-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MNE28LawwQ/nhLcj4rGBfYO3kbCJwFE+Tno2H0mMrdgEHKpjiUv8+p8OwtVTLsuN eMg9uDWMNg/pJ5uOoI52/g== 0000950124-96-004163.txt : 19960927 0000950124-96-004163.hdr.sgml : 19960927 ACCESSION NUMBER: 0000950124-96-004163 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OIS OPTICAL IMAGING SYSTEMS INC CENTRAL INDEX KEY: 0000753601 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 382544320 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16343 FILM NUMBER: 96635077 BUSINESS ADDRESS: STREET 1: 47050 FIVE MILE ROAD CITY: NORTHVILLE STATE: MI ZIP: 48167 BUSINESS PHONE: 3133622738 MAIL ADDRESS: STREET 1: 47050 FIVE MILE ROAD CITY: NORTHVILLE STATE: MI ZIP: 48167 FORMER COMPANY: FORMER CONFORMED NAME: OVONIC IMAGING SYSTEMS INC DATE OF NAME CHANGE: 19900717 FORMER COMPANY: FORMER CONFORMED NAME: OVONIC DISPLAY SYSTEMS INC DATE OF NAME CHANGE: 19860630 10-K 1 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED ___JUNE 30, 1996____ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ____________ Commission File Number 0-16343 OIS OPTICAL IMAGING SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 38-2544320 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 47050 FIVE MILE ROAD, NORTHVILLE, MICHIGAN 48167 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (810) 454-5560 Securities registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Exchange on which Registered -------------------- ------------------------------------ Common Stock, $0.01 par value NASDAQ Over-the-Counter Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates (based upon the average bid and asked prices of such stock in the Over-the- Counter market) on September 18, 1996 was approximately $55,555,488. The number of shares of Registrant's Common Stock outstanding on September 18, 1996 was 97,142,665. Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1996, are incorporated by reference into Part II of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on November 20, 1996, are incorporated by reference into Part III of this Report. 2 PART I ITEM 1: BUSINESS INTRODUCTION OIS Optical Imaging Systems, Inc. ("OIS" or the "Company") is a Delaware corporation that was first organized in 1984 and develops, manufactures and sells active matrix liquid crystal displays ("AMLCDs"). The Company's principal market for AMLCDs is commercial and military avionics. OIS also derives some revenue from the manufacture and sale of image sensors ("sensors") and from licensing and royalty agreements. The Company is planning to enter the medical display and imaging market. During fiscal 1996, the Company completed construction of its new facility in Northville Township, Michigan. The Company recently completed the transfer of production from its Troy, Michigan facility to the Northville facility and has ceased operations at its Troy facility. Guardian Industries Corp. ("Guardian"), a privately held Michigan-based worldwide manufacturing company, owns approximately 53.3% of the outstanding common stock of OIS (as well as 35,000 shares of non-voting, non-convertible, preferred stock), and William Davidson, the President and Chief Executive Officer of Guardian, owns an additional 27.6% of the outstanding common stock of OIS. See Certain Relationships and Related Transactions and Security Ownership of Certain Beneficial Owners and Management. DESCRIPTION OF THE BUSINESS Active Matrix Liquid Crystal Displays. OIS is focusing its efforts on developing, manufacturing and selling AMLCDs. AMLCDs are one kind of display or viewing screen capable of displaying images such as text, graphics or video. AMLCDs incorporate the use of microelectronics and amorphous materials technology to construct transparent thin film electronic switching devices, such as diodes or transistors, on a specially prepared plate of glass known as the active plate. The electronic components are made of semiconductor materials and are similar to those that are constructed on silicon wafers in the manufacture of integrated circuits. A second plate of glass, known as the passive plate, has a filter applied to its surface. The filter has a black background with a microscopic translucent opening for each pixel (picture element) in the display. In a color display, the openings must be alternately colored in the primary colors (red, green and blue) to form pixel groups that will allow the formation of the entire spectrum of colors. A transparent electrode is applied below the filter to complete the circuit with the electronics on the active plate. A liquid crystal material is placed between the active and passive plates. Liquid crystal material, simply put, can be induced to block light or let light pass depending on whether a voltage is applied. Each switch on the active plate, together with the liquid crystal material directly above it, forms one pixel in the display. The two plates are then sealed together, and polarizing layers are laminated to the outside surfaces of the glass, creating what is known as a glass cell. To complete the AMLCD, a light source (called a "backlight") is placed behind the glass cell and electronic controllers (called "drivers") are connected to the active plate to control the individual switches and generate images. While some customers purchase only the glass cell, a complete AMLCD module includes a backlight, drivers and additional electronic components needed to control the display. A number of fields of expertise are necessary for the development and production of AMLCDs. These include liquid crystal technology, microelectronics, optics, filters and manufacturing processes for constructing microelectronics and filters on glass. -1- 3 Until recently, OIS has been the only active manufacturer of AMLCDs in the United States. One other U.S. company has begun production of small AMLCDs, and certain other U.S. based companies have announced that they intend to produce AMLCDs. Other manufacturers are located in Canada, Europe and Japan. See Competition. The principal current submarket for the Company's displays is the military and commercial avionics market, in which displays are incorporated into instruments used in civilian and military aircraft and other military display applications. In this submarket, the Company's customers are typically avionics integrators who purchase displays to be integrated into a panel of navigation instruments, either for a new aircraft or for retrofitting into an existing aircraft. These avionics integrators generally then resell the instrument system to a prime contractor or end user. In some cases, the Company sells directly to the prime contractors or end users. Currently, the primary AMLCD configuration that OIS manufactures, markets and sells is a display cell which consists of a glass cell with drivers attached. However, the Company intends to increase its efforts to manufacture, market and sell complete display modules, which consist of a glass cell (including drivers) plus a backlight and related electronics, all self-contained and enclosed within a housing. In the past, the Company obtained most of its business, and in fiscal 1994 and 1995 obtained 88% and 69% of its revenue, respectively, from development agreements. However, the Company has made a strategic decision to pursue the sale of standard products and minimize development work. Development agreements typically involve adapting OIS' standard products to meet certain form, fit and optical requirements for a specific application. Development agreements, notwithstanding their name, typically do not involve the development of new technology of general application. Under a development agreement, the Company delivers a specified number of prototype displays. Development agreements may provide the customer with options to enter into production contracts for specified numbers of displays after the prototype displays have been delivered and accepted. The ultimate determination of the customer to award a production contract depends on the prototype display meeting the requirements of the development agreement among other things. The Company's policy is to develop new technologies of general application using its own funds and to attempt to retain ownership of related intellectual property rights. OIS has expended $688,094, $1,306,843 and $1,971,513 in Company sponsored research and development for fiscal years 1994, 1995 and 1996 respectively. Production contracts or orders for the sale of displays call for the Company to sell larger quantities of displays that are generally intended for use in a product supplied by OIS' customer to either the commercial or military avionics markets. For example, OIS currently has a production contract to deliver standard displays to Allied Signal for use in flight instruments in commercial aircraft. The Company expects to secure the majority of its business from orders for the sale of standard displays and not from development agreements. In some cases, the Company will make minor modifications to its displays at a customer's request and will charge the customer for the engineering work involved. Through fiscal 1996, the Company produced displays in its Troy, Michigan facility which was originally designed primarily for research and development, not production. In addition, the Troy facility had limited capacity. The Company has experienced significant production difficulties resulting from the design limitations and age of the Troy facility as well as difficulties in applying its manufacturing processes as production volumes increase. Despite these difficulties, the Company was able to manufacture displays in limited numbers at the Troy facility and has gained significant manufacturing experience. The Company has used this experience in the design and start up of the new Northville facility. The Troy facility has been closed, and the Company is currently producing displays at its Northville facility. See Management's Discussion and Analysis. -2- 4 Image Sensors. In addition to displays, the Company manufactures image sensors. Image sensors detect an image on a surface and convert it into electronic impulses. Image sensors are used, for example, in telecopiers ("fax" machines), electronic copyboards and page scanners. At present, the only customer for the Company's sensors is Quartet Manufacturing Co., which incorporates sensors into electronic copyboards. The Company does not believe that the loss of this customer would have a material adverse effect on the Company. Although the Company has focused primarily on its display business, the Company has begun efforts to enter the market for digital radiological (x-ray) image sensors which could replace the use of traditional film-based files. Licensing. In addition to the revenue obtained from development agreements and the sale of products, the Company has obtained revenue from licensing its sensor technology to others. The Company will continue to license its sensor technology where it appears appropriate. The Company has no plans to seek revenue from licensing its core display technology which it views as central to its business. See Intellectual Property Rights. COMPETITION OIS views the market for AMLCDs as consisting of at least two distinct submarkets. The first submarket, and by far the largest, is the market for AMLCDs in consumer electronics products. This market is highly competitive with at least six competitors worldwide. All of these firms have more financial resources than the Company and most are affiliated with major corporations that have extensive experience in the electronics industry. OIS is not active in this market at this time. The second submarket consists of high end applications for AMLCDs in military, commercial avionics, space and other demanding environments. This is the market that OIS has identified as its near-term target market. OIS displays are engineered and manufactured to meet the optical and environmental requirements of these demanding applications. OIS believes that demand for its products for other applications will develop over the next several years, including applications for medical imaging. As discussed below, OIS is planning to attempt to sell products for medical imaging applications. In the high end submarket in which OIS competes, the most significant source of competition comes from currently existing, non-AMLCD technologies such as electromechanical displays and cathode ray tube displays (CRTs). AMLCDs have a number of performance advantages over CRTs and electromechanical displays, including less thickness, lower weight, higher contrast, sunlight readability and longer mean time between failures. OIS management believes that customers recognize that the AMLCD is a superior technology. The Company currently competes with non-AMLCD technologies primarily on the basis of performance. However, OIS' ultimate success in displacing CRTs and electromechanical displays will depend on, among other things, the Company's ability to compete on the basis of price by reducing the per unit cost of its AMLCDs. OIS experiences competition for sales of AMLCDs primarily from two sources. The first is Litton of Canada which markets AMLCDs to Litton Systems, a sister company which is in the business of supplying whole avionic flight information systems. The other source of competition is indirect competition from Japanese manufacturers of consumer grade AMLCDs. Although OIS management believes that consumer grade AMLCDs generally do not meet current military or avionics requirements, a number of avionics integrators are purchasing consumer grade AMLCDs and adapting them to avionics or military use. These adapted products are a growing source of competition for the Company. Although the adapted products generally have weaker performance in one or more respects than OIS' products, these adapted products appear to be lower in price. The Company is carefully monitoring developments in adapted products. Several U.S. companies present a potential source of competition for the Company in the market for high-end AMLCDs. One American company, Kopin Corp., is manufacturing small AMLCDs for -3- 5 head/helmet mounted applications and for screen projection where an image is projected through an AMLCD onto a screen. The Company is not aware of any plans by Kopin to manufacture AMLCDs that would compete directly with products manufactured by the Company. Two other U.S. based companies have announced plans to manufacture AMLCDs: Image Quest Technologies, a start-up company backed by Hyundai of South Korea, and dpiX, a subsidiary of Xerox. Although the Company is not aware of successful production of AMLCDs by either Image Quest or dpiX, each company has been awarded several development contracts and has announced plans to manufacture AMLCDs which would compete with several of the Company's products. While Hyundai and Xerox each have at their disposal substantial resources that could be devoted to the development and manufacture of AMLCDs, the Company does not know the actual level of financial commitment which Hyundai or Xerox have to these companies. The potential competitive impact of these companies is not yet clear. A number of technologies other than the Company's AMLCD technology can be used to manufacture flat panel displays, and a number of companies around the world are working on such technologies. Examples of technologies that are not currently competing with AMLCDs for avionics applications because they either are not sunlight readable or do not produce color images include electroluminescent, plasma and light emitting diode technologies. Other potentially competing technologies include AMLCD poly-silicon (in contrast to the Company's use of amorphous silicon), ferroelectric and field emission technologies. While future displacement of the Company's AMLCD technology is always a possibility, management believes that none of these potentially competing technologies have reached the current state of development of the Company's AMLCD technology. Management's long term goal for the Company is to develop the ability to adopt new technologies if management determines that such technologies are desirable, but there is no assurance that the Company will achieve that goal. OIS does not expect the current large scale producers of consumer grade AMLCDs to enter the Company's high end submarket directly since volumes required of higher performance displays generally mean relatively small production runs that may not be economical for large scale producers. OIS expects to compete on the basis of its ability to meet the performance requirements of its submarket, its identification as a United States manufacturer, and, eventually, price. The Company believes that, over time, it will need to reduce production costs and prices in order to compete effectively. The Company hopes to expand production capacity and expand the Company's activities beyond its target submarket. See Business Developments - New Manufacturing Facility. However, it will not be possible for the Company to compete successfully in consumer markets such as computer displays and televisions, or in many commercial instrumentation markets, unless it can significantly reduce its per unit production costs. Management does not anticipate that the Northville facility will enable the Company to successfully enter consumer markets because throughput at the Northville facility will be too small to generate the necessary economies of scale. Management does hope to be able to enter consumer markets in the future. See Business Developments - -- Consumer Electronics Applications. BUSINESS DEVELOPMENTS Products and Manufacturing. Before 1993 the Company's manufacturing experience was limited to fabrication of prototype AMLCDs developed in connection with internal research and development and customer development agreements. Manufacturing was done on a project or job order basis. The Company did not engage in continuous production of standard products. In fiscal 1993 the Company began work on its first two production contracts. The Company has gained important experience in continuous production and improved its manufacturing capabilities within the limitations of its Troy facility. However, the Company has experienced continuing manufacturing problems at the Troy facility which have contributed to the Company's ongoing losses. While the Company expects that many of these problems will be ameliorated in the Northville facility, it does not yet have enough experience in the Northville facility to evaluate the success of manufacturing operations there. -4- 6 The Company has continued its program of building "standard" or "catalog" displays and making them available to customers on an off-the-shelf basis. The Company currently offers four standard products: a 4" square high resolution display (which is available in three configurations, color, high reliability color and monochrome), a 6" x 8" color display, a 5" x 5" color display and a 2.3" square color display. In the fiscal 1996, the Company derived approximately 38% of its operating revenues from development agreements, approximately 61% from sales of displays (including both production agreements and off-the-shelf sales) and approximately 1% from image sensors. See Management's Discussion & Analysis -- Results of Operations. Presently, the largest ultimate customer for the Company's displays is the United States government, principally the Department of Defense, which is purchasing displays indirectly through a number of prime contractors and avionics integrators. In the fiscal year ended June 30, 1996, approximately 80% of the Company's revenue was derived from U.S. government contracts. When the ultimate customer is an agency of the United States government, the laws and regulations relating to government contracts apply. Even when the Company develops a display for an integrator who is supplying to the government, the contract is a "government contract" in the sense that the Company is required by the contract to satisfy the military specifications and the laws and regulations relating to government contracts and is responsible directly to the government for certain matters relating to the contract. The Company's policy is to sell displays for use by the government as "catalog products" which permits application of somewhat simpler government regulations. Government contracts are subject to delays and risk of cancellation. Also, government contractors generally are subject to various kinds of audits and investigations by government agencies. These audits and investigations involve review of a contractor's performance on its contracts, as well as its pricing practices, the costs it incurs and its compliance with all applicable laws, regulations and standards. The Company is, and in the future expects to be, audited by the government on a regular basis. The Company has three customers that each individually accounted for more than 10% of its total revenues in the fiscal year ended June 30, 1996: Kaiser Electronics, Honeywell Satellite Systems, and Allied Signal. Two agreements with Kaiser Electronics, both of which are government contracts, accounted for approximately $5,250,000 or 50% of revenue. Marketing and Development of the Market. During fiscal 1996, the Company continued to expand its marketing efforts. The marketing department is currently working primarily in the commercial and military avionics submarket. The Company is increasing its efforts to obtain sales for industrial and medical instrumentation applications. During fiscal 1996, the Company continued to experience requests for proposals and marketing activity which resulted in additional production orders. Management expects that the Company's targeted submarket will expand substantially in the next five to seven years, but there is significant uncertainty as to how much expansion will occur in the next one to three years. Fiscal 1996 Results . During fiscal 1996, the Company experienced higher revenue and increased losses caused in substantial part by a reduction in engineering and development revenue, high manufacturing costs and delayed shipments related to the problems experienced in its manufacturing operations. See Management's Discussion & Analysis -- Results of Operations -- Costs of Sales. New Manufacturing Facility . The Company has built a new mid-volume manufacturing facility in Northville Township, Michigan. This facility is intended to serve the commercial and military avionics submarket and to manufacture for high-end commercial instrumentation and medical imaging applications, not the consumer electronics submarket. See Competition. The new facility is intended to be "state-of-the- -5- 7 art" and incorporates flexible manufacturing technology that is intended to facilitate the relatively small production runs that characterize the Company's current submarket. The Company began the lengthy process startup procedures in June 1995. The first glass substrates were processed in August 1995. Several sets of pre-production glass cells were produced in the first half of fiscal 1996, and the first production units were produced in the fourth quarter of fiscal 1996. Production has been be transferred from the Troy facility to the Northville facility, and the Company has ceased operations in the Troy facility. Some of the equipment that was used at the Troy facility will be moved to the Northville facility for use in research and development. The Northville facility was built under an agreement with the Advanced Research Projects Agency of the U.S. Department of Defense ("ARPA"), under which the federal government provides $48 million to OIS upon the attainment of specified planning and construction milestones. OIS used the government funds to purchase process equipment for the Northville facility. The government will own that equipment but OIS will be entitled to use the government-owned equipment through August 1998 without payment. In 1998, OIS will have the option to purchase any or all of the government-owned equipment at its then fair market value. Through August 30, 1996, OIS had invoiced, and the government had paid, approximately $47 million of the $48 million anticipated under the ARPA Agreement. Future Operations. Management believes that the Company's ability to operate profitably after the start-up of the Northville facility and for the short to medium term thereafter will depend on a number of factors, including the following: 1. The rate at which demand for high performance AMLCDs increases. 2. The successful operation of the Northville facility. Management believes that the Northville facility reflects the state-of- the-art in display manufacturing facilities, but no AMLCD manufacturing facility has ever been built in the United States and there is no assurance the Company will be able to manufacture displays at competitive cost in the Northville facility. 3. Whether competitive flat panel displays are ultimately manufactured using competing technologies, and whether the Company is able to adapt to technological change. See Competition. Management intends to endeavor to keep abreast of technological developments. The technology applicable to flat panel displays is continuously evolving. Management has identified as a long range goal the development of a capability to change over in whole or in part from AMLCD technology to a new technology as it evolves if management determines that such a changeover would be advantageous. Imaging Applications. In addition to supplying image sensors for electronic copyboards, the Company has established a goal of expanding its sensor business into industrial, agricultural and medical imaging applications. The Company believes that digital image sensors employing AMLCD technology can successfully compete with existing imaging technologies in a variety of commercial applications such as industrial non-destructive testing, produce, livestock and poultry inspection and radiological (x-ray) diagnosis by reducing archiving costs and access time through the elimination of film-based files. Consumer Electronics Applications . The Company has established a goal of entering the market for flat panel displays in consumer electronics products. If the Company is to enter this market, it will need to build a large scale high volume manufacturing facility. Management is engaging in some preliminary discussions with potential customers for such a facility. The Company is preparing a preliminary design and cost estimate. The Company has no firm plans or timetable for entering the consumer electronics market. -6- 8 FINANCING DEVELOPMENTS During fiscal 1996, the Board of Directors of OIS increased the amount of Series A Cumulative Preferred Stock, par value $0.01 (the "Preferred Stock"), which OIS is authorized to issue from 25,000 shares is 50,000 shares. The Preferred Stock is not convertible into common stock or any other security and is non-voting (except in limited circumstances relating to the rights of the Preferred Stock). The Preferred Stock earns a cumulative dividend at an annual rate of 8% for five years from the date of issuance and at an increasing floating rate (subject to a cap of 16.5%) thereafter. The purchaser of Preferred Stock cannot cause its redemption, and OIS can redeem Preferred Stock only upon a vote of the directors of OIS that are independent of the owner or owners of the Preferred Stock being redeemed. During fiscal 1996, Guardian purchased 22,500 shares of Preferred Stock for an aggregate purchase price of $22,500,000. The investment by Guardian was approved by the disinterested members of OIS's Board of Directors. During fiscal 1996, the disinterested members of OIS authorized OIS to borrow up to $15,000,000 from Guardian at an annual interest rate of 5.7%, with all interest and principal due and payable on November 1, 1996. As of September 19, 1996, OIS had borrowed $15,000,000 from Guardian. The Company continues to utilize commercial financing from Bank of America NTSA and NBD Bank N.A. in the form of a term loan and a credit facility, both maturing in December, 1999. The financing agreements were amended in fiscal 1995 to increase available credit from $40 million to $52.5 million. The financing agreements include a number of covenants, including a prohibition on granting security interests, limitations on capital expenditures and dispositions of assets and financial covenants. Additionally, under the terms of the financing agreements, OIS is restricted from incurring additional debt (as defined) and paying cash dividends. Furthermore, OIS must meet certain financial covenants as defined in the financing agreements. The financing is unsecured and provides for interest rates to be determined at the times of borrowing equal to NBD Bank N.A.'s prime rate or LIBOR plus a margin of .875% or at elected fixed rates with interest periods ranging from 30 days to 180 days. The term loans are payable in quarterly principal installments of $3,000,000 on June 30, 1997, $1,250,000 commencing September 30, 1997 through December 31, 1997, $2,500,000 commencing March 31, 1998 through June 30, 1998, $2,750,000 commencing September 30, 1998 through December 31, 1998, $3,375,000 commencing March 31, 1999 through June 30, 1999, $3,875,000 on September 30, 1999 and $24,375,000 on December 31, 1999. The Company also pays a commitment fee of .375% of the unused portion of the credit facility. The revolving credit facility matures in December 1999. As of June 30, 1996, $1.5 million of the credit facility remained unused. The Company expects to require and to pursue additional equity, and possibly debt, financing in fiscal 1997, but has not determined the amount or nature of the prospective financing. See Management's Discussion & Analysis -- Capital Resources. -7- 9 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Business Data. The following table shows the amount and percentage of the Company's revenues contributed by, the operating profit attributable to, and the assets associated with the development and sales of displays and sales of sensors for each of the three fiscal years ending June 30, 1994, 1995 and 1996:
FY 96 FY 95 FY 94 --------------------- -------------------- ------------------------ AMOUNT % AMOUNT % AMOUNT % ---------------------- -------------------- ------------------------ REVENUE: SALE OF DISPLAYS $ 6,488,975 61% $ 2,290,242 27% $ 1,256,655 11% ENGINEERING 4,001,414 38% 5,799,519 69% 10,322,328 88% SALE OF SENSORS $ 104,818 1% $ 333,280 4% $ 121,406 1% ----------- ----------- TOTAL REVENUES $ 10,595,207 100% $ 8,423,041 100% $ 11,700,389 100% OPERATING PROFIT: SALE OF DISPLAYS $ (9,166,315) -87% $ (7,282,803) -86% $ (2,139,937) -18% ENGINEERING (13,328,809) -126% (6,629,522) -79% (2,764,300) -24% SALE OF SENSORS $( 348,887) -3% $ (1,018,924) -12% $ (822,590) -7% ------------ ------------ ----------- TOTAL OPERATING PROFITS (LOSS) $(22,844,011) -216% $(14,931,279) -177% $ (5,726,827) -49% ASSETS:(1) FIXED ASSETS (NBV) $ 54,731,463 517% $ 45,734,945 543% $22,017,665 188% INVENTORY $ 5,847,250 55% $ 3,360,062 40% $ 2,083,601 18%
(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. 8 10 The following table shows the domestic and foreign revenues attributable to the industry segments for each of the three fiscal years ending June 30, 1994, 1995 and 1996:
FY 96 FY 95 FY 94 ------------------- ------------------ ------------------- AMOUNT % AMOUNT % AMOUNT % ------------------- ------------------ ------------------- REVENUE: ENGINEERING & SALE OF DISPLAYS DOMESTIC $ 9,878,531 93% $ 7,830,225 93% $10,883,165 93% FOREIGN 611,858 6% 259,536 3% 695,818 6% SALE OF SENSORS DOMESTIC 104,818 1% 333,280 4% 121,406 1% FOREIGN _______ _______ _______ TOTAL REVENUES $10,595,207 100% $ 8,423,041 100% $11,700,389 100% ---------- ---------- ---------- TOTAL: DOMESTIC $ 9,983,349 94% $ 8,163,505 97% $11,004,571 94% FOREIGN 611,858 6% 259,536 3% 695,818 6% ----------- ---------- ------------ $10,595,207 100% $ 8,423,041 100% $11,700,389 100%
Backlog at June 30, 1996, was approximately $28.5 million, as compared to $19.8 million at June 30, 1995. It is expected that approximately $21 million of the backlog will be filled in fiscal 1997 if there are no cancellations or delays in existing programs. In fiscal 1996, the Company experienced delays that resulted in the amount of backlog that was actually filled in the fiscal year being approximately $3 million less than had been anticipated. Raw materials and components necessary for production of displays and sensors are generally available from several sources. The Company does not foresee an unavailability of materials or components that would have a material adverse effect on its overall business, or any of its business segments, in the near term. The Company's business is not seasonal. The Company employed 284 persons at June 30, 1996. -9- 11 INTELLECTUAL PROPERTY RIGHTS The Company is working to improve its current displays and to develop enhancements and improvements to the technologies that are involved in producing AMLCDs. The basic methodology for the manufacture of AMLCDs using the thin film transistor technology currently employed by the Company is in the public domain. However, few companies have successfully developed AMLCDs for sale. Management believes that a key part of the Company's ability to produce displays for sale where others have failed lies in the proprietary know-how and other trade secrets developed by the Company over the years. The Company has policies and procedures in place to attempt to protect its trade secrets. The Company endeavors to develop new technologies of general application with its own funds and to retain ownership of related intellectual property rights. Where management has considered it appropriate, the Company has sought patent protection for its inventions in the United States and in other countries. The Company owns over 30 patents, most of which were granted less than ten years ago, and has a number of patent applications pending or in preparation. Management believes that a number of these patents represent or have the potential to represent significant developments, generally in the form of enhancements or improvements to existing technologies, which may be important for the Company and its competitive position. The level of patent activity (and related expense) has increased in fiscal 1996 and is expected to continue to increase. The Company began a review of its own intellectual property rights and the intellectual property rights of others in the display field late in fiscal 1995. That review is not yet complete, but the Company expects to complete it in fiscal 1997. Hundreds of patents relating to AMLCDs have been granted. The Company will review whether it may be necessary or advantageous to obtain licenses for technology owned or claimed by others, or to seek to protect its intellectual property rights. Disputes involving intellectual property, particularly patents, can be extremely expensive to litigate and the results are often difficult to predict. Furthermore, the Company's resources are limited relative to many other participants in the display industry. The Company will endeavor to manage the risks and potential benefits related to intellectual property protection to avoid litigation where possible, consistent with the need to preserve the Company's right to conduct its business and to protect the Company's own intellectual property position. Management believes that it is common in the display and semiconductor industries for firms to enter into cross-licensing agreements in order to mitigate the risk of intellectual property litigation. After reviewing the results of the planned intellectual property review, management will consider whether attempting to obtain cross-licensing agreements in certain fields may be advantageous to the Company. There is no assurance that the Company will be able to enter into cross-licensing agreements on favorable terms. In 1984, Energy Conversion Devices, Inc. ("ECD"), which was then the parent corporation of OIS, granted to OIS a worldwide exclusive license (including the right to grant sublicenses) to make, use, and sell products using any or all of ECD's technology (including patent rights), present or future, in displays and sensors. In addition, OIS granted ECD a nonexclusive cross-license to technology developed by OIS, present or future, for applications outside the fields of displays and sensors. In April 1992, ECD assigned a substantial number of the patents covered by this license to OIS outright, and ECD and OIS entered into a new agreement (the "1992 ECD Agreement") under which ECD granted to OIS a worldwide exclusive license to all of its remaining technology that existed on the date of the 1992 ECD Agreement. The license granted by ECD will become royalty bearing at such time as OIS posts a cumulative 20% after-tax annual return on invested capital. The royalty rates are, subject to certain limitations, 0.5% of net sales of OIS and its sublicenses of licensed products and 7.5% of up-front license payments received by OIS from sublicenses. -10- 12 OIS has also developed its own proprietary technology in the display and sensor fields. The Company is not actively developing its sensor technology at this time, but continues active development of its display technology. As stated above, the Company has derived some revenues form licensing its sensor technology. ENVIRONMENTAL ISSUES The Company believes that it is presently in substantial compliance with all existing applicable environmental laws and does not anticipate that such compliance will have a material effect on future capital expenditures, earnings, or competitive position. ITEM 2: PROPERTIES The principal executive offices of the Company are located at the Company's 108,000 square foot pilot demonstration, research, production and office facility in Northville Township, Michigan. The Company also continues to lease two buildings in Troy, Michigan which were formerly used for production. ITEM 3: LEGAL PROCEEDINGS The Company is not subject to any material pending legal proceedings. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to stockholders during the fourth quarter of the fiscal year. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "PRICE RANGE OF COMMON STOCK" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. ITEM 6: SELECTED FINANCIAL DATA The information set forth under the caption "SELECTED FINANCIAL DATA" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information set forth under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. -11- 13 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements of the Company and Report of Independent Public Accountants set forth in the Annual Report to Shareholders for the fiscal year ended June 30, 1996, are incorporated by reference into this Report: Report of Independent Public Accountants Balance Sheets - June 30, 1996 and 1995 Statements of Operations - years ended June 30, 1996, 1995 and 1994 Statements of Stockholders' Equity - years ended June 30, 1996, 1995 and 1994 Statements of Cash Flows - years ended June 30, 1996, 1995 and 1994 Notes to Financial Statements ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF OIS The information set forth under the caption "ELECTION OF DIRECTORS" appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. ITEM 11: EXECUTIVE COMPENSATION The information set forth under the caption "EXECUTIVE COMPENSATION" appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" appearing in the Proxy Statement for the fiscal year ended June 30, 1996, is incorporated by reference into this Report. -12- 14 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. List of Financial Statements The following financial statements of the Company are set forth in of the Annual Report to Shareholders for the fiscal year ended June 30, 1996, and are incorporated by reference into this Report by Item 8 hereof: Report of Independent Public Accountants Balance Sheets - June 30, 1996 and 1995 Statements of Operations - years ended June 30, 1996, 1995 and 1994 Statements of Stockholders' Equity - years ended June 30, 1996, 1995 and 1994 Statements of Cash Flows - years ended June 30, 1996, 1995 and 1994 Notes to Financial Statements 2. List of Financial Statement Schedules PAGE The following financial statement schedules of the Company are included in this Report: Schedule II - Valuation and Qualifying Accounts - June 30, 1996, 1995 and 1994 . . . . . . . . . . . . 17 Schedules, other than those referred to above, are omitted as not applicable or not required, or the required information is shown in the financial statements or notes thereto. 3. List of Exhibits EXHIBIT NUMBER DESCRIPTION ------- ----------- [S] [C] 3(i) Restated Certificate of Incorporation as currently in effect. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 3(ii) Bylaws as currently in effect. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.1 Lease dated June 10, 1980, as extended on August 12, 1983, and December 10, 1985, between ECD and Ivan J. and Irene I. Stretten, relating to premises located at 1896 Barrett Street, Troy, Michigan. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1987, and incorporated herein by reference.) 10.2 Lease Agreement dated March 10, 1986, between ECD and Ivan and Irene Stretten regarding 1896 Barrett Street, Troy, Michigan. (Filed as Exhibit to Amendment No. 4 to OIS's Registration Statement on Form S-1 and incorporated herein by reference.) -13- 15 10.3 Assignment of Lease dated October 3, 1986, relating to premises located at 1896 Barrett Street, Troy, Michigan. (Filed as Exhibit to Amendment No. 6 to OIS's Registration Statement on Form S-1 and incorporated herein by reference.) 10.4 Amendment to Lease Agreement dated March 10, 1986, between OIS and Irene Stretten dated May 30, 1989. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1989, and incorporated herein by reference.) 10.5 Amendment to Lease Agreement dated March 10, 1986, between OIS and Irene Stretten dated August 3, 1991. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, and incorporated herein by reference.) 10.6 Building Lease Letter Agreement between Irene I. Stretten and OIS dated September 22, 1994. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference.) 10.7 Agreement between OIS, ECD and Quartet Manufacturing Company dated December 31, 1988, with attachments. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1989, and incorporated herein by reference.) 10.8 Master Lease Agreement with Appendices between OIS and GE Capital dated August 26, 1991. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, and incorporated herein by reference.) 10.9 Sensor License Agreement between ECD and OIS dated April 14, 1992. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.10 OIS 1984 Amended and Restated Stock Option Plan. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.11 OIS 1988 Amended and Restated Stock Option and Incentive Plan. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.12 OIS 1994 Significant Employee Stock Incentive Plan. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.13 Amended and Restated Agreement between ECD and OIS dated April 14, 1992. (Filed as Exhibit to OIS's Annual Report on Form 10- K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.14 Amended and Restated Services Agreement between OIS and Guardian dated June 30, 1995. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.15 Loan Agreement and Master Demand Note between OIS and NBD Bank, N.A., dated March 19, 1993. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference.) -14- 16 10.16 Credit Agreement between OIS, Bank of America National Trust and Savings Associations and NBD Bank, N.A., as Banks, NBD Bank, N.A., as Administrative Agent, and BA Securities, Inc., as Arranger, dated December 14, 1993. (Filed as Exhibit to OIS's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, and incorporated herein by reference.) 10.17 Amendment No. 2 and Waiver to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD Bank, N.A., as Banks, NBD Bank, N.A., as Administrative Agent, and BA Securities, Inc., as Arranger, dated February 28, 1995. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.18 Amendment No. 3 to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD Bank, N.A., as Banks, and NBD Bank, N.A., as Administrative Agent, dated September 19, 1996. 10.19 Line of Credit Agreement and Line of Credit Note between OIS and Guardian dated August 26, 1993. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference.) 10.20 Agreement between OIS and The Advanced Research Projects Agency dated August 26, 1993. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference.) 10.21 Consultant Agreement between OIS and Peter Joel C. Young dated as of September 1, 1995. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 13 Form of Annual Report to Shareholders of the Company for the fiscal year ended June 30, 1996. Except for those portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 23 Consent of Arthur Andersen LLP dated September 26, 1996. 27 Financial Data Schedule. (EDGAR version only.) (b) Reports on Form 8-K None. -15- 17 Report of Independent Public Accountants To OIS Optical Imaging Systems, Inc. We have audited, in accordance with generally accepted auditing standards, the financial statements included in OIS Optical Imaging Systems, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated August 23, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. \s\ Arthur Andersen LLP Detroit, Michigan August 23, 1996 -16- 18 OIS OPTICAL IMAGING SYSTEMS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1996, 1995, AND 1994
COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- BALANCE AT ADDITIONS ADDITIONS BEGINNING CHARGED TO CHARGED TO BALANCE AT END DESCRIPTION OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD - ----------- --------- ------------------ -------------- ---------- -------------- YEAR ENDED JUNE 30, 1996: ALLOWANCE FOR DOUBT $ 60,000 $ 60,000 ACCOUNTS YEAR ENDED JUNE 30, 1995: ALLOWANCE FOR DOUBT $ 60,000 $ 60,000 ACCOUNTS YEAR ENDED JUNE 30, 1994: ALLOWANCE FOR DOUBT $ 0 $ 60,000 $ 60,000 ACCOUNTS
-17- 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OIS OPTICAL IMAGING SYSTEMS, INC. By: \s\ Rex Tapp ----------------------------------------------- Rex Tapp, President and Chief Executive Officer Dated: September 26, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: \s\ Charles C. Wilson Executive Vice President, September 10, 1995 - -------------------------------- Chief Financial Officer & Charles C. Wilson Director (Principal Financial & Accounting Officer) \s\ Rex Tapp President, Chief Executive September 10, 1995 - -------------------------------- Officer & Director Rex Tapp \s\ Ralph J. Gerson Chairman of the Board & Director September 10, 1995 - -------------------------------- Ralph J. Gerson \s\ Jeffrey A. Knight Director September 10, 1995 - -------------------------------- Jeffrey A. Knight \s\ C. K. Prahalad Director September 10, 1995 - -------------------------------- C. K. Prahalad \s\ Robert M. Teeter Director September 10, 1995 - -------------------------------- Robert M. Teeter \s\ Mark S. Wrighton Director September 10, 1995 - -------------------------------- Mark S. Wrighton \s\ Peter Joel C. Young Director September 10, 1995 - -------------------------------- Peter Joel C. Young
-18- 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.18 Amendment No. 3 to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD Bank, N.A., as Banks, and NBD Bank, N.A., as Administrative Agent, dated September 19, 1996. 13 Form of Annual Report to Shareholders of the Company for the fiscal year ended June 30, 1995. Except for those portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 23 Consent of Arthur Andersen LLP dated September 26, 1996. 27 Financial Data Schedule. (EDGAR version only)
-19- EX-10.18 2 EXHIBIT 10.18 1 EXHIBIT 10.18 AMENDMENT NO. 3 This Amendment No. 3 to Credit Agreement (this "Amendment") is entered into as of September 19, 1996 among OIS OPTICAL IMAGING SYSTEMS, INC. (the "Company"), the banks named on the signature pages hereof (the "Banks") and NBD BANK, as agent (the "Administrative Agent"). WHEREAS, the Company, the Banks, BA Securities, Inc., as Arranger and the Administrative Agent are parties to that certain Credit Agreement dated as of December 14, 1993 (as amended by Amendment No. 1 thereto dated as of March 31, 1994 and an Amendment No. 2 thereto dated as of February 28, 1995, the "Credit Agreement"); and WHEREAS, the company has requested the Banks to revise the amortization schedule of the Term Loan and to amend the Cash Flow Ratio covenant set forth in Section 7.15 of the Credit Agreement, and the Banks are wiling to so amend the amortization schedule and to amend the Cash Flow Ratio covenant set forth in Section 7.15 of the Credit Agreement all on the terms and subject to the conditions set forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINED TERMS Unless otherwise defined in this Amendment, defined terms used herein shall have the meaning assigned to such terms in the Credit Agreement. ARTICLE II AMENDMENTS TO CREDIT AGREEMENT (1) Section 2.08(a) of the Credit Agreement is hereby amended and restated in its entirety as follows: 2.08 Repayment. (a) The Term Credit. On the Final Maturity Date and on the last day of each calendar quarter beginning on June 30, 1997 (each a " Principal Payment Date"), the Company shall make a scheduled repayment of the aggregate outstanding repayment of the aggregate outstanding principal amount, if any, of Term Loans in the Exhibit 10.18 -- Page 1 of 4 2 amount equal to the amount set forth below for such Principal Payment Date:
Principal Payment Date Amount ------------ ------ June 30, 1997 $3,000,000 September 30, 1997 $1,250,000 December 31, 1997 $1,250,000 March 31, 1998 $1,250,000 June 30, 1998 $1,250,000 September 30, 1998 $1,500,000 December 31, 1998 $1,500,000 March 31, 1999 $1,500,000 June 30, 1999 $1,500,000 September 30, 1999 $2,000,000 December 31, 1999 $4,000,000 or the then outstanding principal amount of all Term Loans, if different.
(2) Section 7.15 of the Credit Agreement is hereby amended by deleting the table set forth therein and replacing it with the following: Measurement Period Ending Ratio ------------------------- ----- June 30, 1997 and thereafter 1.25 to 1.0 ARTICLE III REPRESENTATIONS AND WARRANTIES The Company represents and warrants that: (1) (a) the execution and delivery of this Amendment have been duly authorized by all necessary corporate action; and (b) do not violate any Requirement of Law nor conflict with or result in the breach of any Contractual Obligation binding on the Company; and (b) after giving effect to this Amendment, the representations and warranties of the Company contained in Article V of the Credit Agreement (except for representations and warranties relating to a particular point in time) and in each other Loan Document are true and correct in all material respects as if made on and as of the date of this Amendment and no Potential Event of Default or Event of Default has occurred and is continuing. Exhibit 10.18 -- Page 2 of 4 3 ARTICLE IV EFFECTIVENESS (1) This Amendment shall become effective as of the date first above written when the Administrative Agent has received the following: (a) counterparts hereof executed by the Company, all the Banks and the Agent and signed by Guardian as a consenting party; and (b) copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Amendment and the performance of the transactions contemplated hereby, certified by the Secretary or an Assistant Secretary of the Company. (2) Upon the effectiveness of this Amendment (a) each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import shall mean and be a reference to the Credit Agreement as amended hereby and (b) each reference in each other Loan Document to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. (3) Except as specifically amended above, the Credit Agreement shall remain in full force and effect. (4) The execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power, or remedy of any Lender or the Agent under the Credit Agreement or any of the other Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. ARTICLE V MISCELLANEOUS (1) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (2) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Exhibit 10.18 -- Page 3 of 4 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: \s\ W. Larry Hess ------------------------------- Title: Managing Director ---------------------------- NBD BANK By: \s\ Thomas Lakocy ------------------------------- Title: Vice President ---------------------------- Consented to: GUARDIAN INDUSTRIES CORP., as a Consenting Party By: \s\ R. Mark Manion ---------------------------------------- Title: Assistant Treasurer ------------------------------------- Acknowledged and Agreed to: OIS OPTICAL IMAGING SYSTEMS, INC. By: \s\ Charles Wilson ---------------------------------------- Title: Exec. Vice President & CFO ------------------------------------- Acknowledged: NBD BANK, as Administrative Agent By: \s\ Thomas Lakocy ---------------------------------------- Title: Vice President ---------------------------- Exhibit 10.18 -- Page 4 of 4 EX-13 3 EXHIBIT 13 1 EXHIBIT 13 FORM OF ANNUAL REPORT PRICE RANGE OF COMMON STOCK Shares of OIS Common Stock are traded in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") over-the-counter market under the symbol OVON. The following table sets forth the reported high and low bid quotations of OIS Common Stock for the fiscal periods indicated:
Prices ----------------------------------------------------------- Period Low High ------ --- ---- Year ended June 30, 1995 First Quarter . . . . . . . . . . . . . . . . $5.625 $9.125 Second Quarter. . . . . . . . . . . . . . . . 6.00 7.125 Third Quarter. . . . . . . . . . . . . . . . 5.00 6.625 Fourth Quarter. . . . . . . . . . . . . . . . 4.375 6.0625 Year ended June 30, 1996 First Quarter. . . . . . . . . . . . . . . . $4.125 $5.625 Second Quarter. . . . . . . . . . . . . . . 3.00 5.250 Third Quarter. . . . . . . . . . . . . . . . 3.750 5.625 Fourth Quarter . . . . . . . . . . . . . . . 3.0625 3.75 Year ended June 30, 1997 First Quarter. . . . . . . . . . . . . . . 2.625 3.625 through September 18
____________________________________ The above-listed quotations may include inter-dealer prices that may not necessarily represent actual transactions. No dividend or distribution on OIS Common Stock has been paid and none is presently being considered. The approximate number of stockholders of record on September 18, 1996, was 1,583. Exhibit 13 -- Page 1 of 27 2 SELECTED FINANCIAL DATA Set forth below is certain financial information taken from OIS' audited financial statements.
Year ended June 30, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total Revenues $10,595,207 $ 8,423,041 $11,700,389 $ 7,162,035 $ 5,481,869 Cost of Sales 26,106,953 17,810,224 13,078,919 9,262,815 4,894,526 Internal Research and Development 1,971,513 1,306,843 688,094 372,242 517,348 Selling, General, Administrative and other 6,644,735 3,935,699 3,789,061 2,834,330 6,167,353 Net Loss Before Extraordinary Item (24,127,994) (14,629,725) (5,855,685) (5,307,352) (6,097,358) Net Loss $(24,127,994) $(14,629,725) $ (5,855,685) $(5,307,352) $(5,696,240) Net Loss Available to Common Shareholders $(26,097,584) $(14,840,683) $ (5,855,685) $(5,307,352) $(5,696,240) Net Loss per Share Before Extraordinary Item $(.27) $(.21) $(.19) $(.20) $(.28) Net Loss per Common Share $(.27) $(.21) $(.19) $(.20) $(.26) At year end: Total Assets $70,513,934 $ 57,263,779 $38,146,868 $ 7,088,883 $10,288,994 Long-Term Debt, Net $48,000,000 $ 40,125,454 $12,000,000 $ 77,355 $ 544,819 Convertible Notes $ 7,221,412 $ 6,999,980 Working Capital (Deficit) $ 3,432,241 $ 5,211,233 $ 2,616,215 $(1,173,195) $ 2,018,700 Stockholders' Equity $ 7,163,704 $ 7,820,724 $ 9,633,880 $ 3,501,018 $ 1,013,024
Exhibit 13 -- Page 2 of 27 3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To OIS Optical Imaging Systems, Inc.: We have audited the accompanying balance sheets of OIS Optical Imaging Systems, Inc. (a Delaware corporation) as of June 30, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OIS Optical Imaging Systems, Inc. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years ended June 30, 1996 in conformity with generally accepted accounting principles. As explained in Note H to the financial statements, effective July 1, 1993, the Company changed its method of accounting for income taxes. \s\ Arthur Anderson LLP Detroit, Michigan. August 23, 1996 Exhibit 13 -- Page 3 of 27 4 OIS OPTICAL IMAGING SYSTEMS, INC. BALANCE SHEETS ASSETS
June 30, ---------------------------------------- 1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 516 $ 830,081 Accounts receivable (net of reserve for doubtful accounts of $60,000 at June 30, 1996 and 1995) 3,232,486 2,097,024 Receivable from U.S. Government 131,705 2,584,117 Inventories 5,847,250 3,360,062 Insurance receivable 6,085,263 2,277,385 Prepaid expenses and other current assets 485,251 380,165 ----------- ----------- TOTAL CURRENT ASSETS 15,782,471 11,528,834 PROPERTY AND EQUIPMENT Land 3,000,000 3,000,000 Building 32,232,265 -- Leasehold improvements -- 1,037,010 Machinery and other equipment 28,670,855 9,470,373 Construction in process 129,074 39,339,490 ----------- ----------- TOTAL PROPERTY AND EQUIPMENT 64,032,194 52,846,873 Less accumulated depreciation (9,300,731) (7,111,928) ----------- ----------- NET TOTAL PROPERTY AND EQUIPMENT 54,731,463 45,734,945 TOTAL ASSETS $70,513,934 $57,263,779 =========== ===========
See notes to financial statements. Exhibit 13 -- Page 4 of 27 5 OIS OPTICAL IMAGING SYSTEMS, INC. BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, ---------------------------------------------- 1996 1995 ------------------- -------------------- CURRENT LIABILITIES Current installments on capital lease obligation $ 125,454 $ 121,633 Subordinated note payable to affiliate 2,000,000 Current installment on long-term debt 3,000,000 -- Accounts payable 5,599,266 4,178,305 Accrued interest 951,103 1,115,026 Deferred revenue 236,845 326,954 Other accrued liabilities 437,562 575,683 ------------------- ------------------ TOTAL CURRENT LIABILITIES 12,350,230 6,317,601 LONG TERM DEBT 48,000,000 40,000,000 LOCAL GOVERNMENT SUBSIDY 3,000,000 3,000,000 CAPITAL LEASE OBLIGATION -- 125,454 ------------------- ------------------ TOTAL LIABILITIES 63,350,230 49,443,055 STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 per share: Series A, 8% cumulative, non-convertible and non-voting Authorized - 50,000 shares Issued and outstanding - 35,000 shares at June 30, 1996 and 12,500 shares at June 30, 1995 350 125 Common stock, par value $0.01 per share: Authorized - 125,000,000 shares Issued and outstanding - 97,103,790 shares at June 30, 1996 and 96,712,931 shares at June 30, 1995 971,038 967,129 Additional paid-in capital 105,457,517 81,325,112 Accumulated deficit (98,055,426) (74,138,390) Deferred compensation (1,209,775) (333,252) ------------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 7,163,704 7,820,724 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $70,513,934 $57,263,779 =================== ==================
See notes to financial statements. Exhibit 13 -- Page 5 of 27 6 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, --------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- REVENUES Display revenue $ 6,488,975 $ 2,290,242 $ 1,256,655 Engineering revenue 4,001,414 5,799,519 10,322,328 Sensor revenue 104,818 333,280 121,406 ------------- ------------ ------------ TOTAL REVENUES 10,595,207 8,423,041 11,700,389 COST OF SALES Display 12,658,272 6,257,458 2,102,198 Engineering 13,102,241 9,680,064 10,315,839 Sensors 346,440 1,872,702 660,882 ------------- ------------ ------------ TOTAL COST OF SALES 26,106,953 17,810,224 13,078,919 ------------- ------------ ------------ GROSS LOSS (15,511,746) (9,387,183) (1,378,530) OPERATING EXPENSES Internal research and development 1,971,513 1,306,843 688,094 Selling, general and administrative 5,360,752 4,237,253 3,660,203 ------------- ------------ ------------ TOTAL OPERATING EXPENSES 7,332,265 5,544,096 4,348,297 OPERATING LOSS (22,844,011) (14,931,279) (5,726,827) OTHER INCOME (EXPENSE) Interest expense (2,233,735) (10,808) (324,922) Interest income 41,954 200,236 157,751 Licensing and royalties 104,174 112,126 239,713 Insurance proceeds 803,624 -- -- Loss on sale of long-term investment in joint venture -- -- (201,400) ------------- ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (1,283,983) 301,554 (128,858) NET LOSS $ (24,127,994) $(14,629,725) $ (5,855,685) ------------- ------------ ------------ Preferred stock dividends 1,969,590 210,958 -- ------------- ------------ ------------ NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (26,097,584) $(14,840,683) $ (5,855,685) ------------- ------------ ------------ NET LOSS PER COMMON SHARE $(.27) $(.21) $(.19) ======== ======== =========
Exhibit 13 -- Page 6 of 27 7 STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
PREFERRED STOCK COMMON STOCK ------------------- ------------------------ Number Number of Additional Guardian of Amount Shares Amount Paid-In Equity Shares Capital ------ ------ ---------- --------- ------------ ------------- Balance at June 30, 1993 -0- -0- 30,111,870 $301,119 $ 56,772,078 $ -0- Common shares sold (Fiscal 1994) 597,860 5,979 1,339,206 Common stock granted as deferred compensation (August 20, 1993, December 15, 97,725 977 298,135 1993 and December 22, 1993) Amortize deferred compensation (Fiscal 1994) Conversion of Guardian note to 10,500,000 equity (June 30, 1994) Other (6,500) (65) (5,622) Net loss for year ended June 30, 1994 ------- ------- ---------- ------- ----------- ---------- Balance at June 30, 1994 -0- -0- 30,800,955 308,010 58,403,797 10,500,000 Common shares sold (Fiscal 1995) 87,016 869 292,676 Common stock granted as deferred compensation 49,920 499 323,981 (January 13, 1995) Amortize deferred compensation (Fiscal 1995) Conversion of Guardian equity to Common Stock 65,791,270 657,913 9,842,087 (10,500,000) (November 26, 1995) Preferred Stock sold (Fiscal 12,500 125 12,499,875 1995) Other (Fiscal 1995) (16,230) (162) (37,304) Net loss for year ended June 30, 1995 ------- ------- ---------- ------- ----------- ------------- Balance at June 30, 1995 12,500 125 96,712,931 967,129 81,325,112 -0- Common shares sold (Fiscal 1996) 90,139 902 218,922 Common stock granted as deferred compensation (January 15, 1996) 312,420 3,124 1,402,766 Amortize deferred compensation (Fiscal 1996) Preferred stock sold (Fiscal 1996) 22,500 225 22,499,775 Other (Fiscal 1996) (11,700) (117) 10,942 Net loss for year ended June 30, 1996 ------- ------- ---------- -------- ------------ ------------- Balance at June 30, 1996 35,000 $350 97,103,790 $971,038 $105,457,517 $ -0- ======= ======= ========== ======== ============ =============
Accumulated Deferred Stockholders Per Deficit Compensation ' Equity Share ------------- ------------- ------------- ----------- Balance at June 30, 1993 $(53,442,022) $ (130,157) $ 3,501,018 -- Common shares sold (Fiscal 1994) 1,345,185 2.250 Common stock granted as deferred compensation (August 20, 1993, December 15, (299,112) -- 3.06 1993 and December 22, 1993) Amortize deferred compensation 143,362 143,362 (Fiscal 1994) Conversion of Guardian note to 10,500,000 equity (June 30, 1994) Other 5,687 -- Net loss for year ended June 30, (5,855,685) (5,855,685) 1994 ----------- ------------ ----------- Balance at June 30, 1994 (52,297,707) (280,220) 9,633,880 Common shares sold (Fiscal 1995) 293,545 3.373 Common stock granted as deferred compensation (324,480) -- 6.500 (January 13, 1995) Amortize deferred compensation 240,718 240,718 (Fiscal 1995) Conversion of Guardian equity to Common Stock (November 26, 1995) .16 Preferred Stock sold (Fiscal 1995) 12,500,000 1,000 Other (Fiscal 1995) (210,958) 30,730 (217,694) Net loss for year ended June 30, 1995 (14,629,725) (14,629,725) ------------ ------------ ------------ Balance at June 30, 1995 (74,138,390) (333,252) 7,820,724 Common shares sold (Fiscal 1996) 219,824 2.439 Common stock granted as deferred compensation (January 15, 1996) (1,405,890) -- 4.500 Amortize deferred compensation 492,886 492,886 (Fiscal 1996) Preferred stock sold (Fiscal 22,500,000 1,000 1996) Other (Fiscal 1996) 210,958 36,481 258,264 Net loss for year ended June 30, (24,127,994) (24,127,994) 1996 ------------ ------------ ------------ Balance at June 30, 1996 $(98,055,426) $ (1,209,775) $ 7,163,704 ============ ============ ============
Exhibit 13 -- Page 7 of 27 8 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, -------------------------------------------------------------- 1996 1995 1994 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(24,127,994) $(14,629,725) $ (5,855,685) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,396,279 1,356,533 1,296,667 Loss on sale of long-term investment in joint venture -- -- 201,400 Deferred compensation expense 492,886 233,982 143,362 Impact on cash flows from changes in assets and liabilities: Accounts receivable (2,490,928) 1,042,155 (2,065,447) Inventories (2,487,188) (1,276,461) (1,014,130) Prepaid expenses and other assets (105,086) (2,248,196) (244,952) Accounts payable and accrued liabilities 1,329,875 (3,613,687) 5,593,812 Deferred revenue (90,109) (407,824) 85,548 ----------------- ----------------- ----------------- NET CASH USED IN OPERATING ACTIVITIES (24,082,265) (19,543,223) (1,859,425) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of long-term investment in joint venture -- -- 797,600 Capital expenditures (12,392,797) (24,708,813) (16,561,054) ----------------- ----------------- ----------------- NET CASH USED IN INVESTING (12,392,797) ACTIVITIES (24,708,813) (15,763,454) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (121,633) (158,497) (504,237) Proceeds from issuance of debt and notes 13,000,000 28,000,000 10,700,000 Net proceeds from issuance of common stock 267,130 293,545 1,345,185 Net proceeds from issuance of preferred stock 22,500,000 12,500,000 -- Proceeds from issuance of Guardian note -- -- 10,500,000 ----------------- ----------------- ----------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 35,645,497 40,635,048 22,040,948 ----------------- ----------------- ----------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (829,565) (3,616,988) 4,418,069 CASH, CASH EQUIVALENTS AT BEGINNING OF PERIOD 830,081 4,447,069 29,000 ----------------- ----------------- ----------------- CASH, CASH EQUIVALENTS AT END OF PERIOD $ 516 $ 830,081 $ 4,447,069 ================= ================= =================
See notes to financial statements Exhibit 13 -- Page 8 of 27 9 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF CASH FLOWS (continued) SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS FOR THE YEARS ENDED JUNE 30,
1996 1995 1994 ---------- ----------- ------------ Common Stock Issued in Exchange for Deferred Compensation, Net of Terminations $1,369,409 $ 287,014 $ 293,425 Capitalization of Equipment Pursuant to Capital Lease Obligation 365,000 Conversion of Guardian Equity to Common Stock 10,500,000 Conversion of Convertible Subordinated Securities to Common Stock 7,785,109 Conversion of Accrued Interest to Convertible Subordinated Securities 563,697 Conversion of Guardian Securities to Equity 10,500,000 Accrual of Future Plant Equipment 6,050,000 Contribution of Land under Local Government Subsidy 3,000,000
See Statements of Cash Flows. Exhibit 13 -- Page 9 of 27 10 OIS OPTICAL IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE A - ORGANIZATION OIS Optical Imaging Systems, Inc. was organized to complete the development of and thereafter to manufacture and market flat panel displays and electronic image processing products, employing amorphous and related materials and information technology. OIS is currently providing these services mainly to avionic and military customers. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Cash and Cash Equivalents Cash equivalents consist of investments in short-term, highly-liquid securities having a maturity of three months or less when acquired. Cash equivalents of $516 and $830,081 are included in cash and cash equivalents in the accompanying balance sheets for the years ended June 30, 1996 and 1995, respectively. These are stated at cost which approximates market. Included in Cash and Cash Equivalents at June 30, 1995, is restricted cash of $334,227 which consists of unexpended funds received under the Advanced Research Projects Agency ("ARPA") agreement (see Note L). Cash paid for interest for the fiscal years ended June 30, 1996, 1995 and 1994 was $1,549,826, $10,808 and $74,254, respectively. Property and Equipment All properties are recorded at cost and are depreciated on the straight-line method over the estimated useful lives of the individual assets. The estimated lives of the principal classes of assets are as follows: Years ----- Machinery and other equipment 3 to 10 Buildings and cleanrooms 20 to 30 Machinery and other equipment acquired for a particular research and development project which have no alternative future use (in other research and development projects or otherwise) are charged to the expense of the specific project to which they were dedicated. Machinery and other equipment which have alternative future uses are capitalized at cost. Expenditures for maintenance and repairs are charged to operating expenses. Expenditures for improvements or major renewals are capitalized and are depreciated over their estimated useful lives. Exhibit 13 -- Page 10 of 27 11 Capitalized lease equipment is depreciated over the term of the lease. Certain equipment installed at the new manufacturing facility is owned by the government and is therefore not recorded in the accompanying Balance Sheets (See Note L). Exhibit 13 -- Page 11 of 27 12 Local Government Subsidy The Local Government Subsidy will be amortized over 30 years on a straight line basis beginning when the Company has met all requirements related to the subsidy (See Note L). Inventories Inventories are stated at the lower of cost, determined on a first-in first-out basis, or market, and represents manufacturing supplies, raw material used in display development and displays in process. The components of inventories as of June 30, are as follows:
1996 1995 ----------- ----------- Raw materials $ 5,124,414 $ 2,029,162 Displays in process 722,836 1,330,900 ----------- ----------- Total $ 5,847,250 $ 3,360,062 =========== ===========
Insurance Receivable This amount represents costs incurred by the Company to repair and clean-up damage caused by a fire at the Northville facility and will be reimbursed by an insurance company (See Note L). Research and Development Research and development costs are charged to operating expenses as incurred. Patents Patent expenditures are charged directly to expense, and are included in selling, general and administrative expenses. Customer Agreements Certain long-term customer engineering agreements are accounted for on a percentage of completion basis. Amounts billed but not yet earned and/or amounts received as advance payments net of revenues recognized in advance of billings are recorded as deferred revenue. Projected losses on customer agreements are recorded as cost in excess of anticipated billings at the time such losses become apparent. Revenue on the Company's display contracts is recognized when displays are shipped to the customer. In fiscal 1996 and 1995 the Company derived approximately 76% and 68% of revenue respectively from three customers operating in the U.S. Aerospace industry. In fiscal 1994 the Company derived approximately 62% of revenue from one customer operating in the U.S. aerospace industry. As of June 30, 1996 and 1995, $2,825,252 and $1,215,814 is due from these three customers and is included in Accounts Receivable in the accompanying balance sheets. Exhibit 13 -- Page 12 of 27 13 Reclassifications Certain amounts in the prior year financial statements have been reclassified to conform with the current financial presentation. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE C - CAPITAL STOCK Holders of OIS Common Stock are entitled to one vote per share. The holders of OIS Common Stock are entitled to dividends when and if declared by the Board of Directors of OIS out of any funds legally available therefore. OIS has not declared or paid any dividends on Common Stock. The Company is restricted by its credit agreement from declaring or paying cash dividends (See Note J). During fiscal 1996 and 1995, the Company issued 22,500 and 12,500 shares, respectively, of Preferred Stock to its affiliate Guardian Industries Corp. ("Guardian"). The Company is restricted from paying dividends on its Preferred Stock by its credit agreement. Certain of these restrictions lapse on September 30, 1996 (See Note J). The Preferred Stock bears a dividend rate of 8% for the first five years. During each of years six through eight the members of the Board of Directors independent of Guardian (the "Independent Directors") will select one of the following annual rates: 1) Libor plus 125 basis points or 2) the three year Treasury Bill yield plus 200 basis points. During years nine through eleven the independent directors will select one of the following annual rates: 1) Libor plus 350 basis points or 2) the three year Treasury Bill yield plus 400 basis points. Thereafter, beginning with year twelve and on each successive three year anniversary, the rate then in effect will increase 150 basis points. At no time will the rate exceed 16.5% annually. The Company's policy with respect to dividends under the preferred stock agreement is to accrue all dividends that are declared, or expected to be declared in the current year by the Board of Directors. Management has determined that the fiscal 1996 and 1995 dividends will not be declared. Cumulative dividends in arrears as of June 30, 1996 total $2,180,548. NOTE D - STOCK OPTION PLANS OIS has in effect two stock incentive plans, the 1994 Significant Employee Stock Incentive Plan (the "1994 Plan") and the Amended and Restated 1988 Stock Option and Incentive Plan (the "1988 Plan"). Echibit 13 -- Page 13 of 27 14 The plans are administered by the Stock Option Committee of the Board of Directors of OIS (the "Committee"). These plans authorize the award of restricted stock or stock options covering 3,000,000 shares of OIS Common Stock to employees, consultants and such other persons as the Committee may determine. Currently, the Committee is making awards under the 1994 Plan only. Awards of restricted stock are non-transferable and subject to forfeiture during the restriction period established by the Committee. The awards of restricted stock during fiscal 1996, 1995 and 1994 are summarized in the following table:
Number of Per Share Aggregate Restriction Fiscal Year Shares Granted Price Value Lapse Date - ----------- -------------- ----- ----- ---------- 1996 312,420 $4.50 $1,405,890 October 13, 1998 1995 49,920 $6.50 $324,480 October 13, 1997 1994 97,725 $1.68-3.50 $299,112 October 13, 1995
There are currently 246,950 outstanding stock options that were granted under the 1994 Plan, all in fiscal 1995 and 1996. These options become exerciseable in two stages, six months after the date of grant with respect to 50% of the shares and eighteen months after the date of grant with respect to the remaining 50% of the shares. These options expire 10 years after the date of grant. The option price is set at market on date of grant. There are currently outstanding 150,658 stock options that were granted under the 1988 plan before fiscal 1992. These options generally become exerciseable in five stages, beginning one year after the date of grant with respect to 20% of the shares and continuing with an additional 20% of the shares becoming exerciseable annually thereafter. These options generally expire 6 years after the date of grant. The option price is set at market on date of grant. The stock options granted by the Company are nontransferable and are subject to forfeiture if not exercised within a time specified by the Committee (but not more than three months) after the termination of employment with, or provision of services to, the Company, unless the termination was a result of death, disability or retirement, in which case the option may be exercised until six months after the termination. Exhibit 13 -- Page 14 of 27 15 A summary of the transactions during the three years ended June 30, 1996 with respect to OIS' stock option plans follows:
1996 1995 1994 ---------------- ---------------- ---------------- Average Average Average Option Option Option Shares Price Shares Price Shares Price ------ ------- ------ ------ ------ ----- Outstanding at the beginning of fiscal year 341,104 $3.15 313,419 $2.26 976,859 $2.25 Granted 174,950 4.58 108,000 5.13 79,200 2.25 Cancelled 37,800 4.93 9,350 2.25 143,580 2.25 Exercised 80,646 2,25 70,965 2.25 599,060 2.38 --------- ----- --------- ----- --------- ----- Outstanding June 30, 397,608 $3.77 341,104 $3.15 313,419 $2.26 ========= ===== ========= ===== ========= ===== Exercisable June 30, 220,158 $3.05 143,731 $2.21 131,974 $2.27 ========= ===== ========= ===== ======== ===== Available for grant June 30, 2,430,990 N/A 2,868,860 N/A 1,015,925 N/A ========= === ========= === ========= ===
NOTE E - RELATED PARTY TRANSACTIONS Guardian purchased 22,500 and 12,500 shares of the Company's Series A Preferred Stock in fiscal 1996 and 1995 for aggregate consideration of $22,500,000 and $12,500,000, respectively. Effective November 26, 1994, Guardian exercised its option to purchase additional shares of OIS Common Stock. In that transaction, OIS issued to Guardian 41,828,768 shares of Common Stock and issued to William Davidson, who is the president and owner of Guardian, 23,962,502 shares of Common Stock pursuant to rights derived from convertible subordinated securities. (See Note J - Financing Transactions.) In April 1992, OIS and the Company's affiliate, Guardian entered into a Services Agreement, which was amended in July 1992. Under that agreement, Guardian provided the services of Rex Tapp, who was an employee of Guardian, as President of OIS, for $130,000 per year; provides certain administrative, accounting, technical, travel arrangement, management and tax services for $50,000 per year, and provides legal services at an hourly rate of $100. In July 1995, Mr. Tapp became an employee of OIS with the result that his services to OIS are no longer subject to the Services Agreement. During fiscal years 1996, 1995 and 1994, OIS incurred expenses of approximately $110,000, $190,000 and $267,000, respectively, for these services. During 1995 and 1994, OIS also purchased approximately $17,000 and $80,000, respectively, worth of architectural glass from Guardian for installation at the new manufacturing facility. In May 1993, OIS and Guardian entered into a services agreement in which employees at Guardian provided engineering services in connection with construction of the new facility. The aggregate amount paid by OIS will not exceed $250,000 without approval of the independent directors of OIS. The Company Exhibit 13 -- Page 15 of 27 16 incurred approximately $118,000 and $78,000, for the years ended June 30, 1995 and 1994 respectively, for these engineering services (see Note L). NOTE F - LONG-TERM INVESTMENT IN JOINT VENTURE In December 1993, OIS incurred a $201,400 loss when it sold its investment in common stock of UNIPAC Optoelectronics, Inc., ("UNIPAC") a corporation organized under the laws of the Republic of China in Taiwan,for $797,600. These shares represented 10% ownership of UNIPAC. NOTE G - NET LOSS PER COMMON SHARE Net loss per common share which, equals fully diluted loss per share, is based on the weighted average number of shares of OIS Common Stock outstanding during the year. The number of shares used in the computation for the years ended June 30, 1996, 1995 and 1994 were 96,889,823, 69,241,640 and 30,502,644, respectively. Under the terms of the two Stock Purchase Agreements, the Guardian Option (see Note J) and William Davidson's right pursuant to a May 14, 1993 agreement (see Note J), the Company issued 65,791,720 shares of Common Stock on November 26, 1994. Pursuant to a fiscal 1994 agreement, the shares of Common Stock were paid for, but not issued, prior to June 30, 1994; if these shares of common stock had been issued and outstanding as of June 30, 1994, net loss per share would have been $.15 for the year ended June 30, 1995, based upon 96,654,669 weighted average shares. NOTE H - FEDERAL TAXES ON INCOME Effective July 1, 1993, the Company prospectively adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. This statement requires a change in the method of accounting for income taxes from the deferral method to an asset and liability approach. The effect of the adoption of this standard was not material to the financial statements. The differences between the United States Federal statutory income tax benefit and the consolidated income tax benefit for the years ended June 30, are summarized as follows:
1996 1995 1994 ----------- ----------- ------------- Federal statutory benefit $(8,204,000) $(4,974,000) $(1,991,000) Net increase in valuation reserve due to losses without tax benefit 8,195,000 4,971,000 1,989,000 Other 9,000 3,000 2,000 ----------- ----------- ----------- Actual income tax provision $ -0- $ -0- $ -0- =========== =========== ===========
Exhibit 13 -- Page 16 of 27 17 Deferred income taxes represent temporary differences in the recognition of certain items for income tax and financial reporting purposes. The components of net deferred income taxes are summarized as follows:
June 30, 1996 June 30, 1995 Deferred income tax liability: Depreciation and $ 1,729,000 $ 163,000 amortization ------------ ------------ 1,729,000 163,000 Deferred income tax assets: Net operating loss credits (32,781,000) (22,891,000) Other (1,036,000) (1,165,000) ------------ ------------ (33,817,000) (24,056,000) Valuation allowance 32,088,000 23,893,000 (1,729,000) (163,000) Net deferred income taxes $ -0- $ -0- ============ ============
Tax loss carryforwards and other tax attributes are subject to limitations provided by Internal Revenue Code Sec. 382, which may substantially reduce the amounts available for utilization as a result of changes in control. There was a change of ownership on December 12, 1990 for purposes of Internal Revenue Code Sec. 382. Exhibit 13 -- Page 17 of 27 18 At June 30, 1996, remaining net operating loss and tax credit carryforwards expire as follows:
Net Operating Other Loss Tax Credit Carryforward Carryforwards ------------- ------------- 1999 $ 3,965,000 2000 6,560,000 $351,100 2001 3,255,000 90,450 2002 3,242,000 2003 7,391,000 2004 3,352,000 2005 633,000 2006 6,009,000 1,300 2007 6,476,000 2008 5,213,000 1,000 2009 5,886,000 2,030 2010 15,434,000 2011 28,999,000 ----------- -------- $96,145,000 $445,880 =========== ========
NOTE I - LEASE AGREEMENTS In the year ended June 30, 1995, OIS entered into a three-year non-collateralized lease agreement covering certain machinery and equipment. The lease requires monthly payments of $10,633 through 1997. OIS' Troy facilities are leased under a lease expiring in September 1996 at a monthly rate of $15,460. This lease contains a monthly renewal option. All OIS leases are with unrelated parties. Exhibit 13 -- Page 18 of 27 19 Obligations under capital leases and noncancellable operating leases subsequent to June 30, 1996 are as follows:
Capital Lease Operating Obligations Leases --------------- ----------- 1997 127,577 81,131 1998 10,020 Total $127,577 $91,151 ====== Less interest included above $ 2,123 ------- Present value of minimum payments $125,454 Less current portion 125,454 -------- Long-term portion $-0- ===
Operating lease expense for the fiscal years ended June 30, 1996, 1995 and 1994 was $250,344, 251,632, and $237,483, respectively. NOTE J - FINANCING TRANSACTIONS On November 26, 1991, Guardian paid OIS $10,500,000 for 7,000,000 shares of OIS' Common Stock, which then represented approximately 28 percent of all issued and outstanding shares. OIS also granted and issued to Guardian a three-year option (the "Guardian Option") to purchase additional shares of the Common Stock for a price of $10,500,000. Effective November 26, 1994, Guardian exercised its option to purchase additional shares of OIS Common Stock. In that transaction, OIS issued to Guardian 41,828,768 shares of Common Stock. The option shares issued to Guardian, together with the shares issued to Guardian in November 1991, amounts to approximately 51 percent of the issued and outstanding shares of the Common Stock on a fully diluted basis. (See Note E ) On December 14, 1993 the Company entered into a credit agreement (the "Agreement"), which has been amended, with a consortium of banks. Under the terms of the Agreement, the Company obtained a credit facility that provides $26.25 million in term loans and a $26.25 million revolving credit facility. Under the terms of the Agreement, the term loans and borrowings under the revolving credit facility bear interest, payable quarterly, at LIBOR plus .875%, or at elected fixed rates with interest periods ranging from 30 days to 180 days. The term loans are payable in quarterly principal installments of $3,000,000, on June 30, 1997, $1,250,000 commencing September 30, 1997 through December 31, 1997, $2,500,000 commencing March 31, 1998 through June 30, 1998, $2,750,000 on September 30, 1998 through December 31, 1998, $3,375,000 on March 31, 1999 through June 30, 1999, $3,875,000 on September 30, 1999 and $24,375,000 on December 31, 1999. The Company also pays a commitment fee of .375% of the unused portion of the credit facility. The revolving credit facility matures in December 1999. As of June 30, 1996, $1.5 million of the credit facility remained unused. Under the terms of the Credit Agreement, OIS is restricted from incurring additional debt (as defined) and paying cash dividends (as defined). Furthermore, OIS must maintain a level of minimum tangible capital funds and leverage ratio as defined in the Credit Agreement and have completed Exhibit 13 -- Page 19 of 27 20 construction of the new manufacturing facility by June 30, 1995 (See Note L). On May 14, 1993, the Company, William Davidson and Guardian entered into a transaction to increase the stockholders' equity of the Company. In this transaction, William Davidson converted $5,785,109 of 10% convertible subordinated securities into 2,804,901 shares of common stock and the right to receive additional common stock upon Guardian's exercise of the option described above. Concurrent with the exercise of the Guardian Option, William Davidson received 23,962,502 shares of Common Stock pursuant to this right. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate long-term debt. At June 30, 1996, the Company had an outstanding interest rate swap agreement with a commercial bank, having a total notional principal amount of $15 million. This agreement effectively changes the Company's interest rate exposure on its floating rate notes due in 1999 to a fixed LIBOR rate of 5.933%. The interest rate swap agreement matures at the time the related notes mature. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the counterparties. The fair value of the Company's long-term debt is estimated based on market rates of interest for the same or similar issues and current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company's long term debt approximates its carrying value. During fiscal 1996 the Company signed a $15 million Promissory Note (the "Note") with Guardian Industries Corp. The Note bears interest at a rate of 5.7% per annum. The Note is subordinated to all amounts outstanding under the agreement described above. At June 30, 1996, $2 million is outstanding under the Note. The principal balance of the note and all accrued and unpaid interest is due on November 1, 1996. Management expects additional financing will be needed to support the Company's operations. Guardian has not indicated any intention to discontinue funding the Company. NOTE K - EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan for substantially all employees. Employer contributions are 50% of the employee's contribution, up to a maximum of 5% of the employee's wages. Employer contributions to this plan were approximately $176,000, $135,000 and $91,000 for the years ended June 30, 1996, 1995 and 1994, respectively. NOTE L - NEW MANUFACTURING FACILITY During fiscal 1994 the Company started construction on a new manufacturing facility in Northville, Michigan. In connection with the construction, the Company purchased land valued at approximately $3 million from Wayne County for $10.00. The Company must use the land to construct the above mentioned manufacturing facility and must meet certain employment criteria. If the above criteria are not met, the Company must pay up to approximately $1 million to Wayne County. The facility cost approximately $107 million. Pursuant to this construction, the Company has capitalized approximately $1.10 million, $2.38 million and $325,000 of interest incurred during construction during the years ended June 30, 1996, 1995 and 1994. The capitalized interest is included in Building in the accompanying balance sheets. Exhibit 13 -- Page 20 of 27 21 During fiscal 1994 the Company negotiated an agreement under the ARPA, AMLCD Manufacturing Technology Program. Under the terms of the agreement the Company will receive $48 million (the "Proceeds") over two years. The Company used the proceeds to purchase equipment for installation in the new manufacturing facility. The equipment purchased remains the property of the United States Government and is not reflected in the accompanying balance sheets. The Company is entitled to use this equipment without charge until August 1998. At that time the Company has the option to purchase the Government owned equipment at its then Fair Market Value. Cash received prior to payment for the equipment is reflected in Cash and Cash Equivalents in the accompanying balance sheets. Amounts billed to ARPA, but not received, are reflected as Receivable from the U.S. Government in the accompanying balance sheets. The liability is relieved as equipment is purchased. As of June 30, 1996 approximately $47 million of the $48 million has been billed all of which has been received. As of June 30, 1996, the Company has spent approximately $132,000 for equipment that has not been billed to ARPA and is included in Receivable from U.S. Government in the accompanying balance sheets. Exhibit 13 -- Page 21 of 27 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SUMMARY The operating results for fiscal 1996 continue to reflect substantial operating losses. Although fiscal 1996 revenue was 26% higher than fiscal 1995 revenue, the Company's cost of sales continued to exceed revenue as a result of low production volumes and equipment problems at the aging Troy facility and the costs associated with the start-up of the new Northville facility. During fiscal 1996, the Company achieved its goal of starting-up the Northville facility by establishing a baseline manufacturing process at the Northville facility which is capable of performing each process step necessary to produce saleable products. In conjunction with the start-up of the Northville facility, the Troy facility has been closed, and all production activity has now been transferred from Troy to Northville. The establishment of a baseline manufacturing process at the Northville facility and the shutdown of the Troy facility mark significant milestones in the Company's transition from a research and development operation to a manufacturing operation. However, in order to improve the Company's overall financial performance, the Company must now work to achieve and sustain higher production volumes and better yields. The process of improving manufacturing efficiency and productivity is a process of plant "ramp up" to greater capacity utilization. During fiscal 1997, the Company will work to identify and resolve the remaining process problems that limit production volumes and result in product defects. To the extent that the Company is able to increase production volumes and improve yields, the cost of sales as a percentage of revenue should decrease. While management is optimistic about the Company's ability to efficiently manufacture higher volumes of saleable product at the Northville facility, the manufacturing ramp up is a complex and expensive process which, given the Company's lengthy production cycles, is expected to be ongoing through fiscal 1997. While the Company hopes to achieve gradually higher production volumes and yields during fiscal 1997, management does not anticipate that the Company's operating results for fiscal 1997 will improve compared to fiscal 1996. The Company's degree of success in achieving greater manufacturing efficiency and productivity at the Northville facility will determine whether the Company's financial results can improve in the future. Year Ended June 30, 1996 Compared to Year Ended June 30, 1995 Revenue Total revenue for fiscal year 1996 of $10,595,207 was 26% higher than total revenue for fiscal 1995 of $8,423,041. This increase is attributable to a substantial increase in revenue from the sale of displays which was partly offset by a decrease in revenue from customer- funded engineering. Revenue from the sale of displays for fiscal 1996 of approximately $6,489,000 was 183% higher than revenues from the sale of displays for fiscal 1995 of approximately $2,290,000. This increase is the result of more displays, both standard and contract specific, being manufactured and shipped during fiscal 1996. Deliveries of various size displays, which were developed in prior fiscal years, to Kaiser Electronics under the F-22 and F-18 Exhibit 13 -- Page 22 of 27 23 programs generated approximately $3,000,000 or 46% of the revenue from the sale of displays during fiscal 1996. Revenue from customer-funded engineering for fiscal year 1996 of approximately $4,000,000 was 31% lower than revenue from customer-funded engineering for fiscal 1995 of approximately $5,800,000. This decrease is the result of the Company's strategic decision to reduce customer- funded engineering activity as the Company concentrates on manufacturing operations. Management expects revenue from customer-funded engineering to continue to decline in the future. Although revenue from the sale of displays increased during fiscal 1996, the rate of increase was constrained by manufacturing difficulties at the Troy facility which are discussed below under Cost of Sales. The Company continued operations at the Troy facility longer than expected as a result of the extensive effort to repair and clean-up damage caused by the fire experienced in March 1995 at the Northville facility. Approximately $3,200,000 of displays that had been expected to be delivered in fiscal 1996 were not delivered. The Company has worked closely with its customers, and no orders for the Company's products have yet been canceled as a result of these delays in deliveries. If the ramp-up of the Northville facility proceeds as anticipated, management expects that the delayed shipments will be delivered during fiscal 1997. COST OF SALES Cost of sales for fiscal 1996 of $26,106,953 was 47% higher than cost of sales for fiscal 1995 of $17,810,224. The cost of sales as a percentage of revenue increased to 246% in fiscal 1996 from 211% in fiscal 1995. Cost of sales consists of direct labor, direct material and overhead costs to support the manufacturing process. Overhead costs include, among other things, the costs of utilities, maintenance and repair, insurance, depreciation, engineering, supervisory, quality control personnel and other costs needed to facilitate the manufacturing process. While the Company's direct labor and material costs in fiscal 1996 declined slightly as a percentage of revenue compared to fiscal 1995, the Company's overhead costs for fiscal 1996 increased significantly both in absolute dollars and as a percentage of revenue compared to fiscal 1995. The increase in overhead costs for fiscal 1996 is attributable in large part to the increased costs of wages and benefits for factory support personnel, increased depreciation expense and the expense of maintaining the Troy facility for continuing production operations. In anticipation of increasing production activity in Northville, the Company hired and trained additional production supervisors and quality control personnel during fiscal 1995. Although no significant personnel in these areas were added during fiscal 1996, the costs for these additional personnel were incurred for a full year during fiscal 1996. Depreciation expense for fiscal 1996 increased by approximately $1,900,000 compared to fiscal 1995 due to the Northville facility and process equipment being placed in service during fiscal 1996. The Company spent approximately $500,000 in fiscal 1996 to repair and modify equipment necessary to continue production operations at the Troy facility before it was closed. The Company also recorded a charge of $300,000 as an estimate of cost to restore the Troy facility as required by the terms of the Company's lease. Reducing the Company's cost of sales to an acceptable level depends on improving yields and increasing production volumes. If the Company becomes more efficient in its manufacturing process, direct labor and material costs will decrease on a per unit basis. Because most of the Company's indirect costs are fixed and the Company has already assembled a workforce sufficient to support the anticipated increases in manufacturing activity at Northville, management does not expect a significant increase in indirect costs as production volumes Exhibit 13 -- Page 23 of 27 24 increase. However, until the Company is able to produce and sell more product to absorb its overhead costs, overhead costs will continue to result in high cost of sales on both a per unit and percentage of revenue basis. OTHER COSTS The Company's internal research and development costs of $1,971,513 in fiscal 1996 was 51% higher than the internal research and development costs of $1,306,843 incurred in fiscal 1995. The Company's research and development efforts are focused on improving current products, increasing its standard product line and protecting the Company's technology and intellectual property rights. Management considers it imperative to maintain a strong research and development program and research and development spending for fiscal 1997 is expected to increase slightly from fiscal 1996. The Company's Selling, General and Administrative costs of $5,360,752 in fiscal 1996 were 27% higher than the Selling, General and Administrative costs of $4,237,253 in fiscal 1995. This increase is due to the Company expanding its marketing and administrative organization to manage the current and anticipated increases in marketing and general business activity. Management does not expect its Selling, General and Administrative costs to increase significantly during fiscal 1997. Interest expense during fiscal 1996 increased by approximately $2,200,000 compared to fiscal 1995. During fiscal 1996 most of the Northville facility was placed into service with the consequence that a proportionate amount of interest incurred on the debt to finance construction of the Northville facility is no longer being capitalized as part of the cost of the Northville facility. The Company also incurred additional interest on higher debt levels to finance ongoing operations during fiscal 1996. Interest expense is expected to continue to increase unless operations generate enough profits to begin retiring the outstanding debt. During fiscal 1996 the Company received $803,624 of insurance proceeds resulting from the interruption of business caused by the fire at the Northville facility in March 1995. This amount is separate from the reimbursable expenses incurred by the Company to repair damage from the fire, which is discussed under Liquidity and Capital Resources. Other differences between fiscal 1996 and 1995 are not discussed because they resulted principally from differences in timing of revenue and expenses and not from any known trends. Year Ended June 30, 1995 Compared to Year Ended June 30, 1994 Revenue Total revenue in fiscal 1995 was 28% lower than revenue in fiscal 1994 because of a dramatic reduction of revenue from customer-funded engineering and production delays. While revenue from sale of displays increased, this increase did not offset the larger decrease in revenue from customer-funded engineering. Work on the Company's most significant engineering and development programs for Kaiser Electronics in connection with the Air Force F-22 and F-18 programs wound down in fiscal 1995 as scheduled. The Company has made a strategic decision to reduce customer-funded engineering activity in order to focus on the sale of standard displays and expects revenue from customer-funded engineering to continue to decrease. Capacity limitations of the Troy facility and manufacturing process problems constrained the production and sale of displays by the Company and limited sales revenue for fiscal 1995. Manufacturing problems at the Troy Exhibit 13 -- Page 24 of 27 25 facility caused delays in the production of displays that had been ordered by customers. Approximately $2.4 million of displays that were expected to be delivered in fiscal 1995 were not delivered until fiscal 1996. The Company negotiated revised delivery schedules with a number of customers. Cost of Sales Cost of sales for fiscal 1995 of $17,810,224 were 36% higher than cost of sales for fiscal 1994 of $13,078,919. Cost of sales in fiscal 1995 increased to 211% of revenues from 112% of revenues in fiscal 1994. Much of the increase in the cost of sales resulted from manufacturing problems at the Troy facility. As the Company worked to increase production of displays at the Troy facility to meet increased orders for displays, the Troy facility was pressed to and beyond its manufacturing capacity. The Company identified and solved a number of manufacturing problems at the Troy facility in fiscal 1995. As it did so, limitations of the Company's manufacturing process became evident. The majority of these problems related to the fact that the Company's design and manufacturing tolerances were too narrow for efficient manufacturing as production volumes increased. Additionally, some of the problems related to the final assembly process, among other things. These problems, particularly when combined with the limitations of the aging Troy facility, contributed significantly to increased manufacturing costs in fiscal 1995. In response to these problems, the Company restructured the management of product design and manufacturing and has implemented design rules more suitable to higher volume fabrication. Additionally, where appropriate, the Company renegotiated specifications with customers. The changed specifications do not affect the overall performance of the displays from the point of view of the user, but do allow for a more efficient manufacturing process. A number of other factors also contributed to the increased cost of sales. Cost of sales were adversely affected by increases in production supervisors and quality control personnel who were hired and trained by the Company to operate in the new Northville facility and to accommodate future increases in production activity. Maintenance costs also increased significantly as the Company continued to operate and maintain its aging facilities and equipment at the Troy facility. Other Costs The Company's internal research and development costs of $1,306,843 in fiscal 1995 were 90% higher than the internal research and development costs of $688,094 in fiscal 1994. The Company committed additional resources to increasing its standard product line, improving current products, improving the Company's technological position and protecting the Company's intellectual property rights. The Company's Selling, General and Administrative costs of $4,237,253 in fiscal 1995 were 16% higher than the Selling, General and Administrative costs of $3,660,203 incurred during fiscal 1994. The increase was due to the Company expanding its marketing and administrative organization to manage the current and anticipated increases in marketing and general business activity. Furthermore, legal fees relating to the administration and performance of government contracts increased. Interest expense decreased approximately $357,000 due to significantly lower debt balances during fiscal 1995 compared to fiscal 1994. Debt was used by the Company to finance construction of the Northville facility and was being capitalized as part of the cost of that facility. The Company also earned additional interest income during fiscal 1995 due to higher average cash balances. Exhibit 13 -- Page 25 of 27 26 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company's cash and cash equivalents at June 30, 1996 was $516. The Company is attempting to manage its cash to minimize borrowings under its various debt instruments. Operating Activities During fiscal 1996 the Company incurred a net loss of $24,127,944. Prepaid expenses and other assets increased by approximately $3,900,000 million due to expenses incurred in connection with the March 1995 fire, a substantial portion of which are expected to be reimbursed by insurance proceeds during the first half of fiscal 1997. During fiscal 1996 the Company had received $9,000,000 from the insurance company which represented partial reimbursement of costs incurred in connection with the fire. Accounts payable increased partially due to the accrual of a $1,400,000 invoice for the purchase of additional process equipment. The Company also received $2,400,000, accrued in fiscal 1995, from the Defense Advanced Research Projects Agency ("DARPA") in connection with the purchase of manufacturing equipment for the Northville facility. Inventory increased approximately $2,500,000 as the Company increased levels of raw materials to sustain increased manufacturing activity at the Northville facility. Investing Activities During fiscal 1996 the Company spent $12,400,000 on the Northville facility. Approximately $5,000,000 represented pre-production costs. These costs, which are capitalized as part of the cost of the Northville facility, include wages, material and certain indirect costs incurred in start-up of the Northville facility. The remaining $7,400,000 was spent on completion of the facility and the purchase of certain process equipment not reimbursable by DARPA. The Company has spent approximately $57 million to date for process equipment for the Northville facility of which approximately $47 million is owned by the U.S. government under the OIS-DARPA Agreement. Financing Activities During fiscal 1996 Guardian Industries Corp. ("Guardian") purchased an additional $22,500,000 of Series A Preferred Stock on the same terms as purchases by Guardian in fiscal 1995. During fiscal 1996 Guardian also committed to loan $15,000,000 to the Company to provide the Company with working capital until a more permanent funding source can be obtained (the "Bridge Loan"). The Bridge Loan accrues interest at a rate of 5.7% per annum, and all principal and accrued interest is payable on November 1, 1996. As of June 30 ,1996 the Company had borrowed $2,000,000 under the Bridge Loan and as of September 18, 1996 the Company has borrowed $14,000,000 under the Bridge Loan. During fiscal 1996, the Company borrowed $11,000,000 under its $52,500,000 million commercial credit facility with NBD Bank N.A. and Bank of America NT&SA As of June 30, 1996, the Company's aggregate borrowings under its commercial credit facility were $51,000,000. As of September 4, 1996, the Company's aggregate borrowings under its commercial credit facility were $52,500,000. Repayment of principal commences on June 30, 1997 with a $3,000,000 payment with various quarterly payments due through December 31, 1999. Exhibit 13 -- Page 26 of 27 27 The Company's liquidity is decreasing, and management anticipates a need for additional cash during fiscal 1997. See Capital Resources. Capital Resources The Company has financed the cost of the Northville facility and provided working capital for continuing operations through the current period. The cost of the Northville facility and related start-up is currently anticipated to be $107.4 million. Approximately 95% of these costs have been committed. The Company is in the process of completing the acquisition of an additional 80 acres of land adjacent to the existing property in Northville. The agreement with Wayne County provides a conditional purchase price of $800,000. The price is conditioned on the Company beginning construction on a large scale facility within five years and employing 500 employees within eight years. If the Company does not meet these conditions, it will have the option of either (i) paying approximately $3 million to the county as additional consideration for the land or (ii) conveying the land back to the county and receiving a refund of the original $800,000 purchase price (without interest). Wayne County is currently addressing certain zoning issues which must be resolved before the Company will purchase the additional land. Due to the level of current and anticipated losses, management expects additional capital resources will be needed to support the Company's operations. At this time, Guardian has not indicated any intention to discontinue funding the Company. If Guardian were to discontinue funding the Company, or offer funding to the Company on terms that were not satisfactory to the Company's disinterested directors, then the Company would have to seek alternative sources of funding. There is no assurance that such alternative sources of funding would be available. In such case, the Company would be unable to meet its obligations and would be materially adversely affected. Exhibit 13 -- Page 27 of 27 EX-23 4 EXHIBIT 23 1 EXHIBIT 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports on the June 30, 1996 financial statements and schedules of OIS Optical Imaging Systems, Inc. dated August 23, 1996 included in or incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 registration statements, File Nos. 0-16343 and 33-58562. \s\ Arthur Andersen LLP Detroit, Michigan September 26, 1996 EXHIBIT 23 -- Page 1 of 1 EX-27 5 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations for the year ended June 30, 1996 and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 516 0 3,292,486 60,000 5,847,250 15,782,471 64,032,194 9,300,731 70,513,934 12,350,230 0 0 350 971,038 6,192,316 70,513,934 10,595,207 10,595,207 26,106,953 33,439,218 1,283,983 60,000 2,191,781 (24,127,994) 0 (24,127,994) 0 0 0 (24,127,994) (.27) (.27)
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