<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------
( ) 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.
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(Exact name of registrant as specified in its charter)
Delaware 38-2544320
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
47050 Five Mile Road Northville, Michigan 48167
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 454-5560
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period 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 the number of shares outstanding of each of the issuer's classes of
common stock as of December 16, 1998:
Common Stock, $0.01 par value 97,468,429
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Class Number of Shares
<PAGE> 2
PART I - FINANCIAL INFORMATION
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Financial Statements
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
STATEMENT OF CHANGES IN
-----------------------
NET ASSETS (LIQUIDATION BASIS)
------------------------------
FOR THE PERIOD FROM JUNE 30, 1998 TO SEPTEMBER 30, 1998
-------------------------------------------------------
(Unaudited)
<TABLE>
<S> <C>
Stockholders' deficit at June 30, 1998 (going concern
historical cost basis) $(11,339,920)
Net loss from operations for the period from July 1, 1998 to
September 18, 1998 (4,624,961)
Change in deferred compensation from July 1, 1998 to September 18, 1998 248,012
------------
Stockholders' deficit at September 18, 1998 (going concern historical
cost basis) (15,716,869)
Accrual of estimated closure costs anticipated from discontinuance of
manufacturing operations on September 18, 1998, net of Tax Benefit
of $1,826,000 (3,802,234)
Reversal of local government subsidy due to discontinuance of manufacturing
operations on September 18, 1998 2,775,000
------------
Net asset deficiency at September 30, 1998 $(16,744,103)
============
</TABLE>
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<PAGE> 3
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
STATEMENTS OF OPERATIONS (GOING CONCERN BASIS)
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(Unaudited)
<TABLE>
<CAPTION>
For the Period from
July 1, 1998 through Three Months Ended
September 18, 1998 September 30, 1997
---------------------------- --------------------------
<S> <C> <C>
REVENUES
Display revenue $ 2,541,638 $ 5,471,532
Engineering revenue -- 384,179
Sensor and other revenue 394,405 623,017
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TOTAL REVENUES 2,936,043 6,478,728
COST OF SALES
Display 5,936,692 10,170,131
Engineering -- 858,467
Sensor and other 1,419,069 659,743
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TOTAL COST OF SALES 7,355,761 11,688,341
GROSS LOSS (4,419,718) (5,209,613)
OPERATING EXPENSES
Internal research and development 351,491 365,067
Selling, general and administrative 1,417,780 1,472,228
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TOTAL OPERATING EXPENSES 1,769,271 1,837,295
OPERATING LOSS (6,188,989) (7,046,908)
OTHER INCOME (EXPENSE)
Interest expense (1,093,430) (1,098,926)
Interest income 6,158 9,279
Licensing and royalties 120,000 77,204
Other 25,300 60,700
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TOTAL OTHER INCOME (EXPENSE) (941,972) (951,743)
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Loss before Income Tax benefit $(7,130,961) $(7,998,651)
Income Tax benefit 2,506,000 2,801,000
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NET LOSS $(4,624,961) $(5,197,651)
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Preferred stock dividends 1,837,721 1,484,845
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NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $(6,462,682) $(6,682,496)
=========== ===========
NET LOSS PER COMMON SHARE (Note B) $ (.07) $ (.07)
=========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 4
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENT OF NET ASSETS (LIQUIDATION BASIS)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998
----------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 185,319
Accounts receivable 2,681,848
Inventory 9,311,727
Prepaid assets 860,172
Property and equipment 21,000,000
Deferred income taxes 8,826,000
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TOTAL ASSETS 42,865,066
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LIABILITIES
Accounts payable 353,514
Accrued liabilities 479,581
Accrued interest 1,080,468
Accrued closure costs 5,216,000
Income taxes payable to affiliate 1,229,606
Bank debt (not revalued to liquidation value) 39,250,000
Subordinated note payable to affiliate (not revalued to
liquidation value) 12,000,000
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TOTAL LIABILITIES 59,609,169
------------
NET ASSET DEFICIENCY $(16,744,103)
============
</TABLE>
See notes to financial statements.
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<PAGE> 5
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
BALANCE SHEET
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ASSETS
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(GOING CONCERN BASIS)
<TABLE>
<CAPTION>
June 30,1998
------------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,078,567
Accounts receivable
(Net of reserve for doubtful accounts of
$60,000) 4,040,661
Inventories 9,411,086
Income tax receivable from affiliate 5,100,756
Prepaid expenses and other current assets 771,105
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TOTAL CURRENT ASSETS 20,402,175
PROPERTY AND EQUIPMENT
Land 3,000,000
Building 11,100,000
Machinery and other equipment 6,900,000
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TOTAL PROPERTY AND EQUIPMENT 21,000,000
Less accumulated depreciation --
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TOTAL PROPERTY AND EQUIPMENT, NET 21,000,000
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DEFERRED INCOME TAXES 7,000,000
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TOTAL ASSETS $48,402,175
===========
</TABLE>
See notes to financial statements.
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<PAGE> 6
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
BALANCE SHEET
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LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
(GOING CONCERN BASIS)
<TABLE>
<CAPTION>
June 30,1998
-------------------
<S> <C>
CURRENT LIABILITIES
Subordinated note payable to affiliate $ 12,000,000
Current installment on long-term debt 42,000,000
Accounts payable 1,569,244
Accrued interest 997,129
Other accrued liabilities 375,722
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TOTAL CURRENT LIABILITIES 56,942,095
LOCAL GOVERNMENT SUBSIDY 2,800,000
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TOTAL LIABILITIES 59,742,095
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, par value $0.01 per share:
Series B, 8% cumulative, non-convertible and voting
Authorized - 100,000 shares
91,137 issued and outstanding 911
Common Stock, par value $0.01 per share:
Authorized - 125,000,000 shares
97,468,429 issued and outstanding 974,684
Additional paid-in capital 159,581,155
Accumulated deficit (171,458,726)
Deferred compensation (437,944)
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TOTAL STOCKHOLDERS' DEFICIT (11,339,920)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 48,402,175
=============
</TABLE>
See notes to financial statements.
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<PAGE> 7
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
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(GOING CONCERN BASIS)
---------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Period from
July 1, 1998 through Three Months Ended
September 18, 1998 September 30, 1997
-------------------------- -------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,624,961) $(5,197,651)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of local government subsidy (25,000) 1,550,000
Deferred compensation expense 248,012 246,666
Impact on cash flows from changes in assets and liabilities:
Receivables 6,349,574 (21,066)
Prepaid expenses and other assets (176,722) (120,301)
Inventory 99,359 (725,322)
Accounts payable and accrued liabilities 201,074 (81,367)
Deferred revenues -- (112,204)
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NET CASH PROVIDED BY (USED IN) OPERATING 2,071,336 (4,461,245)
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (214,584) (352,863)
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NET CASH USED IN INVESTING ACTIVITIES (214,584) (352,863)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term debt (2,750,000) --
Net proceeds from issuance of debt and notes -- 6,000,000
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,750,000) 6,000,000
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DECREASE IN CASH AND CASH EQUIVALENTS (893,248) 1,185,892
NET CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,078,567 960,042
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NET CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 185,319 $ 2,145,934
=========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 8
OIS OPTICAL IMAGING SYSTEMS, INC.
---------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(GOING CONCERN BASIS)
---------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Period from
July 1, 1998 through Three Months Ended
September 18, 1998 September 30, 1997
--------------------------- ----------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $1,010,091 $1,309,631
Cash equivalents:
Cash equivalents consist of investments in short-term, highly-liquid
securities having maturity of three months or less, made as a part of OIS'
cash management activity.
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH
TRANSACTIONS:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997
------------------------------------
<S> <C>
Adjust deferred compensation $146,470
</TABLE>
See statements of cash flows.
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<PAGE> 9
OIS OPTICAL IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE A - Financial Statements Presentation
The condensed financial statements included herein have been prepared by OIS
Optical Imaging Systems, Inc. ("OIS" or "the Company") without audit pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's latest annual report on Form 10-K. On
September 18, 1998 the Company changed its basis of accounting from the going
concern historical cost basis to the liquidation basis of accounting. The
primary differences between these methods are discussed below.
During fiscal 1998, the Company, with the encouragement and cooperation of
Guardian Industries Corp. ("Guardian"), had been exploring a full range of
strategic alternatives. Guardian, through its majority-owned subsidiary, GD
Investments Corp. ("GDIC"), is the Company's majority stockholder. In February
1998, the Company retained an investment banking firm and began seeking one or
more investors with a strategic interest in providing long term funding to the
Company. The results of this search were not successful in securing additional
financing or a buyer for the Company. In September 1998, in light of the
Company's continued operating losses and the failure of this strategic
investment process, Guardian informed the Company that it would not make any
further investments in the Company. As a result of these developments effective
September 18, 1998, the Company ceased manufacturing operations at its
Northville facility in accordance with a plant shutdown plan approved by its
Board of Directors. In addition, the Company canceled substantially all of its
outstanding contracts and laid off substantially all of its employees.
On September 28, 1998, the U.S. Department of Commerce ("Department of
Commerce") issued a directive to the Company requiring that it continue to
produce and deliver active matrix liquid crystal displays ("AMLCDs") pursuant to
certain contracts between the Company and certain of its customers which were
allegedly subject to, and rated under, the Defense Priorities and Allocations
System ("DPAS") regulations (15 C.F.R. Part 700), which regulations govern the
performance of certain contracts for the supply of goods in connection with U.S.
defense programs. In response to the directive, the Company advised the
Department of Commerce that the Company believes the Department of Commerce's
directive is not authorized by applicable law and is based on incorrect factual
premises, particularly concerning the existence of any remaining obligations
under any DPAS rated contracts. In addition, the Company believes that, given
its present financial difficulties and its reduction of employees at its
Northville manufacturing facility, compliance with the Department of Commerce's
directive would not be in the best interests of its creditors and stockholders.
As a result of discussions between the parties, the Department of Commerce and
the Company entered into a standstill agreement originally effective from
October 14, 1998, through November 14, 1998 ("Standstill Agreement"), which was
extended to November 18, 1998 by
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<PAGE> 10
the mutual agreement of the parties. During the term of the Standstill
Agreement, the Department of Commerce agreed that it would not initiate action
to enforce the directive, and the Company agreed that it would not sell the
Northville facility or certain finished goods and work-in-process inventory
without the consent of the Department of Commerce. The Company is not aware of
any plans by the Department of Commerce to seek enforcement of the directive
after the term of the Standstill Agreement. However, if the Department of
Commerce seeks to enforce the directive, the Company intends to advance all
factually and legally supported positions in opposition to the directive.
Successful enforcement of the directive could have a material adverse effect on
the Company's ability to conduct an orderly liquidation of its assets if it so
desired.
The Company is in violation of certain covenants contained in its credit
agreement with NBD Bank N.A. and Bank of America NT&SA. Certain of the
violations have been waived by the lending institutions but the lending
institutions have the right to demand the repayment of all amounts outstanding.
In addition, under the terms of the credit agreement the lending institutions
have the right to demand repayment of amounts due based on the lending
institutions' discretion as to whether a material adverse change has occurred in
the Company's business. It is probable that the Company will be unable to meet
the ongoing covenants in the credit agreement during fiscal 1999. Management
anticipates that the Company will be able to obtain waivers of these violations
as they occur and that the lending institutions will not exercise their demand
rights.
Since October 9, 1998, several of the Company's former customers have initiated
claims against the Company in Michigan state court seeking damages for breach of
contract. In addition, certain of these customers sought preliminary injunctive
relief directing the Company to continue manufacturing operations. After a
hearing on October 16, 1998 concerning the preliminary injunction, the court
declined to order the Company to resume manufacturing operations or to take any
steps to complete any work-in-process but did order the Company to deliver
certain finished goods to these former customers and to refrain from selling
certain work-in-process inventory to third parties. The Company has complied
with the court order. The Company is in the process of completing the filing of
its answers to the complaints relating to the foregoing actions. The Company
believes that it has valid defenses to all such litigation pending against it
and intends to vigorously defend the claims. The Company does not expect that
the court order or the pending litigation will have a materially adverse effect
on the Company's ability to conduct an orderly liquidation of its assets in the
future. While the Company is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome of this
litigation, the Company believes that, regardless of the outcome of this
litigation, its common stockholders will not receive any proceeds from a
liquidation of the Company.
On November 11, 1998, the Company's Board of Directors approved a Plan of
Liquidation and Dissolution, which the Board of Directors will submit to the
stockholders of the Company for their approval. Due to the existing debt and
other obligations of the Company, management does not believe that the common
stockholders of the Company will receive any proceeds from the liquidation.
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Although Guardian will not make any additional investments in the Company, the
Company anticipates that funds received under a tax sharing agreement entered
into with Guardian and through the disposition of its assets will be sufficient
to allow the Company to implement the shutdown plan and pay its debts as they
become due.
As a result of the contemplated liquidation discussed above, the Company changed
its method of accounting from the going concern historical cost basis to the
liquidation basis of accounting effective September 18, 1998. The going concern
historical cost basis of accounting contemplates the realization of assets and
liabilities in the ordinary course of business. The liquidation basis of
accounting requires that assets and liabilities be valued at their estimated
liquidation value. Assets and liabilities which have not been revalued to
liquidation value are disclosed as such on the face of the financial statements.
The primary financial statements required under the liquidation basis of
accounting are a Statement of Net Assets (Deficiency) and a Statement of Changes
in Net Assets (Deficiency). The Company's accounting policies under the
liquidation basis of accounting which differ from those under the going concern
basis of accounting are discussed in Note B.
In the opinion of the Company, the accompanying unaudited condensed financial
statements include all adjustments required to present fairly its net assets as
of September 30, 1998 (liquidation basis), changes in net assets from June 30,
1998 to September 30, 1998 (liquidation basis), the results of operations from
July 1, 1998 to September 18, 1998 (going concern basis) and for the three
months ended September 30, 1997 (going concern basis) and cash flows for the
period from July 1, 1998 to September 18, 1998 (going concern basis) and for the
three months ended September 30, 1997 (going concern basis).
NOTE B - Significant Liquidation Basis of Accounting Policies
Accounts Receivable - Since the cessation of manufacturing operations on
September 18, 1998, the Company has put all customers on a cash on delivery
basis.
Accrued Closure Costs - Accrued Closure Costs represent costs to be incurred by
the Company in implementing the shutdown plan approved by the Board of Directors
and in preparing the facility for sale. The Company has accrued all reasonably
estimatable costs directly associated with implementing the shutdown plan and in
preparing for the sale of the facility. The accrual consists primarily of
employee payroll and severance costs, estimated operating expenses during
shutdown and costs to cancel certain leases. The Company has not accrued costs
which could vary significantly based on the timing of the proposed liquidation
or are not reasonably estimatable. The most significant of these costs are
interest and legal expenses. This accrual represents management's estimate of
anticipated closure costs, however, actual costs incurred could differ
materially from this estimate.
Professional Fees - Legal and other professional fees incurred in connection
with the shutdown, liquidation or in the prosecution or defense of any lawsuits
are expensed as incurred.
Interest Expenses - Interest costs are expensed as incurred.
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<PAGE> 12
NOTE C - Net Loss Per Common Share
Basic net loss per common share, which equals diluted loss per share, is based
on the weighted average number of shares of OIS Common Stock outstanding during
the period. The number of shares used in the computation for the period from
July 1, 1998 to September 18, 1998 and for the three months ended September 30,
1997 were 97,466,869 and 97,467,920, respectively. For all periods presented,
all Common Stock equivalents are antidilutive and therefore have not been
considered in the calculation of diluted net loss per common share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
OIS Optical Imaging Systems, Inc.'s ("OIS" or "the Company") operating
results for the first quarter of fiscal 1999 continued to reflect substantial
operating losses. The Company's cost of sales continued to exceed revenues due
to the relatively high cost of sales driven by the Company's overhead, scrap
rates and depreciation expense for the period. While the Company worked to
improve production yields and volumes, the Company was unable to increase its
production and sales volumes enough to significantly reduce the incremental cost
of sales.
As disclosed in its recent reports, OIS, with the encouragement and
cooperation of Guardian Industries Corp. ("Guardian"), had been exploring a full
range of strategic alternatives throughout fiscal 1998. Guardian, through its
majority-owned subsidiary, GD Investments Corp. ("GDIC"), is the majority
stockholder of the Company. In February 1998, OIS retained an investment banking
firm and began seeking one or more investors with a strategic interest in
providing long term funding to OIS. During this process numerous companies in
the avionics and electronics industries, among others, were contacted and
presented with information about OIS. In August and September 1998, OIS and
Guardian also attempted to interest a group of OIS's key customers in acquiring
control of OIS. In September 1998, in light of the Company's continued operating
losses and the failure of this strategic investment process, Guardian informed
the Company that it would not make any further investments in the Company. As a
result of these developments, effective as of September 18, 1998, OIS ceased
manufacturing operations in its Northville facility in accordance with a plant
shutdown plan approved by its board of directors. The Company did not conduct
significant operations for the period from September 18, 1998 to September 30,
1998. Accordingly, the Company anticipates that it will generate little or no
future revenues, except in connection with the liquidation of its assets.
The Company is in violation of certain covenants contained in its
credit agreement with NBD Bank N.A. and Bank of America NT&SA. Certain of the
violations have been waived by the lending institutions but the lending
institutions have the right to demand the repayment of all amounts outstanding.
In addition, under the terms of the credit agreement the lending institutions
have the right to demand repayment of amounts due based on the lending
institutions' discretion as to whether a material adverse change has occurred in
the Company's business. It is probable that the Company will be unable to meet
the ongoing covenants in the credit agreement during fiscal 1999. The Company
believes that it will be able to obtain waivers
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<PAGE> 13
of these violations as they occur and that, if so, the lending institutions will
not exercise their demand rights.
On November 11, 1998, OIS's board of directors authorized, subject to
stockholder approval, the orderly liquidation of the Company's assets pursuant
to a plan of liquidation and dissolution (the "Plan of Liquidation"). The Plan
of Liquidation provides, in part, that, if the requisite stockholder approval is
received (such time of approval deemed the "Effective Date"), the officers and
directors of the Company will initiate the complete liquidation and subsequent
dissolution of the Company. After the Effective Date, OIS will not engage in any
business activities except for the purpose of preserving the value of its
assets, prosecuting and defending suits by or against OIS, adjusting and winding
up its business and affairs, selling and liquidating its properties and assets
and making distributions to stockholders, if any, in accordance with the Plan
of Liquidation. Because of the existing debt and other obligations of OIS, OIS
does not believe that its common stockholders will receive any proceeds from a
liquidation. Once the liquidation of OIS's property and assets is substantially
completed, as determined by the Company's board of directors, the officers of
the Company will promptly execute and file a certificate of dissolution with the
Secretary of State of the State of Delaware.
Although Guardian will not make any additional investments in OIS, OIS
anticipates that funds received under a tax sharing agreement entered into with
Guardian (the "Tax Sharing Agreement") and through the disposition of its assets
will be sufficient to allow OIS to implement the shutdown plan and liquidation
and pay its debts as they become due.
PERIOD FROM JULY 1, 1998 TO SEPTEMBER 18, 1998 AND THE
THREE MONTHS ENDED SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
Revenues
Total revenues for the period from July 1, 1998 to September 18, 1998
(the "Fiscal 1999 First Quarter Operating Period") of approximately $2.9 million
were 55% lower than total revenues for the same period in the preceding fiscal
year of approximately $6.5 million. This decrease was attributable to the
cessation of operations on September 18, 1998.
Revenue from the sale of displays and sensors for the Fiscal 1999 First
Quarter Operating Period of approximately $2.9 million were 52% lower than
revenues from the sale of displays and sensors for the first quarter of fiscal
1998 of approximately $6.1 million. As previously discussed, this decrease was
partially attributable to the cessation of manufacturing on September 18, 1998.
As a result of the shutdown, the Company was not able to obtain normal levels of
shipments during September 1998. Additionally, revenues for the first quarter of
fiscal 1997 were above average due to the fact that the Company was still trying
to fulfill the backlog of orders which existed during the end of calendar 1996
from operations during fiscal 1996.
The Company derived no revenues from engineering development agreements
during the Fiscal 1999 First Quarter Operating Period, a decrease of
approximately $384,179 in revenues from the first quarter of fiscal 1998. This
decrease was due to the Company's efforts to continue its strategy of pursuing
the sale of standard active matrix liquid crystal display and sensor products
and minimizing engineering work.
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<PAGE> 14
Cost of Sales
Cost of sales for the Fiscal 1999 First Quarter Operating Period of
approximately $7.4 million was 37% lower than cost of sales for the first
quarter of fiscal 1998 of approximately $11.7 million due to the lower revenues
and the absence of depreciation expense caused by the write down of assets on
June 30, 1998 to net realizable value. Cost of sales as a percentage of revenue
increased substantially to 251% for the first quarter of fiscal 1999 from 180%
for the same period in the preceding fiscal year. This increase was attributable
to the significant decrease in revenue due to the cessation of manufacturing on
September 18, 1998.
Direct labor and material for the Fiscal 1999 First Quarter Operating
Period decreased approximately $2.5 million when compared to the first quarter
of fiscal 1998. This decrease was due to the decreased plant activity. However,
direct material and direct labor, on a per unit basis, decreased approximately
8% during the Fiscal 1999 First Quarter Operating Period when compared to the
same period during fiscal 1998. This decrease was attributable mainly to higher
product yields along with improved manufacturing processes.
Overhead for the Fiscal 1999 First Quarter Operating Period decreased
approximately $181,000 when compared to the first quarter of fiscal 1998.
Processing chemical usage decreased substantially due to a combination of
improved processes, fewer experiments performed throughout the quarter and
twelve days of plant shutdown. Equipment uptime also improved, which resulted in
a decrease in repairs and maintenance costs.
Other Costs
The Company's operating expenses, which consist of internal research
and development and selling, general and administrative expenses, decreased
approximately $68,000 or 4% during the First 1999 First Quarter Operating Period
when compared to the first quarter of fiscal 1998. This decrease resulted
principally from the timing of expenses and not from any known trends.
Other income and expenses, which consist mainly of interest expense,
decreased approximately $10,000 or 1% during Fiscal 1999 First Quarter Operating
Period when compared to the same period during the preceding fiscal year.
Changes in Net Asset Deficiency
The change in net asset deficiency of approximately $1.0 million was
due to the accrual of estimated closure costs of approximately $3.8 million, net
of related tax benefit of approximately $1.8 million and the reversal of the
local government subsidy of approximately $2.8 million. Accrued closure costs
represent costs to be incurred by the Company in implementing the shutdown plan
approved by the board of directors and in preparing the Company's Northville
facility for sale. The Company has accrued all reasonably estimatable costs
directly associated with implementing the shutdown plan and in preparing for the
sale of its Northville facility. The accrual consists primarily of employee
payroll and severance costs, estimated operating expenses during the shutdown
and cost to cancel certain leases. The Company has not accrued costs which could
vary significantly based on the timing of the proposed liquidation or are not
reasonably estimatable. The most significant of these costs are interest and
legal expenses. This accrual represents the Company's estimate of anticipated
closure costs, however, actual costs incurred
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<PAGE> 15
could differ materially from this estimate. The local government subsidy had
been amortized over 30 years. As the Company has met all requirements of the
local government subsidy and will no longer have any operations, it has been
reversed as of September 18, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
On September 17, 1998 Guardian, the Company's principal source of
funding, informed OIS that, in light of the Company's continued operating losses
and the failure of the strategic investment process, Guardian would not make any
further investments in the Company to fund operations. As a result, effective
September 18, 1998, OIS ceased manufacturing operations in accordance with a
plant shutdown plan approved by its board of directors. The Company's cash and
cash equivalents at September 30, 1998 were $185,319.
OIS's board of directors has, subject to stockholder approval,
authorized the orderly liquidation of the Company's assets pursuant to the plan
of liquidation. Because of the existing debt and other obligations of OIS, OIS
does not believe that its common stockholders will receive any proceeds from
liquidation. However, OIS currently anticipates that funds received under the
Tax Sharing Agreement and through the disposition of its assets will be
sufficient to allow OIS to implement the shutdown plan and liquidation and pay
its debts as they become due.
While the Company's cash had decreased at September 30, 1998, to
approximately $0.2 million from approximately $1.1 million at June 30, 1998, the
Company expects to meet its obligations through collection of accounts
receivable, the sale of both finished and partially completed inventory on hand,
the sale of raw materials, supplies, fixtures, equipment and the facility and
amounts received under the Tax Sharing Agreement.
Capital Resources
As a result of the discontinuation of its operations, the Company's
sole source of funds will be from the disposition of the assets described above.
The Company has exhausted its $52.5 million commercial credit facility
with NBD Bank N.A. and Bank of America NT&SA. In addition, on March 30, 1998,
the Company granted those banks a first priority lien and security interest in
all tangible and intangible assets of the Company, including intellectual
property, to secure repayment of the commercial credit facility. The credit
agreement governing the commercial credit facility contains a number of
financial and other covenants. The Company is not currently in compliance with
all of the financial covenants contained in the credit agreement. Although the
banks have waived certain of these violations and have not declared a default
under the credit agreement, the banks have not provided waivers for all of these
violations. The banks have the right to demand repayment of amounts outstanding
as long as the Company has not cured the event of default or obtained a waiver
from the banks or, if in the banks' discretion, a material adverse change has
occurred with respect to the Company's business. It is probable that the Company
will not be able to meet the ongoing covenants in its credit agreement during
fiscal 1999. If the Company is unable to meet these covenant requirements and is
unable to secure a waiver from the banks, the banks have the right to demand the
immediate repayment of amounts
-15-
<PAGE> 16
outstanding. Due to these violations, amounts outstanding under the credit
agreement have been classified as current in the Company's balance sheet as of
June 30, 1998. During fiscal 1998, the Company repaid a total of $10.5 million
of principal on its commercial credit facility, of which $5.5 million was
originally due on December 31, 1997, but the Company obtained a waiver from the
banks to delay such payment until January 30, 1998. The Company funded these
principal repayments through the receipt of a $6.0 million payment from Guardian
on account of the Tax Sharing Agreement and the sale of 4,500 shares of the
Company's Series B Cumulative Preferred Stock, par value $.01 per share, at a
price of $1,000 per share to GDIC. On September 30, 1998, the Company made an
additional principal repayment of $2.75 million which was funded through receipt
of a payment from Guardian under the Tax Sharing Agreement. The commercial
credit facility matures in December 1999, and quarterly principal installments
are due as follows: $2.75 million on December 31, 1998; $3.38 million on each of
March 31, 1999 and June 30, 1999; $3.88 million on September 30, 1999; and
$25.88 million on December 31, 1999.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
based on historical fact and are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Among other things,
they regard the Company's liquidity, financial condition, operational matters
and certain strategic initiatives and alternatives and their potential outcomes.
Words or phrases denoting the anticipated results of future events, such as
"anticipate," "believe," "estimate," "expects," "may," "not considered likely,"
"are expected to," "will continue," "project," and similar expressions that
denote uncertainty are intended to identify such forward-looking statements.
Additionally, from time to time, the Company or its representatives have made or
may make oral or written forward-looking statements. Such forward-looking
statements may be included in various filings made by the Company with the
Securities and Exchange Commission, or in press releases or oral statements made
by or with the approval of an authorized executive officer of the Company. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, such forward-looking statements:
(1) as a result of risks and uncertainties identified in the Company's publicly
filed reports; (2) as a result of risks associated with the implementation of
its manufacturing facility shutdown and its Plan of Liquidation described
herein; (3) as a result of factors over which the Company has no control,
including the strength of domestic and foreign economies, the overall avionics
display market, sales growth, competition and certain cost increases; or (4) if
the factors on which the Company's conclusions are based do not conform to the
Company's expectations.
-16-
<PAGE> 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. EXHIBITS
--------
Exhibit 2. Plan of Liquidation and Dissolution of
OIS Optical Imaging Systems, Inc. (Filed as
Exhibit 2 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 and
incorporated herein by reference).
Exhibit 27. Financial Data Schedule (EDGAR version
only).
Exhibit 99. Standstill Agreement between the
Company and the U.S. Department of Commerce
effective as of October 14, 1998 (Filed as Exhibit
99 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 and
incorporated herein by reference).
B. REPORTS ON FORM 8-K
-------------------
Report on Form 8-K filed by the Company on November 27, 1998.
Report on Form 8-K filed by the Company on October 13, 1998.
Report on Form 8-K filed by the Company on September 22, 1998.
Report on Form 8-K filed by the Company on September 11, 1998.
-17-
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OIS Optical Imaging Systems, Inc.
(Registrant)
Date: December 16, 1998 By: /s/ Rex Tapp
----------------------------------------
Rex Tapp
President and Chief Executive
Officer
Date: December 16, 1998 By: /s/ Charles C. Wilson
----------------------------------------
Charles C. Wilson
Executive Vice President
(Principal Financial and
Accounting Officer)
-18-
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF NET ASSETS (LIQUIDATION BASIS) AND THE STATEMENT OF OPERATIONS
(GOING CONCERN BASIS) FOR THE QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 185,319
<SECURITIES> 0
<RECEIVABLES> 2,741,848
<ALLOWANCES> 60,000
<INVENTORY> 9,311,727
<CURRENT-ASSETS> 13,039,066
<PP&E> 21,000,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,865,066
<CURRENT-LIABILITIES> 59,609,169
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (16,744,103)
<TOTAL-LIABILITY-AND-EQUITY> 42,865,061
<SALES> 2,936,043
<TOTAL-REVENUES> 2,936,043
<CGS> 7,355,761
<TOTAL-COSTS> 9,125,032
<OTHER-EXPENSES> 941,972
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 1,093,430
<INCOME-PRETAX> (7,130,961)
<INCOME-TAX> (2,506,000)
<INCOME-CONTINUING> (4,624,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,624,961)
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
