-----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, M0gjyw09tKgJferRgHk90jGy/HXD8PqM7+wAZcaAhDyIqR3ikm6UKubrbwEVbyOy S60gXHW3ZvcRy3UGqoKTNw== 0000950124-97-004923.txt : 19970929 0000950124-97-004923.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950124-97-004923 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 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: SEC FILE NUMBER: 000-16343 FILM NUMBER: 97685862 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 FORM 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, 1997 -------------- [ ] 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, 1997 was approximately $36,500,000. The number of shares of Registrant's Common Stock outstanding on September 18, 1997 was 97,468,576. Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1997, are incorporated by reference into Part II of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on November 20, 1997, are incorporated by reference into Part III of this Report. 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 manufactures AMLCDs and sensors at its new mid-volume manufacturing facility in Northville Township, Michigan. GD Investments Corp., a Delaware corporation ("GDIC") owns approximately 80% of the issued and outstanding common stock of OIS as well as all of the issued and outstanding shares of the Company's voting preferred stock. GDIC is an affiliate of Guardian Industries Corp., a privately held Michigan based worldwide flat glass manufacturing company ("Guardian"). William Davidson, the President and Chief Executive Officer of Guardian, owns an additional 1,000,000 shares of the issued and outstanding common stock of OIS. See Certain Relationships and Related Transactions and Security Ownership of Certain Beneficial Owners and Management. DESCRIPTION OF THE BUSINESS Active Matrix Liquid Crystal Displays. OIS manufacture and sells a variety of AMLCDs. AMLCDs are one kind of display or viewing screen capable of displaying images such as text, graphics or video. AMLCDs incorporate the use of microelectronics and amorphous materials technology to construct transparent thin film electronic switching devices, such as diodes or transistors, on a specially prepared plate of glass known as the active plate. The electronic components are made of semiconductor materials and are similar to those that are constructed on silicon wafers in the manufacture of integrated circuits. A second plate of glass, known as the passive plate, has a filter applied to its surface. The filter has a black background with a microscopic translucent opening for each pixel (picture element) in the display. In a color display, the openings must be alternately colored in the primary colors (red, green and blue) to form pixel groups that will allow the formation of the entire spectrum of colors. A transparent electrode is applied below the filter to complete the circuit with the electronics on the active plate. A liquid crystal material is placed between the active and passive plates. Liquid crystal material, simply put, can be induced to block light or let light pass depending on whether a voltage is applied. Each switch on the active plate, together with the liquid crystal material directly above it, forms one pixel in the display. The two plates are then sealed together, and polarizing layers are laminated to the outside surfaces of the glass, creating what is known as a glass cell. To complete the AMLCD, a light source (called a "backlight") is placed behind the glass cell and electronic controllers (called "drivers") are connected to the active plate to control the individual switches and generate images. The primary AMLCD configuration that OIS manufactures, markets and sells is a display cell which consists of a glass cell with drivers attached. The Company currently offers a suite of AMLCD products ranging in size from 1" by 4" to 8" by 8". The Company's displays are generally full color although monochrome displays are available. A number of fields of expertise are necessary for the development and production of AMLCDs. These include liquid crystal technology, microelectronics, optics, filters and manufacturing processes for constructing microelectronics and filters on glass. OIS is one of four manufacturers of AMLCDs in North America. See Competition. The principal current submarket for the Company's displays is the military and commercial avionics market, in which displays are incorporated into instruments used in civilian and military aircraft and other military display applications. In this submarket, the Company's customers are typically avionics integrators who purchase -1- 3 displays to be integrated into a panel of navigation instruments, either for a new aircraft or for retrofitting existing aircraft. These avionics integrators generally then resell the instrument system to a prime contractor or end user. In some cases, the Company sells directly to the prime contractors or end users. In the past, the Company obtained a significant portion of its revenues from engineering development agreements which typically involved adapting the Company's standard AMLCD products to meet certain form, fit and optical requirements for a specific customer applications. However, the Company has made a strategc decision to pursue the sale of standard AMLCD products and minimize engineering work. In fiscal 1997, OIS derived only 15% of its revenue from engineering work compared to 38% of its revenue in fiscal 1996. The Company expects to secure the majority of its business from orders for the sale of products and not from engineering development agreements. In some cases, the Company will make minor modifications to its products at a customer's request and will charge the customer for the engineering work involved. The Company's policy is to develop new technologies of general application using its own funds and to attempt to retain ownership of related intellectual property rights. OIS has expended $1,306,843, $1,971,513 and $2,037,583 in Company sponsored research and development for fiscal years 1995, 1996 and 1997 respectively. Image Sensors. In addition to displays, the Company manufactures image sensors. Image sensors detect an image and convert it into electronic (digital) impulses. Image sensors are used, for example, in fax machines, electronic copyboards and page scanners. In the past, the only customer for the Company's sensors was Quartet Manufacturing Co., which incorporates OIS sensors into electronic copyboards. In fiscal 1997, the Company developed and produced its first flat panel x-ray sensors designed to detect and digitally capture the same images currently captured using x-ray film. The Company believes flat panel x-ray sensors offer many advantages over the use of conventional x-ray film, including digital acquisition, communication and storage of images, fewer repeat exams, faster patient throughput and increased utilization of exam rooms. The Company continues to review other potential commercial applications for its sensor technology, such as industrial non-destructive testing, produce, livestock and poultry inspection and medical diagnosis. Licensing. In addition to the revenue obtained from development agreements and the sale of products, the Company has obtained revenue from licensing its sensor technology to others. The Company will continue to license its technology where it appears appropriate. See Intellectual Property Rights. COMPETITION AMLCDs. OIS views the market for AMLCDs as consisting of at least two distinct submarkets. The first submarket for AMLCDs, and by far the largest, is the market for AMLCDs for use in consumer electronics products, such as laptop computers. This market is highly competitive with at least six competitors worldwide. All of the firms which compete in this submarket have more financial resources than the Company and most are affiliated with major corporations that have extensive experience in the electronics industry. OIS is not active in this submarket at this time, and it will not be possible for the Company to compete successfully in this submarket unless it can significantly reduce its per unit production costs. Management does not anticipate that the Northville facility will enable the Company to successfully enter this submarket because throughput at the Northville facility will be too small to generate the necessary economies of scale. The second submarket for AMLCDs consists of the market for AMLCDs for use in military, commercial avionics, space and other demanding environments. This is the submarket that OIS has identified as the near-term target market for its AMLCDs. OIS AMLCDs are engineered and manufactured to meet the optical and environmental requirements of these demanding applications. Within the submarket in which OIS competes, the most significant source of competition is indirect competition from currently existing, non-AMLCD technologies, such as electromechanical displays and cathode ray tube displays (CRTs). AMLCDs have a number of performance advantages over CRTs and electromechanical displays, including less thickness, lower weight, higher contrast, sunlight readability and -2- 4 longer mean time between failures. OIS management believes that customers recognize that the AMLCD is a superior technology. The Company currently competes with non-AMLCD technologies primarily on the basis of performance. However, the Company's ultimate success in displacing CRTs and electromechanical displays will depend on, among other things, the Company's ability to compete on the basis of price by reducing the per unit cost of its AMLCDs. Within the submarket in which OIS competes, OIS experiences direct competition for sales of AMLCDs primarily from two sources. The first source of competition is from the three other North American companies which manufacture, or intend to manufacture, AMLCDs: Litton Industries of Canada, ImageQuest and dpiX. Litton Industries of Canada supplies AMLCDs to Litton Systems, an affiliated company which is in the business of supplying whole avionic flight information systems. Image Quest is a start-up company backed by Hyundai of South Korea and dpiX is a subsidiary of Xerox. Although the Company is not aware of any significant production of AMLCDs by either ImageQuest or dpiX, each company has announced plans to manufacture AMLCDs which would compete with several of the Company's products. While Hyundai and Xerox each have at their disposal substantial resources that could be devoted to the development and manufacture of AMLCDs, the Company does not know the actual level of financial commitment which Hyundai or Xerox have to these companies. The potential competitive impact of these companies is not yet clear. The second source of direct competition for sales of AMLCDs within the Company's target submarket is from companies which re-manufacture and adapt consumer grade AMLCDs for avionics use. Although OIS management believes that consumer grade AMLCDs generally do not meet current avionics requirements, a number of avionics integrators are purchasing consumer grade AMLCDs and adapting them for avionics use. These adapted products are a growing source of competition for the Company. Although the adapted products are generally lower in price, they also generally have weaker performance in one or more respects than the Company's products. The Company is carefully monitoring developments in adapted products. A number of technologies other than the Company's AMLCD technology can be used to manufacture flat panel displays, and a number of companies around the world are working on such technologies. Examples of technologies that are not currently competing with AMLCDs for avionics applications because they either are not sunlight readable or do not produce color images include electroluminescent, plasma and light emitting diode technologies. Other potentially competing technologies include AMLCD poly-silicon (in contrast to the Company's use of amorphous silicon), ferroelectric and field emission technologies. While future displacement of the Company's AMLCD technology is always a possibility, management believes that none of these potentially competing technologies have reached the current state of development of the Company's AMLCD technology. Management's long term goal for the Company is to develop the ability to adopt new technologies if management determines that such technologies are desirable, but there is no assurance that the Company will achieve that goal. OIS does not expect the current large scale producers of consumer grade AMLCDs to enter the Company's target submarket directly since this submarket is characterized by relatively small production runs that may not be economical for large scale producers. OIS expects to compete on the basis of its ability to meet the performance requirements of its submarket, its identification as a United States manufacturer, and, eventually, price. The Company believes that, over time, it will need to reduce production costs and prices in order to compete effectively. Image Sensors. The Company is seeking to enter into the medical imaging market and has identified the market for digital flat panel x-ray sensors as its near term target submarket. This submarket is at a very early stage of development and is highly dependent on whether or not digital x-ray sensors are accepted as an alternative to traditional x-ray film. OIS is aware of three companies that have announced plans to manufacture digital x-ray sensor products: EG&G Inc., dpiX and Philips Corporation. Recently, EG&G announced that it will be the exclusive supplier of x-ray sensors to GE Medical Systems. The potential competitive impact of these companies is not yet clear. -3- 5 BUSINESS DEVELOPMENTS Northville Facility. Through fiscal 1996, the Company produced displays in its Troy, Michigan, facility which was originally designed primarily for research and development, not production. The Company built a new mid-volume manufacturing facility in Northville Township, Michigan. The Northville facility was designed to produce AMLCDS and sensors for the commercial and military avionics and medical imaging submarkets, not the consumer electronics submarket. See Competition. The Northville facility incorporates flexible manufacturing technology that is intended to facilitate the relatively small production runs that characterize the Company's current submarkets. The Company began lengthy process startup procedures at the Northville facility in June 1995. In August 1996, the Company established a baseline manufacturing process at the Northville facility, transferred all production from the Troy facility to the Northville facility and ceased operations in the Troy facility. Throughout fiscal 1997 the Company concentrated on increasing production volumes and yields at the Northville facility. By the end of fiscal 1997, the Company had achieved regular and continuous manufacturing at the Northville facility sufficient to meet the Company's current demand for its products. The Northville facility was built under an agreement with the Defense Advanced Research Projects Agency of the U.S. Department of Defense ("DARPA"), under which the federal government provided $48 million to OIS upon the attainment of specified planning and construction milestones. OIS used the government funds to purchase process equipment for the Northville facility. The government will own that equipment but OIS will be entitled to use the government-owned equipment through August 1998 without payment. In 1998, OIS will have the option to purchase any or all of the government-owned equipment at its then fair market value. See Management's Discussion and Analysis. Products. During fiscal 1997, the Company has continued its program of building "standard" or "catalog" AMLCDs and making them available to customers on an off-the-shelf basis. During fiscal 1997, the Company also entered into a production agreement with Sterling Diagnostic Imaging Inc. for the delivery of the Company's first commercial flat panel x-ray sensor products. In the fiscal 1997, the Company derived approximately 15% of its operating revenues from development agreements, approximately 78% from sales of AMLCDs (including both production agreements and off-the-shelf sales) and approximately 7% from image sensors. See Management's Discussion & Analysis -- Results of Operations. Customers. In the past, the United States government has been the largest end user of the Company's displays. The U.S. government, principally the Department of Defense, continues to purchase displays from the Company indirectly through a number of prime contractors and avionics integrators. However, as a result of the Company's ongoing policy to sell displays for use by the U.S. government as "catalog" products, the Company is no longer required to satisfy many of the complex requirements associated with traditional government contracts. While OIS is unable to determine the precise mix of U.S. government and non-government sales, management believes that the U.S. government is becoming a less dominate source of the Company's revenue. The Company has three customers that each individually accounted for more than 10% of its total revenues in the fiscal year ended June 30, 1997: Kaiser Electronics, Honeywell and Allied Signal. In aggregate, these three customers accounted for $8.3 million or 61% of the Company's revenue in fiscal 1997. Marketing and Development of the Market. As a result of the ongoing ramp-up at the Northville facility and the availability of additional production capacity, the Company has begun an aggressive campaign to expand sales of both its AMLCDs and sensor products. During fiscal 1997, the Company continued to experience requests for proposals and marketing activity which resulted in additional production orders. Management expects that the Company's targeted submarkets will expand substantially in the next three to five years. Although growth is expected, the amount of growth which will occur in the next one to three years is uncertain as it is not clear how quickly potential customers will adopt the use of AMLCD and sensor technology. -4- 6 Fiscal 1997 Results. During fiscal 1997, revenues from the sale of products increased significantly although decreasing engineering revenue and high costs of sales resulted in continuing losses. See Management's Discussion & Analysis -- Results of Operations -- Costs of Sales. Future Operations. Management believes that the Company's ability to operate profitably will depend on a number of factors, including the following: 1. The rate at which demand for high performance AMLCDs increases. 2. The rate at which digital x-ray sensors are accepted as an alternative to traditional x-ray film. 3. The more efficient operation of the Northville facility. Management believes that the Northville facility reflects the state-of-the-art in AMLCD manufacturing facilities. However, the Company's Northville facility is the first mid-volume AMLCD manufacturing facility ever been built in the United States and there is no assurance that the Company will be able to manufacture its products at competitive cost. FINANCING DEVELOPMENTS On October 29, 1996, the Board of Directors of OIS authorized the issuance of 100,000 shares of a Series B Cumulative Preferred Stock, par value $0.01 (the "Series B Preferred"). The Series B Preferred is not convertible into Common Stock or any other security of OIS. However, each share of Series B Preferred entitles the holder thereof to 350 votes on every matter submitted to a vote of the shareholders of OIS. The Series B Preferred bears a cumulative dividend at a rate of 8% for three years from the date of issuance and at an increasing floating rate thereafter (subject to a cap of 16.5% per year). The purchaser of shares of Series B Preferred cannot cause their redemption, and OIS can redeem shares of Series B Preferred only upon a vote of the directors of OIS that are independent of the owner or owners of the shares of Series B Preferred being redeemed. On October 30, 1996, OIS issued 38,137 shares of Series B Preferred to Guardian in exchange for the 35,000 shares of Series A Preferred Cumulative Preferred Stock previously acquired by Guardian and all dividend in arrears thereon. This exchange was approved by the independent members of OIS's Board of Directors. On October 31, 1996, GDIC purchased 21,000 shares of Series B Preferred from OIS for $1,000 per share. Subsequently during fiscal 1997, GDIC purchased an additional 14,500 shares of Series B Preferred from OIS for $1,000 per share. As of September 18, 1997, GDIC's purchases of Series B Preferred Stock totaled $35,500,000. These investments were approved by the independent members of OIS's Board of Directors and are accounted for as equity by OIS. On October 31, 1996, OIS became eligible, and has elected, to become a member of an affiliated group under Section 1504(a) of the Internal Revenue Code of 1986, as amended, with Guardian, GDIC and Guardian's other qualifying subsidiaries (the "Affiliated Group"). As a member of the Affiliated Group, OIS's tax attributes generated after October 31, 1996 will be included in the single consolidated federal income tax return filed by the Affiliated Group. Net operating losses of OIS generated prior to October 31, 1996 will only be eligible to offset future taxable income of OIS and cannot be used to offset the income of other companies included in the Affiliated Group. In order to provide funding for future operations of OIS, OIS has entered into a Tax Sharing Agreement with Guardian effective November 1, 1996. Under the terms of the Tax Sharing Agreement, Guardian will compensate OIS for the value of OIS's losses and credits which are utilized by the Affiliated Group by making payments to OIS in an amount equal to the difference between (i) the liability reflected on the Affiliated Group's consolidated federal income tax return with the inclusion of OIS and (ii) the liability without the inclusion of OIS. -5- 7 The disinterested members of OIS have authorized OIS to borrow up to $20,000,000 from Guardian at an annual interest rate of up to 7%, with all interest and principal due and payable on demand of GDIC. As of September 18, 1997, OIS had borrowed $9,000,000 from GDIC. The Company continues to utilize commercial financing from Bank of America NTSA and NBD Bank N.A. in the form of a term loan and a credit facility, both maturing in December, 1999. The financing agreements were amended in fiscal 1995 to increase available credit from $40 million to $52.5 million. The financing agreements include a number of covenants, including a prohibition on granting security interests, limitations on capital expenditures and dispositions of assets and financial covenants. Additionally, under the terms of the financing agreements, OIS is restricted from incurring additional debt (as defined) and paying cash dividends. Furthermore, OIS must meet certain financial covenants as defined in the financing agreements. The financing is unsecured and provides for interest rates to be determined at the times of borrowing equal to NBD Bank N.A.'s prime rate or LIBOR plus a margin of .875% or at elected fixed rates with interest periods ranging from 30 days to 180 days. The term loans are payable in quarterly principal installments of $5,500,000 on December 31, 1997, $2,500,000 on each of March 31, 1998 and June 30, 1998, $2,750,000 on each of September 30, 1998 and December 31, 1998, $3,375,000 on each of March 31, 1999 and June 30, 1999, $3,875,000 on September 30, 1999 and $25,875,000 on December 31, 1999. The Company also pays a commitment fee of .375% of the unused portion of the credit facility. The revolving credit facility matures in December 1999. The Company expects to require and to pursue additional equity, and possibly debt, financing in fiscal 1998, but has not determined the amount or nature of the prospective financing. See Management's Discussion & Analysis -- Capital Resources. -6- 8 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Business Data. The following table shows the amount and percentage of the Company's revenues contributed by, the operating profit attributable to, and the assets associated with the development and sales of displays and sales of sensors for each of the three fiscal years ending June 30, 1995, 1996 and 1997:
FY 97 FY 96 FY 95 ------------------- --------------------------- ------------------------- AMOUNT % AMOUNT % AMOUNT % ------------------- --------------------------- ------------------------- REVENUE: SALE OF DISPLAYS $ 10,502,747 78% $ 6,488,975 61% $2,290,242 27% ENGINEERING 2,106,843 15% 4,001,414 38% 5,799,519 69% SALE OF SENSORS $ 990,898 7% $ 104,818 1% $ 333,280 4% ------------ ------------ ----------- TOTAL REVENUES $ 13,600,488 100% $10,595,207 100% $8,423,041 100% OPERATING PROFIT: SALE OF DISPLAYS $(27,176,280) -201% $( 9,166,315) -87% $(7,282,833) -86% ENGINEERING ( 5,359,140) -39% (13,328,809) -126% (6,629,522) -79% SALE OF SENSORS $ (2,504,803) -18% $( 348,887) -3% $(1,018,924) -12% ------------ ------------ ----------- TOTAL OPERATING PROFITS (LOSS) $(35,040,223) -258% $(22,844,011) -216% $(14,931,279) -177% ASSETS:(1) FIXED ASSETS (NBV) $ 56,963,414 419% $ 54,731,463 517% $ 45,734,945 543% INVENTORY $ 9,525,136 70% $ 5,847,250 55% $ 3,360,062 40%
(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. -7- 9 The following table shows the domestic and foreign revenues attributable to the industry segments for each of the three fiscal years ending June 30, 1995, 1996 and 1997:
FY 97 FY 96 FY 95 ------------------- -------------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ------------------- -------------------- ---------------- REVENUE: ENGINEERING & SALE OF DISPLAYS DOMESTIC $11,014,100 81% $ 9,878,531 93% $ 7,830,225 93% FOREIGN 1,595,490 12% 611,858 6% 259,536 3% SALE OF SENSORS DOMESTIC 990,898 7% 104,818 1% 333,280 4% FOREIGN ----------- ----------- ----------- TOTAL REVENUES $13,600,488 100% $10,595,207 100% $ 8,423,041 100% ----------- ----------- ----------- TOTAL: DOMESTIC $12,004,998 88% $ 9,983,349 94% $ 8,163,505 97% FOREIGN 1,595,490 12% 611,858 6% 259,536 3% ----------- ----------- ----------- $13,600,488 100% $10,595,207 100% $ 8,423,041 100%
Backlog at June 30, 1997, was approximately $33.3 million, as compared to $28.5 million at June 30, 1996. It is expected that approximately $20.3 million of the backlog will be filled in fiscal 1998 if there are no cancellations or delays in existing programs. In fiscal 1997, the Company experienced delays that resulted in the amount of backlog that was actually filled in the fiscal year being approximately $7.4 million less than had been anticipated. Raw materials and components necessary for production of displays and sensors are generally available from several sources. The Company does not foresee an unavailability of materials or components that would have a material adverse effect on its overall business, or any of its business segments, in the near term. The Company's business is not seasonal. The Company employed 328 persons at June 30, 1997. -8- 10 INTELLECTUAL PROPERTY RIGHTS The Company is working to improve its current AMLCDs and sensors and to develop enhancements and improvements to the technologies that are involved in producing its products. The basic methodology for the manufacture of AMLCDs using the thin film transistor technology currently employed by the Company is in the public domain. The manufacture of the Company's sensor products, including digital x-ray sensors, is based in large part on OIS patents and trade secrets. Management believes that the proprietary know-how and other trade secrets developed by the Company over the years are a key factor in its ability to produce displays and sensors. The Company has policies and procedures in place to attempt to protect its trade secrets. The Company endeavors to develop new technologies of general application with its own funds and to retain ownership of related intellectual property rights. Where management has considered it appropriate, the Company has sought patent protection for its inventions in the United States and in other countries. The Company owns over 50 patents, most of which were granted less than ten years ago, and has a number of patent applications pending or in preparation. Management believes that a number of these patents represent, or have the potential to represent, significant developments, generally in the form of enhancements or improvements to existing technologies, which may be important for the Company and its competitive position. The level of patent activity (and related expense) has increased in fiscal 1997. Disputes involving intellectual property, particularly patents, can be extremely expensive to litigate and the results are often difficult to predict. Furthermore, the Company's resources are limited relative to many other participants in the display industry. The Company will endeavor to manage the risks and potential benefits related to intellectual property protection to avoid litigation where possible, consistent with the need to preserve the Company's right to conduct its business and to protect the Company's own intellectual property position. Management believes that it is common in the display and semiconductor industries for firms to enter into cross-licensing agreements in order to mitigate the risk of intellectual property litigation. As appropriate, management will consider whether attempting to obtain cross-licensing agreements in certain fields may be advantageous to the Company. There is no assurance that the Company will be able to enter into cross-licensing agreements on favorable terms. In 1984, Energy Conversion Devices, Inc. ("ECD"), which was then the parent corporation of OIS, granted to OIS a worldwide exclusive license (including the right to grant sublicenses) to make, use, and sell products using any or all of ECD's technology (including patent rights), present or future, in displays and sensors. In addition, OIS granted ECD a nonexclusive cross-license to technology developed by OIS, present or future, for applications outside the fields of displays and sensors. In April 1992, ECD assigned a substantial number of the patents covered by this license to OIS outright, and ECD and OIS entered into a new agreement (the "1992 ECD Agreement") under which ECD granted to OIS a worldwide exclusive license to all of its remaining technology that existed on the date of the 1992 ECD Agreement. The license granted by ECD will become royalty bearing at such time as OIS posts a cumulative 20% after-tax annual return on invested capital. The royalty rates are, subject to certain limitations, 0.5% of net sales of OIS and its sublicenses of licensed products and 7.5% of up-front license payments received by OIS from sublicenses. ENVIRONMENTAL ISSUES The Company believes that it is presently in substantial compliance with all existing applicable environmental laws and does not anticipate that such compliance will have a material effect on future capital expenditures, earnings, or competitive position. ITEM 2: PROPERTIES The principal executive offices of the Company are located at the Company's 108,000 square foot pilot demonstration, research, production and office facility in Northville Township, Michigan. -9- 11 ITEM 3: LEGAL PROCEEDINGS The Company is not subject to any material pending legal proceedings. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to stockholders during the fourth quarter of the fiscal year. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "PRICE RANGE OF COMMON STOCK" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 6: SELECTED FINANCIAL DATA The information set forth under the caption "SELECTED FINANCIAL DATA" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information set forth under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION" appearing in the Annual Report to Shareholders for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements of the Company and Report of Independent Public Accountants set forth in the Annual Report to Shareholders for the fiscal year ended June 30, 1997, are incorporated by reference into this Report: Report of Independent Public Accountants Balance Sheets - June 30, 1997 and 1996 Statements of Operations - years ended June 30, 1997, 1996 and 1995 Statements of Stockholders' Equity - years ended June 30, 1997, 1996 and 1995 Statements of Cash Flows - years ended June 30, 1997, 1996 and 1995 Notes to Financial Statements ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -10- 12 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF OIS The information set forth under the caption "ELECTION OF DIRECTORS" appearing in the Proxy Statement for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 11: EXECUTIVE COMPENSATION The information set forth under the caption "EXECUTIVE COMPENSATION" appearing in the Proxy Statement for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" appearing in the Proxy Statement for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" appearing in the Proxy Statement for the fiscal year ended June 30, 1997, is incorporated by reference into this Report. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. List of Financial Statements The following financial statements of the Company are set forth in of the Annual Report to Shareholders for the fiscal year ended June 30, 1997, and are incorporated by reference into this Report by Item 8 hereof: Report of Independent Public Accountants Balance Sheets - June 30, 1997 and 1996 Statements of Operations - years ended June 30, 1997, 1996 and 1995 Statements of Stockholders' Equity - years ended June 30, 1997, 1996 and 1995 Statements of Cash Flows - years ended June 30, 1997, 1996 and 1995 Notes to Financial Statements -11- 13 PAGE ---- 2. List of Financial Statement Schedules PAGE The following financial statement schedules of the Company are included in this Report: Schedule II - Valuation and Qualifying Accounts - June 30, 1997, 1996 and 1995 ................................. 15 Schedules, other than those referred to above, are omitted as not applicable or not required, or the required information is shown in the financial statements or notes thereto. 3. List of Exhibits EXHIBIT NUMBER DESCRIPTION - ------------------------------------------- 3(i) Restated Certificate of Incorporation as currently in effect. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 3(ii) Bylaws as currently in effect. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 4.1 Resolution of the Board of Directors of the company establishing the Series B Cumulative Preferred Stock of the Company. 10.1 Agreement between OIS, ECD and Quartet Manufacturing Company dated December 31, 1988, with attachments. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1989, and incorporated herein by reference.) 10.2 Master Lease Agreement with Appendices between OIS and GE Capital dated August 26, 1991. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1991, and incorporated herein by reference.) 10.3 Sensor License Agreement between ECD and OIS dated April 14, 1992. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.4 OIS 1984 Amended and Restated Stock Option Plan. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.5 OIS 1988 Amended and Restated Stock Option and Incentive Plan. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.6 OIS 1994 Significant Employee Stock Incentive Plan. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.7 Amended and Restated Agreement between ECD and OIS dated April 14, 1992. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.) 10.8 Amended and Restated Services Agreement between OIS and Guardian dated June 30, 1995. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) -12- 14 10.9 Loan Agreement and Master Demand Note between OIS and NBD Bank, N.A., dated March 19, 1993. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference.) 10.10 Credit Agreement between OIS, Bank of America National Trust and Savings Associations and NBD Bank, N.A., as Banks, NBD Bank, N.A., as Administrative Agent, and BA Securities, Inc., as Arranger, dated December 14, 1993. (Filed as Exhibit to OIS's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, and incorporated herein by reference.) 10.11 Amendment No. 2 and Waiver to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD Bank, N.A., as Banks, NBD Bank, N.A., as Administrative Agent, and BA Securities, Inc., as Arranger, dated February 28, 1995. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.12 Amendment No. 3 to Credit Agreement between OIS, Bank of America National Trust and Savings Association and NBD Bank, N.A., as Banks, and NBD Bank, N.A., as Administrative Agent, dated September 19, 1996. (Filed as Exhibit to OIS' Annual Report on Form 10-K for the fiscal year ended June 30, 1996 and incorporated herein by reference.) 10.13 Agreement between OIS and The Advanced Research Projects Agency dated August 26, 1993. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by reference.) 10.14 Consultant Agreement between OIS and Peter Joel C. Young dated as of September 1, 1995. (Filed as Exhibit to OIS's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference.) 10.15 Tax Sharing Agreement dated November 1, 1996 between OIS and Guardian. 10.16 Promissory Note dated June 19, 1997 given by OIS in favor of GDIC. 13 Form of Annual Report to Shareholders of the Company for the fiscal year ended June 30, 1997. Except for those portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 23 Consent of Arthur Andersen LLP dated September 26, 1997. 27 Financial Data Schedule. (EDGAR version only.) (b) Reports on Form 8-K None. -13- 15 Report of Independent Public Accountants To OIS Optical Imaging Systems, Inc. We have audited, in accordance with generally accepted auditing standards, the financial statements included in OIS Optical Imaging Systems, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated August 29, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. \s\ Arthur Andersen LLP Detroit, Michigan August 29, 1997 -14- 16 OIS OPTICAL IMAGING SYSTEMS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS JUNE 30, 1997, 1996 AND 1995
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, 1997: ALLOWANCE FOR DOUBT $60,000 $60,000 ACCOUNTS YEAR ENDED JUNE 30, 1996: ALLOWANCE FOR DOUBT $60,000 $60,000 ACCOUNTS YEAR ENDED JUNE 30, 1995: ALLOWANCE FOR DOUBT $60,000 $60,000 ACCOUNTS
-15- 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OIS OPTICAL IMAGING SYSTEMS, INC. By: \s\ Rex Tapp ----------------------------------------------- Rex Tapp, President and Chief Executive Officer Dated: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: \s\ Charles C. Wilson Executive Vice President, September 9, 1997 - ----------------------- Chief Financial Officer & Charles C. Wilson Director (Principal Financial & Accounting Officer) \s\ Rex Tapp President, Chief Executive September 9, 1997 - ----------------------- Officer & Director Rex Tapp \s\ Ralph J. Gerson Chairman of the Board & Director September 9, 1997 - ----------------------- Ralph J. Gerson \s\ Jeffrey A. Knight Director September 9, 1997 - ----------------------- Jeffrey A. Knight \s\ C. K. Prahalad Director September 9, 1997 - ----------------------- C. K. Prahalad \s\ Robert M. Teeter Director September 9, 1997 - ----------------------- Robert M. Teeter \s\ Mark S. Wrighton Director September 9, 1997 - ----------------------- Mark S. Wrighton \s\ Peter Joel C. Young Director September 9, 1997 - ----------------------- Peter Joel C. Young -16- 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 4.1 Resolution of the Board of Directors establishing the Series B cumulative preferred stock of the Company. 10.15 Tax Sharing Agreement dated November 1, 1996 between OIS and Guardian. 10.16 Promissory Note dated June 19, 1997 given by OIS in favor of GDIC. 13 Form of Annual Report to Shareholders of the Company for the fiscal year ended June 30, 1995. Except for those portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 23 Consent of Arthur Andersen LLP dated September 26, 1997. 27 Financial Data Schedule. (EDGAR version only) -17- EX-4.1 2 EXHIBIT 4.1 1 EXHIBIT 4.1 OIS OPTICAL IMAGING SYSTEMS, INC. RESOLUTION AUTHORIZING THE SERIES B CUMULATIVE PREFERRED STOCK RESOLVED, that in accordance with the provisions of the Company's Restated Certificate of Incorporation, as amended, (the "Certificate of Incorporation") a series of cumulative preferred stock, $0.01 par value ("Series B Preferred"), be and hereby is created and authorized for issuance, and that the designations and amounts thereof and the preferences, qualifications, privileges, limitations, options, and other rights (the "Rights and Preferences") of the Series B Preferred are as set forth in this resolution (this "Designation Resolution"): SECTION 1. Designation and Amount. The Company has authority to issue 100,000 shares of Series B Preferred, which number may be increased or decreased at any time and from time to time by resolution of the Board of Directors (the "Board"), except that no decrease will reduce the number of authorized shares of Series B Preferred to a number less than the number of shares of Series B Preferred then outstanding. SECTION 2. Dividends and Distributions. 2.1 Accrual of Dividends. The holders of shares of Series B Preferred will be entitled to receive, when, as, and if declared by the Board, out of legally available funds, dividends payable in cash as hereinafter provided, which dividends will be paid prior and in preference to any payment of any dividend to the holders of the common stock of the Company and to all other classes or series of capital stock of the Company that are hereafter designated to be subordinated to the Series B Preferred. Dividends on each share of Series B Preferred will begin to accrue from the Original Date Of Issuance (as defined in Section 9.1) of any such share and will accumulate and be payable in cash (and not in kind) on the last day of June and December in each year, computed on the Original Issuance Price (as defined in Section 9.2), at the following rates: (a) during each of the first three (3) years from the Original Date Of Issuance of any such share and through the last day of June or December (as the case may be), at an annual rate of 8%; and (b) thereafter during each of years four (4) through six (6) following the Original Date Of Issuance at one of the following rates, as selected by a majority of the disinterested members of the Company's Board of Directors (the "Independent Directors") (and in the absence of a selection by the Independent Directors, the rate computed as provided in paragraph (i) will Page 1 of Exhibit 4.1 2 apply): (i) a rate per annum equal to the sum of: (A) LIBOR, as quoted on the Reuters Data Service on the first day of January or July, as the case may be; and (B) 125 basis points, which rate will be recalculated as of the first day of each January and July for the following six-month period; or (ii) a rate per annum equal to the sum of (A) the three-year Treasury Bill yield, as quoted on the Reuters Data Service on the first day of the three-year period, and (B) 200 basis points; and (c) thereafter the "Independent Directors" may select one of the following rates (in the absence of a selection by the Independent Directors, the rate computed as provided in paragraph (i) will apply): (i) a rate per annum equal to the sum of: (A) LIBOR, as quoted on the Reuters Data Service on the first day of January or July, as the case may be; and (B) 350 basis points, which rate will be recalculated as of the first day of each January and July for the following six-month period; or (ii) a rate per annum equal to the sum of (A) the three-year Treasury Bill yield, as quoted on the Reuters Data Service on the first day of the applicable three-year period, and (B) 400 basis points, which rate will be recalculated as of the first day of each three-year period; and (d) thereafter beginning with year ten (10) after the Original Date Of Issuance and on each successive three-year anniversary the rate then in effect will increase by an additional 150 basis points. (e) Notwithstanding anything herein to the contrary, the dividend rate shall not at anytime exceed 16.5% per annum. During each of the first three (3) years from the Original Date of Issuance of any share, no interest or sum of money in lieu of interest will be payable in respect of any dividend payment or payments that may be in arrears, and accrued and unpaid dividends will not compound. Thereafter, interest on accrued and unpaid dividends will accrue and will be compounded semi-annually at the annual dividend rate then in effect. 2.2 Payment of Dividends. Dividends on shares of Series B Preferred will be paid on dates established by the Board of Directors (each such date, a "Dividend Payment Date"). Dividends accruing on shares of Series B Preferred for any period of less than a full year will be Page 2 of Exhibit 4.1 3 computed on the basis of a 365 day year. Dividends paid on shares of Series B Preferred in an amount less than the total amount of the dividends accumulated on such shares will be allocated in such manner so that holders of Series B Preferred share ratably in the dividends so paid. 2.3 Record Date. The Board of Directors may fix a record date for the determination of holders of shares of Series B Preferred entitled to receive payment of a dividend or distribution declared thereon, which record date will be no more than 60 days prior to the date fixed for the payment. SECTION 3. No Conversion or Redemption Rights. 3.1 No Conversion Right. The holders of the shares of Series B Preferred will not have any right to convert any such shares into shares of any other class or series of capital stock of the Company, or into rights, options or warrants to subscribe for or purchase shares of any other class or series of capital stock of the Company. 3.2 No Redemption Right. The holders of Series B Preferred will not have any right to require the Company to redeem any or all of their shares. The Company will not redeem any shares of Series B Preferred without the affirmative vote of a majority of the Independent Directors. SECTION 4. Certain Restrictions. 4.1 Dividends and Distributions. At any time while any shares of Series B Preferred are outstanding and any dividends accrued thereon remain unpaid after any Liquidation (as defined in Section 6 below), the Company will not: (a) declare or pay dividends or make any other distributions on any shares of stock ranking junior to the Series B Preferred as to dividends; or (b) declare or pay dividends or make any other distributions on any shares of stock ranking on a parity with the Series B Preferred as to dividends, except dividends or other distributions paid on the Series B Preferred and all such parity stock in such proportions so that the amount of dividends or other distributions declared in respect of each such series or class of stock bear the same ratio to each other as the ratio that the accumulated but unpaid dividends in respect of each such series or class of stock bear to each other. 4.2 Redemption and Purchase. At any time while any shares of Series B Preferred remain outstanding, the Company will not: (a) redeem, purchase or otherwise acquire for consideration (including pursuant to sinking fund requirements) shares of any stock ranking junior to the Series B Preferred as to dividends and as to liquidating distributions, except that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock by the conversion of such shares into, Page 3 of Exhibit 4.1 4 or the exchange of such shares for, shares of any stock of the Company ranking junior to the Series B Preferred as to dividends and as to liquidating distributions; (b) redeem pursuant to a sinking fund or otherwise shares of any stock of the Company ranking on a parity with the Series B Preferred as to dividends and as to liquidating distributions, except (i) by means of a redemption pursuant to which all outstanding shares of Series B Preferred and all stock of the Company ranking on a parity with the Series B Preferred as to dividends and as to liquidating distributions are redeemed or pursuant to which a pro rata redemption is made from all holders of the Series B Preferred and all stock of the Company ranking on a parity with the Series B Preferred as to dividends and as to liquidating distributions, the amount allocable to each class or series of such stock being determined on the basis of the aggregate liquidation preference of the outstanding shares of each such class or series being redeemed, or (ii) by conversion of such parity stock into, or exchange of such parity stock for, stock of the Company ranking junior to the Series B Preferred as to dividends and as to liquidating distributions; or (c) purchase or otherwise acquire for any consideration any stock of the Company ranking on a parity with the Series B Preferred as to dividends and as to liquidating distributions, except (i) pursuant to an acquisition made in accordance with the terms of one or more offers to purchase all of the outstanding shares of Series B Preferred and all stock of the Company ranking on a parity with the Series B Preferred as to dividends and as to liquidating distributions (which offers will describe such proposed acquisition of all such parity stock), each of which offers will have been accepted by the holders of at least 50% of the shares of each series or class of stock receiving such offer outstanding at the commencement of the first of such purchase offers, or (ii) by conversion of such parity stock into, or exchange of such parity stock for, stock of the Company ranking junior to the Series B Preferred as to dividends and as to liquidating distributions. SECTION 5. Reacquired Shares. Any shares of Series B Preferred redeemed, purchased, or otherwise acquired by the Company in any manner whatsoever will have the status of authorized but unissued shares of Series B Preferred. SECTION 6. Liquidation, Dissolution or Winding Up. 6.1 Liquidation Procedure. Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Company (a "Liquidation"), the holders of the Series B Preferred then outstanding will be entitled to be paid out of the assets of the Company available for distribution to its shareholders an amount equal to the Original Issuance Price for each outstanding share of Series B Preferred, plus any accrued but unpaid dividends (the "Redemption Price"). No distribution will be made: (a) to the holders of shares of stock ranking junior to the Series B Preferred upon a Liquidation unless, prior thereto, each holder of shares of Series B Preferred has received a distribution in the amount of the Redemption Price of such holder's shares of Series B Preferred; or Page 4 of Exhibit 4.1 5 (b) to the holders of shares of stock ranking on a parity with the Series B Preferred upon a Liquidation, except distributions made ratably on the Series B Preferred and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon a Liquidation. 6.2 Shortfall in Payment on Liquidation. If the amount available for distribution on Liquidation to holders of shares of Series B Preferred is less than the aggregate Redemption Price of such shares, the amount so available for distribution will be allocated among such holders in such manner so that holders of Series B Preferred share ratably in the distributions upon Liquidation so paid according to the respective aggregate Redemption Price of shares of Series B Preferred held by such holders at the time of such distribution. 6.3 No Other Rights. After payment in full of the Redemption Price of the Series B Preferred, the Series B Preferred will not be entitled to receive any additional cash, property, or other assets of the Company upon the Liquidation of the Company. If the Company pays a liquidation payment amounting in the aggregate to less than the Redemption Price of the Series B Preferred, the Company in its discretion may require the surrender of certificates evidencing the shares of Series B Preferred and issue a replacement certificate or certificates, or it may require the certificates evidencing the shares in respect of which such payments are to be made to be presented to the Company, or its agent, for notation thereon of amounts of the Redemption Price paid for such shares. If a certificate for Series B Preferred on which payment of one or more partial Liquidation payments has been made is presented for exchange or transfer, the certificate issued upon such exchange or transfer will bear an appropriate notation as to the aggregate amount of the Redemption Price that had been paid. SECTION 7. Event of Default. An "Event of Default" will occur if the Company fails to pay (a) the Redemption Price on any shares of the Series B Preferred within thirty (30) days after such Redemption Price will be due or (b) a dividend payment within thirty (30) days after the Dividend Payment Date. SECTION 8. Voting Rights. The holders of shares of Series B Preferred will have only the voting rights expressly provided in this Section 8 and the rights expressly required by applicable law. 8.1 Ordinary Matters. Each share of Series B Preferred will entitle the holder thereof to 350 votes on each and every matter submitted to a vote of the shareholders of the Company. 8.2 Matters Affecting the Rights of Series B Preferred. The affirmative vote of the holders of 75% of the outstanding shares of Series B Preferred will be required for the Company to (a) amend or repeal any provisions of the Certificate of Incorporation or of this Designation Resolution, if the amendment or repeal would materially adversely affect the Rights and Preferences of the Series B Preferred, or (b) amend the Certificate of Incorporation or adopt a designation resolution to create or increase the amount of any class or series of capital stock that would rank Page 5 of Exhibit 4.1 6 senior to or on parity with the Series B Preferred as to dividend and/or liquidation rights. 8.3 Voting Rights Upon Default in Payment of Dividends. Without in any way limiting the rights and remedies of holders of shares of Series B Preferred at law, in equity, or pursuant to contractual arrangement with the Company, upon an Event of Default the affirmative vote of the holders of a majority of outstanding shares of Series B Preferred will be required for the Company to sell or lease all or substantially all of the Company's properties or assets. SECTION 9. Definitions. 9.1 "Original Date Of Issuance" of any share of Series B Preferred means the date on which: (a) a subscription agreement for that share has been received by the Company and (b) the consideration for that share has been fully paid by the initial purchaser. 9.2 "Original Issuance Price" means, with respect to Series B Preferred, One Thousand Dollars ($1,000.00) per share. Page 6 of Exhibit 4.1 EX-10.15 3 EXHIBIT 10.15 1 EXHIBIT 10.15 TAX SHARING AGREEMENT This Tax Sharing Agreement ("Agreement") is effective as of the 1st day of November 1996, by and among GUARDIAN INDUSTRIES CORP., a Delaware corporation (hereinafter referred to as the "Parent Company"), and OIS OPTICAL IMAGING SYSTEMS, INC. a Delaware corporation (hereinafter referred to as the "Subsidiary" or "OIS"). The term "Parent Company" shall include Guardian Industries Corp. and any subsidiary thereof whose stock is owned directly or indirectly by Guardian Industries Corp. and which qualifies as a member of the Parent Company's affiliated group as defined in Section 1504(a) of the Internal Revenue Code of 1986, as amended ("Internal Revenue Code") and such term shall exclude OIS (and its subsidiaries). The terms "Subsidiary" and "OIS" shall include OIS Optical Imaging Systems, Inc. and any of its subsidiaries acquired or formed after the effective date of this Agreement, and which later qualify as members of the Parent Company's affiliated group as defined in Section 1504(a) of the Internal Revenue Code. WITNESSETH WHEREAS, the Parent Company and Subsidiary are expected to qualify as members of an affiliated group as defined in Section 1504 (a) of the Internal Revenue Code ("Affiliated Group"), commencing on November 1, 1996. WHEREAS, the Parent Company and Subsidiary desire to file a United States consolidated income tax return as an Affiliated Group for the taxable period which includes November 1, 1996 through December 31, 1996 and to file, if qualified to do so as an Affiliated Group, United States consolidated income tax returns for subsequent tax years (or other taxable periods). WHEREAS, it is the intent and desire of the Parent Company and Subsidiary that a method be established for each tax year (or other taxable period) that a United States consolidated income tax return is filed by the Affiliated Group for sharing and allocating the United States consolidated income tax liability of the Affiliated Group among its members, for reimbursing the Parent Company for payment of such tax liability, if any, and for providing for the allocation of any United States income tax refund arising from a carryback of losses or tax credits from subsequent tax years (or other taxable periods). WHEREAS, the Parent Company and Subsidiary will make available any current and net operating losses and tax credits as they may have available to reduce the United States consolidated income tax liability of the Affiliated Group. WHEREAS, The Parent Company and Subsidiary desire to provide for the reimbursement to the Parent Company and/or Subsidiary whose current and net operating losses and tax credits have been used to reduce the United States consolidated income tax liability of the Affiliated Group. Page 1 of Exhibit 10.15 2 NOW THEREFORE, In consideration of the mutual covenants and promises contained in this Agreement, the parties hereto do hereby agree as follows: A. CONSOLIDATED FEDERAL INCOME TAX RETURNS (l) A United States consolidated income tax return shall be filed by the Parent Company for the taxable year ending December 31, 1996 and for each subsequent taxable period during which this Agreement is in effect and for which the Affiliated Group is required or permitted to file a United States consolidated income tax return. (2) For each tax year (or other taxable period) the aggregate United States consolidated income tax liability for members of the Affiliated Group shall be computed twice, once with the inclusion of the Subsidiary in such computation and secondly with the exclusion of the Subsidiary from such computation. (3) To the extent that members (including the Parent Company and Subsidiary) of the Affiliated Group have had their United States income tax liabilities, as computed on an aggregate basis, increased by inclusion of Subsidiary, an account payable (liability) of the Subsidiary ("Tax Liability to Parent") to the Parent Company shall be established on the books of the Parent Company and of the Subsidiary. To the extent that members (including the Parent Company and Subsidiary) of the Affiliated Group have had their United States income tax liabilities, as computed on an aggregate basis, decreased by inclusion of Subsidiary, an account payable (liability) of the Parent Company ("Tax Liability to Subsidiary") to the Subsidiary shall be established on the books of the Parent Company and of the Subsidiary. In determining whether the tax liability of the Affiliated Group has been reduced by the Subsidiary's deductions or credits it will be assumed that the Affiliated Group first utilizes comparable credits and net operating loss carryovers from prior years generated by other members of the Affiliated Group. (4) An estimate of the Tax Liability to Parent or Tax Liability to Subsidiary shall be made by the Parent Company not later than March 15th for the preceding calendar year (or taxable period ending on December 31st). The resulting estimated account payable shall be collected within thirty (30) days of the date that such estimate is made. A final calculation of the Tax Liability to Parent or Tax Liability to Subsidiary shall be made within 30 days of the date that the Parent Company files the consolidated return for any calendar year (or taxable period ending on December 31st). The resulting final account payable shall be collected within 30 days of the date that such final calculation of the Tax Liability to Parent or Tax Liability to Subsidiary is provided by the Parent Company to Subsidiary. (5) The Parent Company will determine the allocation of the United States consolidated income tax liability, and the account payables and receivables to be reflected on the books of the Parent Company and Subsidiary in accordance with this Agreement. To the extent that the Subsidiary disagrees with such determination, the matter shall be referred to the independent certified public accountants then auditing the books of the Parent Company, whose determination Page 2 of Exhibit 10.15 3 shall be final. (6) Payment of the actual United States consolidated income tax liability for a taxable year (or other taxable period) shall include the payment of estimated income tax installments due for such tax year (or other taxable period), which payments, if any, will be determined by the Parent Company based on an estimate of income tax liability for the tax year (or other taxable period). The Subsidiary shall pay to the Parent Company, the Subsidiary's share of each payment of the actual estimated consolidated income tax liability, within thirty (30) days of receiving notice of such payment from the Parent Company. The Subsidiary's share of any overpayment of estimated income tax will be refunded to the Subsidiary by the Parent Company within thirty (30) days after it is determined that the Subsidiary has overpaid the estimated income tax. (7) If the United States consolidated income tax liability is adjusted for any tax year (or other taxable period), whether by means of an amended tax return, claim for refund or after a tax audit by the United States Internal Revenue Service, the Tax Liability to Parent or Tax Liability to Subsidiary for that year (or other taxable period) shall be recomputed to give effect to such adjustments. The resulting change in the Tax Liability to Parent or Tax Liability to Subsidiary, shall be determined in the same manner as in Paragraph A (2) of this Agreement. In the case of an increase in Tax Liability to Parent (or decrease in Tax Liability to Subsidiary), the Subsidiary shall pay the resultant difference to the Parent Company within thirty (30) days after receiving notice of such liability from the Parent Company. In the case of a decrease in Tax Liability to Parent (or increase in Tax Liability to Subsidiary), the Parent Company shall pay the resultant difference to Subsidiary within thirty (30) days after the adjustment has been finally determined. Any interest (income or expense) and penalties arising from adjustments to the United States consolidated income tax liability shall be equitably apportioned between the Parent Company and Subsidiary. B. PARENT AS AGENT AND CONSENTS (1) The Subsidiary irrevocably designates the Parent Company as its agent for the purpose of taking any and all action necessary or incidental to the filing of United States consolidated income tax returns and state combined or consolidated returns (including, but not limited to, the conduct of any audit by any taxing authority). (2) The Subsidiary agrees to furnish the Parent Company with any and all information requested by the Parent Company to carry out the provisions of this Agreement, to cooperate with Parent Company in filing any return or consent contemplated by this Agreement and to cooperate in connection with any refund claim, audit, judicial or other like or similar proceeding. (3) At the direction of the Parent Company, the Subsidiary shall execute and file such consents, elections, and other documents that may be required or appropriate for the proper filing of each United States consolidated income tax return and state combined or consolidated returns. (4) Subsidiary hereby consents to all elections made by the Parent Company on behalf Page 3 of Exhibit 10.15 4 of the Affiliated Group. C. CONSOLIDATED AND COMBINED STATE INCOME TAX RETURNS If the Affiliated Group or any members thereof is required or elects to file combined or consolidated state or local tax returns including the Subsidiary, the Parent Company shall not be required to reimburse the Subsidiary for any of the Subsidiary's tax losses or attributes which are utilized by the Affiliated Group or any members thereof. In the event that the Subsidiary would have a stand alone income, franchise or similar tax liability for state and local taxes, then Parent Company shall make an allocation of such state or local tax liability to Subsidiary consistent with the principles set forth in Paragraph A (2) of this Agreement. D. SUBSIDIARY LEAVING THE AFFILIATED GROUP (1) If the Subsidiary (or a subsidiary of the Subsidiary) is no longer a member of the Affiliated Group (a "Former Member"), the Parent Company shall, upon the request of a Former Member, provide any assistance that shall be reasonably required to enable the Former Member to pursue any tax refund, including but not limited to the filing of tax refund claims on behalf of the Former Member. (2) The Former Member shall be able to participate, in good faith and at its own expense, in the audit of the portion of the United States consolidated income tax return of the Affiliated Group which relates to its separate taxable income or loss and shall be able to participate, in good faith and at its own expense, in any contest, litigation, or settlement of any issue relating to such separate taxable income or loss. (3) The Former Member and the remaining members of the Affiliated Group will fully cooperate with each other in connection with the allocation of income and expense for the taxable year in which the Former Member leaves the Affiliated Group. (4) The Former Member (and, in the event the Affiliated Group ceases to file a United States consolidated return, the Parent Company) shall be bound by the terms of this Agreement with respect to all tax years during which such Former Member joined in the filing of United States consolidated income tax returns and state combined or consolidated returns. (5) The Former Member and the remaining members of the Affiliated Group will cooperate and provide such information as will be necessary to enable each of them to file whatever returns are required for United States income tax purposes and state combined or consolidated returns, or in connection with any audit or litigation with respect to such returns. E. MISCELLANEOUS PROVISIONS (1) This Agreement shall apply to the taxable year ending December 31, 1996 and all Page 4 of Exhibit 10.15 5 subsequent taxable periods unless the Parent Company and Subsidiary agree to terminate or modify this Agreement. Any termination or modification, no matter when agreed to, shall be deemed effective as of the end of the then current taxable period. Notwithstanding termination, this Agreement shall continue in effect with respect to any payment or refund (Tax Liability to Parent or Tax Liability to Subsidiary) due for all taxable periods prior to termination. (2) All notices under this Agreement shall be in writing and shall be deemed to have been sufficiently given or served and effective for all purposes when presented personally, or sent by facsimile transmission (if receipt of the transmission is confirmed in writing by the addressee) or three days after being deposited in a United States postal receptacle for registered or certified mail addressed, return receipt requested, postage prepaid, to any person at the address set forth below, or at such other address as such party shall subsequently designate in writing delivered in the form of a notice to: If to Parent Company: Guardian Industries Corp. Vice President and Tax Counsel 2300 Harmon Road Auburn Hills, Michigan 48326 If to Subsidiary: OIS Optical Imaging Systems, Inc. Chief Financial Officer 47050 Five Mile Road Northville, Michigan 48167 (3) Neither this Agreement nor any provision hereof may be changed, waived, discharged, or terminated orally but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. (4) This Agreement shall constitute the entire agreement between the parties concerning the subject matter hereof and shall supersede any prior agreements and understandings between or among the parties with respect to the subject matter hereof. (5) The validity, interpretation, and enforceability of this Agreement shall be governed in all respects by the laws of the State of Michigan. (6) Failure of any party at any time to require the other party's performance of any obligation under this Agreement shall not affect the right to require performance of that obligation. Any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver or modification of the provision itself, or a waiver of any rights under this Agreement. (7) Every provision of this Agreement is intended to be severable. If any term or provision is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. Page 5 of Exhibit 10.15 6 (8) This Agreement may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. (9) This Agreement shall be binding upon and inure to the benefit of any successor, whether by statutory merger, acquisition of assets or otherwise, to any of the parties hereto, to the same extent as if the successor had been an original party to this Agreement. (10) If during a United States consolidated income tax return period Subsidiary acquires or organizes another corporation or company that is allowed to be included in the consolidated return of the Affiliated Group, then such corporation or company shall join in and be bound by this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. GUARDIAN INDUSTRIES CORP. By / Jeffrey A. Knight / ------------------------------------ Jeffrey A. Knight Group Vice President/Finance OIS OPTICAL IMAGING SYSTEMS, INC. By / Charles C. Wilson / ------------------------------------ Charles C. Wilson Executive Vice-President and Chief Financial Officer Page 6 of Exhibit 10.15 EX-10.16 4 EXHIBIT 10.16 1 EXHIBIT 10.16 PROMISSORY NOTE Northville, Michigan June 19, 1997 FOR VALUE RECEIVED, receipt of which is hereby acknowledged, the undersigned, OIS OPTICAL IMAGING SYSTEMS, INC., a Delaware corporation ("Maker"), does hereby promise to pay to the order of GD INVESTMENTS CORP., a Delaware corporation ("Holder"), at 2300 Harmon Road, Auburn Hills, Michigan 48326, or at such other place or to such other party as Holder may from time to time designate, in lawful currency of the United States of America, the principal amount of all advances of funds (the "Advances") made pursuant to this Promissory Note plus interest thereon from the date of each such Advance at a rate of 6% per annum. The outstanding principal amount of all Advances shall not exceed $20,000,000 in the aggregate at any one time. All Advances (together with accrued and unpaid interest thereon) and all repayments and prepayments of such Advances (and of accrued and unpaid interest thereon) shall be marked by the Holder on the last page of this Promissory Note, and the amount of all Advances (together with accrued and unpaid interest thereon) shall be deemed to be the amounts so marked. On written demand of Holder, the entire outstanding principal balance of this Promissory Note, together with all accrued and unpaid interest, shall be immediately due and payable in full. Maker may at any time pay the full amount or any part of the indebtedness evidenced by this Promissory Note without the payment of any premium or fee. All prepayments hereon shall be applied first to accrued and unpaid interest due under this Promissory Note, and then to the outstanding principal balance of this Promissory Note. Maker hereby waives presentment, demand, protest, notice of nonpayment or dishonor of this Promissory Note, and diligence in the collection thereof. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Michigan. To the extent provided herein, the indebtedness evidenced by this Promissory Note (the "Subordinated Debt") is subordinate and junior in right of payment to all principal of, and interest on, loans made to the Maker pursuant to the Credit Agreement dated December 14, 1993, as amended (the "Credit Agreement"), among Maker, Bank of America NT& SA and NBD Bank, N.A. (the "Senior Debt"). Except as otherwise provided herein, Maker may pay principal of, and interest on, the Subordinated Debt. The Senior Debt shall continue to be Senior Debt and entitled to the benefits of the subordination provisions of this Promissory Note irrespective of any amendment, modification or waiver of any term of or extension or renewal of the Senior Debt. Upon the happening of a Default or an Event of Default (as defined in the Credit Agreement) (a "Senior Debt Default"), then, unless and until such Senior Debt Default shall have been remedied or waived or shall have ceased to exist, no direct or indirect payment (in cash, property or securities Page 1 of Exhibit 10.16 2 or by set-off or otherwise) shall be made on account of the principal of, or interest on, any Subordinated Debt, or as a sinking fund for the Subordinated Debt, or in respect of any redemption, retirement, purchase or other acquisition of any of the Subordinated Debt. In the event of (i) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment or other similar proceeding relating to Maker or its property, (ii) any proceeding for the liquidation, dissolution or other winding-up of Maker, voluntary or involuntary, whether or not involving insolvency or bankruptcy proceedings, (iii) any assignment by Maker for the benefit of creditors or (iv) any other marshalling of the assets of Maker, all Senior Debt (including any interest thereon accruing at the legal rate after the commencement of any such proceedings) shall first be paid in full before any payment or distribution, whether in cash, securities or other property of Maker, shall be made to any holder of any Subordinated Debt on account of any Subordinated Debt. Any payment or distribution, whether in cash, securities or other property of Maker or any other entity, provided for by a plan of reorganization or readjustment which would otherwise (but for these subordination provisions) be payable or deliverable in respect of the Subordinated Debt shall be paid or delivered directly to the holders of Senior Debt until all Senior Debt (including any interest thereon accruing at the legal rate after the commencement of any such proceedings) shall have been paid in full. If any payment or distribution of any character or any security, whether in cash, securities or other property, shall be received by a holder of Subordinated Debt in contravention of any of the terms hereof, such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Debt at the time outstanding to the extent necessary to pay all such Senior Debt in full. In the event of the failure of any holder of any Subordinated Debt to endorse or assign any such payment, distribution or security, each holder of Senior Debt is hereby irrevocably authorized to endorse or assign the same. No present or future holder of any Senior Debt shall be prejudiced in the right to enforce subordination of Subordinated Debt by any act or failure to act on the part of Maker. Nothing contained herein shall impair, as between Maker and the holder of the Subordinated Debt, the obligation of Maker to pay the Subordinated Debt as and when the same shall become due and payable in accordance with the terms if this Promissory Note, or prevent the holder of any Subordinated Debt from exercising all rights, powers and remedies otherwise permitted by applicable law or hereunder upon a default or event of default hereunder, all subject to the rights of the holders of the Senior Debt to receive cash, securities or other property otherwise payable or deliverable to the holders of the Subordinated Debt as provided herein. Page 2 of Exhibit 10.16 3 Upon the payment in full of all Senior Debt, the holders of Subordinated Debt shall be subrogated to all rights of any holders of the Senior Debt to receive any further payments or distributions applicable to the Senior Debt until the Subordinated Debt shall have been paid in full. MAKER: OIS OPTICAL IMAGING SYSTEMS, INC. By: / Charles C. Wilson / ------------------------------------- Charles C. Wilson Executive Vice President and Chief Financial Officer The subordination provisions of this Promissory Note are hereby acknowledged and accepted. GD INVESTMENTS CORP. By: / David A. Clark / ----------------------------------- David A. Clark Vice President and Treasurer Page 3 of Exhibit 10.16 EX-13 5 EXHIBIT 13 1 EXHIBIT 13 PRICE RANGE OF COMMON STOCK Shares of OIS Common Stock are traded in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") over-the-counter market under the symbol OVON. The following table sets forth the reported high and low bid quotations of OIS Common Stock for the fiscal periods indicated:
Prices ------------------ Period Low High ------ --- ---- Year ended June 30, 1996 First Quarter . . . . . . . . . . . . . . . . . . . $4.1250 $5.6250 Second Quarter. . . . . . . . . . . . . . . . . . . 3.0000 5.2500 Third Quarter . . . . . . . . . . . . . . . . . . . 3.7500 5.6250 Fourth Quarter. . . . . . . . . . . . . . . . . . . 3.0625 3.7500 Year ended June 30, 1997 First Quarter . . . . . . . . . . . . . . . . . . . $2.6250 $3.6250 Second Quarter. . . . . . . . . . . . . . . . . . . 1.5625 3.1875 Third Quarter . . . . . . . . . . . . . . . . . . . 2.1250 3.1250 Fourth Quarter. . . . . . . . . . . . . . . . . . . 2.1875 3.1250 Year ended June 30, 1998 First Quarter . . . . . . . . . . . . . . . . . . . through September 18 $1.8125 $2.46875
- ------------------------ The quotations listed may include inter-dealer prices that may not necessarily represent actual transactions. No dividend or distribution on OIS Common Stock has been paid and none is presently being considered. The approximate number of stockholders of record on September 18, 1997, was 1,628. Page 1 of Exhibit 13 2 SELECTED FINANCIAL DATA Set forth below is certain financial information taken from OIS' audited financial statements.
Year ended June 30, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Total Revenues $ 13,600,488 $ 10,595,207 $ 8,423,041 $11,700,389 $ 7,162,035 Cost of Sales 41,093,260 26,106,953 17,810,224 13,078,919 9,262,815 Internal Research and Development 2,037,583 1,971,513 1,306,843 688,094 372,242 Selling, General, Administrative and other 8,735,028 6,644,735 3,935,699 3,789,061 2,834,330 Income Tax Benefit 9,755,490 ---- ---- ---- ---- Net Loss $(28,509,893) $(24,127,994) $(14,629,725) $(5,855,685) $ (5,307,352) Net Loss Available to Common Shareholders $(33,020,009) $(26,097,584) $(14,840,683) $(5,855,685) $ (5,307,352) Net Loss per Common Share $(.34) $(.27) $(.21) $(.19) $(.20) At year end: Total Assets $ 77,172,789 $ 70,513,934 $ 57,263,779 $38,146,868 $ 7,088,883 Long-Term Debt, Net $ 42,000,000 $ 48,000,000 $ 40,125,454 $12,000,000 $ 77,355 Convertible Notes -- ---- ---- ---- $ 7,221,412 Working Capital (Deficit) $ 2,904,085 $ 3,432,241 $ 5,211,233 $ 2,616,215 $ (1,173,195) Stockholders' Equity $ 14,967,499 $ 7,163,704 $ 7,820,724 $ 9,633,880 $ 3,501,018
Page 2 of Exhibit 13 3 Report of Independent Public Accountants To OIS Optical Imaging Systems, Inc.: We have audited the accompanying Balance Sheets of OIS Optical Imaging Systems, Inc. (a Delaware corporation) as of June 30, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OIS Optical Imaging Systems, Inc. as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years ended June 30, 1997, in conformity with generally accepted accounting principles. \s\ Arthur Anderson LLP Detroit, Michigan, August 29, 1997. Page 3 of Exhibit 13 4 OIS OPTICAL IMAGING SYSTEMS, INC. BALANCE SHEETS ASSETS
June 30, -------------------------- 1997 1996 ------------ ----------- CURRENT ASSETS Cash and cash equivalents $ 960,042 $ 516 Accounts receivable (net of reserve for doubtful accounts of $60,000) 4,222,508 3,232,486 Inventories 9,525,136 5,847,250 Income tax receivable from affiliate 4,755,490 -- Prepaid expenses and other current assets 746,199 485,251 Insurance receivable -- 6,085,263 Receivable from U.S. Government -- 131,705 TOTAL CURRENT ASSETS 20,209,375 15,782,471 ------------ ------------ PROPERTY AND EQUIPMENT Land 3,000,000 3,000,000 Building 32,891,009 32,232,265 Machinery and other equipment 31,371,764 28,670,855 Construction in process 60,192 129,074 ------------ ------------ TOTAL PROPERTY AND EQUIPMENT 67,322,965 64,032,194 Less accumulated depreciation (10,359,551) (9,300,731) ------------ ------------ NET TOTAL PROPERTY AND EQUIPMENT 56,963,414 54,731,463 TOTAL ASSETS $ 77,172,789 $ 70,513,934 ============ ============
See notes to financial statements. Page 4 of Exhibit 13 5 OIS OPTICAL IMAGING SYSTEMS, INC. BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, --------------------------------- 1997 1996 ---------------- -------------- CURRENT LIABILITIES Current installments on capital lease obligation $ -- $ 125,454 Subordinated note payable to affiliate 3,000,000 2,000,000 Current installment on long-term debt 10,500,000 3,000,000 Accounts payable 2,817,068 5,599,266 Accrued interest 578,166 951,103 Deferred revenue 112,204 236,845 Other accrued liabilities 297,852 437,562 --------------- ------------ TOTAL CURRENT LIABILITIES 17,305,290 12,350,230 LONG TERM DEBT 42,000,000 48,000,000 LOCAL GOVERNMENT SUBSIDY 2,900,000 3,000,000 TOTAL LIABILITIES 62,205,290 63,350,230 STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 per share: Series A, 8% cumulative, non-convertible and non-voting Authorized - 50,000 shares Issued and outstanding - -0- shares at June 30, 1997 and 35,000 shares at June 30, 1996 350 Series B, 8% cumulative, non-convertible and voting Authorized - 100,000 shares Issued and outstanding - 73,637 shares at June 30, 1997 and -0- shares at June 30, 1996 736 Common stock, par value $0.01 per share: Authorized - 125,000,000 shares Issued and outstanding - 97,467,920 shares at June 30, 1997 and 97,103,790 shares at June 30, 1996 974,679 971,038 Additional paid-in capital 141,375,527 105,457,517 Accumulated deficit (126,565,319) (98,055,426) Deferred compensation (818,124) (1,209,775) --------------- ------------ TOTAL STOCKHOLDERS' EQUITY 14,967,499 7,163,704 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,172,789 $ 70,513,934 =============== ============
See notes to financial statements. Page 5 of Exhibit 13 6 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, ------------------------------------------------- 1997 1996 1995 ---- ---- ---- REVENUES Display revenue $ 10,502,747 $ 6,488,975 $ 2,290,242 Engineering revenue 2,106,843 4,001,414 5,799,519 Sensor revenue 990,898 104,818 333,280 ------------ ------------ ------------ TOTAL REVENUES 13,600,488 10,595,207 8,423,041 COST OF SALES Display 31,818,764 12,658,272 6,257,458 Engineering 6,315,576 13,102,241 9,680,064 Sensors 2,958,920 346,440 1,872,702 ------------ ------------ ------------ TOTAL COST OF SALES 41,093,260 26,106,953 17,810,224 ------------ ------------ ------------ GROSS LOSS (27,492,772) (15,511,746) (9,387,183) OPERATING EXPENSES Internal research and development 2,037,583 1,971,513 1,306,843 Selling, general and administrative 5,509,868 5,360,752 4,237,253 ------------ ------------ ------------ TOTAL OPERATING EXPENSES 7,547,451 7,332,265 5,544,096 ------------ ------------ ------------ OPERATING LOSS (35,040,223) (22,844,011) (14,931,279) OTHER INCOME (EXPENSE) Interest expense (4,112,596) (2,233,735) (10,808) Other income 406,898 41,954 200,236 Licensing and royalties 480,538 104,174 112,126 Insurance proceeds -- 803,624 -- ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (3,225,160) (1,283,983) 301,554 LOSS BEFORE INCOME TAX BENEFIT (38,265,383) (24,127,994) (14,629,725) Income tax benefit 9,755,490 -- -- NET LOSS $(28,509,893) $(24,127,994) $(14,629,725) ------------ ------------ ------------ Preferred stock dividends 4,510,116 1,969,590 210,958 ------------ ------------ ------------ NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(33,020,009) $(26,097,584) $(14,840,683) ------------ ------------ ------------ NET LOSS PER COMMON SHARE $(.34) $(.27) $(.21) ===== ===== =====
See notes to financial statements. Page 6 of Exhibit 13 7 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, ----------------------------------------------- 1997 1996 1995 ----------- ------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(28,509,893) $(24,127,994) $(14,629,725) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,168,473 3,396,279 1,356,533 Deferred compensation expense 498,834 492,886 233,982 Impact on cash flows from changes in assets and liabilities: Receivables 471,456 (2,490,928) 1,042,155 Inventories (3,677,886) (2,487,188) (1,276,461) Prepaid expenses and other assets (260,948) (105,086) (2,248,196) Accounts payable and accrued liabilities (3,294,845) 1,329,875 (3,613,687) Deferred revenue (124,641) (90,109) (407,824) ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (28,729,450) (24,082,265) (19,543,223) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,500,423) (12,392,797) (24,708,813) ------------ ------------ ------------ NET CASH USED IN INVESTING (8,500,423) ACTIVITIES (12,392,797) (24,708,813) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligation (125,454) (121,633) (158,497) Proceeds from issuance of debt and notes 2,500,000 13,000,000 28,000,000 Net proceeds from issuance of common stock 298,853 267,130 293,545 Net proceeds from issuance of preferred stock 35,516,000 22,500,000 12,500,000 ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 38,189,399 35,645,497 40,635,048 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 959,526 (829,565) (3,616,988) CASH, CASH EQUIVALENTS AT BEGINNING OF PERIOD 516 830,081 4,447,069 ------------ ------------ ------------ CASH, CASH EQUIVALENTS AT END OF PERIOD $ 960,042 $ 516 $ 830,081 ============ ============ ============
See notes to financial statements. Page 7 of Exhibit 13 8 OIS OPTICAL IMAGING SYSTEMS, INC. STATEMENTS OF CASH FLOWS (continued) SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS FOR THE YEARS ENDED JUNE 30,
1997 1996 1995 ---------- ---------- ------------- Common Stock Issued in Exchange for Deferred Compensation, Net of Terminations $ 675,935 $1,369,409 $ 287,014 Adjust Deferred Compensation 568,752 Capitalization of Equipment Pursuant to Capital Lease Obligation 365,000 Conversion of Guardian Equity to Common Stock 10,500,000 Conversion of Series A Preferred Stock to Series B Preferred Stock 35,000,000 Payment of Dividends on Series A Preferred Stock by Issuance of Series B Preferred Stock 3,128,129
See Statements of Cash Flows. Page 8 of Exhibit 13 9 OIS OPTICAL IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE A - ORGANIZATION OIS Optical Imaging Systems, Inc. ("OIS" or the "Company") was organized to complete the development of and thereafter to manufacture and market flat panel displays and electronic image processing products, employing amorphous and related materials and information technology. OIS is currently providing these products and services mainly to avionics and military customers. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Cash and Cash Equivalents Cash equivalents consist of investments in short-term, highly-liquid securities having a maturity of three months or less when acquired. Cash equivalents of $960,042 and $516 are included in Cash and Cash Equivalents in the accompanying Balance Sheets for the years ended June 30, 1997 and 1996, respectively. These are stated at cost which approximates market. Cash paid for interest for the fiscal years ended June 30, 1997, 1996 and 1995 was $4,485,533, $1,549,826 and $10,808, respectively. Property and Equipment All properties are recorded at cost and are depreciated on the straight-line method over the estimated useful lives of the individual assets. The estimated lives of the principal classes of assets are as follows:
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. Capitalized lease equipment is depreciated over the term of the lease. Certain equipment installed at the new manufacturing facility is owned by the government and is therefore not recorded in the accompanying Balance Sheets (See Note K). Local Government Subsidy The Local Government Subsidy is being amortized over 30 years on a straight-line basis. Amortization began July 1, 1996 (See Note K). Page 9 of Exhibit 13 10 Inventories Inventories are stated at the lower of cost, determined on a first-in first-out basis, or market, and represent spare equipment parts, manufacturing supplies, raw material used in display development and displays in process. The components of inventories as of June 30, are as follows:
1997 1996 ---------- ---------- Spare equipment parts $ 601,585 -- Manufacturing supplies 108,582 $ 76,392 Raw materials 6,787,877 5,048,022 Displays in process 2,027,092 722,836 ---------- ---------- Total $9,525,136 $5,847,250 ========== ==========
Insurance Receivable This amount represents costs incurred by the Company to repair and clean-up damage caused by a fire at the Northville facility. This amount was reimbursed by the insurance company during fiscal 1997. Research and Development Research and development costs are charged to operating expenses as incurred. Patents Patent expenditures are charged directly to expense, and are included in Selling, General and Administrative expenses. Customer Agreements Certain long-term customer engineering agreements are accounted for on a percentage of completion basis. Amounts billed but not yet earned and/or amounts received as advance payments net of revenues recognized in advance of billings are recorded as deferred revenue. Projected losses on customer agreements are recorded as cost in excess of anticipated billings at the time such losses become apparent. Revenue on the Company's display contracts is recognized when displays are shipped to the customer. In fiscal 1997, 1996 and 1995, the Company derived approximately 61%, 76% and 68% of revenue respectively from three customers operating in the U.S. Aerospace industry. As of June 30, 1997, 1996 and 1995, $2,366,421, $2,825,252 and $1,215,814 is due from these three customers and is included in Accounts Receivable in the accompanying Balance Sheets. Reclassifications Certain amounts in the prior year financial statements have been reclassified to conform with the current financial presentation. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Page 10 of Exhibit 13 11 New Accounting Standards During fiscal 1999, the Company must adopt Statement of Financial Accounting Standards (SFAS) No. 130, "Comprehensive Income" and SFAS No. 131, "Segment Disclosures". SFAS No. 130 requires that the Company include a reconciliation of Net Loss to Comprehensive Income. Comprehensive income includes certain gains and losses which are currently required to be included as components of stockholders' equity. SFAS No. 131 requires the Company to disclose certain financial information regarding the Company's internally identified business segments. The effect on the financial statements of adopting these statements has not been determined. NOTE C - CAPITAL STOCK Holders of OIS Common Stock are entitled to one vote per share. The holders of OIS Common Stock are entitled to dividends when and if declared by the Board of Directors of OIS out of any funds legally available therefore. OIS has not declared or paid any dividends on Common Stock. The Company is restricted by its credit agreement from declaring or paying cash dividends (See Note I). During fiscal 1995, the Company issued 12,500 shares of Series A Preferred Stock to its affiliate Guardian Industries Corp. ("Guardian"). During fiscal 1996, the Company issued an additional 22,500 shares of Series A Preferred Stock to Guardian. The Company is restricted from paying dividends on its Preferred Stock by its credit agreement. Certain of these restrictions lapsed on September 30, 1996 (See Note I). The Series A Preferred Stock had a dividend rate of 8% for the first five years. On October 29, 1996, the Company's Board of Directors created and authorized for issuance 100,000 shares of Series B Cumulative Preferred Stock, par value $.01, with an original issuance price of $1,000 per share. The Series B Preferred Stock bears a cumulative dividend rate of 8% for the first three years and a floating rate, subject to a 16.5% cap, thereafter. Each share of Series B Preferred Stock entitles the holder to 350 votes on each and every matter submitted to a vote of the Company's shareholders. The Series B Preferred Stock is non-convertible. On October 30, 1996, the Company exchanged the 35,000 shares of Series A Preferred Stock held by Guardian and all dividends in arrears for 38,137 shares of Series B Preferred Stock. Guardian and William Davidson contributed common stock of the Company and other property to GD Investments Corp. ("GDIC"), a Guardian affiliate. On October 31, 1996, the Company sold 21,000 shares of Series B Preferred Stock to GDIC at a price of $1,000 per share. OIS used the proceeds to retire its subordinated note payable (Bridge Loan) and all accrued interest to Guardian, which amounted to approximately $18.9 million. During fiscal 1997, the Company sold an additional 14,500 shares of Series B Preferred Stock to GDIC for a total of $14.5 million. OIS used the proceeds to fund ongoing operations. The Company's dividend policy on both the Series A and Series B Preferred Stock is to accrue only those dividends that are declared, or expected to be declared, in the current year by the Board of Directors. During fiscal 1997, the Company satisfied all dividends in arrears on the Series A Preferred Stock, totaling $3,128,219, by issuing an additional 3,137 shares of Series B Preferred Stock. Management has determined that the fiscal 1997 dividends on the Series B Preferred Stock will not be declared. Cumulative dividends in arrears as of June 30, 1997 and 1996 total $3,562,445 and $2,180,548, respectively. NOTE D - STOCK OPTION PLANS OIS has in effect two stock incentive plans, the 1994 Significant Employee Stock Incentive Plan (the "1994 Plan") and the Amended and Restated 1988 Stock Option and Incentive Plan (the "1988 Plan"). The plans are administered by the Stock Option Committee of the Board of Directors of OIS (the "Committee"). These plans authorize the award of restricted stock or stock options covering 3,000,000 shares of OIS Common Stock to employees, consultants and such other persons as the Committee may determine. Currently, the Committee is making awards under the 1994 Plan only. Page 11 of Exhibit 13 12 The Company has elected to provide the pro forma disclosures, as permitted under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the 1994 Plan and the 1988 Plan within the accompanying Statements of Operations. Had compensation expense for the Plan been determined based on the fair value at the grant date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's pro forma net loss available to common shareholders and pro forma net loss per common share would have been increased to the amounts indicated below:
1997 1996 Pro forma net loss available to common shareholders As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,020,009) $(26,097,584) SFAS No. 123 pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,333,298) (26,334,147) Pro forma net loss per common share - As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) (.27) SFAS No. 123 pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) (.27)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions were used for the 1997 and 1996 grants: risk-free rate of interest of 6.45% for 1997 and 5.66% and 6.99% for 1996; dividend yield of 0%; and expected lives of 10 years and 4.56 years. Awards of restricted stock are non-transferable and subject to forfeiture during the restriction period established by the Committee. The awards of restricted stock during fiscal 1997, 1996 and 1995 are summarized in the following table:
Number of Per Share Aggregate Restriction Fiscal Year Shares Granted Price Value Lapse Date - ---------- -------------- ----- ----- ---------- 1997 254,300 $3.00 $762,900 October 13, 1999 1996 312,420 $4.50 $1,405,890 October 13, 1998 1995 49,920 $6.50 $324,480 October 13, 1997
There are currently 339,200 outstanding stock options that were granted under the 1994 Plan. These options become exercisable in accordance with the schedule established by the Stock Option Committee at the time of grant. These options expire ten years after the date of grant. The option price is set at market on date of grant. There are currently outstanding 10,000 stock options that were granted under the 1988 Plan. These options generally become exercisable in five stages, beginning one year after the date of grant with respect to 20% of the shares and continuing with an additional 20% of the shares becoming exercisable annually thereafter. These options generally expire six years after the date of grant. The option price is set at market on date of grant. The stock options granted by the Company are non-transferable and are subject to forfeiture if not exercised within a time specified by the Committee (but not more than three months) after the termination of employment with, or provision of services to, the Company, unless the termination was a result of death, disability or retirement, in which case the option may be exercised until six months after the termination. Page 12 of Exhibit 13 13 A summary of the transactions during the three years ended June 30, 1997 with respect to OIS' stock option plans follows:
1997 1996 1995 ------------------------ ---------------------- ------------------------ Average Average Average Option Option Option Shares Price Shares Price Shares Price ----------- --------- --------- ---------- ---------- --------- Outstanding at the beginning of fiscal year 397,608 $3.77 341,104 $3.15 313,419 $2.26 Granted 94,000 2.81 174,950 4.58 108,000 5.13 Cancelled 19,330 2.47 37,800 4.93 9,350 2.25 Exercised 123,078 2.25 80,646 2.25 70,965 2.25 ----- --------- ------ --------- ------ Outstanding June 30, 349,200 $4.12 397,608 $3.77 341,104 $3.15 ========= ===== ========= ====== ========= ====== Exercisable June 30, 110,000 $4.64 220,158 $3.05 143,731 $2.21 ========= ===== ========= ====== ========= ====== Available for grant June 30, 2,126,630 N/A 2,430,990 N/A 2,868,860 N/A ========= ===== ========= ====== ========= ======
NOTE E - RELATED PARTY TRANSACTIONS In April 1992, OIS and the Company's affiliate, Guardian entered into a Services Agreement, which was amended in July 1992. Under that agreement, Guardian provided the services of Rex Tapp, who was an employee of Guardian, as President of OIS, for $130,000 per year; provides certain administrative, accounting, technical, travel arrangement, management and tax services for $50,000 per year, and provides legal services at an hourly rate of $100. In July 1995, Mr. Tapp became an employee of OIS with the result that his services to OIS are no longer subject to the Services Agreement. During fiscal years 1997 and 1996, OIS incurred expenses for these services of approximately $110,000 per year. In 1995, this expense was approximately $190,000. During 1995, OIS also purchased approximately $17,000 worth of architectural glass from Guardian for installation at the new manufacturing facility. In May 1993, OIS and Guardian entered into a Services Agreement in which employees at Guardian provided engineering services in connection with construction of the new facility. The aggregate amount paid by OIS will not exceed $250,000 without approval of the Independent Directors of OIS. The Company incurred approximately $118,000 for the year ended June 30, 1995, for these engineering services (see Note K). NOTE F - NET LOSS PER COMMON SHARE Net loss per common share, which equals fully diluted loss per share, is based on the weighted average number of shares of OIS Common Stock outstanding during the year. The number of shares used in the computation for the years ended June 30, 1997, 1996 and 1995 were 97,286,539, 96,889,823, and 69,241,640, respectively. Under the terms of the two Stock Purchase Agreements, the Guardian Option (see Note I) and William Davidson's right pursuant to a May 14, 1993 agreement (see Note I), the Company issued 65,791,720 shares of Common Stock on November 26, 1994. Pursuant to a fiscal 1994 agreement, the shares of Common Stock were paid for, but not issued, prior to June 30, 1994. If these shares of Common Stock had been issued and outstanding as of June 30, 1994, net loss per share would have been $.15 for the year ended June 30, 1995, based upon 96,654,669 weighted average shares. For the year ended June 30, 1998, the Company will be required to adopt Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 will require primary net loss per common share to be replaced with basic net loss per common share, which is computed by dividing reported net loss available to common shareholders by the weighted average common shares outstanding. No dilution for potentially dilutive securities is included. Fully diluted net loss per common share, now called diluted net loss per common share, is still required. This statement is not expected to have a material effect on the Company's financial statements. Page 13 of Exhibit 13 14 NOTE G - FEDERAL TAXES ON INCOME As a result of certain Capital Stock transactions (See Note C), the Company is eligible to be a member of Guardian's affiliated tax group ("Affiliated Group"). This allows the Company's tax losses, credits and/or income generated after October 31, 1996 to be included in the single consolidated federal income tax return filed by the Affiliated Group. Guardian and the Company entered into a Tax Sharing Agreement dated November 1, 1996, pursuant to which the Company will receive or make tax sharing payments based on the amount by which the federal income tax liability of the Affiliated Group is reduced, or increased, by inclusion of the Company in the Affiliated Group. As of June 30, 1997, the Company had received $5 million and recorded an estimated receivable from Guardian of $4,755,490 in accordance with the Tax Sharing Agreement. The differences between the United States Federal statutory income tax benefit and the income tax benefit as calculated under the provisions of SFAS No. 109 for the years ended June 30, are summarized as follows:
1997 1996 1995 ------------ ---------- ----------- Federal statutory benefit $(13,393,490) $(8,204,000) $(4,974,000) Benefit due to change in effective tax rate (944,000) Net increase in valuation reserve due to losses without tax benefit 4,570,000 8,195,000 4,971,000 Other 12,000 9,000 3,000 ------------ ----------- ----------- Actual income tax benefit $ (9,755,490) $ -0- $ -0-
The components of the income tax benefit for the years ended June 30, are summarized as follows:
1997 1996 1995 Federal Currently refundable $(12,743,490) $(9,860,000) $(5,217,000) Deferred (1,582,000) 1,665,000 246,000 Net increase in valuation Reserve 4,570,000 8,195,000 4,971,000 ------------ ----------- ----------- Actual income tax benefit $ (9,755,490) $ -0- $ -0- ============ =========== ===========
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, 1997 June 30, 1996 ------------- ------------- Deferred income tax liability: Depreciation and amortization $ 1,041,000 $ 1,729,000 ------------ ------------ 1,041,000 1,729,000 Deferred income tax assets: Net operating loss credits (35,769,000) (32,781,000) Other (1,930,000) (1,036,000) ------------ ------------ (37,699,000) (33,817,000) Valuation allowance 36,658,000 32,088,000 (1,041,000) (1,729,000) Net deferred income taxes $ -0- $ -0- ============ ============
Page 14 of Exhhibit 13 15 Tax loss carryforwards and other tax attributes are subject to limitations provided by Internal Revenue Code Sec. 382, which may substantially reduce the amounts available for utilization as a result of changes in control. There was a change of ownership on December 12, 1990 for purposes of Internal Revenue Code Sec. 382. At June 30, 1997, remaining net operating loss and tax credit carryforwards expire as follows:
Net Operating Other Loss Tax Credit Carryforward Carryforwards -------------- --------------- 1999 $ 3,965,000 2000 6,560,000 $351,500 2001 3,255,000 90,200 2002 3,242,000 2003 7,391,000 2004 3,352,000 2005 633,000 2006 6,009,000 2007 6,476,000 2008 5,213,000 1,000 2009 5,886,000 2,030 2010 15,434,000 2011 23,723,000 7,700 2012 11,059,000 $102,198,000 $452,430 ============ ========
NOTE H - LEASE AGREEMENTS In the year ended June 30, 1995, OIS entered into a three-year non-collateralized lease agreement covering certain machinery and equipment. OIS's Troy facilities are leased under a lease that expired in September 1996, at a monthly rate of $15,460. This lease was renewed on a month-to-month basis. All OIS leases are with unrelated parties. Obligations under noncancellable operating leases subsequent to June 30, 1997 are as follows:
Operating Leases 1998 $ 32,644 1999 26,946 2000 26,292 2001 19,719 --------- $ 105,601
Operating lease expense for the fiscal years ended June 30, 1997, 1996 and 1995 was $241,953, $250,344, and $251,632, respectively. NOTE I - FINANCING TRANSACTIONS On November 26, 1991, Guardian paid OIS $10,500,000 for 7,000,000 shares of OIS Common Stock, which then represented approximately 28 percent of all issued and outstanding shares. OIS also granted and issued to Guardian a three-year option (the "Guardian Option") to purchase additional shares of the Common Stock for a price of $10,500,000. Effective November 26, 1994, Guardian exercised its option to purchase additional shares of OIS Common Stock. In that transaction, OIS issued to Guardian 41,828,768 shares of Common Stock. The option shares issued to Guardian, together with the shares issued to Guardian in November 1991, amounts to approximately 51 percent of the issued and outstanding shares of the Common Stock Page 15 of Exhibit 13 16 on a fully diluted basis. On May 14, 1993, the Company, William Davidson and Guardian entered into a transaction to increase the stockholders' equity of the Company. In this transaction, William Davidson converted $5,785,109 of 10% convertible subordinated securities into 2,804,901 shares of Common Stock and the right to receive additional Common Stock upon Guardian's exercise of the option described above. Concurrent with the exercise of the Guardian Option, William Davidson received 23,962,502 shares of Common Stock pursuant to this right. On December 14, 1993, the Company entered into a credit agreement (the "Agreement"), which has been amended, with a consortium of banks. Under the terms of the Agreement, the Company obtained a credit facility that provides $26.25 million in term loans and a $26.25 million revolving credit facility. Under the terms of the Agreement, the term loans and borrowings under the revolving credit facility bear interest, payable quarterly, at LIBOR plus .875%, or at elected fixed rates with interest periods ranging from 30 days to 180 days. The term loans are payable in quarterly principal installments of $5,500,000 on December 31, 1997, $2,500,000 commencing March 31, 1998 through June 30, 1998, $2,750,000 on September 30, 1998 through December 31, 1998, $3,375,000 on March 31, 1999 through June 30, 1999, $3,875,000 on September 30, 1999 and $25,875,000 on December 31, 1999. The Company also pays a commitment fee of .375% of the unused portion of the credit facility. The revolving credit facility matures in December 1999. Under the terms of the Credit Agreement, OIS is restricted from making capital expenditures in excess of certain amounts, from incurring additional debt (as defined) and paying cash dividends (as defined). Furthermore, OIS must maintain a level of minimum tangible capital funds and leverage ratio as defined in the Credit Agreement. As of June 30, 1997, the Company is not in compliance with the capital spending covenant. The Company has received a waiver from the consortium of banks. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate long-term debt. At June 30, 1997, the Company had an outstanding interest rate swap agreement with a commercial bank, having a total notional principal amount of $15 million. This agreement effectively changes the Company's interest rate exposure on its floating rate notes due in 1999 to a fixed LIBOR rate of 5.933%. The interest rate swap agreement matures at the time the related notes mature. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap agreement. However, the Company does not anticipate non-performance by the counterparties. The fair value of the Company's long-term debt is estimated based on market rates of interest for the same or similar issues and current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company's long-term debt approximates its carrying value. During fiscal 1997, the Company signed a $20 million Promissory Note (the "Note") with GDIC. The Note bears interest at a rate of 6% per annum. The Note is subordinated to all amounts outstanding under the agreement described above. At June 30, 1997, $3 million is outstanding under the Note. The principal balance of the Note and all accrued and unpaid interest is due upon demand of the holder. Due to the level of current and anticipated losses, management expects additional capital resources will be needed to support the Company's operations. Management expects that Guardian, directly or through an affiliate, will provide funding to support the Company's operations through fiscal 1998. At this time, Guardian has not indicated any intention to discontinue funding the Company. NOTE J - EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan for substantially all employees. Employer contributions are 50% of the employee's contribution, up to a maximum of 5% of the employee's wages. Employer contributions to this plan were approximately $198,000, $176,000 and $135,000 for the years ended June 30, 1997, 1996 and 1995, respectively. NOTE K - NEW MANUFACTURING FACILITY During fiscal 1994, the Company started construction on a new manufacturing facility in Northville, Michigan. In connection with the construction, the Company purchased land valued at approximately $3 million from Wayne County for $10.00. The Company is using the land for their manufacturing facility and have met certain employment criteria. The facility cost approximately $107 million. Pursuant to this construction, the Company has capitalized approximately $1.10 million and $2.38 million of interest incurred during construction during the years ended June 30, 1996 and 1995. The capitalized interest Page 16 of Exhibit 13 17 is included in Building in the accompanying Balance Sheets. During fiscal 1994, the Company negotiated an agreement under the DARPA, AMLCD Manufacturing Technology Program. Under the terms of the agreement, the Company received $48 million (the "Proceeds") over two years. The Company used the proceeds to purchase equipment for installation in the new manufacturing facility. The equipment purchased remains the property of the United States Government and is not reflected in the accompanying Balance Sheets. The Company is entitled to use this equipment without charge until August 1998. At that time, the Company has the option to purchase the Government owned equipment at its then Fair Market Value. Cash received prior to payment for the equipment is reflected in Cash and Cash Equivalents in the accompanying Balance Sheets. Amounts billed to DARPA, but not received, are reflected as Receivable from the U.S. Government in the accompanying Balance Sheets. The liability is relieved as equipment is purchased. As of June 30, 1997, $48 million has been billed, all of which has been received. As of June 30, 1997, the Company has spent approximately $132,000 for equipment that has not been billed to DARPA and is included in Receivable from U.S. Government in the accompanying Balance Sheets. Page 17 of Exhibit 13 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SUMMARY The operating results for fiscal 1997 continue to reflect substantial operating losses. As a result of increased production volumes, fiscal 1997 revenue was 28% higher than fiscal 1996 revenue. However, the Company's cost of sales continued to exceed revenue due to the relatively high cost of sales driven by the Company's overhead, scrap rates and depreciation expense for the period. During fiscal 1997, the Company worked to resolve a number of production issues, including equipment down-time, that were limiting production volumes. The Company also identified and corrected several process problems which were causing product defects and lower production yields. Although production volumes and yields improved significantly during the fiscal year, the majority of these improvements were not realized until the fourth quarter of the current year. In fact, nearly 81% of the total unit volume of production for the year occurred during the last six months of fiscal 1997. While the Company works to improve production yields and volumes, the Company will also need to expand the markets for its products by increasing its sales of displays, primarily to the avionics markets, and developing its x-ray sensor business. Management is optimistic about the Company's ability to produce and sell more products in fiscal 1998. Although significant losses will continue, management anticipates that the Company's operating results will improve somewhat during fiscal 1998. The Company's ability to further improve its financial performance and achieve profitability will depend on whether the Company is able to achieve significantly higher volumes of production and sales and reduce its incremental cost of sales in future fiscal periods. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 REVENUE Total revenue for fiscal 1997 of $13,600,488 was 28% higher than total revenue for fiscal 1996 of $10,595,207. This increase is attributable to a substantial increase in revenue from the sale of displays and sensors, which was partly offset by a decrease in revenue from customer-funded engineering. Revenue from the sale of displays and sensors for fiscal 1997 of approximately $11,500,000 was 74% higher than revenues from the sale of displays and sensors for fiscal 1996. This increase, which continues a trend started during fiscal 1996, is the result of more displays being manufactured and shipped during fiscal 1997. Although display revenue increased during fiscal 1997, the rate of growth was constrained by low production volumes during the first three quarters of the year. Significant additional display and sensor revenue will be necessary if the Company is to substantially improve its financial results. Management expects that revenues from the sale of displays and sensors will continue to increase during fiscal 1998 as existing orders for the Company's products are satisfied. However, the sales volume required to achieve profitability exceeds the existing market for the Company's products. Therefore, the Company is working aggressively to expand the markets for its displays, x-ray sensors and other products. Page 18 of Exhibit 13 19 Revenue from customer-funded engineering for fiscal 1997 of approximately $2,100,000 was 47% lower than revenue from customer-funded engineering for fiscal 1996 of approximately $4,000,000. This decrease is the result of the Company's strategic decision to reduce customer-funded engineering activity as the Company concentrates on manufacturing operations. COST OF SALES Cost of sales for fiscal 1997 of $41,093,260 was 57% higher than cost of sales for fiscal 1996 of $26,106,953. The cost of sales as a percentage of revenue increased to 302% in fiscal 1997 from 246% in fiscal 1996. Cost of sales consists of direct labor, direct material and overhead costs to support the manufacturing process. Overhead costs include, among other things, the costs of utilities, maintenance and repairs, insurance, depreciation, engineering, supervisory and quality control personnel and other costs needed to facilitate the manufacturing process. Direct labor and material for fiscal 1997 increased by approximately $8.7 million when compared to fiscal 1996. Most of this increase is attributable to the increased amounts of raw materials used to verify process controls and increase production volumes. Although yields improved significantly throughout the fiscal year, higher production volumes resulted in higher overall scrap costs in fiscal 1997 compared to fiscal 1996. Management is encouraged by the significant increase in production volumes and improved yields experienced during the fourth quarter of the current fiscal year. To the extent that the Company can continue to improve yields and increase production volumes, management expects that direct labor and material will decrease on a per unit basis and as a percentage of revenue during fiscal 1998. Overhead for fiscal 1997 increased by approximately $6.3 million when compared to fiscal 1996. The increase is attributable in large part to an increase of approximately $2.7 million in depreciation expense due to the facility and related process equipment being depreciated for a full year during fiscal 1997. During 1997, the Company also incurred approximately $3.6 million in increased costs in the areas of repair and maintenance, utilities, manufacturing supplies and tooling. A substantial part of the Company's overhead costs are largely fixed and, as a result, management does not expect significant changes in the total overhead costs as production volume increases. However, until the Company is able to produce more saleable product, overhead costs will continue to be a major component of cost of sales on both a per unit and percentage of revenue basis. OTHER COSTS The Company's internal research and development costs of $2,037,583 in fiscal 1997 were 3% higher than the internal research and development costs of $1,971,513 incurred in fiscal year 1996. The Company continues to invest resources in order to increase and improve its line of products and to protect its technology and intellectual property rights. This area is an important part of OIS's business. Management expects internal research and development spending for fiscal 1998 will be consistent with fiscal 1997. The Company's Selling, General and Administrative costs of $5,509,868 in fiscal 1997 were 3% higher than Selling, General and Administrative costs of $5,360,752 in fiscal 1996. Management does not expect its Selling, General and Administrative costs to increase significantly in fiscal 1998. Interest expense during fiscal 1997 increased by approximately $1,900,000 compared to fiscal 1996. During fiscal 1996 the new plant was placed in service. Therefore, a proportionate amount of interest incurred on the debt to finance construction of the Northville facility is no longer being capitalized as part of the cost Page 19 of Exhibit 13 20 of the Northville facility. The Company also incurred additional interest on higher debt levels to finance ongoing operations when compared to fiscal 1996. Interest expense is expected to continue to increase until operations generate enough profits to begin retiring the outstanding debt. Other income, licensing and royalty income and insurance proceeds in fiscal 1997 decreased by $62,316 compared to fiscal 1996. This decrease is attributable in large part to a one-time insurance payment of $803,624 received during fiscal 1996 in connection with the interruption of business caused by the fire at the Northville facility in March 1995. Royalty income increased by $376,364 compared to fiscal 1996. The Company also realized $276,481 from the sale of equipment formerly utilized at the Troy facility. Other differences between fiscal 1997 and 1996 are not discussed because they result principally from differences in timing of revenue and expenses and not from any known trends. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 REVENUE Total revenue for fiscal year 1996 of $10,595,207 was 26% higher than total revenue for fiscal 1995 of $8,423,041. This increase is attributable to a substantial increase in revenue from the sale of displays which was partly offset by a decrease in revenue from customer-funded engineering. Revenue from the sale of displays for fiscal 1996 of approximately $6,489,000 was 183% higher than revenues from the sale of displays for fiscal 1995 of approximately $2,290,000. This increase is the result of more displays, both standard and contract specific, being manufactured and shipped during fiscal 1996. Deliveries of various size displays, which were developed in prior fiscal years, to Kaiser Electronics under the F-22 and F-18 programs generated approximately $3,000,000 or 46% of the revenue from the sale of displays during fiscal 1996. Revenue from customer-funded engineering for fiscal year 1996 of approximately $4,000,000 was 31% lower than revenue from customer-funded engineering for fiscal 1995 of approximately $5,800,000. This decrease is the result of the Company's strategic decision to reduce customer-funded engineering activity as the Company concentrates on manufacturing operations. Management expects revenue from customer-funded engineering to continue to decline in the future. Although revenue from the sale of displays increased during fiscal 1996, the rate of increase was constrained by manufacturing difficulties at the Troy facility which are discussed below under Cost of Sales. The Company continued operations at the Troy facility longer than expected as a result of the extensive effort to repair and clean-up damage caused by the fire experienced in March 1995 at the Northville facility. Approximately $3,200,000 of displays that had been expected to be delivered in fiscal 1996 were not delivered. The Company has worked closely with its customers, and no orders for the Company's products have yet been canceled as a result of delivery delays. If the ramp-up of the Northville facility proceeds as anticipated, management expects that the delayed shipments will be delivered during fiscal 1997. COST OF SALES Cost of sales for fiscal 1996 of $26,106,953 was 47% higher than cost of sales for fiscal 1995 of $17,810,224. The cost of sales as a percentage of revenue increased to 246% in fiscal 1996 from 211% in fiscal 1995. Cost of sales consists of direct labor, direct material and overhead costs to support the Page 20 of Exhibit 13 21 manufacturing process. Overhead costs include, among other things, the costs of utilities, maintenance and repairs, insurance, depreciation, engineering, supervisory, quality control and other costs needed to facilitate the manufacturing process. While the Company's direct labor and material costs in fiscal 1996 declined slightly as a percentage of revenue compared to fiscal 1995, the Company's overhead costs for fiscal 1996 increased significantly both in absolute dollars and as a percentage of revenue compared to fiscal 1995. The increase in overhead costs for fiscal 1996 is attributable in large part to the increased costs of wages and benefits for factory support personnel, increased depreciation expense and the expense of maintaining the Troy facility for continuing production operations. In anticipation of increasing production activity in Northville, the Company hired and trained additional production supervisors and quality control personnel during fiscal 1995. Although no significant personnel in these areas were added during fiscal 1996, the costs for these additional personnel were incurred for a full year during fiscal 1996. Depreciation expense for fiscal 1996 increased by approximately $1,900,000 compared to fiscal 1995 due to the Northville facility and process equipment being placed in service during fiscal 1996. The Company spent approximately $500,000 in fiscal 1996 to repair and modify equipment necessary to continue production operations at the Troy facility before it was closed. The Company also recorded a charge of $300,000 as an estimate of cost to restore the Troy facility as required by the terms of the Company's lease. Reducing the Company's cost of sales to an acceptable level depends on improving yields and increasing production volumes. If the Company becomes more efficient in its manufacturing process, direct labor and material costs will decrease on a per unit basis. Because most of the Company's indirect costs are fixed and the Company has already assembled a workforce sufficient to support the anticipated increases in manufacturing activity at Northville, management does not expect a significant increase in indirect costs as production volumes increase. However, until the Company is able to produce and sell more product to absorb its overhead costs, overhead costs will continue to result in high cost of sales on both a per unit and percentage of revenue basis. OTHER COSTS The Company's internal research and development costs of $1,971,513 in fiscal 1996 was 51% higher than the internal research and development costs of $1,306,843 incurred in fiscal 1995. The Company's research and development efforts are focused on improving current products, increasing its standard product line and protecting the Company's technology and intellectual property rights. Management considers it imperative to maintain a strong research and development program. Research and development spending for fiscal 1997 is expected to increase slightly from fiscal 1996. The Company's Selling, General and Administrative costs of $5,360,752 in fiscal 1996 were 27% higher than the Selling, General and Administrative costs of $4,237,253 in fiscal 1995. This increase is due to the Company expanding its marketing and administrative organization to manage the current and anticipated increases in marketing and general business activity. Management does not expect its Selling, General and Administrative costs to increase significantly during fiscal 1997. Interest expense during fiscal 1996 increased by approximately $2,200,000 compared to fiscal 1995. During fiscal 1996, most of the Northville facility was placed into service with the consequence that a proportionate amount of interest incurred on the debt to finance construction of the Northville facility is no longer being capitalized as part of the cost of the Northville facility. The Company also incurred additional interest on higher debt levels to finance ongoing operations during fiscal 1996. Interest expense is expected to continue to increase until operations generate enough profits to begin retiring the outstanding debt. Page 21 of Exhibit 13 22 During fiscal 1996, the Company received $803,624 of insurance proceeds resulting from the interruption of business caused by the fire at the Northville facility in March 1995. This amount is separate from the reimbursable expenses incurred by the Company to repair damage from the fire, which is discussed under Liquidity and Capital Resources. Other differences between fiscal 1996 and 1995 are not discussed because they resulted principally from differences in timing of revenue and expenses and not from any known trends. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company's Cash and Cash Equivalents at June 30,1997 was $960,042. The Company is attempting to manage its cash to minimize borrowings under its various debt instruments. OPERATING ACTIVITIES During fiscal 1997, the Company incurred a net loss of $28,509,893. Inventory increased approximately $3.7 million as the Company increased levels of raw materials and spare equipment parts to sustain the increase in manufacturing activity. Accounts payable and other accrued expenses decreased approximately $3.3 million due to the timing of payment of invoices. Furthermore, the Company incurred approximately $6.2 million in depreciation costs, which contributed to net loss but had no effect on cash. INVESTING ACTIVITIES During fiscal 1997, the Company spent approximately $3.4 million on equipment related to the development and production of x-ray sensors. The Company also spent approximately $2.2 million on substrate carriers, test equipment and display fixtures to handle the increase in production volume. Furthermore, the Company spent an additional $2.9 million for computer hardware and software as well as improving existing equipment, building and cleanrooms in an effort to improve efficiency and productivity. FINANCING ACTIVITIES During fiscal 1997, the Company received $35.5 million from the sale of preferred stock to GD Investments Corp. ("GDIC"), a Guardian affiliate. (See Capital Resources.) During fiscal 1997, the Company signed a $20 million Promissory Note in favor of GDIC to the Company to provide the Company with working capital. The Promissory Note accrues interest at a rate of 6% per annum, and all principal and interest is payable on demand of GDIC. As of June 30, 1997, the Company had borrowed $3 million under the Promissory Note. As of September 18, 1997, the Company has borrowed $9 million under the promissory note. During fiscal 1997, the Company borrowed $16.4 million under an existing $20 million bridge loan from Guardian to provide the Company with working capital requirements. In October of 1997, the Company repaid the entire $18.9 million principal balance of the bridge loan together with all accrued interest. (See Capital Resources). During fiscal 1997, the Company borrowed $1.5 million under its $52.5 million commercial credit facility Page 22 of Exhibit 13 23 with NBD Bank N.A. and Bank of America NT&SA. As of June 30, 1997, the Company's aggregate borrowings under its commercial credit facility were $52.5 million. The repayment of principal, which was originally scheduled to begin on June 30, 1997, has been deferred to December 31, 1997 under agreement with the banks. The first payment on this date is $5.5 million with various quarterly payments due through December 31, 1999. The Company's cash is decreasing, and management anticipates a need for additional cash during fiscal 1998 (see Capital Resources). CAPITAL RESOURCES The Company has financed the completion of the Northville plant and related ramp-up and provided working capital for continuing operations through fiscal 1997. On October 29, 1996, the Company's Board of Directors created and authorized for issuance 100,000 shares of Series B Preferred Stock, par value $.01, with an original issuance price of $1,000 per share. The Series B Preferred Stock bears a dividend rate of 8% for the first three years and a floating rate, subject to a 16.5% cap, thereafter. Each share of Series B Preferred Stock entitles the holder to 350 votes per share on each and every matter submitted to a vote of the Company's shareholders. The Series B Preferred Stock is non-convertible. On October 30, 1996, the Company exchanged the 35,000 shares of Series A Preferred Stock held by Guardian and all dividends in arrears for 38,137 shares of Series B Preferred Stock. Guardian and William Davidson contributed common stock of the Company and other property to GDIC. On October 31, 1996, the Company sold 21,000 shares of Series B Preferred Stock to GDIC at a price of $1,000 per share. OIS used the proceeds to repay all principal and all accrued interest under its bridge loan from Guardian, which amounted to approximately $18.9 million. During the remainder of fiscal 1997, the Company sold an additional 14,500 shares of Series B Preferred Stock to GDIC at a price of $1,000 per share. As a result of the above transaction, the Company is eligible to be a member of Guardian's affiliated tax group ("Affiliated Group"). This allows the Company's tax losses, credits and/or income generated after October 31, 1996, to be included in the single consolidated federal tax return by the Affiliated Group. Guardian and the Company entered into a Tax Sharing Agreement dated November 1, 1996, pursuant to which the Company will receive or make tax sharing payments based on the amount by which the federal income tax liability of the Affiliated Group is reduced or increased by inclusion of the Company in the Affiliated Group. As of June 30, 1997, the Company had received $5 million and recorded an estimated receivable from Guardian of $4,755,490 in accordance with the Tax Sharing Agreement. The Company had entered into an agreement with Wayne County for the purchase of approximately 80 acres of land adjacent to the Company's existing facility for a conditional purchase price of $800,000 (the "Purchase Agreement"). Due to the time involved in having the site rezoned to allow for the Company's intended use, the Purchase Agreement expired. Management of the Company determined that the Company should not appropriate the financial resources to revive the Purchase Agreement in order to acquire and develop the site in accordance with the Purchase Agreement. However, Guardian acquired the site from Wayne County on substantially the same terms as the Purchase Agreement. In addition, Guardian has indicated that if within five years the Company presents an acceptable plan to develop a new manufacturing facility on that site, and is capable of financing such a plan, Guardian would be willing to sell the site to the Page 23 of Exhibit 13 24 Company on substantially the same terms as the Purchase Agreement. Due to the level of current and anticipated losses, management expects additional capital resources will be needed to support the Company's operations. Management expects that Guardian, directly or through an affiliate, will provide funding to support the Company's operations through fiscal 1998. At this time, Guardian has not indicated any intention to discontinue funding the Company. If Guardian were to discontinue funding the Company or offer funding to the Company on terms that were not satisfactory to the Company's disinterested directors, then the Company would have to seek alternative sources of funding. There is no assurance that such alternative sources of funding would be available. In such case, the Company would be unable to meet its obligations and would be materially adversely affected. Page 24 of Exhibit 13 EX-23 6 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, 1997 financial statements and schedules of OIS Optical Imaging Systems, Inc. dated August 29, 1997 included in or incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 registration statements, File Nos. 0-16343 and 33-58562. \s\ Arthur Andersen LLP Detroit, Michigan September 26, 1997 EXHIBIT 23 -- Page 1 of Exhibit 23 EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 960,042 0 4,282,508 60,000 9,525,136 20,209,375 67,322,965 10,359,551 77,172,789 17,305,290 0 974,679 0 736 13,992,084 77,172,789 13,600,488 13,600,488 41,093,260 48,640,711 3,225,160 60,000 4,112,596 (38,265,383) (9,755,490) (28,509,893) 0 0 0 (28,509,893) .34 .34
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