<PAGE> 1
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, 1997
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
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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, 1997 was approximately $36,500,000.
The number of shares of Registrant's Common Stock outstanding on September 18,
1997 was 97,468,576.
Portions of the Annual Report to Shareholders for the fiscal year ended June
30, 1997, 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, 1997, 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 manufactures AMLCDs and
sensors at its new mid-volume manufacturing facility in Northville Township,
Michigan.
GD Investments Corp., a Delaware corporation ("GDIC") owns approximately
80% of the issued and outstanding common stock of OIS as well as all of the
issued and outstanding shares of the Company's voting preferred stock. GDIC is
an affiliate of Guardian Industries Corp., a privately held Michigan based
worldwide flat glass manufacturing company ("Guardian"). William Davidson, the
President and Chief Executive Officer of Guardian, owns an additional 1,000,000
shares of the issued and 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 manufacture and sells a
variety of 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. The primary AMLCD
configuration that OIS manufactures, markets and sells is a display cell which
consists of a glass cell with drivers attached. The Company currently offers a
suite of AMLCD products ranging in size from 1" by 4" to 8" by 8". The
Company's displays are generally full color although monochrome displays are
available.
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.
OIS is one of four manufacturers of AMLCDs in North America. 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
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displays to be integrated into a panel of navigation instruments, either
for a new aircraft or for retrofitting 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.
In the past, the Company obtained a significant portion of its revenues
from engineering development agreements which typically involved adapting the
Company's standard AMLCD products to meet certain form, fit and optical
requirements for a specific customer applications. However, the Company has
made a strategc decision to pursue the sale of standard AMLCD products and
minimize engineering work. In fiscal 1997, OIS derived only 15% of its revenue
from engineering work compared to 38% of its revenue in fiscal 1996. The
Company expects to secure the majority of its business from orders for the sale
of products and not from engineering development agreements. In some cases,
the Company will make minor modifications to its products at a customer's
request and will charge the customer for the engineering work involved.
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 $1,306,843, $1,971,513 and $2,037,583 in
Company sponsored research and development for fiscal years 1995, 1996 and
1997 respectively.
Image Sensors. In addition to displays, the Company manufactures image
sensors. Image sensors detect an image and convert it into electronic
(digital) impulses. Image sensors are used, for example, in fax machines,
electronic copyboards and page scanners. In the past, the only customer for
the Company's sensors was Quartet Manufacturing Co., which incorporates OIS
sensors into electronic copyboards. In fiscal 1997, the Company developed and
produced its first flat panel x-ray sensors designed to detect and digitally
capture the same images currently captured using x-ray film. The Company
believes flat panel x-ray sensors offer many advantages over the use of
conventional x-ray film, including digital acquisition, communication and
storage of images, fewer repeat exams, faster patient throughput and increased
utilization of exam rooms. The Company continues to review other potential
commercial applications for its sensor technology, such as industrial
non-destructive testing, produce, livestock and poultry inspection and medical
diagnosis.
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 technology where it appears appropriate. See Intellectual Property
Rights.
COMPETITION
AMLCDs. OIS views the market for AMLCDs as consisting of at least two
distinct submarkets. The first submarket for AMLCDs, and by far the largest,
is the market for AMLCDs for use in consumer electronics products, such as
laptop computers. This market is highly competitive with at least six
competitors worldwide. All of the firms which compete in this submarket 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 submarket at this time, and it will not be possible for
the Company to compete successfully in this submarket 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 this submarket because throughput at the Northville facility will be too
small to generate the necessary economies of scale.
The second submarket for AMLCDs consists of the market for AMLCDs for use
in military, commercial avionics, space and other demanding environments. This
is the submarket that OIS has identified as the near-term target market for its
AMLCDs. OIS AMLCDs are engineered and manufactured to meet the optical and
environmental requirements of these demanding applications.
Within the submarket in which OIS competes, the most significant source of
competition is indirect competition 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
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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, the Company's 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.
Within the submarket in which OIS competes, OIS experiences direct
competition for sales of AMLCDs primarily from two sources. The first source
of competition is from the three other North American companies which
manufacture, or intend to manufacture, AMLCDs: Litton Industries of Canada,
ImageQuest and dpiX. Litton Industries of Canada supplies AMLCDs to Litton
Systems, an affiliated company which is in the business of supplying whole
avionic flight information systems. Image Quest is a start-up company backed
by Hyundai of South Korea and dpiX is a subsidiary of Xerox. Although the
Company is not aware of any significant production of AMLCDs by either
ImageQuest or dpiX, each company 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.
The second source of direct competition for sales of AMLCDs within the
Company's target submarket is from companies which re-manufacture and adapt
consumer grade AMLCDs for avionics use. Although OIS management believes that
consumer grade AMLCDs generally do not meet current avionics requirements, a
number of avionics integrators are purchasing consumer grade AMLCDs and
adapting them for avionics use. These adapted products are a growing source of
competition for the Company. Although the adapted products are generally lower
in price, they also generally have weaker performance in one or more respects
than the Company's products. The Company is carefully monitoring developments
in adapted products.
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 target submarket directly since this submarket is
characterized by 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.
Image Sensors. The Company is seeking to enter into the medical imaging
market and has identified the market for digital flat panel x-ray sensors as
its near term target submarket. This submarket is at a very early stage of
development and is highly dependent on whether or not digital x-ray sensors are
accepted as an alternative to traditional x-ray film. OIS is aware of three
companies that have announced plans to manufacture digital x-ray sensor
products: EG&G Inc., dpiX and Philips Corporation. Recently, EG&G announced
that it will be the exclusive supplier of x-ray sensors to GE Medical Systems.
The potential competitive impact of these companies is not yet clear.
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BUSINESS DEVELOPMENTS
Northville Facility. Through fiscal 1996, the Company produced displays
in its Troy, Michigan, facility which was originally designed primarily for
research and development, not production. The Company built a new mid-volume
manufacturing facility in Northville Township, Michigan. The Northville
facility was designed to produce AMLCDS and sensors for the commercial and
military avionics and medical imaging submarkets, not the consumer electronics
submarket. See Competition. The Northville facility incorporates flexible
manufacturing technology that is intended to facilitate the relatively small
production runs that characterize the Company's current submarkets. The
Company began lengthy process startup procedures at the Northville facility in
June 1995. In August 1996, the Company established a baseline manufacturing
process at the Northville facility, transferred all production from the Troy
facility to the Northville facility and ceased operations in the Troy facility.
Throughout fiscal 1997 the Company concentrated on increasing production
volumes and yields at the Northville facility. By the end of fiscal 1997, the
Company had achieved regular and continuous manufacturing at the Northville
facility sufficient to meet the Company's current demand for its products.
The Northville facility was built under an agreement with the Defense
Advanced Research Projects Agency of the U.S. Department of Defense ("DARPA"),
under which the federal government provided $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. See Management's Discussion and Analysis.
Products. During fiscal 1997, the Company has continued its program of
building "standard" or "catalog" AMLCDs and making them available to customers
on an off-the-shelf basis. During fiscal 1997, the Company also entered into a
production agreement with Sterling Diagnostic Imaging Inc. for the delivery of
the Company's first commercial flat panel x-ray sensor products. In the fiscal
1997, the Company derived approximately 15% of its operating revenues from
development agreements, approximately 78% from sales of AMLCDs (including both
production agreements and off-the-shelf sales) and approximately 7% from image
sensors. See Management's Discussion & Analysis -- Results of Operations.
Customers. In the past, the United States government has been the largest
end user of the Company's displays. The U.S. government, principally the
Department of Defense, continues to purchase displays from the Company
indirectly through a number of prime contractors and avionics integrators.
However, as a result of the Company's ongoing policy to sell displays for use
by the U.S. government as "catalog" products, the Company is no longer required
to satisfy many of the complex requirements associated with traditional
government contracts. While OIS is unable to determine the precise mix of U.S.
government and non-government sales, management believes that the U.S.
government is becoming a less dominate source of the Company's revenue. The
Company has three customers that each individually accounted for more than 10%
of its total revenues in the fiscal year ended June 30, 1997: Kaiser
Electronics, Honeywell and Allied Signal. In aggregate, these three customers
accounted for $8.3 million or 61% of the Company's revenue in fiscal 1997.
Marketing and Development of the Market. As a result of the ongoing
ramp-up at the Northville facility and the availability of additional
production capacity, the Company has begun an aggressive campaign to expand
sales of both its AMLCDs and sensor products. During fiscal 1997, the Company
continued to experience requests for proposals and marketing activity which
resulted in additional production orders. Management expects that the
Company's targeted submarkets will expand substantially in the next three to
five years. Although growth is expected, the amount of growth which will occur
in the next one to three years is uncertain as it is not clear how quickly
potential customers will adopt the use of AMLCD and sensor technology.
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Fiscal 1997 Results. During fiscal 1997, revenues from the sale of
products increased significantly although decreasing engineering revenue and
high costs of sales resulted in continuing losses. See Management's Discussion
& Analysis -- Results of Operations -- Costs of Sales.
Future Operations. Management believes that the Company's ability to
operate profitably will depend on a number of factors, including the following:
1. The rate at which demand for high performance AMLCDs increases.
2. The rate at which digital x-ray sensors are accepted as an alternative
to traditional x-ray film.
3. The more efficient operation of the Northville facility. Management
believes that the Northville facility reflects the state-of-the-art in AMLCD
manufacturing facilities. However, the Company's Northville facility is the
first mid-volume AMLCD manufacturing facility ever been built in the United
States and there is no assurance that the Company will be able to manufacture
its products at competitive cost.
FINANCING DEVELOPMENTS
On October 29, 1996, the Board of Directors of OIS authorized the issuance
of 100,000 shares of a Series B Cumulative Preferred Stock, par value $0.01
(the "Series B Preferred"). The Series B Preferred is not convertible into
Common Stock or any other security of OIS. However, each share of Series B
Preferred entitles the holder thereof to 350 votes on every matter submitted to
a vote of the shareholders of OIS. The Series B Preferred bears a cumulative
dividend at a rate of 8% for three years from the date of issuance and at an
increasing floating rate thereafter (subject to a cap of 16.5% per year). The
purchaser of shares of Series B Preferred cannot cause their redemption, and
OIS can redeem shares of Series B Preferred only upon a vote of the directors
of OIS that are independent of the owner or owners of the shares of Series B
Preferred being redeemed.
On October 30, 1996, OIS issued 38,137 shares of Series B Preferred to
Guardian in exchange for the 35,000 shares of Series A Preferred Cumulative
Preferred Stock previously acquired by Guardian and all dividend in arrears
thereon. This exchange was approved by the independent members of OIS's Board
of Directors.
On October 31, 1996, GDIC purchased 21,000 shares of Series B Preferred
from OIS for $1,000 per share. Subsequently during fiscal 1997, GDIC purchased
an additional 14,500 shares of Series B Preferred from OIS for $1,000 per
share. As of September 18, 1997, GDIC's purchases of Series B Preferred Stock
totaled $35,500,000. These investments were approved by the independent
members of OIS's Board of Directors and are accounted for as equity by OIS.
On October 31, 1996, OIS became eligible, and has elected, to become a
member of an affiliated group under Section 1504(a) of the Internal Revenue
Code of 1986, as amended, with Guardian, GDIC and Guardian's other qualifying
subsidiaries (the "Affiliated Group"). As a member of the Affiliated Group,
OIS's tax attributes generated after October 31, 1996 will be included in the
single consolidated federal income tax return filed by the Affiliated Group.
Net operating losses of OIS generated prior to October 31, 1996 will only be
eligible to offset future taxable income of OIS and cannot be used to offset
the income of other companies included in the Affiliated Group.
In order to provide funding for future operations of OIS, OIS has entered
into a Tax Sharing Agreement with Guardian effective November 1, 1996. Under
the terms of the Tax Sharing Agreement, Guardian will compensate OIS for the
value of OIS's losses and credits which are utilized by the Affiliated Group by
making payments to OIS in an amount equal to the difference between (i) the
liability reflected on the Affiliated Group's consolidated federal income tax
return with the inclusion of OIS and (ii) the liability without the inclusion
of OIS.
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The disinterested members of OIS have authorized OIS to borrow up to
$20,000,000 from Guardian at an annual interest rate of up to 7%, with all
interest and principal due and payable on demand of GDIC. As of September 18,
1997, OIS had borrowed $9,000,000 from GDIC.
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
$5,500,000 on December 31, 1997, $2,500,000 on each of March 31, 1998 and June
30, 1998, $2,750,000 on each of September 30, 1998 and December 31, 1998,
$3,375,000 on each of March 31, 1999 and June 30, 1999, $3,875,000 on September
30, 1999 and $25,875,000 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.
The Company expects to require and to pursue additional equity, and
possibly debt, financing in fiscal 1998, 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, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
FY 97 FY 96 FY 95
------------------- --------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
SALE OF DISPLAYS $ 10,502,747 78% $ 6,488,975 61% $2,290,242 27%
ENGINEERING 2,106,843 15% 4,001,414 38% 5,799,519 69%
SALE OF SENSORS $ 990,898 7% $ 104,818 1% $ 333,280 4%
------------ ------------ -----------
TOTAL REVENUES $ 13,600,488 100% $10,595,207 100% $8,423,041 100%
OPERATING PROFIT:
SALE OF DISPLAYS $(27,176,280) -201% $( 9,166,315) -87% $(7,282,833) -86%
ENGINEERING ( 5,359,140) -39% (13,328,809) -126% (6,629,522) -79%
SALE OF SENSORS $ (2,504,803) -18% $( 348,887) -3% $(1,018,924) -12%
------------ ------------ -----------
TOTAL OPERATING PROFITS
(LOSS) $(35,040,223) -258% $(22,844,011) -216% $(14,931,279) -177%
ASSETS:(1)
FIXED ASSETS (NBV) $ 56,963,414 419% $ 54,731,463 517% $ 45,734,945 543%
INVENTORY $ 9,525,136 70% $ 5,847,250 55% $ 3,360,062 40%
</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,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
FY 97 FY 96 FY 95
------------------- -------------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
ENGINEERING &
SALE OF DISPLAYS
DOMESTIC $11,014,100 81% $ 9,878,531 93% $ 7,830,225 93%
FOREIGN 1,595,490 12% 611,858 6% 259,536 3%
SALE OF SENSORS
DOMESTIC 990,898 7% 104,818 1% 333,280 4%
FOREIGN
----------- ----------- -----------
TOTAL REVENUES $13,600,488 100% $10,595,207 100% $ 8,423,041 100%
----------- ----------- -----------
TOTAL:
DOMESTIC $12,004,998 88% $ 9,983,349 94% $ 8,163,505 97%
FOREIGN 1,595,490 12% 611,858 6% 259,536 3%
----------- ----------- -----------
$13,600,488 100% $10,595,207 100% $ 8,423,041 100%
</TABLE>
Backlog at June 30, 1997, was approximately $33.3 million, as compared to
$28.5 million at June 30, 1996. It is expected that approximately $20.3
million of the backlog will be filled in fiscal 1998 if there are no
cancellations or delays in existing programs. In fiscal 1997, the Company
experienced delays that resulted in the amount of backlog that was actually
filled in the fiscal year being approximately $7.4 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 328 persons at June 30, 1997.
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INTELLECTUAL PROPERTY RIGHTS
The Company is working to improve its current AMLCDs and sensors and to
develop enhancements and improvements to the technologies that are involved in
producing its products. The basic methodology for the manufacture of AMLCDs
using the thin film transistor technology currently employed by the Company is
in the public domain. The manufacture of the Company's sensor products,
including digital x-ray sensors, is based in large part on OIS patents and
trade secrets.
Management believes that the proprietary know-how and other trade secrets
developed by the Company over the years are a key factor in its ability to
produce displays and sensors. 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 50 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 1997.
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. As appropriate,
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.
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.
-9-
<PAGE> 11
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, 1997, 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, 1997, 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, 1997, is
incorporated by reference into this Report.
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, 1997, are incorporated by reference into
this Report:
Report of Independent Public Accountants
Balance Sheets - June 30, 1997 and 1996
Statements of Operations - years ended June 30, 1997, 1996 and 1995
Statements of Stockholders' Equity - years ended June 30, 1997, 1996 and
1995
Statements of Cash Flows - years ended June 30, 1997, 1996 and 1995
Notes to Financial Statements
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-10-
<PAGE> 12
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, 1997, 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, 1997, 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, 1997, 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, 1997, is incorporated by reference into this Report.
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, 1997, and
are incorporated by reference into this Report by Item 8 hereof:
Report of Independent Public Accountants
Balance Sheets - June 30, 1997 and 1996
Statements of Operations - years ended June 30, 1997, 1996 and 1995
Statements of Stockholders' Equity - years ended June 30, 1997, 1996
and 1995
Statements of Cash Flows - years ended June 30, 1997, 1996 and 1995
Notes to Financial Statements
-11-
<PAGE> 13
PAGE
----
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, 1997, 1996 and 1995 ................................. 15
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
- -------------------------------------------
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.)
4.1 Resolution of the Board of Directors of the company establishing the
Series B Cumulative Preferred Stock of the Company.
10.1 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.)
10.2 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.)
10.3 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.)
10.4 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.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
-12-
<PAGE> 14
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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. (Filed as Exhibit to OIS' Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 and
incorporated herein by reference.)
10.13 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.)
10.14 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.)
10.15 Tax Sharing Agreement dated November 1, 1996 between OIS and
Guardian.
10.16 Promissory Note dated June 19, 1997 given by OIS in favor of
GDIC.
13 Form of Annual Report to Shareholders of the Company for the
fiscal year ended June 30, 1997. 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, 1997.
27 Financial Data Schedule. (EDGAR version only.)
(b) Reports on Form 8-K
None.
-13-
<PAGE> 15
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 29, 1997. 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 29, 1997
-14-
<PAGE> 16
OIS OPTICAL IMAGING SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1997, 1996 AND 1995
<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, 1997:
ALLOWANCE FOR DOUBT $60,000 $60,000
ACCOUNTS
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
</TABLE>
-15-
<PAGE> 17
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, 1997
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:
\s\ Charles C. Wilson Executive Vice President, September 9, 1997
- ----------------------- Chief Financial Officer &
Charles C. Wilson Director
(Principal Financial &
Accounting Officer)
\s\ Rex Tapp President, Chief Executive September 9, 1997
- ----------------------- Officer & Director
Rex Tapp
\s\ Ralph J. Gerson Chairman of the Board & Director September 9, 1997
- -----------------------
Ralph J. Gerson
\s\ Jeffrey A. Knight Director September 9, 1997
- -----------------------
Jeffrey A. Knight
\s\ C. K. Prahalad Director September 9, 1997
- -----------------------
C. K. Prahalad
\s\ Robert M. Teeter Director September 9, 1997
- -----------------------
Robert M. Teeter
\s\ Mark S. Wrighton Director September 9, 1997
- -----------------------
Mark S. Wrighton
\s\ Peter Joel C. Young Director September 9, 1997
- -----------------------
Peter Joel C. Young
-16-
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.1 Resolution of the Board of Directors establishing the Series B
cumulative preferred stock of the Company.
10.15 Tax Sharing Agreement dated November 1, 1996 between OIS and Guardian.
10.16 Promissory Note dated June 19, 1997 given by OIS in favor of GDIC.
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, 1997.
27 Financial Data Schedule. (EDGAR version only)
-17-
<PAGE> 1
EXHIBIT 4.1
OIS OPTICAL IMAGING SYSTEMS, INC.
RESOLUTION AUTHORIZING
THE SERIES B CUMULATIVE PREFERRED STOCK
RESOLVED, that in accordance with the provisions of the Company's
Restated Certificate of Incorporation, as amended, (the "Certificate of
Incorporation") a series of cumulative preferred stock, $0.01 par value
("Series B Preferred"), be and hereby is created and authorized for issuance,
and that the designations and amounts thereof and the preferences,
qualifications, privileges, limitations, options, and other rights (the "Rights
and Preferences") of the Series B Preferred are as set forth in this resolution
(this "Designation Resolution"):
SECTION 1. Designation and Amount. The Company has authority to issue
100,000 shares of Series B Preferred, which number may be increased or
decreased at any time and from time to time by resolution of the Board of
Directors (the "Board"), except that no decrease will reduce the number of
authorized shares of Series B Preferred to a number less than the number of
shares of Series B Preferred then outstanding.
SECTION 2. Dividends and Distributions.
2.1 Accrual of Dividends. The holders of shares of
Series B Preferred will be entitled to receive, when, as, and if declared by
the Board, out of legally available funds, dividends payable in cash as
hereinafter provided, which dividends will be paid prior and in preference to
any payment of any dividend to the holders of the common stock of the Company
and to all other classes or series of capital stock of the Company that are
hereafter designated to be subordinated to the Series B Preferred. Dividends
on each share of Series B Preferred will begin to accrue from the Original Date
Of Issuance (as defined in Section 9.1) of any such share and will accumulate
and be payable in cash (and not in kind) on the last day of June and December
in each year, computed on the Original Issuance Price (as defined in Section
9.2), at the following rates:
(a) during each of the first three (3) years from the
Original Date Of Issuance of any such share and
through the last day of June or December (as the case
may be), at an annual rate of 8%; and
(b) thereafter during each of years four (4) through six
(6) following the Original Date Of Issuance at one of
the following rates, as selected by a majority of the
disinterested members of the Company's Board of
Directors (the "Independent Directors") (and in the
absence of a selection by the Independent Directors,
the rate computed as provided in paragraph (i) will
Page 1 of Exhibit 4.1
<PAGE> 2
apply):
(i) a rate per annum equal to the sum of: (A)
LIBOR, as quoted on the Reuters Data Service
on the first day of January or July, as the
case may be; and (B) 125 basis points, which
rate will be recalculated as of the first day
of each January and July for the following
six-month period; or
(ii) a rate per annum equal to the sum of (A) the
three-year Treasury Bill yield, as quoted on
the Reuters Data Service on the first day of
the three-year period, and (B) 200 basis
points; and
(c) thereafter the "Independent Directors" may select one
of the following rates (in the absence of a selection
by the Independent Directors, the rate computed as
provided in paragraph (i) will apply):
(i) a rate per annum equal to the sum of: (A)
LIBOR, as quoted on the Reuters Data Service
on the first day of January or July, as the
case may be; and (B) 350 basis points, which
rate will be recalculated as of the first day
of each January and July for the following
six-month period; or
(ii) a rate per annum equal to the sum of (A) the
three-year Treasury Bill yield, as quoted on
the Reuters Data Service on the first day of
the applicable three-year period, and (B) 400
basis points, which rate will be recalculated
as of the first day of each three-year
period; and
(d) thereafter beginning with year ten (10)
after the Original Date Of Issuance and
on each successive three-year anniversary the rate
then in effect will increase by an additional 150
basis points.
(e) Notwithstanding anything herein to the contrary, the
dividend rate shall not at anytime exceed 16.5% per
annum.
During each of the first three (3) years from the Original Date of Issuance of
any share, no interest or sum of money in lieu of interest will be payable in
respect of any dividend payment or payments that may be in arrears, and accrued
and unpaid dividends will not compound. Thereafter, interest on accrued and
unpaid dividends will accrue and will be compounded semi-annually at the annual
dividend rate then in effect.
2.2 Payment of Dividends. Dividends on shares of Series
B Preferred will be paid on dates established by the Board of Directors (each
such date, a "Dividend Payment Date"). Dividends accruing on shares of Series
B Preferred for any period of less than a full year will be
Page 2 of Exhibit 4.1
<PAGE> 3
computed on the basis of a 365 day year. Dividends paid on shares of Series B
Preferred in an amount less than the total amount of the dividends accumulated
on such shares will be allocated in such manner so that holders of Series B
Preferred share ratably in the dividends so paid.
2.3 Record Date. The Board of Directors may fix a record
date for the determination of holders of shares of Series B Preferred entitled
to receive payment of a dividend or distribution declared thereon, which record
date will be no more than 60 days prior to the date fixed for the payment.
SECTION 3. No Conversion or Redemption Rights.
3.1 No Conversion Right. The holders of the shares of
Series B Preferred will not have any right to convert any such shares into
shares of any other class or series of capital stock of the Company, or into
rights, options or warrants to subscribe for or purchase shares of any other
class or series of capital stock of the Company.
3.2 No Redemption Right. The holders of Series B
Preferred will not have any right to require the Company to redeem any or all
of their shares. The Company will not redeem any shares of Series B Preferred
without the affirmative vote of a majority of the Independent Directors.
SECTION 4. Certain Restrictions.
4.1 Dividends and Distributions. At any time while any
shares of Series B Preferred are outstanding and any dividends accrued thereon
remain unpaid after any Liquidation (as defined in Section 6 below), the
Company will not:
(a) declare or pay dividends or make any other
distributions on any shares of stock ranking junior to the Series B Preferred
as to dividends; or
(b) declare or pay dividends or make any other
distributions on any shares of stock ranking on a parity with the Series B
Preferred as to dividends, except dividends or other distributions paid on the
Series B Preferred and all such parity stock in such proportions so that the
amount of dividends or other distributions declared in respect of each such
series or class of stock bear the same ratio to each other as the ratio that
the accumulated but unpaid dividends in respect of each such series or class of
stock bear to each other.
4.2 Redemption and Purchase. At any time while any
shares of Series B Preferred remain outstanding, the Company will not:
(a) redeem, purchase or otherwise acquire for
consideration (including pursuant to sinking fund requirements) shares of any
stock ranking junior to the Series B Preferred as to dividends and as to
liquidating distributions, except that the Company may at any time redeem,
purchase or otherwise acquire shares of any such junior stock by the conversion
of such shares into,
Page 3 of Exhibit 4.1
<PAGE> 4
or the exchange of such shares for, shares of any stock of the Company ranking
junior to the Series B Preferred as to dividends and as to liquidating
distributions;
(b) redeem pursuant to a sinking fund or otherwise
shares of any stock of the Company ranking on a parity with the Series B
Preferred as to dividends and as to liquidating distributions, except (i) by
means of a redemption pursuant to which all outstanding shares of Series B
Preferred and all stock of the Company ranking on a parity with the Series B
Preferred as to dividends and as to liquidating distributions are redeemed or
pursuant to which a pro rata redemption is made from all holders of the Series
B Preferred and all stock of the Company ranking on a parity with the Series B
Preferred as to dividends and as to liquidating distributions, the amount
allocable to each class or series of such stock being determined on the basis
of the aggregate liquidation preference of the outstanding shares of each such
class or series being redeemed, or (ii) by conversion of such parity stock
into, or exchange of such parity stock for, stock of the Company ranking junior
to the Series B Preferred as to dividends and as to liquidating distributions;
or
(c) purchase or otherwise acquire for any
consideration any stock of the Company ranking on a parity with the Series B
Preferred as to dividends and as to liquidating distributions, except (i)
pursuant to an acquisition made in accordance with the terms of one or more
offers to purchase all of the outstanding shares of Series B Preferred and all
stock of the Company ranking on a parity with the Series B Preferred as to
dividends and as to liquidating distributions (which offers will describe such
proposed acquisition of all such parity stock), each of which offers will have
been accepted by the holders of at least 50% of the shares of each series or
class of stock receiving such offer outstanding at the commencement of the
first of such purchase offers, or (ii) by conversion of such parity stock into,
or exchange of such parity stock for, stock of the Company ranking junior to
the Series B Preferred as to dividends and as to liquidating distributions.
SECTION 5. Reacquired Shares. Any shares of Series B Preferred
redeemed, purchased, or otherwise acquired by the Company in any manner
whatsoever will have the status of authorized but unissued shares of Series B
Preferred.
SECTION 6. Liquidation, Dissolution or Winding Up.
6.1 Liquidation Procedure. Upon any voluntary or
involuntary liquidation, dissolution, or winding up of the Company (a
"Liquidation"), the holders of the Series B Preferred then outstanding will be
entitled to be paid out of the assets of the Company available for distribution
to its shareholders an amount equal to the Original Issuance Price for each
outstanding share of Series B Preferred, plus any accrued but unpaid dividends
(the "Redemption Price"). No distribution will be made:
(a) to the holders of shares of stock ranking junior
to the Series B Preferred upon a Liquidation unless, prior thereto, each holder
of shares of Series B Preferred has received a distribution in the amount of
the Redemption Price of such holder's shares of Series B Preferred; or
Page 4 of Exhibit 4.1
<PAGE> 5
(b) to the holders of shares of stock ranking on
a parity with the Series B Preferred upon a Liquidation, except distributions
made ratably on the Series B Preferred and all other such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon a Liquidation.
6.2 Shortfall in Payment on Liquidation. If the amount
available for distribution on Liquidation to holders of shares of Series B
Preferred is less than the aggregate Redemption Price of such shares, the
amount so available for distribution will be allocated among such holders in
such manner so that holders of Series B Preferred share ratably in the
distributions upon Liquidation so paid according to the respective aggregate
Redemption Price of shares of Series B Preferred held by such holders at the
time of such distribution.
6.3 No Other Rights. After payment in full of the
Redemption Price of the Series B Preferred, the Series B Preferred will not be
entitled to receive any additional cash, property, or other assets of the
Company upon the Liquidation of the Company. If the Company pays a liquidation
payment amounting in the aggregate to less than the Redemption Price of the
Series B Preferred, the Company in its discretion may require the surrender of
certificates evidencing the shares of Series B Preferred and issue a
replacement certificate or certificates, or it may require the certificates
evidencing the shares in respect of which such payments are to be made to be
presented to the Company, or its agent, for notation thereon of amounts of the
Redemption Price paid for such shares. If a certificate for Series B Preferred
on which payment of one or more partial Liquidation payments has been made is
presented for exchange or transfer, the certificate issued upon such exchange
or transfer will bear an appropriate notation as to the aggregate amount of the
Redemption Price that had been paid.
SECTION 7. Event of Default. An "Event of Default" will occur if the
Company fails to pay (a) the Redemption Price on any shares of the Series B
Preferred within thirty (30) days after such Redemption Price will be
due or (b) a dividend payment within thirty (30) days after the Dividend
Payment Date.
SECTION 8. Voting Rights. The holders of shares of Series B
Preferred will have only the voting rights expressly provided in this
Section 8 and the rights expressly required by applicable law.
8.1 Ordinary Matters. Each share of Series B Preferred
will entitle the holder thereof to 350 votes on each and every matter submitted
to a vote of the shareholders of the Company.
8.2 Matters Affecting the Rights of Series B Preferred.
The affirmative vote of the holders of 75% of the outstanding shares of Series
B Preferred will be required for the Company to (a) amend or repeal any
provisions of the Certificate of Incorporation or of this Designation
Resolution, if the amendment or repeal would materially adversely affect the
Rights and Preferences of the Series B Preferred, or (b) amend the Certificate
of Incorporation or adopt a designation resolution to create or increase the
amount of any class or series of capital stock that would rank
Page 5 of Exhibit 4.1
<PAGE> 6
senior to or on parity with the Series B Preferred as to dividend and/or
liquidation rights.
8.3 Voting Rights Upon Default in Payment of Dividends.
Without in any way limiting the rights and remedies of holders of shares of
Series B Preferred at law, in equity, or pursuant to contractual arrangement
with the Company, upon an Event of Default the affirmative vote of the holders
of a majority of outstanding shares of Series B Preferred will be required for
the Company to sell or lease all or substantially all of the Company's
properties or assets.
SECTION 9. Definitions.
9.1 "Original Date Of Issuance" of any share of Series B
Preferred means the date on which: (a) a subscription agreement for that share
has been received by the Company and (b) the consideration for that share has
been fully paid by the initial purchaser.
9.2 "Original Issuance Price" means, with respect to
Series B Preferred, One Thousand Dollars ($1,000.00) per share.
Page 6 of Exhibit 4.1
<PAGE> 1
EXHIBIT 10.15
TAX SHARING AGREEMENT
This Tax Sharing Agreement ("Agreement") is effective as of the 1st day of
November 1996, by and among GUARDIAN INDUSTRIES CORP., a Delaware corporation
(hereinafter referred to as the "Parent Company"), and OIS OPTICAL IMAGING
SYSTEMS, INC. a Delaware corporation (hereinafter referred to as the
"Subsidiary" or "OIS").
The term "Parent Company" shall include Guardian Industries Corp. and any
subsidiary thereof whose stock is owned directly or indirectly by Guardian
Industries Corp. and which qualifies as a member of the Parent Company's
affiliated group as defined in Section 1504(a) of the Internal Revenue Code of
1986, as amended ("Internal Revenue Code") and such term shall exclude OIS (and
its subsidiaries). The terms "Subsidiary" and "OIS" shall include OIS Optical
Imaging Systems, Inc. and any of its subsidiaries acquired or formed after the
effective date of this Agreement, and which later qualify as members of the
Parent Company's affiliated group as defined in Section 1504(a) of the Internal
Revenue Code.
WITNESSETH
WHEREAS, the Parent Company and Subsidiary are expected to qualify as members
of an affiliated group as defined in Section 1504 (a) of the Internal Revenue
Code ("Affiliated Group"), commencing on November 1, 1996.
WHEREAS, the Parent Company and Subsidiary desire to file a United States
consolidated income tax return as an Affiliated Group for the taxable period
which includes November 1, 1996 through December 31, 1996 and to file, if
qualified to do so as an Affiliated Group, United States consolidated income
tax returns for subsequent tax years (or other taxable periods).
WHEREAS, it is the intent and desire of the Parent Company and Subsidiary
that a method be established for each tax year (or other taxable period) that a
United States consolidated income tax return is filed by the Affiliated Group
for sharing and allocating the United States consolidated income tax liability
of the Affiliated Group among its members, for reimbursing the Parent Company
for payment of such tax liability, if any, and for providing for the allocation
of any United States income tax refund arising from a carryback of losses or
tax credits from subsequent tax years (or other taxable periods).
WHEREAS, the Parent Company and Subsidiary will make available any current
and net operating losses and tax credits as they may have available to reduce
the United States consolidated income tax liability of the Affiliated Group.
WHEREAS, The Parent Company and Subsidiary desire to provide for the
reimbursement to the Parent Company and/or Subsidiary whose current and net
operating losses and tax credits have been used to reduce the United States
consolidated income tax liability of the Affiliated Group.
Page 1 of Exhibit 10.15
<PAGE> 2
NOW THEREFORE, In consideration of the mutual covenants and promises
contained in this Agreement, the parties hereto do hereby agree as follows:
A. CONSOLIDATED FEDERAL INCOME TAX RETURNS
(l) A United States consolidated income tax return shall be filed by the
Parent Company for the taxable year ending December 31, 1996 and for each
subsequent taxable period during which this Agreement is in effect and for
which the Affiliated Group is required or permitted to file a United States
consolidated income tax return.
(2) For each tax year (or other taxable period) the aggregate United States
consolidated income tax liability for members of the Affiliated Group shall be
computed twice, once with the inclusion of the Subsidiary in such computation
and secondly with the exclusion of the Subsidiary from such computation.
(3) To the extent that members (including the Parent Company and Subsidiary)
of the Affiliated Group have had their United States income tax liabilities, as
computed on an aggregate basis, increased by inclusion of Subsidiary, an
account payable (liability) of the Subsidiary ("Tax Liability to Parent") to
the Parent Company shall be established on the books of the Parent Company and
of the Subsidiary. To the extent that members (including the Parent Company
and Subsidiary) of the Affiliated Group have had their United States income tax
liabilities, as computed on an aggregate basis, decreased by inclusion of
Subsidiary, an account payable (liability) of the Parent Company ("Tax
Liability to Subsidiary") to the Subsidiary shall be established on the books
of the Parent Company and of the Subsidiary. In determining whether the tax
liability of the Affiliated Group has been reduced by the Subsidiary's
deductions or credits it will be assumed that the Affiliated Group first
utilizes comparable credits and net operating loss carryovers from prior years
generated by other members of the Affiliated Group.
(4) An estimate of the Tax Liability to Parent or Tax Liability to
Subsidiary shall be made by the Parent Company not later than March 15th for
the preceding calendar year (or taxable period ending on December 31st). The
resulting estimated account payable shall be collected within thirty (30) days
of the date that such estimate is made. A final calculation of the Tax
Liability to Parent or Tax Liability to Subsidiary shall be made within 30 days
of the date that the Parent Company files the consolidated return for any
calendar year (or taxable period ending on December 31st). The resulting final
account payable shall be collected within 30 days of the date that such final
calculation of the Tax Liability to Parent or Tax Liability to Subsidiary is
provided by the Parent Company to Subsidiary.
(5) The Parent Company will determine the allocation of the United States
consolidated income tax liability, and the account payables and receivables to
be reflected on the books of the Parent Company and Subsidiary in accordance
with this Agreement. To the extent that the Subsidiary disagrees with such
determination, the matter shall be referred to the independent certified public
accountants then auditing the books of the Parent Company, whose determination
Page 2 of Exhibit 10.15
<PAGE> 3
shall be final.
(6) Payment of the actual United States consolidated income tax liability
for a taxable year (or other taxable period) shall include the payment of
estimated income tax installments due for such tax year (or other taxable
period), which payments, if any, will be determined by the Parent Company based
on an estimate of income tax liability for the tax year (or other taxable
period). The Subsidiary shall pay to the Parent Company, the Subsidiary's
share of each payment of the actual estimated consolidated income tax
liability, within thirty (30) days of receiving notice of such payment from the
Parent Company. The Subsidiary's share of any overpayment of estimated income
tax will be refunded to the Subsidiary by the Parent Company within thirty (30)
days after it is determined that the Subsidiary has overpaid the estimated
income tax.
(7) If the United States consolidated income tax liability is adjusted for
any tax year (or other taxable period), whether by means of an amended tax
return, claim for refund or after a tax audit by the United States Internal
Revenue Service, the Tax Liability to Parent or Tax Liability to Subsidiary for
that year (or other taxable period) shall be recomputed to give effect to such
adjustments. The resulting change in the Tax Liability to Parent or Tax
Liability to Subsidiary, shall be determined in the same manner as in Paragraph
A (2) of this Agreement. In the case of an increase in Tax Liability to Parent
(or decrease in Tax Liability to Subsidiary), the Subsidiary shall pay the
resultant difference to the Parent Company within thirty (30) days after
receiving notice of such liability from the Parent Company. In the case of a
decrease in Tax Liability to Parent (or increase in Tax Liability to
Subsidiary), the Parent Company shall pay the resultant difference to
Subsidiary within thirty (30) days after the adjustment has been finally
determined. Any interest (income or expense) and penalties arising from
adjustments to the United States consolidated income tax liability shall be
equitably apportioned between the Parent Company and Subsidiary.
B. PARENT AS AGENT AND CONSENTS
(1) The Subsidiary irrevocably designates the Parent Company as its agent
for the purpose of taking any and all action necessary or incidental to the
filing of United States consolidated income tax returns and state combined or
consolidated returns (including, but not limited to, the conduct of any audit
by any taxing authority).
(2) The Subsidiary agrees to furnish the Parent Company with any and all
information requested by the Parent Company to carry out the provisions of this
Agreement, to cooperate with Parent Company in filing any return or consent
contemplated by this Agreement and to cooperate in connection with any refund
claim, audit, judicial or other like or similar proceeding.
(3) At the direction of the Parent Company, the Subsidiary shall execute and
file such consents, elections, and other documents that may be required or
appropriate for the proper filing of each United States consolidated income tax
return and state combined or consolidated returns.
(4) Subsidiary hereby consents to all elections made by the Parent Company on
behalf
Page 3 of Exhibit 10.15
<PAGE> 4
of the Affiliated Group.
C. CONSOLIDATED AND COMBINED STATE INCOME TAX RETURNS
If the Affiliated Group or any members thereof is required or elects to file
combined or consolidated state or local tax returns including the Subsidiary,
the Parent Company shall not be required to reimburse the Subsidiary for any of
the Subsidiary's tax losses or attributes which are utilized by the Affiliated
Group or any members thereof. In the event that the Subsidiary would have a
stand alone income, franchise or similar tax liability for state and local
taxes, then Parent Company shall make an allocation of such state or local tax
liability to Subsidiary consistent with the principles set forth in Paragraph A
(2) of this Agreement.
D. SUBSIDIARY LEAVING THE AFFILIATED GROUP
(1) If the Subsidiary (or a subsidiary of the Subsidiary) is no longer a
member of the Affiliated Group (a "Former Member"), the Parent Company shall,
upon the request of a Former Member, provide any assistance that shall be
reasonably required to enable the Former Member to pursue any tax refund,
including but not limited to the filing of tax refund claims on behalf of the
Former Member.
(2) The Former Member shall be able to participate, in good faith and at its
own expense, in the audit of the portion of the United States consolidated
income tax return of the Affiliated Group which relates to its separate taxable
income or loss and shall be able to participate, in good faith and at its own
expense, in any contest, litigation, or settlement of any issue relating to
such separate taxable income or loss.
(3) The Former Member and the remaining members of the Affiliated Group will
fully cooperate with each other in connection with the allocation of income and
expense for the taxable year in which the Former Member leaves the Affiliated
Group.
(4) The Former Member (and, in the event the Affiliated Group ceases to file
a United States consolidated return, the Parent Company) shall be bound by the
terms of this Agreement with respect to all tax years during which such Former
Member joined in the filing of United States consolidated income tax returns
and state combined or consolidated returns.
(5) The Former Member and the remaining members of the Affiliated Group will
cooperate and provide such information as will be necessary to enable each of
them to file whatever returns are required for United States income tax
purposes and state combined or consolidated returns, or in connection with any
audit or litigation with respect to such returns.
E. MISCELLANEOUS PROVISIONS
(1) This Agreement shall apply to the taxable year ending December 31, 1996
and all
Page 4 of Exhibit 10.15
<PAGE> 5
subsequent taxable periods unless the Parent Company and Subsidiary agree to
terminate or modify this Agreement. Any termination or modification, no matter
when agreed to, shall be deemed effective as of the end of the then current
taxable period. Notwithstanding termination, this Agreement shall continue in
effect with respect to any payment or refund (Tax Liability to Parent or Tax
Liability to Subsidiary) due for all taxable periods prior to termination.
(2) All notices under this Agreement shall be in writing and shall be deemed
to have been sufficiently given or served and effective for all purposes when
presented personally, or sent by facsimile transmission (if receipt of the
transmission is confirmed in writing by the addressee) or three days after
being deposited in a United States postal receptacle for registered or
certified mail addressed, return receipt requested, postage prepaid, to any
person at the address set forth below, or at such other address as such party
shall subsequently designate in writing delivered in the form of a notice to:
If to Parent Company: Guardian Industries Corp.
Vice President and Tax Counsel
2300 Harmon Road
Auburn Hills, Michigan 48326
If to Subsidiary: OIS Optical Imaging Systems, Inc.
Chief Financial Officer
47050 Five Mile Road
Northville, Michigan 48167
(3) Neither this Agreement nor any provision hereof may be changed, waived,
discharged, or terminated orally but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge, or
termination is sought.
(4) This Agreement shall constitute the entire agreement between the parties
concerning the subject matter hereof and shall supersede any prior agreements
and understandings between or among the parties with respect to the subject
matter hereof.
(5) The validity, interpretation, and enforceability of this Agreement shall
be governed in all respects by the laws of the State of Michigan.
(6) Failure of any party at any time to require the other party's
performance of any obligation under this Agreement shall not affect the right
to require performance of that obligation. Any waiver by any party of any
breach of any provision of this Agreement shall not be construed as a waiver or
modification of the provision itself, or a waiver of any rights under this
Agreement.
(7) Every provision of this Agreement is intended to be severable. If any
term or provision is illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the validity of the remainder of this
Agreement.
Page 5 of Exhibit 10.15
<PAGE> 6
(8) This Agreement may be executed in multiple counterparts each of which
shall be deemed an original and all of which shall constitute one agreement,
and the signatures of any party to any counterpart shall be deemed to be a
signature to, and may be appended to, any other counterpart.
(9) This Agreement shall be binding upon and inure to the benefit of any
successor, whether by statutory merger, acquisition of assets or otherwise, to
any of the parties hereto, to the same extent as if the successor had been an
original party to this Agreement.
(10) If during a United States consolidated income tax return period
Subsidiary acquires or organizes another corporation or company that is allowed
to be included in the consolidated return of the Affiliated Group, then such
corporation or company shall join in and be bound by this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
GUARDIAN INDUSTRIES CORP.
By / Jeffrey A. Knight /
------------------------------------
Jeffrey A. Knight
Group Vice President/Finance
OIS OPTICAL IMAGING SYSTEMS, INC.
By / Charles C. Wilson /
------------------------------------
Charles C. Wilson
Executive Vice-President and
Chief Financial Officer
Page 6 of Exhibit 10.15
<PAGE> 1
EXHIBIT 10.16
PROMISSORY NOTE
Northville, Michigan June 19, 1997
FOR VALUE RECEIVED, receipt of which is hereby acknowledged, the undersigned,
OIS OPTICAL IMAGING SYSTEMS, INC., a Delaware corporation ("Maker"), does
hereby promise to pay to the order of GD INVESTMENTS CORP., a Delaware
corporation ("Holder"), at 2300 Harmon Road, Auburn Hills, Michigan 48326, or
at such other place or to such other party as Holder may from time to time
designate, in lawful currency of the United States of America, the principal
amount of all advances of funds (the "Advances") made pursuant to this
Promissory Note plus interest thereon from the date of each such Advance at a
rate of 6% per annum.
The outstanding principal amount of all Advances shall not exceed $20,000,000
in the aggregate at any one time. All Advances (together with accrued and
unpaid interest thereon) and all repayments and prepayments of such Advances
(and of accrued and unpaid interest thereon) shall be marked by the Holder on
the last page of this Promissory Note, and the amount of all Advances (together
with accrued and unpaid interest thereon) shall be deemed to be the amounts so
marked.
On written demand of Holder, the entire outstanding principal balance of this
Promissory Note, together with all accrued and unpaid interest, shall be
immediately due and payable in full. Maker may at any time pay the full amount
or any part of the indebtedness evidenced by this Promissory Note without the
payment of any premium or fee. All prepayments hereon shall be applied first
to accrued and unpaid interest due under this Promissory Note, and then to the
outstanding principal balance of this Promissory Note.
Maker hereby waives presentment, demand, protest, notice of nonpayment or
dishonor of this Promissory Note, and diligence in the collection thereof.
This Promissory Note shall be governed by and construed in accordance with the
laws of the State of Michigan.
To the extent provided herein, the indebtedness evidenced by this Promissory
Note (the "Subordinated Debt") is subordinate and junior in right of payment to
all principal of, and interest on, loans made to the Maker pursuant to the
Credit Agreement dated December 14, 1993, as amended (the "Credit Agreement"),
among Maker, Bank of America NT& SA and NBD Bank, N.A. (the "Senior Debt").
Except as otherwise provided herein, Maker may pay principal of, and interest
on, the Subordinated Debt. The Senior Debt shall continue to be Senior Debt
and entitled to the benefits of the subordination provisions of this Promissory
Note irrespective of any amendment, modification or waiver of any term of or
extension or renewal of the Senior Debt.
Upon the happening of a Default or an Event of Default (as defined in the
Credit Agreement) (a "Senior Debt Default"), then, unless and until such Senior
Debt Default shall have been remedied or waived or shall have ceased to exist,
no direct or indirect payment (in cash, property or securities
Page 1 of Exhibit 10.16
<PAGE> 2
or by set-off or otherwise) shall be made on account of the principal of, or
interest on, any Subordinated Debt, or as a sinking fund for the Subordinated
Debt, or in respect of any redemption, retirement, purchase or other
acquisition of any of the Subordinated Debt.
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment or other similar proceeding relating to Maker or
its property, (ii) any proceeding for the liquidation, dissolution or other
winding-up of Maker, voluntary or involuntary, whether or not involving
insolvency or bankruptcy proceedings, (iii) any assignment by Maker for the
benefit of creditors or (iv) any other marshalling of the assets of Maker, all
Senior Debt (including any interest thereon accruing at the legal rate after
the commencement of any such proceedings) shall first be paid in full before
any payment or distribution, whether in cash, securities or other property of
Maker, shall be made to any holder of any Subordinated Debt on account of any
Subordinated Debt. Any payment or distribution, whether in cash, securities or
other property of Maker or any other entity, provided for by a plan of
reorganization or readjustment which would otherwise (but for these
subordination provisions) be payable or deliverable in respect of the
Subordinated Debt shall be paid or delivered directly to the holders of Senior
Debt until all Senior Debt (including any interest thereon accruing at the
legal rate after the commencement of any such proceedings) shall have been paid
in full.
If any payment or distribution of any character or any security, whether in
cash, securities or other property, shall be received by a holder of
Subordinated Debt in contravention of any of the terms hereof, such payment or
distribution or security shall be received in trust for the benefit of, and
shall be paid over or delivered and transferred to, the holders of the Senior
Debt at the time outstanding to the extent necessary to pay all such Senior
Debt in full. In the event of the failure of any holder of any Subordinated
Debt to endorse or assign any such payment, distribution or security, each
holder of Senior Debt is hereby irrevocably authorized to endorse or assign the
same.
No present or future holder of any Senior Debt shall be prejudiced in the
right to enforce subordination of Subordinated Debt by any act or failure to
act on the part of Maker. Nothing contained herein shall impair, as between
Maker and the holder of the Subordinated Debt, the obligation of Maker to pay
the Subordinated Debt as and when the same shall become due and payable in
accordance with the terms if this Promissory Note, or prevent the holder of any
Subordinated Debt from exercising all rights, powers and remedies otherwise
permitted by applicable law or hereunder upon a default or event of default
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the holders of the Subordinated Debt as provided herein.
Page 2 of Exhibit 10.16
<PAGE> 3
Upon the payment in full of all Senior Debt, the holders of Subordinated Debt
shall be subrogated to all rights of any holders of the Senior Debt to receive
any further payments or distributions applicable to the Senior Debt until the
Subordinated Debt shall have been paid in full.
MAKER:
OIS OPTICAL IMAGING SYSTEMS, INC.
By: / Charles C. Wilson /
-------------------------------------
Charles C. Wilson
Executive Vice President and
Chief Financial Officer
The subordination provisions of this Promissory Note are hereby acknowledged
and accepted.
GD INVESTMENTS CORP.
By: / David A. Clark /
-----------------------------------
David A. Clark
Vice President and Treasurer
Page 3 of Exhibit 10.16
<PAGE> 1
EXHIBIT 13
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, 1996
First Quarter . . . . . . . . . . . . . . . . . . . $4.1250 $5.6250
Second Quarter. . . . . . . . . . . . . . . . . . . 3.0000 5.2500
Third Quarter . . . . . . . . . . . . . . . . . . . 3.7500 5.6250
Fourth Quarter. . . . . . . . . . . . . . . . . . . 3.0625 3.7500
Year ended June 30, 1997
First Quarter . . . . . . . . . . . . . . . . . . . $2.6250 $3.6250
Second Quarter. . . . . . . . . . . . . . . . . . . 1.5625 3.1875
Third Quarter . . . . . . . . . . . . . . . . . . . 2.1250 3.1250
Fourth Quarter. . . . . . . . . . . . . . . . . . . 2.1875 3.1250
Year ended June 30, 1998
First Quarter . . . . . . . . . . . . . . . . . . .
through September 18 $1.8125 $2.46875
</TABLE>
- ------------------------
The quotations listed 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, 1997,
was 1,628.
Page 1 of Exhibit 13
<PAGE> 2
SELECTED FINANCIAL DATA
Set forth below is certain financial information taken from OIS' audited
financial statements.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues $ 13,600,488 $ 10,595,207 $ 8,423,041 $11,700,389 $ 7,162,035
Cost of Sales 41,093,260 26,106,953 17,810,224 13,078,919 9,262,815
Internal Research and Development 2,037,583 1,971,513 1,306,843 688,094 372,242
Selling, General, Administrative and other 8,735,028 6,644,735 3,935,699 3,789,061 2,834,330
Income Tax Benefit 9,755,490 ---- ---- ---- ----
Net Loss $(28,509,893) $(24,127,994) $(14,629,725) $(5,855,685) $ (5,307,352)
Net Loss Available to Common Shareholders $(33,020,009) $(26,097,584) $(14,840,683) $(5,855,685) $ (5,307,352)
Net Loss per Common Share $(.34) $(.27) $(.21) $(.19) $(.20)
At year end:
Total Assets $ 77,172,789 $ 70,513,934 $ 57,263,779 $38,146,868 $ 7,088,883
Long-Term Debt, Net $ 42,000,000 $ 48,000,000 $ 40,125,454 $12,000,000 $ 77,355
Convertible Notes -- ---- ---- ---- $ 7,221,412
Working Capital (Deficit) $ 2,904,085 $ 3,432,241 $ 5,211,233 $ 2,616,215 $ (1,173,195)
Stockholders' Equity $ 14,967,499 $ 7,163,704 $ 7,820,724 $ 9,633,880 $ 3,501,018
</TABLE>
Page 2 of Exhibit 13
<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, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years ended June 30, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years ended June 30, 1997, in conformity with
generally accepted accounting principles.
\s\ Arthur Anderson LLP
Detroit, Michigan,
August 29, 1997.
Page 3 of Exhibit 13
<PAGE> 4
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 960,042 $ 516
Accounts receivable (net of reserve for doubtful
accounts of $60,000) 4,222,508 3,232,486
Inventories 9,525,136 5,847,250
Income tax receivable from affiliate 4,755,490 --
Prepaid expenses and other current assets 746,199 485,251
Insurance receivable -- 6,085,263
Receivable from U.S. Government -- 131,705
TOTAL CURRENT ASSETS 20,209,375 15,782,471
------------ ------------
PROPERTY AND EQUIPMENT
Land 3,000,000 3,000,000
Building 32,891,009 32,232,265
Machinery and other equipment 31,371,764 28,670,855
Construction in process 60,192 129,074
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 67,322,965 64,032,194
Less accumulated depreciation (10,359,551) (9,300,731)
------------ ------------
NET TOTAL PROPERTY AND EQUIPMENT 56,963,414 54,731,463
TOTAL ASSETS $ 77,172,789 $ 70,513,934
============ ============
</TABLE>
See notes to financial statements.
Page 4 of Exhibit 13
<PAGE> 5
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
---------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Current installments on capital lease obligation $ -- $ 125,454
Subordinated note payable to affiliate 3,000,000 2,000,000
Current installment on long-term debt 10,500,000 3,000,000
Accounts payable 2,817,068 5,599,266
Accrued interest 578,166 951,103
Deferred revenue 112,204 236,845
Other accrued liabilities 297,852 437,562
--------------- ------------
TOTAL CURRENT LIABILITIES 17,305,290 12,350,230
LONG TERM DEBT 42,000,000 48,000,000
LOCAL GOVERNMENT SUBSIDY 2,900,000 3,000,000
TOTAL LIABILITIES 62,205,290 63,350,230
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 - -0- shares at June 30, 1997 and
35,000 shares at June 30, 1996 350
Series B, 8% cumulative, non-convertible and voting
Authorized - 100,000 shares
Issued and outstanding - 73,637 shares at June 30, 1997 and
-0- shares at June 30, 1996 736
Common stock, par value $0.01 per share:
Authorized - 125,000,000 shares
Issued and outstanding - 97,467,920 shares at June 30, 1997
and 97,103,790 shares at June 30, 1996 974,679 971,038
Additional paid-in capital 141,375,527 105,457,517
Accumulated deficit (126,565,319) (98,055,426)
Deferred compensation (818,124) (1,209,775)
--------------- ------------
TOTAL STOCKHOLDERS' EQUITY 14,967,499 7,163,704
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,172,789 $ 70,513,934
=============== ============
</TABLE>
See notes to financial statements.
Page 5 of Exhibit 13
<PAGE> 6
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Display revenue $ 10,502,747 $ 6,488,975 $ 2,290,242
Engineering revenue 2,106,843 4,001,414 5,799,519
Sensor revenue 990,898 104,818 333,280
------------ ------------ ------------
TOTAL REVENUES 13,600,488 10,595,207 8,423,041
COST OF SALES
Display 31,818,764 12,658,272 6,257,458
Engineering 6,315,576 13,102,241 9,680,064
Sensors 2,958,920 346,440 1,872,702
------------ ------------ ------------
TOTAL COST OF SALES 41,093,260 26,106,953 17,810,224
------------ ------------ ------------
GROSS LOSS (27,492,772) (15,511,746) (9,387,183)
OPERATING EXPENSES
Internal research and development 2,037,583 1,971,513 1,306,843
Selling, general and administrative 5,509,868 5,360,752 4,237,253
------------ ------------ ------------
TOTAL OPERATING EXPENSES 7,547,451 7,332,265 5,544,096
------------ ------------ ------------
OPERATING LOSS (35,040,223) (22,844,011) (14,931,279)
OTHER INCOME (EXPENSE)
Interest expense (4,112,596) (2,233,735) (10,808)
Other income 406,898 41,954 200,236
Licensing and royalties 480,538 104,174 112,126
Insurance proceeds -- 803,624 --
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (3,225,160) (1,283,983) 301,554
LOSS BEFORE INCOME TAX BENEFIT (38,265,383) (24,127,994) (14,629,725)
Income tax benefit 9,755,490 -- --
NET LOSS $(28,509,893) $(24,127,994) $(14,629,725)
------------ ------------ ------------
Preferred stock dividends 4,510,116 1,969,590 210,958
------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(33,020,009) $(26,097,584) $(14,840,683)
------------ ------------ ------------
NET LOSS PER COMMON SHARE $(.34) $(.27) $(.21)
===== ===== =====
</TABLE>
See notes to financial statements.
Page 6 of Exhibit 13
<PAGE> 7
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1997 1996 1995
----------- ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(28,509,893) $(24,127,994) $(14,629,725)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,168,473 3,396,279 1,356,533
Deferred compensation expense 498,834 492,886 233,982
Impact on cash flows from changes in assets
and liabilities:
Receivables 471,456 (2,490,928) 1,042,155
Inventories (3,677,886) (2,487,188) (1,276,461)
Prepaid expenses and other assets (260,948) (105,086) (2,248,196)
Accounts payable and accrued liabilities (3,294,845) 1,329,875 (3,613,687)
Deferred revenue (124,641) (90,109) (407,824)
------------ ------------ ------------
NET CASH USED IN OPERATING
ACTIVITIES (28,729,450) (24,082,265) (19,543,223)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (8,500,423) (12,392,797) (24,708,813)
------------ ------------ ------------
NET CASH USED IN INVESTING (8,500,423)
ACTIVITIES (12,392,797) (24,708,813)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on capital lease obligation (125,454) (121,633) (158,497)
Proceeds from issuance of debt and notes 2,500,000 13,000,000 28,000,000
Net proceeds from issuance of common stock 298,853 267,130 293,545
Net proceeds from issuance of preferred stock 35,516,000 22,500,000 12,500,000
------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 38,189,399 35,645,497 40,635,048
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 959,526 (829,565) (3,616,988)
CASH, CASH EQUIVALENTS AT
BEGINNING OF PERIOD 516 830,081 4,447,069
------------ ------------ ------------
CASH, CASH EQUIVALENTS AT
END OF PERIOD $ 960,042 $ 516 $ 830,081
============ ============ ============
</TABLE>
See notes to financial statements.
Page 7 of Exhibit 13
<PAGE> 8
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------------
<S> <C> <C> <C>
Common Stock Issued in Exchange for Deferred
Compensation, Net of Terminations $ 675,935 $1,369,409 $ 287,014
Adjust Deferred Compensation 568,752
Capitalization of Equipment Pursuant to Capital
Lease Obligation 365,000
Conversion of Guardian Equity to Common Stock 10,500,000
Conversion of Series A Preferred Stock to
Series B Preferred Stock 35,000,000
Payment of Dividends on Series A Preferred
Stock by Issuance of Series B Preferred Stock 3,128,129
</TABLE>
See Statements of Cash Flows.
Page 8 of Exhibit 13
<PAGE> 9
OIS OPTICAL IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
OIS Optical Imaging Systems, Inc. ("OIS" or the "Company") 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 products and services mainly to avionics 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 $960,042 and $516 are included in Cash and Cash Equivalents in
the accompanying Balance Sheets for the years ended June 30, 1997 and 1996,
respectively. These are stated at cost which approximates market.
Cash paid for interest for the fiscal years ended June 30, 1997, 1996 and
1995 was $4,485,533, $1,549,826 and $10,808, 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:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and other equipment 3 to 10
Buildings and cleanrooms 20 to 30
</TABLE>
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.
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 K).
Local Government Subsidy
The Local Government Subsidy is being amortized over 30 years on a
straight-line basis. Amortization began July 1, 1996 (See Note K).
Page 9 of Exhibit 13
<PAGE> 10
Inventories
Inventories are stated at the lower of cost, determined on a first-in
first-out basis, or market, and represent spare equipment parts, 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>
1997 1996
---------- ----------
<S> <C> <C>
Spare equipment parts $ 601,585 --
Manufacturing supplies 108,582 $ 76,392
Raw materials 6,787,877 5,048,022
Displays in process 2,027,092 722,836
---------- ----------
Total $9,525,136 $5,847,250
========== ==========
</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. This amount was
reimbursed by the insurance company during fiscal 1997.
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 1997, 1996 and 1995, the Company derived approximately 61%, 76%
and 68% of revenue respectively from three customers operating in the U.S.
Aerospace industry. As of June 30, 1997, 1996 and 1995, $2,366,421, $2,825,252
and $1,215,814 is due from these three customers and is included in Accounts
Receivable in the accompanying Balance Sheets.
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.
Page 10 of Exhibit 13
<PAGE> 11
New Accounting Standards
During fiscal 1999, the Company must adopt Statement of Financial
Accounting Standards (SFAS) No. 130, "Comprehensive Income" and SFAS No. 131,
"Segment Disclosures". SFAS No. 130 requires that the Company include a
reconciliation of Net Loss to Comprehensive Income. Comprehensive income
includes certain gains and losses which are currently required to be included
as components of stockholders' equity. SFAS No. 131 requires the Company to
disclose certain financial information regarding the Company's internally
identified business segments. The effect on the financial statements of
adopting these statements has not been determined.
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 I).
During fiscal 1995, the Company issued 12,500 shares of Series A Preferred
Stock to its affiliate Guardian Industries Corp. ("Guardian"). During fiscal
1996, the Company issued an additional 22,500 shares of Series A Preferred
Stock to Guardian. The Company is restricted from paying dividends on its
Preferred Stock by its credit agreement. Certain of these restrictions lapsed
on September 30, 1996 (See Note I). The Series A Preferred Stock had a
dividend rate of 8% for the first five years.
On October 29, 1996, the Company's Board of Directors created and
authorized for issuance 100,000 shares of Series B Cumulative Preferred Stock,
par value $.01, with an original issuance price of $1,000 per share. The
Series B Preferred Stock bears a cumulative dividend rate of 8% for the first
three years and a floating rate, subject to a 16.5% cap, thereafter. Each
share of Series B Preferred Stock entitles the holder to 350 votes on each and
every matter submitted to a vote of the Company's shareholders. The Series B
Preferred Stock is non-convertible.
On October 30, 1996, the Company exchanged the 35,000 shares of Series A
Preferred Stock held by Guardian and all dividends in arrears for 38,137 shares
of Series B Preferred Stock. Guardian and William Davidson contributed common
stock of the Company and other property to GD Investments Corp. ("GDIC"), a
Guardian affiliate. On October 31, 1996, the Company sold 21,000 shares of
Series B Preferred Stock to GDIC at a price of $1,000 per share. OIS used the
proceeds to retire its subordinated note payable (Bridge Loan) and all accrued
interest to Guardian, which amounted to approximately $18.9 million.
During fiscal 1997, the Company sold an additional 14,500 shares of Series
B Preferred Stock to GDIC for a total of $14.5 million. OIS used the proceeds
to fund ongoing operations.
The Company's dividend policy on both the Series A and Series B Preferred
Stock is to accrue only those dividends that are declared, or expected to be
declared, in the current year by the Board of Directors. During fiscal 1997,
the Company satisfied all dividends in arrears on the Series A Preferred Stock,
totaling $3,128,219, by issuing an additional 3,137 shares of Series B
Preferred Stock. Management has determined that the fiscal 1997 dividends on
the Series B Preferred Stock will not be declared. Cumulative dividends in
arrears as of June 30, 1997 and 1996 total $3,562,445 and $2,180,548,
respectively.
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"). 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.
Page 11 of Exhibit 13
<PAGE> 12
The Company has elected to provide the pro forma disclosures, as permitted
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the 1994 Plan and the 1988 Plan within the accompanying
Statements of Operations. Had compensation expense for the Plan been
determined based on the fair value at the grant date for awards in 1997 and
1996 consistent with the provisions of SFAS No. 123, the Company's pro forma
net loss available to common shareholders and pro forma net loss per common
share would have been increased to the amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma net loss available to common shareholders
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,020,009) $(26,097,584)
SFAS No. 123 pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,333,298) (26,334,147)
Pro forma net loss per common share -
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) (.27)
SFAS No. 123 pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) (.27)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
were used for the 1997 and 1996 grants: risk-free rate of interest of 6.45%
for 1997 and 5.66% and 6.99% for 1996; dividend yield of 0%; and expected lives
of 10 years and 4.56 years.
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 1997, 1996 and 1995 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>
1997 254,300 $3.00 $762,900 October 13, 1999
1996 312,420 $4.50 $1,405,890 October 13, 1998
1995 49,920 $6.50 $324,480 October 13, 1997
</TABLE>
There are currently 339,200 outstanding stock options that were granted
under the 1994 Plan. These options become exercisable in accordance with the
schedule established by the Stock Option Committee at the time of grant. These
options expire ten years after the date of grant. The option price is set at
market on date of grant.
There are currently outstanding 10,000 stock options that were granted
under the 1988 Plan. These options generally become exercisable 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 exercisable
annually thereafter. These options generally expire six 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 non-transferable 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.
Page 12 of Exhibit 13
<PAGE> 13
A summary of the transactions during the three years ended June 30, 1997
with respect to OIS' stock option plans follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ---------------------- ------------------------
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 397,608 $3.77 341,104 $3.15 313,419 $2.26
Granted 94,000 2.81 174,950 4.58 108,000 5.13
Cancelled 19,330 2.47 37,800 4.93 9,350 2.25
Exercised 123,078 2.25 80,646 2.25 70,965 2.25
----- --------- ------ --------- ------
Outstanding June 30, 349,200 $4.12 397,608 $3.77 341,104 $3.15
========= ===== ========= ====== ========= ======
Exercisable June 30, 110,000 $4.64 220,158 $3.05 143,731 $2.21
========= ===== ========= ====== ========= ======
Available for grant June 30, 2,126,630 N/A 2,430,990 N/A 2,868,860 N/A
========= ===== ========= ====== ========= ======
</TABLE>
NOTE E - RELATED PARTY 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
1997 and 1996, OIS incurred expenses for these services of approximately
$110,000 per year. In 1995, this expense was approximately $190,000. During
1995, OIS also purchased approximately $17,000 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 incurred
approximately $118,000 for the year ended June 30, 1995, for these engineering
services (see Note K).
NOTE F - 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, 1997, 1996 and 1995 were 97,286,539, 96,889,823, and 69,241,640,
respectively.
Under the terms of the two Stock Purchase Agreements, the Guardian Option
(see Note I) and William Davidson's right pursuant to a May 14, 1993 agreement
(see Note I), 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.
For the year ended June 30, 1998, the Company will be required to adopt
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 will require primary net loss per common share to be
replaced with basic net loss per common share, which is computed by dividing
reported net loss available to common shareholders by the weighted average
common shares outstanding. No dilution for potentially dilutive securities is
included. Fully diluted net loss per common share, now called diluted net loss
per common share, is still required. This statement is not expected to have a
material effect on the Company's financial statements.
Page 13 of Exhibit 13
<PAGE> 14
NOTE G - FEDERAL TAXES ON INCOME
As a result of certain Capital Stock transactions (See Note C), the
Company is eligible to be a member of Guardian's affiliated tax group
("Affiliated Group"). This allows the Company's tax losses, credits and/or
income generated after October 31, 1996 to be included in the single
consolidated federal income tax return filed by the Affiliated Group. Guardian
and the Company entered into a Tax Sharing Agreement dated November 1, 1996,
pursuant to which the Company will receive or make tax sharing payments based
on the amount by which the federal income tax liability of the Affiliated Group
is reduced, or increased, by inclusion of the Company in the Affiliated Group.
As of June 30, 1997, the Company had received $5 million and recorded an
estimated receivable from Guardian of $4,755,490 in accordance with the Tax
Sharing Agreement.
The differences between the United States Federal statutory income tax
benefit and the income tax benefit as calculated under the provisions of SFAS
No. 109 for the years ended June 30, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- -----------
<S> <C> <C> <C>
Federal statutory benefit $(13,393,490) $(8,204,000) $(4,974,000)
Benefit due to change in
effective tax rate (944,000)
Net increase in valuation
reserve due to losses
without tax benefit 4,570,000 8,195,000 4,971,000
Other 12,000 9,000 3,000
------------ ----------- -----------
Actual income tax benefit $ (9,755,490) $ -0- $ -0-
</TABLE>
The components of the income tax benefit for the years ended June 30, are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal
Currently refundable $(12,743,490) $(9,860,000) $(5,217,000)
Deferred (1,582,000) 1,665,000 246,000
Net increase in valuation
Reserve 4,570,000 8,195,000 4,971,000
------------ ----------- -----------
Actual income tax benefit $ (9,755,490) $ -0- $ -0-
============ =========== ===========
</TABLE>
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, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Deferred income tax liability:
Depreciation and amortization $ 1,041,000 $ 1,729,000
------------ ------------
1,041,000 1,729,000
Deferred income tax assets:
Net operating loss credits (35,769,000) (32,781,000)
Other (1,930,000) (1,036,000)
------------ ------------
(37,699,000) (33,817,000)
Valuation allowance 36,658,000 32,088,000
(1,041,000) (1,729,000)
Net deferred income taxes $ -0- $ -0-
============ ============
</TABLE>
Page 14 of Exhhibit 13
<PAGE> 15
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.
At June 30, 1997, 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 $351,500
2001 3,255,000 90,200
2002 3,242,000
2003 7,391,000
2004 3,352,000
2005 633,000
2006 6,009,000
2007 6,476,000
2008 5,213,000 1,000
2009 5,886,000 2,030
2010 15,434,000
2011 23,723,000 7,700
2012 11,059,000
$102,198,000 $452,430
============ ========
</TABLE>
NOTE H - LEASE AGREEMENTS
In the year ended June 30, 1995, OIS entered into a three-year
non-collateralized lease agreement covering certain machinery and equipment.
OIS's Troy facilities are leased under a lease that expired in September
1996, at a monthly rate of $15,460. This lease was renewed on a month-to-month
basis. All OIS leases are with unrelated parties.
Obligations under noncancellable operating leases subsequent to June 30,
1997 are as follows:
<TABLE>
<CAPTION>
Operating
Leases
<S> <C>
1998 $ 32,644
1999 26,946
2000 26,292
2001 19,719
---------
$ 105,601
</TABLE>
Operating lease expense for the fiscal years ended June 30, 1997, 1996 and
1995 was $241,953, $250,344, and $251,632, respectively.
NOTE I - 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
Page 15 of Exhibit 13
<PAGE> 16
on a fully diluted basis.
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.
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
$5,500,000 on 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 $25,875,000 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.
Under the terms of the Credit Agreement, OIS is restricted from making
capital expenditures in excess of certain amounts, 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. As of June 30, 1997, the Company is not in
compliance with the capital spending covenant. The Company has received a
waiver from the consortium of banks.
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, 1997, 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 non-performance by the other parties
to the interest rate swap agreement. However, the Company does not anticipate
non-performance 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 1997, the Company signed a $20 million Promissory Note (the
"Note") with GDIC. The Note bears interest at a rate of 6% per annum. The
Note is subordinated to all amounts outstanding under the agreement described
above. At June 30, 1997, $3 million is outstanding under the Note. The
principal balance of the Note and all accrued and unpaid interest is due upon
demand of the holder.
Due to the level of current and anticipated losses, management expects
additional capital resources will be needed to support the Company's
operations. Management expects that Guardian, directly or through an
affiliate, will provide funding to support the Company's operations through
fiscal 1998. At this time, Guardian has not indicated any intention to
discontinue funding the Company.
NOTE J - 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
$198,000, $176,000 and $135,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
NOTE K - 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 is using the land for their
manufacturing facility and have met certain employment criteria. The facility
cost approximately $107 million. Pursuant to this construction, the Company
has capitalized approximately $1.10 million and $2.38 million of interest
incurred during construction during the years ended June 30, 1996 and 1995.
The capitalized interest
Page 16 of Exhibit 13
<PAGE> 17
is included in Building in the accompanying Balance Sheets.
During fiscal 1994, the Company negotiated an agreement under the DARPA,
AMLCD Manufacturing Technology Program. Under the terms of the agreement, the
Company received $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 DARPA, 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, 1997, $48
million has been billed, all of which has been received. As of June 30, 1997,
the Company has spent approximately $132,000 for equipment that has not been
billed to DARPA and is included in Receivable from U.S. Government in the
accompanying Balance Sheets.
Page 17 of Exhibit 13
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
The operating results for fiscal 1997 continue to reflect substantial operating
losses. As a result of increased production volumes, fiscal 1997 revenue was
28% higher than fiscal 1996 revenue. However, the Company's cost of sales
continued to exceed revenue due to the relatively high cost of sales driven by
the Company's overhead, scrap rates and depreciation expense for the period.
During fiscal 1997, the Company worked to resolve a number of production
issues, including equipment down-time, that were limiting production volumes.
The Company also identified and corrected several process problems which were
causing product defects and lower production yields. Although production
volumes and yields improved significantly during the fiscal year, the majority
of these improvements were not realized until the fourth quarter of the current
year. In fact, nearly 81% of the total unit volume of production for the year
occurred during the last six months of fiscal 1997.
While the Company works to improve production yields and volumes, the Company
will also need to expand the markets for its products by increasing its sales
of displays, primarily to the avionics markets, and developing its x-ray
sensor business. Management is optimistic about the Company's ability to
produce and sell more products in fiscal 1998. Although significant losses
will continue, management anticipates that the Company's operating results will
improve somewhat during fiscal 1998. The Company's ability to further improve
its financial performance and achieve profitability will depend on whether the
Company is able to achieve significantly higher volumes of production and sales
and reduce its incremental cost of sales in future fiscal periods.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
REVENUE
Total revenue for fiscal 1997 of $13,600,488 was 28% higher than total revenue
for fiscal 1996 of $10,595,207. This increase is attributable to a
substantial increase in revenue from the sale of displays and sensors, which
was partly offset by a decrease in revenue from customer-funded engineering.
Revenue from the sale of displays and sensors for fiscal 1997 of approximately
$11,500,000 was 74% higher than revenues from the sale of displays and sensors
for fiscal 1996. This increase, which continues a trend started during fiscal
1996, is the result of more displays being manufactured and shipped during
fiscal 1997. Although display revenue increased during fiscal 1997, the rate
of growth was constrained by low production volumes during the first three
quarters of the year. Significant additional display and sensor revenue will
be necessary if the Company is to substantially improve its financial results.
Management expects that revenues from the sale of displays and sensors will
continue to increase during fiscal 1998 as existing orders for the Company's
products are satisfied. However, the sales volume required to achieve
profitability exceeds the existing market for the Company's products.
Therefore, the Company is working aggressively to expand the markets for its
displays, x-ray sensors and other products.
Page 18 of Exhibit 13
<PAGE> 19
Revenue from customer-funded engineering for fiscal 1997 of approximately
$2,100,000 was 47% lower than revenue from customer-funded engineering for
fiscal 1996 of approximately $4,000,000. This decrease is the result of the
Company's strategic decision to reduce customer-funded engineering activity as
the Company concentrates on manufacturing operations.
COST OF SALES
Cost of sales for fiscal 1997 of $41,093,260 was 57% higher than cost of sales
for fiscal 1996 of $26,106,953. The cost of sales as a percentage of revenue
increased to 302% in fiscal 1997 from 246% in fiscal 1996. 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 repairs, insurance, depreciation, engineering,
supervisory and quality control personnel and other costs needed to facilitate
the manufacturing process.
Direct labor and material for fiscal 1997 increased by approximately $8.7
million when compared to fiscal 1996. Most of this increase is attributable
to the increased amounts of raw materials used to verify process controls and
increase production volumes. Although yields improved significantly throughout
the fiscal year, higher production volumes resulted in higher overall scrap
costs in fiscal 1997 compared to fiscal 1996. Management is encouraged by the
significant increase in production volumes and improved yields experienced
during the fourth quarter of the current fiscal year. To the extent that the
Company can continue to improve yields and increase production volumes,
management expects that direct labor and material will decrease on a per unit
basis and as a percentage of revenue during fiscal 1998.
Overhead for fiscal 1997 increased by approximately $6.3 million when compared
to fiscal 1996. The increase is attributable in large part to an increase of
approximately $2.7 million in depreciation expense due to the facility and
related process equipment being depreciated for a full year during fiscal 1997.
During 1997, the Company also incurred approximately $3.6 million in
increased costs in the areas of repair and maintenance, utilities,
manufacturing supplies and tooling.
A substantial part of the Company's overhead costs are largely fixed and, as a
result, management does not expect significant changes in the total overhead
costs as production volume increases. However, until the Company is able to
produce more saleable product, overhead costs will continue to be a major
component of cost of sales on both a per unit and percentage of revenue basis.
OTHER COSTS
The Company's internal research and development costs of $2,037,583 in fiscal
1997 were 3% higher than the internal research and development costs of
$1,971,513 incurred in fiscal year 1996. The Company continues to invest
resources in order to increase and improve its line of products and to protect
its technology and intellectual property rights. This area is an important
part of OIS's business. Management expects internal research and development
spending for fiscal 1998 will be consistent with fiscal 1997.
The Company's Selling, General and Administrative costs of $5,509,868 in fiscal
1997 were 3% higher than Selling, General and Administrative costs of
$5,360,752 in fiscal 1996. Management does not expect its Selling, General and
Administrative costs to increase significantly in fiscal 1998.
Interest expense during fiscal 1997 increased by approximately $1,900,000
compared to fiscal 1996. During fiscal 1996 the new plant was placed in
service. Therefore, 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
Page 19 of Exhibit 13
<PAGE> 20
of the Northville facility. The Company also incurred additional interest on
higher debt levels to finance ongoing operations when compared to fiscal 1996.
Interest expense is expected to continue to increase until operations generate
enough profits to begin retiring the outstanding debt.
Other income, licensing and royalty income and insurance proceeds in fiscal
1997 decreased by $62,316 compared to fiscal 1996. This decrease is
attributable in large part to a one-time insurance payment of $803,624 received
during fiscal 1996 in connection with the interruption of business caused by
the fire at the Northville facility in March 1995. Royalty income increased by
$376,364 compared to fiscal 1996. The Company also realized $276,481 from the
sale of equipment formerly utilized at the Troy facility.
Other differences between fiscal 1997 and 1996 are not discussed because they
result principally from differences in timing of revenue and expenses and not
from any known trends.
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 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 delivery delays. 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
Page 20 of Exhibit 13
<PAGE> 21
manufacturing process. Overhead costs include, among other things, the costs
of utilities, maintenance and repairs, insurance, depreciation, engineering,
supervisory, quality control 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 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. 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 until operations generate enough profits to begin
retiring the outstanding debt.
Page 21 of Exhibit 13
<PAGE> 22
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.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's Cash and Cash Equivalents at June 30,1997 was $960,042. The
Company is attempting to manage its cash to minimize borrowings under its
various debt instruments.
OPERATING ACTIVITIES
During fiscal 1997, the Company incurred a net loss of $28,509,893. Inventory
increased approximately $3.7 million as the Company increased levels of raw
materials and spare equipment parts to sustain the increase in manufacturing
activity. Accounts payable and other accrued expenses decreased approximately
$3.3 million due to the timing of payment of invoices. Furthermore, the
Company incurred approximately $6.2 million in depreciation costs, which
contributed to net loss but had no effect on cash.
INVESTING ACTIVITIES
During fiscal 1997, the Company spent approximately $3.4 million on equipment
related to the development and production of x-ray sensors. The Company also
spent approximately $2.2 million on substrate carriers, test equipment and
display fixtures to handle the increase in production volume. Furthermore,
the Company spent an additional $2.9 million for computer hardware and
software as well as improving existing equipment, building and cleanrooms in an
effort to improve efficiency and productivity.
FINANCING ACTIVITIES
During fiscal 1997, the Company received $35.5 million from the sale of
preferred stock to GD Investments Corp. ("GDIC"), a Guardian affiliate. (See
Capital Resources.)
During fiscal 1997, the Company signed a $20 million Promissory Note in favor
of GDIC to the Company to provide the Company with working capital. The
Promissory Note accrues interest at a rate of 6% per annum, and all principal
and interest is payable on demand of GDIC. As of June 30, 1997, the Company had
borrowed $3 million under the Promissory Note. As of September 18, 1997, the
Company has borrowed $9 million under the promissory note.
During fiscal 1997, the Company borrowed $16.4 million under an existing $20
million bridge loan from Guardian to provide the Company with working capital
requirements. In October of 1997, the Company repaid the entire $18.9 million
principal balance of the bridge loan together with all accrued interest. (See
Capital Resources).
During fiscal 1997, the Company borrowed $1.5 million under its $52.5 million
commercial credit facility
Page 22 of Exhibit 13
<PAGE> 23
with NBD Bank N.A. and Bank of America NT&SA. As of June 30, 1997, the
Company's aggregate borrowings under its commercial credit facility were $52.5
million. The repayment of principal, which was originally scheduled to begin
on June 30, 1997, has been deferred to December 31, 1997 under agreement with
the banks. The first payment on this date is $5.5 million with various
quarterly payments due through December 31, 1999.
The Company's cash is decreasing, and management anticipates a need for
additional cash during fiscal 1998 (see Capital Resources).
CAPITAL RESOURCES
The Company has financed the completion of the Northville plant and related
ramp-up and provided working capital for continuing operations through fiscal
1997.
On October 29, 1996, the Company's Board of Directors created and authorized
for issuance 100,000 shares of Series B Preferred Stock, par value $.01, with
an original issuance price of $1,000 per share. The Series B Preferred Stock
bears a dividend rate of 8% for the first three years and a floating rate,
subject to a 16.5% cap, thereafter. Each share of Series B Preferred Stock
entitles the holder to 350 votes per share on each and every matter submitted
to a vote of the Company's shareholders. The Series B Preferred Stock is
non-convertible.
On October 30, 1996, the Company exchanged the 35,000 shares of Series A
Preferred Stock held by Guardian and all dividends in arrears for 38,137 shares
of Series B Preferred Stock. Guardian and William Davidson contributed common
stock of the Company and other property to GDIC. On October 31, 1996, the
Company sold 21,000 shares of Series B Preferred Stock to GDIC at a price of
$1,000 per share. OIS used the proceeds to repay all principal and all accrued
interest under its bridge loan from Guardian, which amounted to approximately
$18.9 million. During the remainder of fiscal 1997, the Company sold an
additional 14,500 shares of Series B Preferred Stock to GDIC at a price of
$1,000 per share.
As a result of the above transaction, the Company is eligible to be a member of
Guardian's affiliated tax group ("Affiliated Group"). This allows the
Company's tax losses, credits and/or income generated after October 31, 1996,
to be included in the single consolidated federal tax return by the Affiliated
Group.
Guardian and the Company entered into a Tax Sharing Agreement dated November 1,
1996, pursuant to which the Company will receive or make tax sharing payments
based on the amount by which the federal income tax liability of the Affiliated
Group is reduced or increased by inclusion of the Company in the Affiliated
Group. As of June 30, 1997, the Company had received $5 million and recorded
an estimated receivable from Guardian of $4,755,490 in accordance with the Tax
Sharing Agreement.
The Company had entered into an agreement with Wayne County for the purchase of
approximately 80 acres of land adjacent to the Company's existing facility for
a conditional purchase price of $800,000 (the "Purchase Agreement"). Due to
the time involved in having the site rezoned to allow for the Company's
intended use, the Purchase Agreement expired. Management of the Company
determined that the Company should not appropriate the financial resources to
revive the Purchase Agreement in order to acquire and develop the site in
accordance with the Purchase Agreement. However, Guardian acquired the site
from Wayne County on substantially the same terms as the Purchase Agreement.
In addition, Guardian has indicated that if within five years the Company
presents an acceptable plan to develop a new manufacturing facility on that
site, and is capable of financing such a plan, Guardian would be willing to
sell the site to the
Page 23 of Exhibit 13
<PAGE> 24
Company on substantially the same terms as the Purchase Agreement.
Due to the level of current and anticipated losses, management expects
additional capital resources will be needed to support the Company's
operations. Management expects that Guardian, directly or through an
affiliate, will provide funding to support the Company's operations through
fiscal 1998. 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.
Page 24 of Exhibit 13
<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, 1997 financial statements and
schedules of OIS Optical Imaging Systems, Inc. dated August 29, 1997 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, 1997
EXHIBIT 23 -- Page 1 of Exhibit 23
<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, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 960,042
<SECURITIES> 0
<RECEIVABLES> 4,282,508
<ALLOWANCES> 60,000
<INVENTORY> 9,525,136
<CURRENT-ASSETS> 20,209,375
<PP&E> 67,322,965
<DEPRECIATION> 10,359,551
<TOTAL-ASSETS> 77,172,789
<CURRENT-LIABILITIES> 17,305,290
<BONDS> 0
974,679
0
<COMMON> 736
<OTHER-SE> 13,992,084
<TOTAL-LIABILITY-AND-EQUITY> 77,172,789
<SALES> 13,600,488
<TOTAL-REVENUES> 13,600,488
<CGS> 41,093,260
<TOTAL-COSTS> 48,640,711
<OTHER-EXPENSES> 3,225,160
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 4,112,596
<INCOME-PRETAX> (38,265,383)
<INCOME-TAX> (9,755,490)
<INCOME-CONTINUING> (28,509,893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (28,509,893)
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