SPECTRATEK TECHNOLOGIES INC, S-1/A, 1997-11-14

SPECTRATEK TECHNOLOGIES INC
S-1/A, 1997-11-14
CONVERTED PAPER & PAPERBOARD PRODS (NO CONTANERS/BOXES)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997

REGISTRATION NO. 333-38471

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SPECTRATEK TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 2671 95-3541556
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

------------------------

5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

TERRENCE CONWAY
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SPECTRATEK TECHNOLOGIES, INC.
5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
BRUCE R. HALLETT, ESQ. DANA M. WARREN, ESQ.
ELLEN S. BANCROFT, ESQ. THOMAS M. CLEARY, ESQ.
MATTHEW V. WATERMAN, ESQ. ASHLEY S. NEWSOM, ESQ.
BROBECK, PHLEGER & HARRISON LLP RIORDAN & McKINZIE
4675 MacARTHUR COURT, SUITE 1000 300 SOUTH GRAND AVENUE, 29TH FLOOR
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071
(714) 752-7535 (213) 629-4824
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1997

PROSPECTUS

LOGO
COMMON STOCK
------------------------

Of the shares of common stock, no par value (the "Common Stock")
of Spectratek Technologies, Inc. ("Spectratek" or the "Company") being offered,
shares are being sold by the Company and shares are being
sold by the Selling Stockholders. The Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders." Prior to this Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol "SPTK."

------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
Per Share....................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
=====================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated at $575,000. Of
the Proceeds to Company, $ will be distributed to the Company's existing
stockholders in payment of promissory notes issued in connection with the
termination of the Company's S Corporation status. See "Prior S Corporation
Status" and "Use of Proceeds."

(3) The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable within 30 days hereof, to purchase up to an aggregate of
additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions, Proceeds
to the Company and Proceeds to the Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."

------------------------

The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters and subject to certain prior conditions,
including the right of the Underwriters to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock will be made through
the facilities of The Depository Trust Company in New York, New York on or about
, 1997.

EVEREN SECURITIES, INC.

The date of this Prospectus is , 1997
<PAGE> 3

[COLOR PHOTOS AND ART WORK TO COME]

The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.

Geometric Pigment(TM), Spectratek(TM), Spectrasheen(TM), Holosheen(TM) and
Hyperplaid(TM) are trademarks of the Company. This Prospectus also includes
trade names and trademarks of other companies.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFER AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

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<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) assumes no exercise of options to purchase 91,500 shares of Common
Stock outstanding as of November 1, 1997, (iii) gives effect to a 300-for-1
stock split of the Common Stock effected in June 1997, and (iv) gives effect to
the reincorporation of the Company in the State of Delaware to occur in November
1997.

THE COMPANY

Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using its
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, food,
beverages, computer games and displays; and in industrial applications such as
paint, fabrics, flooring and architectural materials. The Company has refined
its proprietary technology to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.

All of the Company's films utilize holographic technology. Holograms are
visual recordings of light wave patterns in a compacted form that enable three
dimensional information to be condensed onto a flat surface. Microscopic grooves
and bumps on the surface of film facilitate the dispersion of white light into
its component spectral colors to create the holographic effect. By arranging
areas of different grating angles and groove spacing, holographic images or
patterns are created that when viewed from different angles, reveal features
(color and depth) of the hologram that are not otherwise visible in a
conventionally printed image.

A key step in the manufacture of holographic films is the microreplication
process, which involves the transfer of a master holographic image or pattern
onto the surface of thin film. The Company has developed proprietary remastering
methodologies that enable the Company to enhance and refine the shape, size and
position of the grooves and bumps on the existing custom holographic master. The
specific pattern of grooves and bumps determines the effect created by the
interaction of light with the thin films. By adjusting the depth and spacing of
the grooves (as many as 44,000 lines per linear inch) and bumps (often only .25
micron deep), the Company is able to increase the brightness and clarity of the
hologram. The Company is not aware of any competitor who is able to modify or
enhance an existing master. In addition, the elimination of virtually all seams
and breaks within most of the Company's patterns make the Company's products
more attractive and economical for its customers.

The Company currently manufactures and markets 14 custom stock patterns,
which are typically sold in finished rolls of film in widths of 24 or 40 inches,
or as glitter or geometric pigment (precision cut particles of the Company's
films) and are generally forwarded to converters, cutters or finishers who
create the final product for end users. The Company is currently constructing a
new microreplication machine to manufacture film in widths of 55 inches, which
should enable the Company to meet demand in new markets requiring wider films.
During 1996, the Company manufactured more than 80 million square feet of
holographic thin films.

The Company sells both microreplicated holographic films as well as
converted products which incorporate the Company's holographic films. Converted
products include film that is permanently laminated to paper or board stock or
pressure sensitive backing, that is coated or tinted, or that is cut into
particles ranging from 1/16 inch to 1/500 inch. The Company does not engage in
such conversion processes internally, but rather contracts with a number of
third party vendors to perform these processes. Such vendors also act as value
added resellers who add conversion steps to these films and sell the converted
products directly.

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<PAGE> 5

The Company believes that significant growth opportunities exist for
holographic films in the markets for both rigid and flexible packaging materials
and for industrial applications due to the visual appeal, impact and uniqueness
of holographic films. According to the Flexible Packaging Association, the size
of the flexible packaging (bags and pouches) market is estimated to reach $16.4
billion in 1997. Packages utilizing holographic materials currently represent a
very small share of the packaging materials market due to their higher cost when
compared with traditional packaging materials. The Company's new
microreplication machine should enable it to produce films 55 inches wide in
order to better address the requirements of the packaging industry.

The Company is also taking steps to expand the industrial applications for
its products, particularly by marketing the Company's geometric pigment for use
in paints and coatings in the automobile OEM and refinish paint markets. In July
1997, PPG Industries, Inc. launched its Prizmatique(TM) automobile paint line,
featuring the Company's geometric pigment, for use in the automobile refinishing
market. In addition, BASF and Englehard are each beta testing the Company's
geometric pigment for use in their OEM paint products. In addition, Vegla, a
large European glass manufacturer, is marketing the Company's holographic films
for use in residential and commercial decorative glass applications. The
Company's objective is to leverage its proprietary microreplication technology
to expand its product offerings in existing markets, maximize economies of
scale, and develop new markets for its holographic films.

The Company was incorporated in California in October 1980 as Spectratek
and changed its name to Spectratek Technologies, Inc. in June 1997. The Company
will be reincorporated in Delaware prior to the consummation of the Offering.
The Company's executive offices are located at 5405 Jandy Place, Los Angeles,
California 90066, and its telephone number at that location is (310) 822-2400.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered
By the Company.......................... shares
By the Selling Stockholders............. shares
Total.............................. shares
Common Stock to be outstanding after the
Offering................................... shares(1)
Use of Proceeds.............................. The Company intends to use the net proceeds
from the Offering to purchase additional
capital equipment (primarily for the
Company's laser laboratory and mastering
facility), to repay indebtedness, including
indebtedness incurred in connection with the
S Corporation Distribution (as defined
herein) and under the Company's bank line of
credit, to fund the relocation of the
Company's manufacturing facilities to its new
facility, to expand the Company's marketing
capabilities, and for general corporate
purposes (including working capital
requirements). See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... SPTK
</TABLE>

- ---------------

(1) Excludes 303,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan (the "1997 Plan"). As of November 1,
1997, options to purchase 91,500 shares of Common Stock were outstanding
under the 1997 Plan at a weighted average exercise price of $16.73 per
share. See "Management -- 1997 Stock Incentive Plan" and Note 10 of Notes to
Financial Statements.

4
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

The following summary financial information for the Company is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 8,457 $ 11,857
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 3,444 5,213
Income from operations ................... 72 2,720 1,702 2,396 2,243 1,702 2,819
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,669 2,782
Provision for income taxes................ 30 701 791 1,021 851 662 673(2)
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 1,007 $ 2,109
Net income per common and common
equivalent share........................ $ 0.01 $ 0.66 $ 0.33 $ 0.45 $ 0.42 $ 0.33

Weighted average common and common
equivalent shares(1).................... 3,048,273 3,048,273 3,048,273 3,048,273 3,049,636 3,048,273

Pro forma provision for income taxes(3)... $ 1,220
Pro forma net income(3)................... $ 1,562
Pro forma net income per share(3).........
Pro forma weighted average common and
common equivalent shares(1)(4)

OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 92 $ 334
Research and development.................. 238 397 576 571 504 379 193
Depreciation and amortization............. 79 214 107 165 310 232 313
EBITDA(5)................................. 158 2,971 1,945 2,628 2,612 2,017 3,174
Cash flow provided by (used in) operating
activities.............................. (424) 464 164 (5) 1,346 1,037 1,477
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(6)(7)
------- -------- -----------------
<S> <C> <C> <C>
Working capital........................................................ $ 6,200 $ 5,744
Total assets........................................................... 10,186 10,818
Notes payable.......................................................... 800 800
Retained earnings...................................................... 8,281 4,734
Stockholders' equity................................................... 8,351 7,804
</TABLE>

- ---------------

(1) See Note 2 of Notes to Financial Statements.

(2) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the nine
months ended September 30, 1997 consists primarily of net deferred tax
assets which were written-off in January 1997 upon the Company's election to
be taxed as an S Corporation.

(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company had been taxed as a C Corporation for the nine months ended
September 30, 1997. Upon consummation of the Offering, the Company will be
subject to federal and state income taxes. See "Prior S Corporation Status."

(4) Also assumes as outstanding during each of the periods presented,
shares of the Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes (as defined herein). See
"Prior S Corporation Status," "Use of Proceeds" and Note 2 of Notes to
Financial Statements.

(footnotes continued on next page)

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(5) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a generally accepted accounting principle ("GAAP") measurement of
income. EBITDA may not provide an accurate comparison among companies
because it is not necessarily computed by all companies in an identical
manner. The use of such information is intended only to supplement the
conventional income statement presentation, and is not to be considered as
an alternative to net income, cash flows or any other indicator of the
Company's operating performance which is presented in accordance with GAAP
above.

(6) Presented to give pro forma effect to (i) the distribution of previously
undistributed retained earnings of the Company (which were approximately
$3.0 million at September 30, 1997) from January 1, 1997 through the date of
the termination of the Company's S Corporation status (the "S Corporation
Distribution"), and (ii) the termination of the Company's S Corporation
status.

(7) As adjusted to give effect to the sale by the Company and the Selling
Stockholders of shares of Common Stock at an assumed initial public
offering price of $ per share and the application of the estimated net
proceeds therefrom (including the repayment of indebtedness incurred under
the Company's bank line of credit and the Stockholder Notes). See "Prior S
Corporation Status" and "Use of Proceeds."

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<PAGE> 8

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby.

DEPENDENCE ON MARKET ACCEPTANCE OF HOLOGRAPHIC PRODUCTS; LIMITATION ON ABILITY
TO IDENTIFY AND PENETRATE NEW MARKETS

All of the Company's products are based on holography and, as a result, the
Company's operating results will depend substantially on the continued market
acceptance of holographic products. Any decline in the applications for the
Company's products or the emergence of a new technology for the production of
high quality holographic materials at reduced prices would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company believes that its growth prospects depend
in large part on its ability to identify and penetrate new markets and to gain
greater acceptance of the Company's products in its existing markets.
Holographic materials currently constitute only a small percentage of the
materials used in the large and highly competitive markets in which the
Company's products are currently sold. In particular, the Company faces
significant challenges in penetrating the packaging market due to material size
constraints and cost considerations resulting from the availability of less
expensive packaging materials. Additional challenges to the Company's expansion
into new markets and within existing markets include, among others, adapting to
specialized marketing needs, technological requirements and new product
compositions. In addition, the Company sells a significant portion of its
products to value added resellers, and accordingly, is often unable to identify
the end user for such products. This limits the Company's ability to identify
and penetrate new markets and to pursue additional opportunities within its
existing markets. The inability of the Company to identify and penetrate new
markets or to gain broader acceptance of its products in the markets it
currently serves could have a material adverse effect on the Company's business,
results of operations and prospects for growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Existing Markets" and "Business -- Competition."

PROTECTION OF PROPRIETARY TECHNOLOGIES; RELIANCE ON TRADE SECRETS

The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its technologies. The Company
believes that its proprietary processes are significantly different from and
superior to those used by competitors to produce similar materials. To date, the
Company has relied primarily upon trade secret laws and nondisclosure agreements
to protect its proprietary rights and has not sought patent protection. There
can be no assurance that such trade secrets will remain confidential, that any
patents will be applied for or granted or that other intellectual property
rights of the Company will provide meaningful protection for the Company's
proprietary rights. If the processes employed by the Company become known to
competitors, it is likely that they could be used to produce materials of the
quality and durability produced by the Company, and that such competitors could
gain market share and become more successful in the markets in which the Company
operates. There can be no assurance that the steps taken by the Company will be
adequate to deter the misappropriation of its proprietary information and
technologies, that the Company will be able to prevent the assertion of an
adverse claim to its technologies, that the Company will be able to detect
unauthorized use and take effective steps to enforce its intellectual property
rights, or that the Company's competitors will not independently develop
technologies that are similar or superior to the Company's technologies.

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<PAGE> 9

seek licenses from third parties, which might not be available on terms
acceptable to the Company, if at all, and possibly prevent the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- The Spectratek Advantage" and "-- Proprietary
Rights."

RELIANCE ON KEY PERSONNEL

The Company creates its products using proprietary technologies that the
Company's founders, particularly Michael Foster, have developed over the past
twenty-six years. Only four of the Company's executive officers are aware of all
of the proprietary techniques employed by the Company and the Company does not
have employment contracts with any of such officers. In particular, Mr. Foster
has had the primary responsibility for the development of the holographic
technologies currently used by the Company, and his absence or loss would make
it significantly more difficult for the Company to address evolving market needs
and to expand the applications for the Company's products, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company's future performance will also depend in significant part on
the efforts and contributions of Terrence Conway, James Wanlass and Michael
Wanlass, as well as certain other key technical personnel. While the Company
maintains key employee life insurance on Messrs. Conway and Foster in the
amounts of $1.0 million and $5.0 million, respectively, the Company does not
maintain key employee life insurance on any other employee. The loss of the
services of either Mr. Conway or Mr. Foster could have a material adverse effect
on the Company's operations beyond the value of such insurance policies. See
"Business -- Employees" and "Management -- Executive Officers and Directors."

MANAGEMENT OF GROWTH

The Company's sales and marketing efforts have historically been
application specific, with less emphasis directed to the particular industries
in which the Company's customers operate. As a consequence, the Company's sales
and marketing activities to date primarily have been reactive. Upon consummation
of the Offering, the Company intends to hire additional technical and sales
personnel as part of its efforts to expand its sales, marketing and
manufacturing capabilities. The competition for such personnel is intense. The
Company faces the task of quickly identifying, recruiting, training and
integrating these new employees. As the Company expands its operations, the
Company will also be required to upgrade its financial and management
information systems. There can be no assurance that the Company will be able to
upgrade such systems on a timely basis, if at all. In addition, the Company is
currently in the process of expanding its manufacturing capabilities to include,
among other things, a laser laboratory and a 55 inch wide microreplication
machine, as well as additional quality control and testing equipment. The
failure of the Company's management to attract and retain qualified employees,
to successfully expand the Company's sales, marketing and manufacturing
capabilities or to upgrade its financial and management information systems
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Business Strategy."

DEPENDENCE ON CONVERTERS AND OTHER THIRD PARTIES

The Company manufactures microreplicated holographic films that are
purchased by customers and value added resellers who incorporate the Company's
films into a wide variety of finished products. The holographic films
manufactured by the Company must undergo a metallization process and, in many
cases, other converting processes before the Company can deliver the films to
such customers and value added resellers. These other converting processes may
include the slitting, coating, laminating or cutting of the holographic films.
The Company generally relies on third parties for coating, laminating, cutting
and certain other converting or finishing processes. Certain of the Company's
converting steps are highly specialized and can only be provided by a limited
number of vendors. For example, the Company is aware of only two high quality
glitter and geometric pigment cutters in the United States. Because these
vendors themselves may have capacity constraints and do not work exclusively for
the Company, the Company cannot always ensure the timely delivery of materials
ordered by its customers or the quality of the finished product. The Company

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<PAGE> 10

has not entered into long-term contracts with any of such vendors for the
Company's converting requirements. The inability of the Company to continue to
obtain quality services from these vendors in a timely manner and at attractive
prices could have a material adverse effect on the Company's business, financial
condition and results of operations.

In certain instances, third party vendors to the Company are also
purchasers and resellers of the Company's materials, and often resell to the
same customers to which the Company sells directly. This competition may affect
such vendors' incentive to provide quality service to the Company. While as a
matter of policy, the Company does not wish to undertake converting processes
that are readily available and attractively priced from third parties, it may do
so if necessary to ensure or improve the quality of its products or the
availability of supply. Any expansion by the Company into areas traditionally
served by third party converters could, during that expansion, disrupt
relationships with those converters or interfere with the Company's ability to
meet its obligations to its customers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

A large percentage of the Company's sales consists of holographic films
that are sold to value added resellers, who then convert such films into their
own end products. The Company also sells its holographic films to distributors,
who resell these films to value added resellers and end users. The inability of
such value added resellers or distributors to convert the Company's holographic
films successfully or to create attractive and saleable products from the
Company's materials would adversely affect their demand for the Company's films,
which in turn could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company intends to use a portion of the proceeds of this Offering to
design and install a laser laboratory and mastering facility in an effort to
reduce its reliance on third party customer holographers and to provide added
flexibility for its customers. There can be no assurance that the Company will
be able to design and develop such a facility successfully, or that the Company
will be able to produce high quality custom imagery cost-effectively in such
facility. The inability of the Company to develop and utilize such a facility
successfully could increase its dependence on converters and other third parties
as described above. See "-- Dependence on Market Acceptance of Holographic
Products" and "Business -- Manufacturing."

COMPETITION

The markets targeted by the Company for its products are highly competitive
and are dominated by manufacturers of non-holographic materials, particularly in
the markets for flexible packaging materials and folding cartons, pigments and
fabrics. The applications for holographic films within these markets
historically have been limited and have only recently begun to develop. Due to
the higher cost of holographic films, the Company's products often are at a
price disadvantage when compared with many non-holographic alternatives. As a
result, the Company expects to continue to encounter significant competition
from manufacturers of non-holographic materials in its markets, particularly as
it seeks to expand the applications for its products.

The market for holographic films is characterized by intense competition,
changing technology and evolving standards. Competitors vary based upon the type
of raw materials used, the quality and consistency of the holographic films they
produce, and the variety of stock patterns that they offer. Many of the
Company's current and potential competitors within the holographic materials
market have significantly greater financial, manufacturing, marketing and other
resources than the Company. These competitors may be able to use these resources
to expand the applications and market acceptance for their products and to
capture a greater share of the holographic films market or other non-holographic
markets. At the lower quality or "commodity" end of the holographic materials
market, the Company also faces potential competition from new entrants, since
basic holographic technology is well known and there are relatively low barriers
to entry. The Company also anticipates increased competition in this portion of
the market from other established and emerging companies. Increased competition
may result in price reductions, lower gross margins or loss of market share, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."

9
<PAGE> 11

FLUCTUATIONS OF QUARTERLY OPERATING RESULTS

The Company's operating results have in the past fluctuated and may
continue to fluctuate in the future, based on a number of factors, not all of
which are under the Company's control. These factors include, without
limitation, the size and timing of significant customer orders, changes in
pricing policies or price reductions by the Company or its competitors,
variations in the Company's sales channels or the mix of product sales, market
acceptance of product applications, the Company's ability to control costs,
possible delays in the shipment of products, currency fluctuations, personnel
changes, and general economic and market conditions. The Company generally ships
its products as orders are received, and accordingly, the Company historically
has had very little backlog. As a result, sales in any quarter are dependent
upon orders booked and shipped in that quarter and are not predictable with any
degree of certainty. Consequently, there may be significant variations in the
Company's operating results, and the results achieved in any quarter should not
be viewed as necessarily indicative of the results that will be achieved for a
full fiscal year or any future quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International product sales represented approximately 44% and 39% of the
Company's net sales during the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. The Company believes that international
sales will continue to represent a significant portion of its net sales, and
that continued growth will require increased international sales. Currently, all
of the Company's sales are denominated in United States dollars. The Company's
international sales may be adversely affected by currency exchange rate
fluctuations, changes in regulatory requirements, tariffs and other trade
barriers, varying technical standards, longer accounts receivable payment
cycles, difficulties in managing international operations and retaining
qualified international distributors and marketing representatives, potentially
adverse tax consequences, the burdens of compliance with a wide variety of
foreign laws, or political and economical instability, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales and Marketing;
Principal Customers."

AVAILABILITY AND PRICE OF POLYESTER

Polyester, a petroleum based polymer, is the basic raw material used in
substantially all of the Company's products and constitutes a significant
component of the Company's cost of sales. Historically, the price of polyester
has experienced significant fluctuations as a result of changes in worldwide
manufacturing capacity and the demand for and prices of petrochemicals. The
Company has never entered into long-term contracts for the purchase of
polyester. Consequently, no assurance can be given that polyester will continue
to be available on a timely basis, at acceptable prices or in quantities or
thicknesses required by the Company. Large price increases in or a shortage of
supply of polyester could have a material adverse effect on the Company's
business, financial condition and results of operations.

While the Company does not rely on any single source of supply for
polyester, the loss of any of the Company's suppliers could slow production and
adversely affect the Company's business until alternative supply arrangements
could be secured. In addition, there can be no assurance that any new supply
arrangement would be available to the Company on a timely basis or on terms
comparable with its existing supply arrangements. See
"Business -- Manufacturing."

CONCENTRATION OF CUSTOMER SALES

The Company has in the past derived, and expects in the future to continue
to derive, a significant portion of its net sales from a relatively small number
of customers, the identity of which have varied historically from period to
period. Approximately 24%, 17% and 32% of the Company's net sales for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively, were derived from sales of products to the Company's three largest
customers in each of these periods. No single customer

10
<PAGE> 12

accounted for 10% or more of the Company's net sales during each of these
periods, other than Labelad/Sandylion, which accounted for 13%, 10% and 17% of
the Company's net sales for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, respectively. The Company expects that it
will continue to be dependent upon a limited number of customers that place
large orders for a significant part of its net sales in any future period. There
can be no assurance that any sales to the Company's existing customers,
individually or as a group, will continue or, if continued, will reach or exceed
historical levels in any future period. In addition, the loss of any significant
customer could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Marketing; Principal Customers."

RISK OF DISASTER

The Company currently manufactures all of its products at two facilities
located in Los Angeles, California. Substantially all of the equipment used in
these facilities was designed and built by the Company and is not available for
purchase elsewhere. Due to the need for substantial security to protect the
Company's proprietary rights, the Company's manufacturing processes cannot
readily be moved to replacement facilities. Accordingly, if a disaster (such as
an earthquake or fire) were to destroy or significantly damage either of these
facilities, the Company would need to acquire new facilities and rebuild its
machinery and custom microreplication equipment, which could take six months or
longer. Customer orders would have to be supplied from existing inventory, which
likely would not be sufficient to cover customers' needs. The loss of the
Company's manufacturing capability would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Reliance on Key Personnel" and "Business -- Manufacturing."

CONTROL BY EXISTING STOCKHOLDERS

Immediately following this Offering, Messrs. Conway, Foster, J. Wanlass and
M. Wanlass will beneficially own approximately % of the Company's
outstanding shares of Common Stock ( % if the Underwriters' over-allotment
option is exercised in full). As a result, these four individuals, who have
functioned together as the Company's management team for more than fifteen
years, will be able to significantly influence the use of the Company's proceeds
from this Offering, the election of the Company's directors, and the outcome of
corporate actions requiring stockholder approval, regardless of how other
stockholders of the Company may vote. If, for example, they were to act in
concert, they would be able to elect all of the directors and approve any
proposal submitted to the stockholders that requires the approval only of a
majority of a quorum of the stockholders at a valid meeting. Such a high level
of ownership by such persons may have a significant effect in delaying,
deferring or preventing a change in control of the Company. See
"Management -- Executive Officers and Directors" and "Principal and Selling
Stockholders."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The Company believes
that the price of its Common Stock could fluctuate, perhaps substantially, as a
result of the following factors: announcements of developments related to the
Company's business; fluctuations in operating results; failure to meet
securities analysts' expectations; the gain or loss of significant orders or
customers; changes in management; announcements of technological innovations or
new products by the Company, its customers or its competitors; general trends in
the industry and other events. In addition, in recent years, the stock market
has experienced extreme price and volume fluctuations which have affected the
market price for the securities of companies similar to the Company, and which
have often been unrelated to the operating performance of the companies whose
stocks were affected. Such fluctuations could adversely affect the market price
of the Company's Common Stock.

11
<PAGE> 13

BROAD DISCRETION OVER USE OF PROCEEDS

A significant portion of the estimated net proceeds of this Offering has
not been allocated to a particular purpose, and management's allocation
decisions concerning such net proceeds are dependent on a variety of factors,
including the Company's ability to find additional applications for its products
and the timing and status of new product developments. Accordingly, management
will have broad discretion in allocating the net proceeds of this Offering, and
no stockholder approval will be required for such allocations. See "Use of
Proceeds."

ENVIRONMENTAL CONCERNS

The Company is subject to a variety of governmental regulations related to
the discharge and disposal of toxic, volatile or otherwise hazardous substances
used on the Company's premises, including state and local ordinances prohibiting
or restricting the use or disposal of solvents, polyester and certain other
materials used by the Company. Widespread adoption of such restrictions and a
resulting decline in consumer preference for polyester or other polymer products
due to environmental considerations could adversely effect demand for the
Company's products. The adoption of laws prohibiting or restricting the use or
disposal of aluminum dust or other waste products of the Company's metallizing
processes could substantially increase the Company's manufacturing costs or make
metallizing impractical, either of which would have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company fails to comply with environmental laws and regulations, it could be
subject to liability ranging from monetary damages to injunctions, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after
this Offering could adversely affect the market price of the Common Stock. Upon
the completion of this Offering, the Company will have a total of shares
of Common Stock outstanding, of which the shares offered hereby will
be freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"). The remaining shares are "restricted
securities" as defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in the public market 180 days after the date of this
Prospectus in reliance on Rule 144 (subject to the volume and other applicable
restrictions of Rule 144) following expiration of lock-up agreements to be
entered into by the holders of such shares with the representatives of the
Underwriters. In addition, following this Offering, the Company intends to file
a registration statement covering 303,000 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Incentive Plan, of which options to
purchase 91,500 shares of Common Stock were outstanding at November 1, 1997.
None of these options vest until April 1998. Subject to Rule 144 volume
limitations applicable to affiliates, such shares will be available for sale in
the open market at the time they are exercised by the holders thereof. The
Company is unable to estimate the number of shares of the Company's Common Stock
that will be sold under Rule 144 or under the planned registration statement,
since such sales will depend in part on the market price for the Common Stock,
the personal circumstances of the sellers and other factors not susceptible of
being known in advance. Prior to this Offering, there has been no public market
for the Common Stock, and any sale of substantial amounts of restricted shares
in the open market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock offered hereby. See
"Management -- 1997 Stock Inventive Plan," "Principal and Selling Stockholders"
and "Shares Eligible for Future Sale."

ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW;
POTENTIAL ADVERSE EFFECT OF UNISSUED PREFERRED STOCK

Certain provisions of the Company's Certificate of Incorporation and Bylaws
and of the Delaware General Corporation Law, together or separately, could have
the effect of discouraging potential acquisition proposals or delaying or
preventing changes in the control or management of the Company, and may limit
the price that certain investors might be willing to pay in the future for
shares of the Common Stock. These provisions include the ability to issue,
without further stockholder approval, preferred stock with voting rights,

12
<PAGE> 14

liquidating preferences, redemption rights and other rights and privileges
senior to the Common Stock. See "Description of Securities."

DILUTION

Purchasers of the Common Stock of the Company in this Offering will
experience immediate and substantial dilution in the net tangible book value of
the Common Stock from the initial public offering price. See "Dilution."

ABSENCE OF DIVIDENDS

Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on shares of its capital stock. The Company currently
intends to retain any future earnings in its business and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy."

FORWARD LOOKING STATEMENTS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as within the Prospectus generally. Such
statements are subject to a number of risks and uncertainties. Actual results in
the future could differ materially from those described in the forward-looking
statements as a result of the risk factors set forth above and the matters set
forth in this Prospectus generally. The Company undertakes no obligation to
publicly release the result of any revisions of these forward-looking statements
that may be made to reflect any future events or circumstances.

13
<PAGE> 15

PRIOR S CORPORATION STATUS

On January 1, 1997, the Company elected to be treated as an S Corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable state tax laws. As a result, substantially all of the Company's
earnings from January 1, 1997 until the date of termination of the Company's S
Corporation status (the "Termination Date") have been or will be included in the
taxable income of its stockholders for federal and certain state income tax
purposes, and the Company has not and will not be subject to tax on such
earnings, other than California franchise taxes. Deferred income taxes recorded
when the Company was taxed as a C Corporation were written-off on January 1,
1997. Following the Termination Date, the Company will no longer be treated as
an S Corporation, and accordingly, will be fully subject to federal and state
income taxes. The Termination Date will be on or immediately prior to the
consummation of the Offering.

In October 1997, the Company made a distribution to its existing
stockholders consisting of promissory notes (the "Stockholder Notes") in an
aggregate amount equal to the undistributed retained earnings of the Company
(which is estimated to be approximately $3.0 million at the Termination Date)
from January 1, 1997 through the Termination Date (the "S Corporation
Distribution"). The Stockholders Notes are due and payable on April 1, 1998, and
bear interest at the rate of 5.5% per annum. The Company intends to use a
portion of the proceeds of this Offering to repay all amounts due under the
Stockholder Notes upon consummation of this Offering. See "Use of Proceeds" and
"Certain Transactions."

On the Termination Date, as a result of its conversion to a C Corporation,
the Company will record an estimated $541,000 increase in earnings to establish
deferred income taxes which were previously the responsibility of the existing
stockholders. See Note 6 of Notes to Financial Statements.

Prior to the consummation of this Offering, the Company intends to enter
into a tax indemnity agreement with its existing stockholders pursuant to which
the Company will indemnify such stockholders, and such stockholders will
indemnify the Company, against unexpected tax consequences resulting from
adjustments to allocations of income.

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Common
Stock are estimated to be approximately $ million ($ million if the
Underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discounts and commissions, and estimated offering
expenses.

The Company intends to use approximately $4.5 million to purchase capital
equipment (primarily for the Company's laser laboratory and mastering facility).
The Company also intends to use approximately $3.0 million of the net proceeds
of this Offering to repay the Stockholder Notes (representing the S Corporation
Distribution) and approximately $100,000 to repay the indebtedness outstanding
under the Company's bank line of credit. The proceeds from this line of credit
were used to repay all outstanding indebtedness under the Company's former line
of credit and for general working capital purposes. All outstanding indebtedness
under the Company's current line of credit and the Stockholder Notes is due and
payable on April 1, 1998. Interest accrues on the Stockholder Notes at 5.5% per
annum and on the current line of credit at the base rate announced by the
Company's senior lender from time to time, plus .75% (9.25% at September 30,
1997).

The balance of the net proceeds of this Offering will be used to fund the
relocation of the Company's manufacturing facilities to its new facility, to
expand the Company's marketing and packaging capabilities and for other general
corporate purposes, including working capital requirements. The Company may also
use a portion of the net proceeds of this Offering for acquisitions of
complementary businesses and technologies, although the Company currently has no
agreement or understanding with respect to any such acquisitions at this time.
Pending the use thereof, the Company intends to invest the net proceeds in
short-term, interest bearing, investment grade securities.

The Company will not receive any of the proceeds from the sale of the
shares of Common Stock being sold by the Selling Stockholders.

DIVIDEND POLICY

Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on its Common Stock. The Company anticipates that all
future earnings, if any, will be retained for use in the Company's business and
does not anticipate paying any cash dividends in the foreseeable future.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth (i) the Company's actual capitalization as
of September 30, 1997, (ii) pro forma to give effect to the S Corporation
Distribution as if it had been made at September 30, 1997 and an increase of
$541,000 to earnings to establish the net deferred taxes of the Company that
would have been recorded had the Company's S Corporation status terminated on
September 30, 1997, and (iii) pro forma as adjusted to reflect the sale of
shares of Common Stock offered hereby (assuming an initial offering
price of $ per share) and the application of the net proceeds therefrom
(including the repayment of indebtedness incurred under the Company's bank line
of credit and the Stockholders Notes).

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable................................................ $ 800 $ 800 $
Stockholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued or outstanding.........................
Common Stock, no par value; 20,000,000 shares authorized;
3,012,035 shares issued and outstanding, actual(2);
shares issued and outstanding, pro
forma(2)(3); and shares issued and
outstanding, pro forma as adjusted (2)(3)............... 10 10
Additional paid in capital................................. 60 3,060
Retained earnings.......................................... 8,281 4,734
------- ------- -------
Total stockholders' equity.............................. 8,351 7,804
------- ------- -------
Total capitalization.................................... $ 9,151 $8,604 $
======= ======= =======
</TABLE>

- ---------------

(1) See "Prior S Corporation Status" and Note 2 to Notes to Financial
Statements.

(2) Excludes 303,000 shares of Common Stock reserved for issuance under the 1997
Stock Incentive Plan, of which 91,500 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $16.73 at
November 1, 1997. See "Management -- 1997 Stock Incentive Plan."

(3) Also includes as outstanding during each of the periods presented,
shares of the Common Stock offered by the Company, which represent
the approximate number of shares deemed to be sold by the Company to fund
the repayment of the Stockholder Notes. See "Prior S Corporation Status,"
"Use of Proceeds" and Note 2 of Notes to Financial Statements.

16
<PAGE> 18

DILUTION

The net tangible book value of the Company at September 30, 1997 was $8.4
million or $2.77 per share of Common Stock. Net tangible book value per share is
equal to the Company's total assets less its total liabilities, divided by the
total number of outstanding shares of Common Stock. After giving effect to (i)
the sale of shares of Common Stock in this Offering and the
application of the net proceeds therefrom and (ii) the S Corporation
Distribution, the pro forma net tangible book value of the Company as adjusted
at September 30, 1997 would have been $ million or $ per share. See
"Prior S Corporation Status" and "Use of Proceeds." This represents an immediate
increase in the net tangible book value of $ to existing stockholders
and an immediate dilution of $ per share to new investors purchasing shares
of Common Stock in this Offering. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
-------
Net tangible book value per share as of September 30, 1997....... $ 2.77
-------
Decrease attributable to S Corporation Distribution.............. $
-------
Increase per share attributable to new investors................. $
-------
Pro forma net tangible book value per share as adjusted after this
Offering......................................................... $
-------
Dilution per share to new investors................................ $
=======
</TABLE>

The information with respect to net tangible book value per share in the
table set forth above does not include 91,500 shares of Common Stock which were
subject to outstanding options as of November 1, 1997 at a weighted average
exercise price of $16.73 per share under the 1997 Stock Incentive Plan. As of
November 1, 1997, 303,000 shares were reserved for issuance under the 1997 Plan
(inclusive of the 91,500 shares noted above). See "Management -- 1997 Stock
Incentive Plan." To the extent such options are exercised, there will be further
dilution to the new investors.

The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by existing stockholders and by new investors purchasing shares in this Offering
(assuming an initial public offering price of $ per share and before
deducting underwriting discounts and commissions and estimated offering
expenses).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL
------------------- CONSIDERATION
----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 3,012,035 % $70,000 % $ 0.023
New investors...................... % $
--------
-
--------- ----- -----
Total......................... 100.0% $ %
========= ===== ========= =====
</TABLE>

- ---------------
(1) Sales by the Selling Stockholders in this Offering will cause the number of
shares held by existing stockholders in the table set forth above to be
reduced to shares or % of the total number of shares to be
outstanding after this Offering. If the Underwriters' over-allotment option
is exercised in full, the number of shares held by existing stockholders in
the table set forth above will be further reduced to shares,
or % of the total number of shares to be outstanding after this
Offering. See "Principal and Selling Stockholders."

17
<PAGE> 19

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1995 and 1996 and
September 30, 1997, and for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1997, has been derived from the financial
statements of the Company which have been audited by Deloitte & Touche LLP and
are included elsewhere in this Prospectus. The following selected financial data
as of December 31, 1992, 1993 and 1994, and September 30, 1996, and for the
years ended December 31, 1992 and 1993 and the nine months ended September 30,
1996 has been derived from the Company's unaudited financial statements. The
unaudited financial statements reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The results for the nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year ending December 31, 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 8,457 $ 11,857
Cost of goods sold........................ 3,078 2,902 5,243 5,573 7,114 5,013 6,644
--------- --------- --------- --------- --------- --------- ---------
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 3,444 5,213
Selling, general and administrative
expense................................. 1,148 1,368 1,531 1,780 2,142 1,363 2,201
Research and development expense.......... 238 397 576 571 504 379 193
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................... 72 2,720 1,702 2,396 2,243 1,702 2,819
Interest expense.......................... 5 32 34 68 157 116 79
Other income (expense).................... 7 37 136 67 59 83 42
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,669 2,782
Provision for income taxes................ 30 701 791 1,021 851 662 673(2)
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 1,007 $ 2,109
========= ========= ========= ========= ========= ========= =========
Net income per common and common
equivalent share........................ $ 0.01 $ 0.66 $ 0.33 $ 0.45 $ 0.42 $ 0.33
========= ========= ========= ========= ========= =========
Weighted average common and common
equivalent shares(1).................... 3,048,273 3,048,273 3,048,273 3,048,273 3,049,636 3,048,273

Pro forma provision for income taxes(3)... $ 1,220
=========
Pro forma net income(3)................... $ 1,562
=========
Pro forma net income per share(3)......... $
=========
Pro forma weighted average common and
common equivalent shares(1)(4)..........
OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 92 $ 334
Research and development.................. 238 397 576 571 504 379 193
Depreciation and amortization............. 79 214 107 165 310 232 313
EBITDA(5)................................. 158 2,971 1,945 2,628 2,612 2,017 3,174
Cash flow provided by (used in) operating
activities.............................. (424) 464 164 (5) 1,346 1,037 1,477
</TABLE>

18
<PAGE> 20

<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 17 $ 324 $ 75 $ 97 $ 462 $ 311 $ 1,038
Working capital........................... 1 2,128 2,814 3,134 4,097 4,025 6,200
Total assets.............................. 1,382 3,868 4,726 8,523 8,764 8,501 10,186
Notes payable............................. -- 17 12 1,582 695 1,029 800
Retained earnings......................... 467 2,491 3,504 4,878 6,172 5,885 8,281
Stockholders' equity...................... 477 2,501 3,513 4,888 6,242 5,895 8,351
</TABLE>

- ---------------
(1) See Note 2 to Notes to Financial Statements.

(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company has been taxed as a C Corporation for the nine months ended
September 30, 1997. Upon consummation of the Offering, the Company will be
subject to federal and state income taxes. See "Prior S Corporation Status."

(4) Also assumes as outstanding during each of the periods presented,
shares of Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes. See "Prior S Corporation
Status," "Use of Proceeds" and Note 2 of Notes to Financial Statements.

(5) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a GAAP measurement of income. EBITDA may not provide an accurate
comparison among companies because it is not necessarily computed by all
companies in an identical manner. The use of such information is intended
only to supplement the conventional income statement presentation, and is
not to be considered as an alternative to net income, cash flows from
operating activities or any other indicator of the Company's operating
performance which is presented in accordance with GAAP above.

19
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company commenced operations in October 1980 to pioneer the research
and development of microreplicated surfaces for use in holographic sheet
products, high-end special effect camera lenses and projection filters. The
Company initially manufactured these products on a custom order basis, one batch
at a time. Through considerable research, the Company developed proprietary
processes that enable it to manufacture microreplicated surfaces continuously
onto rolls of polymer film. This breakthrough has enabled the Company to
significantly increase its production speeds, lower costs, improve quality and
take advantage of the growing market for holographic films.

The commercial applications of the Company's proprietary microreplication
technologies have changed significantly over time. In the late 1980s and early
1990s, the Company manufactured large quantities of holographic custom images
for its customers. In 1992, the Company shifted its focus from the manufacture
of custom images to the mass production of microreplicated polymer films
featuring the Company's proprietary stock holographic patterns. This shift
enabled the Company to reduce its dependence upon large custom orders, increase
sales volumes, expand new product applications and improve manufacturing
efficiencies. The Company now focuses on three primary market segments: consumer
products, packaging materials and industrial applications. Sales of holographic
films featuring the Company's proprietary stock patterns constituted
substantially all of the Company's net sales during the year ended December 31,
1996 and the nine months ended September 30, 1997.

The Company's proprietary manufacturing processes consist of creating image
or pattern masters and microreplicating the master's surface topography onto
continuous rolls of polymer films. Most of the Company's polymer films are
"metallized" by thermally evaporating aluminum onto the holographic film,
creating a metallic or reflective appearance to the film. Once metallized, the
film often undergoes a number of converting or other finishing steps prior to
sale, including laminating, cutting, coating, slitting or sheeting processes.

Prior to 1996, the Company contracted with third party vendors to perform
substantially all of the metallizing and converting steps other than slitting.
In response to expanding sales, the Company made a capital investment in late
1995 of more than $1.5 million to obtain metallizing capabilities. This
investment was made to reduce the Company's metallizing costs, improve quality
and shorten turnaround time. The Company facilitates the sale of its products by
outsourcing certain nonproprietary conversion or finishing processes. While the
Company's products include both converted and unconverted holographic films, the
Company realizes higher gross margins on sales of its unconverted films. In 1996
and the nine months ended September 30, 1997, approximately one third of the
Company's cost of goods sold represented costs associated with outsourced
conversion processes.

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Financial Statements and notes
thereto included elsewhere in this Prospectus. Historical results of operations,
percentage relationships and any trends that may be inferred from the discussion
below are not necessarily indicative of the results for any future period.

20
<PAGE> 22

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain statement
of operations data of the Company.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
------ ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $9,052 $10,320 $12,003 $8,457 $11,857
Cost of goods sold................. 5,243 5,573 7,114 5,013 6,644
------ ------- ------- ------ -------
Gross profit....................... 3,809 4,747 4,889 3,444 5,213
Selling, general and administrative
expense.......................... 1,531 1,780 2,142 1,363 2,201
Research and development expense... 576 571 504 379 193
------ ------- ------- ------ -------
Income from operations............. 1,702 2,396 2,243 1,702 2,819
Interest expense................... 34 68 157 116 79
Other income (expense)............. 136 67 59 83 42
------ ------- ------- ------ -------
Income before provision for income
taxes............................ 1,804 2,395 2,145 1,669 2,782
Provision for income taxes......... 791 1,021 851 662 673(1)
------ ------- ------- ------ -------
Net income......................... $1,013 $ 1,374 $ 1,294 $1,007 $ 2,109(1)
====== ======= ======= ====== =======
</TABLE>

The following table sets forth for the periods indicated, the percentages
of net sales represented by each item in the Company's statement of operations.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 57.9 54.0 59.3 59.3 56.0
----- ----- ----- ----- -----
Gross profit............................... 42.1 46.0 40.7 40.7 44.0
Selling, general and administrative
expense.................................. 16.9 17.3 17.8 16.1 18.6
Research and development expense........... 6.4 5.5 4.2 4.5 1.6
----- ----- ----- ----- -----
Income from operations..................... 18.8 23.2 18.7 20.1 23.8
Interest expense........................... 0.4 0.7 1.3 1.4 0.7
Other income............................... 1.5 0.7 0.5 1.0 0.4
----- ----- ----- ----- -----
Income before provision for income taxes... 19.9 23.2 17.9 19.7 23.5
Provision for income taxes................. 8.7 9.9 7.1 7.8 5.7(1)
----- ----- ----- ----- -----
Net income................................. 11.2% 13.3% 10.8% 11.9% 17.8%(1)
===== ===== ===== ===== =====
</TABLE>

- ---------------

(1) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the nine
months ended September 30, 1997 consists primarily of net deferred tax
assets which were written-off in January 1997 upon the Company's election to
be taxed as an S Corporation. If the Company had been taxed as a C
Corporation for the nine months ended September 30, 1997, the pro forma
provision for income taxes and the pro forma net income would have been
$1,220,000 (10.3% of net sales) and $1,562,000 (13.2% of net sales),
respectively.

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

Net Sales. Net sales increased 40.2% to $11.9 million in the nine month
period ended September 30, 1997 from $8.5 million in the corresponding period of
1996. Increased sales of $2.8 million to the Company's ten largest customers
across all existing product markets constituted 81.9% of this increase.
Increased sales in

21
<PAGE> 23

the nine months ended September 30, 1997 also reflected expanded applications of
the Company's films in the consumer products market and increased demand for
geometric pigment and glitter.

Gross Profit. Gross profit increased 51.3% to $5.2 million in the nine
months ended September 30, 1997 from $3.4 million in the corresponding period of
1996. Gross profit as a percentage of net sales for the nine months ended
September 30, 1997 increased to 44.0% from 40.7% in the corresponding period of
1996. The improvement in gross profit as a percentage of net sales primarily
reflected the absorption of fixed overhead over an increased production volume
in the third quarter of 1997 and increased sales of unconverted films to certain
large customers in the third quarter of 1997. The improvement in gross profit as
a percentage of net sales was offset in part by lower selling prices to select
customers associated with higher sales volumes during the first six months of
1997.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 61.4% to $2.2 million (18.6% of net sales) in
the nine months ended September 30, 1997 from $1.4 million (16.1% of net sales)
in the corresponding period of 1996. This increase reflects higher expenses
associated with additional administrative and sales and marketing personnel
hired in connection with the Company's business expansion, and higher
commissions associated with the Company's increased net sales.

Research and Development Expense. Research and development expense
decreased 49.1% to $193,000 (1.6% of net sales) in the nine months ended
September 30, 1997 from $379,000 (4.5% of net sales) in the corresponding period
of 1996. Research and development efforts during the first nine months of 1997
were focused primarily on the completion of proprietary manufacturing equipment
capable of producing 55 inch web and the creation of two new custom masters used
in the manufacturing process. The Company capitalized approximately $185,000
related to these development efforts during the nine months ended September 30,
1997, and anticipates that these projects will be completed in the last quarter
of 1997.

Income From Operations. Income from operations increased 65.6% to $2.8
million (23.8% of net sales) in the nine months ended September 30, 1997 from
$1.7 million (20.1% of net sales) in the corresponding period of 1996. This
increase as a percentage of net sales was primarily due to increased sales by
the Company of higher margin products in the third quarter of 1997, partially
offset by the increase in selling, general and administrative expense described
above.

Interest Expense. Interest expense decreased 31.9% to $79,000 in the nine
months ended September 30, 1997 from $116,000 in the corresponding period of
1996. This decrease related primarily to the repayment of debt related to the
acquisition of the metallizer and incurred in connection with loans previously
advanced from time to time to the Company from certain of its officers in order
to finance the Company's operations.

Other Income (Expense). Other income (expense) decreased 49.4% to $42,000
in the nine months ended September 30, 1997 from $83,000 in the corresponding
period of 1996. This decrease was primarily due to audit adjustments to the
Company's 1994 and 1995 federal income tax returns and amortization of a loan
fee incurred in connection with the establishment of the Company's $3.5 million
line of credit facility in March 1997, which was partially offset by royalties
paid to the Company by a large label and packaging company for the license of
two of the Company's stock holographic patterns. The timing of the licensee's
promotional programs and product labeling needs varies from time to time,
resulting in fluctuations in other income.

Provision for Income Taxes. Historically, the Company has provided for
federal and state income taxes at a blended rate of approximately 42%. The
Company does not have any net operating losses or other unusual items that would
create significant differences between the tax rate applied in the financial
statements from the statutory tax rates. From January 1, 1997 through the
Termination Date, the Company elected to be treated as an S Corporation for
federal and state income tax purposes. As a consequence, the Company generally
did not have any income tax liability during this period, and the Company's
earnings were treated as having been distributed to the existing stockholders
for income tax reporting purposes. As a result of this election, approximately
$619,000 of net deferred tax assets that were outstanding at December 31, 1996
were written off on January 1, 1997 upon the Company's election to be treated as
an S Corporation.

22
<PAGE> 24

Net Income. Net income increased 109.4% to $2.1 million (17.8% of net
sales) for the nine months ended September 30, 1997 from $1.0 million (11.9% of
net sales) in the corresponding period of 1996. If income taxes had been
recorded during the nine months ended September 30, 1997 as if the Company were
a C Corporation, net income would have increased 55.1% to $1.6 million (13.2% of
net sales) for the nine months ended September 30, 1997 from $1.0 million (11.9%
of net sales) in the corresponding period of 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net Sales. Net sales increased 16.3% to $12.0 million in 1996 from $10.3
million in 1995. This increase in net sales was derived from sales growth across
the Company's diverse base of customers.

Gross Profit. Gross profit increased 3.0% to $4.9 million in 1996 from $4.7
million in 1995, although gross margin declined to 40.7% in 1996 from 46.0% in
1995. In October 1995, the Company made an investment in substantially larger
facilities, expanding from 27,500 square feet to approximately 77,700 square
feet, in response to the growing commercial demand for its products. This
relocation increased the Company's fixed overhead costs related to internal
manufacturing, warehousing and shipping, causing gross profit as a percentage of
net sales to decline. The Company also invested in new metallizing equipment in
February 1996, which resulted in additional fixed costs during this period. The
decline in gross profit as a percentage of net sales also reflects increased
depreciation expense associated with the acquisition of the metallizing
equipment. The Company believes these strategic investments will enable the
Company to better take advantage of growth opportunities and to achieve
economies of scale.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.3% to $2.1 million (17.8% of net sales) in
1996 from $1.8 million (17.3% of net sales) in 1995. The increase reflects
higher expenses associated with additional administrative and sales and
marketing personnel, and higher commissions associated with the Company's
increased net sales, as well as higher professional fees related to a three year
audit of the Company's accounts and records.

Research and Development Expense. Research and development expense declined
11.7% to $504,000 (4.2% of net sales) in 1996 from $571,000 (5.5% of net sales)
in 1995. This decrease was primarily due to the timing of development projects.

Income From Operations. Income from operations declined 6.4% to $2.2
million (18.7% of net sales) in 1996 from $2.4 million (23.2% of net sales) in
1995. This decline primarily reflected the decrease in gross profit as a
percentage of net sales due to the Company's significant investment in
facilities and equipment as described above.

Interest Expense. Interest expense increased 130.9% to $157,000 in 1996
from $68,000 in 1995. This increase was due in part to interest incurred in
connection with the Company's financing of certain metallizing equipment that
was purchased in the fourth quarter of 1995. This increase reflected $61,000 of
interest incurred in connection with advances from officers as previously
described.

Other Income. Other income decreased 11.9% to $59,000 in 1996 from $67,000
in 1995. This decrease resulted from a decline in royalties paid by one customer
in connection with the license of two of the Company's stock holographic
patterns.

Provision for Income Taxes. The Company has provided for federal and state
income taxes at a blended rate of approximately 42%. The Company does not have
any net operating losses or other unusual items that would create significant
differences between the tax rate applied in the financial statements from the
statutory tax rates.

Net Income. Net income decreased 5.8% to $1.3 million (10.8% of net sales)
in 1996 from $1.4 million (13.3% of net sales) in 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net Sales. Net sales increased 14.0% to $10.3 million in 1995 from $9.0
million 1994. This growth was primarily attributable to increased market
acceptance of the Company's glitter products and higher sales of

23
<PAGE> 25

pressure sensitive films to the Company's largest customer in 1995. These
increases were offset in part by declining sales to certain significant
customers, reflecting a change in their product mix.

Gross Profit. Gross profit increased 24.6% to $4.7 million in 1995 from
$3.8 million in 1994. Gross profit as a percentage of net sales increased to
46.0% in 1995 from 42.1% in 1994. Management believes that the improvement in
gross profit as a percentage of net sales was due in part to a shift in the
product sales mix towards higher margin pressure sensitive and unconverted
holographic films. This margin improvement also reflected the absorption of
fixed overhead over an increased production volume.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 16.3% to $1.8 million (17.3% of net sales) in
1995 from $1.5 million (16.9% of net sales) in 1994. This increase was largely
due to increased rental obligations incurred in connection with the Company's
relocation to larger facilities and related moving expenses. This increase was
also due to the addition of administrative and sales and marketing personnel and
higher commissions associated with increased net sales.

Research and Development Expense. Research and development expense remained
relatively constant, decreasing slightly to $571,000 (5.5% of net sales) in 1995
from $576,000 (6.4% of net sales) in 1994.

Income From Operations. Income from operations increased 40.8% to $2.4
million (23.2% of net sales) in 1995 from $1.7 million (18.8% of net sales) in
1994. This increase was primarily due to increased net sales and improved gross
profit as a percentage of net sales in 1995.

Interest Expense. Interest expense increased 100.0% to $68,000 in 1995 from
$34,000 in 1994. This increase reflected additional interest expense associated
with debt incurred in connection with the financing of certain metallizing
equipment that was purchased in the fourth quarter of 1995.

Other Income. Other income decreased 50.7% to $67,000 in 1995 from $136,000
in 1994. This decrease primarily resulted from a decline in royalties paid by
one customer in connection with the license of two of the Company's stock
holographic patterns.

Net Income. Net income increased 35.6% to $1.4 million (13.3% of net sales)
in 1995 from $1.0 million (11.2% of net sales) in 1994.

24
<PAGE> 26

QUARTERLY RESULTS

The following table presents selected quarterly financial information for
each of the eight quarters through September 30, 1997 and as a percentage of the
Company's net sales for the periods presented. This information is unaudited,
but in the opinion of the Company's management, reflects all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Quarterly results for prior periods
are not necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales...................... $2,488 $2,526 $2,926 $ 3,005 $3,546 $4,334 $3,288 $ 4,235
Cost of goods sold............. 1,344 1,497 1,734 1,781 2,102 2,633 1,893 2,118
------ ------ ------ ------- ------ ------ ------ -------
Gross profit................... 1,144 1,029 1,192 1,224 1,444 1,701 1,395 2,117
Selling, general and
administrative expense....... 452 455 438 470 779(1) 637 678 886
Research and development
expense...................... 143 127 128 124 125 130 42(2) 21(2)
------ ------ ------ ------- ------ ------ ------ -------
Income from operations......... 549 447 626 630 540 934 675 1,210
Income before provision for
income taxes................. 561 434 626 610 475 867 680 1,235
Provision for income taxes..... 239 173 248 241 189 635(3) 8(3) 30(3)
------ ------ ------ ------- ------ ------ ------ -------
Net income..................... $ 322 $ 261 $ 378 $ 369 $ 286 $ 232(3) $ 672(3) $ 1,205(3)
====== ====== ====== ======= ====== ====== ====== =======
</TABLE>

<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 54.0 59.3 59.3 59.3 59.3 60.7 57.6 50.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 46.0 40.7 40.7 40.7 40.7 39.3 42.4 50.0
Selling, general and
administrative expense....... 18.2 18.0 15.0 15.6 22.0(1) 14.7 20.6 20.9
Research and development
expense...................... 5.7 5.0 4.3 4.1 3.5 3.0 1.3 0.5
------ ------ ------ ------ ------ ------ ------ ------
Income from operations......... 22.1 17.7 21.4 21.0 15.2 21.6 20.5 28.6
Income before provision for
income taxes................. 22.5 17.2 21.4 20.3 13.4 20.0 20.6 29.2
Provision for income taxes..... 9.6 6.9 8.5 8.0 5.3 14.7(3) 0.2(3) 0.7(3)
------ ------ ------ ------ ------ ------ ------ ------
Net income..................... 12.9% 10.3% 12.9% 12.3% 8.1% 5.3%(3) 20.4%(3) 28.5%(3)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

- ---------------
(1) Includes year end bonuses in the aggregate amount of $125,000, as well as a
$47,500 year end audit fee.

(2) Reflects a shift in the research and development team's focus towards the
construction of the Company's new microreplication machine for 55 inch wide
holographic film and two new custom masters, resulting in related
capitalized expenses.

(3) The Company has been taxed as an S Corporation for federal and state
purposes since January 1, 1997. Provision for income taxes for the quarter
ended March 31, 1997 consists primarily of net deferred tax assets which
were written off in January 1997 upon the Company's election to be taxed as
an S Corporation. If the Company had been taxed as a C Corporation for the
quarters ended March 31, June 30 and September 30, 1997, the Company's pro
forma provision for income taxes and pro forma net income, respectively,
would have been $390,000 (9.0% of net sales) and $477,000 (11.0% of net
sales) for the quarter ended March 31, 1997; $307,000 (9.3% of net sales)
and $373,000 (11.3% of net sales) for the quarter ended June 30, 1997; and
$523,000 (12.3% of net sales) and $712,000 (16.8% of net sales) for the
quarter ended September 30, 1997.

25
<PAGE> 27

SEASONALITY

The Company's business historically has not been impacted by general
seasonal trends. Although a number of the Company's customers are affected by
seasonality (in the decorative packaging market in particular), the diversity of
the Company's customer base typically negates the impact of these patterns.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has relied generally on funds generated from
operations and loans from its officers to finance its operations. The ownership
of the Company has been primarily concentrated in four individuals who have not
received any dividend distributions since the Company commenced operations in
1980 (other than the S Corporation Distribution). Cash provided by (used in)
operating activities amounted to $(5,000), $1.3 million and $1.5 million for
1995, 1996 and the nine months ended September 30, 1997, respectively. Cash used
by the Company in investing activities amounted to $634,000, $103,000 and
$334,000 for 1995, 1996 and the nine months ended September 30, 1997,
respectively. These activities were restricted to the purchase of new
manufacturing equipment and office furniture. In particular, in 1995, the
Company used cash and an aggregate of $1.1 million in notes payable and advances
from officers to purchase a new metallizer machine at a cost of approximately
$1.5 million. Cash generated by (used in) financing activities in 1995 and 1996
primarily reflected the $1.1 million debt incurred to purchase a new metallizer
in 1995, and payments made to amortize principal and interest on that debt.
During the nine month period ended September 30, 1997, the Company borrowed
approximately $1.0 million pursuant to a new revolving line of credit, the
proceeds of which, along with cash flow from operations, were used to repay the
outstanding balance of approximately $695,000 on its prior credit line, and
approximately $672,000 that remained outstanding on advances from officers of
the Company.

The Company anticipates making capital expenditures of approximately $4.5
million through December 31, 1998 to expand and equip its laser laboratory,
quality control and research and development facilities, to relocate its
proprietary manufacturing operations to a new facility, to incorporate key
conversion steps into its manufacturing processes and, potentially, for
strategic acquisitions. The Company plans to use a portion of the proceeds of
this Offering to finance these capital expenditures.

In March 1997, the Company obtained a $3.5 million revolving credit line
facility from Citibank, FSB, which is secured by substantially all of the
Company's assets and has been guaranteed by four of the Company's stockholders.
The line of credit bears interest at Citibank's base rate plus .75% (9.25% at
September 30, 1997) and expires on April 1, 1998. At December 31, 1996, the
Company had $695,000 of outstanding indebtedness that was incurred to purchase
the Company's metallizer. The Company used borrowings under the new line of
credit to refinance that debt. The outstanding balance on the new line of credit
was approximately $100,000 at November 1, 1997. The Company plans to use a
portion of the net proceeds of this Offering to retire the balance outstanding
under the line of credit by December 31, 1997.

On January 1, 1997, the Company converted from a C Corporation to an S
Corporation and, in connection therewith, issued the Stockholder Notes to
provide the current stockholders with a one time distribution of retained
earnings derived from that time through the Termination Date. On or before the
consummation of the Offering, the Company will revert to a C Corporation. The
Company intends to use a portion of the proceeds of this Offering to repay all
amounts due under the Stockholder Notes upon consummation of this Offering
(estimated to be $3.0 million at the Termination Date). As a consequence of the
Company's January 1, 1997 election, approximately $619,000 of net deferred tax
assets that were outstanding at December 31, 1996 were written off on January 1,
1997.

The Company believes that funds generated from operations, the net proceeds
of the Offering and available borrowings under the Company's line of credit will
be sufficient to meet operating needs and other capital requirements of the
Company for at least the 18 months following the Offering.

26
<PAGE> 28

BUSINESS

GENERAL

Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, computer
games, food, beverages and displays; and in industrial applications such as
paint, fabrics, flooring and architectural materials. The Company has refined
its proprietary technology to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.

TECHNOLOGY OVERVIEW

Holograms consist of visual recordings of light wave patterns in a
compacted form that permit three dimensional information to be condensed onto a
flat surface. While holography was originally invented in 1947, broad commercial
applications of holographic materials did not occur until the late 1980s due to
the specialized technology necessary to mass produce holograms.

Holograms add a colorful new dimension to traditional merchandising media.
Attention is often drawn to holograms because images appear to project out of
the hologram, creating the illusion of depth. In addition, when a hologram is
viewed from different angles, features of the depicted object can be seen that
would not otherwise be visible in a conventionally printed image. The Company
believes significant growth potential exists in the applications for the
Company's products due to the visual appeal, impact and uniqueness of holograms.

Holograms are generally created using a four step manufacturing process
involving mastering, microreplication, metallizing and finishing. A master
hologram is created by recording the interference of two coherent laser beams
onto a plate coated with photosensitive material which creates light and dark
regions on the plate. The photosensitive materials undergo a development process
in which certain unexposed areas are removed from the photosensitive material on
the plate, leaving a pattern of microscopic grooves or bumps on the plate's
surface. The close spacing of the grooves or bumps facilitates the dispersion of
white light into its component spectral colors. Color dispersion is increased by
using finer groove spacing. Patterns and artwork may be created by arranging
areas of different grating angles and groove spacing.

Once the master is formed, most traditional holographers use an
electroforming nickel process to produce an exact copy or negative of the
master. This process involves silver coating the master and then plating nickel
over the silver resulting in a hard microreplication negative or a "shim." The
shim is typically wrapped around a cylinder in the microreplication machine.
Microreplication is the process by which the microscopic grooves and bumps from
the shim are transferred to and pressed into thin film material (usually
polyester, nylon, polypropylene or paper). A seam or pattern break on the
holographic film is usually created where the shim is joined as it is wrapped
around the pressure cylinder.

Commercial applications for this technology require the production of large
quantities of continuous thin film material. The uniformity of the optical and
physical properties of this material throughout a production run is often
critical. Large scale production is accomplished with high speed, close
tolerance microreplication equipment.

Once the holographic film is microreplicated, it is often metallized in a
vacuum chamber where aluminum is thermally evaporated onto the holographic film,
creating a reflective coating on the film. Once the holographic film is
produced, it is often sent to third party converters for further processing.
These

27
<PAGE> 29

converters cut the film into particulate, slit it into fine strips, coat or tint
the film or laminate the film to paper or board stock or pressure sensitive
backing.

THE SPECTRATEK ADVANTAGE

The Company's proprietary microreplication technologies have enabled the
Company to mass produce large quantities of holographic films which the Company
believes offer superior brightness, clarity and consistency when compared with
competitors' products. The Company's core strengths include the following:

Unlike most traditional holographers, the Company uses a proprietary
mastering process prior to microreplication that facilitates the mass production
of virtually seamless holographic patterns of a consistent quality. In this
mastering process, the Company creates its own master tool from the shim or the
original master (created either by the Company or by other custom holographers).
The Company utilizes this master tool in its microreplication machines instead
of a shim.

The Company is able to use this procedure to enhance and refine the shape,
size and position of the grooves on the master. By increasing the spacing of the
grooves (as many as 44,000 lines per linear inch) or depth of the bumps (often
only .25 micron deep) and by adjusting the frequency of the light waves (similar
to screening out audio noises), the Company is able to increase the brightness
and clarity of the hologram. The Company is not aware of any other competitor
that is able to modify or enhance a master hologram once it has been generated.
The brightness and clarity of the Company's films are retained even when the
films are finely chopped into geometric pigment. When added to paint or other
coatings, the Company's geometric pigment adds a sparkle and luster to the
finish. In addition, when viewed from different angles, the geometric pigment
creates an optical effect of changing colors. The Company believes these
different optical effects are sought after by large paint and coatings
companies.

The Company also has developed and constructed its own proprietary
microreplication machines that use the Company's unique mastering tool instead
of traditional shims. Because the grooves on a shim wear over time, films
produced using shims tend to lose their clarity and brightness as their groove
resolution deteriorates. The Company has experienced significantly less
deterioration in the groove structure in its mastering tool as compared to
traditional shims, thereby achieving greater output consistency and quality
throughout its production run. The Company is able to manufacture a large
quantity of film without a noticeable change in the quality of the films. The
failure of competitors' films to achieve uniformity throughout the production
run can make it difficult for printers to process the films due to mismatched
inks and can lead to an increased amount of wasted products. In addition,
because the Company's proprietary microreplication machines do not use shims,
the seams or breaks between the Company's patterns are virtually undetectable in
most of the Company's custom stock holographic patterns.

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<PAGE> 30

EXISTING MARKETS

The following table summarizes the Company's principal markets and product
applications:

<TABLE>
<CAPTION>
MARKET APPLICATION SELECTED END USERS *
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Consumer Products Children's stickers, wrapping DC Comics (Batman cover decals), Jerome
paper, bows, balloons, trading Russell Cosmetics (nail polish and body
cards, snowboards, magazines, gels), Labelad/Sandylion Sticker Co.
glitter, nail polish and (stickers), Motor Trend Magazine (cover
cosmetics. decals), MacUser and PCWorld (cover
decals), TOPPS (trading cards) and The
Upper Deck Company (trading cards)
- --------------------------------------------------------------------------------------------------------------
Packaging Materials Packaging and labels for toys, Coca-Cola (Hi-C labels), Coors (Coors
computer games, food, vitamins, Arctic Ice and Zima labels and signs),
beverages and cigarettes. Also Capital Records (security seals), GT
used in point of purchase Interactive (Duke Nukem software box),
displays and security seals. Kraft General Foods (Capri Sun
packaging), Lucas Art Entertainment (DIG
software box), Mattel (Barbie dolls and
packaging), Proctor & Gamble (Crest
decals), Ralston Purina (Ninja Turtles),
Sears (Mainframe garment tags), Sony
(security seals), Wachovia Bank
(security stickers for cashier's
checks), Wilson Sporting Goods (Pro
Staff Hammer tennis racquets) and
Wrigley Chewing Gum (bubble beeper)
- --------------------------------------------------------------------------------------------------------------
Industrial Applications Fabrics, paint, flooring and Charles Gray Interiors (AMC theater
architectural applications. decor), PPG Industries, Inc. (automobile
paint), Riviera Hotel (signage) and
Soorim Textile Co., Ltd. (fabrics)
</TABLE>

* The trademarks named are the property of their respective owners.

Consumer Products. The largest market addressed by the Company's products
is currently the consumer products market. The Company's films have been used in
children's stickers, wrapping paper, bows, balloons, trading cards, snow boards,
magazines, glitter, nail polish and cosmetics. The Company's largest application
to date within this market has been pressure sensitive labels. Consumer products
are often impulse purchases and the uniqueness and impact of holography can
differentiate products and draw attention to them at the point of purchase. The
Company believes that brightness and clarity of the films are key factors in
selecting holographic films for these applications.

Packaging Materials. The Company also manufactures holographic films for
flexible packaging and folding carton applications for a variety of consumer
products such as food, beverages, vitamins, cigarettes, toys and computer games.
The Company's products are also used in signage materials and point of purchase
displays. The Company believes significant growth opportunities exist for use of
the Company's products in the packaging materials market due to the visual
appeal, impact and uniqueness of holograms. The Company's holographic films are
selected in various packaging applications for appearance and functional
characteristics. Similar to the consumer products market, a significant
challenge in the packaging market is to draw the attention of the buyer to the
product. For packaging applications, the Company's proprietary stock pattern
films are often laminated to paper or board stock and then printed with a
combination of semi-opaque, opaque and reversed-out, four color process
printing, allowing the optical characteristics of the film to highlight certain
parts of the package.

The packaging market, which includes flexible packaging (bags and pouches)
as well as folding cartons, represents a significant expansion opportunity for
the Company. According to a recent report by the Flexible Packaging Association,
the size of the flexible packaging market is estimated to reach $16.4 billion in
1997. Holographic materials currently represent a very small share of this
market due to the higher cost of

29
<PAGE> 31

holographic materials as compared to traditional packaging materials. To date,
the Company's ability to serve the flexible packaging market has also been
constrained to a large degree by limitations on the width of its material. In
general, it is more economical for the flexible packaging industry to work with
wider materials than the Company has historically been able to produce.

The Company is in the process of building a new microreplication machine
which is anticipated to be completed in late 1997, which should enable the
Company to manufacture film 55 inches wide. The Company believes its ability to
manufacture this wider material will broaden the applications for its products
by enabling the Company to address the larger material requirements of the
packaging materials market on a more cost-effective basis. In 1998, the Company
plans to develop and build a microreplication machine to produce film that is 65
inches wide.

While the Company has produced only a limited quantity of holographic films
to date for the packaging market, its films were used in the Capri Sun package
for Kraft General Foods. The Company was presented a Silver Award/Structural
Packaging for the Capri Sun package as a part of the Beverage Packaging Global
Design Awards.

Industrial Applications. While industrial applications currently represent
the smallest existing market for the Company's products, the Company believes
this market offers the most significant growth opportunities. The Company's
products can be slit for use in fabrics, finely chopped into geometric pigment
to add sparkle to paint and flooring materials and can be used for architectural
applications such as billboard signage and window treatments. In general, the
Company's films can be used to replace mica or aluminum flakes in various
industrial applications.

The Company has developed proprietary microreplicating technologies which
enable the processing of polyester film ranging as thin as .004 inch to .00024
inch to a depth of .25 micron. The Company is not aware of any other company
with this capability. The Company is working with independent companies to
precision cut the Company's film into particles as small as 1/500 inch. The
Company has entered into joint development efforts with three large paint and
coating manufacturers to expand the applications for the Company's geometric
pigment, particularly for the automobile market. Metallic applications in
automobile paints are currently achieved by adding aluminum flakes or mica to
the paint. The Company's geometric pigment can be added to paint to achieve a
similar effect and to provide tiny pinpoints of reflecting light. Depending on
the angle of the sun, these pinpoints will reflect different colors. By varying
the size or amount of the pigment, the application of the Company's geometric
pigment to automobile paint can provide a subtle glimmer or a spectacular
sparkling effect. Due to the reflective nature of the Company's pigment and the
thinness of the material, the Company believes such effect can be achieved using
significantly less geometric pigment in the paint than would be required with
aluminum flakes or mica.

In July 1997, PPG Industries, Inc. launched the Prizmatique(TM) automobile
paint line which features the Company's geometric pigment. BASF and Englehard
are also beta testing the Company's geometric pigment for use in their paint
products. In addition to automobile paint, the Company's geometric pigment can
be used in a variety of other paint applications including bicycle, personal
watercraft and outdoor furniture paints.

BUSINESS STRATEGY

The Company's objective is to become the leading worldwide provider of
holographic materials by expanding the applications for its products,
continually improving the quality and consistency of its products, enhancing its
mastering capabilities and providing products that meet its customers'
objectives. The key elements of the Company's strategy include the following:

- Expand the Applications for the Company's Products. The Company currently
manufactures holographic film for use in the markets for consumer goods,
packaging materials and industrial applications. The Company believes
significant growth opportunities exist both for different applications
within these markets, as well as in new markets such as architectural
products. To date, the Company's penetration of the packaging market and
certain other markets has been constrained to a large degree by its
inability to produce materials in widths that can be efficiently
processed and used by converters, printers and finishers. The Company is
currently developing a new microreplication

30
<PAGE> 32

machine to manufacture 55 inch wide rolls of film which the Company
believes will enable it to better address the packaging market. The
Company also intends to focus its research and development efforts to
process thinner films, precision cut the Company's film into finer
particles, utilize other substrates and new coatings, and expand its
custom mastering capabilities.

- Maximize Cost Efficiencies. The Company plans to maintain its position as
a low cost producer of holographic films by expanding its production
facilities and by designing and building equipment capable of producing
wider material in larger quantities. The Company is currently operating
only one manufacturing shift and may be able to achieve greater
efficiencies by adding another shift, incorporating new equipment and
bringing certain of the manufacturing steps in house in order to lower
costs, increase quality and expedite turnaround. In addition, the Company
continually modifies its manufacturing processes and proprietary
microreplication equipment in order to utilize the Company's production
facilities more efficiently. In this regard, the Company's new metallizer
and the anticipated new microreplication machine should enable the
Company to manufacture 55 inch wide films with significantly less waste
than the Company's current 24 inch films.

- Expand Sales and Marketing Capabilities. The Company currently operates
in a number of discrete but very large market segments. The Company's
existing sales and marketing efforts have traditionally been product
oriented, with less emphasis directed to the specific industries in which
the Company's customers operate. As a result, the Company's sales and
marketing activities to date have been reactive. The Company plans to
redirect its marketing strategies based on product lines, focus on
in-depth knowledge of targeted applications, provide additional training
to existing employees, increase advertising to educate the Company's
target markets about the benefits of holographic products, and hire
additional marketing personnel and sales representatives to focus on
specific product opportunities in the markets for consumer products,
packaging materials and industrial applications.

- Leverage Proprietary Technology to Expand Mastering Capabilities. The
Company's founders have been refining the proprietary microreplication
technologies and holographic manufacturing processes for nearly twenty
years and accordingly have gained significant expertise in manufacturing
high quality, durable holographic films. While the Company has in recent
years focused its resources on refining its manufacturing processes, it
has elected not to produce its own custom imagery on a large scale basis
in order to achieve greater manufacturing efficiencies. The Company
believes, however, that the increasing utilization of holographic films
will necessitate expanding the Company's mastering capabilities to
respond to its customers' needs quickly and more effectively. The Company
intends to leverage its proprietary technology and know-how to provide
custom imagery upon customer request by designing and installing a laser
laboratory and mastering facility. The Company believes these added
capabilities will enable the Company to offer higher quality holographic
imagery, reduce the Company's reliance on third party custom holographers
and provide additional flexibility for its customers.

- Increase Penetration in International Markets. International sales
constitute a significant portion of the Company's net sales, and the
Company intends to devote additional resources to expand the worldwide
marketing of its products. The Company anticipates substantial growth
opportunities in China, Europe and South America, and intends to market
its custom stock patterns and geometric pigment aggressively in those
markets through the Company's existing direct sales organization. The
Company may also enter into distribution arrangements with foreign
distributors or agents to increase its penetration of these markets.

- Acquire Complementary Products and Technologies. The Company believes
that numerous consolidation opportunities exist in the holographic
materials market which could enable the Company to increase its market
share in its target markets, enter into new markets and attain cost
efficiencies in its manufacturing operations. The Company may seek to
acquire companies with an existing presence in certain markets, which
have well developed sales and marketing capabilities (both domestically
and internationally) or which have manufacturing expertise in certain of
the manufacturing steps not currently addressed by the Company.

31
<PAGE> 33

PRODUCTS

The Company's holographic films are used in a wide range of value added
applications in consumer products, packaging materials and industrial
applications. In general, the Company's films represent only a small percentage
of the cost of the final product, but can have a significant effect on the
product's marketability due to the visual appeal, impact and uniqueness of the
holographic material.

The Company currently sells its holographic films in five basic forms:
metallized film, metallized pressure sensitive film, permanent laminated film,
glitter or geometric pigment and non-metallized film. The Company offers these
products in 14 stock holographic patterns manufactured at widths of either 25
inches or 40 inches, primarily polyester, in a variety of gauges (thicknesses)
from .004 inch to .00024 inch. The Company is currently in the process of
developing a new microreplication machine to enable the Company to produce 55
inch wide film. The Company believes this wider material will expand the
applications for the Company's products by enabling the Company to address the
larger material requirements of the packaging market on a more efficient basis.

The Company's principal products include the following:

Metallized Film. Nearly all of the Company's holographic films are
metallized by the Company. Once the polyester film has been
microreplicated, the Company typically metallizes the film in a vacuum
chamber where aluminum is thermally evaporated onto the holographic film
providing a reflective coating on the film. Microreplicated metallized film
is the Company's core product and is typically sold to value added
resellers who either laminate the film or convert it into the final
product.

Metallized Pressure Sensitive Film. Once the holographic film is
metallized, the Company often subcontracts with a converter to laminate the
film to paper coated with a silicone release layer. The resulting pressure
sensitive material is typically used in children's stickers, prime labels
and decals and has historically represented the largest segment of the
Company's business.

Permanent Laminated Film. To create its permanent laminated films, the
Company contracts with a converter who laminates the metallized film,
generally to plastic films, paper or board stock for use in packaging
applications. The laminated film is typically used in flexible packaging,
folding cartons, signs, banners, trading cards, point of purchase displays,
folders and boxes.

Glitter or Geometric Pigment. The brightness, clarity and other
optical characteristics of the Company's holographic films are retained
when the material is cut into fine particles creating glitter and geometric
pigment. Glitter is typically cut into particles ranging in size from 1/128
inch to 1/8 inch and is used in a variety of applications including nail
polish, fabrics, hobby and craft applications, cosmetics and injection
molded parts. Geometric pigment is produced by precision cutting the
holographic film into particles 1/250 inch, 1/500 inch or smaller and is
currently used in paint, cosmetics and flooring materials to add a sparkle,
glimmer, color change and other optical effects to these products.

Nonmetallized Film. While nearly all of the Company's products are
metallized, the Company also manufactures nonmetallized holographic film in
small quantities which is typically sold to converters who have their own
metallizing capabilities or to customers who are seeking a transparent
material.

SALES AND MARKETING; PRINCIPAL CUSTOMERS

The Company sells its holographic films directly to end users, to
distributors who sell to end users, and to value added resellers, who add
conversion steps to the film and sell to distributors and end users. A large
percentage of the Company's net sales represent sales of unfinished film to
distributors and to value added resellers. The Company intends to use a portion
of the proceeds of this Offering to expand its marketing and sales capabilities
and to provide a more in depth product focus in its marketing strategies.

The Company currently employs an internal sales staff of four
representatives at its Los Angeles headquarters and provides office space at
that location for an independent sales representative. The Company also has two
outside sales representatives located in Northern California and Michigan.

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<PAGE> 34

During 1996, the Company's customer base worldwide exceeded 1,000
customers. International sales are typically made directly and through foreign
distributors. The Company has entered into distribution arrangements with Soorim
Textile Co., Ltd. and Ying Lih Industrial Co., Ltd., pursuant to which the
Company's products are sold in Korea and Taiwan, respectively. The arrangements
are cancelable at will at any time by either party. Sales to Soorim and Ying Lih
during the year ended December 31, 1996 represented approximately 7% and 3%,
respectively of the Company net sales. See Note 2 of Notes to Financial
Statements.

During 1995, 1996 and the nine months ended September 30, 1997, the
Company's three largest customers accounted for an aggregate of 24%, 17% and
32%, respectively, of the Company's net sales. The Upper Deck Company, LLC
("Upper Deck") accounted for more than 7% of the Company's net sales in 1994.
Labelad/Sandylion Sticker Designs, which accounted for 13%, 10% and 17%,
respectively, of the Company's net sales in 1995, 1996 and the nine months ended
September 30, 1997. While Mattel typically does not directly purchase
significant quantities of the Company's products, Mattel frequently specifies
the Company's products for inclusion in the product and packaging specifications
for Mattel's products.

MANUFACTURING

Polyester is the primary raw material used in the Company's products. While
the Company also microreplicates nylon and polyvinyl chloride, approximately 95%
of all of the Company's products utilize thin polyester film in thicknesses
ranging from .004 inch to .00024 inch. Because the Company is able to
microreplicate directly into thin polyester film without altering the properties
of the film, the Company's products retain the inherent properties of the
polyester, resulting in a stronger final product which retains its existing
physical properties under extreme heat (up to 175 degrees Celsius) and can
withstand many solvents or other chemicals used in the finishing and converting
processes. The raw polyester film in the thicker gauges (.004 inch to .0005
inch) is readily available from a number of sources without any significant
qualitative differences, and the Company routinely tests material produced by
several suppliers. The Company obtains its .00024 inch polyester film from a
sole source supplier, and is currently investigating other sources of this
material.

The price the Company has paid for polyester film stock has fluctuated
significantly in recent periods due to changes in the supply and demand of
polyester products. Polyester is generally more expensive than the base
materials used by certain of the Company's competitors. There can be no
assurance that the necessary polyester film will continue to be available in the
desired thicknesses at favorable prices.

The Company's manufacturing processes consist primarily of creating image
or pattern masters and microreplicating the images and patterns onto continuous
rolls of polyester film. When the Company creates a new stock pattern or
undertakes a custom order, the Company usually subcontracts the initial custom
mastering. The Company intends to use a portion of the proceeds of this Offering
to install a laser laboratory and expand its mastering capabilities. The Company
currently creates all of the intermediate master tools which are used in the
Company's microreplication machines in lieu of the shims. The Company currently
operates four microreplication machines and is in the process of developing a
new machine that should enable the Company to manufacture 55 inch wide
holographic films. All of the Company's microreplication machines have been
custom developed by the Company and are not otherwise commercially available.

The Company purchased metallizing machines in the fourth quarter of 1995 to
enable the Company to engage in vacuum metallizing, which machines became
operational in February 1996. This equipment can metallize rolls of film up to
65 inches wide. The Company also slits, rewinds and splices rolls to satisfy
customer orders, and to enable efficient warehousing and shipping of its
products. In addition, the Company outsources certain other converting processes
such as cutting, laminating, slitting, coating, tinting and sheeting, but does
not currently provide these processes in-house. If a customer requires a
converted product, the Company typically processes the raw film, metallizes it
and then ships it to converters for additional processing. Some conversion
processes are provided by a large number of suppliers, and the Company has a
wide range of choices in procuring services. Other conversion processes such as
cutting into particulate are more specialized and only a few converters have
demonstrated an ability to meet the Company's requirements.

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<PAGE> 35

In particular, the Company is aware of only two high quality geometric pigment
cutters in the United States who can consistently cut the Company's films into
1/250 inch, 1/500 inch and smaller. The Company is currently underutilizing its
manufacturing capabilities and may be able to achieve greater efficiencies by
bringing more of the manufacturing steps in house such as cutting, finishing and
custom mastering capabilities.

The Company's primary output consists of continuous polyester rolls of
holographic film, although the Company also produces small quantities of other
polymer films, including nylon and polyvinyl chloride. Microreplication and the
Company's other proprietary processes are conducted in facilities which are
physically separate from the Company's administrative and warehouse facilities.

COMPETITION

Competition among holographic materials manufacturers is intense and is
characterized by changing technology and evolving standards. Competitors vary
based upon the type of materials into which they microreplicate, the quality of
the holograms, and the breadth of customization or stock patterns offered. While
the Company believes its holographic technology is unique, basic holographic
technology is well known, and there are relatively low barriers to entry into
the holographic materials market. Accordingly, the Company anticipates increased
competition from other established and emerging companies as the market for
holographic materials grows. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Many of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing,
marketing and other resources than the Company and may be able to expand the
applications for their products and capture a greater share of the holographic
materials market.

The Company also competes to a certain extent with its value added
resellers who purchase the Company's holographic films, add conversion steps to
the films and market the converted products for resale. This competition may
affect such vendors' incentive to provide quality service to the Company.

The Company also experiences competition from manufacturers of
non-holographic materials, particularly in the market for packaging materials,
pigments, fabrics and aluminum flakes. The applications for holographic
materials within such markets are small and have only recently begun to expand.
Due to the higher cost of holographic film and current size constraints, the
Company is often at a price disadvantage as compared to certain non-holographic
media. Accordingly, the Company expects to continue to encounter significant
competition from manufacturers of non-holographic materials in its markets
particularly as it seeks to expand the applications for its products.

The Company's competitors utilize different techniques to microreplicate
polyester than those employed by the Company. The Company believes that its
techniques enable it to produce films which have superior appearance and
properties when compared with those produced by the Company's competitors. The
Company believes that it has a competitive advantage where appearance
characteristics, solvent resistance and durability are critical.

PROPRIETARY RIGHTS

The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its microreplication
technology. The Company believes that its proprietary processes are
significantly different from those used by competitors to produce similar
materials. To date, the Company has relied primarily upon trade secret laws and
nondisclosure agreements to protect its proprietary rights and has not sought
patent protection for any of its technologies due to the limited protection
offered by process patents. All of the Company's proprietary manufacturing
processes are conducted at a limited access facility which is separate from the
Company's administrative and warehousing facilities. The Company maintains an
extensive security system at such facility to prevent the unauthorized
disclosure of its trade secrets, and plans to institute similar security
measures at its new manufacturing facility. There can be no assurance that such
trade secrets will remain confidential, that any patents will be applied for or
granted in the future or that other intellectual

34
<PAGE> 36

property rights of the Company will provide meaningful protection for the
Company's proprietary rights. If the processes employed by the Company become
known to competitors, it is likely that they could be used to produce materials
of the quality and durability produced by the Company. Certain of the customers
of the Company could, if in possession of the Company's trade secrets, produce
the materials which are substantially equivalent or superior products to the
Company's products. There can be no assurance that the steps taken by the
Company will be adequate to deter the misappropriation of its proprietary
information and technologies, or will prevent the assertion of an adverse claim
to technology utilized by the Company, or that the Company will be able to
detect unauthorized use and take effective steps to enforce its intellectual
property rights. The Company has substantial foreign sales, and the laws of some
foreign countries into which the Company's products are sold may not protect the
Company's proprietary rights to as great an extent as do the laws of the United
States. Accordingly, effective protection of intellectual property may be
unavailable or limited in certain foreign countries. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate, or that competitors will not independently
develop technologies that are similar or superior to the Company's technology or
duplicate the Company's technology.

The Company has previously licensed to FosterCo, a related entity, on an
exclusive basis (even as to the Company), the use of certain aspects of any
proprietary technologies the Company may have with respect to the manufacture of
microreplicated films for pre-recorded and recordable machine readable digital
information. The Company currently does not anticipate that it will pursue these
applications as part of its growth strategy. Furthermore, to the extent that the
Company exercises the FosterCo Option, the Company will be bound by the
provisions of (i) a license agreement between FosterCo and Cyberwerks LLC and
(ii) a noncompetition agreement previously entered into by FosterCo with Upper
Deck and Cyberwerks LLC that will prevent the Company from pursuing applications
using pre-recorded digital information. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions."

Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. While the Company is not currently engaged
in any intellectual property litigation or proceedings, there can be no
assurance that it will not become so involved in the future. An adverse outcome
in such litigation or similar proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others or require the Company to cease marketing or using certain products,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company is required to
obtain licenses under patents or proprietary rights of others, there can be no
assurance that any required licenses would be made available on terms acceptable
to the Company, if at all. In addition, the cost of addressing any intellectual
property litigation claim, both in legal fees and expenses and the diversion of
management's attention, regardless of whether the claim is valid, could be
significant and could have a material adverse effect on the Company's business,
financial condition and results of operations.

EMPLOYEES

At November 1, 1997, the Company employed 55 employees, including 31 in
shipping, warehousing and manufacturing, one in engineering, three in customer
service, ten in sales and marketing and ten in finance and administration. The
Company is not a party to any collective bargaining agreement or other similar
agreement and has not experienced any work stoppages to date. The Company
believes that its relationship with its employees is good.

FACILITIES

The Company currently leases a 70,440 square foot building in Los Angeles,
California under a sublease expiring in February 1998. This building serves as
the Company's principal administrative, sales and marketing, customer support
and warehousing facility. The Company also conducts certain non-proprietary
manufacturing processes including metallizing and slitting at this facility. The
Company recently renegotiated a new lease for this space which will commence in
February 1998 upon expiration of the existing sublease. The

35
<PAGE> 37

rent under the new lease will be $42,000 per month. While the new lease will
expires in 2003, the Company has the option to extend this lease for an
additional five years thereafter.

The Company also currently leases two additional buildings on a
month-to-month basis in Los Angeles, California with a combined square footage
of approximately 7,500. These facilities house the Company's proprietary
manufacturing processes including mastering and microreplication which involve
trade secret technology. In July 1997, the Company leased an additional 17,000
square foot facility in Los Angeles pursuant to lease which expires in September
2002. The Company has the option to renew this lease for an additional five
years. The rent on this new facility is $12,750 per month. The Company intends
to relocate its proprietary manufacturing processes to this new facility within
the next six months and terminate the existing month-to-month lease on its two
smaller facilities once the relocation has been completed. The Company believes
that its facilities are sufficient to meet its needs for at least the next three
years.

LEGAL PROCEEDINGS

The Company may be involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this Prospectus, there are no
material legal proceedings pending against the Company.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning the Company's
executive officers and directors as of November 1, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Michael S. Foster............... 53 Chairman of the Board and Chief Technology Officer
Terrence Conway(1)(2)........... 40 Director, President, Chief Executive Officer and Secretary
James Wanlass................... 52 Director and Vice President, Manufacturing
Michael Wanlass................. 55 Director and Vice President, Marketing
Charles M. Spear(1)(2).......... 54 Director and Chief Financial Officer
</TABLE>

- ---------------

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Michael S. Foster, a co-founder of the Company, has served as its Chairman
of the Board and as a director since its inception in October 1980. Since March
1997, he has also served as the Company's Chief Technology Officer. From October
1980 to March 1997, Mr. Foster served as the Company's Vice President, Research
and Development. Since June 1995, Mr. Foster also has served as a director, the
Chief Technical Officer and the Vice President, Research and Development of
FosterCo., Inc., a development stage startup company ("FosterCo"). From June
1995 to August 1997, Mr. Foster served as the Chief Technical Officer and Vice
President, Research and Development of Cyberwerks Interactive, L.L.C., a
development stage startup company ("Cyberwerks LLC"). Mr. Foster successfully
completed in 1966 the coursework required to receive a B.S. degree in Chemistry
from the University of Utah.

Terrence Conway has served as the Company's President, Chief Executive
Officer, Secretary and as a director since January 1988. Since June 1995, Mr.
Conway also has served as a director and the President of FosterCo and as a
manager of Cyberwerks LLC. From June 1995 to August 1997, Mr. Conway served as
the President of Cyberwerks LLC. Mr. Conway received his B.B.A. degree from the
University of Michigan in 1979.

James Wanlass, a co-founder of the Company, has served as its Vice
President, Manufacturing since January 1988 and as a director since its
inception in October 1980. From October 1980 through December 1987, Mr. Wanlass
also served as the Company's President and Treasurer.

Michael Wanlass, a co-founder of the Company, has served as its Vice
President, Marketing and as a director since its inception in October 1980. From
October 1980 through December 1987, Mr. Wanlass also served as the Company's
Secretary.

Charles M. Spear joined the Company as a director in April 1997 and became
its Chief Financial Officer in October 1997. Since April 1993, Mr. Spear has
served as Chairman of the Board and Chief Executive Officer of Spear, Inc., a
privately held financial services company. From April 1995 through January 1996,
Mr. Spear served as Chief Financial Officer of Smith Micro Software, Inc., a
publicly held developer of communications software, and from July 1995 through
January 1996 he also served as a Senior Vice President and director of Smith
Micro. From April 1983 until December 1992, Mr. Spear served as Chairman of the
Board and Chief Executive Officer of Spear Financial Services, Inc., a public
company which Mr. Spear founded. Mr. Spear also is a member of the Board of
Directors of Dynatem, Inc. Mr. Spear received his B.B.A. degree from Ohio
University in 1964 and received his J.D. from Case Western Reserve University in
1968.

The Company's Certificate of Incorporation and Bylaws provide for the Board
of Directors to be divided into three classes, with each class to be as nearly
equal in number of directors as possible. At each annual meeting of
stockholders, the successors to the class of directors whose term expires at the
time are elected to hold office for a term of three years, and until their
respective successors are elected and qualified, so that the

37
<PAGE> 39

term of one class of directors expires at each such annual meeting. The terms of
office expire as follows: Mr. J. Wanlass and Mr. Spear in 1998; Mr. M. Wanlass
and Mr. Conway in 1999; and Mr. Foster in 2000. See "Description of
Securities -- Certain Provisions of the Company's Certificate of Incorporation
and Bylaws."

The Company intends to appoint two independent directors to serve on the
Board upon the consummation of the Offering, as soon as appropriate individuals
are identified and agree to serve.

Officers are elected by, and serve at the discretion of, the Board of
Directors. Messrs. J. Wanlass and M. Wanlass are brothers. There are no other
family relationships among the directors or executive officers of the Company.

BOARD COMMITTEES

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
and evaluates the Company's internal control functions, and monitors
transactions between the Company and its employees, officers and directors. The
Compensation Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, administers the Company's stock option
plan and designates compensation levels for officers and directors of the
Company.

Upon consummation of the Offering, the Company intends to establish a
Fairness Committee of the Board (comprised of two independent directors), which
will make recommendations to the Company regarding the exercise of the Company's
option to purchase the outstanding capital stock of FosterCo. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions." These independent
directors will also serve on the Compensation Committee and the Audit Committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee currently consists of Messrs. Conway
and Spear, who are also officers and employees of the Company.

From January 1993 through December 1996, Mr. Conway made various loans to
the Company. No more than $672,115 was owing to Mr. Conway at any one time and,
as of March 31, 1997, all such loans had been repaid in full. In October 1997,
the Company declared a distribution to its existing stockholders, including
Messrs. Conway and Spear, representing all of the Company's undistributed
retained earnings through the Termination Date. Mr. Conway is a manager and
former officer of Cyberwerks LLC, a director and officer of FosterCo and a
shareholder of ComDisc Technologies, Inc., a California corporation ("ComDisc").
While Mr. Conway received a salary from both Cyberwerks LLC and FosterCo during
the past two fiscal years, he no longer receives any compensation from these
entities. The Company currently shares its facilities with Cyberwerks LLC and
has entered into licensing and other arrangements with Cyberwerks LLC, FosterCo
and ComDisc at various times. In addition, FosterCo previously loaned $25,000 to
the Company in August 1995, which amount has been repaid. See "Certain
Transactions."

In April 1996, the Company issued 30,000 shares of Common Stock to Mr.
Spear in consideration for consulting services previously rendered by him to the
Company. In October 1997, the Company granted an option to Mr. Spear for the
purchase of 7,500 shares of the Company's Common Stock under the 1997 Plan at an
exercise price of $19.25 per share. See "Certain Transactions -- Consulting
Arrangements."

No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
its Compensation Committee.

DIRECTOR COMPENSATION

The Company currently does not provide any cash compensation to its
directors but does reimburse them for certain out-of-pocket expenses incurred in
connection with attendance at board and committee meetings.

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<PAGE> 40

Nonemployee directors will also receive stock option grants automatically under
the 1997 Plan. See "-- 1997 Stock Incentive Plan."

EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation received, for all
services rendered in all capacities to the Company, by the Chief Executive
Officer and each of the other four most highly compensated executive officers
(the "Named Executive Officers") whose salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1996. Except as indicated below, no Named
Executive Officer received other compensation in excess of the lesser of $50,000
or 10% of such officer's compensation.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITIONS SALARY BONUS
-------------------------------------------------------------- -------- -------
<S> <C> <C>
Michael S. Foster............................................. $300,000 $20,000
Chairman of the Board and Chief Technology Officer
Terrence Conway............................................... 150,000(1) 10,000
President and Chief Executive Officer
James Wanlass................................................. 150,000 10,000
Vice President, Manufacturing
Michael Wanlass............................................... 150,000 10,000
Vice President, Marketing
Charles M. Spear(2)........................................... -- --
Chief Financial Officer
</TABLE>

- ---------------

(1) Includes $60,000 earned by Mr. Conway in the fiscal year ended December 31,
1996 but paid in March 1997.

(2) Mr. Spear became the Chief Financial Officer of the Company in October 1997.
In October 1997, the Company granted an option to Mr. Spear for the purchase
of up to 7,500 shares of the Company's Common Stock at an exercise price
equal to $19.25 per share. Such options vest in five equal annual
installments beginning in April 1998.

The Company currently has no employment contracts with any of the Named
Executive Officers. As described below under "-- 1997 Stock Incentive Plan,"
under certain circumstances, the exercisability of options granted to the Named
Executive Officers may be accelerated.

1997 STOCK INCENTIVE PLAN

The Company's 1997 Stock Incentive Plan (the "1997 Plan") became effective
on April 1, 1997 upon adoption by the Board of Directors and approval by the
stockholders of the Company. A total of 303,000 shares of Common Stock have been
reserved for issuance under the 1997 Plan. In no event may any one participant
in the 1997 Plan receive option grants or direct stock issuances for more than
60,000 shares in any given calendar year.

The 1997 Plan is divided into three separate components: the Discretionary
Option Grant Program, the Stock Issuance Program and the Automatic Option Grant
Program. Under the Discretionary Option Grant Program, eligible individuals in
the employ or service or the Company or any parent or subsidiary of the Company
(including employees, officers, nonemployee directors, consultants and other
independent advisors thereof) may, in the discretion of the Plan Administrator,
be granted options to purchase shares of Common Stock at an exercise price not
less than the fair market value of those shares on the grant date. Under the
Stock Issuance Program, the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not less than fair market value of those shares at the
time of issuance, or as a bonus awarded for services rendered to the Company or
any parent or subsidiary of the Company. Lastly, under the Automatic Option
Grant Program, option grants will automatically be made at periodic intervals to
eligible nonemployee directors, which options will enable such directors to
purchase shares of Common Stock at an exercise price equal to 100% of the fair
market value

39
<PAGE> 41

of those shares on the grant date. Eligibility in the Automatic Option Grant
Program shall be limited to those individuals: (i) serving as nonemployee
directors on the date on which the Underwriting Agreement in connection with
this Offering is executed and the Common Stock offered hereby is priced (the
"Underwriting Date") (provided that no initial option will be granted on such
date to any director who has previously received a stock option grant from the
Company in connection with his or her Board service), (ii) who first become
non-employee directors at any time after the Underwriting Date, whether through
appointment by the Board or election by the Company's stockholders (provided
that no such person previously in the employ of the Company or any parent or
subsidiary of the Company shall receive an initial option grant), and (iii) who
serve as non-employee directors at one or more annual meetings of the Company's
stockholders held after the Underwriting Date (provided that no such person who
has not served as a nonemployee director for at least six months shall receive
an option grant in connection with their service at any such meeting).

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Company's Compensation Committee. The Compensation
Committee as Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock option or a nonqualified stock option, the
vesting schedule to be in effect for the option grant or stock issuance, and the
maximum term for which any granted option is to remain outstanding. The
administration of the Automatic Option Grant Program will be self executing in
accordance with the express provisions of that program.

The exercise price of options granted under the 1997 Plan may be paid in
cash or in shares of Common Stock valued at fair market value on the exercise
date. The option may also be exercised through a same day sale program that
would enable an optionee to exercise without any cash outlay. In addition, the
Plan Administrator may provide financial assistance to one or more individuals
in their acquisition of shares of Common Stock through option exercises or
direct issuances by allowing such individuals to deliver a full recourse,
interest bearing promissory note in payment of the applicable exercise or issue
price (as well as any associated withholding taxes incurred in connection with
their acquisition of those shares).

In the event that the Company is acquired by merger or the purchase of more
than 50% of the Company's outstanding voting securities, or in the event that
the Company sells substantially all of its assets, the exercisability of each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or otherwise to continue in effect or to
be replaced with a cash incentive program of the successor corporation will
automatically accelerate in full, and all unvested shares then outstanding under
the Stock Issuance Program will immediately vest, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the successor corporation or such accelerated vesting is precluded by other
limitations imposed under the Stock Issuance Program. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a designated period (not to exceed eighteen
(18) months) following (i) an acquisition in which those options are assumed or
replaced or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the Company's outstanding voting stock or by proxy contest for the election
of directors.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock.

Under the 1997 Plan, the Plan Administrator has the authority to effect the
cancellation of options outstanding under the Discretionary Option Grant Program
in return for the grant of new options for the same or different number of
option shares with an exercise price per share equal to the fair market value of
the Common Stock on the new grant date.

40
<PAGE> 42

Under the Automatic Option Grant Program, each individual who first joins
the Board after the effective date of this Offering as a nonemployee director
will receive an option grant for 5,100 shares of Common Stock at the time of his
or her commencement of Board service, provided such individual has not otherwise
been in the prior employ of the Company or any parent or subsidiary of the
Company. In addition, at each annual meeting of the Company's stockholders,
beginning with the first annual meeting held after the effective date of this
Offering, each individual who is to continue to serve as a nonemployee director
will receive an option grant to purchase an additional 2,400 shares of Common
Stock provided such individual has served as a nonemployee director for at least
six months.

Each grant of options made pursuant to the Automatic Option Grant Program
will have a maximum term of ten years, subject to earlier termination following
the optionee's cessation of service as a non-employee director. The options to
purchase 5,100 shares of Common Stock that may be granted to any individual who
first joins the Board as a nonemployee director after the effective date of this
Offering will vest and become exercisable in four equal annual installments over
the four year period commencing on the grant date. Any of the annual option
grants to purchase 2,400 shares of Common Stock will vest and become exercisable
in full on the one year anniversary of the grant date, assuming that the
nonemployee director who receives such option has continued to serve as a
director at all times during such period. Notwithstanding the foregoing, all
options granted pursuant to the Automatic Option Grant Program will become
immediately exercisable in full upon (i) certain changes in the ownership or
control of the Company, or (ii) the death or disability of the optionee if it
occurs while such optionee is serving as a nonemployee director.

The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on the earlier of (i) March 31, 2007, (ii) the date on which all
shares available for issuance under the 1997 Plan shall have been issued as
fully-vested shares or (iii) the termination of all outstanding options in
connection with a merger or consolidation in which securities possessing more
than 50% of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction or the sale,
transfer or other disposition of all or substantially all of the Company's
assets in complete liquidation or dissolution of the Company.

As of November 1, 1997, the Board had granted to certain employees of the
Company options to purchase an aggregate of 91,500 shares of Common Stock
pursuant to the 1997 Plan. The options vest in four equal annual installments
commencing on the grant date and have a weighted average exercise price of
$16.73 per share. Such exercise price was equal to the fair market value of the
Common Stock on the grant date, as determined by the Board. As of November 1,
1997, no other options had been granted under the Discretionary Option Grant
Program, no options had been granted under the Automatic Option Grant Program,
and no shares of Common Stock had been purchased or awarded pursuant to the
terms of the Stock Issuance Program.

KEY MAN LIFE INSURANCE

The Company currently maintains life insurance policies, under which the
Company is the sole beneficiary, in the amount of $5.0 million on the life of
Mr. Foster and $1.0 million on the life of Mr. Conway.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law (the "DGCL"), the
Company can indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act. The
Company's Bylaws provide that the Company will indemnify its directors and
officers to the fullest extent permitted by law and require the Company to
advance litigation expenses upon receipt by the Company of an undertaking by the
director or officer to repay such advances if it is ultimately determined that
the director or officer is not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws do not exclude any other right
such persons may have or acquire under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.

The Company's Certificate of Incorporation provides that, pursuant to the
DGCL, the Company's directors shall not be liable for monetary damages for
breach of such directors' fiduciary duty of care to the

41
<PAGE> 43

Company and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under the DGCL. In addition, each director will continue to be subject
to liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the DGCL. The provision
also does not affect a director's responsibilities under any other law, such as
the federal or state securities laws environmental laws.

The Company intends to enter into agreements to indemnify its directors in
addition to the indemnification provided for in the Company's Certificate of
Incorporation and Bylaws. These agreements, among other things, will indemnify
the Company's directors for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, or as a director or officer
of any other company or enterprise to which the person provides services at the
request of the Company. The Company also intends to purchase liability insurance
covering its directors and officers.

There is no pending or overtly threatened litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or overtly threatened litigation that may result in claims for indemnification
by any director, officer, employee or other agent.

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<PAGE> 44

CERTAIN TRANSACTIONS

FOSTERCO/CYBERWERKS LLC TRANSACTIONS

To date, the Company has focused its microreplication technology primarily
on holographic film applications. In the early 1980s, Messrs. Conway, Foster, J.
Wanlass and M. Wanlass and a third party created a separate business, ComDisc,
to pursue applications of microreplication technology for the development and
production of products incorporating pre-recorded and recordable machine
readable digital information (the "Information Storage Technology"). In 1985,
Mr. Foster granted an exclusive license to ComDisc for the development and
production of products incorporating Information Storage Technology. At that
time, 87% of the outstanding Common Stock of ComDisc was owned by Messrs.
Conway, Foster, J. Wanlass and M. Wanlass, and the balance was owned by certain
individuals unaffiliated with the Company. ComDisc became inactive in 1988.

In 1995, Messrs. Foster and Conway created a separate business, FosterCo,
which is owned 50% by Mr. Conway and 50% by Mr. Foster. In May 1995, the Company
(to the extent it had any rights to the Information Storage Technology) and
ComDisc granted perpetual exclusive licenses to the Information Storage
Technology to FosterCo. In consideration for these licenses to FosterCo,
FosterCo will pay to the Company and to ComDisc (and its affiliates), for a
period of ten years following the date of its agreements with such parties, 5%
and 4% royalties, respectively, based on the amount of thin film microreplicated
with pre-recorded digital information that was sold by FosterCo during such
period. While royalties to ComDisc are currently payable when earned, all
royalties to the Company accrue, but are not due and payable, until cumulative
sales revenue of $20 million is achieved by Cyberwerks LLC, a joint venture
owned 50% by FosterCo and 50% by Upper Deck, and to whom FosterCo has agreed to
supply such thin film. To date, Cyberwerks LLC has not generated any sales or
revenue, and all expenses of Cyberwerks LLC have been funded by Upper Deck. No
royalty payments to either the Company or ComDisc have been earned or accrued to
date.

In June 1995, FosterCo granted an exclusive license to the Information
Storage Technology to Cyberwerks LLC for certain commercial applications. In
connection with this license, FosterCo agreed to transfer to Cyberwerks LLC,
upon the earlier of (i) Cyberwerks LLC's achievement of revenues of $50 million
or more in any 12-month period, or (ii) upon the completion of an initial public
offering by Cyberwerks LLC (which, pursuant to the terms of the Operating
Agreement between Upper Deck and FosterCo pursuant to which Cyberwerks LLC was
created, unless amended, cannot occur until June 1998 and then only if certain
agreed upon conditions are met), the equipment used in the manufacture of
certain Information Storage Technology products and FosterCo's interest in the
facility used in or intended for the manufacture of such products.

Messrs. Conway and Richard McWilliam, the Chairman of the Board of Upper
Deck, are currently the managers of Cyberwerks LLC. In addition, from the date
of its formation until August 1997, Mr. Foster served as Cyberwerks LLC's Chief
Technical Officer and Mr. Conway served as its President. Both of Messrs. Foster
and Conway have resigned as employees and officers of Cyberwerks LLC.

In October 1997, Mr. Foster, the inventor and developer of the Company's
microreplication technology, assigned to the Company all of his rights in that
technology, other than for use in Information Storage Technology.

Messrs. Conway and Foster are also officers and directors of FosterCo. Mr.
Conway received compensation from FosterCo in the amount of approximately
$59,000 and $18,000 during the year ended December 31, 1996 and the period ended
July 31, 1997, respectively. Mr. Foster received compensation from FosterCo in
the amount of approximately $96,000 and $30,000 during the year ended December
31, 1996 and the period ended July 31, 1997, respectively.

Mr. Conway received compensation from Cyberwerks LLC in the amount of
approximately $35,481, $75,000 and $51,923 during the years ended December 31,
1995 and 1996 and the period ended July 31, 1997,

43
<PAGE> 45

respectively. Mr. Foster received compensation from Cyberwerks LLC in the amount
of approximately $59,000, $125,000 and $87,000 during the years ended December
31, 1995 and 1996 and the period ended July 31, 1997, respectively.

Neither of Messrs. Conway and Foster will receive any compensation from
Cyberwerks LLC or FosterCo in the future.

Since August 1995, Cyberwerks LLC has subleased space at two of the
Company's facilities. Currently, Cyberwerks LLC subleases approximately 16% of
the square footage at both the Company's corporate headquarters and at its
manufacturing facilities. In consideration for the usage of such space,
Cyberwerks LLC has paid the Company an amount equal to a pro rata portion of the
Company's rent and overhead for each of those facilities. Cyberwerks LLC has
also relied on the Company to provide certain personnel, administrative and
management services and has compensated the Company in an amount equal to a pro
rata portion of the salaries and expenses of the Company personnel whose
services Cyberwerks LLC has used. The aggregate amount paid by Cyberwerks LLC to
the Company for rent, overhead, salary and expense reimbursement in 1995 and
1996, and for the nine months ended September 30, 1997 was approximately
$119,000, $633,000 and $379,000, respectively. The Company believes that it has
been compensated for both the usage of its space and its personnel on terms no
less favorable than it would have received in transactions with independent
third parties.

In October 1997, Messrs. Conway and Foster granted an option (the "FosterCo
Option") to the Company to purchase all the outstanding capital stock of
FosterCo from Messrs. Foster and Conway at an exercise price equal to the
greater of $5.0 million or 50% of the fair market value of FosterCo's
outstanding capital stock as of the date of exercise. The FosterCo Option is
exercisable during the 12-month period beginning October 1, 2002, but will
become exercisable immediately in the event Cyberwerks LLC files a registration
statement on Form S-1 with the Securities and Exchange Commission to register
shares of its Common Stock (which, pursuant to the terms of the Operating
Agreement for Cyberwerks LLC, unless amended, cannot occur before June 1998 and
then only under certain circumstances, as previously described). The FosterCo
Option is exercisable in cash, stock of the Company or a combination thereof, at
the discretion of the Fairness Committee of the Board of Directors of the
Corporation, which will be comprised of the Company's two independent directors.
In connection with any exercise of the option, FosterCo's capital stock shall be
valued by mutual agreement of the Messrs. Foster and Conway and the Fairness
Committee or, in the event the parties cannot agree on a valuation, by
independent appraisal. The Company's decision to exercise the FosterCo Option
must be approved by the Fairness Committee. See "Management -- Board
Committees."

The Operating Agreement for Cyberwerks LLC contains a provision that
currently enables either FosterCo or Upper Deck to unilaterally dissolve
Cyberwerks LLC, based on its failure to achieve certain prescribed revenue
targets. Consequently, no assurances can be given that the FosterCo Option will
be of any value to the Company at any time.

FINANCING TRANSACTIONS

From January 1993 through December 1996, Mr. Conway, the Company's
President and Chief Executive Officer, made various loans to the Company for
working capital and unreimbursed expenses pursuant to nine short-term promissory
notes bearing interest ranging from 7.0% to 9.5% per annum. No more than
$672,115 was owing to Mr. Conway at any one time. As of March 31, 1997, all such
loans had been repaid in full. In December 1993, Mr. Foster, the Company's
Chairman of the Board and Chief Technical Officer, loaned the Company $40,000
for working capital purposes pursuant to a short-term promissory note bearing
interest at a rate of 7.0% per annum. This loan was repaid in full by December
1994. In August 1995, Mr. Foster loaned the Company $75,000 for working capital
purposes pursuant to a short-term promissory note bearing interest at a rate of
11.0% per annum. This loan was repaid in full by October 1995.

In August 1995, FosterCo loaned the Company $25,000 for working capital
purposes pursuant to a short-term promissory notes bearing interest at a rate of
9.75% per annum. This loan was repaid in full by December 1996.

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<PAGE> 46

In March 1997, the Company obtained a revolving $3.5 million line of credit
from Citibank, FSB, which is guaranteed personally by Messrs. Foster, Conway, J.
Wanlass and M. Wanlass for all amounts borrowed thereunder.

S CORPORATION DISTRIBUTION

In October 1997, the Company declared a distribution to its existing
stockholders, Messrs. Conway, Foster, Spear, J. Wanlass and M. Wanlass,
consisting of the Stockholder Notes in the aggregate principal amount equal to
the Company's undistributed retained earnings from January 1, 1997 through the
Termination Date (which is estimated to be approximately $3.0 million on the
Termination Date). The Stockholder Notes bear interest at the rate of 5.5% per
annum and are due and payable on April 1, 1998. The Company intends to use a
portion of the proceeds of the Offering to repay all amounts due under the
Stockholder Notes upon consummation of this Offering. See "Prior S Corporation
Status," "Use of Proceeds" and Note 1 to Notes to Financial Statements.

CONSULTING ARRANGEMENTS

In April 1996, the Company issued 30,000 shares of Common Stock to Mr.
Charles M. Spear, a director of the Company, in consideration for consulting
services previously rendered by him to the Company. In October 1997, the Company
granted an option to Mr. Spear for the purchase of up to 7,500 shares of the
Company's Common Stock at an exercise price equal to $19.25 per share. Such
options vest in five equal annual installments beginning in April 1998.

45
<PAGE> 47

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of November 1, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity who beneficially owns more than 5% of the Company's
Common Stock, (ii) each of the Selling Stockholders, (iii) each Named Executive
Officer, (iv) each director of the Company, and (v) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
PRIOR TO BENEFICIAL OWNERSHIP
OFFERING(1) AFTER OFFERING(1)
------------------- NUMBER OF ---------------------
NUMBER OF SHARES BEING NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------- --------- ------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Michael Foster............................. 1,200,000 39.8%
Terrence Conway............................ 600,000 19.9
James Wanlass.............................. 591,237 19.6
Michael Wanlass............................ 591,237 19.6
Charles M. Spear........................... 29,561 1.0
All directors and executive officers
as a group (5 persons)................... 3,012,035 100%
</TABLE>

- ---------------

(1) Beneficial ownership is based on 3,012,035 shares of Common Stock
outstanding as of November 1, 1997 and shares of Common Stock outstanding
after completion of the Offering.

(2) The address for Messrs. Foster, Conway, J. Wanlass, M. Wanlass and Spear is
5405 Jandy Place, Los Angeles, California 90066. The persons named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.

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<PAGE> 48

DESCRIPTION OF SECURITIES

Upon consummation of the Offering and the reincorporation of the Company in
the State of Delaware, the authorized capital stock of the Company will consist
of 20,000,000 shares of Common Stock, $.0001 par value per share, and 5,000,000
shares of Preferred Stock, $.0001 par value per share. No shares of Preferred
Stock are currently issued and outstanding. The following summary description of
the capital stock of the Company (i) assumes the reincorporation of the Company
in the State of Delaware immediately prior to the consummation of the Offering,
and (ii) does not purport to be complete and is qualified in its entirety by
reference to the Company's Certificate of Incorporation (the "Certificate") and
Bylaws, which are incorporated by reference as exhibits to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.

COMMON STOCK

As of November 1, 1997, there were 3,012,035 shares of Common Stock issued
and outstanding held of record by five stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters to be
voted on by the stockholders. The holders of Common Stock are entitled to
receive ratable dividends, when, as and if declared by the Board of Directors
from funds legally available therefor, subject to the dividend preferences of
the holders of Preferred Stock, if any. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision is made for each series of
Preferred Stock, if any, having preference over the Common Stock. Holders of
Common Stock have no preemptive rights, no cumulative voting rights and no
rights to convert their Common Stock into any other securities. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of any series of Preferred Stock which the
Company may issue in the future. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this Offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors is authorized, without any further vote or action by
the Company's stockholders, to issue up to 5,000,000 shares of Preferred Stock,
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. The
issuance of Preferred Stock could adversely affect, among other things, the
rights of existing stockholders or could delay or prevent a change in control of
the Company without further action by the stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and the satisfaction of any dividend
preferences of any outstanding Preferred Stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Holders of Preferred
Stock may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding up of the Company before any payment is made
to the holders of Common Stock. The issuance of Preferred Stock by the Board of
Directors could also have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, discouraging or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.

DELAWARE LAW

Following the consummation of the Offering, the Company will be subject to
the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a

47
<PAGE> 49

merger, asset or stock sale, or other transaction resulting in a financial
benefit to the stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of a corporation's outstanding voting stock. This provision
may have the effect of discouraging, delaying or preventing a change in control
of the Company without further action by the stockholders.

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS

Provisions of the Company's Certificate and Bylaws may make more difficult
the acquisition of control of the Company by various means, such as a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise and could thereby deprive the stockholders of
opportunities to realize a premium on their Common Stock. In addition, they may
adversely affect the prevailing market price of the stock. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
in control of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. These provisions also
encourage persons seeking to acquire control of the Company to consult first
with the Company's Board of Directors to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or that
is otherwise unfair to stockholders of the Company. The Board of Directors
believes that, as a general rule, such takeover proposals would not be in the
best interests of the Company and its stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects of Certificate of Incorporation,
Bylaws and Delaware Law; Effect of Unissued Preferred Stock."

Directors; Classified Board; Removal; Filling Vacancies and Amendment. The
Certificate provides that the number of directors will be fixed from time to
time by resolution adopted by a majority of the directors then in office, but
shall not consist of less than five, nor more than nine, directors. The
Certificate provides for the Board of Directors to be divided into three
classes, with each class to be as nearly equal in number of directors as
possible. Further, subject to the rights of the holders of any series of
Preferred Stock then outstanding, the Certificate authorizes only the Board of
Directors to fill vacancies, including newly created directorships. Accordingly,
this provision could prevent a stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors and
filling the new directorships with its own nominees. The Certificate also
provides that directors of the Company may be removed by stockholders only for
cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of voting stock.

Special Stockholder Meetings. The Certificate provides that special
meetings of the stockholders, for any purpose or purposes, unless required by
law, shall be called by the President or Secretary pursuant to a request in
writing of the President, a majority of the entire Board of Directors or
stockholders owning not less than 40% of the entire voting stock of the Company
then issued and outstanding. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. Such limitation on the right of stockholders to call a special meeting
could make it more difficult for stockholders to initiate action that is opposed
by the Board of Directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the Board of Directors
with respect to unsolicited takeover bids. The limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing Board of Directors and management.

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Certificate establishes an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at special or annual stockholders'
meetings. Notice of stockholder proposals and director nominations must be
timely given in writing to the Secretary of the Company prior to the meeting at
which the matters are to be acted upon or the directors are to be elected. To be
timely, notice must be received

48
<PAGE> 50

in general at the principal offices of the Company not less than 60 days nor
more than 90 days prior to the meeting of stockholders. The purpose of requiring
advance notice is to afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees or the merits of other stockholder
proposals and, to the extent deemed necessary or desirable by the Board of
Directors, to inform stockholders about those matters.

Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock in order to amend any provisions of the Certificate
concerning (i) the removal or appointment of directors, (ii) the authority of
stockholders to act by written consent, (iii) the required vote to amend the
Certificate, (iv) calling a special meeting of stockholders, (v) the procedure
and content of stockholder proposals concerning business to be conducted at a
meeting of stockholders, and (vi) director nominations by stockholders. These
voting requirements will make it more difficult for minority stockholders to
make changes in the Certificate that could be designed to facilitate the
exercise of control over the Company. On the other hand, the requirement for
approval by at least a two-thirds stockholder vote will enable the holders of a
minority of the voting stock of the Company to prevent the holders of a majority
or more of such securities from amending such provisions of the Certificate.
Following the completion of the Offering, the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately % of the outstanding Common Stock ( % if the Underwriters'
overallotment option is exercised in full), giving them veto power with respect
to any stockholder action or approval requiring a two-thirds vote.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.

49
<PAGE> 51

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have shares of
Common Stock outstanding ( if the Underwriters' over-allotment option is
exercised in full). All of the shares sold in this Offering will be freely
tradeable without restriction or registration under the Securities Act, except
for any shares held by an "affiliate" of the Company as defined in the
Securities Act (in general, a person who has a control relationship with the
Company). All of the remaining shares are deemed to be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act ("Restricted Shares"). Restricted Shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including an exemption under Rule 144 or Rule 144A.
Upon completion of the Offering, the resale of all of such remaining shares will
be exempt from registration pursuant to Rule 144, subject to the volume
limitations, lock-up prohibitions and certain other restrictions discussed
below.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned for at
least one year (including the holding period of any immediate prior owner,
except an affiliate) shares of Common Stock that have not been registered under
the Securities Act or that were acquired from an "affiliate" of the Company (in
a transaction or chain of transactions not involving a public offering) is
entitled to sell in broker's transactions or to market makers, within any three
month period commencing 90 days after the date of effectiveness of the
Registration Statement of which this Prospectus is a part, a number of shares of
Common Stock which does not exceed the greater of (i) 1% of the number of shares
of Common Stock then outstanding (approximately shares immediately
after this Offering, assuming the Underwriters do not exercise the
over-allotment option), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the sale. Sales under Rule 144
are generally subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during a 90 day period preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any immediate prior owner, except an affiliate)
is entitled to sell such shares without having to comply with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

The Commission has recently proposed revisions to the holding periods and
volume limitations contained in Rule 144. The adoption of amendments effecting
such proposed revisions may result in resales of restricted securities sooner
than would be the case under Rules 144 and 144(k) as currently amended and in
effect. There can, however, be no assurance of when, if ever, such amendments
will be proposed or adopted.

The Company and its directors and executive officers have agreed that for a
period of 180 days from the date of this Prospectus that they will not, without
the prior written consent of EVEREN Securities, Inc., directly or indirectly
offer for sale, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock, subject to certain exceptions.

The Company intends to register, on or before March 31, 1998, the 303,000
shares of Common Stock that are reserved for issuance under the 1997 Plan. As of
November 1, 1997, options to purchase 91,500 shares were outstanding thereunder.
Once registered, shares issued upon exercise of options will be generally
eligible for immediate resale in the public market, subject to vesting under the
applicable option agreements.

The Company is unable to estimate the number of shares of the Company's
Common Stock that will be sold under Rule 144 or under the planned registration
statement since such sales will depend in part on the market price for the
Common Stock, the personal circumstances of the sellers and other factors not
susceptible of being known in advance.

Prior to this Offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of restricted shares in the open
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock offered hereby.

50
<PAGE> 52

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting
Agreement, the syndicate of underwriters named below (the "Underwriters"), for
whom EVEREN Securities, Inc. is acting as Representative (the "Representative"),
have severally agreed, to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have agreed to sell,
the respective number of shares of Common Stock set forth opposite the names of
such Underwriters below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
EVEREN Securities, Inc....................................................

---------
Total...........................................................
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to purchase all
of the shares of Common Stock offered hereby (other than the shares of Common
Stock covered by the over-allotment option described below) if any are
purchased.

The Company and the Selling Stockholders have been advised by the
Underwriters that they propose to offer the Common Stock to the public initially
at the price set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price, less a concession not
in excess of $ per share of Common Stock. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share of
Common Stock to certain other dealers. After the initial public Offering, the
price to the public, the concession and the discount to dealers may be changed.
The Representative has informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.

The Offering of the Common Stock is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the Common Stock.

The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of additional shares of Common Stock at the
initial price to public, less the underwriting discounts and commissions, solely
to cover over-allotments. To the extent that the Underwriters exercise such
option, each Underwriter may be committed, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
Underwriter's initial commitment pursuant to the Underwriting Agreement.

In the Underwriting Agreement, the Company, the Selling Stockholders and
the Underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

The initial price to the public for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative. The
factors considered in determining the initial price to the public included the
history of and the prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of this Offering and the recent market prices of securities of
generally comparable companies.

51
<PAGE> 53

Prior to this Offering, there has been no established trading market for
the Common Stock. There can be no assurance as to the liquidity of any market
that may develop for the Common Stock or the ability of holders to sell their
Common Stock; nor can there by any assurance that the price at which holders are
able to sell their Common Stock will not be lower than the price at which the
Common Stock is sold to the public by the Underwriters.

Subject to certain exceptions, the Company, the executive officers and
directors of the Company (which include the Selling Stockholders) each have
agreed that they will not, without the prior written consent of EVEREN
Securities, Inc., offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock for a period of 180 days from the date of
this Prospectus.

In connection with the Offering, the Representative and certain
Underwriters and selling group members and their respective affiliates may, in
accordance with Regulation M under the Securities Act of 1934 (the "Exchange
Act"), engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and other transactions that stabilize, maintain or
otherwise affect the market price for the Common Stock. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position, in which case the Underwriters may engage in a syndicate covering
transaction or may exercise the Underwriters' over-allotment option described
above. Syndicate covering transactions involve the purchase of Common Stock in
the open market following completion of the offering to cover all or a portion
of a syndicate short position. Penalty bids permit the Representative, on behalf
of the Underwriters, to reclaim a selling concession from a syndicate member
when Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified minimum and prevent or retard a
decline in the market price of the Common Stock. Any of the transactions
described in this paragraph may cause the price of Common Stock to be higher
than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.

The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "SPTK."

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Brobeck, Phleger & Harrison
LLP, Newport Beach, California. Certain legal matters relating to this Offering
will be passed upon for the Underwriters by Riordan & McKinzie, a Professional
Law Corporation, Los Angeles, California.

EXPERTS

The financial statements at December 31, 1995 and 1996 and at September 30,
1997, for the years ended December 31, 1994, 1995 and 1996, and for the nine
month period ended September 30, 1997 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.

52
<PAGE> 54

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to this Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge or copied at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2551 and Seven World Trade Center, Suite 1300, New York,
New York 10048, and copies of all or any part thereof can also be obtained by
mail at prescribed rates from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.

53
<PAGE> 55

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 and (unaudited)
Pro Forma as of September 30, 1997.................................................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and nine
month periods ended September 30, 1996 (unaudited) and September 30, 1997........... F-4
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and nine month period ended September 30, 1997................................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and nine
month periods ended September 30, 1996 (unaudited) and September 30, 1997........... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 56

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Spectratek Technologies, Inc.:

We have audited the accompanying balance sheets of Spectratek Technologies,
Inc. (the "Company"), as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996 and the
nine-month period ended September 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and 1996
and September 30, 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 and the nine-month
period ended September 30, 1997 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

Los Angeles, California

November 6, 1997

F-2
<PAGE> 57

SPECTRATEK TECHNOLOGIES, INC.

BALANCE SHEETS

DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 AND

PRO FORMA SEPTEMBER 30, 1997

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
(NOTE 13)
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets (Note 5):
Cash........................................ $ 97,371 $ 461,807 1,038,339 $ 1,038,339
Accounts receivable, net of allowance for
doubtful accounts and returns of
$119,518, $155,047 and $167,262 as of
December 31, 1995 and 1996 and September
30, 1997, respectively (Note 9).......... 1,124,275 1,328,809 2,147,437 2,147,437
Inventory (Note 3).......................... 4,080,802 3,957,663 3,973,402 3,973,402
Prepaid expenses and other current assets
(Note 9)................................. 109,315 68,805 796,180 796,180
Advances to officers........................ 78,875 78,875
Deferred tax asset (Note 6)................. 608,425 710,290 632,290
---------- ---------- ------------ ------------
Total current assets................ 6,020,188 6,527,374 8,034,233 8,666,523
Furniture, Fixtures and Equipment, Net
(Notes 4 and 5)............................. 2,273,175 2,021,583 2,054,972 2,054,972
Deposits...................................... 230,000 215,529 96,750 96,750
---------- ---------- ------------ ------------
Total............................... $8,523,363 $8,764,486 $ 10,185,955 $ 10,818,245
========== ========== ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses....... $1,324,438 $ 717,568 $ 1,034,721 $ 1,034,721
Income taxes payable (Note 6)............... 10,971 346,401 1,088,251
Advances from officers and related entity
(Note 8)................................. 663,519 672,115
Current portion of notes payable (Note 5)... 887,663 694,745 800,000 800,000
---------- ---------- ------------ ------------
Total current liabilities........... 2,886,591 2,430,829 1,834,721 2,922,972
---------- ---------- ------------ ------------
Notes Payable (Note 5)........................ 694,745
Deferred Tax Liability (Note 6)............... 54,297 91,692 91,692
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 10):
Preferred stock, no par value, 5,000,000
shares authorized; no shares issued or
outstanding
Common stock, no par value, 15,000,000
shares authorized; 3,000,000 and
3,030,000 shares issued and outstanding
as of December 31, 1995 and 1996,
respectively; 3,012,035 shares issued and
outstanding as of September 30, 1997 (Pro
Forma shares)..................... 10,000 10,100 10,100 10,100
Additional paid-in capital.................. 59,900 59,900 3,059,900
Retained earnings........................... 4,877,730 6,171,965 8,281,234 4,733,581
---------- ---------- ------------ ------------
Total stockholders' equity.......... 4,887,730 6,241,965 8,351,234 7,803,581
---------- ---------- ------------ ------------
Total............................... $8,523,363 $8,764,486 $ 10,185,955 $ 10,818,245
========== ========== ============ ============
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 58

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales (Note 9).................. $9,051,642 $10,320,300 $12,003,415 $8,457,440 $11,857,400
Cost of Goods Sold.............. 5,243,047 5,573,395 7,114,595 5,012,845 6,644,100
---------- ----------- ----------- ---------- -----------
Gross Profit.................... 3,808,595 4,746,905 4,888,820 3,444,595 5,213,300
---------- ----------- ----------- ---------- -----------
Selling, General and
Administrative Expense (Note
9)*........................... 1,531,474 1,779,941 2,142,186 1,363,205 2,200,912
Research and Development
Expense....................... 576,000 570,474 504,000 379,000 193,500
---------- ----------- ----------- ---------- -----------
Income from Operations.......... 1,701,121 2,396,490 2,242,634 1,702,390 2,818,888
Interest Expense (Notes 5 and
8)............................ 34,266 68,181 156,900 116,078 78,901
Other Income.................... 136,899 67,558 59,459 83,495 41,974
---------- ----------- ----------- ---------- -----------
Income Before Provision for
Income Taxes.................. 1,803,754 2,395,867 2,145,193 1,669,807 2,781,961
Provision for Income Taxes (Note
6)............................ 790,991 1,021,439 850,958 662,496 672,692
---------- ----------- ----------- ---------- -----------
Net Income...................... $1,012,763 $ 1,374,428 $ 1,294,235 $1,007,311 $ 2,109,269
========== =========== =========== ========== ===========
Net Income per Common and Common
Equivalent Share.............. $ 0.33 $ 0.45 $ 0.42 $ 0.33
========== =========== =========== ==========
Weighted Average Common and
Common Equivalent Shares...... 3,048,273 3,048,273 3,049,636 3,048,273
========== =========== =========== ==========
Proforma Net Income Data
(Unaudited)
Income before income taxes, as
reported...................... $ 2,781,961
Proforma Provision for Income
Taxes......................... 1,220,345
-----------
Proforma Net Income............. $ 1,561,616
===========
Proforma Net Income per Common
and Common Equivalent Share... $
===========
Proforma Weighted Average Common
and Common Equivalent Shares
(Note 2)......................
===========
</TABLE>

- ---------------

* Net of reimbursed expenses by a related party of $119,045 and $632,663 for the
years ended December 31, 1995 and 1996, respectively, and $502,464 (unaudited)
and $369,689 for the nine month periods ended September 30, 1996 and 1997,
respectively.

See accompanying notes to financial statements.

F-4
<PAGE> 59

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 3,000,000 $10,000 $2,490,539 $2,500,539
Net income.............................. 1,012,763 1,012,763
--------- ------- ------- ---------- ----------
Balance at December 31, 1994.............. 3,000,000 10,000 3,503,302 3,513,302
Net income.............................. 1,374,428 1,374,428
--------- ------- ------- ---------- ----------
Balance at December 31, 1995.............. 3,000,000 10,000 4,877,730 4,887,730
Issuance of common stock................ 30,000 100 $59,900 60,000
Net income.............................. 1,294,235 1,294,235
--------- ------- ------- ---------- ----------
Balance at December 31, 1996.............. 3,030,000 10,100 59,900 6,171,965 6,241,965
Retirement of common stock (Note 12).... (17,965)
Net income.............................. 2,109,269 2,109,269
--------- ------- ------- ---------- ----------
Balance at September 30, 1997............. 3,012,035 $10,100 $59,900 $8,281,234 $8,351,234
========= ======= ======= ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 60

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................. $1,012,763 $1,374,428 $1,294,235 $1,007,311 $2,109,269
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................ 107,171 164,762 309,969 232,477 312,658
Loss on disposal of assets........................... 44,271 2,860
Issuance of common stock for services rendered....... 60,000
Provision for deferred income taxes.................. (121,280) (200,868) (64,470) (161,016) 618,598
Provision for doubtful accounts and returns.......... 65,964 85,207 155,047 120,154 127,108
Changes in operating assets and liabilities:
Accounts receivable.................................. (130,250) (244,232) (359,581) (247,920) (945,736)
Inventory............................................ (392,785) (1,767,133) 123,139 274,304 (15,739)
Prepaid expenses and other current assets............ (190,508) 113,849 40,510 55,481 (527,071)
Advances to officers................................. (78,875)
Deposits............................................. (36,400) (93,600) 14,471 (747) (96,750)
Accounts payable and accrued expenses................ 103,442 551,580 (606,870) (291,292) 317,153
Income taxes payable................................. (254,353) 10,971 335,430 47,895 (346,401)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 163,764 (5,036) 1,346,151 1,036,647 1,477,074
---------- ---------- ---------- ---------- ----------

Cash Flows from Investing Activities:
Capital expenditures................................... (403,547) (633,970) (102,648) (91,749) (333,682)
---------- ---------- ---------- ---------- ----------

Cash Flows from Financing Activities:
Net proceeds from (repayments of) line-of-credit....... -- 250,000 (250,000) 249,286 800,000
Proceeds from issuance of notes payable................ 500,000
Repayments of notes payable............................ (16,667) (631,588) (802,550) (694,745)
Advances from (payments to) officers and related
entity............................................... (4,087) (66,327) 8,596 (178,346) (672,115)
Repayment of capital lease obligations................. (4,997) (5,867) (6,075)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... (9,084) 661,139 (879,067) (731,610) (566,860)
---------- ---------- ---------- ---------- ----------

Net Increase (Decrease) in Cash.......................... (248,867) 22,133 364,436 213,288 576,532

Cash, Beginning of Period................................ 324,105 75,238 97,371 97,371 461,807
---------- ---------- ---------- ---------- ----------

Cash, End of Period...................................... $ 75,238 $ 97,371 $ 461,807 $ 310,659 $1,038,339
========== ========== ========== ========== ==========

Supplemental Disclosures of Cash Flow Information --
Cash paid for:
Interest............................................. $ 34,266 $ 47,526 $ 201,986 $ 72,392 $ 198,089
Income taxes......................................... 939,754 1,077,552 580,000 330,000 575,000
</TABLE>

Supplemental Disclosure of Noncash Investing and Financing Activities:

During 1995, the Company recorded $843,000 in notes payable and $250,000 of
advances from officers in connection with the purchase of equipment of
$1,093,000.

During 1995, a $100,000 advance from officer was recorded in connection with
the payment of a deposit on the Company's operating facility.

See accompanying notes to financial statements.

F-6
<PAGE> 61

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

1. ORGANIZATION

Spectratek (the "Company") was incorporated in the State of California in
October 1980, changed its name to Spectral Holding Corporation in May 1993 and
to Spectratek Technologies, Inc. in June 1997. The Company will be
reincorporated in Delaware in November 1997. The Company is a manufacturer of
microreplicated holographic films that are used in a wide range of value-added
applications in consumer products packaging materials and industrial products.
Sales are made to domestic and foreign companies.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Inventory -- Inventory is stated at standard cost, which approximates the
lower of weighted average cost or market.

Furniture, Fixtures and Equipment -- Furniture, fixtures and equipment are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to fifteen years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.

Revenue Recognition -- Revenue is recognized when the product is shipped.
An allowance is recorded for estimated sales returns at the time of shipment.

The allowance for doubtful accounts and returns consists of the following:

<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
SEPTEMBER 30,
-------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1........................... $ -- $ 65,964 $119,518 $119,518 $155,047
Provision for doubtful accounts and
returns.................................... 65,964 85,207 155,047 120,154 127,108
Actual write-offs............................ 31,653 119,518 89,639 114,893
-------- -------- -------- -------- --------
Ending balance............................... $65,964 $119,518 $155,047 $150,034 $167,262
======== ======== ======== ======== ========
</TABLE>

Major Customers and International Sales -- The Company had sales to a
single customer which represented 6%, 13% and 10% of total sales for the years
ended December 31, 1994, 1995 and 1996, respectively. During the nine month
periods ended September 30, 1996 and 1997, sales to a single customer were 15%
and 17% of total sales, respectively. International product sales represented
23%, 36% and 44% of net sales for the years end December 31, 1994, 1995 and
1996, respectively. During the nine month periods ended September 30, 1996 and
1997, international product sales were 26% and 32% of net sales, respectively.

Research and Development Costs -- Research and Development Costs related to
the designing, developing and testing of new holographic equipment and patterns
are charged to expense as incurred.

Income Taxes -- Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases of
assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax law and rates applicable in periods in
which the differences are expected to reverse. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that the
amount will not be realized. Income tax expense is the tax payable or refundable
for the period and the effect of any changes in deferred income tax assets and
liabilities during the period.

On January 1, 1997, the Company elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable State laws through the effective date of the proposed initial public
offering (the "Termination Date"). Under those provisions the Company does not
pay

F-7
<PAGE> 62

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

federal or state corporate income taxes on the Company's taxable income from
January 1, 1997 until the Termination Date. Instead, the stockholders are liable
for federal and state income taxes on the Company's taxable income.

The State of California has adopted the provisions of the S Corporation
election; however, there is a 1.5% franchise tax charged at the corporate level.

Net Income Per Common and Common Equivalent Share -- Net income per common
and common equivalent share has been determined by dividing net income by the
weighted average common and common equivalent shares outstanding during the
period. Options issued at prices below the expected offering price in the twelve
months prior to the initial public offering have been included in the
calculation of weighted average common and common equivalent shares as if
outstanding for all periods presented using the treasury stock method.

Unaudited Pro Forma Net Income Per Share -- Unaudited Pro forma net income
per share is based on the weighted average number of shares of common stock
outstanding and dilutive common equivalent shares from stock options (using the
treasury stock method). The shares outstanding for all periods give effect to
the stock split described in Note 11 as well as shares deemed to be
outstanding, which represent the approximate number of shares deemed to be sold
by the Company (at an assumed initial public offering price of $ per
share) to fund an S corporation distribution from January 1, 1997 to the
Termination Date (which is estimated to be $3.0 million at the Termination
Date), which will be paid from the proceeds of the offering. Common and common
equivalent shares issued during the 12-month period prior to the proposed
offering have been included in the calculation using the treasury stock method
as if they were outstanding for all periods presented.

Fair Values of Financial Instruments -- The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts
payable, advances from officers, and notes payable. The carrying values of all
financial instruments, other than advances from officers and notes payable, are
representative of their fair values due to their short-term maturities. The
carrying value of the Company's notes payable is considered to approximate its
fair value due to the variable interest rate of this instrument. Fair values of
advances from officers are not determinable due to their related party nature.

Concentration of Credit Risk -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. Concentration
of credit risk with respect to accounts receivable are generally diversified due
to the large number of entities composing the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses. Approximately
22%, 24% and 17% of net revenues for the years ended December 31, 1994, 1995 and
1996, respectively, were derived from sales of products to the Company's three
largest customers. During the nine month periods ended September 30, 1996 and
1997, approximately 26% and 32% of net revenues were derived from sales of
products to the Company's three largest customers.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Impairment of Long-Lived Assets -- The Company regularly reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less

F-8
<PAGE> 63

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

than the carrying amount of the asset, the Company recognizes an impairment
loss. As of December 31, 1994, 1995 and 1996 and September 30, 1997, no
impairment was identified.

Unaudited Interim Financial Statements -- In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of financial
position and results of operations for such dates and periods.

Accounting Standards -- In October 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") SFAS
No. 123, "Accounting for Stock-Based Compensation" which defines a fair value
based method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, companies are encouraged, but are not required, to adopt the fair
value method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but
must disclose in a note to the financial statements pro forma net income and
earnings per share as if SFAS No. 123 had been applied. The Company has
determined that it will not adopt the fair value method but will continue to
account for stock-based compensation under APB No. 25. The required disclosures
related to SFAS No. 123 are presented in Note 10.

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS") which supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share" ("APB No. 15") and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and provides guidance on other computational changes. SFAS
No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company does not expect EPS under SFAS No. 128 to be materially different
from EPS calculated under APB No. 15.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosure about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be
material in relation to its financial statements.

F-9
<PAGE> 64

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

3. INVENTORY

Inventory consists of the following components at December 31, 1995 and
1996 and at September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Raw materials......................... $1,136,067 $ 896,368 $ 910,296
Finished goods........................ 2,944,735 3,061,295 3,063,106
---------- ---------- -----------
$4,080,802 $3,957,663 $ 3,973,402
========== ========== ===========
</TABLE>

4. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consist of the following at December 31,
1995 and 1996 and at September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Furniture and fixtures................ $ 54,592 $ 64,703 $ 80,000
Equipment............................. 2,609,938 2,600,025 2,906,649
Leasehold improvements................ 90,463 127,420 137,211
---------- ---------- -----------
2,754,993 2,792,148 3,123,860
Less accumulated depreciation and
amortization........................ 481,818 770,565 1,068,888
---------- ---------- -----------
Furniture, fixtures and equipment,
net................................. $2,273,175 $2,021,583 $ 2,054,972
========== ========== ===========
</TABLE>

5. NOTES PAYABLE

Notes payable consist of the following at December 31, 1995 and 1996 and at
September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- -------- -------------
<S> <C> <C> <C>
Line-of-credit agreement for $3,500,000
bearing interest at the bank's base
rate plus .75% per annum (9.25% at
September 30, 1997), which is subject
to change from time to time, payable
monthly. All unpaid principal and
interest is due April 1, 1998........ $ 800,000
Line-of-credit agreement for $500,000
bearing interest at the prime rate
plus 1% per annum (9.5% at December
31, 1995), which is subject to change
from time to time.................... $ 250,000
Note payable to bank bears interest at
the prime rate plus 1% per annum
(9.25% at December 31, 1996), which
is subject to change from time to
time, payable on a monthly basis. The
note requires monthly principal
payments of $8,333 with the unpaid
balance due February 28, 1997. The
note is secured by substantially all
the assets of the Company............ 483,333 $351,745
</TABLE>

F-10
<PAGE> 65

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
---------- -------- ----------
<S> <C> <C> <C>
Note payable bearing interest at 7.91%
per annum. The note requires various
principal payments along with accrued
interest throughout a period of two
years upon delivery of equipment
(August 1995). The note is secured by
the metallizer....................... 843,000 343,000
---------- -------- ----------
Total notes payable.................... 1,576,333 694,745 800,000
Capital lease obligations.............. 6,075
---------- -------- ----------
Total notes payable and capital lease
obligations.......................... 1,582,408 694,745 800,000
Less current portion................... 887,663 694,745 800,000
---------- -------- ----------
Long term portion of notes payable..... $ 694,745 $ -- $ --
========== ======== ==========
</TABLE>

In March 1997, the Company entered into a line of credit agreement with a
bank for $3.5 million which is guaranteed personally by four of the officers of
the Company. The Company drew on this line of credit to pay off all outstanding
debt at that time, and to pay the balance of the outstanding advances from
officers. The line of credit bears interest at the bank's base rate plus 0.75%.
All unpaid principal and interest is due April 1, 1998. The line of credit
agreement is secured by the assets of the Company. Under the terms of the
agreement, the Company is required to meet certain financial covenants, as
defined. These include covenants related to current ratio, tangible net worth,
total liabilities to tangible net worth, net profit, and net profit after tax.
The Company failed to comply with the net profit after tax covenant contained in
the line-of-credit agreement for the year ended December 31, 1996 and the three
month period ended March 31, 1997. In addition, the Company failed to provide
the bank within 120 days after year end 1996 audited financial statements. The
lender waived compliance with the net profit after tax covenant for the year
ended December 31, 1996 and the three month period ended March 31, 1997. The
lender waived the receipt of the audited financial statements for the year
ending December 31, 1996 until October 31, 1997.

The Company leased certain equipment under capital leases. Included in
furniture, fixtures and equipment are capitalized leases with a cost of $17,434
and accumulated depreciation of $14,529 as of December 31, 1995.

The weighted average interest rate on the line of credit agreements during
the years ended December 31, 1995 and 1996 and the nine month period ended
September 30, 1997 was 9.5%, 9.25% and 9.25%, respectively.

6. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, NINE MONTH
------------------------------------ PERIOD ENDED
1994 1995 1996 SEPTEMBER 30, 1997
-------- ---------- -------- ------------------
<S> <C> <C> <C> <C>
Current:
Federal..................... $716,468 $ 983,522 $771,704 $ --
State....................... 195,803 238,785 143,724 54,094
Deferred:
Federal..................... (94,528) (158,529) (41,348) 486,711
State....................... (26,752) (42,339) (23,122) 131,887
-------- ---------- -------- --------
Provision for income taxes.... $790,991 $1,021,439 $850,958 $672,692
======== ========== ======== ========
</TABLE>

F-11
<PAGE> 66

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

A reconciliation of the provision for income taxes at the federal statutory
rate to the provision recorded in the accompanying financial statements is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, NINE MONTH
---------------------- PERIOD ENDED
1994 1995 1996 SEPTEMBER 30, 1997
---- ---- ---- ------------------
<S> <C> <C> <C> <C>
Statutory federal rate....................... 35.0% 35.0% 35.0% --%
State income taxes, net of federal income tax
benefit.................................... 7.9 6.4 4.5 1.9
Miscellaneous................................ 0.9 1.2 0.1 --
Write-off of deferred income taxes upon
S-Corporation election..................... 22.2
---- ---- ---- ----
Effective tax rates.......................... 43.8% 42.6% 39.6% 24.1%
==== ==== ==== ====
</TABLE>

The components of deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current:
Uniform capitalization............................... $ 26,045 $ 29,351
Accrued vacation..................................... 12,916 15,692
Allowance for bad debt............................... 51,751 67,135
Inventory reserve.................................... 432,168 558,697
Deferred salaries.................................... 42,095 42,095
State taxes.......................................... 43,450 (2,680)
-------- --------
Total current..................................... 608,425 710,290
-------- --------
Non-current:
State taxes.......................................... 4,277 7,223
Depreciation......................................... (58,574) (98,915)
-------- --------
Total non-current................................. (54,297) (91,692)
-------- --------
Total........................................ $554,128 $618,598
======== ========
</TABLE>

There are no deferred income tax balances as of September 30, 1997, due to
the write-off of the deferred income taxes upon the S Corporation election
effective January 1, 1997.

F-12
<PAGE> 67

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

7. COMMITMENTS AND CONTINGENCIES

The Company leases buildings under noncancelable operating leases that
expire on various dates through 2003. The Company is also a lessee under
operating leases for certain equipment whose terms are generally month to month.
Future minimum rental payments under such leases as of September 30, 1997 are
summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------
<S> <C>
1997 (quarter ending December 31, 1997)........ $ 177,525
1998........................................... 665,000
1999........................................... 657,000
2000........................................... 657,000
2001........................................... 657,000
2002........................................... 618,750
Thereafter..................................... 42,000
----------
$3,464,275
==========
</TABLE>

In September 1997, the Company entered into a new five year lease for space
approximating 17,000 square feet in a building located in Los Angeles,
California. This new space will replace two separate Los Angeles facilities
("Cotner Street" buildings), aggregating approximately 7,200 square feet,
presently used in research and manufacturing. Rent commenced on this new
facility on September 1, 1997 at a rate of $12,750 per month. The facilities on
Cotner Street are currently rented on a month-to-month basis, and will be
vacated upon six months notice. In addition, in July 1997, the Company
renegotiated a new lease for the existing premises on Jandy Place which will
commence in February 1998 upon expiration of the existing lease and expire in
February 2003. The rent under the new lease will be $42,000 per month.

Total rental expense for operating leases amounted to $259,589, $516,874
and $522,870 for the years ended December 31, 1994, 1995 and 1996, respectively.
Total rental expense for operating leases amounted to $410,732 (unaudited) and
$382,561 for the nine month periods ended September 30, 1996 and 1997,
respectively.

8. ADVANCES FROM OFFICERS AND RELATED ENTITY

Advances from officers and related entity bear interest at various rates
ranging from 7 to 11% per annum. Advances from officers and related entity were
$597,218 and $544,718 as of December 31, 1995 and 1996, respectively. Interest
payable related to advances from officers and related entity was $66,301 and
$127,397 as of December 31, 1995 and 1996, respectively. The related entity is
FosterCo, Inc. ("FosterCo"), a corporate entity owned by two stockholders and
officers of the Company. All amounts outstanding as of December 31, 1996 were
paid prior to September 30, 1997.

9. RELATED PARTY TRANSACTIONS

FosterCo is a corporate entity owned 50% by Terrence Conway and 50% by
Michael Foster, directors, stockholders and officers of the Company. The Upper
Deck Co. ("Upper Deck") is a customer of the company. Cyberwerks Interactive,
L.L.C. ("Cyberwerks LLC") is a joint venture 50% owned by FosterCo and 50% owned
by Upper Deck.

Since August 1995, the Company has subleased space at each of its two
facilities to Cyberwerks LLC which includes a portion of the Company's
headquarters facility and of its research and manufacturing facility, both in
Los Angeles, California. In addition to space, Cyberwerks LLC also shares
certain common services at

F-13
<PAGE> 68

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

these facilities including personnel, administrative and management services,
for which it reimburses the Company on a pro rata basis. Expenses reimbursed by
Cyberwerks LLC amounted to approximately $119,045 and $632,663 in the years
ended December 31, 1995 and 1996, respectively and $502,464 (unaudited) and
$369,689 for the nine month periods ended September 30, 1996 and 1997,
respectively. Included in prepaid expenses and other current assets as of
December 31, 1995 is $71,795 due from Cyberwerks LLC. The Company believes that
it has been compensated for both the usage of its space and its personnel on
terms no less favorable than it would have received in transactions with
independent third parties and that the allocation method used is reasonable.
(see Note 12).

Upper Deck purchased product from the Company in amounts approximating
$666,810, $654,609 and $115,376 in the years ended December 31, 1994, 1995 and
1996, respectively and $79,740 for the nine month period ended September 30,
1996. Included in accounts receivable as of December 31, 1995 and 1996,
respectively, is $4,053 and $35,834 due from Upper Deck. The Company believes
that these purchases were made on terms no less favorable than it would have
received in transactions with independent third parties.

10. STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN

During fiscal year 1996, the Company issued 30,000 shares of Common Stock
in exchange for $60,000 worth of consulting services. The number of shares
issued was based on the estimated fair value of the Company's stock at the time
of issuance related to the value of services performed.

Effective April 1, 1997, the Company adopted the 1997 Stock Incentive Plan
("1997 Plan") under which a total of 303,000 shares of the Company's Common
Stock have been reserved. Options are granted at the fair market value of the
Company's stock, as determined by the Board of Directors, on the date of grant.

The 1997 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, nonemployee directors and
consultants) may, in the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
the fair market value of those shares on the grant date, (ii) the Stock Issuance
Program, under which the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not less than fair market value of those shares at the
time of issuance, or as a bonus awarded for services rendered to the Company,
and (iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible nonemployee directors,
which options will enable such directors to purchase shares of Common Stock at
an exercise price equal to 100% of the fair market value of those shares on the
grant date. The persons eligible to participant in the Discretionary Option
Grant and Stock Issuance Programs are Company employees, non-employee directors,
and consultants and other independent advisors who provide services to the
Company. A person is eligible to participate in the Automatic Option Grant
Program if he or she (i) is serving as non-employee director on the date on
which the Underwriting Agreement in connection with the Initial Public Offering
is executed and the Common Stock offered hereby is priced (the "Underwriting
Date") (provided that no initial option will be granted on such date to a
director who has previously received a stock option grant form the Company in
connection with his or her Board service), (ii) first becomes a non-employee
director at any time after the Underwriting Date, whether through appointment by
the Board or election by the Company's stockholders, and (iii) continues to
serve as a non-employee director at one or more annual meetings of the Company's
stockholders held after the Underwriting Date.

During the nine month period ended September 30, 1997, options to purchase
84,000 shares of common stock were granted at an exercise price of $16.50.

F-14
<PAGE> 69

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

Stock option activity for the years are as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
------ -------- --------
<S> <C> <C> <C>
Options outstanding, January 1, 1997............ 0 -- --
Options granted................................. 84,000 $16.50 $16.50
------
Options outstanding, September 30, 1997......... 84,000 $16.50 $16.50
======
</TABLE>

The following table summarizes information about stock options outstanding
at September 30, 1997:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE SHARES
WEIGHTED OUTSTANDING REMAINING EXERCISABLE
AVERAGE AT CONTRACTUAL AT
GRANT EXERCISES SEPTEMBER 30, LIVES SEPTEMBER 30,
YEAR PRICES 1997 (YEARS) 1997
---------------------------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1997........................ $ 16.50 84,000 5 0
</TABLE>

All stock options are granted at the fair market value of the Company's
Common Stock at the grant date. The weighted average estimated fair value of the
options granted in the nine months ended September 30, 1997 was $4.65 per share.
As allowed, under SFAS 123, the Company applies Accounting Principles Board
Opinion No. 25 and the related interpretations in accounting for its stock
option plan. Accordingly, no compensation cost for the Company's stock option
plan has been recognized in 1997. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates or awards
under the plan (without giving effect to the pro forma adjustments as described
in Note 13), the Company's net income for the nine month period ended September
30, 1997 would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
-----------------------
<S> <C>
Net income:
As reported.......................................... $ 2,109,269
Pro forma............................................ $ 2,052,921
Net income per share:
As reported.......................................... $
Pro forma............................................ $
</TABLE>

The fair market value of options granted under the stock option plan during
nine month period ended September 30, 1997 was determined using the minimum
value method as prescribed by SFAS 123 utilizing the following weighted-average
assumptions:

<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
-------------------------
<S> <C>
Expected volatility................................... 0%
Dividend yield........................................ --
Risk-free interest rate............................... 6.73%
Expected life......................................... 5 years
</TABLE>

In October 1997, the Company granted options to purchase 7,500 shares of
Common Stock to an employee director at an exercise price of $19.25.

F-15
<PAGE> 70

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE

NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

11. COMMON STOCK SPLIT

In June 1997, the Company's Board of Directors enacted a 300 for one split
of its shares of common stock. All outstanding options to purchase shares of the
Company's Common Stock were adjusted accordingly. All references to shares and
per share amounts have been restated to reflect the forward stock split.

12. SUBSEQUENT EVENTS

S Corporation Dividends -- In October 1997, the Company declared a
distribution to its existing stockholders, consisting of promissory notes (the
"Stockholder Notes") in an aggregate amount equal to the undistributed retained
earnings of the Company (which is estimated to be approximately $3 million at
the Termination Date). The estimated distribution may change based on actual
earnings incurred through the Termination Date. The promissory notes bear
interest from the closing date of the Company's initial public offering at 5.5%
per annum. Unpaid principal and interest are due April 1, 1998. This amount
represents the Company's estimated undistributed retained earnings from January
1, 1997 through the Termination Date of the Company's status as an S
corporation. On the Termination Date, the Company will revert to its former
status as a C corporation.

In connection with the initial public offering of its Common Stock, the
Company anticipates that it will repay the Stockholder Notes from the proceeds
of the offering (see Note 13)

FosterCo Option Agreement -- In September 1997, the Company acquired an
option (the "FosterCo Option") to purchase all of the outstanding capital stock
of FosterCo from two stockholders of the Company. Three of the Company's
stockholders, who are not stockholders of FosterCo, contributed 17,965 shares of
Common Stock to the Company as consideration for the option, which shares were
retired on September 30, 1997. The exercise price is equal to the greater of
$5,000,000 or 50% of the fair market value, as defined, of FosterCo's
outstanding capital stock as of the date of exercise of the option. The FosterCo
Option is exercisable during the 12-month period beginning October 1, 2002 and
ending on September 30, 2003. The exercise date will be accelerated in the event
Cyberwerks LLC files a registration statement on Form S-1 with the Securities
and Exchange Commission to register shares of its Common Stock. The option is
exercisable in cash, stock of the Company or a combination thereof, at the
discretion of the Fairness Committee of the Board of Directors of the Company.
The potential effect of the exercise of the FosterCo Option, were it exercisable
at September 30, 1997, would not have a material effect on the Company's
financial statements.

13. PRO FORMA INFORMATION (UNAUDITED)

The unaudited pro forma balance sheet and the unaudited pro forma
adjustments to the statement of operations has been presented to give pro forma
effect to (i) the distribution, which will be made from the proceeds of the
Offering of previously undistributed income taxed or taxable to the Company's
stockholders (of approximately $3 million as of the Termination Date); and (ii)
the recognition of income tax expense as if the Company were a C Corporation
during the nine month period ended September 30, 1997.

A reconciliation of stockholders' equity is as follows:

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Historical balance..................... $10,100 $ 59,900 $8,281,234 $8,351,234
Effect on net income as if Company were
a C Corporation during the nine month
period ended September 30, 1997...... (547,653) (547,653)
Less S Corporation dividend............ 3,000,000 (3,000,000) --
------- ---------- ---------- ----------
Pro forma balance...................... $10,100 $3,059,900 $4,733,581 $7,803,581
======= ========== ========== ==========
</TABLE>

F-16
<PAGE> 71

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Prior S Corporation Status............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 37
Certain Transactions.................. 43
Principal and Selling Stockholders.... 46
Description of Securities............. 47
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Index to Financial Statements......... F-1
UNTIL , 1997 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
</TABLE>

======================================================
======================================================

LOGO
COMMON STOCK
------------------

PROSPECTUS
------------------

EVEREN SECURITIES, INC.
, 1997

======================================================
<PAGE> 72

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts shown are estimated
except the Securities and Exchange Commission registration fee and the filing
fee for the National Association of Securities Dealers, Inc. All of the amounts
shown will be paid by the Company (the "Registrant").

<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ ---------
<S> <C>
SEC registration fee.............................................. $ 7,576
NASD filing fee................................................... 3,000
Nasdaq National Market listing (entry) fee........................ *
Blue sky fees and expenses........................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
---------
Total................................................... $ 575,000
=========
</TABLE>

- ---------------
* to be provided by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (to be filed as Exhibit 3.4 hereto) provide
that the Registrant shall indemnify its directors and officers to the fullest
extent permitted by Delaware law. The Bylaws require the Registrant, subject to
certain limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.

In addition, the Registrant's Certificate of Incorporation (the
"Certificate") (to be filed as Exhibit 3.3 hereto) provides that the Registrant
shall indemnify its directors and officers if such persons acted (i) in good
faith, (ii) in a manner reasonably believed to be in or not opposed to the best
interests of the Registrant, and (iii) with respect to any criminal action or
proceeding, with reasonable cause to believe such conduct was lawful. The
Certificate also provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. This provision in the
Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Registrant be authorized

II-1
<PAGE> 73

to indemnify its directors and officers to the fullest extent permitted by law
through the Bylaws, agreement, vote of stockholders or disinterested directors,
or otherwise.

The Registrant intends to obtain directors' and officers' liability
insurance in connection with this Offering.

In addition, the Registrant has entered or, concurrently with this
Offering, will enter, into agreements to indemnify its directors and certain of
its officers in addition to the indemnification provided for in the Certificate
and Bylaws. These agreements will, among other things, indemnify the
Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.

The Underwriting Agreement (to be filed as Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, its officers and
directors and by the Registrant and the Selling Stockholders of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since August 1994, the Registrant has sold and issued the following
unregistered securities:

1. On April 1, 1996, the Registrant issued 30,000 shares of its Common
Stock to a business consultant in consideration for services rendered to
the Registrant by such consultant.

2. On April 1, 1997, the Registrant granted incentive stock options to
certain employees of the Registrant under its 1997 Stock Incentive Plan
covering an aggregate of 84,000 shares of the Registrant's Common Stock, at
an exercise price of $16.50 per share. These options vest in five equal
annual installments commencing one year following the date of grant. None
of the optionees paid any cash consideration for these options.

3. In June 1997, the Registrant affected a 300-for-1 stock split. Such
issuance was exempt from registration under Section 2(3) of the Securities
Act on the basis that such transaction did not involve a "sale" of
securities.

4. In October 1997, the Registrant granted stock options to an officer
of the Registrant covering an aggregate of 7,500 shares of Common Stock, at
an exercise price of $19.25 per share. These options vest in five equal
annual installments commencing in April 1998. The optionee did not pay any
cash consideration for these options.

The issuance of securities in Items 1, 2 and 4 above were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contract relating to
compensation, as provided by Rule 701.

There were no underwriters, brokers or finders employed in connection with
any of the transactions set forth above.

II-2
<PAGE> 74

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

The following Exhibits are attached hereto and incorporated herein by
reference.

<TABLE>
<S> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3** Form of Certificate of Incorporation of the Registrant, a Delaware corporation.
3.4** Form of Bylaws of the Registrant, a Delaware corporation.
3.5** Certificate of Merger of the Registrant, a Delaware corporation, and
Registrant, a California corporation.
4.1** Specimen certificate representing shares of Common Stock of the Registrant.
4.2* 1997 Stock Incentive Plan.
4.3* Form of Notice of Grant of Stock Option and related form of Stock Option
Agreement under 1997 Stock Incentive Plan.
4.4* Form of Notice of Grant of Nonemployee Director Automatic Stock Option and
related form of Stock Option Agreement under 1997 Stock Incentive Plan.
4.5* Form of Stock Issuance Agreement.
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement.
10.2* Standard Industrial/Commercial Single-Tenant Lease, dated July 1, 1997, between
Bardon of Hollywood, Inc. and the Registrant.
10.3* Standard Industrial Lease, dated July 10, 1985, between Phillip Rossman and
Ruth Rossman Trust and Comdisc Technologies, Inc., as assigned to the
Registrant as of July 10, 1985.
10.4* Standard Sublease, dated May 8, 1996, between Legasys Legal Systems and the
Registrant.
10.5* Revolving Credit Promissory Note Issued by the Registrant to Citibank, FSB.
10.6** Standard Industrial/Commercial Single-Tenant Lease, dated as of July 21, 1997,
between Jerry Harold Waxman and Arlene Reva Waxman, as Trustees under the Jerry
Harold Waxman and Arlene Reva Waxman Inter Vivos Trust Agreement Dated October
7, 1977, and the Registrant.
10.7* Option Agreement, dated October 1, 1997, among the Registrant, Terrence Conway,
Michael S. Foster and FosterCo, Inc.
10.8* Form of Employee Proprietary Information and Inventions Agreement.
10.9* Technology Assignment Agreement, dated October 1, 1997, between Michael S.
Foster and the Registrant.
10.10** Standard Sublease, dated June 8, 1995, between Foote, Cone & Belding
Communications, Inc., now known as True North Communication, and the
Registrant.
10.11* Form of Stockholder's Note, dated October 1, 1997.
10.12** License Agreement and Release, dated May 31, 1995 among the Registrant,
FosterCo, Inc., Michael Foster, Terrence Conway, Michael Wanlass and James
Wanlass.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche LLP Independent Auditors.
23.2** Consent of Brobeck, Phleger & Harrison LLP (to be contained in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>

- ---------------

*filed as an exhibit to the Registrant's Registration Statement on Form S-1, as
filed with the Commission on October 22, 1997.

** to be filed by amendment

II-3
<PAGE> 75

(b) Financial Statement Schedules

<TABLE>
<CAPTION>
SCHEDULE
------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective;

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 76
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 14th day of
November 1997.

SPECTRATEK TECHNOLOGIES, INC.

By: /s/ TERRENCE CONWAY
------------------------------------
Terrence Conway
Chief Executive Officer and
President

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<S> <C> <C>

/s/ TERRENCE CONWAY Chief Executive Officer, November 14, 1997
- ------------------------------------- President and Director
Terrence Conway (principal executive officer)

* Chairman of the Board, Director November 14, 1997
- ------------------------------------- and Chief Technology Officer
Michael S. Foster

* Vice President, Marketing November 14, 1997
- ------------------------------------- and Director
Michael Wanlass

* Vice President, Manufacturing November 14, 1997
- ------------------------------------- and Director
James Wanlass

/s/ CHARLES M. SPEAR Chief Financial Officer November 14, 1997
- ------------------------------------- and Director
Charles M. Spear (principal financial and
accounting officer)
</TABLE>

*By: /s/ TERRENCE CONWAY
---------------------------
Terrence Conway
Attorney-in-Fact

II-5
<PAGE> 77

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.........................................
3.1* Amended and Restated Articles of Incorporation of the Registrant.......
3.2* Amended and Restated Bylaws of the Registrant..........................
3.3** Form of Certificate of Incorporation of the Registrant, a Delaware
corporation............................................................
3.4** Form of Bylaws of the Registrant, a Delaware corporation...............
3.5** Certificate of Merger of the Registrant, a Delaware corporation, and
Registrant, a California corporation...................................
4.1** Specimen certificate representing shares of Common Stock of the
Registrant.............................................................
4.2* 1997 Stock Incentive Plan..............................................
4.3* Form of Notice of Grant of Stock Option and related form of Stock
Option Agreement under 1997 Stock Incentive Plan.......................
4.4* Form of Notice of Grant of Nonemployee Director Automatic Stock Option
and related form of Stock Option Agreement under 1997 Stock Incentive
Plan...................................................................
4.5* Form of Stock Issuance Agreement.......................................
5.1** Form of Opinion of Brobeck, Phleger & Harrison LLP.....................
10.1* Form of Indemnification Agreement......................................
10.2* Standard Industrial/Commercial Single-Tenant Lease, dated July 1, 1997,
between Bardon of Hollywood, Inc. and the Registrant...................
10.3* Standard Industrial Lease, dated July 10, 1985, between Phillip Rossman
and Ruth Rossman Trust and Comdisc Technologies, Inc., as assigned to
the Registrant as of July 10, 1985.....................................
10.4* Standard Sublease, dated May 8, 1996, between Legasys Legal Systems and
the Registrant.........................................................
10.5* Revolving Credit Promissory Note Issued by the Registrant to Citibank,
FSB....................................................................
10.6** Standard Industrial/Commercial Single-Tenant Lease, dated as of July
21, 1997, between Jerry Harold Waxman and Arlene Reva Waxman, as
Trustees under the Jerry Harold Waxman and Arlene Reva Waxman Inter
Vivos Trust Agreement Dated October 7, 1977, and the Registrant........
10.7* Option Agreement, dated October 1, 1997, among the Registrant, Terrence
Conway, Michael S. Foster and FosterCo, Inc............................
10.8* Form of Employee Proprietary Information and Inventions Agreement......
10.9* Technology Assignment Agreement, dated October 1, 1997, between Michael
S. Foster and the Registrant...........................................
10.10** Standard Sublease, dated June 8, 1995, between Foote, Cone & Belding
Communications, Inc., now known as True North Communication, and the
Registrant.............................................................
10.11* Form of Stockholder's Note, dated October 1, 1997......................
10.12** License Agreement and Release, dated May 31, 1995 among the Registrant,
FosterCo, Inc., Michael Foster, Terrence Conway, Michael Wanlass and
James Wanlass..........................................................
11.1 Statement Regarding Computation of Earnings Per Share..................
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.................
23.2** Consent of Brobeck, Phleger & Harrison LLP (to be contained in Exhibit
5.1)...................................................................
24.1* Power of Attorney......................................................
27.1 Financial Data Schedule................................................
</TABLE>

- ---------------

*filed as an exhibit to the Registrant's Registration Statement on Form S-1, as
filed with the Commission on October 22, 1997.

** to be filed by amendment

<PAGE> 1

EXHIBIT 11.1
SPECTRATEK TECHNOLOGIES, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
AND OF PRO FORMA NET INCOME PER SHARE

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income........................... $1,012,763 $1,374,428 $1,294,235 $1,007,311
Pro forma net income................. $2,109,269
Weighted average number of shares
outstanding........................ 3,000,000 3,000,000 3,015,000 3,000,000 3,029,934
Dilutive effect of stock options
using the treasury stock method.... 48,273 48,273 34,636 48,273 21,938
Effect of common stock issued in
connection with the IPO to pay-off
Stockholder Notes..................
---------- ---------- ---------- ---------- ----------
Number of shares used to compute net
income and pro forma net income per
share.............................. 3,048,273 3,048,273 3,049,636 3,048,273
========== ========== ========== ========== ==========
Net income per share................. $ 0.33 $ 0.45 $ 0.42 $ 0.33
========== ========== ========== ==========
Pro forma net income per share.......
==========
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-38471 of Spectratek Technologies, Inc. on our report dated November 6, 1997,
appearing in the Prospectus, which is part of such Registration Statement and to
the reference to us under the headings "Selected Financial Data" and "Experts"
in such Prospectus.

DELOITTE & TOUCHE LLP

Los Angeles, California

November 13, 1997

<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statement for the year ended December 31, 1996
and September 30, 1997 financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,038
<SECURITIES> 0
<RECEIVABLES> 2,314
<ALLOWANCES> 167
<INVENTORY> 3,973
<CURRENT-ASSETS> 8,034
<PP&E> 2,055
<DEPRECIATION> 1,069
<TOTAL-ASSETS> 10,186
<CURRENT-LIABILITIES> 1,835
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 10,186
<SALES> 11,857
<TOTAL-REVENUES> 11,857
<CGS> 6,644
<TOTAL-COSTS> 6,644
<OTHER-EXPENSES> 2,226
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 2,782
<INCOME-TAX> 673
<INCOME-CONTINUING> 2,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,109
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statements for the year ended December
31, 1996 and June 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 462
<SECURITIES> 0
<RECEIVABLES> 1,484
<ALLOWANCES> 155
<INVENTORY> 3,958
<CURRENT-ASSETS> 6,527
<PP&E> 2,792
<DEPRECIATION> 771
<TOTAL-ASSETS> 8,764
<CURRENT-LIABILITIES> 2,431
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 8,764
<SALES> 12,003
<TOTAL-REVENUES> 12,003
<CGS> 7,115
<TOTAL-COSTS> 7,115
<OTHER-EXPENSES> 2,432
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> 2,145
<INCOME-TAX> 851
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42

</TABLE>