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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
[ X ] OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED JUNE 30, 1998
(Mark one) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
[ ] OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________
Commission File Number 0-16343
OIS OPTICAL IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2544320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47050 FIVE MILE ROAD, NORTHVILLE, MICHIGAN 48167
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 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
COMMON STOCK, $0.01 PAR VALUE
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 and 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 [ ] No [ X ]
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 on the Nasdaq SmallCap Market) on
December 8, 1998 was approximately $4,568,833.
The number of shares of Registrant's Common Stock outstanding on December 8,
1998 was 97,468,429.
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PART I
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ITEM 1: BUSINESS
INTRODUCTION
OIS Optical Imaging Systems, Inc. ("OIS" or the "Company") is a
Delaware corporation that was first organized in 1984 to develop, manufacture
and sell active matrix liquid crystal displays ("AMLCDs"). The Company's
principal market for AMLCDs is commercial and military avionics. OIS also has
derived revenue from the manufacture and sale of image sensors ("sensors") and
from licensing and royalty agreements. Since the beginning of fiscal 1997, the
Company has manufactured AMLCDs and sensors at its 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."
RECENT DEVELOPMENTS
In recent years, OIS's operating losses have averaged approximately
$3.0 million per month. Although revenues increased significantly during fiscal
1998, OIS's operating results for fiscal 1998 continued to reflect substantial
operating losses. Due to these ongoing losses, the Company has required constant
infusions of significant amounts of additional capital to support its
operations. In recent years, Guardian has been the primary source of funding for
the Company.
As disclosed in its recent quarterly reports, OIS, with the
encouragement and cooperation of Guardian, had been exploring a full range of
strategic alternatives throughout fiscal 1998. 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.
As the Company progressed in identifying strategic alternatives to
obtain additional long-term funding, it became apparent in the first quarter of
fiscal 1999 that the Company may not be able to realize the full value of its
property and equipment. Accordingly as of June 30, 1998, as more fully described
in Note B to the financial statements, the Company recorded an impairment loss
of approximately $30.6 million under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121 - "Accounting for the Impairment
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of Long-Lived Assets and for Long-Lived Assets to be Disposed of." However, as
discussed above, the Company continued to be funded by Guardian and operate
through September 18, 1998. Therefore, the financial statements have been
presented on a going concern basis versus a liquidating basis as of June 30,
1998. The Company changed from the going concern basis to the liquidating basis
of accounting in September 1998. The going concern basis of accounting
contemplates the realization of assets and the settlement of liabilities in the
ordinary course of business. The liquidating basis of accounting requires
adjustment of asset and liability carrying values to their estimated settlement
amounts. Management does not anticipate that additional write-downs of the
Company's assets will be required upon the change to the liquidating basis of
accounting.
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 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 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 its tax sharing agreement with Guardian
(as described below) and through the disposition of its assets will be
sufficient to allow OIS to implement the shutdown plan and pay its debts as they
become due.
On September 28, 1998, the U.S. Department of Commerce (the "Department
of Commerce") issued a directive to the Company requiring that it continue to
produce and deliver AMLCDs pursuant to certain customer contracts related to
products made in connection with certain U.S. defense programs. The Company
submitted a response to the directive in which it questioned many of the factual
and legal premises of the directive, including the authority of the Department
of Commerce to issue the directive and the practical feasibility of implementing
it. 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 (the "Standstill Agreement"), which
was extended to November 18, 1998 by 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 its Northville facility or certain finished goods and
work-in-process inventory without the consent of the Department of Commerce. The
Department of Commerce has not sought to enforce the directive, and the Company
is not aware of any plans by the Department of Commerce to seek enforcement of
the directive. However, if the Department of Commerce does seek 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. See "Legal Proceedings."
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DESCRIPTION OF THE BUSINESS
Active Matrix Liquid Crystal Displays. Prior to the discontinuance of
its manufacturing operations on September 18, 1998, OIS manufactured and sold 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 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 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 head
assembly which consists of a glass cell with drivers attached mounted on a
frame. The Company's AMLCD products range in size from 1" by 4" to 8" x 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.
At this time, there is only one other company besides OIS that
manufactures AMLCDs in North America. See "- Competition." The principal
submarket for the Company's displays previously was 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 were typically avionics integrators who
purchase 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 contract or
end user. In some cases, the Company has sold 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 specific customer applications. However, more recently the
Company has made the strategic decision to pursue the sale of standard AMLCD
products and minimize engineering work. In fiscal years 1998, 1997 and 1996, OIS
derived 3%, 15% and 38% of its revenue, respectively, from engineering work.
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The Company's policy has been 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 approximately $1.4 million, $2.0
million and $2.0 million in Company sponsored research and development for
fiscal years 1998, 1997 and 1996, respectively.
Image Sensors. In addition to displays, prior to the discontinuance of
its manufacturing operations, the Company manufactured 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 fiscal 1998, the Company developed and produced its 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.
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. See "-Intellectual Property Rights."
COMPETITION
AMLCDs. OIS has traditionally viewed 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 six
to ten competitors worldwide. All of the firms that compete in this submarket
have greater financial resources than the Company and most are affiliated with
major corporations that have extensive experience in the electronics industry.
Historically, OIS has not been active in this submarket. The Northville facility
has not enabled the Company to successfully enter this submarket because
throughput at the Northville facility has been 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 submarket has been the near-term target market for the Company's AMLCDs.
OIS AMLCDs were engineered and manufactured to meet the optical and
environmental requirements of these demanding applications.
Within the submarket in which OIS has competed, 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 longer mean time between failures. OIS
management believes that customers recognize that the AMLCD is a superior
technology. The Company historically has competed with non-AMLCD technologies
primarily on the basis of performance.
Prior to the discontinuance of it manufacturing operations, OIS
experienced direct competition for sales of AMLCDs primarily from two sources.
The first source of competition was from other North American companies that
manufacture, or intended to manufacture, AMLCDs. Until recently, Litton
Industries of Canada supplied AMLCDs to Litton Systems, an affiliated company
that is in the business of supplying whole
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avionic flight information systems. ImageQuest, a start-up company backed by
Hyundai of South Korea, had announced plans to manufacture AMLCDs that would
compete with several of the Company's products. Neither Litton Systems nor
ImageQuest are currently pursuing the production of AMLCDs that are competitive
with the Company's products. dpiX, a subsidiary of Xerox, is producing AMLCDs
that would be competitive with the Company's products although the Company is
not aware of any significant production of AMLCDs by dpiX.
Another source of direct competition for sales of AMLCDs within the
Company's target submarket came from companies that re-manufacture and adapt
consumer grade AMLCDs for avionics use. Although OIS 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 have been 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.
OIS has traditionally competed on the basis of its ability to meet the
performance requirements of its submarket and its identification as a U.S.
manufacturer.
Image Sensors. Prior to the discontinuance of it manufacturing
operations, the Company had sought to enter into the medical imaging market and
had 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.
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, rather than production. In 1994, 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, rather than the
consumer electronics submarket. See "-Competition." The Northville facility
incorporated flexible manufacturing technology intended to facilitate the
relatively small production runs that characterize the Company's targeted
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 and throughout fiscal 1998, the Company had achieved regular
and continuous manufacturing at the Northville facility sufficient to meet the
Company's current demand for its products. Effective as of September 18, 1998,
manufacturing operations at the Northville facility were discontinued, except
for the conversion of certain work-in-process into finished goods, which ceased
on or about October 2, 1998.
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
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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 owns all of the equipment purchased with
DARPA funds. Under the DARPA agreement, OIS had the right to use the
government-owned equipment without payment through August 1998, at which time
OIS had the option to purchase the equipment at its fair market value. Although
OIS did not exercise its purchase option, the government allowed OIS to continue
to use the equipment while an extension agreement was being negotiated. The
government-owned equipment remains at the Northville facility although OIS has
ceased its manufacturing operations.
Products. During fiscal 1998, the Company continued its program of
building "standard" or "catalog" AMLCDs and making them available to customers
on an off-the-shelf basis. During fiscal 1998, the Company produced its first
commercial flat panel x-ray sensor products for Sterling Diagnostic Imaging Inc.
In fiscal 1998, the Company derived approximately 3% of its operating revenues
from development agreements, approximately 88% from sales of AMLCDs (including
both production agreements and off-the-shelf sales) and approximately 9% from
image sensors. See "Management's Discussion & Analysis of Financial Condition
and Results of Operations Results of Operations."
Customers. In the past, the U.S. government has been the largest end
user of the Company's displays. The U.S. government, principally the Department
of Defense, continued in fiscal 1998 to purchase displays from the Company
indirectly through a number of prime contractors and avionics integrators. While
OIS is unable to determine the precise mix of U.S. government and non-government
sales, management believes that during fiscal 1998 the U.S. government was a
less significant source of the Company's revenues then in previous fiscal years.
The Company has three customers that each individually accounted for more than
10% of its total revenues in fiscal 1998: Kaiser Electronics, Honeywell and
AlliedSignal. In the aggregate, these three customers accounted for $12 million
(53%), $8.3 million (61%) and $8.1 million (76%) of the Company's revenue in
fiscal 1998, 1997 and 1996, respectively.
Marketing and Development of the Market. As a result of the ramp-up at
the Northville facility and the availability of additional production capacity,
the Company continued its aggressive campaign to expand sales of both its AMLCDs
and sensor products. During fiscal 1998, the Company continued to experience
requests for proposals and marketing activity which resulted in additional
production orders and increased revenue. However, as indicated previously, the
additional revenue earned by the Company through increased sales of its AMLCDs
and sensor products was insufficient to offset the costs incurred related to
such sales resulting in continuing losses from operations. See "Management's
Discussion of Analysis of Financial Condition and Results of Operations -
Results of Operations -- Cost of Sales."
Discontinued Operations; Future Considerations. OIS shutdown
manufacturing operations at its Northville facility on September 18, 1998,
except for the conversion of certain work-in-process into finished goods which
ceased on or about October 2, 1998. At this time, OIS is seeking to sell its
current inventories of finished goods and work-in-process. OIS's board of
directors has, subject to stockholder approval, authorized the orderly
liquidation of the Company's other assets. 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.
FINANCIAL INFORMATION ABOUT THE COMPANY
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Business Data. The following table shows the amount and percentage of
the Company's revenues contributed by, and the operating loss attributable to,
the development and sales of displays and sales of sensors for each of the three
fiscal years ended June 30, 1998, 1997, 1996. The table also shows the amounts
of fixed assets and inventory of the Company as of the end of such periods:
<TABLE>
<CAPTION>
Fiscal Year 98 Fiscal Year 97 Fiscal Year 96
------------------------ --------------------------- -----------------------
Amount % Amount % Amount %
------ - ------ - ------- -
REVENUE:
<S> <C> <C> <C> <C> <C> <C>
Sale of Displays $ 19,862,674 88% $ 10,502,747 78% $ 6,488,975 61%
Engineering 673,243 3% 2,106,843 15% 4,001,414 38%
2,157,638 9% 990,898 7% 104,818 1%
Sale of Sensors
------------ ------------ ------------
Total Revenues $ 22,693,555 100% $ 13,600,488 100% $ 10,595,207 100%
============ ============ ============
OPERATING LOSS:
Sale of Displays(3) $(57,190,464) -252% $(27,176,280) -201% $( 9,166,315) -87%
Engineering ( 1,266,001) -6% ( 5,359,140) -39% (13,328,809) -126%
Sale of Sensors ( 1,117,170) -5% ( 2,504,803) -18% $( 348,887) -3%
------------ ------------ ------------
Total Operating
Loss $(59,573,635) -263% $(35,040,223) -258% $(22,844,011) -216%
============ ============ ============
ASSETS: (1)
Fixed Assets (2)(3) $ 21,000,000 93% $ 56,963,414 419% $ 54,731,463 517%
Inventory $ 9,411,086 41% $ 9,525,136 70% $ 5,847,250 55%
</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.
(2) Represents net book value for fiscal 1997 and 1996. Fiscal 1998
reflects an adjustment made on June 30, 1998, in which the
Company recorded an impairment loss in accordance with the provisions
of SFAS No. 121 (See Note B to the Company's financial statements).
(3) In fiscal 1998, the Company recorded an impairment loss of
approximately $30.6 million in accordance with the provisions of SFAS
No. 121 (See Note B to the Company's financial statements). The
impairment loss has been allocated entirely to the sale of displays
segment as all of the Company's property and equipment relate to the
sale of displays.
The following table shows the domestic and foreign revenues
attributable to the industry segments for each of the three fiscal years ended
June 30, 1998, 1997 and 1996:
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<TABLE>
<CAPTION>
Fiscal Year 98 Fiscal Year 97 Fiscal Year 96
------------------- ------------------ ----------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Engineering &
Sale of Displays
Domestic $17,309,679 76% $11,014,100 81% $ 9,878,531 93%
Foreign 3,226,238 14% 1,595,490 12% 611,858 6%
Sale of Sensors
Domestic $ 2,157,638 10% 990,898 7% 104,818 1%
----------- ----------- -----------
Total Revenues $22,693,555 100% $13,600,488 100% $10,595,207 100%
=========== =========== ===========
TOTAL:
Domestic $19,467,317 86% $12,004,998 88% $ 9,983,349 94%
Foreign 3,226,238 14% 1,595,490 12% 611,858 6%
----------- ----------- -----------
$22,693,555 100% $13,600,488 100% $10,595,207 100%
=========== =========== ===========
</TABLE>
Backlog at June 30, 1998, was approximately $35.1 million, as compared
to $33.3 million at June 30, 1997. As a result of the discontinuance of its
manufacturing operations on September 18, 1998 and the related cancellation of
the Company's sales contracts, the Company expects that a large portion of its
fiscal 1998 backlog will not be fulfilled in fiscal 1999. Raw materials and
components necessary for production of displays and sensors have been generally
available from several sources.
As of June 30, 1998, the Company employed approximately 289 persons on
a full-time or part-time basis, including its management and sales personnel. On
September 18, 1998, approximately 220 employees were terminated in connection
with the shutdown of the Company's Northville facility. A core group of
employees required to implement the shutdown was retained to work for a limited
period of time. As of December 8, 1998, the Company employed 26 full-time
employees but expects to further reduce its workforce in the next several
months.
The Company's business is not seasonal.
INTELLECTUAL PROPERTY RIGHTS
The basic methodology for the manufacture of AMLCDs using the thin film
transistor technology 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 have been a
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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.
Where management has considered it appropriate, the Company has sought
patent protection for its inventions in the U.S. 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. The
level of patent activity (and related expense) has increased in fiscal 1998.
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 has continually endeavored 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.
Beginning in fiscal 1998 and continuing into fiscal 1999, the Company
entered into discussions with makers of AMLCDs for consumer applications, such
as laptop computers, to determine their interest in licensing certain of OIS'
patents. On July 6, 1998, OIS and Sharp Corporation entered into a royalty-free,
cross-license agreement in order to resolve certain potential patent
interference claims relating to "high aperture" designs for flat panel displays
and other applications using AMLCD technology. OIS believes that resolution of
these potential claims will enhance OIS' ability to sell or license its patented
high aperture designs to third parties.
Although OIS has ceased its manufacturing operations, the Company will
continue to prosecute patent applications and monitor the use of OIS technology
within the flat panel display and sensor industry. As appropriate, OIS intends
to seek to realize value from its intellectual property portfolio, particularly
through the sale or licensing of its patented high aperture and retarder film
designs.
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 has been and
continues to be royalty free until 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.
Given the Company's operating losses, no royalty has ever been paid to ECD.
ENVIRONMENTAL ISSUES
The Company believes that it is presently in substantial compliance
with all existing applicable environmental laws.
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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.
ITEM 3: LEGAL PROCEEDINGS
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. 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 September 28, 1998, the Department of Commerce issued a directive to
the Company requiring that it continue to produce and deliver 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 resources 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 the Standstill Agreement originally effective from October
14, 1998, through November 14, 1998, which was extended to November 18, 1998 by
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 Department of Commerce
has not sought to enforce the directive, and the Company is not aware of any
plans by the Department of Commerce to seek enforcement of the directive.
However, if the Department of Commerce does seek 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.
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<PAGE> 12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of
fiscal 1998.
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<PAGE> 13
PART II
-------
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of OIS Common Stock are traded in the Nasdaq SmallCap 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, 1997
First Quarter ............... $2.625 $3.625
Second Quarter .............. 1.563 3.188
Third Quarter ............... 2.125 3.125
Fourth Quarter .............. 2.188 3.125
Year ended June 30, 1998
First Quarter ............... $1.813 $2.469
Second Quarter .............. 1.375 2.375
Third Quarter ............... 1.047 1.656
Fourth Quarter .............. 1.031 2.125
Year ended June 30, 1999
First Quarter .............. $ .016 $1.063
</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.
By letter dated October 16, 1998, the Company was notified by the
Nasdaq Stock Market, Inc. ("Nasdaq") that the Company's Common Stock will be
delisted from the Nasdaq SmallCap Market on January 6, 1999, unless prior to
that date the Company's shares of Common Stock report for ten consecutive days a
closing bid price of at least $1.00 per share, the minimum bid price required
for continued listing. By letter dated October 16, 1998, the Company was further
notified by Nasdaq that the Company's Common Stock is would be delisted from the
Nasdaq SmallCap Market effective October 23, 1998, as a result of the Company's
failure to file its Form 10-K for fiscal year 1998 and its Form 10-Q for the
three months ended September 30, 1998 in a timely manner as required by the
Nasdaq Marketplace Rules. Pursuant to the Nasdaq Marketplace Rules, the Company
requested an oral hearing regarding the delisting of its Common Stock from the
Nasdaq SmallCap Market. By letter dated November 18, 1998, Nasdaq informed the
Company that the hearing has been scheduled for December 17, 1998 and the
delisting process will be stayed until the hearing and a final determination by
Nasdaq. By letter dated December 4, 1998, Nasdaq informed the Company that, in
addition to the foregoing issues to be considered at the oral hearing, it would
also consider the fact that the Company was no longer in compliance with its
Marketplace Rules regarding minimum requirements for net tangible assets, market
capitalization and/or net income. The Company anticipates that its Common
Stock will be delisted from the Nasdaq SmallCap Market after the hearing. In the
event of such delisting, trading in the Company's Common Stock, if any, may
thereafter be conducted on the Nasdaq Electronic Bulletin Board which would
substantially reduce the liquidity of, and the market for, the Company's Common
Stock.
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<PAGE> 14
On December 8, 1998, the closing bid price for a share of the Company's
Common Stock as reported by the Nasdaq SmallCap Market was $0.047 and the
approximate number of stockholders of record was 1,500.
During fiscal 1998, the Company sold a total of 17,500 shares of its
Series B Cumulative Preferred Stock, par value $0.01 per share (the "Series B
Preferred"), to GDIC at a price of $1,000 per share for an aggregate
consideration of $17,500,000. The Series B Preferred issued in fiscal 1998 did
not involve underwriters and was exempt from registration under the Securities
Act of 1933, as amended, by virtue of the exemption provided by Section 4(2)
thereof for transactions not involving any public offering.
ITEM 6: SELECTED FINANCIAL DATA
Set forth below is certain financial information taken from OIS's
audited financial statements.
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 22,693,555 $ 13,600,488 $ 10,595,207 $ 8,423,041 $ 11,700,389
Cost of sales 43,775,594 41,093,260 26,106,953 17,810,224 13,078,919
Internal research and development 1,351,261 2,037,583 1,971,513 1,306,843 688,094
Selling, general and administrative 10,274,773 8,735,028 6,644,735 3,935,699 3,789,061
Impairment loss 30,644,334 -- -- -- --
Income tax benefit 18,459,000 9,755,490 -- -- --
Net loss (44,893,407) (28,509,893) (24,127,994) (14,629,725) (5,855,685)
Net loss available to common
stockholders (51,188,422) (33,020,009) (26,097,584) (14,840,683) (5,855,685)
Net loss per common share (.53) (.34) (.27) (.21) (.19)
At year end:
Total assets(1) $ 48,402,175 $ 77,172,789 $ 70,513,934 $ 57,263,779 $ 38,146,868
Long-term debt 42,000,000 52,500,000 51,125,454 40,247,087 12,040,584
Working capital (deficit)(2) (36,539,920) 2,904,085 3,432,241 5,211,233 2,616,215
Stockholders' equity (deficit) $(11,339,920) 14,967,499 7,163,704 7,820,724 9,633,880
</TABLE>
(1) As described in Note B to the Company's financial statements, during
fiscal 1998 the Company recorded an impairment loss of approximately
$30.6 million in accordance with the provisions of SFAS No. 121.
(2) As discussed in Notes A and H to the Company's financial statements,
the Company is in violation of certain debt covenants as of June 30,
1998 which allows the lending institution to demand repayment of the
related outstanding debt totaling $42.0 million. Accordingly, the
outstanding debt has been classified as current in the June 30, 1998
balance sheet.
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<PAGE> 15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SUMMARY
The operating results for fiscal 1998 continued to reflect substantial
operating losses. As a result of increased production volumes due to resolution
of several production issues and process problems, fiscal 1998 revenues were 67%
higher than fiscal 1997 revenues. However, 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 quarterly reports, OIS, with the
encouragement and cooperation of Guardian, had been exploring a full range of
strategic alternatives throughout fiscal 1998. 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.
As the Company progressed in identifying strategic alternatives to
obtain additional long-term funding, it became apparent in the first quarter of
fiscal 1999 that the Company may not be able to realize the full value of its
property and equipment. Accordingly, as more fully described in Note B to the
Company's financial statements, the Company recorded an impairment loss of
approximately $30.6 million under the provisions of SFAS No. 121. However, the
Company continued to be funded by Guardian and operate through September 18,
1998. Therefore, the financial statements have been presented on a going concern
basis versus a liquidating basis as of June 30, 1998. The Company changed from
the going concern basis to the liquidating basis of accounting in September
1998. The going concern basis of accounting contemplates the realization of
assets and the settlement of liabilities in the ordinary course of business. The
liquidating basis of accounting requires adjustment of asset and liability
carrying values to their estimated settlement amounts. Management does not
anticipate that additional write-downs of the Company's assets will be required
upon the change to the liquidating basis of accounting.
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. 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. Certain of the violations have been waived by the lending
institution but the lending institution has the right to demand the
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<PAGE> 16
repayment of all amounts outstanding. In addition, under the terms of the credit
agreement the lending institution has 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. Although management anticipates that the Company will be
able to obtain waivers of these violations as they occur and that the lending
institution will not exercise its demand rights, the entire balance due under
the credit agreement has been classified as current and is included in the
current portion of long term debt in the accompanying balance sheet as of June
30, 1998.
OIS's board of directors has, subject to stockholder approval,
authorized the orderly liquidation of the Company's assets. See "Business -
Recent Developments." Because of the existing debt and other obligations of OIS,
OIS does not believe that its common stockholders will receive any proceeds from
liquidation. Although Guardian will not make any additional investments in OIS,
OIS anticipates that funds received under its tax sharing agreement with
Guardian 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.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Revenues
Total revenues for fiscal 1998 of approximately $22.7 million were 67%
higher than total revenues for fiscal 1997 of approximately $13.6 million. This
increase is attributable to a substantial increase in revenues from the sale of
displays and sensors.
Revenues from the sale of displays and sensors for fiscal 1998 of
approximately $22.0 million was 92% higher than revenues from the sale of
displays and sensors for fiscal 1997. This increase, which continues a trend
started during fiscal 1996, is the result of more displays being manufactured
and shipped during fiscal 1998. While the rate of growth of revenues was
constrained in fiscal 1997 by low production capabilities during the first three
quarters of fiscal 1997, the rate of growth of revenues for fiscal 1998 was
constrained by market demand. Sales volume required to achieve profitability
continues to exceed the existing market for the Company's products.
Revenues from customer-funded engineering for fiscal 1998 of
approximately $0.7 million was 68% lower than revenue from customer-funded
engineering for fiscal 1997 of approximately $2.1 million. This decrease is the
result of the Company's strategic decision to reduce customer-funded engineering
activity as the Company concentrated on manufacturing operations.
Cost of Sales
Cost of sales for fiscal 1998 of approximately $43.8 million was 7%
higher than cost of sales for fiscal 1997 of approximately $41.1 million. The
cost of sales as a percentage of revenue decreased to 193% in fiscal 1998 from
302% in fiscal 1997. 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,
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<PAGE> 17
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 1998 increased by approximately
$1.0 million when compared to fiscal 1997. Given the fact that production volume
increased significantly in fiscal 1998 compared to fiscal 1997, this slight
increase in direct labor and material is mainly attributed to improvements in
production yields. As a percentage of revenue, direct labor and material
decreased to 77% in fiscal 1998 compared to 122% in fiscal 1997. Although yields
improved significantly throughout the fiscal year, higher production volumes
resulted in higher overall scrap costs in fiscal 1998 compared to fiscal 1997.
Overhead for fiscal 1998 increased by approximately $1.3 million when
compared to fiscal 1997. As a percentage of revenue, overhead costs for fiscal
1998 decreased 50% when compared with fiscal 1997. Overhead costs for fiscal
1998 were 89% of revenue compared with 139% in fiscal 1997. The increase in
total overhead costs is mainly attributable to an increase of approximately $0.5
million in production chemicals and gases used due to the increase in production
volumes. Also, approximately $0.4 million of the increase is attributable to an
increase in depreciation expense due to new process equipment being depreciated
for a full year during fiscal 1998.
A substantial part of the Company's overhead costs are largely fixed
and, as a result, management did not expect significant changes in the total
overhead costs as production volume increased.
Other Costs
The Company's internal research and development costs of approximately
$1.4 million in fiscal 1998 were 34% lower than the internal research and
development costs of approximately $2.0 million incurred in fiscal year 1997.
The Company's selling, general and administrative costs of
approximately $6.5 million in fiscal 1998 were 18% higher than selling, general
and administrative costs of approximately $5.5 million in fiscal 1997. The
increase is mainly attributable to an increase in consulting fees as a result of
the Company's search for long term financing and/or a strategic partner.
As of June 30, 1998, the Company has determined that its property and
equipment had been impaired as defined in SFAS No. 121. Accordingly, an
impairment loss has been recognized in the accompanying statement of operations
to reduce the carrying value of the property and equipment to its estimated
realizable value. The Company has estimated the realizable value based on recent
transactions for similar property in the case of the land, estimates of selling
prices from commercial real estate brokers for the building and on recent
appraisals of similar equipment for machinery and other equipment. These
estimates represent the Company's best estimates of the realizable value of the
property and equipment. The amounts realized upon the ultimate disposition of
the property and equipment could differ materially from these estimates.
Interest expense during fiscal 1998 increased by approximately $0.2
million compared to fiscal 1997. The Company incurred additional interest on
higher debt levels to finance ongoing operations when compared to fiscal 1997.
-16-
<PAGE> 18
Other income, licensing and royalty income in fiscal 1998
decreased by approximately $0.4 million compared to fiscal 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues
Total revenues for fiscal 1997 of approximately $13.6 million was 28%
higher than total revenues for fiscal 1996 of approximately $10.6 million. This
increase was attributable to a substantial increase in revenue from the sale of
displays and sensors, which was partly offset by a decrease in revenues from
customer-funded engineering.
Revenues from the sale of displays and sensors for fiscal 1997 of
approximately $11.5 million was 74% higher than revenues from the sale of
displays and sensors for fiscal 1996. This increase, which continued a trend
started during fiscal 1996, was the result of more displays being manufactured
and shipped during fiscal 1997. Although display revenues 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
revenues would have been necessary if the Company was to substantially improve
its financial results.
Revenues from customer-funded engineering for fiscal 1997 of
approximately $2.1 million was 47% lower than revenues from customer-funded
engineering for fiscal 1996 of approximately $4.0 million. This decrease was the
result of the Company's strategic decision to reduce customer-funded engineering
activity as the Company concentrated on manufacturing operations.
Cost of Sales
Cost of sales for fiscal 1997 of approximately $41.1 million was 57%
higher than cost of sales for fiscal 1996 of approximately $26.1 million. The
cost of sales as a percentage of revenue increased to 302% in fiscal 1997 from
246% in fiscal 1996. Cost of sales consisted of direct labor, direct material
and overhead costs to support the manufacturing process. Overhead costs
included, 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 was
attributable to the increased amounts of raw materials used to verify process
controls and increase production volumes. Although yields improved significantly
throughout fiscal 1997, higher production volumes resulted in higher overall
scrap costs in fiscal 1997 compared to fiscal 1996. Management was encouraged by
the significant increase in production volumes and improved yields experienced
during the fourth quarter of fiscal 1997. To the extent that the Company could
continue to improve yields and increase production volumes, management expected
that direct labor and material would 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 was 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,
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<PAGE> 19
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 were largely fixed
and, as a result, management did not expect significant changes in the total
overhead costs as production volume increased. During Fiscal 1997, overhead
costs continued 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 approximately
$2.0 million in fiscal 1997 were 3% higher than the internal research and
development costs of approximately $2.0 million incurred in fiscal 1996. Being
an important part of OIS business, the Company continued to invest resources in
order to increase and improve its line of products and to protect its technology
and intellectual property rights.
The Company's selling, general and administrative costs of
approximately $5.5 million in fiscal 1997 were 3% higher than selling, general
and administrative costs of approximately $5.4 million in fiscal 1996.
Interest expense during fiscal 1997 increased by approximately $1.9
million compared to fiscal 1996. During fiscal 1996 the Northville plant was
placed in service. Therefore, a proportionate amount of interest incurred on the
debt to finance construction of the Northville facility was not capitalized as
part of the cost 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 was expected to continue to increase
until operations could generate enough profits to begin retiring the outstanding
debt.
Other income, licensing and royalty income and insurance proceeds in
fiscal 1997 decreased by approximately $0.1 million compared to fiscal 1996.
This decrease was attributable in large part to a one-time insurance payment of
approximately $0.8 million 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 approximately $0.4 million compared to fiscal
1996. The Company also realized approximately $0.3 million 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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has suffered recurring losses from operations that have
significantly reduced its net capital and liquidity position. The Company's cash
and cash equivalents at June 30, 1998 were approximately $1.1 million.
Throughout fiscal 1998, the Company had been attempting to manage its cash to
minimize funding requirements. 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.
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<PAGE> 20
As a result, effective September 18, 1998, OIS ceased manufacturing operations
in its Northville facility in accordance with a plant shutdown plan approved by
its board of directors.
OIS's board of directors has, subject to stockholder approval,
authorized the orderly liquidation of the Company's assets. 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 its tax sharing agreement with Guardian
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.
Operating Activities
During fiscal 1998, the Company incurred a net loss of approximately
$44.9 million, including an income tax benefit of approximately $18.5 million.
Inventory decreased slightly as the Company's cost reduction program was
beginning to influence inventory costs. Accounts payable and other accrued
expenses decreased approximately $0.8 million due to the timing of payment of
invoices. In addition, the Company recorded an impairment loss on its property
and equipment of approximately $30.6 million which contributed to the net loss
but had no effect on cash. Furthermore, the Company incurred approximately $6.5
million in depreciation costs, which contributed to net loss but had no effect
on cash.
Investing Activities
Capital expenditures totaled $1.3 million in fiscal 1998 as the Company
continued to invest in property and equipment, primarily for microprocessing
manufacturing equipment.
Financing Activities and Capital Resources
On October 30, 1996, OIS issued 38,137 shares of the Series B Preferred
to Guardian in exchange for the 35,000 shares of the Company's Series A
Cumulative Preferred Stock previously acquired by Guardian and all dividends in
arrears thereon. 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
stockholders 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). Holders 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. 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.
During fiscal 1998, GDIC purchased an additional 17,500 shares of
Series B Preferred from OIS for $1,000 per share. As of September 30, 1998, GDIC
owned 91,137 shares of Series B Preferred Stock. These investments were approved
by the independent members of OIS's board of directors.
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<PAGE> 21
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 have been 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. As of June 30, 1998,
the Company had received approximately $16.1 million and recorded an estimated
receivable from Guardian of approximately $5.1 million and related deferred
income taxes of $7.0 million in accordance with the Tax Sharing Agreement.
In order to provide funding for future operations of OIS, OIS entered
into a tax sharing agreement with Guardian effective November 1, 1996 (the "Tax
Sharing Agreement"). Under the terms of the Tax Sharing Agreement, Guardian
compensates 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.
During fiscal 1997, the independent members of, and the full board of
directors of OIS authorized OIS to borrow up to $20,000,000 from GDIC at an
annual interest rate of up to 7%, with all interest and principal due and
payable on demand of GDIC. To provide the Company with working capital, the
Company borrowed $3.0 million from GDIC during fiscal 1997 and borrowed an
additional $9.0 million during fiscal 1998. As of June 30, 1998, the Company had
borrowed $12.0 million from GDIC at an annual interest rate of 6%.
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 not declared a default under the credit agreement, the Company has
not received a waiver from the banks 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. 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 outstanding. Due to
these violations, amounts outstanding under the credit agreement have been
classified as current in the accompanying 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 Series B
Preferred 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.
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<PAGE> 22
Year 2000
During fiscal 1998, the Company continued taking the required steps to
make its existing systems Year 2000 ready. Prior to the end of fiscal 1998, no
material expenditures had been made related to Year 2000. The Company mainly
used packaged software from outside suppliers that make available upgrades to
correct Year 2000 issues. The Company expected to purchase these upgrades by
January 1, 1999 at an estimated cost of approximately $100,000. However, in
light of its plant shutdown and planned liquidation, the Company no longer
anticipates making such purchases. Internally developed software has been
modified to comply with Year 2000 issues.
The Company's efforts have focused on Year 2000 compliance in the
following six principal areas:
- Application software, including operating systems and
applications and process equipment;
- Network and communication software;
- Computer equipment, including PCs and process equipment;
- Telecommunications equipment, including telephone, radio and
emergency alert devices;
- Facilities, including building security, building control and
environmental systems; and
- Procedures, including forms, reports and customer service
operations.
These activities are intended to encompass all major categories of
systems in use by the Company, including sales, manufacturing, finance and human
resources. The Company also believes that is has no material exposure to
contingencies related to the Year 2000 issues for products it has sold.
In addition to making its own systems Year 2000 ready, during fiscal
1998, the Company continued to survey its key suppliers and customers to
determine the extent to which the systems of such suppliers and customers were
Year 2000 compliant and the extent to which the Company could be affected by the
failure of such third parties to be Year 2000 compliant. The Company cannot
presently estimate the impact of the failure of such third parties to be Year
2000 compliant.
As of September 18, 1998, the Company ceased manufacturing operations
at its Northville plant. As a result, since that time, the Company has not
continued to further evaluate its Year 2000 readiness or that of its key
suppliers and customers. Given that the Company has no plans to resume its
manufacturing operations, the Company believes that any outstanding Year 2000
issues will not have a material impact on the Company's financial condition.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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
-21-
<PAGE> 23
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.
-22-
<PAGE> 24
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1998 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years ended June 30, 1998. 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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note A, the Company has closed its manufacturing operations and
is in violation of certain debt covenants. On November 11, 1998, the Company's
Board of Directors approved a plan of liquidation and dissolution. These
factors, among others, as discussed in Note A, cause substantial doubt as to the
future of the Company. The accompanying financial statements have been prepared
on a historical basis of accounting and do not include any liquidation
accounting or other adjustments which could result upon completion of the
proposed liquidation.
/s/ Arthur Andersen LLP
- --------------------------------
Arthur Andersen LLP
Detroit, Michigan,
November 23, 1998.
-23-
<PAGE> 25
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,078,567 $ 960,042
Accounts receivable (net of reserve for doubtful
accounts of $60,000) 4,040,661 4,222,508
Inventories 9,411,086 9,525,136
Income tax receivable from affiliate 5,100,756 4,755,490
Prepaid expenses and other current assets 771,105 746,199
----------- ------------
TOTAL CURRENT ASSETS 20,402,175 20,209,375
----------- ------------
PROPERTY AND EQUIPMENT
Land 3,000,000 3,000,000
Building 11,100,000 32,891,009
Machinery and other equipment 6,900,000 31,431,956
----------- ------------
TOTAL PROPERTY AND EQUIPMENT (Note B) 21,000,000 67,322,965
Less accumulated depreciation -- (10,359,551)
----------- ------------
TOTAL PROPERTY AND EQUIPMENT, NET 21,000,000 56,963,414
----------- ------------
DEFERRED INCOME TAXES 7,000,000 --
----------- ------------
TOTAL ASSETS $48,402,175 $ 77,172,789
=========== ============
</TABLE>
See notes to financial statements.
-24-
<PAGE> 26
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
June 30,
---------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Subordinated note payable to affiliate $ 12,000,000 $ 3,000,000
Current installment on long-term debt 42,000,000 10,500,000
Accounts payable 1,569,244 2,817,068
Accrued interest 997,129 578,166
Deferred revenue -- 112,204
Other accrued liabilities 375,722 297,852
------------- -------------
TOTAL CURRENT LIABILITIES 56,942,095 17,305,290
LONG TERM DEBT -- 42,000,000
LOCAL GOVERNMENT SUBSIDY 2,800,000 2,900,000
------------- -------------
TOTAL LIABILITIES 59,742,095 62,205,290
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
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, 1998 and 1997 -- --
Series B, 8% cumulative, non-convertible and voting
Authorized - 100,000 shares
Issued and outstanding - 91,137 shares at June 30, 1998 and
73,637 shares at June 30, 1997 911 736
Common stock, par value $0.01 per share:
Authorized - 125,000,000 shares
Issued and outstanding - 97,468,429 shares at June 30, 1998
and 97,467,920 shares at June 30, 1997 974,684 974,679
Additional paid-in capital 159,581,155 141,375,527
Accumulated deficit (171,458,726) (126,565,319)
Deferred compensation (437,944) (818,124)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (11,339,920) 14,967,499
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 48,402,175 $ 77,172,789
============= =============
</TABLE>
See notes to financial statements.
-25-
<PAGE> 27
OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Display revenue $ 19,862,674 $ 10,502,747 $ 6,488,975
Engineering revenue 673,243 2,106,843 4,001,414
Sensor revenue 2,157,638 990,898 104,818
---------------- --------------- ---------------
TOTAL REVENUES 22,693,555 13,600,488 10,595,207
COST OF SALES
Display 39,354,137 31,818,764 12,658,272
Engineering 1,644,458 6,315,576 13,102,241
Sensors 2,776,999 2,958,920 346,440
---------------- --------------- ---------------
TOTAL COST OF SALES 43,775,594 41,093,260 26,106,953
---------------- --------------- ---------------
GROSS LOSS (21,082,039) (27,492,772) (15,511,746)
OPERATING EXPENSES
Internal research and development 1,351,261 2,037,583 1,971,513
Selling, general and administrative 6,496,001 5,509,868 5,360,752
Impairment loss (Note B) 30,644,334 -- --
---------------- --------------- ---------------
TOTAL OPERATING EXPENSES 38,491,596 7,547,451 7,332,265
OPERATING LOSS (59,573,635) (35,040,223) (22,844,011)
OTHER INCOME (EXPENSE)
Interest expense (4,296,611) (4,112,596) (2,233,735)
Other income 195,783 406,898 41,954
Licensing and royalties 322,056 480,538 104,174
Insurance proceeds -- -- 803,624
---------------- --------------- ---------------
TOTAL OTHER INCOME (EXPENSE) (3,778,772) (3,225,160) (1,283,983)
---------------- --------------- ---------------
LOSS BEFORE INCOME TAX BENEFIT (63,352,407) (38,265,383) (24,127,994)
Income tax benefit 18,459,000 9,755,490 --
---------------- --------------- ---------------
NET LOSS $(44,893,407) $(28,509,893) $(24,127,994)
---------------- --------------- ---------------
Preferred stock dividends 6,295,015 4,510,116 1,969,590
---------------- --------------- ---------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(51,188,422) $(33,020,009) $(26,097,584)
---------------- --------------- ---------------
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $(.53) $(.34) $(.27)
================ =============== ===============
</TABLE>
See notes to financial statements.
-26-
<PAGE> 28
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
------------------ --------------- ------------ Additional
Number of Number of Number of Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- ------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 12,500 $ 125 -0- $-0- 96,712,931 $967,129 $ 81,325,112
Common shares sold (Fiscal --- --- --- --- 90,139 902 218,922
1996)
Common stock granted as --- --- --- --- 312,420 3,124 1,402,766
deferred compensation
(Fiscal 1996)
Amortize deferred --- --- --- --- --- --- ---
compensation (Fiscal 1996)
Preferred stock sold 22,500 225 --- --- --- --- 22,499,775
(Fiscal 1996)
Other (Fiscal 1996) --- --- --- --- (11,700) (117) 10,942
Net loss for year ended --- --- --- --- --- --- ---
June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 35,000 350 -0- -0- 97,103,790 971,038 105,457,517
Common shares sold (Fiscal --- --- --- --- 134,440 1,344 297,508
1997)
Common stock granted as --- --- --- --- 254,300 2,543 760,357
deferred compensation
(January 13, 1997)
Amortize deferred --- --- --- --- --- --- (568,752)
compensation (Fiscal 1997)
Series A Preferred Stock (35,000) (350) --- --- --- --- (34,999,650)
redeemed
Series B Preferred Stock --- --- 70,500 705 --- --- 70,515,295
sold
Series A Preferred Stock --- --- 3,137 31 --- --- (31)
dividends paid by issuance
of 3,137 shares of series
B Preferred Stock
Other (Fiscal 1997) --- --- --- --- (24,610) (246) (86,717)
Net loss for year ended --- --- --- --- --- --- ---
June 30, 1997
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 -0- -0- 73,637 736 97,467,920 974,679 141,375,527
Common shares sold (Fiscal --- --- --- --- 26,224 262 26,526
Amortize deferred --- --- --- --- --- --- 771,867
compensation (Fiscal 1998)
Series B Preferred Stock --- --- 17,500 175 --- --- 17,499,825
sold
Other (Fiscal 1998) --- --- --- --- (25,715) (257) (92,590)
Net loss for year ended --- --- --- --- --- --- ---
June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 -0- $ -0- 91,137 $ 911 97,468,429 $974,684 $159,581,155
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Deferred Stockholders' Per
Deficit Compensation Equity (Deficit) Share
------------ ------------ --------------- ------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $ (74,138,390) $ (333,252) $ 7,820,724 ---
Common shares sold (Fiscal --- --- 219,824 $ 2.439
1996)
Common stock granted as --- (1,405,890) --- 4.500
deferred compensation
(Fiscal 1996)
Amortize deferred --- 492,886 492,886 ---
compensation (Fiscal 1996)
Preferred stock sold --- --- 22,500,000 1,000
(Fiscal 1996)
Other (Fiscal 1996) 210,958 36,481 258,264 ---
Net loss for year ended (24,127,994) --- (24,127,994) ---
June 30, 1996
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 (98,055,426) (1,209,775) 7,163,704 ---
Common shares sold (Fiscal --- --- 298,852 2.223
1997)
Common stock granted as --- (762,900) --- 3.000
deferred compensation
(January 13, 1997)
Amortize deferred --- 1,087,676 518,924 ---
compensation (Fiscal 1997)
Series A Preferred Stock --- --- (35,000,000) 1,000
redeemed
Series B Preferred Stock --- --- 70,516,000 1,000
sold
Series A Preferred Stock --- --- --- ---
dividends paid by issuance
of 3,137 shares of series
B Preferred Stock
Other (Fiscal 1997) --- 66,875 (20,088) ---
Net loss for year ended (28,509,893) --- (28,509,893) ---
June 30, 1997
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (126,565,319) (818,124) 14,967,499 ---
Common shares sold (Fiscal --- --- 26,788 1.022
1998)
Amortize deferred --- 318,949 1,090,816 ---
compensation (Fiscal 1998)
Series B Preferred Stock --- --- 17,500,000 $ 1,000
sold
Other (Fiscal 1998) --- 61,231 (31,616) ---
Net loss for year ended
June 30, 1998 (44,893,407) --- (44,893,407) ---
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $(171,458,726) $ (437,944) $(11,339,920) ---
===============================================================================================================
</TABLE>
See notes to financial statements
-27-
<PAGE> 29
<TABLE>
<CAPTION>
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years ended June 30,
--------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(44,893,407) $(28,509,893) $(24,127,994)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 6,503,051 6,168,473 3,396,279
Deferred compensation expense 1,059,200 498,834 492,886
Impairment loss 30,644,334 --- ---
Deferred income taxes (7,000,000) --- ---
Impact on cash flows from changes in assets and
liabilities:
Accounts and income tax receivables (163,419) 471,456 (2,490,928)
Inventories 114,050 (3,677,886) (2,487,188)
Prepaid expenses and other current assets (24,906) (260,948) (105,086)
Accounts payable and accrued liabilities (750,991) (3,294,845) 1,329,875
Deferred revenue (112,204) (124,641) (90,109)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES
(14,624,292) (28,729,450) (24,082,265)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (1,283,971) (8,500,423) (12,392,797)
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (1,283,971) (8,500,423) (12,392,797)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-term debt (10,500,000) --- ---
Payments on capital lease obligation --- (125,454) (121,633)
Proceeds from issuance of debt and notes 9,000,000 2,500,000 13,000,000
Net proceeds from issuance of common stock 26,788 298,853 267,130
Net proceeds from issuance of preferred stock 17,500,000 35,516,000 22,500,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 16,026,788 38,189,399 35,645,497
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 118,525 959,526 (829,565)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 960,042 516 830,081
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,078,567 $ 960,042 $ 516
============ ============ ============
</TABLE>
See notes to financial statements.
-28-
<PAGE> 30
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------- -----------------
<S> <C> <C> <C>
Adjustment of accumulated depreciation based on $16,962,602 -- --
recognition of impairment loss
Adjust deferred compensation -- $ 568,752 --
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 --
Common Stock issued in exchange for deferred
compensation, net of terminations -- 675,935 $ 1,369,409
</TABLE>
See Statements of Cash Flows
-29-
<PAGE> 31
OIS OPTICAL IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND CURRENT STATUS
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 had been providing these
products and services mainly to avionics and military customers.
Although revenues increased significantly during fiscal 1998, the
Company's operating results for fiscal 1998 continued to reflect substantial
losses. Due to these ongoing losses, the Company has required constant infusions
of significant amounts of additional capital to support its operations. In
recent years, Guardian Industries Corp. (Guardian), the Company's majority
stockholder, has been the primary source of funding for the Company.
During fiscal 1998, the Company, with the encouragement and cooperation
of Guardian, had been exploring a full range of strategic alternatives. 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. As the Company progressed in
its investigation of strategic initiatives, it became apparent that the Company
may not be able to realize the value of its property and equipment. 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. Accordingly, as of June 30, 1998, the Company recorded an
impairment loss of approximately $30.6 million in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
(See Note B).
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 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 the mutual agreement of the parties. During the term of the Standstill
Agreement, the Department
-30-
<PAGE> 32
of Commerce has agreed that it will not initiate action to enforce the
directive, and the Company has agreed that it will 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 (see Note H). Certain of the violations have been waived by the
lending institution but the lending institution has the right to demand the
repayment of all amounts outstanding. In addition, under the terms of the credit
agreement the lending institution has 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. Although management anticipates that the Company will be
able to obtain waivers of these violations as they occur and that the lending
institution will not exercise its demand rights, the entire balance due under
the credit agreement has been classified as current and is included in current
portion of long term debt in the accompanying balance sheet as of June 30, 1998.
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 intends
to comply 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.
Although Guardian will not make any additional investments in the
Company, the Company anticipates that funds received under its tax sharing
agreement with Guardian (See Note G) 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 discussed above, the Company's Board of Directors has approved a Plan
of Liquidation and Dissolution, which is subject to stockholder approval. The
accompanying financial statements have been
-31-
<PAGE> 33
prepared on a going concern basis of accounting which contemplates the
settlement of assets and liabilities in the ordinary course of business. They do
not include any liquidating basis of accounting or other adjustments. The
liquidating basis of accounting requires that assets and liabilities be stated
at their estimated liquidation values.
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 $1,078,567 and $960,042 are included in Cash and Cash Equivalents
in the accompanying Balance Sheets for the years ended June 30, 1998 and 1997,
respectively. These are stated at cost which approximates market.
Cash paid for interest for the fiscal years ended June 30, 1998, 1997
and 1996 was $3,816,535, $4,485,533 and $1,549,826, respectively.
Property and Equipment
In fiscal 1997 and 1996, all properties were recorded at cost and
depreciated on the straight-line method over the estimated useful lives of the
individual assets. The estimated lives of the principal classes of assets are as
follows:
Years
-----
Machinery and other equipment 3 to 10
Buildings and clean rooms 20 to 30
Machinery and other equipment acquired for a particular research and
development project which have no alternative future use (in other research and
development projects or otherwise) are charged to the expense of the specific
project to which they were dedicated. Machinery and other equipment which have
alternative future uses are capitalized at cost.
Under the provisions of SFAS No. 121, the Company periodically evaluates
the realizability of the carrying value of its property and equipment. As
discussed in Note A, based on the status of the Company's strategic process the
Company determined that its property and equipment had been impaired as defined
in SFAS No. 121. Accordingly, as of June 30, 1998, an impairment loss has been
recognized in the accompanying statement of operations to reduce the carrying
value of the property and equipment to its estimated realizable value.
Management has estimated the realizable value based on recent transactions for
similar property in the case of the land, estimates of selling prices from
commercial real estate brokers for the building and on recent appraisals of
similar equipment for machinery and other equipment. These estimates represent
management's best estimates of the realizable value of the property and
equipment. The amounts realized upon the ultimate disposition of the property
and equipment could differ materially from these estimates.
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.
-32-
<PAGE> 34
Certain equipment installed at the Company's Northville facility is
owned by the government and is therefore not recorded in the accompanying
Balance Sheets (see Note J).
Local Government Subsidy
The Local Government Subsidy is being amortized over 30 years on a
straight-line basis. Amortization began July 1, 1996. The Local Government
Subsidy represents the excess of the fair market value of the land purchased
from Wayne County over the purchase price paid and amounted to approximately
$3.0 million at the date of purchase.
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. As
discussed in Note A, the Company ceased manufacturing operations on September
18, 1998. No adjustments have been made to the carrying value of inventories due
to this event. The components of inventories as of June 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Spare equipment parts $1,165,293 $ 601,585
Manufacturing supplies 118,100 108,582
Raw materials 5,788,256 6,787,877
Displays in process 2,339,437 2,027,092
---------- ----------
Total $9,411,086 $9,525,136
========== ==========
</TABLE>
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 1998, 1997 and 1996, the Company derived approximately 53%,
61% and 76% of revenue, respectively from three customers operating in the U.S.
aerospace industry. As of June 30, 1998 and 1997, $2,059,693 and $2,366,421 is
due from these three customers and is included in Accounts Receivable in the
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<PAGE> 35
accompanying Balance Sheets. As discussed in Note A, the Company ceased
operations on September 18, 1998. No adjustments have been made to the carrying
value of Accounts Receivable due to this event.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
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 H).
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 H). 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 all matters
submitted to a vote of the Company's stockholders. The Series B Preferred Stock
is non-convertible.
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<PAGE> 36
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. During fiscal 1998, the Company sold an
additional 17,500 shares of Series B Preferred Stock to GDIC for a total of
$17.5 million. OIS used the proceeds to fund ongoing operations.
The Company's dividend policy on 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 1998 dividends on the Series B
Preferred Stock will not be declared. Cumulative dividends in arrears on Series
B Preferred Stock as of June 30, 1998 and 1997 total $9,857,460 and $3,562,445,
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.
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. The fair value of each option grant is
estimated using various option pricing models. Had compensation expense for the
Plan been determined based on the fair value at the grant date for awards in
1998 and 1997 consistent with the provisions of SFAS No. 123, the Company's pro
forma net loss available to common stockholders and pro forma net loss per
common share would not have significantly differed from the reported amounts.
Awards of restricted stock are non-transferable and subject to
forfeiture during the restriction period established by the Committee. There
were no awards of restricted stock made during fiscal 1998 and the awards of
restricted stock during fiscal 1997 and 1996 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
</TABLE>
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<PAGE> 37
There are currently 893,350 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.
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.
On April 3, 1998, the Company's Board of Directors approved the
repricing of 316,200 stock options with original exercise prices between $5.38
per share and $1.31 per share. These options were repriced such that the new
exercise price equaled the closing price of the Company's Common Stock on April
2, 1998, which was $1.13 per share. No other terms of the original options were
modified. In the accompanying summary of transactions, these options have been
recorded as canceled options and newly granted options.
A summary of the transactions during the three years ended June 30, 1998
with respect to OIS' stock option plans follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ----------------------------- ----------------------------------
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 349,200 $4.12 397,608 $3.77 341,104 $3.15
Granted 893,850 1.34 94,000 2.81 174,950 4.58
Canceled 339,700 3.92 19,330 2.47 37,800 4.93
Exercised 10,000 .94 123,078 2.25 80,646 2.25
--------- ----- --------- ----- --------- -----
Outstanding June 30, 893,350 $1.46 349,200 $4.12 397,608 $3.77
========= ===== ========= ===== ========= =====
Exercisable June 30, 366,200 $1.40 110,000 $4.64 220,158 $3.05
========= ===== ========= ===== ========= =====
Available for grant June 30, 1,572,480 N/A 2,126,630 N/A 2,430,990 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 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. During fiscal years 1998, 1997 and
1996, OIS incurred expenses for these services of approximately $110,000 per
year.
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<PAGE> 38
NOTE F - NET LOSS PER COMMON SHARE
For the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 requires 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 stockholders 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.
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 year. The number of shares used in the computation for the years
ended June 30, 1998, 1997 and 1996 were 97,458,415, 97,286,539 and 96,889,823,
respectively. For fiscal 1998, 1997 and 1996, all Common Stock equivalents are
antidilutive and therefore have not been considered in the calculation of
diluted net loss per common share.
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. For
the years ended June 30, 1998 and 1997, the Company received approximately $11
million and $5 million, respectively, under the Tax Sharing Agreement and
recorded an estimated receivable from Guardian of $5,100,756 and $4,755,490,
respectively in accordance with the Tax Sharing Agreement. In addition, as of
June 30, 1998, the Company has recorded approximately $7.0 million of Deferred
Income Taxes 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>
1998 1997 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Federal statutory benefit $(21,119,000) $ (13,393,490) $ (8,204,000)
Benefit due to change in
effective tax rate -- (944,000) --
Net increase in valuation
reserve due to losses
without tax 2,652,000 4,570,000 8,195,000
benefitOther 8,000 12,000 9,000
============== =========== ==========
Actual income tax benefit $(18,459,000) $(9,755,490) $ -0-
============== =========== ===========
</TABLE>
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<PAGE> 39
The components of the income tax benefit for the years ended June 30, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Federal
Currently refundable $(11,459,000) $(12,743,490) $(9,860,000)
Deferred (9,652,000) (1,582,000) 1,665,000
Net increase in valuation
reserve 2,652,000 4,570,000 8,195,000
============= ============= ============
Actual income tax benefit $(18,459,000) $(9,755,490) $ -0-
============= ============= ============
</TABLE>
Deferred income taxes represent temporary differences in the
recognition of certain items for income tax and financial reporting purposes
under the Tax Sharing Agreement with Guardian. The components of net
deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
----------------- -------------------
<S> <C> <C>
Deferred income tax liability:
Depreciation and amortization $ -- $1,041,000
----------------- -------------------
-- 1,041,000
----------------- -------------------
Deferred income tax assets:
Net operating loss carry forwards (35,769,000) (35,769,000)
Property and equipment (7,800,000) --
Other (2,741,000) (1,930,000)
----------------- -------------------
(46,310,000) (37,699,000)
Valuation allowance 39,310,000 36,658,000
----------------- -------------------
(7,000,000) (1,041,000)
----------------- -------------------
Net deferred income taxes $(7,000,000) $ -0-
================= ===================
</TABLE>
Tax loss carryforwards and other tax attributes are subject to
limitations provided by Internal Revenue Code Sec. 382, which may substantially
reduce the amounts available for utilization as a result of changes in control.
There was a change of ownership on December 12, 1990 for purposes of Internal
Revenue Code Sec. 382.
The Company has recorded a valuation allowance against certain deferred
income tax assets. The valuation allowance has been recorded based on
management's estimate that it is unlikely that the Company will be able to
utilize certain benefits when they become available under its Tax Sharing
Agreement with Guardian and that the Company will not be able to utilize the Net
Operating Loss Carryforwards created prior to the Tax Sharing Agreement.
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<PAGE> 40
At June 30, 1998, remaining net operating loss and tax credit
carryforwards expire as follows:
<TABLE>
<CAPTION>
Net Operating Other
Loss Tax Credit
Carryforwards Carryforwards
------------------- ------------------
<S> <C> <C>
2000 -- $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 --
------------ ---------
$91,673,000 $452,430
============ =========
</TABLE>
NOTE H- FINANCING TRANSACTIONS
The Company has a credit agreement (the Agreement), which has been
amended, with NBD Bank N.A. and Bank of America NT&SA. Under the terms of the
Agreement the Company received $26.25 million in term loans and $26.25 million
in revolving credit facilities, which has subsequently been reduced. Borrowings
under the term loans and revolving credit facilities 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 $2,750,000 on September 30, 1998 through December 31,
1998, $3,375,000 on March 31, 1999 through June 30, 1999, and $3,875,000 on
September 30, 1999 with the remaining balance of $25,875,000 due and payable on
December 31, 1999. The Company pays a commitment fee of .375% of the unused
portion of the credit facility. In consideration of certain waivers granted
during fiscal 1998, the Company granted the 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 Agreement. The
Agreement contains certain financial and other covenants and a clause allowing
the banks to accelerate the maturity of amounts outstanding based on a material
adverse change in the Company's business. The most restrictive of the covenants
limit the Company's ability to make capital expenditures in excess of certain
amounts, incur additional debt (as defined) and pay cash dividends (as defined).
Furthermore, OIS must maintain a level of minimum tangible capital funds and
leverage ratio as defined in the Agreement. The Company is not currently in
compliance with certain of the covenants. The banks have not declared an event
of default or demanded repayment of amounts outstanding. The Company has
received waivers for certain of these covenant violations. It is probable that
the Company will be unable to meet the ongoing covenants in the Agreement during
fiscal 1999. Although management anticipates that waivers would be granted if
the Company requested and that the banks will not exercise their right to demand
repayment based on changes in the business (see Note A), the entire balance
outstanding under the Agreement has been classified as current and included in
current portion of long term debt in the accompanying balance sheet as of June
30, 1998.
-39-
<PAGE> 41
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, 1998, 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. Due to the uncertainty regarding the Company's future (see Note A),
the Company is unable to estimate the fair value of its long-term debt.
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, 1998, $12 million was outstanding under the Note. The
principal balance of the Note and all accrued and unpaid interest is due upon
demand of the holder.
NOTE I- 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
$217,000, $198,000 and $176,000 for the years ended June 30, 1998, 1997 and
1996, respectively.
NOTE J - GOVERNMENT EQUIPMENT LEASE
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 Northville manufacturing
facility. The equipment purchased remains the property of the United States
Government and is not reflected in the accompanying Balance Sheets. The Company
was entitled to use this equipment without charge until August 1998 at which
time OIS had the option to purchase the equipment at its fair market value.
Although OIS did not exercise its purchase option, the government allowed OIS to
continue to use the equipment while an extension agreement was being negotiated.
The government-owned equipment remains at the Northville facility although OIS
has ceased its manufacturing operations.
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<PAGE> 42
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND NAMED EXECUTIVE OFFICERS OF OIS
The Directors and Executive Officers of OIS are as follows:
<TABLE>
<CAPTION>
Position Held
Name Age with OIS
- ---- --- -------------
<S> <C> <C>
Rex Tapp 48 President, Chief Executive Officer & Director
Charles C. Wilson 46 Executive Vice President, Chief Financial
Officer, Secretary & Director
Ralph J. Gerson 48 Chairman & Director
Jeffrey A. Knight 47 Director
C.K. Prahalad 57 Director
Robert M. Teeter 59 Director
Mark S. Wrighton 49 Director
Peter Joel C. Young 38 Director
Scott V. Thomsen 34 Vice President Engineering and Fab Operations
</TABLE>
Rex Tapp was first elected to the Board of Directors in November 1991
and is a Guardian designee. Mr. Tapp has been the President of OIS since
December 1991 and until July 1, 1995 was also the Director of Technical
Development for Guardian Industries Corp.
Charles C. Wilson was first elected to the Board of Directors in
November 1991 and is a Guardian designee. Mr. Wilson has been OIS's Executive
Vice President and Chief Financial Officer since November 1991. From July 1987
until joining OIS, Mr. Wilson was the Vice President and Treasurer of Guardian
Photo, Inc.
Ralph J. Gerson was first elected to the Board of Directors in
November 1992, is the Chairman of the Board and is a Guardian designee. Mr.
Gerson has been Guardian's Executive Vice President and a member of the Guardian
Board of Directors since 1988.
Jeffrey A. Knight was first elected to the Board of Directors in
November 1991 and is a Guardian designee. Since 1989, Mr. Knight has been Group
Vice President-Finance and Chief Financial Officer of Guardian.
C.K. Prahalad was first elected to the Board of Directors in February
1995. Dr. Prahalad is a Harvey C. Fruehauf Professor of Business Administration
at The University of Michigan.
Robert Teeter was first elected to the Board of Directors in February
1995. Mr. Teeter is President of Coldwater Corporation of Ann Arbor, Michigan.
-41-
<PAGE> 43
Mark S. Wrighton was first elected to the Board of Directors in
February 1995. Dr. Wrighton is the Chancellor of Washington University in St.
Louis, Missouri. From October 1990 to June 1995, Dr. Wrighton was Provost and
Ciba-Geigy Professor of Chemistry at The Massachusetts Institute of Technology
in Cambridge, Massachusetts.
Peter Joel C. Young was first elected to the Board of Directors in
November 1991. Mr. Young is currently Chief Executive Officer of Harry London
Candies Inc. of North Canton, Ohio. From March 1991 through August 1993, Mr.
Young was the Director of International Business Development of Guardian.
Scott V. Thomsen joined OIS in September 1994 as Director of Technical
Development. In July 1995 he assumed the position of Director of Product
Engineering and in June 1997 was appointed Vice President Engineering and Fab
Operations. From December 1989 until joining OIS, Mr. Thomsen was employed by
the Satellite Systems Operations Division of Honeywell, Inc. as a technical
director and computer systems design engineer on the space shuttle cockpit and
trainer programs.
COMPENSATION OF DIRECTORS
OIS has established an annual director compensation program that
consists of $15,000 basic compensation, an additional $1,000 for each board
meeting attended by the director, an additional $500 for each committee meeting
attended by the director and the grant of options to purchase 5,000 shares of
OIS Common Stock within five years from the date of grant at the market price of
the Company's Common Stock on the date of grant. All Guardian designees have
waived all director compensation.
MEETINGS AND COMMITTEES
During the fiscal year ended June 30, 1998, there were four meetings
and one special meeting held by the Board of Directors. All directors
participated in 75% or more of the meetings of the Board of Directors and
committees on which they served.
The Audit Committee of the Board of Directors (the "Audit Committee")
currently consists of Mark S. Wrighton, Peter J.C. Young, both independent
directors, and Charles C. Wilson (ex officio). The principal duties of the Audit
Committee are to (a) recommend selection of OIS's independent public
accountants, (b) review with the independent public accountants the results of
their audits, (c) review with the independent public accountants and management
OIS's financial reporting and operating controls and the scope of audits and (d)
make recommendations concerning OIS's financial reporting, accounting practices
and policies and financial, accounting and operating controls and safeguards.
The Compensation Committee of the Board of Directors (the "Compensation
Committee") met once during the fiscal year ended June 30, 1998, and currently
consists of Mark S. Wrighton and Ralph J. Gerson. The principal duties of the
Compensation Committee are to make recommendations concerning, and to review,
the compensation packages of OIS's executive officers and key personnel.
During fiscal 1998, the Board of Directors of the Company established
an Advisory Committee, consisting of Mark S. Wrighton (as Chairman of the
Advisory Committee), C.K. Prahalad and Peter J.C. Young, to oversee and review
all proposed transactions with (i) current and proposed sources of financing for
the Company, including the Company's banking relationships and (ii) prospective
financing sources or potential investors or purchasers of the Company. Each
member of the Advisory Committee was granted options to purchase 5,000 shares of
the Company's Common Stock within five years of the date of grant at the market
price of such Common Stock on the date of grant, except for the Chairman of the
Advisory Committee who was granted options to purchase 10,000 shares of the
Company's Common Stock on the same terms.
-42-
<PAGE> 44
The Stock Option Plan Committee of the Board of Directors currently
consists of Ralph J. Gerson, Jeffrey A. Knight and Peter Joel C. Young, who met
once during the fiscal year ended June 30, 1998, and took action by unanimous
consent. The principal duties of the Stock Option Plan Committee are to make,
administer, and interpret all rules and regulations that it deems necessary to
administer OIS stock option plans and to recommend and make awards of stock
options and restricted stock under the plans. Members of the Stock Option Plan
Committee are not eligible for awards under the plans.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons who own more than ten
percent (10%) of the Company's Common Stock to file initial reports of ownership
and reports of change of ownership with the SEC. Executive officers and
directors are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on a review of the copies of
such forms furnished to it, the Company believes that, during the preceding
year, the executive officers and directors and persons who own more than ten
percent (10%) of the Company's Common Stock then subject to Section 16(a)
complied with all Section 16(a) filing requirements.
ITEM 11: EXECUTIVE COMPENSATION
The following table shows compensation paid, with respect to the three
most recent fiscal years, to the Chief Executive Officer and two other executive
officers of OIS serving at the end of fiscal 1998 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
Other ------ ------- All
Annual Restricted Other
Name and Compen- Stock Options LTIP Compen-
Principal Salary Bonus sation Awards(1) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------- ---- -------- ------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Rex Tapp, CEO & 1998 $190,050 --- (2) --- 135,000 $23,000(6)
President 1997 $190,050 --- (2) --- 20,000 $23,000(6)
1996 $181,000 --- (2) $225,000(3) 50,000 $23,000(6)
Charles C. Wilson, 1998 $150,000 --- --- --- 40,000 $12,685(6)
Executive Vice 1997 $150,500 --- --- $ 70,313(4) 12,500 $12,685(6)
President & CFO 1996 $144,500 --- --- $184,500 35,000 $12,685(6)
Scott V. Thomsen, 1998 $150,000 --- --- --- 90,000 $12,800(6)
Vice President 1997 $136,154 --- --- $ 70,313(5) 12,500 $ 6,500(6)
Engineering and 1996 $109,692 --- --- $202,500 20,000 $ 6,500(6)
Fab Operations
</TABLE>
Footnotes to the table of compensation of Named Executive Officers:
(1) Represents the market value of restricted stock on the date of grant.
-43-
<PAGE> 45
(2) The aggregate amount of other compensation is less than 10% of the
total of salary and bonus.
(3) As of June 30, 1998, Mr. Tapp held 53,100 restricted shares with a
market value of $49,807.
(4) As of June 30, 1998, Mr. Wilson held 62,800 restricted shares with a
market value of $58,906. Of these 62,800 restricted shares, Mr. Wilson
will forfeit 25,000 shares granted on February 18, 1997, if he does not
remain an employee through October 13, 1999.
(5) As of June 30, 1998, Mr. Thomsen held 60,000 restricted shares with a
market value of $60,970. Of these 65,000 shares, Mr. Thomsen will
forfeit the 25,000 shares granted on February 18, 1997, if he does not
remain an employee through October 13, 1999.
(6) Amount is for the cost of premiums for split-dollar life insurance
provided by OIS.
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<PAGE> 46
The following tables show grants, exercises and fiscal year-end values
of stock options for the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed Annual
Rates of Stock Option
Appreciation for Option
Individual Grants Term
- ----------------------------------------------------------------------------------------------------- -------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) In Fiscal Year Price($/SH)(1) Date 5% ($) 10% ($)
---- ----------- -------------- -------------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Rex Tapp, 50,000 5.9 1.50 04/27/2008 47,167 119,531
President & CEO 20,000(2) 2.4 1.13 02/17/2007 12,154 29,904
50,000(2) 5.9 1.13 01/15/2006 25,920 61,865
15,000(2) 1.8 1.13 03/08/2005 6,797 15,878
Charles C. Wilson, 40,000 4.7 1.50 04/27/2008 37,734 95,625
Executive Vice 12,500(2) 1.5 1.13 02/17/2007 7,596 18,690
President & CFO 35,000(2) 4.1 1.13 01/15/2006 18,144 43,306
12,000(2) 1.4 1.13 03/08/2005 5,437 12,702
Scott V. Thomsen, 90,000 10.7 1.50 04/27/2008 84,901 215,155
Vice President 12,500(2) 1.5 1.13 02/17/2007 7,596 18,690
Engineering and Fab 20,000(2) 2.4 1.13 01/15/2006 10,368 24,146
Operations
</TABLE>
Footnotes to table of option grants for last fiscal year:
(1) Represents the market price of the shares on the date of grant or the date
of repricing, as applicable.
(2) Represents outstanding options that were repriced as of April 3, 1998.
-45-
<PAGE> 47
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End (#) FY-End ($)
Shares
Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ----------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Rex Tapp, President & CEO -0- -0- 40,000/95,000 -0-
Charles C. Wilson, Executive Vice -0- -0- 29,500/70,000 -0-
President, CFO
Scott V. Thomsen, -0- -0- 10,000/112,500 -0-
Vice President Engineering
and Fab Operations
</TABLE>
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Number of Market Price
Securities of Stock At Exercise Price Length of Original
Underlying time of At time of Option Term
Options/SARs Repricing or Repricing or New Remaining at
Repriced or Amendment Amendment Exercise Date of Repricing
Name Date Amended (#) ($) ($) Price ($) or Amendment
- ---- ---- ----------- ------------ -------------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Rex Tapp, 4/3/1998 15,000 1.125 5.375 1.125 approx. 83 months
President & CEO 50,000 1.125 4.625 1.125 approx. 93 months
20,000 1.125 2.813 1.125 approx. 106 months
Charles C. Wilson, 4/3/1998 12,000 1.125 5.375 1.125 approx. 83 months
Executive Vice 35,000 1.125 4.625 1.125 approx. 93 months
President & CFO 12,500 1.125 2.813 1.125 approx. 106 months
Scott V. Thomsen, 4/3/1998 20,000 1.125 4.625 1.125 approx. 93 months
Vice President 12,500 1.125 2.813 1.125 approx. 106 months
Engineering and Fab
Operations
</TABLE>
-46-
<PAGE> 48
The Company entered into an employment agreement with Mr. Scott
Thomsen, Vice President - Engineering and Fab Operations, on August 26, 1998,
whereby the Company agreed to continue Mr. Thomsen's employment at his current
compensation level (base salary and benefits) during the 12 month period
following any shutdown of the manufacturing operations of the Company and to pay
Mr. Thomsen a bonus of $50,000 six months after the commencement of such period.
Upon the expiration of the agreement and the termination of his employment, Mr.
Thomsen is entitled to a severance payment of $50,000, as well as the
forgiveness of a $50,000 relocation loan from the Company. The agreement also
provides that if Mr. Thomsen's employment with the Company (or any successor to
the Company's business) is terminated within 18 months following a change of
control of the Company, Mr. Thomsen is entitled to a $150,000 severance payment
and forgiveness of the $50,000 relocation loan.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
POLICIES APPLICABLE TO COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers other than the President and
Chief Executive Officer, Rex Tapp, is determined by Mr. Tapp in consultation
with the Compensation Committee of the Company's Board of Directors (the
"Compensation Committee"). The Compensation Committee is comprised of
non-management directors, Ralph J. Gerson and Mark S. Wrighton. Before the end
of each fiscal year and again before bonuses are determined, Mr. Tapp meets with
the Compensation Committee and discusses the overall compensation situation of
the Company, the range of increases he proposes to implement and any special
circumstances present. Mr. Tapp makes compensation determinations for executive
officers on a subjective basis, taking into account the financial performance
(i.e., the ongoing losses) of OIS, the performance reviews and individual
compensation history of each individual executive officer, the range of
comparable salaries from other companies in OIS's industry and geographic region
as well as other factors that he considers relevant. The information on
comparable salaries is drawn from general published survey information. OIS's
compensation of executive officers is, on average, in the median range of
surveyed companies. No one factor is accorded more weight than any other.
Although OIS's performance is taken into consideration, there is no formal or
formulaic relationship between OIS's performance and executive compensation and
no performance targets have been set. OIS feels that this relatively informal
method of determining executive compensation is appropriate given the current
stage of development of OIS's business.
Salary adjustments for executive officers are made effective as of July
1 of each year and bonuses are awarded each December. Bonuses for executive
officers consist solely of awards of stock options and restricted stock.
Restricted stock is required to be forfeited if the officer's employment
terminates within a specified period after the award. The number of stock
options and shares of restricted stock awarded to each executive officer is
determined as part of the overall compensation process described above. Awards
of stock options and restricted stock made in prior years are not taken into
account when determining grants to be made in the current year. Mr. Tapp
determined the levels of salary increases and bonuses on a subjective basis
taking into account all of the factors discussed above. Awards of restricted
stock and stock options are made by the Stock Option Committee of the Board
after its receipt of recommendations from Mr. Tapp.
The salary adjustments and bonuses were lower than they would have been
had OIS not incurred significant losses. No executive officer receives annual
compensation that approaches $1.0 million, and OIS does not anticipate
compensation approaching $1.0 million in the foreseeable future. Accordingly,
the Compensation Committee has not considered the effect of Section 162(m) of
the Internal Revenue Code which makes certain non-performance based compensation
to executives of public companies in excess of $1.0 million non-deductible.
-47-
<PAGE> 49
CEO COMPENSATION
Mr. Tapp's compensation is determined by the Compensation
Committee. The Compensation Committee has determined to apply OIS's informal
method of compensation determination to Mr. Tapp. The Chairman of the Board,
Ralph J. Gerson, makes compensation recommendations to the Compensation
Committee before the July salary adjustment and the December bonus
determination.
Mr. Gerson makes his recommendations on a subjective basis taking into
account the financial performance (i.e., the ongoing losses) of OIS, his
subjective view of Mr. Tapp's job performance, Mr. Tapp's compensation history,
OIS's financial performance and other factors that he considers relevant. In
addition, the Compensation Committee has undertaken to review periodically
information concerning the compensation of chief executive officers at similar
companies.
The Compensation Committee does not accord any one factor more weight
than any other. Although OIS's performance is taken into account, and Mr. Tapp's
compensation is lower than it would be if OIS had not incurred significant
losses, the Compensation Committee does not apply any formal or formulaic
relationship between OIS's performance and Mr. Tapp's compensation and no formal
targets have been set. The Compensation Committee believes that this relatively
informal method of determining the compensation of the chief executive officer
is appropriate given the current stage of OIS's business.
OPTION REPRICING
On April 3, 1998, the Board of Directors approved the repricing of all
stock options outstanding as of such date and the Company thereby amended the
exercise price of such options to $1.125, the closing price of the Company's
Common Stock as of April 2, 1998. The repricing was unanimously approved by the
disinterested directors. No other terms or conditions of the stock options,
including the exercise schedule or expiration date, were affected.
The stock options were repriced to realign the value of the previously
granted options, upon exercisability, with the market value of the Company's
Common Stock at the time of repricing. The expectation at the time was that the
opportunity to earn compensation based on potential appreciation of the
Company's Common Stock from the repriced level would motivate employees to
achieve greater results over the long term, encourage key employees to remain
with the Company and compensate employees for work and economic sacrifices made.
COMPENSATION COMMITTEE
Ralph J. Gerson
Mark S. Wrighton
-48-
<PAGE> 50
The following graph compares the five-year cumulative total return to
the stockholders of OIS to Standard and Poor's Midcap 400 Index and Standard and
Poor's Electronics (Semiconductor) Index.
[LINE GRAPH]
TOTAL RETURN TO STOCKHOLDER'S
(DIVIDENDS REINVESTED MONTHLY)
<TABLE>
<CAPTION>
ANNUAL RETURN PERCENTAGE
YEARS ENDING
COMPANY/INDEX JUN94 JUN95 JUN96 JUN97 JUN98
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIS OPTICAL IMAGING SYSTEMS 183.94 -6.82 -40.25 -20.41 -61.51
S&P MIDCAP 400 INDEX -0.06 22.34 21.58 23.33 27.15
ELECTRONICS (SEMICNDCTR)-500 5.83 88.70 -21.18 87.08 1.20
INDEXED RETURNS
Base (Years Ending)
Period
Company/Index Jun93 Jun94 Jun95 Jun96 Jun97 Jun98
- ---------------------------------------------------------------------------------------------------------------------------------
OIS OPTICAL IMAGING SYSTEMS 100 283.94 264.58 158.08 125.81 48.43
S&P MIDCAP 400 INDEX 100 99.94 122.27 148.66 183.34 233.13
ELECTRONICS (SEMICNDCTR)-500 100 105.83 199.70 157.40 294.48 298.01
</TABLE>
-49-
<PAGE> 51
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of December 8, 1998, the beneficial
ownership of shares of OIS Common Stock and Series B Preferred by each person
(i) known to OIS to be the beneficial owner of more than five percent (5%) of
each such class of stock (ii) each director, (iii) each Named Executive Officer
and (iv) executive officers and directors as a group. All shares are owned
directly except as otherwise indicated.
<TABLE>
<CAPTION>
Common Stock Series B Preferred
----------------------------------------- ----------------------------------
Amount and Amount and Percent
Nature of Percent of Nature of of
Name and Address of Owner Beneficial Ownership(1) Class(2) Beneficial Owner Class
- ------------------------- ----------------------- ---------- ----------------- -------
<S> <C> <C> <C> <C>
GD Investments Corp. 77,562,451 79.6% 91,137 100%
2300 Harmon Road
Auburn Hills, MI 48326
William Davidson 78,562,451(3) 80.6% 91,137(4) 100%
2300 Harmon Road
Auburn Hills, MI 48326
Ralph J. Gerson 20,108(5) -- --
(14)
Jeffrey A. Knight 310,000(6) -- --
(14)
C.K. Prahalad 20,000(7) -- --
(14)
Rex Tapp 146,400(8) -- --
(14)
Robert M. Teeter 25,000(9) -- --
(14)
Scott V. Thomsen 91,250(10) -- --
(14)
Charles C. Wilson 120,650(11) -- --
(14)
Mark S. Wrighton 26,000(12) -- --
(14)
Peter Joel C. Young 46,00(13) -- --
(14)
All executive officers and
directors 805,408 -- --
as a group (14)
(9 persons)
</TABLE>
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if that person has the
right to acquire beneficial ownership of such security within 60 days,
whether through the exercise of options or warrants or through the
conversion of another security.
(2) Under the rules of the Securities and Exchange Commission, shares of OIS
Common Stock issuable upon exercise of options which are deemed to be
beneficially owned by the holder thereof (See Note (1) above) are deemed
to be outstanding for the purpose of computing the percentage of
outstanding securities of the class owned by such person (but are not
deemed to be outstanding for the purpose of computing the percentage of
the class owned by any other person). The calculation of percent of
class is computed in accordance with the rules of the Securities and
Exchange Commission on the basis of
-50-
<PAGE> 52
the number of shares actually
outstanding on September 16, 1998, plus the number of shares subject to
options that could be exercised within 60 days.
(3) Of these shares, William Davidson owns 1,000,000 shares directly and is
deemed to beneficially own all of the shares owned directly by GD
Investments Corp.
(4) Of these shares, William Davidson is deemed to beneficially own all
shares owned directly by GD Investments Corp.
(5) Of these shares, 4,608 are owned by Mr. Gerson's children.
(6) Of these shares, 307,000 shares are owned indirectly by Jeffrey A.
Knight as a general partner of a limited partnership which has a 0.5%
interest in OIS. Mr. Knight disclaims beneficial ownership of such
shares held by the partnership.
(7) These 20,000 shares represent shares underlying exercisable options.
(8) Of these shares, 75,000 represent shares underlying exercisable options.
(9) Of these shares 15,000 represent shares underlying exercisable options.
(10) Of these shares 26,250 represent shares underlying exercisable options.
(11) Of these shares, 53,250 represent shares underlying exercisable options.
(12) Of these shares, 25,000 represent shares underlying exercisable options.
(13) Of these shares, 5,000 represent shares underlying exercisable options.
(14) Less than 1%.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXCHANGE AND PURCHASE OF SERIES B PREFERRED STOCK
During fiscal 1998, GDIC purchased 17,500 shares of Series B Preferred
from OIS for $1,000 per share. As of September 30, 1998, GDIC owned 91,137
shares of Series B Preferred. These investments were approved by the independent
members of OIS's board of directors and are accounted for as equity by OIS.
TAX CONSOLIDATION AND TAX SHARING AGREEMENT
On October 31, 1996, OIS became eligible, and has elected, to become a
member of the Affiliated Group under Section 1504(a) of the Internal Revenue
Code of 1986, as amended. 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
-51-
<PAGE> 53
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. The foregoing description of the terms
of the Tax Sharing Agreement is qualified in its entirety by reference to the
express terms of the Tax Sharing Agreement, a copy of which Agreement was
attached as Exhibit 99 to the Form 8-K filed by OIS on November 5, 1996, which
is incorporated herein by reference. As of June 30, 1998, the Company had
received $16,013,734 and recorded an estimated receivable from Guardian of
$5,100,756 and related Deferred Income Taxes of $7,000,000 in accordance with
the Tax Sharing Agreement.
LOANS BY GUARDIAN AND GDIC
Approximately $18,900,000 of the proceeds from the sale of Series B
Preferred Stock to GDIC on October 31, 1996, were used by OIS to repay loans
previously made by Guardian to OIS. OIS no longer has any outstanding loans from
Guardian. As of September 30, 1998, GDIC has loaned OIS $12,000,000. These loans
bear interest at an annual rate of 6%, and all interest and principal is due and
payable on written demand of GDIC.
SERVICES AGREEMENT
Pursuant to a Services Agreement, Guardian provides certain
administrative, accounting, technical, travel arrangement, management and tax
services to OIS for $50,000 per year and provides legal services to OIS through
its corporate legal department at an hourly rate of $100.
-52-
<PAGE> 54
Report of Independent Public Accountants
We have audited in accordance with generally accepted auditing standards, the
financial statements of OIS Optical Imaging Systems, Inc. included in this
filing on Form 10-K and have issued our report thereon dated November 23, 1998.
Our report was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Our report on the financial statements includes an
explanatory paragraph with respect to the Company's ability to continue as a
going concern as discussed in Note A to the financial statements. The schedule
listed in the index below 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 states 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
- -----------------------------
Arthur Andersen LLP
November 23, 1998
Detroit, Michigan.
-53-
<PAGE> 55
OIS OPTICAL IMAGING SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT ADDITIONS ADDITIONS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
DESCRIPTION OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ------------------ -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS $60,000 $ 60,000
YEAR ENDED JUNE 30, 1997:
ALLOWANCE FOR $60,000 $ 60,000
DOUBTFUL ACCOUNTS
YEAR ENDED JUNE 30, 1996:
ALLOWANCE FOR $60,000 $ 60,000
DOUBTFUL ACCOUNTS
$115,081
YEAR ENDED JUNE 30, 1998: $ -0- $115,081
INVENTORY RESERVE
</TABLE>
-54-
<PAGE> 56
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following financial statements are included in Part II, Item 8:
Report of Independent Public Accountants
Balance Sheets - June 30, 1998 and 1997
Statements of Operations - years ended June 30, 1998, 1997 and 1996
Statements of Stockholders' Equity - years ended June 30, 1998, 1997 and
1996
Statements of Cash Flows - years ended June 30, 1998, 1997 and 1996
Notes to Financial Statements
2. List of Financial Statement Schedules
The following financial statement schedules of the Company are included
in this Report:
Report of Independent Public Accountants on financial statement
schedule.
Schedule II - Valuation and Qualifying Accounts - June 30, 1998, 1997
and 1996
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
------- -----------
2 Plan of Liquidation and Dissolution of OIS Optical Imaging
Systems, Inc.
3(i) Restated Certificate of Incorporation as currently in effect.
(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.)
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).
-55-
<PAGE> 57
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's 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.)
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 period ended March
31, 1994, and incorporated herein by reference).
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<PAGE> 58
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's 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's 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. (Filed as Exhibit to OIS's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, and incorporated
herein by reference).
10.16 Promissory Note dated June 19, 1997 given by OIS in favor of
GDIC. (Filed as Exhibit to OIS's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997, and incorporated herein by
reference).
23 Consent of Arthur Andersen LLP dated December 8, 1998.
27 Financial Data Schedule (EDGAR version only).
99 Standstill Agreement between the Company and the U.S.
Department of Commerce effective as of October 14, 1998.
(b) Reports on Form 8-K
None.
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<PAGE> 59
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: December 8, 1998
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\ Rex Tapp President, Chief Executive December 8, 1998
- -----------------------
Rex Tapp Officer & Director
\s\ Charles C. Wilson Executive Vice President, December 8, 1998
- -----------------------
Charles C. Wilson Chief Financial Officer &
Director
(Principal Financial &
Accounting Officer)
\s\ Ralph J. Gerson Chairman of the Board & Director December 8, 1998
- -----------------------
Ralph J. Gerson
\s\ Jeffrey A. Knight Director December 8, 1998
- -----------------------
Jeffrey A. Knight
\s\ C. K. Prahalad Director December 8, 1998
- -----------------------
C. K. Prahalad
\s\ Robert M. Teeter Director December 8, 1998
- -----------------------
Robert M. Teeter
\s\ Mark S. Wrighton Director December 8, 1998
- -----------------------
Mark S. Wrighton
\s\ Peter Joel C. Young Director December 8, 1998
- -----------------------
Peter Joel C. Young
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<PAGE> 60
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Plan of Liquidation and Dissolution of OIS Optical
Imaging Systems, Inc.
23 Consent of Arthur Andersen LLP dated December 8, 1998.
27 Financial Data Schedule (EDGAR version only).
99 Standstill Agreement between the Company and the U.S.
Department of Commerce effective as of October 14, 1998.
<PAGE> 1
EXHIBIT 2
PLAN OF LIQUIDATION AND DISSOLUTION
OF OIS OPTICAL IMAGING SYSTEMS, INC.
WHEREAS, the Board of Directors (the "Board") of OIS Optical Imaging
Systems, Inc. (the "Company"), a Delaware corporation, has deemed it advisable
that the Company should be liquidated and subsequently dissolved and has
approved and determined that this Plan of Liquidation and Dissolution of OIS
Optical Imaging Systems, Inc. (this "Plan") is advisable and in the best
interests of the creditors and stockholders of the Company; and
WHEREAS, the Board has directed that this Plan be submitted to the
stockholders of the Company for their approval or rejection at the annual
meeting of stockholders of the Company (or otherwise at a special meeting of
such stockholders) to be held in or about February 1999 or such other date as
the Board may determine, in accordance with the requirements of the Delaware
General Corporation Law (the "DGCL") and the Company's Certificate of
Incorporation (the "Certificate of Incorporation") and has authorized the filing
with the Securities and Exchange Commission (the "SEC"), and the distribution of
a proxy statement to stockholders (the "Proxy Statement"), in connection with
the solicitation of proxies for such meeting; and
WHEREAS, the Board, upon substantial completion of the liquidation of
the Company's properties and assets or such earlier time as determined in its
discretion, may voluntarily dissolve the Company in accordance with the DGCL and
the Internal Revenue Code of 1986, as amended (the "Code"), upon the terms and
conditions set forth in this Plan;
NOW, THEREFORE, the Board hereby adopts and sets forth this Plan of
Liquidation and Dissolution of OIS Optical Imaging Systems, Inc. as follows:
1. EFFECTIVE DATE OF PLAN.
The effective date of this Plan (the "Effective Date") shall be the
date on which the stockholders of the Company voted to approve this Plan.
2. CESSATION OF BUSINESS ACTIVITIES.
This Plan is intended to be a complete plan of liquidation and
dissolution. After the Effective Date, the Company shall not engage in any
business activities except for the purpose of preserving the value of its
assets, prosecuting and defending suits by or against the Company, adjusting and
winding up its business and affairs, selling and liquidating its properties and
assets and making distributions to stockholders in accordance with this Plan.
The directors in office on the Effective Date and, at the pleasure of such
directors, the officers of the Company, shall continue in office solely for
these purposes and as otherwise provided in this Plan.
3. LIQUIDATION OF ASSETS.
Prior to the date the Certificate of Dissolution (as defined in Section
8 below) is accepted
<PAGE> 2
by the Secretary of the State of Delaware (the "Secretary of State") and the
Company is dissolved, as provided for in Section 8 below (the "Dissolution
Date"), the Company shall sell, exchange, transfer, lease, license or otherwise
dispose of all of its property and assets to the extent, for such consideration
(which may consist in whole or in part of money or other property) and upon such
terms and conditions as the Board deems expedient and in the best interests of
the Company and its creditors and stockholders, without any further vote or
action by the Company's stockholders. The Company's assets and properties may be
sold in bulk to one buyer or a small number of buyers or on a piecemeal basis to
numerous buyers. The Company will not be required to obtain appraisals or other
third party opinions as to the value of its properties and assets in connection
with the liquidation. As part of the liquidation of its property and assets, the
Company shall collect, or make provision for the collection of, all accounts
receivable, debts and claims owing to the Company.
Following the Dissolution Date, any assets remaining available for
distribution to holders of the Common Stock (as defined below) shall be
distributed (the "Dissolution Distribution") only in accordance with the
provisions of the DGCL.
4. PAYMENT OF DEBTS.
Prior to making any distributions to the Company's stockholders, the
Company shall pay, or as determined by the Board, make reasonable provision to
pay, all claims and obligations of the Company, including all contingent,
conditional or unmatured claims known to the Company and any obligations of the
Company to holders of the Preferred Stock (as defined below).
Following the Effective Date, the Board may, if and to the extent
deemed necessary or advisable by the Board, establish a contingency reserve (the
"Contingency Reserve") and set aside into the Contingency Reserve such amounts
of cash or property of the Company as the Board, in its discretion, determines
is sufficient to account for unknown events, claims, contingencies and expenses
incurred in connection with the collection and defense of the Company's property
and assets and the liquidation and dissolution provided for in this Plan.
Following the payment, satisfaction or other resolution of all such events,
claims, contingencies and expenses, any amounts remaining in the Contingency
Reserve shall be distributed in accordance with this Plan.
5. PREFERRED STOCK; LIQUIDATION PREFERENCE.
Prior to making any distribution to the holders of the Company's Common
Stock, par value $0.01 (the "Common Stock"), the Company shall, to the extent
that sufficient funds are available, satisfy in full the liquidation preference
(the "Liquidation Preference") of the Company's Series B Cumulative Preferred
Stock, par value $0.01 (the "Preferred Stock"), all of which Preferred Stock is
currently held by GD Investments Corp. ("GDIC"). In the event that the Company
lacks sufficient funds to pay the Liquidation Preference in full, it shall
distribute to
-2-
<PAGE> 3
GDIC all of its remaining property and assets, if any, in satisfaction of the
Liquidation Preference.
6. DISTRIBUTIONS TO COMMON STOCKHOLDERS.
Following the payment or the provision for the payment of the Company's
claims and obligations as provided in Section 4 and the payment in full of the
Liquidation Preference as provided in Section 5, the Company shall distribute
pro rata to the holders of the Common Stock all of its remaining property and
assets, if any, in one or a series of distributions.
7. NOTICE OF LIQUIDATION.
As soon as practicable after the Effective Date, but in no event later
than 20 days prior to the filing of the Certificate of Dissolution as provided
in Section 8 below, the Company shall mail notice in accordance with the DGCL to
all its creditors and employees that this Plan has been approved by the Board
and the Company's stockholders.
8. CERTIFICATE OF DISSOLUTION.
Once the liquidation of the Company's property and assets is
substantially completed (as determined by the Board) or such earlier time as the
Board determines, in its discretion, to be appropriate, the officers of the
Company shall execute and cause to be filed with the Secretary of State, and
elsewhere as may be required or deemed appropriate, such documents as may be
required to effectuate the dissolution of the Company, including a Certificate
of Dissolution conforming to the requirements of Section 275 of the DGCL (the
"Certificate of Dissolution"). From and after the date such documents are
accepted by the Secretary of State, the Company will be deemed to be completely
dissolved, but will continue to exist under Delaware law for the purposes of
paying, satisfying and discharging any existing debts or obligations, collecting
and distributing its assets, and doing all other acts required to liquidate and
wind up the Company's business affairs. The members of the Board in office at
the time the Certificate of Dissolution is accepted for filing by the Secretary
of State shall have all powers provided to them under the DGCL and other
applicable law.
9. POWERS OF BOARD AND OFFICERS.
The Board and the officers of the Company are authorized to approve
such changes to the terms of any of the transactions referred to herein, to
interpret any of the provisions of this Plan, and to make, execute and deliver
such other agreements, conveyances, assignments, transfers, certificates and
other documents and take such other action as the Board and the officers of the
Company deem necessary or desirable in order to carry out the provisions of this
Plan and effect the complete liquidation and dissolution of the Company in
accordance with the Code and the DGCL and any rules and regulations of the SEC
or any state securities commission, including,
-3-
<PAGE> 4
without limitation, any instruments of dissolution or other documents, and
withdrawing any qualification to conduct business in any state in which the
Company is so qualified, as well as the preparation and filing of any tax
returns.
10. CANCELLATION OF STOCK.
The distributions to the Company's stockholders pursuant to this Plan,
if any, shall be in complete redemption and cancellation of all of the
outstanding Common Stock and Preferred Stock. As a condition to the disbursement
of the Dissolution Distribution under this Plan, the Board may require
stockholders to surrender their certificates evidencing stock to the Company or
its agent for cancellation. If a stockholder's certificate for shares of Common
Stock or Preferred Stock has been lost, stolen or destroyed, such stockholder
may be required, as a condition to the disbursement of any distribution under
this Plan, to furnish to the Company satisfactory evidence of the loss, theft or
destruction thereof, together with a surety bond or other security or indemnity
reasonably satisfactory to the Company.
11. RECORD DATE AND RESTRICTIONS ON TRANSFER OF SHARES.
The Company shall close its stock transfer books and discontinue
recording transfers of Common Stock and Preferred Stock at the close of business
on the record date fixed by the Board for the Dissolution Distribution (the
"Record Date"), and thereafter, certificates representing the Common and
Preferred Stock shall not be assignable or transferable on the books of the
Company except by will, intestate succession or operation of law. The
proportionate interests of all of the stockholders of the Company shall be fixed
on the basis of their respective stock holdings at the close of business on the
Record Date, and, after the Record Date, any distributions made by the Company
shall be made solely to the stockholders of record at the close of business on
the Record Date, except as may be necessary to reflect subsequent transfers
recorded on the books of the Company as a result of any assignments by will,
intestate succession or operation of law.
12. LIQUIDATING TRUST.
If advisable for any reason to complete the liquidation and
distribution of the Company's assets to its stockholders, the Board may at any
time transfer to a liquidating trust (the "Trust") the remaining assets of the
Company. The Trust thereupon shall succeed to all of the then remaining assets
of the Company, including all amounts in the Contingency Reserve, and any
remaining liabilities and obligations of the Company. The sole purpose of the
Trust shall be to prosecute and defend suits by or against the Company, to
settle and close the business of the Company, to dispose of and convey the
assets of the Company, to satisfy the remaining liabilities and obligations of
the Company and to distribute the remaining assets of the Company to its
stockholders. Any distributions made from the Trust shall be made in accordance
with the provisions of this Plan. The Board may appoint one or more individuals
or corporate persons to
-4-
<PAGE> 5
act as trustee or trustees of the Trust and to cause the Company to enter into a
liquidating trust agreement with such trustee or trustees on such terms and
conditions as the Board determines. Approval of this Plan by the stockholders
also will constitute the approval by the stockholders of any appointment of the
trustees and of the liquidating trust agreement between the Company and such
trustees.
13. COMPENSATION.
The Company may pay to the Company's officers, directors, employees and
agents, or any of them, compensation for services rendered in connection with
the implementation of this Plan. Further, if deemed advisable by the Board, the
Company may pay a "wind-down" consultant reasonable compensation for services
rendered in connection with the liquidation and dissolution of the Company.
Approval of this Plan by the stockholders of the Company shall constitute the
approval of the stockholders of the payment of any such compensation referred to
in this Section 13.
14. INDEMNIFICATION.
The Company shall continue to indemnify its officers, directors,
employees and agents in accordance with its Certificate of Incorporation, bylaws
and any contractual arrangements as therein or elsewhere provided, and such
indemnification shall apply to acts or omissions of such persons in connection
with the implementation of this Plan and the winding up of the affairs of the
Company. The Company's obligation to indemnify such persons may be satisfied out
of the Contingency Reserve or out of assets transferred to the Trust, if any.
The Board and the trustees of any Trust are authorized to obtain and maintain
insurance as may be necessary to cover the Company's indemnification
obligations.
15. COSTS.
The Company is authorized, empowered and directed to pay all legal,
accounting, printing and other fees, costs and expenses for services rendered to
the Company in connection with the preparation, adoption and implementation of
this Plan, including, without limitation, any such fees and expenses incurred in
connection with the preparation of a proxy statement for the meeting of
stockholders to be held for the purpose, among others, of voting upon the
approval of this Plan.
-5-
<PAGE> 1
EXHIBIT 23
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements (File No. 33-58562 and File No.
33-88288).
/s/ Arthur Andersen LLP
December 8, 1998,
Detroit, Michigan
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000753601
<NAME> OIS OPTICAL IMAGING SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,078,567
<SECURITIES> 0
<RECEIVABLES> 4,100,661
<ALLOWANCES> 60,000
<INVENTORY> 9,411,086
<CURRENT-ASSETS> 20,402,175
<PP&E> 21,000,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,402,175
<CURRENT-LIABILITIES> 56,942,095
<BONDS> 0
0
911
<COMMON> 974,684
<OTHER-SE> (10,364,325)
<TOTAL-LIABILITY-AND-EQUITY> 48,402,175
<SALES> 22,693,555
<TOTAL-REVENUES> 22,693,555
<CGS> 43,775,594
<TOTAL-COSTS> 82,267,190
<OTHER-EXPENSES> 3,778,772
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 4,296,611
<INCOME-PRETAX> (63,352,407)
<INCOME-TAX> (18,459,000)
<INCOME-CONTINUING> (44,893,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,893,407)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
<PAGE> 1
EXHIBIT 99
[United States Department of Commerce]
[Letterhead]
October 14, 1998
Mr. Rex Tapp
President and Chief Executive Officer
OIS Optical Imaging Systems, Inc.
47050 Five Mile Road
Northville, MI 48167
Dear Mr. Tapp:
This is in reference to the Directive (SIES Case No. X-41242) issued
by the U.S. Department of Commerce (the "Department") to OIS Optical Imaging
Systems, Inc. ("OIS") on September 28, 1998 (the "Directive").
The Department is interested in seeing the 108,000 square foot
manufacturing and office facility of OIS located in Northville Township,
Michigan (the "OIS Facility") preserved as a manufacturing source of flat panel
display and sensor products.
In furtherance of this interest, Department hereby enters into the
following agreement with OIS (the "Agreement"):
1. Term. The term of this Agreement will commence as of the date OIS
countersigns this letter and will continue until 5:00 pm Eastern Standard Time
on November 14, 1998 (the "Term"), unless extended by mutual agreement of the
parties.
2. No Liquidation. During the Term of this Agreement, OIS shall not
transfer ownership and shall retain possession of the land, building, fixtures,
fittings, machinery, equipment, masks and tooling, buildings, computers,
furniture and other tangible assets comprising, and hereinafter collectively
referred to as, the OIS Facility, without the prior written consent of the
Department. In addition, OIS will take commercially reasonable steps to maintain
the OIS Facility (including the actions set forth in the enclosed Attachment 1
to this Agreement), including all equipment and assets owned by the U.S.
Government, in the same order and condition as at the Effective Date, ordinary
wear and tear excepted. Further, OIS shall not sell or
<PAGE> 2
provide any finished product, or any work-in-progress or materials necessary to
the completion of finished product, to any other party if the finished product,
work-in-progress, or materials could be used to meet the requirements of any
customer who claims to have placed a rated order with OIS as listed in the
enclosure to the Directive, without the prior written consent of the Department.
3. Access. During the Term of this Agreement, OIS will provide prospective
buyers of the OIS Facility with reasonable access to the OIS Facility, current
OIS employees and OIS books and records for inspection or interviews as
necessary for the performance of due diligence. Upon request, OIS will provide
prospective buyers with reasonable assistance to identify, contact and negotiate
employment agreements with former employees of OIS.
4. No Enforcement of the Directive. During the Term of this Agreement, the
Department will not initiate action to enforce the Directive. OIS admits no
wrongdoing and reserves all of its rights with respect to the Directive. The
Department specifically reserves the right, however, to otherwise take any
official action authorized by law or regulation, including without limitation
the right to inspect, audit, and require production of records or information
from OIS.
5. Entire Agreement. This Agreement, including the enclosed attachment,
constitutes the entire and complete agreement between the Department and OIS,
and except for the agreement to conduct and conclude an inspection of OIS
pursuant to the Inspection Authorization dated October 1, 1998, supersedes any
prior understandings, agreements, or representations by or between the
Department and OIS, written or oral, regarding the subject matter hereof. This
Agreement shall not be modified except in a writing signed by authorized
representatives of the Department and OIS.
<PAGE> 3
Please sign and date the enclosed copy of this letter in the spaces
provided below to confirm our mutual understandings and agreement as set forth
in this letter and return a fully signed copy to the undersigned.
Office of Strategic Industries and Economic Security
By: /s/ Richard V. Meyers Concur: /s/ William J. Denk
------------------------- ---------------------------
Richard V. Meyers William Denk
DPAS Program Manager Director
Defense Programs Division
OIS HEREBY ACKNOWLEDGES AND AGREES TO THIS AGREEMENT.
OIS Optical Imaging Systems, Inc.
By: /s/ Rex Tapp
------------------
Rex Tapp
President and CEO
Date: October 14, 1998
Enclosure
