<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission File Number 0-16343
OIS OPTICAL IMAGING SYSTEMS, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-2544320
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
47050 Five Mile Road Northville, Michigan 48167
- ---------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 454-5560
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 19, 1999:
Common Stock, $0.01 par value 97,468,429
- ------------------------------------------- -----------------------------------
Class Number of Shares
<PAGE> 2
PART I - FINANCIAL INFORMATION
Financial Statements
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENT OF CHANGES IN
NET ASSETS (LIQUIDATION BASIS)
FOR THE PERIOD FROM JUNE 30, 1998 TO DECEMBER 31, 1998
(Unaudited)
<TABLE>
<S> <C>
Stockholders' deficit at June 30, 1998 (going concern
historical cost basis) $(11,339,920)
Net loss from operations for the period from July 1, 1998 to
September 18, 1998 (4,624,961)
Change in deferred compensation from July 1, 1998 to September 18, 1998 248,012
-------------------
Stockholders' deficit at September 18, 1998 (going concern historical
cost basis) (15,716,869)
Accrual of estimated closure costs anticipated from discontinuance of
manufacturing operations on September 18, 1998, net of tax benefit
of $1,826,000 (3,802,234)
Recognition of local government subsidy due to discontinuance of
manufacturing operations on September 18, 1998 2,775,000
Reduction of inventory balance to liquidation basis, net of estimated
tax benefit of $380,000 (712,364)
Expenses incurred:
Interest expense, net of tax benefit of $255,000 (473,727)
Legal expense, net of tax benefit of $128,000 (237,220)
-------------------
Net asset deficiency at December 31, 1998 $(18,167,414)
===================
</TABLE>
-2-
<PAGE> 3
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF OPERATIONS (GOING CONCERN BASIS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period from
Three Months July 1, 1998 Six Months
Ended through Ended
December 31, 1997 September 18, 1998 December 31, 1997
------------------------- ------------------------ -------------------------
<S> <C> <C> <C>
REVENUES
Display revenue $ 4,963,468 $ 2,541,638 $ 10,435,001
Engineering revenue 170,507 -- 554,686
Sensor and other revenue 529,979 394,405 1,152,996
---------------- ----------------- ------------------
TOTAL REVENUES 5,663,954 2,936,043 12,142,683
COST OF SALES
Display 10,388,109 5,936,692 20,555,200
Engineering 357,127 -- 1,218,384
Sensor and other 812,598 1,419,069 1,472,591
---------------- ----------------- ------------------
TOTAL COST OF SALES 11,557,834 7,355,761 23,246,175
GROSS LOSS (5,893,880) (4,419,718) (11,103,492)
OPERATING EXPENSES
Internal research and development 362,716 351,491 727,784
Selling, general and administrative 1,795,395 1,417,780 3,267,623
---------------- ----------------- ------------------
TOTAL OPERATING EXPENSES 2,158,111 1,769,271 3,995,407
OPERATING LOSS (8,051,991) (6,188,989) (15,098,899)
OTHER INCOME (EXPENSE)
Interest expense (1,169,553) (1,093,430) (2,268,479)
Interest income 4,555 6,158 13,833
Licensing and royalties 100,000 120,000 177,204
Other 27,560 25,300 88,261
---------------- ----------------- ------------------
TOTAL OTHER INCOME (EXPENSE) (1,037,438) (941,972) (1,989,181)
---------------- ----------------- ------------------
Loss before income tax benefit (9,089,429) (7,130,961) (17,088,080)
Income tax benefit 3,180,000 2,506,000 5,981,000
---------------- ----------------- ------------------
NET LOSS (5,909,429) (4,624,961) (11,107,080)
---------------- ----------------- ------------------
Preferred stock dividends, unaccrued
and unpaid 1,487,913 1,837,721 2,972,758
---------------- ----------------- ------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
$(7,397,342) $(6,462,682) $(14,079,838)
================ ================= ==================
NET LOSS PER COMMON SHARE
(Note B) $ (.08) $ (.07) $ (.14)
================ ================= ==================
</TABLE>
See notes to financial statements.
-3-
<PAGE> 4
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENT OF NET ASSETS (LIQUIDATION BASIS)
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 214,372
Accounts receivable 1,303,559
Inventory 4,561,000
Prepaid assets 1,377,455
Property and equipment 21,000,000
Deferred income taxes 8,926,000
-------------------
TOTAL ASSETS 37,382,386
-------------------
LIABILITIES
Accounts payable 1,265,366
Accrued liabilities 587,062
Accrued interest 1,117,766
Accrued closure costs 1,697,000
Income taxes payable to affiliate 2,382,606
Bank debt (not revalued to liquidation value) 36,500,000
Subordinated note payable to affiliate (not revalued to
liquidation value) 12,000,000
-------------------
TOTAL LIABILITIES 55,549,800
-------------------
NET ASSET DEFICIENCY $(18,167,414)
===================
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEET
ASSETS
(GOING CONCERN BASIS)
<TABLE>
<CAPTION>
June 30, 1998
-----------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,078,567
Accounts receivable
(Net of reserve for doubtful accounts of $60,000) 4,040,661
Inventories 9,411,086
Income tax receivable from affiliate 5,100,756
Prepaid expenses and other current assets 771,105
-----------------
TOTAL CURRENT ASSETS 20,402,175
PROPERTY AND EQUIPMENT
Land 3,000,000
Building 11,100,000
Machinery and other equipment 6,900,000
-----------------
TOTAL PROPERTY AND EQUIPMENT 21,000,000
Less accumulated depreciation --
TOTAL PROPERTY AND EQUIPMENT, NET 21,000,000
-----------------
DEFERRED INCOME TAXES 7,000,000
-----------------
TOTAL ASSETS $48,402,175
=================
</TABLE>
See notes to financial statements.
-5-
<PAGE> 6
OIS OPTICAL IMAGING SYSTEMS, INC.
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' DEFICIT
(GOING CONCERN BASIS)
<TABLE>
<CAPTION>
June 30, 1998
-----------------
<S> <C>
CURRENT LIABILITIES
Subordinated note payable to affiliate $ 12,000,000
Current installment on long-term debt 42,000,000
Accounts payable 1,569,244
Accrued interest 997,129
Other accrued liabilities 375,722
------------------
TOTAL CURRENT LIABILITIES 56,942,095
LOCAL GOVERNMENT SUBSIDY 2,800,000
------------------
TOTAL LIABILITIES 59,742,095
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, par value $0.01 per share:
Series B, 8% cumulative, non-convertible and voting
Authorized - 100,000 shares
91,137 issued and outstanding 911
Common Stock, par value $0.01 per share:
Authorized - 125,000,000 shares
97,468,429 issued and outstanding 974,684
Additional paid-in capital 159,581,155
Accumulated deficit (171,458,726)
Deferred compensation (437,944)
------------------
TOTAL STOCKHOLDERS' DEFICIT (11,339,920)
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 48,402,175
==================
</TABLE>
See notes to financial statements.
-6-
<PAGE> 7
OIS OPTICAL IMAGING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(GOING CONCERN BASIS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period from
July 1, 1998
through Six Months Ended
September 18, 1998 December 31, 1997
-------------------------- ---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,624,961) $(11,107,080)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and recognition of local government subsidy (25,000) 3,100,000
Deferred compensation expense 248,012 454,750
Impact on cash flows from changes in assets and liabilities:
Receivables 6,349,574 (1,507,346)
Prepaid expenses and other assets (176,722) (425,295)
Inventory 99,359 (1,665,187)
Accounts payable and accrued expenses 201,074 900,509
Deferred revenues -- (112,204)
----------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 2,071,336 (10,361,853)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (214,584) (665,966)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (214,584) (665,966)
CASH FLOWS FROM FINANCIAL ACTIVITIES:
Principal payments on long term debt (2,750,000) --
Net proceeds from issuance of debt and notes -- 9,000,000
Net proceeds from issuance of common stock -- 9,545
Net proceeds from issuance of preferred stock -- 2,000,000
----------------- -----------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,750,000) 11,009,545
----------------- -----------------
DECREASE IN CASH AND CASH EQUIVALENTS (893,248) (18,274)
NET CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,078,567 960,042
----------------- -----------------
NET CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 185,319 $ 941,768
================= =================
</TABLE>
See notes to financial statements.
-7-
<PAGE> 8
OIS OPTICAL IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(GOING CONCERN BASIS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period from
July 1, 1998 through Six Months Ended
September 18, 1998 December 31, 1997
---------------------------- ---------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $1,010,091 $1,994,314
Cash equivalents:
Cash equivalents consist of investments in short-term, highly-liquid securities
having maturity of three months or less, made as a part of OIS' cash management
activity.
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH
TRANSACTIONS:
Six Months Ended
December 31, 1997
---------------------------------------
<S> <C>
Adjust deferred compensation $275,785
</TABLE>
-8-
<PAGE> 9
OIS OPTICAL IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - Financial Statements Presentation
The condensed financial statements included herein have been prepared by OIS
Optical Imaging Systems, Inc. ("OIS" or "the Company") without audit pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's latest annual report on Form 10-K. On
September 18, 1998 the Company changed is basis of accounting from the going
concern historical cost basis to the liquidation basis of accounting. The
primary differences between these methods are discussed below and in Note B.
During fiscal 1998, the Company, with the encouragement and cooperation of
Guardian Industries Corp. ("Guardian"), had been exploring a full range of
strategic alternatives. Guardian, through its majority-owned subsidiary, GD
Investments Corp. ("GDIC"), is the Company's majority stockholder. In February
1998, the Company retained an investment banking firm and began seeking one or
more investors with a strategic interest in providing long term funding to the
Company. The results of this search were not successful in securing additional
financing or a buyer for the Company. In September 1998, in light of the
Company's continued operating losses and the failure of this strategic
investment process, Guardian informed the Company that it would not make any
further investments in the Company. As a result of these developments, effective
September 18, 1998, the Company ceased manufacturing operations at its
Northville facility in accordance with a plant shutdown plan approved by its
board of directors. In addition, the Company canceled substantially all of its
outstanding contracts and laid off substantially all of its employees. During
the second quarter of fiscal 1999, the Company did not conduct any manufacturing
operations in its Northville facility. A core group of employees remain at the
facility to maintain and prepare for the anticipated liquidation of the
Company's assets.
On September 28, 1998, the U.S. Department of Commerce ("Department of
Commerce") issued a directive to the Company requiring that it continue to
produce and deliver active matrix liquid crystal displays ("AMLCDs") pursuant to
certain contracts between the Company and certain of its customers which were
allegedly subject to, and rated under, the Defense Priorities and Allocations
System ("DPAS") regulations (15 C.F.R. Part 700), which regulations govern the
performance of certain contracts for the supply of goods in connection with U.S.
defense programs. In response to the directive, the Company advised the
Department of Commerce that the Company believes the Department of Commerce's
directive is not authorized by applicable law and is based on incorrect factual
premises, particularly concerning the existence of any remaining obligations
under any DPAS rated contracts. In addition, the Company believes that, given
its present financial difficulties and its reduction of employees at its
Northville manufacturing facility, compliance with the Department of Commerce's
directive would not be in the best interests of its creditors and stockholders.
As a result of discussions between the parties, the Department of Commerce and
the
-9-
<PAGE> 10
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 terms of
the Standstill Agreement, the Department of Commerce agreed that it would not
initiate action to enforce the directive, and the Company agreed that it would
not sell the Northville facility or certain finished goods and work-in-process
inventory without the consent of the Department of Commerce. The Company is not
aware of any plans by the Department of Commerce to seek enforcement of the
directive. In February 1999, the Department of Commerce initiated discussions
with the Company to revoke the outstanding directive. The Company expects that
the Department of Commerce will revoke the directive and this matter will be
concluded.
The Company is in violation of certain covenants contained in its credit
agreement with NBD Bank N.A. and Bank of America NT&SA. In addition, under the
terms of the credit agreement the lending institutions have the right to demand
repayment of amounts due based on the lending institutions' discretion as to
whether a material adverse change has occurred in the Company's business. It is
probable that the Company will be unable to meet the ongoing covenants in the
credit agreement during fiscal 1999. The Company anticipates that it would be
able to obtain waivers of these violations, if requested, and that the lending
institutions will not exercise their demand rights.
In October 1998, several of the Company's former customers 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 to third parties. The Company has complied with the
court order. In January 1999, the Company entered into agreements with the
majority of these former customers to allow them to complete certain
work-in-process related to their specific programs using the OIS facility. A
condition of these agreements is a full and general release of any claims these
former customers have or could initiate.
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 its existing debt and
other obligations, the Company does not believe that its common stockholders
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 a tax sharing agreement entered
into with Guardian and through the disposition of its assets will be sufficient
to allow the Company to implement the shutdown plan and pay its debts as they
become due.
As a result of the contemplated liquidation discussed above, the Company changed
its method of accounting from the going concern historical cost basis to the
liquidation basis of accounting effective September 18, 1998. The going concern
historical cost basis of accounting contemplates the realization of assets and
liabilities in the ordinary course of business. The liquidation basis of
accounting requires that assets and liabilities be valued at their estimated
liquidation value. Assets
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<PAGE> 11
and liabilities which have not been revalued to liquidation value are disclosed
as such on the face of the financial statements. In addition, under the
liquidation basis of accounting, gains and losses from dispositions of assets
are displayed as net amounts versus gross revenue and expenses under the going
concern historical cost basis of accounting. The primary financial statements
required under the liquidation basis of accounting are a Statement of Net Assets
(Deficiency) and a Statement of Changes in Net Assets (Deficiency).
Under the liquidation basis of accounting, the Company believes that the going
concern historical cost basis of cash and property and equipment will be
realized and therefore deemed that no adjustment to the carrying value was
necessary. Certain accounts receivable from employees, totaling approximately
$110,000, were deemed uncollectable due to the lay off of the employees and were
written off to adjust the going concern historical costs basis of accounts
receivable to liquidation value. Prepaid assets and deferred income taxes were
valued at the estimated cash liquidation value. Accordingly, the Company wrote
off approximately $90,000 in prepaid assets as a result of the change to the
liquidation basis of accounting. The Company recorded deferred income taxes of
$1,826,000 resulting from the accrual of closure costs discussed below (See Note
B). In addition, the Company wrote off approximately $214,000 in construction in
progress which was not expected to be completed due to the probable liquidation
of the Company. Initially, Management anticipated that inventory would be
realized at its going concern historical cost basis. However, a buyer that had
expressed interest in purchasing substantially all of the Company's assets has
formally notified the Company that it no longer had the intention to purchase
the Company's assets. Accordingly, the Company reassessed the liquidation value
of all assets and determined that it is not likely that the Company could
realize the carrying value of inventory. Accordingly, the Company recorded an
additional write down of inventory to estimated liquidation value of
approximately $700,000, net of a tax benefit of approximately $380,000. The
Company anticipates that accounts payable, accrued liabilities, accrued interest
and income taxes payable to affiliate will be settled at their going concern
basis carrying values and accordingly they have not been adjusted based upon the
change to the liquidation basis of accounting. Bank debt and subordinated note
payable to affiliate have not been revalued to liquidation basis primarily due
to uncertainties as to when they would be settled based on the ultimate disposal
of the Company's assets. The Company's accounting policies under the liquidation
basis of accounting which differ from those under the going concern basis of
accounting are discussed in Note B.
In the opinion of the Company, the accompanying unaudited condensed financial
statements include all adjustments required to present fairly its net assets as
of December 31, 1998 (liquidation basis), changes in net assets from June 30,
1998 to December 31, 1998 (liquidation basis), the results of operations from
July 1, 1998 to September 18, 1998 (going concern basis) and for the three
months and six months ended December 31, 1997 (going concern basis) and cash
flows for the period from July 1, 1998 to September 18, 1998 (going concern
basis) and for the six months ended December 31, 1997 (going concern basis).
NOTE B - Significant Liquidation Basis of Accounting Policies
Accounts Receivable - Since the cessation of manufacturing operations on
September 18, 1998, the Company has put most customers on a cash on delivery
basis.
Accrued Closure Costs - Accrued Closure Costs represent costs to be incurred by
the Company in implementing the shutdown plan approved by the Board of Directors
and in preparing the facility for sale (see Note A). The Company has accrued all
reasonably estimatable costs directly
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<PAGE> 12
associated with implementing the shutdown plan and in preparing for the sale of
the facility. The accrual consists primarily of employee payroll and severance
costs, totaling approximately $3,900,000 and estimated operating expenses during
shutdown. Estimated operating expenses during the shutdown consist primarily of
insurance expense, totaling $286,000, utilities expenses totaling $658,000 and
other operating expenses totaling $372,000. Employee payroll and severance costs
were estimated based on known payroll and severance commitments, including
applicable fringe benefits, through approximately June 30, 1999. The Company
estimates that all employees will be terminated by that date based on agreements
reached with remaining employees. Operating expenses were estimated based on
historical amounts, adjusted for the reduced activity of the Company during the
liquidation period, which are expected to be incurred through June 30, 1999 to
maintain the facility as required by the Company's debt and other agreements. It
is expected that the liquidation will be substantially complete by June 30,
1999. The Company has not accrued costs which could vary significantly based on
the timing of the proposed liquidation or are not reasonably estimatable. The
most significant of these costs are interest and legal expenses. This accrual
represents the Company's estimate of anticipated closure costs, however, actual
costs incurred could differ materially from the estimate.
Following is a summary of amounts utilized and provided for in accrued closure
costs during the period from September 18, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
CHARGES AGAINST BALANCE AT
COMPONENT ORIGINAL ESTIMATE ACCRUAL DECEMBER 31, 1998
--------- ----------------- ------- -----------------
<S> <C> <C> <C>
Payroll and related $ 3,900,000 $ (2,853,000) $ 1,047,000
Utilities 658,000 (258,000) 400,000
Other operating expenses 372,000 (272,000) 100,000
Insurance 286,000 (136,000) 150,000
------------ ------------- -----------
Total $ 5,216,000 $ (3,519,000) $ 1,697,000
============ ============= ===========
</TABLE>
Professional Fees - Legal and other professional fees incurred in connection
with the shutdown, liquidation or in the prosecution or defense of any lawsuits
are expensed as incurred.
Interest Expenses - Interest costs are expensed as incurred.
NOTE C - Net Loss Per Common Share
Basic net loss per common share, which equals diluted loss per share, is based
on the weighted average number of shares of OIS Common Stock outstanding during
the period. The number of shares used in the computation for the period from
July 1, 1998 to September 18, 1998 and for the three and six months ended
December 31, 1997 were 97,466,869, 97,468,007 and 97,467,964, respectively. For
all periods presented, all Common Stock equivalents are antidilutive and
therefore have not been considered in the calculation of diluted net loss per
common share.
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
As described below, on September 18, 1998, OIS Optical Imaging Systems,
Inc. ("OIS" or "the Company") discontinued manufacturing operations at its
Northville facility pursuant to a plan shut down approved by its board of
directors. Accordingly, OIS conducted no operations for the three month period
ended December 31, 1998.
Discontinuance of Operations
As disclosed in its public reports, OIS, with the encouragement and
cooperation of Guardian, had been exploring a full range of strategic
alternatives throughout fiscal 1998. Guardian, through its majority-owned
subsidiary, GD Investments Corp. ("GDIC"), is the majority stockholder of the
Company. In February 1998, OIS retained an investment banking firm and began
seeking one or more investors with a strategic interest in providing long term
funding to OIS. During this process numerous companies in the avionics and
electronics industries, among others, were contacted and presented with
information about OIS. In August and September 1998, OIS and Guardian also
attempted to interest a group of OIS's key customers in acquiring control of
OIS. In September 1998, in light of the Company's continued operating losses and
the failure of this strategic investment process, Guardian informed the Company
that it would not make any further investments in the Company. As a result of
these developments, effective as of September 18, 1998, OIS ceased manufacturing
operations in its Northville facility in accordance with a plant shutdown plan
approved by its board of directors. The Company did not conduct significant
operations for the period from September 18, 1998 to September 30, 1998.
Accordingly, the Company anticipates that it will generate little or no future
revenues, except in connection with the liquidation of its assets.
On September 28, 1998, the U.S. Department of Commerce ("Department of
Commerce") issued a directive to the Company requiring that it continue to
produce and deliver active matrix liquid crystal displays ("AMLCDs") pursuant to
certain contracts between the Company and certain of its customers which were
allegedly subject to, and rated under, the Defense Priorities and Allocations
System ("DPAS") regulations (15 C.F.R. Part 700), which regulations govern the
performance of certain contracts for the supply of goods in connection with U.S.
defense programs. In response to the directive, the Company advised the
Department of Commerce that the Company believes the Department of Commerce's
directive is not authorized by applicable law and is based on incorrect factual
premises, particularly concerning the existence of any remaining obligations
under any DPAS rated contracts. In addition, the
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<PAGE> 14
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 terms of the Standstill Agreement, the
Department of Commerce agreed that it would not initiate action to enforce the
directive, and the Company agreed that it would not sell the Northville facility
or certain finished goods and work-in-process inventory without the consent of
the Department of Commerce. The Company is not aware of any plans by the
Department of Commerce to seek enforcement of the directive. In February 1999,
the Department of Commerce initiated discussions with the Company to revoke the
outstanding directive. The Company expects that the Department of Commerce will
revoke the directive and this matter will be concluded.
In October 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 to third parties. The Company has complied with
the court order. In January 1999, the Company entered into agreements with the
majority of these former customers to allow them to complete certain
work-in-process related to their specific programs using the OIS facility. A
condition of these agreements is a full and general release of any claims these
former customers have or could initiate.
Plan of Liquidation
On November 11, 1998, OIS's board of directors authorized, subject to
stockholder approval, the orderly liquidation of the Company's assets pursuant
to the Company's Plan of Liquidation and Dissolution (the "Plan"). The Plan
provides that, if the requisite stockholder approval is received (such time of
approval deemed the "Effective Date"), the officers and directors of the Company
will initiate the complete liquidation and subsequent dissolution of the
Company. After the Effective Date, OIS will not engage in any business
activities except for the purpose of preserving the value of its assets,
prosecuting and defending suits by or against OIS, adjusting and winding up its
business and affairs, selling and liquidating its properties and assets,
including its intellectual property and other intangible assets, paying its
creditors and making distributions to stockholders, if any, in accordance with
the Plan.
Under the Plan, OIS will sell, transfer, or otherwise dispose of all of
its property and assets, including its intellectual property and other
intangible assets, to the extent, for such consideration and upon such terms and
conditions as its board of directors deems expedient and in the best interest of
OIS, its creditors and its stockholders. Prior to making any distributions, if
any, to its stockholders, OIS will pay or make reasonable provisions to pay all
of its claims and obligations, including all contingent, conditional or
unmatured claims known to OIS. As part of the benefits granted thereto, GDIC,
the holder of the outstanding shares of the Company's Series B Cumulative
-14-
<PAGE> 15
Preferred Stock, par value $.01 per share, has the right to a preferential
distribution of the assets of the Company in the event of a liquidation (the
"Liquidation Preference"). If the Company's stockholders approve the Plan, in
addition to paying the debts of its creditors, the Company will be obligated to
distribute the Liquidation Preference to GDIC prior to any distributions to its
common stockholders.
Subject to its stockholders' approval of the Plan, the Company has been
and will continue focusing its efforts on locating prospective buyers primarily
interested in acquiring all or substantially all of the tangible assets of the
Company. In anticipation of the possibility that it will be unable to effect a
single transaction sale, the Company has been and will continue preparing for a
liquidation involving separate multiple transactions by identifying prospective
buyers for much of the Company's equipment and soliciting such buyers to access
levels of interest. Although no timetable has been formally established, the
Company anticipates that the liquidation of its assets will be substantially
complete by June 30, 1999.
Once the liquidation of OIS's property and assets is substantially
completed, or at such earlier time as determined by its board of directors, the
officers of the Company will promptly execute and file a certification of
dissolution with the Secretary of State of the State of Delaware. 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.
Liquidation Basis of Accounting
As a result of the contemplated liquidation discussed above, the
Company changed its method of accounting from the going concern historical cost
basis to the liquidation basis of accounting effective September 18, 1998. The
going concern historical cost basis of accounting contemplates the realization
of assets and liabilities in the ordinary course of business. The liquidation
basis of accounting requires that assets and liabilities be valued at their
estimated liquidation value. Assets and liabilities which have not been revalued
to liquidation value are disclosed as such on the face of the financial
statements. In addition, under the liquidation basis of accounting, gains and
losses from dispositions of assets are displayed as net amounts versus gross
revenue and expenses under the going concern historical cost basis of
accounting. The primary financial statements required under the liquidation
basis of accounting are a Statement of Net Assets (Deficiency) and a Statement
of Changes in Net Assets (Deficiency).
Under the liquidation basis of accounting, the Company believes that
the going concern historical cost basis of cash and property and equipment will
be realized and therefore deemed that no adjustment to the carrying value was
necessary. Certain accounts receivable from employees, totaling approximately
$110,000, were deemed uncollectable due to the lay off of the employees and were
written off to adjust the going concern historical costs basis of accounts
receivable to liquidation value. Prepaid assets and deferred income taxes were
valued at the estimated cash liquidation value. Accordingly, the Company wrote
off approximately $90,000 in prepaid assets as a result of the change to the
liquidation basis of accounting. The Company recorded deferred income taxes of
$1,826,000 resulting from the accrual of closure costs discussed below (see Note
B to the Company's unaudited financial statements which make a part of this Form
10-Q). In addition, the Company wrote off approximately $214,000 in construction
in progress which was not expected to be completed due to the probable
liquidation of the Company. Initially, the Company anticipated that inventory
would be realized at its going concern historical cost basis. However, a buyer
that had expressed interest in purchasing substantially all of the Company's
assets has formally notified the Company that it no longer had
-15-
<PAGE> 16
the intention to purchase the Company's assets. Accordingly, the Company
reassessed the liquidation value of all assets and determined that it is not
likely that the Company could realize the carrying value of inventory.
Accordingly, the Company recorded an additional write down of inventory to
estimated liquidation value of approximately $700,000, net of a tax benefit of
approximately $380,000. The Company anticipates that accounts payable, accrued
liabilities, accrued interest and income taxes payable to affiliate will be
settled at their going concern basis carrying values and accordingly they have
not been adjusted based upon the change to the liquidation basis of accounting.
Bank debt and subordinated note payable to affiliate have not been revalued to
liquidation basis primarily due to uncertainties as to when they would be
settled based on the ultimate disposal of the Company's assets. The Company's
accounting policies under the liquidation basis of accounting which differ from
those under the going concern basis of accounting are discussed in Note B to the
Company's unaudited financial statements which make a part of this Form 10-Q.
Accrued closure costs represent costs to be incurred by the Company in
implementing the shutdown plan approved by the board of directors and in
preparing the facility for sale. The Company has accrued all reasonably
estimatable costs directly associated with implementing the shutdown plan and in
preparing for the sale of the facility. The accrual consists primarily of
employee payroll and severance costs, totaling approximately $3,900,000 and
estimated operating expenses during shutdown. Estimated operating expenses
during the shutdown consist primarily of insurance expense, totaling $286,000,
utilities expenses totaling $658,000 and other operating expenses totaling
$372,000. Employee payroll and severance costs were estimated based on known
payroll and severance commitments, including applicable fringe benefits, through
approximately June 30, 1999, the date upon which most of the Company's current
employee's employment agreements terminate. Operating expenses were estimated
based on historical amounts, adjusted for the reduced activity of the Company
during the liquidation period, which are expected to be incurred through June
30, 1999 to maintain the facility as required by the Company's debt and other
agreements. Although no timetable has been formally established, it is expected
that the liquidation will be substantially complete by June 30, 1999. The
Company has not accrued costs which could vary significantly based on the timing
of the proposed liquidation or are not reasonably estimatable. The most
significant of these costs are interest and legal expenses. This accrual
represents the Company's estimate of anticipated closure costs, however, actual
costs incurred could differ materially from the estimate.
Following is a summary of amounts utilized and provided for in accrued closure
costs during the period from September 18, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
CHARGES AGAINST BALANCE AT
COMPONENT ORIGINAL ESTIMATE ACCRUAL DECEMBER 31, 1998
--------- ----------------- --------------- -----------------
<S> <C> <C> <C>
Payroll and related $ 3,900,000 $ (2,853,000) $ 1,047,000
Utilities 658,000 (258,000) 400,000
Other operating expenses 372,000 (272,000) 100,000
Insurance 286,000 (136,000) 150,000
----------------- --------------- -----------------
Total $ 5,216,000 $ (3,519,000) $ 1,697,000
================= =============== =================
</TABLE>
-16-
<PAGE> 17
Commercial Credit Facility
The Company is in violation of certain covenants contained in its
credit agreement with NBD Bank N.A. and Bank of America NT&SA. Certain of the
violations have been waived by the lending institutions but the lending
institutions have the right to demand the repayment of all amounts outstanding.
In addition, under the terms of the credit agreement the lending institutions
have the right to demand repayment of amounts due based on the lending
institutions' discretion as to whether a material adverse change has occurred in
the Company's business. It is probable that the Company will be unable to meet
the ongoing covenants in the credit agreement during fiscal 1999. The Company
believes that it will be able to obtain waivers of these violations as they
occur and that, if so, the lending institutions will not exercise their demand
rights.
Although Guardian will not make any additional investments in OIS, OIS
anticipates that funds received under a tax sharing agreement entered into with
Guardian (the "Tax Sharing Agreement") and through the disposition of its assets
will be sufficient to allow OIS to implement the shutdown plan and liquidation
and pay its debts as they become due.
-17-
<PAGE> 18
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
RESULTS OF OPERATIONS
As discussed in the summary above, the Company conducted no
manufacturing operations during the three months ended December 31, 1998, as a
result of the plant shutdown effective September 18, 1998. Accordingly, there is
no comparison of results of operations with the three months ended December 31,
1997. Following is a summary of actions taken during the three months ended
December 31, 1998 as the Company pursued various options, discussed above,
related to the contemplated liquidation of the Company.
The Company continued to liquidate its inventories to its former
customers. In addition, the Company was informed that a potential buyer for the
Company would no longer actively pursue the purchase of the Company's assets.
Accordingly, the Company recorded a net loss of approximately $0.7 million, net
of related tax benefit of approximately $0.4 million, to reduce inventories to
estimated liquidation value based on this change in contemplated liquidation.
The Company incurred approximately $0.5 million in interest expense,
net of related tax benefit of approximately $0.3 million, to service the
Company's outstanding bank debt. In addition, $0.2 million in legal expenses,
net of related tax benefit of $0.1 million, were incurred related to the
shutdown and to prosecute and defend various legal actions by and against the
Company, as discussed in the summary above
PERIOD FROM JULY 1, 1998 TO SEPTEMBER 18, 1998 AND THE
SIX MONTHS ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Revenues
Total revenues for the period from July 1, 1998 to September 18, 1998
(the "1999 Operating Period") of approximately $2.9 million were 76% lower than
total revenue for the six months ended December 31, 1997 of $12.1 million. This
decrease is attributable to the cessation of manufacturing operations in the
Northville facility on September 18, 1998.
The Company derived no revenues from engineering development agreements
during the 1999 Operating Period, a decrease of $554,686 in revenues from the
first six months of fiscal 1998. This decrease was due to the Company's
decreased focus on engineering development agreements.
-18-
<PAGE> 19
Cost of Sales
Cost of sales for the 1999 Operating Period of approximately $7.4
million was 68% lower than the cost of sales for the first six months of fiscal
1998 of approximately $23.2 million. This decrease in cost of sales is primarily
attributable to the cessation of manufacturing operations in the Northville
facility on September 18, 1998.
Other Costs
The Company's operating expenses, which consist of internal research
and development and selling, general and administrative expenses, decreased
approximately 56% during the 1999 Operating Period when compared to the first
six months of fiscal 1998. This decrease resulted principally from the cessation
of manufacturing operations in the Northville facility on September 18, 1998.
Changes in Net Asset Deficiency
The change in net asset deficiency of approximately $2.4 million was
due to the accrual of estimated closure costs of approximately $3.8 million, net
of related tax benefit of approximately $1.8 million; the recognition of the
local government subsidy of approximately $2.8 million; a reduction of inventory
to estimated liquidation value of approximately $0.7 million, net of related tax
benefit of approximately $0.4 million; and interest and legal expenses incurred
of approximately $0.7 million, net of related tax benefit of approximately $0.4
million. Accrued closure costs represent costs to be incurred by the Company in
implementing the shutdown plan approved by its board of directors and in
preparing the Company's Northville facility for sale. The Company has accrued
all reasonably estimatable costs directly associated with implementing the
shutdown plan and in preparing for the sale of its Northville facility. The
accrual consists primarily of employee payroll and severance costs totaling
$3,900,000 and other estimated operating expenses during the shutdown. Estimated
operating expenses during the shutdown consist primarily of insurance expense,
totaling $286,000, utilities expenses totaling $658,000 and other operating
expenses totaling $372,000. Employee payroll and severance costs were estimated
based on known payroll and severance commitments, including applicable fringe
benefits, through approximately June 30, 1999. The Company estimates that all
employees will be terminated by that date based on agreements reached with
remaining employees. Operating expenses were estimated based on historical
amounts, adjusted for the reduced activity of the Company during the liquidation
period, which are expected to be incurred through June 30, 1999 to maintain the
facility as required by the Company's debt and other agreements. It is expected
that the liquidation will be substantially complete by June 30, 1999.
The Company has not accrued costs which could vary significantly based
on the timing of the proposed liquidation or are not reasonably estimatable. The
most significant of these costs are interest and legal expenses. This accrual
represents the Company's estimate of anticipated closure costs, however, actual
costs incurred could differ materially from this estimate. The local government
subsidy had been amortized over 30 years. As the Company has met all
requirements of the local government subsidy, and will no longer have any
operations, the remaining balance was recognized as of September 18, 1998.
Initially, the Company anticipated that inventory would be realized at its going
concern historical cost basis. However, a buyer that had expressed interest in
purchasing substantially all of the Company's assets formally notified the
Company that it no longer had the intention to purchase the Company's assets.
Accordingly, the Company reassessed the liquidation value of all assets and
determined that it is not likely that the Company could realize the carrying
value of its inventory.
-19-
<PAGE> 20
Following is a summary of amounts utilized and provided for in accrued closure
costs during the period from September 18, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
Charges against Balance at
Component Original Estimate Accrual December 31, 1998
--------- ----------------- ------- ------------------
<S> <C> <C> <C>
Payroll and related $ 3,900,000 $ (2,853,000) $ 1,047,000
Utilities 658,000 (258,000) 400,000
Other operating expenses 372,000 (272,000) 100,000
Insurance 286,000 (136,000) 150,000
----------------- ------------- ------------------
Total $ 5,216,000 $ (3,519,000) $ 1,697,000
================= ============= ==================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
On September 17, 1998 Guardian, the Company's principal source of
funding, informed OIS that, in light of the Company's continued operating losses
and the failure of the strategic investment process, Guardian would not make any
further investments in the Company to fund operations. As a result, effective
September 18, 1998, OIS ceased manufacturing operations in accordance with a
plant shutdown plan approved by its board of directors. The Company's cash and
cash equivalents at December 31, 1998 were $214,372.
OIS's board of directors has, subject to stockholder approval,
authorized the orderly liquidation of the Company's assets pursuant to the Plan
of Liquidation. Because of its existing debt and other obligations, OIS
does not believe that its common stockholders will receive any proceeds from a
liquidation. However, OIS currently anticipates that funds received under the
Tax Sharing Agreement and through the disposition of its assets will be
sufficient to allow OIS to implement the shutdown plan and liquidation and pay
its debts as they become due.
While the Company's cash had decreased at December 31, 1998, to
approximately $214,000 from approximately $1.1 million at June 30, 1998,
the Company expects to meet its obligations through collection of accounts
receivable, the sale of both finished and partially completed inventory on hand,
the sale of raw materials, supplies, fixtures, equipment and the facility and
amounts received under the Tax Sharing Agreement.
Capital Resources
As a result of the discontinuation of its operations, the Company's
sole source of funds will be from the disposition of the assets described above.
The Company has exhausted its $52.5 million commercial credit facility
with NBD Bank N.A. and Bank of America NT&SA. In addition, on March 30, 1998,
the Company granted those banks a first priority lien and security interest in
all tangible and intangible assets of the Company, including intellectual
property, to secure repayment of the commercial credit facility. The credit
agreement
-20-
<PAGE> 21
governing the commercial credit facility contains a number of financial and
other covenants. The Company is not currently in compliance with all of the
covenants contained in the credit agreement. The banks have the right to demand
repayment of amounts outstanding as long as the Company has not cured the event
of default or obtained a waiver from the banks or, if in the banks discretion, a
material adverse change has occurred with respect to the Company's business. It
is probable that the Company will not be able to meet the ongoing covenants in
its credit agreement during fiscal 1999. If the Company is unable to meet these
covenant requirements and is unable to secure a waiver from the banks, the banks
have the right to demand the immediate repayment of amounts outstanding. On
December 31, 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: $3.38 million on each
of March 31, 1999 and June 30, 1999; $3.88 million on September 30, 1999; and
$25.88 million on December 31, 1999.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
based on historical fact and are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Among other things,
they regard the Company's liquidity, financial condition, operational matters
and certain strategic initiatives and alternatives and their potential outcomes.
Words or phrases denoting the anticipated results of future events, such as
"anticipate," "believe," "estimate," "expects," "may," "not considered likely,"
"are expected to," "will continue," "project," and similar expressions that
denote uncertainty are intended to identify such forward-looking statements.
Additionally, from time to time, the Company or its representatives have made or
may make oral or written forward-looking statements. Such forward-looking
statements may be included in various filings made by the Company with the
Securities and Exchange Commission, or in press releases or oral statements made
by or with the approval of an authorized executive officer of the Company. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, such forward-looking statements:
(1) as a result of risks and uncertainties identified in the Company's publicly
filed reports; (2) as a result of risks associated with the implementation of
its manufacturing facility shutdown and its Plan of Liquidation described
herein; (3) as a result of factors over which the Company has no control,
including the overall strength of the avionics display market;(4) as a result of
the value that potential buyers may place on the assets of the Company; or (5)
if the factors on which the Company's conclusions are based do not conform to
the Company's expectations.
-21-
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under Part I of this Form 10-Q.
Item 2. Changes in Securities and Use of Proceeds.
Name.
Item 3. Defaults Upon Senior Securities.
None. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Part I of this Form 10-Q
for a discussion of the Company's liquidity and capital resources.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. EXHIBITS
Exhibit 27. Financial Data Schedule (EDGAR version only).
B. REPORTS ON FORM 8-K
Report on Form 8-K filed by the Company on January 6, 1999.
Report on Form 8-K filed by the Company on January 7, 1999.
-22-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OIS Optical Imaging Systems, Inc.
(Registrant)
Date: February 22, 1999 By: /s/ Charles C. Wilson
--------------------------------------------
Charles C. Wilson
President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
-23-
<PAGE> 24
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF NET ASSETS (LIQUIDATION BASIS) AND THE STATEMENT OF OPERATIONS
(GOING CONCERN BASIS) FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 214,372
<SECURITIES> 0
<RECEIVABLES> 1,363,559
<ALLOWANCES> 60,000
<INVENTORY> 4,561,000
<CURRENT-ASSETS> 7,456,386
<PP&E> 21,000,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,382,386
<CURRENT-LIABILITIES> 55,549,800
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (18,167,414)
<TOTAL-LIABILITY-AND-EQUITY> 37,382,386
<SALES> 2,936,043
<TOTAL-REVENUES> 2,936,043
<CGS> 7,355,761
<TOTAL-COSTS> 9,125,032
<OTHER-EXPENSES> 941,972
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 1,093,430
<INCOME-PRETAX> (7,130,961)
<INCOME-TAX> (2,506,000)
<INCOME-CONTINUING> (4,624,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,624,961)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
