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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED ___JUNE 30, 1996____
[ ] 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 0-16343
OIS OPTICAL IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2544320
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
47050 FIVE MILE ROAD, NORTHVILLE, MICHIGAN 48167
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 454-5560
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on which Registered
-------------------- ------------------------------------
Common Stock, $0.01 par value NASDAQ Over-the-Counter Market
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates (based upon
the average bid and asked prices of such stock in the Over-the- Counter market)
on September 18, 1996 was approximately $55,555,488.
The number of shares of Registrant's Common Stock outstanding on September 18,
1996 was 97,142,665.
Portions of the Annual Report to Shareholders for the fiscal year ended June
30, 1996, are incorporated by reference into Part II of this Report. Portions
of the Proxy Statement relating to the Annual Meeting of Shareholders to be
held on November 20, 1996, are incorporated by reference into Part III of this
Report.
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PART I
ITEM 1: BUSINESS
INTRODUCTION
OIS Optical Imaging Systems, Inc. ("OIS" or the "Company") is a
Delaware corporation that was first organized in 1984 and develops,
manufactures and sells active matrix liquid crystal displays ("AMLCDs"). The
Company's principal market for AMLCDs is commercial and military avionics. OIS
also derives some revenue from the manufacture and sale of image sensors
("sensors") and from licensing and royalty agreements. The Company is planning
to enter the medical display and imaging market.
During fiscal 1996, the Company completed construction of its new
facility in Northville Township, Michigan. The Company recently completed the
transfer of production from its Troy, Michigan facility to the Northville
facility and has ceased operations at its Troy facility.
Guardian Industries Corp. ("Guardian"), a privately held
Michigan-based worldwide manufacturing company, owns approximately 53.3% of the
outstanding common stock of OIS (as well as 35,000 shares of non-voting,
non-convertible, preferred stock), and William Davidson, the President and
Chief Executive Officer of Guardian, owns an additional 27.6% of the
outstanding common stock of OIS. See Certain Relationships and Related
Transactions and Security Ownership of Certain Beneficial Owners and
Management.
DESCRIPTION OF THE BUSINESS
Active Matrix Liquid Crystal Displays. OIS is focusing its efforts on
developing, manufacturing and selling AMLCDs. AMLCDs are one kind of display
or viewing screen capable of displaying images such as text, graphics or video.
AMLCDs incorporate the use of microelectronics and amorphous materials
technology to construct transparent thin film electronic switching devices,
such as diodes or transistors, on a specially prepared plate of glass known as
the active plate. The electronic components are made of semiconductor
materials and are similar to those that are constructed on silicon wafers in
the manufacture of integrated circuits. A second plate of glass, known as the
passive plate, has a filter applied to its surface. The filter has a black
background with a microscopic translucent opening for each pixel (picture
element) in the display. In a color display, the openings must be alternately
colored in the primary colors (red, green and blue) to form pixel groups that
will allow the formation of the entire spectrum of colors. A transparent
electrode is applied below the filter to complete the circuit with the
electronics on the active plate. A liquid crystal material is placed between
the active and passive plates. Liquid crystal material, simply put, can be
induced to block light or let light pass depending on whether a voltage is
applied. Each switch on the active plate, together with the liquid crystal
material directly above it, forms one pixel in the display. The two plates are
then sealed together, and polarizing layers are laminated to the outside
surfaces of the glass, creating what is known as a glass cell. To complete the
AMLCD, a light source (called a "backlight") is placed behind the glass cell
and electronic controllers (called "drivers") are connected to the active plate
to control the individual switches and generate images. While some customers
purchase only the glass cell, a complete AMLCD module includes a backlight,
drivers and additional electronic components needed to control the display.
A number of fields of expertise are necessary for the development and
production of AMLCDs. These include liquid crystal technology,
microelectronics, optics, filters and manufacturing processes for constructing
microelectronics and filters on glass.
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Until recently, OIS has been the only active manufacturer of AMLCDs in
the United States. One other U.S. company has begun production of small
AMLCDs, and certain other U.S. based companies have announced that they intend
to produce AMLCDs. Other manufacturers are located in Canada, Europe and
Japan. See Competition. The principal current submarket for the Company's
displays is the military and commercial avionics market, in which displays are
incorporated into instruments used in civilian and military aircraft and other
military display applications. In this submarket, the Company's customers are
typically avionics integrators who purchase displays to be integrated into a
panel of navigation instruments, either for a new aircraft or for retrofitting
into an existing aircraft. These avionics integrators generally then resell
the instrument system to a prime contractor or end user. In some cases, the
Company sells directly to the prime contractors or end users.
Currently, the primary AMLCD configuration that OIS manufactures,
markets and sells is a display cell which consists of a glass cell with drivers
attached. However, the Company intends to increase its efforts to manufacture,
market and sell complete display modules, which consist of a glass cell
(including drivers) plus a backlight and related electronics, all
self-contained and enclosed within a housing.
In the past, the Company obtained most of its business, and in fiscal
1994 and 1995 obtained 88% and 69% of its revenue, respectively, from
development agreements. However, the Company has made a strategic decision to
pursue the sale of standard products and minimize development work.
Development agreements typically involve adapting OIS' standard
products to meet certain form, fit and optical requirements for a specific
application. Development agreements, notwithstanding their name, typically do
not involve the development of new technology of general application. Under a
development agreement, the Company delivers a specified number of prototype
displays. Development agreements may provide the customer with options to
enter into production contracts for specified numbers of displays after the
prototype displays have been delivered and accepted. The ultimate determination
of the customer to award a production contract depends on the prototype display
meeting the requirements of the development agreement among other things.
The Company's policy is to develop new technologies of general
application using its own funds and to attempt to retain ownership of related
intellectual property rights. OIS has expended $688,094, $1,306,843 and
$1,971,513 in Company sponsored research and development for fiscal years 1994,
1995 and 1996 respectively.
Production contracts or orders for the sale of displays call for the
Company to sell larger quantities of displays that are generally intended for
use in a product supplied by OIS' customer to either the commercial or military
avionics markets. For example, OIS currently has a production contract to
deliver standard displays to Allied Signal for use in flight instruments in
commercial aircraft. The Company expects to secure the majority of its
business from orders for the sale of standard displays and not from development
agreements. In some cases, the Company will make minor modifications to its
displays at a customer's request and will charge the customer for the
engineering work involved.
Through fiscal 1996, the Company produced displays in its Troy,
Michigan facility which was originally designed primarily for research and
development, not production. In addition, the Troy facility had limited
capacity. The Company has experienced significant production difficulties
resulting from the design limitations and age of the Troy facility as well as
difficulties in applying its manufacturing processes as production volumes
increase. Despite these difficulties, the Company was able to manufacture
displays in limited numbers at the Troy facility and has gained significant
manufacturing experience. The Company has used this experience in the design
and start up of the new Northville facility. The Troy facility has been
closed, and the Company is currently producing displays at its Northville
facility. See Management's Discussion and Analysis.
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Image Sensors. In addition to displays, the Company manufactures
image sensors. Image sensors detect an image on a surface and convert it into
electronic impulses. Image sensors are used, for example, in telecopiers
("fax" machines), electronic copyboards and page scanners. At present, the
only customer for the Company's sensors is Quartet Manufacturing Co., which
incorporates sensors into electronic copyboards. The Company does not believe
that the loss of this customer would have a material adverse effect on the
Company. Although the Company has focused primarily on its display business,
the Company has begun efforts to enter the market for digital radiological
(x-ray) image sensors which could replace the use of traditional film-based
files.
Licensing. In addition to the revenue obtained from development
agreements and the sale of products, the Company has obtained revenue from
licensing its sensor technology to others. The Company will continue to
license its sensor technology where it appears appropriate. The Company has no
plans to seek revenue from licensing its core display technology which it views
as central to its business. See Intellectual Property Rights.
COMPETITION
OIS views the market for AMLCDs as consisting of at least two distinct
submarkets. The first submarket, and by far the largest, is the market for
AMLCDs in consumer electronics products. This market is highly competitive
with at least six competitors worldwide. All of these firms have more
financial resources than the Company and most are affiliated with major
corporations that have extensive experience in the electronics industry. OIS
is not active in this market at this time. The second submarket consists of
high end applications for AMLCDs in military, commercial avionics, space and
other demanding environments. This is the market that OIS has identified as
its near-term target market. OIS displays are engineered and manufactured to
meet the optical and environmental requirements of these demanding
applications. OIS believes that demand for its products for other applications
will develop over the next several years, including applications for medical
imaging. As discussed below, OIS is planning to attempt to sell products for
medical imaging applications.
In the high end submarket in which OIS competes, the most significant
source of competition comes from currently existing, non-AMLCD technologies
such as electromechanical displays and cathode ray tube displays (CRTs).
AMLCDs have a number of performance advantages over CRTs and electromechanical
displays, including less thickness, lower weight, higher contrast, sunlight
readability and longer mean time between failures. OIS management believes
that customers recognize that the AMLCD is a superior technology. The Company
currently competes with non-AMLCD technologies primarily on the basis of
performance. However, OIS' ultimate success in displacing CRTs and
electromechanical displays will depend on, among other things, the Company's
ability to compete on the basis of price by reducing the per unit cost of its
AMLCDs.
OIS experiences competition for sales of AMLCDs primarily from two
sources. The first is Litton of Canada which markets AMLCDs to Litton Systems,
a sister company which is in the business of supplying whole avionic flight
information systems.
The other source of competition is indirect competition from Japanese
manufacturers of consumer grade AMLCDs. Although OIS management believes that
consumer grade AMLCDs generally do not meet current military or avionics
requirements, a number of avionics integrators are purchasing consumer grade
AMLCDs and adapting them to avionics or military use. These adapted products
are a growing source of competition for the Company. Although the adapted
products generally have weaker performance in one or more respects than OIS'
products, these adapted products appear to be lower in price. The Company is
carefully monitoring developments in adapted products.
Several U.S. companies present a potential source of competition for
the Company in the market for high-end AMLCDs. One American company, Kopin
Corp., is manufacturing small AMLCDs for
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head/helmet mounted applications and for screen projection where an image is
projected through an AMLCD onto a screen. The Company is not aware of any
plans by Kopin to manufacture AMLCDs that would compete directly with products
manufactured by the Company. Two other U.S. based companies have announced
plans to manufacture AMLCDs: Image Quest Technologies, a start-up company
backed by Hyundai of South Korea, and dpiX, a subsidiary of Xerox. Although
the Company is not aware of successful production of AMLCDs by either Image
Quest or dpiX, each company has been awarded several development contracts and
has announced plans to manufacture AMLCDs which would compete with several of
the Company's products. While Hyundai and Xerox each have at their disposal
substantial resources that could be devoted to the development and manufacture
of AMLCDs, the Company does not know the actual level of financial commitment
which Hyundai or Xerox have to these companies. The potential competitive
impact of these companies is not yet clear.
A number of technologies other than the Company's AMLCD technology can
be used to manufacture flat panel displays, and a number of companies around
the world are working on such technologies. Examples of technologies that are
not currently competing with AMLCDs for avionics applications because they
either are not sunlight readable or do not produce color images include
electroluminescent, plasma and light emitting diode technologies. Other
potentially competing technologies include AMLCD poly-silicon (in contrast to
the Company's use of amorphous silicon), ferroelectric and field emission
technologies. While future displacement of the Company's AMLCD technology is
always a possibility, management believes that none of these potentially
competing technologies have reached the current state of development of the
Company's AMLCD technology. Management's long term goal for the Company is to
develop the ability to adopt new technologies if management determines that
such technologies are desirable, but there is no assurance that the Company
will achieve that goal.
OIS does not expect the current large scale producers of consumer
grade AMLCDs to enter the Company's high end submarket directly since volumes
required of higher performance displays generally mean relatively small
production runs that may not be economical for large scale producers. OIS
expects to compete on the basis of its ability to meet the performance
requirements of its submarket, its identification as a United States
manufacturer, and, eventually, price. The Company believes that, over time, it
will need to reduce production costs and prices in order to compete
effectively.
The Company hopes to expand production capacity and expand the
Company's activities beyond its target submarket. See Business Developments -
New Manufacturing Facility. However, it will not be possible for the Company
to compete successfully in consumer markets such as computer displays and
televisions, or in many commercial instrumentation markets, unless it can
significantly reduce its per unit production costs. Management does not
anticipate that the Northville facility will enable the Company to successfully
enter consumer markets because throughput at the Northville facility will be
too small to generate the necessary economies of scale. Management does hope
to be able to enter consumer markets in the future. See Business Developments
- -- Consumer Electronics Applications.
BUSINESS DEVELOPMENTS
Products and Manufacturing. Before 1993 the Company's manufacturing
experience was limited to fabrication of prototype AMLCDs developed in
connection with internal research and development and customer development
agreements. Manufacturing was done on a project or job order basis. The
Company did not engage in continuous production of standard products. In fiscal
1993 the Company began work on its first two production contracts. The Company
has gained important experience in continuous production and improved its
manufacturing capabilities within the limitations of its Troy facility.
However, the Company has experienced continuing manufacturing problems at the
Troy facility which have contributed to the Company's ongoing losses. While
the Company expects that many of these problems will be ameliorated in the
Northville facility, it does not yet have enough experience in the Northville
facility to evaluate the success of manufacturing operations there.
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The Company has continued its program of building "standard" or
"catalog" displays and making them available to customers on an off-the-shelf
basis. The Company currently offers four standard products: a 4" square high
resolution display (which is available in three configurations, color, high
reliability color and monochrome), a 6" x 8" color display, a 5" x 5" color
display and a 2.3" square color display.
In the fiscal 1996, the Company derived approximately 38% of its
operating revenues from development agreements, approximately 61% from sales of
displays (including both production agreements and off-the-shelf sales) and
approximately 1% from image sensors. See Management's Discussion & Analysis --
Results of Operations.
Presently, the largest ultimate customer for the Company's displays is
the United States government, principally the Department of Defense, which is
purchasing displays indirectly through a number of prime contractors and
avionics integrators. In the fiscal year ended June 30, 1996, approximately
80% of the Company's revenue was derived from U.S. government contracts. When
the ultimate customer is an agency of the United States government, the laws
and regulations relating to government contracts apply. Even when the Company
develops a display for an integrator who is supplying to the government, the
contract is a "government contract" in the sense that the Company is required
by the contract to satisfy the military specifications and the laws and
regulations relating to government contracts and is responsible directly to the
government for certain matters relating to the contract. The Company's policy
is to sell displays for use by the government as "catalog products" which
permits application of somewhat simpler government regulations.
Government contracts are subject to delays and risk of cancellation.
Also, government contractors generally are subject to various kinds of audits
and investigations by government agencies. These audits and investigations
involve review of a contractor's performance on its contracts, as well as its
pricing practices, the costs it incurs and its compliance with all applicable
laws, regulations and standards. The Company is, and in the future expects to
be, audited by the government on a regular basis.
The Company has three customers that each individually accounted for
more than 10% of its total revenues in the fiscal year ended June 30, 1996:
Kaiser Electronics, Honeywell Satellite Systems, and Allied Signal. Two
agreements with Kaiser Electronics, both of which are government contracts,
accounted for approximately $5,250,000 or 50% of revenue.
Marketing and Development of the Market. During fiscal 1996, the
Company continued to expand its marketing efforts. The marketing department
is currently working primarily in the commercial and military avionics
submarket. The Company is increasing its efforts to obtain sales for
industrial and medical instrumentation applications.
During fiscal 1996, the Company continued to experience requests for
proposals and marketing activity which resulted in additional production
orders. Management expects that the Company's targeted submarket will expand
substantially in the next five to seven years, but there is significant
uncertainty as to how much expansion will occur in the next one to three years.
Fiscal 1996 Results . During fiscal 1996, the Company experienced
higher revenue and increased losses caused in substantial part by a reduction in
engineering and development revenue, high manufacturing costs and delayed
shipments related to the problems experienced in its manufacturing operations.
See Management's Discussion & Analysis -- Results of Operations -- Costs of
Sales.
New Manufacturing Facility . The Company has built a new mid-volume
manufacturing facility in Northville Township, Michigan. This facility is
intended to serve the commercial and military avionics submarket and to
manufacture for high-end commercial instrumentation and medical imaging
applications, not the consumer electronics submarket. See Competition. The
new facility is intended to be "state-of-the-
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art" and incorporates flexible manufacturing technology that is intended to
facilitate the relatively small production runs that characterize the Company's
current submarket.
The Company began the lengthy process startup procedures in June 1995.
The first glass substrates were processed in August 1995. Several sets of
pre-production glass cells were produced in the first half of fiscal 1996, and
the first production units were produced in the fourth quarter of fiscal 1996.
Production has been be transferred from the Troy facility to the Northville
facility, and the Company has ceased operations in the Troy facility. Some of
the equipment that was used at the Troy facility will be moved to the
Northville facility for use in research and development.
The Northville facility was built under an agreement with the Advanced
Research Projects Agency of the U.S. Department of Defense ("ARPA"), under
which the federal government provides $48 million to OIS upon the attainment of
specified planning and construction milestones. OIS used the government funds
to purchase process equipment for the Northville facility. The government will
own that equipment but OIS will be entitled to use the government-owned
equipment through August 1998 without payment. In 1998, OIS will have the
option to purchase any or all of the government-owned equipment at its then
fair market value. Through August 30, 1996, OIS had invoiced, and the
government had paid, approximately $47 million of the $48 million anticipated
under the ARPA Agreement.
Future Operations. Management believes that the Company's ability to
operate profitably after the start-up of the Northville facility and for the
short to medium term thereafter will depend on a number of factors, including
the following:
1. The rate at which demand for high performance AMLCDs
increases.
2. The successful operation of the Northville facility.
Management believes that the Northville facility reflects the state-of- the-art
in display manufacturing facilities, but no AMLCD manufacturing facility has
ever been built in the United States and there is no assurance the Company will
be able to manufacture displays at competitive cost in the Northville facility.
3. Whether competitive flat panel displays are ultimately
manufactured using competing technologies, and whether the Company is able to
adapt to technological change. See Competition. Management intends to
endeavor to keep abreast of technological developments. The technology
applicable to flat panel displays is continuously evolving. Management has
identified as a long range goal the development of a capability to change over
in whole or in part from AMLCD technology to a new technology as it evolves if
management determines that such a changeover would be advantageous.
Imaging Applications. In addition to supplying image sensors for
electronic copyboards, the Company has established a goal of expanding its
sensor business into industrial, agricultural and medical imaging applications.
The Company believes that digital image sensors employing AMLCD technology can
successfully compete with existing imaging technologies in a variety of
commercial applications such as industrial non-destructive testing, produce,
livestock and poultry inspection and radiological (x-ray) diagnosis by reducing
archiving costs and access time through the elimination of film-based files.
Consumer Electronics Applications . The Company has established a goal
of entering the market for flat panel displays in consumer electronics
products. If the Company is to enter this market, it will need to build a
large scale high volume manufacturing facility. Management is engaging in some
preliminary discussions with potential customers for such a facility. The
Company is preparing a preliminary design and cost estimate. The Company has no
firm plans or timetable for entering the consumer electronics market.
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FINANCING DEVELOPMENTS
During fiscal 1996, the Board of Directors of OIS increased the amount
of Series A Cumulative Preferred Stock, par value $0.01 (the "Preferred
Stock"), which OIS is authorized to issue from 25,000 shares is 50,000 shares.
The Preferred Stock is not convertible into common stock or any other security
and is non-voting (except in limited circumstances relating to the rights of
the Preferred Stock). The Preferred Stock earns a cumulative dividend at an
annual rate of 8% for five years from the date of issuance and at an increasing
floating rate (subject to a cap of 16.5%) thereafter. The purchaser of
Preferred Stock cannot cause its redemption, and OIS can redeem Preferred Stock
only upon a vote of the directors of OIS that are independent of the owner or
owners of the Preferred Stock being redeemed.
During fiscal 1996, Guardian purchased 22,500 shares of Preferred
Stock for an aggregate purchase price of $22,500,000. The investment by
Guardian was approved by the disinterested members of OIS's Board of Directors.
During fiscal 1996, the disinterested members of OIS authorized OIS to
borrow up to $15,000,000 from Guardian at an annual interest rate of 5.7%, with
all interest and principal due and payable on November 1, 1996. As of
September 19, 1996, OIS had borrowed $15,000,000 from Guardian.
The Company continues to utilize commercial financing from Bank of
America NTSA and NBD Bank N.A. in the form of a term loan and a credit facility,
both maturing in December, 1999. The financing agreements were amended in
fiscal 1995 to increase available credit from $40 million to $52.5 million. The
financing agreements include a number of covenants, including a prohibition on
granting security interests, limitations on capital expenditures and
dispositions of assets and financial covenants. Additionally, under the terms
of the financing agreements, OIS is restricted from incurring additional debt
(as defined) and paying cash dividends. Furthermore, OIS must meet certain
financial covenants as defined in the financing agreements. The financing is
unsecured and provides for interest rates to be determined at the times of
borrowing equal to NBD Bank N.A.'s prime rate or LIBOR plus a margin of .875% or
at elected fixed rates with interest periods ranging from 30 days to 180 days.
The term loans are payable in quarterly principal installments of $3,000,000 on
June 30, 1997, $1,250,000 commencing September 30, 1997 through December 31,
1997, $2,500,000 commencing March 31, 1998 through June 30, 1998, $2,750,000
commencing September 30, 1998 through December 31, 1998, $3,375,000 commencing
March 31, 1999 through June 30, 1999, $3,875,000 on September 30, 1999 and
$24,375,000 on December 31, 1999. The Company also pays a commitment fee of
.375% of the unused portion of the credit facility. The revolving credit
facility matures in December 1999. As of June 30, 1996, $1.5 million of the
credit facility remained unused.
The Company expects to require and to pursue additional equity, and
possibly debt, financing in fiscal 1997, but has not determined the amount or
nature of the prospective financing. See Management's Discussion & Analysis --
Capital Resources.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Business Data. The following table shows the amount and percentage of
the Company's revenues contributed by, the operating profit attributable to,
and the assets associated with the development and sales of displays and sales
of sensors for each of the three fiscal years ending June 30, 1994, 1995 and
1996:
<TABLE>
<CAPTION>
FY 96 FY 95 FY 94
--------------------- -------------------- ------------------------
AMOUNT % AMOUNT % AMOUNT %
---------------------- -------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
SALE OF DISPLAYS $ 6,488,975 61% $ 2,290,242 27% $ 1,256,655 11%
ENGINEERING 4,001,414 38% 5,799,519 69% 10,322,328 88%
SALE OF SENSORS $ 104,818 1% $ 333,280 4% $ 121,406 1%
----------- -----------
TOTAL REVENUES $ 10,595,207 100% $ 8,423,041 100% $ 11,700,389 100%
OPERATING PROFIT:
SALE OF DISPLAYS $ (9,166,315) -87% $ (7,282,803) -86% $ (2,139,937) -18%
ENGINEERING (13,328,809) -126% (6,629,522) -79% (2,764,300) -24%
SALE OF SENSORS $( 348,887) -3% $ (1,018,924) -12% $ (822,590) -7%
------------ ------------ -----------
TOTAL OPERATING PROFITS
(LOSS) $(22,844,011) -216% $(14,931,279) -177% $ (5,726,827) -49%
ASSETS:(1)
FIXED ASSETS (NBV) $ 54,731,463 517% $ 45,734,945 543% $22,017,665 188%
INVENTORY $ 5,847,250 55% $ 3,360,062 40% $ 2,083,601 18%
</TABLE>
(1) For each year, all fixed assets and 99% of the inventory relate to the
development and sale of displays, and 1% of the inventory relates to sale
of sensors.
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The following table shows the domestic and foreign revenues
attributable to the industry segments for each of the three fiscal years ending
June 30, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
FY 96 FY 95 FY 94
------------------- ------------------ -------------------
AMOUNT % AMOUNT % AMOUNT %
------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
ENGINEERING &
SALE OF DISPLAYS
DOMESTIC $ 9,878,531 93% $ 7,830,225 93% $10,883,165 93%
FOREIGN 611,858 6% 259,536 3% 695,818 6%
SALE OF SENSORS
DOMESTIC 104,818 1% 333,280 4% 121,406 1%
FOREIGN _______ _______ _______
TOTAL REVENUES $10,595,207 100% $ 8,423,041 100% $11,700,389 100%
---------- ---------- ----------
TOTAL:
DOMESTIC $ 9,983,349 94% $ 8,163,505 97% $11,004,571 94%
FOREIGN 611,858 6% 259,536 3% 695,818 6%
----------- ---------- ------------
$10,595,207 100% $ 8,423,041 100% $11,700,389 100%
</TABLE>
Backlog at June 30, 1996, was approximately $28.5 million, as compared
to $19.8 million at June 30, 1995. It is expected that approximately $21
million of the backlog will be filled in fiscal 1997 if there are no
cancellations or delays in existing programs. In fiscal 1996, the Company
experienced delays that resulted in the amount of backlog that was actually
filled in the fiscal year being approximately $3 million less than had been
anticipated.
Raw materials and components necessary for production of displays and
sensors are generally available from several sources. The Company does not
foresee an unavailability of materials or components that would have a material
adverse effect on its overall business, or any of its business segments, in the
near term.
The Company's business is not seasonal.
The Company employed 284 persons at June 30, 1996.
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INTELLECTUAL PROPERTY RIGHTS
The Company is working to improve its current displays and to develop
enhancements and improvements to the technologies that are involved in
producing AMLCDs. The basic methodology for the manufacture of AMLCDs using
the thin film transistor technology currently employed by the Company is in the
public domain. However, few companies have successfully developed AMLCDs for
sale. Management believes that a key part of the Company's ability to produce
displays for sale where others have failed lies in the proprietary know-how and
other trade secrets developed by the Company over the years. The Company has
policies and procedures in place to attempt to protect its trade secrets.
The Company endeavors to develop new technologies of general
application with its own funds and to retain ownership of related intellectual
property rights.
Where management has considered it appropriate, the Company has sought
patent protection for its inventions in the United States and in other
countries. The Company owns over 30 patents, most of which were granted less
than ten years ago, and has a number of patent applications pending or in
preparation. Management believes that a number of these patents represent or
have the potential to represent significant developments, generally in the form
of enhancements or improvements to existing technologies, which may be
important for the Company and its competitive position. The level of patent
activity (and related expense) has increased in fiscal 1996 and is expected to
continue to increase.
The Company began a review of its own intellectual property rights and
the intellectual property rights of others in the display field late in fiscal
1995. That review is not yet complete, but the Company expects to complete it
in fiscal 1997. Hundreds of patents relating to AMLCDs have been granted. The
Company will review whether it may be necessary or advantageous to obtain
licenses for technology owned or claimed by others, or to seek to protect its
intellectual property rights.
Disputes involving intellectual property, particularly patents, can be
extremely expensive to litigate and the results are often difficult to predict.
Furthermore, the Company's resources are limited relative to many other
participants in the display industry. The Company will endeavor to manage the
risks and potential benefits related to intellectual property protection to
avoid litigation where possible, consistent with the need to preserve the
Company's right to conduct its business and to protect the Company's own
intellectual property position.
Management believes that it is common in the display and semiconductor
industries for firms to enter into cross-licensing agreements in order to
mitigate the risk of intellectual property litigation. After reviewing the
results of the planned intellectual property review, management will consider
whether attempting to obtain cross-licensing agreements in certain fields may
be advantageous to the Company. There is no assurance that the Company will be
able to enter into cross-licensing agreements on favorable terms.
In 1984, Energy Conversion Devices, Inc. ("ECD"), which was then the
parent corporation of OIS, granted to OIS a worldwide exclusive license
(including the right to grant sublicenses) to make, use, and sell products
using any or all of ECD's technology (including patent rights), present or
future, in displays and sensors. In addition, OIS granted ECD a nonexclusive
cross-license to technology developed by OIS, present or future, for
applications outside the fields of displays and sensors. In April 1992, ECD
assigned a substantial number of the patents covered by this license to OIS
outright, and ECD and OIS entered into a new agreement (the "1992 ECD
Agreement") under which ECD granted to OIS a worldwide exclusive license to all
of its remaining technology that existed on the date of the 1992 ECD Agreement.
The license granted by ECD will become royalty bearing at such time as OIS
posts a cumulative 20% after-tax annual return on invested capital. The
royalty rates are, subject to certain limitations, 0.5% of net sales of OIS and
its sublicenses of licensed products and 7.5% of up-front license payments
received by OIS from sublicenses.
-10-
<PAGE> 12
OIS has also developed its own proprietary technology in the display
and sensor fields. The Company is not actively developing its sensor
technology at this time, but continues active development of its display
technology. As stated above, the Company has derived some revenues form
licensing its sensor technology.
ENVIRONMENTAL ISSUES
The Company believes that it is presently in substantial compliance
with all existing applicable environmental laws and does not anticipate that
such compliance will have a material effect on future capital expenditures,
earnings, or competitive position.
ITEM 2: PROPERTIES
The principal executive offices of the Company are located at the
Company's 108,000 square foot pilot demonstration, research, production and
office facility in Northville Township, Michigan. The Company also continues
to lease two buildings in Troy, Michigan which were formerly used for
production.
ITEM 3: LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of
the fiscal year.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "PRICE RANGE OF COMMON
STOCK" appearing in the Annual Report to Shareholders for the fiscal year ended
June 30, 1996, is incorporated by reference into this Report.
ITEM 6: SELECTED FINANCIAL DATA
The information set forth under the caption "SELECTED FINANCIAL DATA"
appearing in the Annual Report to Shareholders for the fiscal year ended June
30, 1996, is incorporated by reference into this Report.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information set forth under the caption "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION" appearing in the
Annual Report to Shareholders for the fiscal year ended June 30, 1996, is
incorporated by reference into this Report.
-11-
<PAGE> 13
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements of the Company and Report of
Independent Public Accountants set forth in the Annual Report to Shareholders
for the fiscal year ended June 30, 1996, are incorporated by reference into
this Report:
Report of Independent Public Accountants
Balance Sheets - June 30, 1996 and 1995
Statements of Operations - years ended June 30, 1996, 1995 and 1994
Statements of Stockholders' Equity - years ended June 30, 1996, 1995
and 1994
Statements of Cash Flows - years ended June 30, 1996, 1995 and 1994
Notes to Financial Statements
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF OIS
The information set forth under the caption "ELECTION OF DIRECTORS"
appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is
incorporated by reference into this Report.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION"
appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is
incorporated by reference into this Report.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" appearing in the Proxy Statement for
the fiscal year ended June 30, 1996, is incorporated by reference into this
Report.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" appearing in the Proxy Statement for the fiscal year
ended June 30, 1996, is incorporated by reference into this Report.
-12-
<PAGE> 14
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. List of Financial Statements
The following financial statements of the Company are set forth in of
the Annual Report to Shareholders for the fiscal year ended June 30,
1996, and are incorporated by reference into this Report by Item 8
hereof:
Report of Independent Public Accountants
Balance Sheets - June 30, 1996 and 1995
Statements of Operations - years ended June 30, 1996, 1995 and
1994
Statements of Stockholders' Equity - years ended June 30, 1996,
1995 and 1994
Statements of Cash Flows - years ended June 30, 1996, 1995 and
1994
Notes to Financial Statements
2. List of Financial Statement Schedules PAGE
The following financial statement schedules of the Company are
included in this Report:
Schedule II - Valuation and Qualifying Accounts -
June 30, 1996, 1995 and 1994 . . . . . . . . . . . . 17
Schedules, other than those referred to above, are omitted as not
applicable or not required, or the required information is shown in
the financial statements or notes thereto.
3. List of Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
[S] [C]
3(i) Restated Certificate of Incorporation as currently in effect.
(Filed as Exhibit to OIS' Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, and incorporated herein by
reference.)
3(ii) Bylaws as currently in effect. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1992, and incorporated herein by reference.)
10.1 Lease dated June 10, 1980, as extended on August 12, 1983, and
December 10, 1985, between ECD and Ivan J. and Irene I.
Stretten, relating to premises located at 1896 Barrett Street,
Troy, Michigan. (Filed as Exhibit to OIS's Annual Report on
Form 10-K for the fiscal year ended June 30, 1987, and
incorporated herein by reference.)
10.2 Lease Agreement dated March 10, 1986, between ECD and Ivan
and Irene Stretten regarding 1896 Barrett Street, Troy,
Michigan. (Filed as Exhibit to Amendment No. 4 to OIS's
Registration Statement on Form S-1 and incorporated herein
by reference.)
-13-
<PAGE> 15
10.3 Assignment of Lease dated October 3, 1986, relating to
premises located at 1896 Barrett Street, Troy, Michigan.
(Filed as Exhibit to Amendment No. 6 to OIS's Registration
Statement on Form S-1 and incorporated herein by reference.)
10.4 Amendment to Lease Agreement dated March 10, 1986, between OIS
and Irene Stretten dated May 30, 1989. (Filed as Exhibit to
OIS's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989, and incorporated herein by reference.)
10.5 Amendment to Lease Agreement dated March 10, 1986, between OIS
and Irene Stretten dated August 3, 1991. (Filed as Exhibit to
OIS's Annual Report on Form 10-K for the fiscal year ended
June 30, 1991, and incorporated herein by reference.)
10.6 Building Lease Letter Agreement between Irene I. Stretten and
OIS dated September 22, 1994. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended June 30,
1994, and incorporated herein by reference.)
10.7 Agreement between OIS, ECD and Quartet Manufacturing Company
dated December 31, 1988, with attachments. (Filed as Exhibit
to OIS's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989, and incorporated herein by reference.)
10.8 Master Lease Agreement with Appendices between OIS and GE
Capital dated August 26, 1991. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended June 30,
1991, and incorporated herein by reference.)
10.9 Sensor License Agreement between ECD and OIS dated April 14,
1992. (Filed as Exhibit to OIS's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, and incorporated
herein by reference.)
10.10 OIS 1984 Amended and Restated Stock Option Plan. (Filed as
Exhibit to OIS's Annual Report on Form 10-K for the fiscal
year ended June 30, 1992, and incorporated herein by
reference.)
10.11 OIS 1988 Amended and Restated Stock Option and Incentive Plan.
(Filed as Exhibit to OIS's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992, and incorporated herein by
reference.)
10.12 OIS 1994 Significant Employee Stock Incentive Plan. (Filed as
Exhibit to OIS' Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, and incorporated herein by reference.)
10.13 Amended and Restated Agreement between ECD and OIS dated April
14, 1992. (Filed as Exhibit to OIS's Annual Report on Form
10- K for the fiscal year ended June 30, 1992, and
incorporated herein by reference.)
10.14 Amended and Restated Services Agreement between OIS and
Guardian dated June 30, 1995. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference.)
10.15 Loan Agreement and Master Demand Note between OIS and NBD
Bank, N.A., dated March 19, 1993. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended June 30,
1993, and incorporated herein by reference.)
-14-
<PAGE> 16
10.16 Credit Agreement between OIS, Bank of America National Trust
and Savings Associations and NBD Bank, N.A., as Banks, NBD
Bank, N.A., as Administrative Agent, and BA Securities, Inc.,
as Arranger, dated December 14, 1993. (Filed as Exhibit to
OIS's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994, and incorporated herein by reference.)
10.17 Amendment No. 2 and Waiver to Credit Agreement between OIS,
Bank of America National Trust and Savings Association and NBD
Bank, N.A., as Banks, NBD Bank, N.A., as Administrative Agent,
and BA Securities, Inc., as Arranger, dated February 28, 1995.
(Filed as Exhibit to OIS' Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, and incorporated herein by
reference.)
10.18 Amendment No. 3 to Credit Agreement between OIS, Bank of
America National Trust and Savings Association and NBD Bank,
N.A., as Banks, and NBD Bank, N.A., as Administrative Agent,
dated September 19, 1996.
10.19 Line of Credit Agreement and Line of Credit Note between OIS
and Guardian dated August 26, 1993. (Filed as Exhibit to
OIS's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993, and incorporated herein by reference.)
10.20 Agreement between OIS and The Advanced Research Projects
Agency dated August 26, 1993. (Filed as Exhibit to OIS's
Annual Report on Form 10-K for the fiscal year ended June 30,
1993, and incorporated herein by reference.)
10.21 Consultant Agreement between OIS and Peter Joel C. Young dated
as of September 1, 1995. (Filed as Exhibit to OIS's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995,
and incorporated herein by reference.)
13 Form of Annual Report to Shareholders of the Company for the
fiscal year ended June 30, 1996. Except for those portions of
such Annual Report to Shareholders expressly incorporated by
reference into this Report, such Annual Report to Shareholders
is furnished solely for the information of the Securities and
Exchange Commission and shall not be deemed a "filed"
document.
23 Consent of Arthur Andersen LLP dated September 26, 1996.
27 Financial Data Schedule. (EDGAR version only.)
(b) Reports on Form 8-K
None.
-15-
<PAGE> 17
Report of Independent Public Accountants
To OIS Optical Imaging Systems, Inc.
We have audited, in accordance with generally accepted auditing standards, the
financial statements included in OIS Optical Imaging Systems, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated August 23, 1996. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
\s\ Arthur Andersen LLP
Detroit, Michigan
August 23, 1996
-16-
<PAGE> 18
OIS OPTICAL IMAGING SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- --------
BALANCE AT ADDITIONS ADDITIONS
BEGINNING CHARGED TO CHARGED TO BALANCE AT END
DESCRIPTION OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- ------------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
ALLOWANCE FOR DOUBT $ 60,000 $ 60,000
ACCOUNTS
YEAR ENDED JUNE 30, 1995:
ALLOWANCE FOR DOUBT $ 60,000 $ 60,000
ACCOUNTS
YEAR ENDED JUNE 30, 1994:
ALLOWANCE FOR DOUBT $ 0 $ 60,000 $ 60,000
ACCOUNTS
</TABLE>
-17-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OIS OPTICAL IMAGING SYSTEMS, INC.
By: \s\ Rex Tapp
-----------------------------------------------
Rex Tapp, President and Chief Executive Officer
Dated: September 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
\s\ Charles C. Wilson Executive Vice President, September 10, 1995
- -------------------------------- Chief Financial Officer &
Charles C. Wilson Director
(Principal Financial &
Accounting Officer)
\s\ Rex Tapp President, Chief Executive September 10, 1995
- -------------------------------- Officer & Director
Rex Tapp
\s\ Ralph J. Gerson Chairman of the Board & Director September 10, 1995
- --------------------------------
Ralph J. Gerson
\s\ Jeffrey A. Knight Director September 10, 1995
- --------------------------------
Jeffrey A. Knight
\s\ C. K. Prahalad Director September 10, 1995
- --------------------------------
C. K. Prahalad
\s\ Robert M. Teeter Director September 10, 1995
- --------------------------------
Robert M. Teeter
\s\ Mark S. Wrighton Director September 10, 1995
- --------------------------------
Mark S. Wrighton
\s\ Peter Joel C. Young Director September 10, 1995
- --------------------------------
Peter Joel C. Young
</TABLE>
-18-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.18 Amendment No. 3 to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD
Bank, N.A., as Banks, and NBD Bank, N.A., as Administrative Agent, dated September 19, 1996.
13 Form of Annual Report to Shareholders of the Company for the fiscal year ended June 30, 1995. Except for those
portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual
Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall
not be deemed a "filed" document.
23 Consent of Arthur Andersen LLP dated September 26, 1996.
27 Financial Data Schedule. (EDGAR version only)
</TABLE>
-19-
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NO. 3
This Amendment No. 3 to Credit Agreement (this "Amendment") is entered
into as of September 19, 1996 among OIS OPTICAL IMAGING SYSTEMS, INC. (the
"Company"), the banks named on the signature pages hereof (the "Banks") and NBD
BANK, as agent (the "Administrative Agent").
WHEREAS, the Company, the Banks, BA Securities, Inc., as Arranger and
the Administrative Agent are parties to that certain Credit Agreement dated as
of December 14, 1993 (as amended by Amendment No. 1 thereto dated as of March
31, 1994 and an Amendment No. 2 thereto dated as of February 28, 1995, the
"Credit Agreement"); and
WHEREAS, the company has requested the Banks to revise the
amortization schedule of the Term Loan and to amend the Cash Flow Ratio
covenant set forth in Section 7.15 of the Credit Agreement, and the Banks are
wiling to so amend the amortization schedule and to amend the Cash Flow Ratio
covenant set forth in Section 7.15 of the Credit Agreement all on the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINED TERMS
Unless otherwise defined in this Amendment, defined terms used herein
shall have the meaning assigned to such terms in the Credit Agreement.
ARTICLE II
AMENDMENTS TO CREDIT AGREEMENT
(1) Section 2.08(a) of the Credit Agreement is hereby amended and
restated in its entirety as follows:
2.08 Repayment.
(a) The Term Credit. On the Final Maturity Date
and on the last day of each calendar quarter beginning on June
30, 1997 (each a " Principal Payment Date"), the Company shall
make a scheduled repayment of the aggregate outstanding
repayment of the aggregate outstanding principal amount, if
any, of Term Loans in the
Exhibit 10.18 -- Page 1 of 4
<PAGE> 2
amount equal to the amount set forth below for such Principal
Payment Date:
<TABLE>
<CAPTION>
Principal
Payment Date Amount
------------ ------
<S> <C>
June 30, 1997 $3,000,000
September 30, 1997 $1,250,000
December 31, 1997 $1,250,000
March 31, 1998 $1,250,000
June 30, 1998 $1,250,000
September 30, 1998 $1,500,000
December 31, 1998 $1,500,000
March 31, 1999 $1,500,000
June 30, 1999 $1,500,000
September 30, 1999 $2,000,000
December 31, 1999 $4,000,000
or the then outstanding principal
amount of all Term Loans, if different.
</TABLE>
(2) Section 7.15 of the Credit Agreement is hereby amended by
deleting the table set forth therein and replacing it with the following:
Measurement Period Ending Ratio
------------------------- -----
June 30, 1997 and thereafter 1.25 to 1.0
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants that:
(1) (a) the execution and delivery of this Amendment have
been duly authorized by all necessary corporate action; and (b) do not
violate any Requirement of Law nor conflict with or result in the
breach of any Contractual Obligation binding on the Company; and
(b) after giving effect to this Amendment, the
representations and warranties of the Company contained in Article V
of the Credit Agreement (except for representations and warranties
relating to a particular point in time) and in each other Loan
Document are true and correct in all material respects as if made on
and as of the date of this Amendment and no Potential Event of Default
or Event of Default has occurred and is continuing.
Exhibit 10.18 -- Page 2 of 4
<PAGE> 3
ARTICLE IV
EFFECTIVENESS
(1) This Amendment shall become effective as of the date first
above written when the Administrative Agent has received the following:
(a) counterparts hereof executed by the Company, all
the Banks and the Agent and signed by Guardian as a consenting
party; and
(b) copies of the resolutions of the Board of
Directors of the Company authorizing the execution and delivery
of this Amendment and the performance of the transactions
contemplated hereby, certified by the Secretary or an Assistant
Secretary of the Company.
(2) Upon the effectiveness of this Amendment (a) each reference in
the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import shall mean and be a reference to the Credit Agreement as
amended hereby and (b) each reference in each other Loan Document to the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended
hereby.
(3) Except as specifically amended above, the Credit Agreement
shall remain in full force and effect.
(4) The execution, delivery, and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of any Lender or the Agent under the Credit Agreement
or any of the other Loan Documents, nor constitute a waiver of any provision of
any of the Loan Documents.
ARTICLE V
MISCELLANEOUS
(1) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
(2) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
Exhibit 10.18 -- Page 3 of 4
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective duly authorized officers as of the date first
above written.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: \s\ W. Larry Hess
-------------------------------
Title: Managing Director
----------------------------
NBD BANK
By: \s\ Thomas Lakocy
-------------------------------
Title: Vice President
----------------------------
Consented to:
GUARDIAN INDUSTRIES CORP.,
as a Consenting Party
By: \s\ R. Mark Manion
----------------------------------------
Title: Assistant Treasurer
-------------------------------------
Acknowledged and Agreed to:
OIS OPTICAL IMAGING SYSTEMS, INC.
By: \s\ Charles Wilson
----------------------------------------
Title: Exec. Vice President & CFO
-------------------------------------
Acknowledged:
NBD BANK,
as Administrative Agent
By: \s\ Thomas Lakocy
----------------------------------------
Title: Vice President
----------------------------
Exhibit 10.18 -- Page 4 of 4
<PAGE> 1
EXHIBIT 13
FORM OF ANNUAL REPORT
PRICE RANGE OF COMMON STOCK
Shares of OIS Common Stock are traded in the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") over-the-counter market under the
symbol OVON. The following table sets forth the reported high and low bid
quotations of OIS Common Stock for the fiscal periods indicated:
<TABLE>
<CAPTION>
Prices
-----------------------------------------------------------
Period Low High
------ --- ----
<S> <C> <C>
Year ended June 30, 1995
First Quarter . . . . . . . . . . . . . . . . $5.625 $9.125
Second Quarter. . . . . . . . . . . . . . . . 6.00 7.125
Third Quarter. . . . . . . . . . . . . . . . 5.00 6.625
Fourth Quarter. . . . . . . . . . . . . . . . 4.375 6.0625
Year ended June 30, 1996
First Quarter. . . . . . . . . . . . . . . . $4.125 $5.625
Second Quarter. . . . . . . . . . . . . . . 3.00 5.250
Third Quarter. . . . . . . . . . . . . . . . 3.750 5.625
Fourth Quarter . . . . . . . . . . . . . . . 3.0625 3.75
Year ended June 30, 1997
First Quarter. . . . . . . . . . . . . . . 2.625 3.625
through September 18
</TABLE>
____________________________________
The above-listed quotations may include inter-dealer prices that may not
necessarily represent actual transactions. No dividend or distribution on OIS
Common Stock has been paid and none is presently being considered.
The approximate number of stockholders of record on September 18, 1996,
was 1,583.
Exhibit 13 -- Page 1 of 27
<PAGE> 2
SELECTED FINANCIAL DATA
Set forth below is certain financial information taken from OIS' audited
financial statements.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues $10,595,207 $ 8,423,041 $11,700,389 $ 7,162,035 $ 5,481,869
Cost of Sales 26,106,953 17,810,224 13,078,919 9,262,815 4,894,526
Internal Research and Development 1,971,513 1,306,843 688,094 372,242 517,348
Selling, General, Administrative and other 6,644,735 3,935,699 3,789,061 2,834,330 6,167,353
Net Loss Before Extraordinary Item (24,127,994) (14,629,725) (5,855,685) (5,307,352) (6,097,358)
Net Loss $(24,127,994) $(14,629,725) $ (5,855,685) $(5,307,352) $(5,696,240)
Net Loss Available to Common Shareholders $(26,097,584) $(14,840,683) $ (5,855,685) $(5,307,352) $(5,696,240)
Net Loss per Share Before Extraordinary
Item $(.27) $(.21) $(.19) $(.20) $(.28)
Net Loss per Common Share $(.27) $(.21) $(.19) $(.20) $(.26)
At year end:
Total Assets $70,513,934 $ 57,263,779 $38,146,868 $ 7,088,883 $10,288,994
Long-Term Debt, Net $48,000,000 $ 40,125,454 $12,000,000 $ 77,355 $ 544,819
Convertible Notes $ 7,221,412 $ 6,999,980
Working Capital (Deficit) $ 3,432,241 $ 5,211,233 $ 2,616,215 $(1,173,195) $ 2,018,700
Stockholders' Equity $ 7,163,704 $ 7,820,724 $ 9,633,880 $ 3,501,018 $ 1,013,024
</TABLE>
Exhibit 13 -- Page 2 of 27
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OIS Optical Imaging Systems, Inc.:
We have audited the accompanying balance sheets of OIS Optical Imaging Systems,
Inc. (a Delaware corporation) as of June 30, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years ended June 30, 1996. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of OIS Optical Imaging Systems,
Inc. as of June 30, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years ended June 30, 1996 in conformity with
generally accepted accounting principles.
As explained in Note H to the financial statements, effective July 1, 1993, the
Company changed its method of accounting for income taxes.
\s\ Arthur Anderson LLP
Detroit, Michigan.
August 23, 1996
Exhibit 13 -- Page 3 of 27
<PAGE> 4
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 516 $ 830,081
Accounts receivable (net of reserve for doubtful
accounts of $60,000 at June 30, 1996 and 1995) 3,232,486 2,097,024
Receivable from U.S. Government 131,705 2,584,117
Inventories 5,847,250 3,360,062
Insurance receivable 6,085,263 2,277,385
Prepaid expenses and other current assets 485,251 380,165
----------- -----------
TOTAL CURRENT ASSETS 15,782,471 11,528,834
PROPERTY AND EQUIPMENT
Land 3,000,000 3,000,000
Building 32,232,265 --
Leasehold improvements -- 1,037,010
Machinery and other equipment 28,670,855 9,470,373
Construction in process 129,074 39,339,490
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 64,032,194 52,846,873
Less accumulated depreciation (9,300,731) (7,111,928)
----------- -----------
NET TOTAL PROPERTY AND EQUIPMENT 54,731,463 45,734,945
TOTAL ASSETS $70,513,934 $57,263,779
=========== ===========
</TABLE>
See notes to financial statements.
Exhibit 13 -- Page 4 of 27
<PAGE> 5
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1996 1995
------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES
Current installments on capital lease obligation $ 125,454 $ 121,633
Subordinated note payable to affiliate 2,000,000
Current installment on long-term debt 3,000,000 --
Accounts payable 5,599,266 4,178,305
Accrued interest 951,103 1,115,026
Deferred revenue 236,845 326,954
Other accrued liabilities 437,562 575,683
------------------- ------------------
TOTAL CURRENT LIABILITIES 12,350,230 6,317,601
LONG TERM DEBT 48,000,000 40,000,000
LOCAL GOVERNMENT SUBSIDY 3,000,000 3,000,000
CAPITAL LEASE OBLIGATION -- 125,454
------------------- ------------------
TOTAL LIABILITIES 63,350,230 49,443,055
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 per share:
Series A, 8% cumulative, non-convertible and non-voting
Authorized - 50,000 shares
Issued and outstanding - 35,000 shares at June 30, 1996 and
12,500 shares at June 30, 1995 350 125
Common stock, par value $0.01 per share:
Authorized - 125,000,000 shares
Issued and outstanding - 97,103,790 shares at June 30, 1996
and 96,712,931 shares at June 30, 1995 971,038 967,129
Additional paid-in capital 105,457,517 81,325,112
Accumulated deficit (98,055,426) (74,138,390)
Deferred compensation (1,209,775) (333,252)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 7,163,704 7,820,724
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $70,513,934 $57,263,779
=================== ==================
</TABLE>
See notes to financial statements.
Exhibit 13 -- Page 5 of 27
<PAGE> 6
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Display revenue $ 6,488,975 $ 2,290,242 $ 1,256,655
Engineering revenue 4,001,414 5,799,519 10,322,328
Sensor revenue 104,818 333,280 121,406
------------- ------------ ------------
TOTAL REVENUES 10,595,207 8,423,041 11,700,389
COST OF SALES
Display 12,658,272 6,257,458 2,102,198
Engineering 13,102,241 9,680,064 10,315,839
Sensors 346,440 1,872,702 660,882
------------- ------------ ------------
TOTAL COST OF SALES 26,106,953 17,810,224 13,078,919
------------- ------------ ------------
GROSS LOSS (15,511,746) (9,387,183) (1,378,530)
OPERATING EXPENSES
Internal research and development 1,971,513 1,306,843 688,094
Selling, general and administrative 5,360,752 4,237,253 3,660,203
------------- ------------ ------------
TOTAL OPERATING EXPENSES 7,332,265 5,544,096 4,348,297
OPERATING LOSS (22,844,011) (14,931,279) (5,726,827)
OTHER INCOME (EXPENSE)
Interest expense (2,233,735) (10,808) (324,922)
Interest income 41,954 200,236 157,751
Licensing and royalties 104,174 112,126 239,713
Insurance proceeds 803,624 -- --
Loss on sale of long-term investment
in joint venture -- -- (201,400)
------------- ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,283,983) 301,554 (128,858)
NET LOSS $ (24,127,994) $(14,629,725) $ (5,855,685)
------------- ------------ ------------
Preferred stock dividends 1,969,590 210,958 --
------------- ------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
$ (26,097,584) $(14,840,683) $ (5,855,685)
------------- ------------ ------------
NET LOSS PER COMMON SHARE $(.27) $(.21) $(.19)
======== ======== =========
</TABLE>
Exhibit 13 -- Page 6 of 27
<PAGE> 7
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ------------------------
Number Number of Additional Guardian
of Amount Shares Amount Paid-In Equity
Shares Capital
------ ------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 -0- -0- 30,111,870 $301,119 $ 56,772,078 $ -0-
Common shares sold (Fiscal 1994) 597,860 5,979 1,339,206
Common stock granted as deferred
compensation
(August 20, 1993, December 15, 97,725 977 298,135
1993 and December
22, 1993)
Amortize deferred compensation
(Fiscal 1994)
Conversion of Guardian note to 10,500,000
equity (June 30, 1994)
Other (6,500) (65) (5,622)
Net loss for year ended June 30,
1994
------- ------- ---------- ------- ----------- ----------
Balance at June 30, 1994 -0- -0- 30,800,955 308,010 58,403,797 10,500,000
Common shares sold (Fiscal 1995) 87,016 869 292,676
Common stock granted as deferred
compensation 49,920 499 323,981
(January 13, 1995)
Amortize deferred compensation
(Fiscal 1995)
Conversion of Guardian equity to
Common Stock 65,791,270 657,913 9,842,087 (10,500,000)
(November 26, 1995)
Preferred Stock sold (Fiscal 12,500 125 12,499,875
1995)
Other (Fiscal 1995) (16,230) (162) (37,304)
Net loss for year ended June 30,
1995
------- ------- ---------- ------- ----------- -------------
Balance at June 30, 1995 12,500 125 96,712,931 967,129 81,325,112 -0-
Common shares sold (Fiscal 1996) 90,139 902 218,922
Common stock granted as deferred
compensation (January 15, 1996) 312,420 3,124 1,402,766
Amortize deferred compensation
(Fiscal 1996)
Preferred stock sold (Fiscal 1996) 22,500 225 22,499,775
Other (Fiscal 1996) (11,700) (117) 10,942
Net loss for year ended June 30,
1996
------- ------- ---------- -------- ------------ -------------
Balance at June 30, 1996 35,000 $350 97,103,790 $971,038 $105,457,517 $ -0-
======= ======= ========== ======== ============ =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Deferred Stockholders Per
Deficit Compensation ' Equity Share
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993 $(53,442,022) $ (130,157) $ 3,501,018 --
Common shares sold (Fiscal 1994) 1,345,185 2.250
Common stock granted as deferred
compensation
(August 20, 1993, December 15, (299,112) -- 3.06
1993 and December
22, 1993)
Amortize deferred compensation 143,362 143,362
(Fiscal 1994)
Conversion of Guardian note to 10,500,000
equity (June 30, 1994)
Other 5,687 --
Net loss for year ended June 30, (5,855,685) (5,855,685)
1994 ----------- ------------ -----------
Balance at June 30, 1994 (52,297,707) (280,220) 9,633,880
Common shares sold (Fiscal 1995) 293,545 3.373
Common stock granted as deferred
compensation (324,480) -- 6.500
(January 13, 1995)
Amortize deferred compensation 240,718 240,718
(Fiscal 1995)
Conversion of Guardian equity to
Common Stock
(November 26, 1995) .16
Preferred Stock sold (Fiscal 1995) 12,500,000 1,000
Other (Fiscal 1995) (210,958) 30,730 (217,694)
Net loss for year ended June 30,
1995 (14,629,725) (14,629,725)
------------ ------------ ------------
Balance at June 30, 1995 (74,138,390) (333,252) 7,820,724
Common shares sold (Fiscal 1996) 219,824 2.439
Common stock granted as deferred
compensation (January 15, 1996) (1,405,890) -- 4.500
Amortize deferred compensation 492,886 492,886
(Fiscal 1996)
Preferred stock sold (Fiscal 22,500,000 1,000
1996)
Other (Fiscal 1996) 210,958 36,481 258,264
Net loss for year ended June 30, (24,127,994) (24,127,994)
1996
------------ ------------ ------------
Balance at June 30, 1996 $(98,055,426) $ (1,209,775) $ 7,163,704
============ ============ ============
</TABLE>
Exhibit 13 -- Page 7 of 27
<PAGE> 8
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,127,994) $(14,629,725) $ (5,855,685)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,396,279 1,356,533 1,296,667
Loss on sale of long-term investment in
joint venture -- -- 201,400
Deferred compensation expense 492,886 233,982 143,362
Impact on cash flows from changes in assets
and liabilities:
Accounts receivable (2,490,928) 1,042,155 (2,065,447)
Inventories (2,487,188) (1,276,461) (1,014,130)
Prepaid expenses and other assets (105,086) (2,248,196) (244,952)
Accounts payable and accrued liabilities 1,329,875 (3,613,687) 5,593,812
Deferred revenue (90,109) (407,824) 85,548
----------------- ----------------- -----------------
NET CASH USED IN OPERATING
ACTIVITIES (24,082,265) (19,543,223) (1,859,425)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of long-term investment in
joint venture -- -- 797,600
Capital expenditures (12,392,797) (24,708,813) (16,561,054)
----------------- ----------------- -----------------
NET CASH USED IN INVESTING (12,392,797)
ACTIVITIES (24,708,813) (15,763,454)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-term debt (121,633) (158,497) (504,237)
Proceeds from issuance of debt and notes 13,000,000 28,000,000 10,700,000
Net proceeds from issuance of common stock 267,130 293,545 1,345,185
Net proceeds from issuance of preferred stock 22,500,000 12,500,000 --
Proceeds from issuance of Guardian note -- -- 10,500,000
----------------- ----------------- -----------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 35,645,497 40,635,048 22,040,948
----------------- ----------------- -----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (829,565) (3,616,988) 4,418,069
CASH, CASH EQUIVALENTS AT
BEGINNING OF PERIOD 830,081 4,447,069 29,000
----------------- ----------------- -----------------
CASH, CASH EQUIVALENTS AT
END OF PERIOD $ 516 $ 830,081 $ 4,447,069
================= ================= =================
</TABLE>
See notes to financial statements
Exhibit 13 -- Page 8 of 27
<PAGE> 9
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
Common Stock Issued in Exchange for Deferred
Compensation, Net of Terminations $1,369,409 $ 287,014 $ 293,425
Capitalization of Equipment Pursuant to Capital
Lease Obligation 365,000
Conversion of Guardian Equity to Common Stock 10,500,000
Conversion of Convertible Subordinated Securities
to Common Stock 7,785,109
Conversion of Accrued Interest to Convertible
Subordinated Securities 563,697
Conversion of Guardian Securities to Equity 10,500,000
Accrual of Future Plant Equipment 6,050,000
Contribution of Land under Local Government
Subsidy 3,000,000
</TABLE>
See Statements of Cash Flows.
Exhibit 13 -- Page 9 of 27
<PAGE> 10
OIS OPTICAL IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
OIS Optical Imaging Systems, Inc. was organized to complete the
development of and thereafter to manufacture and market flat panel displays and
electronic image processing products, employing amorphous and related materials
and information technology. OIS is currently providing these services mainly
to avionic and military customers.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist of investments in short-term, highly-liquid
securities having a maturity of three months or less when acquired. Cash
equivalents of $516 and $830,081 are included in cash and cash equivalents in
the accompanying balance sheets for the years ended June 30, 1996 and 1995,
respectively. These are stated at cost which approximates market.
Included in Cash and Cash Equivalents at June 30, 1995, is restricted
cash of $334,227 which consists of unexpended funds received under the Advanced
Research Projects Agency ("ARPA") agreement (see Note L).
Cash paid for interest for the fiscal years ended June 30, 1996, 1995
and 1994 was $1,549,826, $10,808 and $74,254, respectively.
Property and Equipment
All properties are recorded at cost and are depreciated on the
straight-line method over the estimated useful lives of the individual assets.
The estimated lives of the principal classes of assets are as follows:
Years
-----
Machinery and other equipment 3 to 10
Buildings and cleanrooms 20 to 30
Machinery and other equipment acquired for a particular research and
development project which have no alternative future use (in other research and
development projects or otherwise) are charged to the expense of the specific
project to which they were dedicated. Machinery and other equipment which have
alternative future uses are capitalized at cost.
Expenditures for maintenance and repairs are charged to operating
expenses. Expenditures for improvements or major renewals are capitalized and
are depreciated over their estimated useful lives.
Exhibit 13 -- Page 10 of 27
<PAGE> 11
Capitalized lease equipment is depreciated over the term of the lease.
Certain equipment installed at the new manufacturing facility is owned
by the government and is therefore not recorded in the accompanying Balance
Sheets (See Note L).
Exhibit 13 -- Page 11 of 27
<PAGE> 12
Local Government Subsidy
The Local Government Subsidy will be amortized over 30 years on a
straight line basis beginning when the Company has met all requirements related
to the subsidy (See Note L).
Inventories
Inventories are stated at the lower of cost, determined on a first-in
first-out basis, or market, and represents manufacturing supplies, raw material
used in display development and displays in process. The components of
inventories as of June 30, are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw materials $ 5,124,414 $ 2,029,162
Displays in process 722,836 1,330,900
----------- -----------
Total $ 5,847,250 $ 3,360,062
=========== ===========
</TABLE>
Insurance Receivable
This amount represents costs incurred by the Company to repair and
clean-up damage caused by a fire at the Northville facility and will be
reimbursed by an insurance company (See Note L).
Research and Development
Research and development costs are charged to operating expenses as
incurred.
Patents
Patent expenditures are charged directly to expense, and are included
in selling, general and administrative expenses.
Customer Agreements
Certain long-term customer engineering agreements are accounted for on
a percentage of completion basis. Amounts billed but not yet earned and/or
amounts received as advance payments net of revenues recognized in advance of
billings are recorded as deferred revenue. Projected losses on customer
agreements are recorded as cost in excess of anticipated billings at the time
such losses become apparent. Revenue on the Company's display contracts is
recognized when displays are shipped to the customer.
In fiscal 1996 and 1995 the Company derived approximately 76% and 68%
of revenue respectively from three customers operating in the U.S. Aerospace
industry. In fiscal 1994 the Company derived approximately 62% of revenue from
one customer operating in the U.S. aerospace industry. As of June 30, 1996 and
1995, $2,825,252 and $1,215,814 is due from these three customers and is
included in Accounts Receivable in the accompanying balance sheets.
Exhibit 13 -- Page 12 of 27
<PAGE> 13
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current financial presentation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
NOTE C - CAPITAL STOCK
Holders of OIS Common Stock are entitled to one vote per share.
The holders of OIS Common Stock are entitled to dividends when and if
declared by the Board of Directors of OIS out of any funds legally available
therefore. OIS has not declared or paid any dividends on Common Stock. The
Company is restricted by its credit agreement from declaring or paying cash
dividends (See Note J).
During fiscal 1996 and 1995, the Company issued 22,500 and 12,500
shares, respectively, of Preferred Stock to its affiliate Guardian Industries
Corp. ("Guardian"). The Company is restricted from paying dividends on its
Preferred Stock by its credit agreement. Certain of these restrictions lapse
on September 30, 1996 (See Note J).
The Preferred Stock bears a dividend rate of 8% for the first five
years. During each of years six through eight the members of the Board of
Directors independent of Guardian (the "Independent Directors") will select one
of the following annual rates: 1) Libor plus 125 basis points or 2) the three
year Treasury Bill yield plus 200 basis points. During years nine through
eleven the independent directors will select one of the following annual rates:
1) Libor plus 350 basis points or 2) the three year Treasury Bill yield plus
400 basis points. Thereafter, beginning with year twelve and on each
successive three year anniversary, the rate then in effect will increase 150
basis points. At no time will the rate exceed 16.5% annually.
The Company's policy with respect to dividends under the preferred
stock agreement is to accrue all dividends that are declared, or expected to be
declared in the current year by the Board of Directors. Management has
determined that the fiscal 1996 and 1995 dividends will not be declared.
Cumulative dividends in arrears as of June 30, 1996 total $2,180,548.
NOTE D - STOCK OPTION PLANS
OIS has in effect two stock incentive plans, the 1994 Significant
Employee Stock Incentive Plan (the "1994 Plan") and the Amended and Restated
1988 Stock Option and Incentive Plan (the "1988 Plan").
Echibit 13 -- Page 13 of 27
<PAGE> 14
The plans are administered by the Stock Option Committee of the Board of
Directors of OIS (the "Committee"). These plans authorize the award of
restricted stock or stock options covering 3,000,000 shares of OIS Common Stock
to employees, consultants and such other persons as the Committee may
determine. Currently, the Committee is making awards under the 1994 Plan only.
Awards of restricted stock are non-transferable and subject to
forfeiture during the restriction period established by the Committee. The
awards of restricted stock during fiscal 1996, 1995 and 1994 are summarized in
the following table:
<TABLE>
<CAPTION>
Number of Per Share Aggregate Restriction
Fiscal Year Shares Granted Price Value Lapse Date
- ----------- -------------- ----- ----- ----------
<S> <C> <C> <C> <C>
1996 312,420 $4.50 $1,405,890 October 13, 1998
1995 49,920 $6.50 $324,480 October 13, 1997
1994 97,725 $1.68-3.50 $299,112 October 13, 1995
</TABLE>
There are currently 246,950 outstanding stock options that were granted
under the 1994 Plan, all in fiscal 1995 and 1996. These options become
exerciseable in two stages, six months after the date of grant with respect to
50% of the shares and eighteen months after the date of grant with respect to
the remaining 50% of the shares. These options expire 10 years after the date
of grant. The option price is set at market on date of grant.
There are currently outstanding 150,658 stock options that were granted
under the 1988 plan before fiscal 1992. These options generally become
exerciseable in five stages, beginning one year after the date of grant with
respect to 20% of the shares and continuing with an additional 20% of the
shares becoming exerciseable annually thereafter. These options generally
expire 6 years after the date of grant. The option price is set at market on
date of grant.
The stock options granted by the Company are nontransferable and are
subject to forfeiture if not exercised within a time specified by the Committee
(but not more than three months) after the termination of employment with, or
provision of services to, the Company, unless the termination was a result of
death, disability or retirement, in which case the option may be exercised
until six months after the termination.
Exhibit 13 -- Page 14 of 27
<PAGE> 15
A summary of the transactions during the three years ended June 30,
1996 with respect to OIS' stock option plans follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
------ ------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of fiscal
year 341,104 $3.15 313,419 $2.26 976,859 $2.25
Granted 174,950 4.58 108,000 5.13 79,200 2.25
Cancelled 37,800 4.93 9,350 2.25 143,580 2.25
Exercised 80,646 2,25 70,965 2.25 599,060 2.38
--------- ----- --------- ----- --------- -----
Outstanding June 30, 397,608 $3.77 341,104 $3.15 313,419 $2.26
========= ===== ========= ===== ========= =====
Exercisable June 30, 220,158 $3.05 143,731 $2.21 131,974 $2.27
========= ===== ========= ===== ======== =====
Available for grant
June 30, 2,430,990 N/A 2,868,860 N/A 1,015,925 N/A
========= === ========= === ========= ===
</TABLE>
NOTE E - RELATED PARTY TRANSACTIONS
Guardian purchased 22,500 and 12,500 shares of the Company's Series A
Preferred Stock in fiscal 1996 and 1995 for aggregate consideration of
$22,500,000 and $12,500,000, respectively.
Effective November 26, 1994, Guardian exercised its option to purchase
additional shares of OIS Common Stock. In that transaction, OIS issued to
Guardian 41,828,768 shares of Common Stock and issued to William Davidson, who
is the president and owner of Guardian, 23,962,502 shares of Common Stock
pursuant to rights derived from convertible subordinated securities. (See Note
J - Financing Transactions.)
In April 1992, OIS and the Company's affiliate, Guardian entered into a
Services Agreement, which was amended in July 1992. Under that agreement,
Guardian provided the services of Rex Tapp, who was an employee of Guardian, as
President of OIS, for $130,000 per year; provides certain administrative,
accounting, technical, travel arrangement, management and tax services for
$50,000 per year, and provides legal services at an hourly rate of $100. In
July 1995, Mr. Tapp became an employee of OIS with the result that his services
to OIS are no longer subject to the Services Agreement. During fiscal years
1996, 1995 and 1994, OIS incurred expenses of approximately $110,000, $190,000
and $267,000, respectively, for these services. During 1995 and 1994, OIS also
purchased approximately $17,000 and $80,000, respectively, worth of
architectural glass from Guardian for installation at the new manufacturing
facility. In May 1993, OIS and Guardian entered into a services agreement in
which employees at Guardian provided engineering services in connection with
construction of the new facility. The aggregate amount paid by OIS will not
exceed $250,000 without approval of the independent directors of OIS. The
Company
Exhibit 13 -- Page 15 of 27
<PAGE> 16
incurred approximately $118,000 and $78,000, for the years ended June 30, 1995
and 1994 respectively, for these engineering services (see Note L).
NOTE F - LONG-TERM INVESTMENT IN JOINT VENTURE
In December 1993, OIS incurred a $201,400 loss when it sold its
investment in common stock of UNIPAC Optoelectronics, Inc., ("UNIPAC") a
corporation organized under the laws of the Republic of China in Taiwan,for
$797,600. These shares represented 10% ownership of UNIPAC.
NOTE G - NET LOSS PER COMMON SHARE
Net loss per common share which, equals fully diluted loss per share,
is based on the weighted average number of shares of OIS Common Stock
outstanding during the year. The number of shares used in the computation for
the years ended June 30, 1996, 1995 and 1994 were 96,889,823, 69,241,640 and
30,502,644, respectively.
Under the terms of the two Stock Purchase Agreements, the Guardian
Option (see Note J) and William Davidson's right pursuant to a May 14, 1993
agreement (see Note J), the Company issued 65,791,720 shares of Common Stock on
November 26, 1994. Pursuant to a fiscal 1994 agreement, the shares of Common
Stock were paid for, but not issued, prior to June 30, 1994; if these shares of
common stock had been issued and outstanding as of June 30, 1994, net loss per
share would have been $.15 for the year ended June 30, 1995, based upon
96,654,669 weighted average shares.
NOTE H - FEDERAL TAXES ON INCOME
Effective July 1, 1993, the Company prospectively adopted the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. This statement requires a change in the method of accounting
for income taxes from the deferral method to an asset and liability approach.
The effect of the adoption of this standard was not material to the financial
statements.
The differences between the United States Federal statutory income tax
benefit and the consolidated income tax benefit for the years ended June 30, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
Federal statutory benefit $(8,204,000) $(4,974,000) $(1,991,000)
Net increase in valuation reserve
due to losses without tax benefit 8,195,000 4,971,000 1,989,000
Other 9,000 3,000 2,000
----------- ----------- -----------
Actual income tax provision $ -0- $ -0- $ -0-
=========== =========== ===========
</TABLE>
Exhibit 13 -- Page 16 of 27
<PAGE> 17
Deferred income taxes represent temporary differences in the
recognition of certain items for income tax and financial reporting purposes.
The components of net deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Deferred income tax liability:
Depreciation and $ 1,729,000 $ 163,000
amortization
------------ ------------
1,729,000 163,000
Deferred income tax assets:
Net operating loss credits (32,781,000) (22,891,000)
Other (1,036,000) (1,165,000)
------------ ------------
(33,817,000) (24,056,000)
Valuation allowance 32,088,000 23,893,000
(1,729,000) (163,000)
Net deferred income taxes $ -0- $ -0-
============ ============
</TABLE>
Tax loss carryforwards and other tax attributes are subject to
limitations provided by Internal Revenue Code Sec. 382, which may substantially
reduce the amounts available for utilization as a result of changes in control.
There was a change of ownership on December 12, 1990 for purposes of Internal
Revenue Code Sec. 382.
Exhibit 13 -- Page 17 of 27
<PAGE> 18
At June 30, 1996, remaining net operating loss and tax credit
carryforwards expire as follows:
<TABLE>
<CAPTION>
Net Operating Other
Loss Tax Credit
Carryforward Carryforwards
------------- -------------
<S> <C> <C>
1999 $ 3,965,000
2000 6,560,000 $351,100
2001 3,255,000 90,450
2002 3,242,000
2003 7,391,000
2004 3,352,000
2005 633,000
2006 6,009,000 1,300
2007 6,476,000
2008 5,213,000 1,000
2009 5,886,000 2,030
2010 15,434,000
2011 28,999,000
----------- --------
$96,145,000 $445,880
=========== ========
</TABLE>
NOTE I - LEASE AGREEMENTS
In the year ended June 30, 1995, OIS entered into a three-year
non-collateralized lease agreement covering certain machinery and equipment.
The lease requires monthly payments of $10,633 through 1997.
OIS' Troy facilities are leased under a lease expiring in September
1996 at a monthly rate of $15,460. This lease contains a monthly renewal
option. All OIS leases are with unrelated parties.
Exhibit 13 -- Page 18 of 27
<PAGE> 19
Obligations under capital leases and noncancellable operating leases
subsequent to June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Lease Operating
Obligations Leases
--------------- -----------
<S> <C> <C>
1997 127,577 81,131
1998 10,020
Total $127,577 $91,151
======
Less interest
included above $ 2,123
-------
Present value of
minimum payments $125,454
Less current portion 125,454
--------
Long-term portion $-0-
===
</TABLE>
Operating lease expense for the fiscal years ended June 30, 1996, 1995
and 1994 was $250,344, 251,632, and $237,483, respectively.
NOTE J - FINANCING TRANSACTIONS
On November 26, 1991, Guardian paid OIS $10,500,000 for 7,000,000
shares of OIS' Common Stock, which then represented approximately 28 percent of
all issued and outstanding shares. OIS also granted and issued to Guardian a
three-year option (the "Guardian Option") to purchase additional shares of the
Common Stock for a price of $10,500,000. Effective November 26, 1994, Guardian
exercised its option to purchase additional shares of OIS Common Stock. In
that transaction, OIS issued to Guardian 41,828,768 shares of Common Stock.
The option shares issued to Guardian, together with the shares issued to
Guardian in November 1991, amounts to approximately 51 percent of the issued
and outstanding shares of the Common Stock on a fully diluted basis. (See Note
E )
On December 14, 1993 the Company entered into a credit agreement (the
"Agreement"), which has been amended, with a consortium of banks. Under
the terms of the Agreement, the Company obtained a credit facility that
provides $26.25 million in term loans and a $26.25 million revolving credit
facility. Under the terms of the Agreement, the term loans and borrowings
under the revolving credit facility bear interest, payable quarterly, at LIBOR
plus .875%, or at elected fixed rates with interest periods ranging from 30
days to 180 days. The term loans are payable in quarterly principal
installments of $3,000,000, on June 30, 1997, $1,250,000 commencing September
30, 1997 through December 31, 1997, $2,500,000 commencing March 31, 1998
through June 30, 1998, $2,750,000 on September 30, 1998 through December 31,
1998, $3,375,000 on March 31, 1999 through June 30, 1999, $3,875,000 on
September 30, 1999 and $24,375,000 on December 31, 1999. The Company also pays
a commitment fee of .375% of the unused portion of the credit facility. The
revolving credit facility matures in December 1999. As of June 30, 1996, $1.5
million of the credit facility remained unused.
Under the terms of the Credit Agreement, OIS is restricted from
incurring additional debt (as defined) and paying cash dividends (as defined).
Furthermore, OIS must maintain a level of minimum tangible capital funds and
leverage ratio as defined in the Credit Agreement and have completed
Exhibit 13 -- Page 19 of 27
<PAGE> 20
construction of the new manufacturing facility by June 30, 1995 (See Note L).
On May 14, 1993, the Company, William Davidson and Guardian entered
into a transaction to increase the stockholders' equity of the Company. In
this transaction, William Davidson converted $5,785,109 of 10% convertible
subordinated securities into 2,804,901 shares of common stock and the right to
receive additional common stock upon Guardian's exercise of the option
described above. Concurrent with the exercise of the Guardian Option, William
Davidson received 23,962,502 shares of Common Stock pursuant to this right.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on its floating rate long-term debt.
At June 30, 1996, the Company had an outstanding interest rate swap agreement
with a commercial bank, having a total notional principal amount of $15
million. This agreement effectively changes the Company's interest rate
exposure on its floating rate notes due in 1999 to a fixed LIBOR rate of
5.933%. The interest rate swap agreement matures at the time the related notes
mature. The Company is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swap agreement. However, the Company
does not anticipate nonperformance by the counterparties. The fair value of
the Company's long-term debt is estimated based on market rates of interest for
the same or similar issues and current rates offered to the Company for debt of
the same remaining maturities. The fair value of the Company's long term debt
approximates its carrying value.
During fiscal 1996 the Company signed a $15 million Promissory Note
(the "Note") with Guardian Industries Corp. The Note bears interest at a rate
of 5.7% per annum. The Note is subordinated to all amounts outstanding under
the agreement described above. At June 30, 1996, $2 million is outstanding
under the Note. The principal balance of the note and all accrued and unpaid
interest is due on November 1, 1996. Management expects additional financing
will be needed to support the Company's operations. Guardian has not indicated
any intention to discontinue funding the Company.
NOTE K - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan for substantially all employees.
Employer contributions are 50% of the employee's contribution, up to a maximum
of 5% of the employee's wages. Employer contributions to this plan were
approximately $176,000, $135,000 and $91,000 for the years ended June 30, 1996,
1995 and 1994, respectively.
NOTE L - NEW MANUFACTURING FACILITY
During fiscal 1994 the Company started construction on a new
manufacturing facility in Northville, Michigan. In connection with the
construction, the Company purchased land valued at approximately $3 million
from Wayne County for $10.00. The Company must use the land to construct the
above mentioned manufacturing facility and must meet certain employment
criteria. If the above criteria are not met, the Company must pay up to
approximately $1 million to Wayne County. The facility cost approximately $107
million. Pursuant to this construction, the Company has capitalized
approximately $1.10 million, $2.38 million and $325,000 of interest incurred
during construction during the years ended June 30, 1996, 1995 and 1994. The
capitalized interest is included in Building in the accompanying balance
sheets.
Exhibit 13 -- Page 20 of 27
<PAGE> 21
During fiscal 1994 the Company negotiated an agreement under the ARPA,
AMLCD Manufacturing Technology Program. Under the terms of the agreement the
Company will receive $48 million (the "Proceeds") over two years. The Company
used the proceeds to purchase equipment for installation in the new
manufacturing facility. The equipment purchased remains the property of the
United States Government and is not reflected in the accompanying balance
sheets. The Company is entitled to use this equipment without charge until
August 1998. At that time the Company has the option to purchase the
Government owned equipment at its then Fair Market Value. Cash received prior
to payment for the equipment is reflected in Cash and Cash Equivalents in the
accompanying balance sheets. Amounts billed to ARPA, but not received, are
reflected as Receivable from the U.S. Government in the accompanying balance
sheets. The liability is relieved as equipment is purchased. As of June 30,
1996 approximately $47 million of the $48 million has been billed all of which
has been received. As of June 30, 1996, the Company has spent approximately
$132,000 for equipment that has not been billed to ARPA and is included in
Receivable from U.S. Government in the accompanying balance sheets.
Exhibit 13 -- Page 21 of 27
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
The operating results for fiscal 1996 continue to reflect substantial operating
losses. Although fiscal 1996 revenue was 26% higher than fiscal 1995 revenue,
the Company's cost of sales continued to exceed revenue as a result of low
production volumes and equipment problems at the aging Troy facility and the
costs associated with the start-up of the new Northville facility.
During fiscal 1996, the Company achieved its goal of starting-up the Northville
facility by establishing a baseline manufacturing process at the Northville
facility which is capable of performing each process step necessary to produce
saleable products. In conjunction with the start-up of the Northville
facility, the Troy facility has been closed, and all production activity has
now been transferred from Troy to Northville. The establishment of a baseline
manufacturing process at the Northville facility and the shutdown of the Troy
facility mark significant milestones in the Company's transition from a
research and development operation to a manufacturing operation. However, in
order to improve the Company's overall financial performance, the Company must
now work to achieve and sustain higher production volumes and better yields.
The process of improving manufacturing efficiency and productivity is a process
of plant "ramp up" to greater capacity utilization.
During fiscal 1997, the Company will work to identify and resolve the remaining
process problems that limit production volumes and result in product defects.
To the extent that the Company is able to increase production volumes and
improve yields, the cost of sales as a percentage of revenue should decrease.
While management is optimistic about the Company's ability to efficiently
manufacture higher volumes of saleable product at the Northville facility, the
manufacturing ramp up is a complex and expensive process which, given the
Company's lengthy production cycles, is expected to be ongoing through fiscal
1997. While the Company hopes to achieve gradually higher production volumes
and yields during fiscal 1997, management does not anticipate that the
Company's operating results for fiscal 1997 will improve compared to fiscal
1996. The Company's degree of success in achieving greater manufacturing
efficiency and productivity at the Northville facility will determine whether
the Company's financial results can improve in the future.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Revenue
Total revenue for fiscal year 1996 of $10,595,207 was 26% higher than total
revenue for fiscal 1995 of $8,423,041. This increase is attributable to a
substantial increase in revenue from the sale of displays which was partly
offset by a decrease in revenue from customer- funded engineering.
Revenue from the sale of displays for fiscal 1996 of approximately $6,489,000
was 183% higher than revenues from the sale of displays for fiscal 1995 of
approximately $2,290,000. This increase is the result of more displays, both
standard and contract specific, being manufactured and shipped during fiscal
1996. Deliveries of various size displays, which were developed in prior
fiscal years, to Kaiser Electronics under the F-22 and F-18
Exhibit 13 -- Page 22 of 27
<PAGE> 23
programs generated approximately $3,000,000 or 46% of the revenue from the sale
of displays during fiscal 1996.
Revenue from customer-funded engineering for fiscal year 1996 of approximately
$4,000,000 was 31% lower than revenue from customer-funded engineering for
fiscal 1995 of approximately $5,800,000. This decrease is the result of the
Company's strategic decision to reduce customer- funded engineering activity as
the Company concentrates on manufacturing operations. Management expects
revenue from customer-funded engineering to continue to decline in the future.
Although revenue from the sale of displays increased during fiscal 1996, the
rate of increase was constrained by manufacturing difficulties at the Troy
facility which are discussed below under Cost of Sales. The Company continued
operations at the Troy facility longer than expected as a result of the
extensive effort to repair and clean-up damage caused by the fire experienced in
March 1995 at the Northville facility. Approximately $3,200,000 of displays
that had been expected to be delivered in fiscal 1996 were not delivered. The
Company has worked closely with its customers, and no orders for the Company's
products have yet been canceled as a result of these delays in deliveries. If
the ramp-up of the Northville facility proceeds as anticipated, management
expects that the delayed shipments will be delivered during fiscal 1997.
COST OF SALES
Cost of sales for fiscal 1996 of $26,106,953 was 47% higher than cost of sales
for fiscal 1995 of $17,810,224. The cost of sales as a percentage of revenue
increased to 246% in fiscal 1996 from 211% in fiscal 1995. Cost of sales
consists of direct labor, direct material and overhead costs to support the
manufacturing process. Overhead costs include, among other things, the costs
of utilities, maintenance and repair, insurance, depreciation, engineering,
supervisory, quality control personnel and other costs needed to facilitate the
manufacturing process. While the Company's direct labor and material costs in
fiscal 1996 declined slightly as a percentage of revenue compared to fiscal
1995, the Company's overhead costs for fiscal 1996 increased significantly both
in absolute dollars and as a percentage of revenue compared to fiscal 1995.
The increase in overhead costs for fiscal 1996 is attributable in large part to
the increased costs of wages and benefits for factory support personnel,
increased depreciation expense and the expense of maintaining the Troy facility
for continuing production operations. In anticipation of increasing production
activity in Northville, the Company hired and trained additional production
supervisors and quality control personnel during fiscal 1995. Although no
significant personnel in these areas were added during fiscal 1996, the costs
for these additional personnel were incurred for a full year during fiscal
1996. Depreciation expense for fiscal 1996 increased by approximately
$1,900,000 compared to fiscal 1995 due to the Northville facility and process
equipment being placed in service during fiscal 1996. The Company spent
approximately $500,000 in fiscal 1996 to repair and modify equipment necessary
to continue production operations at the Troy facility before it was closed.
The Company also recorded a charge of $300,000 as an estimate of cost to
restore the Troy facility as required by the terms of the Company's lease.
Reducing the Company's cost of sales to an acceptable level depends on
improving yields and increasing production volumes. If the Company becomes
more efficient in its manufacturing process, direct labor and material costs
will decrease on a per unit basis. Because most of the Company's indirect
costs are fixed and the Company has already assembled a workforce sufficient to
support the anticipated increases in manufacturing activity at Northville,
management does not expect a significant increase in indirect costs as
production volumes
Exhibit 13 -- Page 23 of 27
<PAGE> 24
increase. However, until the Company is able to produce and sell more product
to absorb its overhead costs, overhead costs will continue to result in high
cost of sales on both a per unit and percentage of revenue basis.
OTHER COSTS
The Company's internal research and development costs of $1,971,513 in fiscal
1996 was 51% higher than the internal research and development costs of
$1,306,843 incurred in fiscal 1995. The Company's research and development
efforts are focused on improving current products, increasing its standard
product line and protecting the Company's technology and intellectual property
rights. Management considers it imperative to maintain a strong research and
development program and research and development spending for fiscal 1997 is
expected to increase slightly from fiscal 1996.
The Company's Selling, General and Administrative costs of $5,360,752 in fiscal
1996 were 27% higher than the Selling, General and Administrative costs of
$4,237,253 in fiscal 1995. This increase is due to the Company expanding its
marketing and administrative organization to manage the current and anticipated
increases in marketing and general business activity. Management does not
expect its Selling, General and Administrative costs to increase significantly
during fiscal 1997.
Interest expense during fiscal 1996 increased by approximately $2,200,000
compared to fiscal 1995. During fiscal 1996 most of the Northville facility
was placed into service with the consequence that a proportionate amount of
interest incurred on the debt to finance construction of the Northville
facility is no longer being capitalized as part of the cost of the Northville
facility. The Company also incurred additional interest on higher debt levels
to finance ongoing operations during fiscal 1996. Interest expense is expected
to continue to increase unless operations generate enough profits to begin
retiring the outstanding debt.
During fiscal 1996 the Company received $803,624 of insurance proceeds
resulting from the interruption of business caused by the fire at the
Northville facility in March 1995. This amount is separate from the
reimbursable expenses incurred by the Company to repair damage from the fire,
which is discussed under Liquidity and Capital Resources.
Other differences between fiscal 1996 and 1995 are not discussed because they
resulted principally from differences in timing of revenue and expenses and not
from any known trends.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
Revenue
Total revenue in fiscal 1995 was 28% lower than revenue in fiscal 1994 because
of a dramatic reduction of revenue from customer-funded engineering and
production delays. While revenue from sale of displays increased, this
increase did not offset the larger decrease in revenue from customer-funded
engineering. Work on the Company's most significant engineering and
development programs for Kaiser Electronics in connection with the Air Force
F-22 and F-18 programs wound down in fiscal 1995 as scheduled. The Company has
made a strategic decision to reduce customer-funded engineering activity in
order to focus on the sale of standard displays and expects revenue from
customer-funded engineering to continue to decrease.
Capacity limitations of the Troy facility and manufacturing process problems
constrained the production and sale of displays by the Company and limited
sales revenue for fiscal 1995. Manufacturing problems at the Troy
Exhibit 13 -- Page 24 of 27
<PAGE> 25
facility caused delays in the production of displays that had been ordered by
customers. Approximately $2.4 million of displays that were expected to be
delivered in fiscal 1995 were not delivered until fiscal 1996. The Company
negotiated revised delivery schedules with a number of customers.
Cost of Sales
Cost of sales for fiscal 1995 of $17,810,224 were 36% higher than cost of sales
for fiscal 1994 of $13,078,919. Cost of sales in fiscal 1995 increased to 211%
of revenues from 112% of revenues in fiscal 1994. Much of the increase in
the cost of sales resulted from manufacturing problems at the Troy facility. As
the Company worked to increase production of displays at the Troy facility to
meet increased orders for displays, the Troy facility was pressed to and beyond
its manufacturing capacity. The Company identified and solved a number of
manufacturing problems at the Troy facility in fiscal 1995. As it did so,
limitations of the Company's manufacturing process became evident. The
majority of these problems related to the fact that the Company's design and
manufacturing tolerances were too narrow for efficient manufacturing as
production volumes increased. Additionally, some of the problems related to
the final assembly process, among other things. These problems, particularly
when combined with the limitations of the aging Troy facility, contributed
significantly to increased manufacturing costs in fiscal 1995. In response to
these problems, the Company restructured the management of product design and
manufacturing and has implemented design rules more suitable to higher volume
fabrication. Additionally, where appropriate, the Company renegotiated
specifications with customers. The changed specifications do not affect the
overall performance of the displays from the point of view of the user, but do
allow for a more efficient manufacturing process.
A number of other factors also contributed to the increased cost of sales.
Cost of sales were adversely affected by increases in production supervisors
and quality control personnel who were hired and trained by the Company to
operate in the new Northville facility and to accommodate future increases in
production activity. Maintenance costs also increased significantly as the
Company continued to operate and maintain its aging facilities and equipment at
the Troy facility.
Other Costs
The Company's internal research and development costs of $1,306,843 in fiscal
1995 were 90% higher than the internal research and development costs of
$688,094 in fiscal 1994. The Company committed additional resources to
increasing its standard product line, improving current products, improving the
Company's technological position and protecting the Company's intellectual
property rights.
The Company's Selling, General and Administrative costs of $4,237,253 in fiscal
1995 were 16% higher than the Selling, General and Administrative costs of
$3,660,203 incurred during fiscal 1994. The increase was due to the Company
expanding its marketing and administrative organization to manage the current
and anticipated increases in marketing and general business activity.
Furthermore, legal fees relating to the administration and performance of
government contracts increased.
Interest expense decreased approximately $357,000 due to significantly lower
debt balances during fiscal 1995 compared to fiscal 1994. Debt was used by the
Company to finance construction of the Northville facility and was being
capitalized as part of the cost of that facility. The Company also earned
additional interest income during fiscal 1995 due to higher average cash
balances.
Exhibit 13 -- Page 25 of 27
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's cash and cash equivalents at June 30, 1996 was $516. The Company
is attempting to manage its cash to minimize borrowings under its various debt
instruments.
Operating Activities
During fiscal 1996 the Company incurred a net loss of $24,127,944. Prepaid
expenses and other assets increased by approximately $3,900,000 million due to
expenses incurred in connection with the March 1995 fire, a substantial portion
of which are expected to be reimbursed by insurance proceeds during the first
half of fiscal 1997. During fiscal 1996 the Company had received $9,000,000
from the insurance company which represented partial reimbursement of costs
incurred in connection with the fire. Accounts payable increased partially
due to the accrual of a $1,400,000 invoice for the purchase of additional
process equipment. The Company also received $2,400,000, accrued in fiscal
1995, from the Defense Advanced Research Projects Agency ("DARPA") in
connection with the purchase of manufacturing equipment for the Northville
facility. Inventory increased approximately $2,500,000 as the Company
increased levels of raw materials to sustain increased manufacturing activity
at the Northville facility.
Investing Activities
During fiscal 1996 the Company spent $12,400,000 on the Northville facility.
Approximately $5,000,000 represented pre-production costs. These costs, which
are capitalized as part of the cost of the Northville facility, include wages,
material and certain indirect costs incurred in start-up of the Northville
facility. The remaining $7,400,000 was spent on completion of the facility and
the purchase of certain process equipment not reimbursable by DARPA. The
Company has spent approximately $57 million to date for process equipment for
the Northville facility of which approximately $47 million is owned by the U.S.
government under the OIS-DARPA Agreement.
Financing Activities
During fiscal 1996 Guardian Industries Corp. ("Guardian") purchased an
additional $22,500,000 of Series A Preferred Stock on the same terms as
purchases by Guardian in fiscal 1995.
During fiscal 1996 Guardian also committed to loan $15,000,000 to the Company
to provide the Company with working capital until a more permanent funding
source can be obtained (the "Bridge Loan"). The Bridge Loan accrues interest
at a rate of 5.7% per annum, and all principal and accrued interest is payable
on November 1, 1996. As of June 30 ,1996 the Company had borrowed $2,000,000
under the Bridge Loan and as of September 18, 1996 the Company has borrowed
$14,000,000 under the Bridge Loan.
During fiscal 1996, the Company borrowed $11,000,000 under its $52,500,000
million commercial credit facility with NBD Bank N.A. and Bank of America NT&SA
As of June 30, 1996, the Company's aggregate borrowings under its commercial
credit facility were $51,000,000. As of September 4, 1996, the Company's
aggregate borrowings under its commercial credit facility were $52,500,000.
Repayment of principal commences on June 30, 1997 with a $3,000,000 payment
with various quarterly payments due through December 31, 1999.
Exhibit 13 -- Page 26 of 27
<PAGE> 27
The Company's liquidity is decreasing, and management anticipates a need for
additional cash during fiscal 1997. See Capital Resources.
Capital Resources
The Company has financed the cost of the Northville facility and provided
working capital for continuing operations through the current period. The cost
of the Northville facility and related start-up is currently anticipated to be
$107.4 million. Approximately 95% of these costs have been committed.
The Company is in the process of completing the acquisition of an additional 80
acres of land adjacent to the existing property in Northville. The agreement
with Wayne County provides a conditional purchase price of $800,000. The price
is conditioned on the Company beginning construction on a large scale facility
within five years and employing 500 employees within eight years. If the
Company does not meet these conditions, it will have the option of either (i)
paying approximately $3 million to the county as additional consideration for
the land or (ii) conveying the land back to the county and receiving a refund
of the original $800,000 purchase price (without interest). Wayne County is
currently addressing certain zoning issues which must be resolved before the
Company will purchase the additional land.
Due to the level of current and anticipated losses, management expects
additional capital resources will be needed to support the Company's
operations. At this time, Guardian has not indicated any intention to
discontinue funding the Company. If Guardian were to discontinue funding the
Company, or offer funding to the Company on terms that were not satisfactory to
the Company's disinterested directors, then the Company would have to seek
alternative sources of funding. There is no assurance that such alternative
sources of funding would be available. In such case, the Company would be
unable to meet its obligations and would be materially adversely affected.
Exhibit 13 -- Page 27 of 27
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our reports on the June 30, 1996 financial statements and
schedules of OIS Optical Imaging Systems, Inc. dated August 23, 1996 included
in or incorporated by reference in this Form 10-K, into the Company's
previously filed Form S-8 registration statements, File Nos. 0-16343 and
33-58562.
\s\ Arthur Andersen LLP
Detroit, Michigan
September 26, 1996
EXHIBIT 23 -- Page 1 of 1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operations for the year ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 516
<SECURITIES> 0
<RECEIVABLES> 3,292,486
<ALLOWANCES> 60,000
<INVENTORY> 5,847,250
<CURRENT-ASSETS> 15,782,471
<PP&E> 64,032,194
<DEPRECIATION> 9,300,731
<TOTAL-ASSETS> 70,513,934
<CURRENT-LIABILITIES> 12,350,230
<BONDS> 0
0
350
<COMMON> 971,038
<OTHER-SE> 6,192,316
<TOTAL-LIABILITY-AND-EQUITY> 70,513,934
<SALES> 10,595,207
<TOTAL-REVENUES> 10,595,207
<CGS> 26,106,953
<TOTAL-COSTS> 33,439,218
<OTHER-EXPENSES> 1,283,983
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 2,191,781
<INCOME-PRETAX> (24,127,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,127,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,127,994)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
