devices and
subsystems increased, both in absolute dollars and as a percentage of total
company revenues, as a result of an increase in sales to the medical diagnostic
industry. Revenues from sales of security and inspection products decreased
largely because of delayed shipments of certain large cargo scanning machines
under one contract.
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by $104,000, or 1.6%, to $6.4 million for the
three months ended September 30, 1998 from $6.3 million for the three months
ended September 30, 1997. As a percentage of revenues, gross profit increased to
30.0% for three months ended September 30, 1998 from 27.5% for the three months
ended September 30, 1997. The increase in gross margin was mainly due to
increased manufacturing efficiencies and product mix.
Selling, General and Administrative. Selling, general and administrative
expenses consisted primarily of compensation paid to sales, marketing, and
administrative personnel, professional service fees, and marketing expenses. For
the three months ended September 30, 1998, such expenses increased by $290,000
or 9.4%, to $3.4 million from $3.1 million for the three months ended September
30, 1997. As a percentage of revenues, selling, general and administrative
expenses increased to 15.8% for the three
-9-
months ended September 30, 1998 from 13.5% for the three months ended September
30, 1997. The increase in expenses was due primarily to the inclusion of
Osteometer's selling, general and administrative expenses in the Company's
consolidated financial statements commencing September 1998, and an increase in
marketing expenses to penetrate new markets.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended September 30, 1998, such expenses increased by $197,000 or
23.8% compared to $1.0 million from $827,000 for the three months ended
September 30, 1997. As a percentage of revenues, research and development
expenses increased to 4.8% from 3.6%. The increase was due primarily to
acceleration of certain research and development projects and increased efforts
to develop products for cargo scanning and an operator training system known as
Screener Proficiency Evaluation And Reporting System.
Income from Operations. Income from operations for the three months ended
September 30, 1998, decreased by $383,000 or 16.1% to $2.0 million from $2.4
million for the three months ended September 30, 1997. As a percentage of
revenues, income from operations decreased to 9.4% from 10.4% for the reasons
discussed under Selling, General and Administrative Expenses and Research and
Development.
Interest Expense. For the three months ended September 30, 1998, the Company
earned net interest income of $167,000 compared to net interest expense of
$411,000 for the three months ended September 30, 1997. The net interest income
was due to short term investments of the remaining proceeds from the initial
public offering of the Company's common stock in October 1997.
Provision for Income Taxes. Provision for income taxes decreased to $510,000
for the three months ended September 30, 1998 from $534,000 for the comparable
prior year quarter. As a percentage of income before provision for income taxes,
provision for income taxes decreased in the quarter to 23.5% this year from
27.0% last year. The decrease was a result of increased utilization of research
and development credits and a lower tax rate on certain products shipped by the
Company's wholly owned subsidiary Opto Sensors (Malaysia) Sdn. Bhd.
Net Income. For the reasons outlined above, net income for the three months
ended September 30, 1998 increased by 15.2% to $1.7 million compared to $1.4
million for the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $1.1 million during the three
months ended September 30, 1998. The amount of net cash provided by operations
reflects reductions in accounts receivable and increases in income taxes payable
and other accrued expenses and current liabilities. Net cash provided by
operations was offset in
-10-
part by increases in inventory, other receivables, prepaid expenses and
reduction in accrued payroll and related expenses, advances from customers and
accrued warranty.
The reduction in accounts receivable is mainly due to the collection of amounts
due under certain large contracts. Net cash used in investing activities was
$12.2 million and $549,000 for the three months ended September 30, 1998 and
1997, respectively. In the period ended September 30, 1998, the net cash used in
investing activities reflects primarily cash used in business acquisitions,
purchases of property and equipment, and purchase of marketable securities
available for sale. In the period ended September 30, 1997, the net cash used in
investing activities reflects primarily the purchase of property and equipment.
In the period ended September 30, 1998, $8.7 million was used for the
acquisition of Osteometer and an investment in two businesses as well as
professional fees associated with the acquisition and investments. Of the total
property and equipment purchases, approximately $700,000 was for the purchase of
equipment to manufacture products used in the oil exploration field.
Net cash provided by financing activities was $6.1 million and $3.5 million for
the three months ended September 30, 1998 and 1997, respectively, in each case
primarily in the form of net borrowing from bank lines of credit.
The Company anticipates that current cash balances, anticipated cash flows from
operations and current borrowing arrangements will be sufficient to meet its
working capital and capital expenditure needs for the foreseeable future.
Foreign Currency Translation. The accounts of the Company's operations in
Singapore, Malaysia, England, Denmark and Norway are maintained in Singapore
dollars, Malaysian ringgits, U.K. pounds sterling, Danish kroner and Norwegian
kroner, 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. Net
transaction gains of approximately $47,000 and $74,000 were included in income
for the three months ended September 30, 1998 and 1997, respectively.
Inflation. The Company does not believe that inflation has had a material impact
on its September 30, 1998 results of operations.
Year 2000 Compliance. The Company has a comprehensive Year 2000 project designed
to identify and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers, and customers that are not
Year 2000 compliant, and to develop, implement, and test remediation and
contingency plans to mitigate these risks. The project, comprises four phases:
(1) identification of risks, (2) assessment of risks, (3) development of
remediation and contingency plans, and (4) implementation and testing.
-11-
The Company's Year 2000 project is currently in the assessment phase and, with
respect to certain information systems and products, is in the remediation
phase. The Company's Year 2000 project is being spearheaded by a special task
force comprised of a senior management team as well as other key personnel. The
task force meets on a regular basis to determine and implement the steps
necessary to insure that the Company becomes fully Year 2000 compliant.
The Company has upgraded its critical database and believes that it is Year 2000
compliant. The financial records of the Company's principal U.S. subsidiaries,
Rapiscan Security Products, (U.S.A.) Inc. and UDT Sensors, Inc. have also been
upgraded and are Year 2000 compliant. The financial records model will be made
uniform throughout the Company on a worldwide basis; the estimated completion
date for this upgrade is on or before June 30, 1999. The Company has completed
an upgrade of the telephone systems, including voice-mail software, for Rapiscan
U.S.A. and UDT Sensors. The cost of these upgrades to date has not been
material. The Enterprise Resource Planning software used by several of the
Company's operating subsidiaries has been certified as Year 2000 compliant.
The Company is in the assessment and remediation phase of determining Year 2000
compliance of its own products, which are dependent on third party suppliers
and vendors for critical parts. The Company expects to complete this assessment
by March 31, 1999 and expects to be able to complete remediation as required by
June 30, 1999. Based on what the Company knows at this time, DOS and Windows 95
are not Year 2000 compliant; therefore, the Company's products which rely on
these products are themselves not Year 2000 compliant. The Company intends to
upgrade this software to Year 2000 compliant versions. The Company's products
which are not presently Year 2000 compliant are not affected in terms of
performance in any material respect; however, archiving of information may be
affected by Year 2000 noncompliance. The Company's exposure is with respect to
its products under warranty which were manufactured prior to the software
upgrade. In such cases, the Company would offer its customers a software upgrade
to a Year 2000 compliant version. Until the assessment phase is completed, the
Company is not in a position to know if the costs of upgrading the software used
in the manufacture of its products or offering its customers such upgrading will
be material.
The Company expects to have completed by March 31, 1999 a full assessment of all
hardware, operating systems and software applications in use on a worldwide
basis. Some upgrading is expected to be required, including upgrading to a
uniform operating system on a Company-wide basis. The costs of such assessment
and upgrading are not expected to be material. Required upgrading is expected to
be completed on or before June 30, 1999. In addition, the Company is in the
process of obtaining Year 2000 compliance statements from the manufacturers of
the Company's hardware and software products.
The Company believes that its greatest potential risks are associated with (i)
its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers. The Company is at the beginning stage of assessments for
its operations and infrastructure, and cannot predict
-12-
whether significant problems will be identified. The Company is asking its
critical vendors and suppliers to complete a Year 2000 survey to assess the
status of their compliance in order to assess the effect it could have on the
Company. The Company expects that all such surveys will be distributed to
vendors by December 31, 1998. The Company has not yet determined the full extent
of contingency planning that may be required. Based on the status of the
assessments made and remediation plans developed to date, the Company is not in
a position to state the total cost of remediation of all Year 2000 issues. Costs
identified to date have not been material. The Company does not currently expect
the total costs to be material, and it expects to be able to fund the total
costs through operating cash flows. However, the Company has not yet completed
its assessments, developed remediation for all problems, developed any
contingency plans, or completely implemented or tested any of its remediation
plans.
Based on the Company's current analysis and assessment of the state of its Year
2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of parts, including critical parts, by certain of
the Company's vendors and suppliers. Such delays could cause the Company to
experience delays in shipping its products. Specific contingency plans will be
formulated after the Company has received compliance surveys back from its
vendors and suppliers but could include, among other things, increasing
inventory of critical parts in late 1999 to insure an adequate supply is on hand
to minimize shipping delays by the Company of its products.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test such third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed in a timely and satisfactory
way. Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year 2000
compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues related to its
products in a timely manner, it could be exposed to liability to third parties.
The Company is continuing to evaluate Year 2000-related risks and will take such
further corrective actions as may be required.
-13-
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.22 Cooperative Research and Development Agreement dated May 13, 1998
between Rapiscan Security Products, Inc. and the Federal Aviation
Administration (portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Secuities and Exchange
Commission).
27. Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Hawthorne, State of
California on the 13th day of November 1998.
OSI Systems, Inc.
-----------------
By: /s/ Deepak Chopra
__________________________
Deepak Chopra
President and
Chief Executive Officer
By: /s/ Ajay Mehra
_________________________
Ajay Mehra
Vice President and
Chief Financial Officer
-14-
EXHIBIT 10.22
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT
97-CRDA-0106
RAPISCAN SECURITY PRODUCTS, INC.
AND
THE FEDERAL AVIATION ADMINISTRATION
WILLIAM J. HUGHES TECHNICAL CENTER
This Cooperative Research and Development Agreement (CRDA), dated
______________________ is entered into by and between Rapiscan Security
Products, Inc. [RAPISCAN], and the United States of America, as represented by
the Federal Aviation Administration William J. Hughes Technical Center [FAA
Technical Center], located at the Atlantic City International Airport, New
Jersey.
A. BACKGROUND
-------------
The development of effective enhanced automated baggage screening systems is a
continuing effort at the Federal Aviation Administration (FAA) Technical Center.
The Aviation Security Research & Development Division has been examining the
potential of several technologies and is particularly interested in further
development of the X-ray measurement and analysis techniques currently under
development by Rapiscan. The Rapiscan technology is unique and proprietary in
its particular scanning approach as well as in its image processing ability to
sort out the signatures of numerous objects within a typical piece of luggage
and then to identify to an operator whether a particular object constitutes a
threat (explosive). The technology has been developed to the point where it is
approaching the capability to meet the detection and throughput requirements for
enhanced automated inspection of luggage at an airport.
B. OBJECTIVE AND PLAN
---------------------
The intent of this CRDA is to assist Rapiscan to optimize its prototype enhanced
automated X-ray baggage screening system for use at airports.
C. AGREEMENT
------------
The Federal Technology Transfer Act of 1986, as amended, 15 U.S.C. 371Oa, et
--
seq. permits the Director of the FAA Technical Center to enter into Cooperative
- ----
Research and Development Agreements consistent with that Act, associated
Executive Orders, and agency policies.
ARTICLE 1. Definitions
-----------
As used in this AGREEMENT, the following terms shall have the following
meanings:
1.0 The term "AGREEMENT" means this Cooperative Research and Development
Agreement, or"CRDA".
1.1 The term "Cooperative Research and Development Program" means the research
and development work as defined in the Obligation of the Parties (OP) in Article
2, paragraph 2.1.
1.2 The term "effective date" means the date on which the Director of the FAA
Technical Center signs the AGREEMENT.
1.3 The term "made" in relation to any invention means the conception or first
actual reduction to practice of such invention.
1.4 The term "invention" means any invention or discovery (including software-
related invention) which is or may be patentable or otherwise protected under
Title 35 of the United States Code or any novel variety of plant which is or may
be protectable under the Plant Variety Protection Act (7 U.S.C. 7321 et seq.).
1.5 The term "proprietary information" means information which could provide a
competitive advantage to the party possessing such information and which either
embodies trade secrets developed at private expense and outside of any
Government contract or is confidential technical, business, or financial
information provided that such information:
a) is not generally known, or is not available from other sources without
obligations concerning its confidentiality;
b) has not been made available by the owners to others without obligations
concerning its confidentiality; or,
c) is not already available to the public without obligations concerning
its confidentiality.
1.6 "Subject invention" means any invention conceived or first actually reduced
to practice in the performance of work under this AGREEMENT (as described in
Section 2.0 of the Obligations of the Parties attached hereto as Appendix A),
but shall not include any invention conceived and first actually reduced to
practice prior to the date hereof.
1.7 The term "created" in relation to any copyrightable software work means
when the work is fixed in any tangible medium of expression for the first time,
as provided for at 17 U.S.C. 101.
2
ARTICLE 2. Cooperative Research and Development Program
--------------------------------------------
2.1 Obligation of the Parties. The cooperative research and development
-------------------------
program performed under this AGREEMENT shall be performed in accordance with the
Obligations of the Parties [OP], attached as Appendix A. The utilization of the
FAA Technical Center's personnel, resources, facilities, equipment, skills,
know-how, computer software and information will be consistent with its own
policies, missions, and requirements. It is understood that the nature of this
cooperative research is such that completion within the period of performance
specified, or within the limits of financial support allocated, cannot be
guaranteed. Accordingly, it is agreed that all cooperative research is to be
performed on a best efforts basis. Any modifications of the OP shall be by
mutual agreement between the parties and shall be incorporated into this
AGREEMENT by a formally executed written amendment.
2.2 Review of Work. Periodic conferences may be held, when deemed necessary by
--------------
both parties, between personnel of the FAA Technical Center and RAPISCAN for the
purpose of reviewing the progress of work defined in the OP of paragraph 2.1.
2.3 Principal Investigator. The Aviation Security Research & Development
----------------------
Division agrees to assign a substantial portion of the work to be performed
pursuant to the OP to the Aviation Security Research & Development Division,
AAR-500, AAR-520. The work will be performed under the supervision of Roy Mason
who, as Principal Investigator, has the responsibility for the scientific and
technical conduct of this project.
2.4 Scope Change. If at any time the Principal Investigator determines that
------------
the research data dictates a substantial change in the direction of the work,
the FAA Technical Center shall promptly notify RAPISCAN and the parties shall
make a good faith effort to agree on any necessary change to the OP. Any
substantial change in the direction of work will be formalized by a mutual
agreement and a change to the OP that specifies the new work to be performed, in
each case signed by the FAA and by the chairman or president of RAPISCAN.
ARTICLE 3. Reports
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The FAA Technical Center shall prepare quarterly and final reports. These
reports shall follow the guidelines in Appendix B. The final report shall be
prepared within three (3) months after completing the work called for in the OP.
Copies of all reports shall be forwarded to AAR-201. Any other reports as
called for in the OP shall be in a format agreed upon by RAPISCAN and the PI and
shall be forwarded to RAPISCAN and AAR-201.
ARTICLE 4. Financial Obligation
--------------------
The performance of research by the FAA Technical Center under this AGREEMENT is
not conditioned on any advance payment of funds by RAPISCAN.
3
ARTICLE 5. Term
----
The term of this AGREEMENT is for a period of 36 months, commencing on the
effective date of this AGREEMENT, unless otherwise modified pursuant to Article
13.
ARTICLE 6. Title to Property
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6.1 Capital Equipment. All capital equipment developed, acquired, and funded
-----------------
under this AGREEMENT by the FAA Technical Center shall be the property of the
FAA Technical Center, except that title to items of capital equipment provided
to the FAA Technical Center by RAPISCAN or acquired by the FAA Technical Center
with funds supplied by RAPISCAN (including without limitation, x-ray machines
and related equipment) shall remain or vest in RAPISCAN.
6.2 Software. Title to software developed by RAPISCAN exclusively at private
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expense shall remain in RAPISCAN. Except to the extent that such software may
be patentable, the Government acquires no rights to software developed by
RAPISCAN in the course of participating in this AGREEMENT. Rights acquired in
patentable software are set out in Article 9.
ARTICLE 7. Publicity, Use of Name, and Endorsement
---------------------------------------
7.1 Use of Technical Center Name Prohibited. RAPISCAN shall not use the name
---------------------------------------
of the FAA Technical Center on any product or service which is directly or
indirectly related to either this AGREEMENT or any patent license or assignment
Agreement which implements this AGREEMENT without the prior approval of the FAA
Technical Center.
7.2 No Endorsement by FAA. By entering into this AGREEMENT, the FAA Technical
---------------------
Center does not directly or indirectly endorse any product or service provided,
or to be provided, by RAPISCAN, its successors, assignees, or licensees.
RAPISCAN shall not in any way imply that this AGREEMENT is an endorsement by the
FAA Technical Center of any such product or service.
7.3 Publicity. Notwithstanding Articles 7.1 and 7.2 of this AGREEMENT,
---------
RAPISCAN may publicly disclose the existence of this AGREEMENT, a general
discussion of the services to be performed by the FAA Technical Center hereunder
and such other information as it determines reasonably necessary for compliance
with applicable securities laws or listing agreements affecting its parent
corporation.
ARTICLE 8. Publication
-----------
The FAA Technical Center and RAPISCAN agree to confer and consult with each
other prior to publication or other public disclosure of the results of work
under this AGREEMENT to ensure that no proprietary information or military
critical technology is released. Furthermore, prior to submitting a manuscript
for publication or before any other public disclosure, each party will offer the
other party ample opportunity to review such
4
proposed publication or disclosure, to submit objections, and to file patent
applications in a timely manner.
Notwithstanding the foregoing, RAPISCAN may make such public disclosures as it
determines reasonably necessary to satisfy applicable securities laws or listing
agreements affecting its parent corporation without first submitting such public
disclosure to the FAA Technical Center; provided, however, that a copy of such
disclosure shall thereafter be provided to the FAA Technical Center.
ARTICLE 9. Patents
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9.1 Reporting of Inventions. The FAA Technical Center shall promptly report to
-----------------------
RAPISCAN each subject invention reported to the FAA Technical Center by its
employees. RAPISCAN shall promptly disclose to the FAA Technical Center each
subject invention reported to RAPISCAN by any of its employees. Each party
shall provide the other party with copies of the patent applications it files on
any subject invention along with the power to inspect and make copies of all
documents retained in the official patent application files by the applicable
patent office, except as may be prohibited by 35 U.S.C. 181, relating to
inventions affecting the national security.
9.2 Inventions Made Solely by Employees of RAPISCAN. The FAA Technical Center,
------------------------------------------------
on behalf of the U.S. Government, waives any ownership rights the U.S.
Government may have in subject inventions made solely by RAPISCAN employees and
agrees that RAPISCAN shall have the option to retain title to any such employee
subject invention. RAPISCAN shall notify the FAA Technical Center promptly upon
making this election and agrees to file timely patent applications on such
subject invention at its own expense in such countries which RAPISCAN, in its
own discretion, deems expedient. Nothing in this AGREEMENT shall be interpreted
to require RAPISCAN to continue the prosecution of such patents, nor to maintain
them in force. Should RAPISCAN choose to abandon an application once filed or
decide not to pay any maintenance fee when due, RAPISCAN shall immediately grant
title to such application or patent to the Government of the United States.
9.3 Inventions Made Solely by Government Employees and Joint Inventions. The
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FAA Technical Center, on behalf of the U.S. Government, shall have the initial
option to retain title to each subject invention made solely by its employees
and in each subject invention made jointly by RAPISCAN and Government employees.
In the event that the FAA Technical Center informs RAPISCAN that it elects to
retain title to such joint subject invention, RAPISCAN agrees to assign to the
Government whatever right, title and interest RAPISCAN has in and to such joint
subject invention.
5
9.4 Grant of Non-Exclusive License in U.S. Government Inventions.
-------------------------------------------------------------
The FAA Technical Center, on behalf of the U.S. Government, agrees to grant to
RAPISCAN, for reasonable compensation not to exceed /*/ (as defined in Appendix
C), a nonexclusive license in any invention made under this AGREEMENT, in whole
or in part, by a Government employee.
9.5 Exclusive License in U.S. Government Invention in Specific Field of Use.
------------------------------------------------------------------------
The FAA Technical Center, on behalf of the U.S. Government, agrees to grant to
RAPISCAN, for reasonable compensation, not to exceed /*/ (as defined in Appendix
C), exclusive license in any invention made under this AGREEMENT, in whole or in
part, by a Government employee in the following specific field of use:
Automated Detection of Explosives in Baggage
9.6 Filing of Patent Application. The party having the right to retain title
----------------------------
and file patent applications on a specific subject invention may elect not to
file patent applications thereon provided it so advises the other party within
sixty (60) days from the date it discloses the subject invention to the other
party. Thereafter, the other party may elect to file patent applications on
such subject invention and the party initially reporting such subject invention
agrees to assign its right, title and interest in such subject invention to the
other party and cooperate with such party in the preparation and filing of
patent applications thereon. The assignment of the entire right, title, and
interest to the other party pursuant to this paragraph shall be subject to the
retention by the party assigning title of a non-exclusive, irrevocable, paid-up
license to practice, or have practiced on its behalf, the subject invention
throughout the world. In the event neither of the parties to this AGREEMENT
elect to file a patent application on a subject invention, either or both (if a
joint invention) may, at their sole discretion and subject to reasonable
conditions, release the right to file to the inventor(s) with a license in each
party of the same scope as set forth in the immediately preceding sentence.
9.7 Patent Expenses. The expenses attendant to the filing of patent
----------------
applications as specified in 9.6 above, and all maintenance fees, shall be borne
by the party filing the patent application. Any party having an obligation to
pay a maintenance fee who decides not to pay such maintenance fee, shall so
notify the other party of that decision in sufficient time to permit the other
party to act to preserve its interest in the patent.
9.8 Prior Patents of RAPISCAN. RESERVED
-------------------------
- ----------------------------
/*/ Symbol indicates that material has been omitted pursuant to a request for
confidential treatment and such material has been filed separately with the
Securities and Exchange Commission.
6
9.9 Retention of Government Rights in Inventions Made Under this AGREEMENT.
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9.9.1 Government License. RAPISCAN agrees to grant to the U.S. Government
------------------
a nonexclusive, nontransferable, irrevocable, paid-up license to practice or
have practiced throughout the world by or on behalf of the Government each
invention made in whole or in part by its employees under this AGREEMENT. This
license shall be evidenced by a confirmatory license agreement prepared by
RAPISCAN in a form satisfactory to the FAA Technical Center.
9.9.2 March-in Rights. In the event the FAA Technical Center assigns
---------------
title or grants an exclusive license to a subject invention made in whole or in
part by a Government employee, the Government shall retain the right:
a) to require RAPISCAN to grant to a responsible applicant a
nonexclusive, partially exclusive, or exclusive license to use the invention in
the applicant's licensed field of use, on terms that are reasonable under the
circumstances; or
b) if RAPISCAN fails to grant such a license, to grant the license
itself. See 15 U.S.C. 3710a(b)(1)(B).
9.9.3 Government Exercise of March-in Rights. The Government may exercise
--------------------------------------
its rights under Article 9.9.2 only in exceptional circumstances and only if the
Government determines that
a) the action is necessary to meet health or safety needs that are
not reasonably satisfied by the RAPISCAN;
b) the action is necessary to meet requirements for public use
specified by Federal regulations, and such requirements are not reasonably
satisfied by the RAPISCAN; or
c) the RAPISCAN has failed to comply with an agreement containing
provisions described at 15 U.S.C. 3710a(c)(4)(B) pertaining to domestic
manufacture of products embodying subject inventions. See 15 U.S.C.
371Oa(b)(1)(C) and Article 15.1.3 of this AGREEMENT.
ARTICLE 10. Copyrights
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10.1 Ownership of Copyright. RAPISCAN shall have the option to own the
----------------------
copyright in all software (including modifications and enhancements thereto),
documentation, and other works created in whole or in part by RAPISCAN under
this AGREEMENT, which is subject to being copyrighted under Title 17, United
States Code. RAPISCAN shall mark any such works with a copyright notice showing
RAPISCAN as the author or co-author and shall in its reasonable discretion
determine whether to file applications for registration of copyright. Should
RAPISCAN choose not to own the copyright in any such software, it will execute
an assignment of the copyright to the U.S. Government. The Government, as
represented by the FAA Technical Center, agrees to license such software to
RAPISCAN on terms acceptable to the parties.
7
10.2 Copyright Notice. RAPISCAN will clearly mark all copyrighted software or
----------------
other works provided to the Government with appropriate notices.
ARTICLE 11. Copyright Royalties - RESERVED
------------------------------
ARTICLE 12. Proprietary Information
-----------------------
12.1 Ownership of Proprietary Information. Subject to Articles 9 and 10, any
------------------------------------
proprietary information developed solely by a party under this AGREEMENT shall
be owned by the party which developed it. When proprietary information (except
for computer software) is developed solely by RAPISCAN, RAPISCAN agrees to grant
the U.S. Government a nonexclusive, royalty-free license to use, duplicate, and
disclose in confidence, such proprietary information. Any jointly developed
proprietary information shall be jointly owned by the FAA Technical Center and
RAPISCAN. With respect to any such jointly owned proprietary information or
proprietary information developed solely by the FAA Technical Center, RAPISCAN
shall have the option to obtain from the U.S. Government an exclusive royalty-
free license with respect to the Government's interest in the proprietary
information, provided, however, that RAPISCAN shall exercise its option within
twenty-four (24) months after termination or expiration of the AGREEMENT. This
license is subject to reservation by the U.S. Government of a royalty-free right
to use, duplicate, and disclose in confidence, the licensed proprietary
information for Governmental purposes, and to permit others to do so on behalf
of the U.S. Government and on behalf of any foreign Government or international
organization pursuant to any existing or future treaty or agreement with the
United States. The terms of any license respecting proprietary information
developed solely by the FAA Technical Center shall be limited in accordance with
15 U.S.C. 3710a(c)(7)(B) dealing with exemptions to the Freedom of Information
Act, 5 U.S.C. 552. Computer software developed solely by RAPISCAN is covered by
Article 6.2 "Software."
12.2 Proprietary Notice. The parties will mutually develop an appropriate
------------------
proprietary notice(s) for use in connection with this AGREEMENT. The parties
agree to cooperate in removing or remarking any information marked as
proprietary information which ceases to be proprietary information, for reasons
set forth in Article 1.5 or because the information was publicly disclosed in a
patent, copyrighted work, or as may be required by law.
ARTICLE 13. Expiration, Termination, Disputes and Extensions
------------------------------------------------
13.1 Expiration and Termination. This AGREEMENT shall expire as specified in
--------------------------
Article 5 unless both parties hereto agree in writing to extend it further.
However, either party may terminate this AGREEMENT upon delivery of written
notice at least ninety (90) days prior to such termination. Each party shall
bear its own costs resulting from or related to the termination.
13.2 Disputes. RAPISCAN and the FAA Technical Center recognize that disputes
--------
arising under this AGREEMENT are best resolved at the local working level by the
parties directly involved. Both parties are encouraged to be imaginative in
designing mechanisms and
8
procedures to resolve disputes at this level. Any dispute arising under this
AGREEMENT which is not disposed of by agreement of the parties shall be
submitted jointly to the Administrator, Federal Aviation Administration, or his
designee, for resolution. Subject to the rights, if any, of RAPISCAN to seek
judicial relief, the decision of the Administrator, or his designee, shall be
final.
13.3 Continuation of Cooperative Research Pending Resolution. Pending the
-------------------------------------------------------
resolution of any dispute under this Article, work under this AGREEMENT will
continue as elsewhere provided herein.
13.4 Obligations Surviving Termination. Termination of this AGREEMENT by either
---------------------------------
party for any reason shall not affect the rights and obligations of the parties
accrued prior to the effective date of termination of this AGREEMENT. No
termination of this AGREEMENT, however effectuated, shall release the parties
hereto from their rights, duties and obligations under Articles 3, 4, 6, 7, 8,
9, 10, 11, and 12.
13.5 Extensions. Extensions of the term of this AGREEMENT may be made prior to
----------
the expiration of the AGREEMENT without the need for additional review beyond
that of the Director, FAA Technical Center, ACT-1. If the parties wish to
continue the work called for under the OP after the expiration of this
AGREEMENT, they may enter into a new CRDA.
ARTICLE 14. Independent Contractors
-----------------------
The parties to this AGREEMENT are independent contractors and are not agents of
each other, joint venturers, partners or joint parties to a formal business
organization of any kind. Neither party is authorized or empowered to act on
behalf of the other with regard to any contract, warranty or representation as
to any matter and neither party will be bound by the acts or conduct of the
other. Each party will maintain sole and exclusive control over its own
personnel and operations.
ARTICLE 15. Representations and Warranties
------------------------------
15.1 Representations and Warranties of the FAA Technical Center. The FAA
----------------------------------------------------------
Technical Center hereby represents and warrants to RAPISCAN as follows:
15.1.1 Mission. The performance of the activities specified by this
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AGREEMENT are consistent with the mission of the FAA Technical Center.
15.1.2 Authority. All prior reviews and approvals required by regulations
---------
or law have been obtained by the FAA Technical Center prior to the execution of
the AGREEMENT. The FAA Technical Center official executing this AGREEMENT has
the requisite authority to do so. Notwithstanding the delegation of authority
to execute the AGREEMENT to the Director of the FAA Technical Center, ACT-1, the
Administrator, Federal Aviation Administration, or his designee, pursuant to 15
U.S.C. 3710a(c)(5)(A), may disapprove or require the modification of this
AGREEMENT within thirty (30) days of the date it is presented to him by the FAA
Technical Center.
9
15.1.3 Statutory Compliance. The FAA Technical Center, prior to
--------------------
entering into this AGREEMENT, has (1) given special consideration to entering
into CRDAs with small business firms and consortia involving small business
firms; (2) has given preference to business units located in the United States
which agree that products embodying inventions made under the AGREEMENT or
produced through the use of such inventions will be manufactured substantially
in the United States and; (3) in the event this AGREEMENT is made with an
industrial organization or other person subject to the control of a foreign
company or Government, taken into consideration whether or not such foreign
Government permits United States agencies, organizations, or other persons to
enter into CRDAs and licensing agreements with such foreign country.
15.2 Representations and Warranties of RAPISCAN. RAPISCAN hereby represents and
------------------------------------------
warrants to the FAA Technical Center as follows:
15.2.1 Corporate Organization. RAPISCAN, as of the date hereof,
----------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of California.
15.2.2 Statement of Ownership. RAPISCAN is neither foreign
----------------------
controlled nor a subsidiary of a foreign controlled entity.
15.2.3 Power and Authority. RAPISCAN has the requisite power and
-------------------
authority to enter into this AGREEMENT and to perform according to the terms
thereof.
15.2.4 Due Authorization. The Board of Directors and shareholders
-----------------
of RAPISCAN have taken all actions required to be taken by law, RAPISCAN's
Certificate or Articles of Incorporation, its bylaws or otherwise, to authorize
the execution and delivery of this AGREEMENT.
15.2.5 No Violation. The execution and delivery of this AGREEMENT
------------
does not contravene any material provision of, or constitute a material default
under any material Agreement binding on RAPISCAN or any valid order of any
court, or any regulatory agency or other body having authority to which RAPISCAN
is subject.
ARTICLE 16. Liability
---------
16.1 Tort Liability of Government. The U.S. Government shall not, except for
----------------------------
gross negligence, fraud, abuse, or misuse, be responsible for any property of
RAPISCAN consumed, damaged, or destroyed in the performance of this AGREEMENT.
Any liability of the U.S. Government is determined pursuant to the Federal Tort
Claims Act, 28 U.S.C. 2671 et seq.
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16.2 Personal Injury and Damage to Property. RAPISCAN agrees to hold and save
--------------------------------------
the Government, its officers, agents, and employees harmless from liability of
any nature or kind, including costs and expenses, for, or on account of, any or
all suits or damages of any character whatsoever resulting from injuries or
damages sustained by any person or persons
10
or property by virtue of negligence on the part of RAPISCAN, its officers,
agents, and employees in the performance of this AGREEMENT.
16.3 No Warranty. Except as specifically stated in Article 15, neither the FAA
-----------
Technical Center nor RAPISCAN makes NO express or implied warranty as to any
matter whatsoever, including the conditions of the research or any invention or
product, whether tangible or intangible, made or developed under this agreement,
or the ownership, MERCHANTABILITY, or fitness for a particular purpose of the
research or any invention or product.
16.4 Indemnification. RAPISCAN holds the U.S. Government harmless and
---------------
indemnifies the Government for all liabilities, demands, damages, expenses and
losses arising out of the use by RAPISCAN, or any party acting on its behalf or
under its authorization, of the FAA Technical Center's research and technical
developments or out of any use, sale or other disposition by RAPISCAN, or others
acting on its behalf or with its authorization, of products made by the use of
the FAA Technical Center's technical developments. This provision shall survive
termination of this AGREEMENT.
16.5 Disposal of Toxic or Other Waste. - RESERVED
--------------------------------
ARTICLE 17. Force Majeure
-------------
Neither party shall be liable for any unforeseeable event beyond its reasonable
control not caused by the fault or negligence of such party, which causes such
party to be unable to perform its obligations under this AGREEMENT (and which it
has been unable to overcome by the exercise of due diligence), including, but
not limited to, flood, drought, earthquake, storm, fire, pestilence, lightning
and other natural catastrophes, epidemic, war, riot, civic disturbance or
disobedience, strikes, labor dispute, or failure, threat of failure, or
sabotage, or any order or injunction made by a court or public agency other than
an order or injunction made by or at the request of the FAA. In the event of
the occurrence of such a force majeure event, the party unable to perform shall
promptly notify the other party. It shall further use its best efforts to
resume performance as quickly as possible and shall suspend performance only for
such period of time as is necessary as a result of the force majeure event.
ARTICLE 18. Miscellaneous
-------------
18.1 No Benefits. No member of, or delegate to the United States Congress, or
-----------
resident commissioner, shall be admitted to any share or part of this AGREEMENT,
nor to any benefit that may arise therefrom; but this provision shall not be
construed to extend to this AGREEMENT if made with a corporation for its general
benefit.
18.2 Governing Law. The construction, validity, performance, and effect of this
-------------
AGREEMENT for all purposes shall be governed by the laws applicable to the
Government of the United States.
11
18.3 Entire Agreement. This AGREEMENT constitutes the entire agreement between
----------------
the parties concerning the subject matter of this AGREEMENT.
18.4 Headings. Titles and headings of the Sections and Subsections of this
--------
AGREEMENT are for the convenience of references only and do not form a part of
this AGREEMENT and shall in no way affect the interpretation thereof.
18.5 Waivers. None of the provisions of this AGREEMENT shall be considered
-------
waived by any party hereto unless such waiver is given in writing to all other
parties. The failure of any party to insist upon strict performance of any of
the terms and conditions hereof, or failure or delay to exercise any rights
provided herein or by law, shall not be deemed a waiver of any rights of any
party hereto.
18.6 Severability. The illegality or invalidity of any provisions of this
------------
AGREEMENT shall not impair, affect or invalidate the other provisions of this
AGREEMENT.
18.7 Amendments. If either party desires a modification in this AGREEMENT, the
----------
parties shall, upon reasonable notice of the proposed modification by the party
desiring the change, confer in good faith to determine the desirability of such
modification. Such modification shall not be effective until a written
amendment is signed by the FAA and the chairman or president of RAPISCAN.
18.8 Assignment. Neither this AGREEMENT nor any rights or obligations of any
----------
party hereunder shall be assigned or otherwise transferred by either party
without the prior written consent of the other party.
18.9 Export Controls. Information and/or products developed pursuant to this
---------------
AGREEMENT may contain information for which export is restricted by the Arms
Control Act (22 U.S.C. 2571 et seq.) or the Export Administration Act (50 U.S.C.
-------
2401 et seq.). Nothing in this AGREEMENT shall be construed to permit any
-------
disclosure in violation of those restrictions.
ARTICLE 19. Notices
-------
Notices, communications, and payments hereunder shall be deemed made if given by
registered or certified envelope, postage prepaid, and addressed to the party to
receive such notice, communication or payment at the address given below, or
such other address as may hereafter be designated by notice in writing.
12
A. Formal notices under this AGREEMENT shall be addressed as follows:
FAA Technical Center:
Name: Jennelle Derrickson, AAR-201
Address: Federal Aviation Administration
William J. Hughes Technical Center
Atlantic City International Airport
New Jersey, 08405
Telephone: 609-485-5096
RAPISCAN:
Name: Andreas F. Kotowski
Address: 2830 Temple Avenue
Long Beach, California 90806
Telephone: 562-427-0515
cc:
Name: Allan B. Duboff, Esq.
Richman, Lawrence, Mann, Chizever & Phillips
Address: 9601 Wilshire Boulevard
Penthouse
Beverly Hills, California 90210
Telephone: 310-274-8300
B. Correspondence relating to technical matters should be addressed as follows:
FAA Technical Center:
Name: Jennelle Derrickson, AAR-201
Address: Federal Aviation Administration
William J. Hughes Technical Center
Atlantic City International Airport
New Jersey, 08405
Telephone: 609-485-5096
AAR-520:
Name: Roy Mason, AAR-520
Address: FAA Technical Center
Atlantic City International Airport
Atlantic City, NJ 08405
Telephone: 609-485-4153
13
RAPISCAN:
Name: Peter Modica
Address: 2830 Temple Avenue
Long Beach, California 90806
Telephone: 562-427-0515
cc:
Name: Andreas F. Kotowski
Address: 2830 Temple Avenue
Long Beach, California 90806
Telephone: 562-427-0515
ARTICLE 20. Review and Ratification
-----------------------
20.1 Review of CRDA by ARA-1. One copy of this document must be presented to
-----------------------
the Associate Administrator for Research and Acquisitions, ARA-1, Federal
Aviation Administration, for review. Receipt of this document by ARA-1 will
begin a thirty (30) day period during which the AGREEMENT may be disapproved or
modification required. If no notice of disapproval or required modification is
received from the ARA-1 during the review period, this AGREEMENT shall enter
into effect as of the date of the signature of the Director of the FAA Technical
Center, ACT-1.
20.2 Ratification by RAPISCAN. In the event that the Associate Administrator
------------------------
for Research and Acquisitions, ARA-1, Federal Aviation Administration, exercises
the authority reserved by Article 15.1.2, RAPISCAN shall have thirty (30) days
from notification of the required modifications to ratify the modifications or
terminate the AGREEMENT.
20.3 Certification. This AGREEMENT has been received by the Aviation Security
-------------
Research & Development Division of the Federal Aviation Administration, AAR-500.
The effort called for under this AGREEMENT is consistent with the mission of the
FAA Technical Center and the participation by the Technical Center in this
AGREEMENT is endorsed and supported by the Manager of the Aviation Security
Research & Development Division, AAR-500.
/s/ Paul A. Polski
- ----------------------------------------------------------
Paul A. Polski, Division Manager
Aviation Security Research & Development Division, AAR-500
DATE: 3/13/98
-------
14
IN WITNESS THEREOF, the Parties have caused this AGREEMENT to be executed in
duplicate by their duly authorized representatives as follows:
RAPISCAN SECURITY PRODUCTS, INC.
BY /s/ Andreas F. Kotowski
------------------------
NAME: Andreas F. Kotowski
TITLE: President
DATE:
FAA WILLIAM J. HUGHES TECHNICAL CENTER
BY: /s/ Anne Harlan
----------------
NAME: Anne Harlan
TITLE: Director
DATE: 5/13/98
-------
15
APPENDIX A
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT
FAA TECHNICAL CENTER/RAPISCAN
OBLIGATION OF THE PARTIES
1.0 STATEMENT OF WORK
-----------------
BACKGROUND
The development of effective enhanced automated baggage screening systems is a
continuing effort at the Federal Aviation Administration (FAA) Technical Center.
The Aviation Security Research & Development Division has been examining the
potential of several technologies and is particularly interested in further
development of the X-ray measurement and analysis techniques currently under
development by Rapiscan. The Rapiscan technology is unique and proprietary in
its particular scanning approach as well as in its image processing ability to
sort out the signatures of numerous objects within a typical piece of luggage
and then to identify to an operator whether a particular object constitutes a
threat (explosive). The technology has been developed to the point where it is
approaching the capability to meet the detection and throughput requirements for
enhanced automated inspection of luggage at an airport.
OBJECTIVE AND PLAN
The intent of this CRDA is to assist Rapiscan to optimize its prototype enhanced
automated X-ray baggage screening system for use at airports.
EXPECTED RESULTS
As a result of this agreement, we anticipate that there will be progress toward
developing enhanced automated baggage screening systems that can more
effectively screen carry-on and checked passenger luggage at airports.
CONSTRAINTS
All information concerning system performance generated under this agreement
will be covered by the Classification Guide for FAA Explosives Detection Systems
Information and Data. No classified information shall be generated or received
by Rapiscan unless site and personnel clearances are granted by the Defense
Investigative Service. Participation in testing shall be restricted to those
personnel having the need to know and possessing the appropriate security
clearance. However, participation of Rapiscan personnel is considered
essential. FAA will attempt to conduct the tests in a fashion that will allow
the widest possible participation by Rapiscan personnel and consultants without
comprising classified
16
information. Rapiscan will supply cleared personnel to participate in the
testing whenever possible.
All explosive materials used during testing shall be handled by trained
personnel. FAA will have the responsibility for providing the explosives test
articles. Storage, handling, and transportation shall be in compliance with
established safety procedures and shall be in compliance with local, state, FAA,
and Federal regulations.
All reports generated resulting from work covered by this CRDA shall be
consistent with both security procedures and non-disclosure agreements and are
releasable only with the approval of FAA and the Rapiscan technical contact.
2.0 OBLIGATIONS OF THE PARTIES
--------------------------
2.1 Obligations of the FAA Technical Center
FAA shall provide assistance in several areas of development. These include:
collaboration with FAA scientists, engineers, consultants, and testing
personnel; use of laboratory facilities, including assistance in obtaining test
samples of explosives, detonators, and luggage; and coordination with airports
and Government agencies to facilitate obtaining performance data. FAA will
provide test samples that include typical explosives in quantities used by
terrorists against civil aviation. FAA will supply both clean actual passenger
bags and bags with explosives concealed in a manner consistent with known
terrorist threats. FAA will test for Probability of Detection and False Alarm
rate as a function of weight and type of explosive. The threat objects may be
either bulk or sheet explosives. Additional threat objects may be added to
characterize system performance. FAA will provide to Rapiscan information
consistent with security regulations so that system performance can be
optimized.
2.2 Obligations of Rapiscan:
Under this agreement, Rapiscan shall furnish to the FAA one or more of its
prototype X-ray machines for testing and data collection at the Technical Center
or at appropriate sites, for times and duration that are mutually acceptable.
Rapiscan will provide to FAA information regarding system operation, system
design, and algorithm development. Any information that is company proprietary
shall be so labeled and will be treated accordingly. If testing of the Rapiscan
X-ray system is to be done either at the FAA Technical Center or at Los Angeles
Airport, Rapiscan will make the arrangements and pay for the shipping. At sites
other than the above, the arrangements and cost of shipping will be negotiated
between Rapiscan and FAA.
17
APPENDIX B
QUARTERLY PROGRESS REPORT (PAGE 1)
CRDA #: 97-A-0106 Quarterly Report # Date:
-------------- ------------- -----------------
Subject: X-Ray and Computer Automation
-----------------------------
PI: Roy Mason
---------
Route Symbol: AAR-520 Phone: 609-485-4153
------- ------------
Initiation Date: Term: 36 months
------------- ---------
Collaborator (CRO): Rapiscan Security Products, Inc.
--------------------------------
STATUS:
(Brief narrative)
Check appropriate box:
[_] Will complete on time
[_] Will require more time (only)
[_] Will require more time and minor change in Obligations of the Parties
[_] Will require major change in Scope of Work
[_] Will complete on time and extend activities under a new CRDA
[_] Other:_____________________________________________________________________
18
QUARTERLY PROGRESS REPORT (PAGE 2)
Please provide supplementary cost data for the FAA that reflect any changes from
the original cost estimate you submitted to the TTPO.
SUPPLEMENTARY COST DATA: FAA
CATEGORY DATA
1. PERSONNEL
A. Number of people ____
B. Person hours (total) ____
C. Cost/hour ____
B x C = dollars (1) ____
2. FACILITIES
A. Storage
1. Days used ____
2. Cost/day ____
B. Facilities usage
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (2) ____
B.1 x B.2 = dollars (3) ____
3. EQUIPMENT/SUPPLIES
A. Existing equipment
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (4) ____
B. Newly purchased for this CRDA (total dollars) (5) ____
TOTAL VALUE OF CRDA (1 + 2 + 3 + 4 + 5) ____
19
QUARTERLY PROGRESS REPORT (PAGE 3)
Please provide supplementary cost data for the FAA that reflect any changes from
the original cost estimates you submitted to the TTPO.
SUPPLEMENTARY COST DATA: CRO (COLLABORATOR)
CATEGORY DATA
1. PERSONNEL
A. Number of people ____
B. Person hours (total) ____
C. Cost/hour ____
B x C = dollars (1) ____
2. FACILITIES
A. Storage
1. Days used ____
2. Cost/hour ____
B. Facilities usage
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (2) ____
B.1 x B.2 = dollars (3) ____
3. EQUIPMENT/SUPPLIES
A. Existing equipment
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (4) ____
B. Newly purchased for this CRDA (total dollars) (5) ____
4. FUNDS (OTHER DOLLARS EXPENDED FOR THIS CRDA) (6) ____
TOTAL VALUE OF CRDA (1 + 2 + 3 + 4 + 5 + 6) ____
20
FINAL REPORT (PAGE 1)
CRDA # 97-A-0106 Date: 1/27/97
--------- -------
Subject: X-Ray and Computer Automation
-----------------------------
PI: Roy Mason
---------
Route Symbol: AAR-520 Phone: 609-485-4153
------- ------------
Initiation Date: Term: 36 MONTHS
--------------- ---------
Collaborator (CRO): Rapiscan Security Products, Inc.
--------------------------------
Prepare a brief narrative report discussing the highlights of the project.
Address the following topics (use additional pages if necessary).
SUCCESSES (How the project met or exceeded its objectives):
SHORTCOMINGS (Disappointments, limitations, shortfalls):
CONTINUING ACTIVITIES (Follow-on work; other research; additional agreements):
TECHNOLOGY TRANSFER APPLICATIONS (Commercial applications, markets, etc.):
21
FINAL REPORT (PAGE 2)
Please provide supplementary cost data for the FAA that reflect any changes from
the original cost estimates you submitted to the TTPO.
SUPPLEMENTARY COST DATA: FAA
CATEGORY DATA
1. PERSONNEL
A. Number of people ____
B. Person hours (total) ____
C. Cost/hour ____
B x C = dollars (1) ____
2. FACILITIES
A. Storage
1. Days used ____
2. Cost/hour ____
B. Facilities usage
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (2) ____
B.1 x B.2 = dollars (3) ____
3. EQUIPMENT/SUPPLIES
A. Existing equipment
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (4) ____
B. Newly purchased for this CRDA (total dollars) (5) ____
TOTAL VALUE OF CRDA (1 + 2 + 3 + 4 + 5) ____
22
FINAL REPORT (PAGE 3)
Please provide supplementary cost data for the FAA that reflect any changes from
the original cost estimates you submitted to the TTPO.
SUPPLEMENTARY COST DATA: CRO (COLLABORATOR)
CATEGORY DATA
1. PERSONNEL
A. Number of people ____
B. Person hours (total) ____
C. Cost/hour ____
B x C = dollars (1) ____
2. FACILITIES
A. Storage
1. Days used ____
2. Cost/hour ____
B. Facilities usage
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (2) ____
B.1 x B.2 = dollars (3) ____
3. EQUIPMENT/SUPPLIES
A. Existing equipment
1. Hours used ____
2. Cost/hour ____
A.1 x A.2 = dollars (4) ____
B. Newly purchased for this CRDA (total dollars) (5) ____
4. FUNDS (OTHER DOLLARS EXPENDED FOR THIS CRDA) (6) ____
TOTAL VALUE OF CRDA (1 + 2 + 3 + 4 + 5 + 6) ____
23
APPENDIX C
DEFINITIONS FOR CALCULATING THE ROYALTY RATES MENTIONED IN SECTION 9.4 AND
SECTION 9.5:
(a) "Component Products" shall mean Products which are incorporated in, or
a component of, another item or device.
(b) /*/
(c) "Products" shall mean items or devices that include and rely on
licensed technology and any elements or applications thereof that are
incorporated therein, or components or intermediate structures thereof.
/*/ Symbol indicates that material has been omitted pursuant to a request for
confidential treatment and such material has been filed separately with the
Securities and Exchange Commission.
24
5
1,000
3-MOS
JUN-30-1999
JUL-01-1998
SEP-30-1998
17,498
1,598
23,736
0
25,888
73,884
12,983
0
96,492
27,747
166
0
0
49,140
19,143
96,492
21,404
21,404
14,988
14,988
4,413
0
(167)
2,170
510
1,660
0
0
0
1,660
0.17
0.17
