<PAGE>
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1995
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File No. 0-17531
-------
OPTICAL SECURITY GROUP, INC.
----------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1094032
- ------------------------------------- ---------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
535 16th Street, Suite 920
Denver, Colorado 80202
-----------------------
(Address of Principal Executive Offices)
(303) 534-4500
--------------
(Registrant's telephone number, including area code)
4500 Cherry Creek Drive South, Suite 900
Denver, Colorado 80222
----------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934, during the preceding twelve months and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No _____.
-----
APPLICABLE ONLY TO CORPORATE ISSUES:
Class of Stock No. of Shares Outstanding Date
- -------------- ------------------------- ----
Common 3,024,552 September 30, 1995
1
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 571,502
Accounts receivable, net 1,224,206
Inventory 303,236
Prepaid expenses and other 83,107
----------
TOTAL CURRENT ASSETS 2,182,051
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $162,350 452,019
OTHER ASSETS:
Patents and patent applications, net of
accumulated amortization of $58,658 275,274
Goodwill, net of accumulated
amortization of $94,951 1,245,554
License agreements, net of accumulated
amortization of $63,049 478,612
Deposits and other assets 46,125
----------
2,045,565
----------
TOTAL ASSETS $4,679,635
==========
</TABLE>
2
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and finance leases 200,810
Accounts payable 694,300
Accruals and other liabilities 315,219
-----------
TOTAL CURRENT LIABILITIES 1,210,329
OTHER LIABILITIES:
Notes payable and finance leases 100,010
-----------
TOTAL LIABILITIES 1,310,339
STOCKHOLDERS' EQUITY (Note 3 and 4):
Preferred stock, $.001 par value, 2,100,000
shares authorized, none issued and
outstanding
Preferred stock (convertible), Series A,
400,000 authorized and committed pursuant
to the Exchange Agreements 1,250,000
Common stock, $.005 par value, 15,000,000
shares authorized; 3,024,552 issued and
outstanding 75,614
Additional paid-in capital 8,389,120
Foreign currency translation adjustment 261
Accumulated deficit (6,345,699)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,369,296
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,679,635
===========
</TABLE>
See Notes to Consolidated Financial Statement
3
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 30, 1995
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------------
September 30, September 30,
------------------------- -------------------------------
1995 1994 1995 1994
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Sales $1,942,505 $ 573,861 $4,573,068 $1,437,975
Cost of Sales 1,224,925 216,081 2,997,905 468,049
---------- ---------- ---------- ----------
Gross Profit 717,580 357,780 1,575,163 969,026
Operating Expenses
Salaries, benefits and taxes 418,177 345,160 838,944 607,757
Depreciation and amortization 62,109 49,506 123,816 91,679
Other operating expenses 279,990 224,503 555,839 411,747
---------- ---------- ---------- ----------
Total Expenses 760,276 619,169 1,518,599 1,111,183
---------- ---------- ---------- ----------
Net Operating Income (42,696) (261,389) 56,564 (142,157)
Interest Income 3,643 11,510 7,088 11,596
Other Income 24,594 4,425 17,512 (7,684)
Interest Expense (7,147) (46,419) (53,682) (74,491)
---------- ---------- ---------- ----------
Net Income (Loss) before tax (21,606) (291,873) 27,482 (212,736)
Income tax expense 42,476 17,946 76,570 71,740
---------- ---------- ---------- ----------
Net Loss (64,082) (309,819) (49,088) (284,476)
========== ========== ========== ==========
Net Loss Per Share $(.02) $(.115) $(.016) $(.118)
========== ========== ========== ==========
Weighted average number of
shares outstanding 3,024,552 2,699,396 3,015,990 2,416,335
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1995
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1995 1994
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (49,088) $ (284,476)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 123,816 91,679
Common shares issued for services - 20,000
Common shares issued for interest 37,500 37,500
Stock options issued for services - 102,626
Change in operating assets and
liabilities:
Accounts receivable 75,802 36,237
Inventory 38,829 (3,128)
Prepaid and other assets (21,789) (85,630)
Accounts payable and
accrued expenses (22,113) (229,051)
--------- -----------
Net cash used by operating activities 182,957 (314,243)
INVESTING ACTIVITIES:
Patent costs (5,883) (21,129)
Acquisition - ELEF, Plc - (1,661,879)
Acquisition - The Diffraction Co. - (2,814)
Property and equipment (51,694) (173,002)
Other intangible assets (2,174) (33,707)
--------- -----------
Net cash used by investing activities (59,751) (1,892,531)
FINANCIAL ACTIVITIES:
Proceeds from conversion of debt
into preferred stock $ - $ -
Proceeds from issuance of common stock - 2,046,333
Proceeds from issuance of debt - 1,267,623
Payments on notes and capital
lease obligations (23,817) (142,600)
--------- -----------
Net cash provided by financing
activities (23,817) 3,171,356
Effect of exchange rate changes on
cash flows (10,912) -
--------- -----------
Net increase in cash 88,477 964,582
Cash, beginning of period 483,025 66,527
--------- -----------
Cash, end of period $ 571,502 $ 1,031,109
========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company, through its principal operating subsidiaries, Optical Security
Industries, Inc. ("OpSec U.S.") and Optical Security Industries, Plc ("OpSec
U.K."), is a technology company which provides products and solutions to
businesses and governments for the problems of product tampering and
counterfeiting, diversion (grey marketing) of goods, and illegal document
alteration and copying. In addition, the Company provides materials and
products for use in decorative packaging and other commercial applications,
including holography and dimensional printing for book illustrations and trading
cards and for consumer product promotions.
The Company owns three other subsidiaries, TSL Incorporated ("TSL"), which will
be used to hold the Company's patents, VisiLink, Inc., which was formed to
participate as exclusive marketing agent for the interactive computer disk
technology owned by Interactive Digital, Inc. ("IDI"), a Colorado corporation,
and Light Fantastic, Inc. which was used to acquire the assets of The
Diffraction Company.
The Company is headquartered in Denver, Colorado, with manufacturing facilities
and sales offices in the U.K. and in the U.S. The Company is publicly held and
traded on the NASDAQ Smallcap Market System under the symbol "OPSC."
The Company was formed on August 4, 1988, to develop and commercialize tamper-
resistant and anti-counterfeiting technology. In May 1994, under new management
led by Richard H. Bard, the Company expanded its business by acquiring ELEF,
Plc. ("ELEF") (now known as OpSec U.K.), a United Kingdom corporation. ELEF was
founded in 1981 and is involved in the design and production of holographic
images and products. In addition, in October 1994, through Light Fantastic,
Inc., the Company acquired substantially all of the assets of The Diffraction
Company, a Maryland corporation. The Diffraction Company was founded in 1957 and
is involved in the manufacture of diffraction patters and embossed holographic
foils, labels and laminates. Both entities sell non-security products under
Light Fantastic, Inc.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries since the dates of acquisition. All
material intercompany accounts and transaction have been eliminated. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.
6
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY
Foreign currency denominated assets and liabilities are translated into U.S.
dollar equivalents based on exchange rates prevailing at the end of each period.
Revenues and expenses are translated at average exchange rates during the year.
Aggregate foreign exchange gains and losses arising from the translation of
foreign currency denominated assets and liabilities are included in
stockholders' equity, and realized gains and losses are reflected in income.
INVENTORY
Inventory is stated at the lower of cost or market using the first-in, first-out
(FIFO) method. Inventory on hand consists principally of raw materials used in
embossing polyester films and foils.
COMMON STOCK SPLIT
Effective February 28, 1995, the Company amended its Articles of Incorporation
in order to effect a five-to-one reverse split of the Company's common stock.
Unless otherwise noted, all shares of common stock have been adjusted to reflect
the five-to-one reverse split.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over their estimated useful lives.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining lease term. Depreciation is computed using the straight-
line method.
GOODWILL AND LICENSE AGREEMENTS
Goodwill represents the excess of purchase price over tangible and other
identifiable assets acquired, less liabilities assumed arising from business
combinations. Goodwill at September 30, 1995 is associated with the acquisition
during the fiscal year ended March 31, 1995 of ELEF, Plc. Other intangible
assets consist primarily of license agreements that provide the Company with
royalties from the use and sale of holographic and diffraction patterns by
various licensees.
Goodwill is being amortized on a straight-line basis over a 20-year life.
License agreements are being amortized over a 10-year life.
Goodwill and license agreements are reviewed for impairment whenever events
indicate their carrying amount may not be recoverable. When the Company
believes that those assets may not be recoverable, it estimates the future cash
flows to be generated by the business associated with those assets. In the
event that the sum of the cash flows is less than the carrying amount of those
assets, the assets would be written down to their fair value, which is normally
measured by discounting estimated future cash flows.
7
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS AND PATENT APPLICATIONS
The Company's patent applications relate to tamper-evident packaging methods and
document security. Amortization is provided using straight-line methods over
the estimated economic lives, not to exceed 17 years.
NET LOSS PER COMMON SHARE
Net loss per common share is computed on the basis of the weighted average
number of shares of common stock outstanding. Common share equivalents are not
included in the computation of net loss per share. Common share equivalents
relate to the dilutive effect of exercisable options, warrants and conversion
rights.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred.
2. BUSINESS COMBINATIONS
The Company completed two acquisitions during the fiscal year ended March 31,
1995, as more fully described below, including the acquisition of 100% of the
stock of ELEF, Plc on May 1, 1994 and, in an asset purchase, substantially all
of the assets of The Diffraction Company on October 21, 1994. These
acquisitions provide the Company with a customer base and manufacturing
capabilities to further its penetration of markets for its labels,
authenticating, anti-diversion products and document security.
Both acquisitions have been accounted for as purchases, and operations of the
businesses acquired have been included in the accompanying consolidated
financial statements from their respective dates of acquisition. The excess of
the purchase price over the fair value of the net assets acquired is generally
included in goodwill and license agreements.
On May 1, 1994, the Company's subsidiary, Optical Security Industries, Inc.,
acquired 100% of the stock of ELEF, Plc, a corporation based in the United
Kingdom. The purchase price was approximately $1.75 million, including 40,000
common shares of the Company valued at $122,500, with the balance paid in cash.
Warrants for 70,000 common shares of the Company were issued to the seller as
part of the purchase with exercise prices, as adjusted, ranging from $4.05 to
$5.00 per share. The cost of the acquisition has been allocated based on the
relative fair value of the assets acquired and liabilities assumed. This
allocation has resulted in goodwill and license agreements of $1,340,505 and
$253,447, respectively.
8
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
2. BUSINESS COMBINATIONS (CONTINUED)
On October 21, 1994, the Company's newly formed subsidiary, Light Fantastic,
Inc., acquired substantially all of the assets of The Diffraction Company, based
in Maryland. The purchase price was approximately $795,000, including 60,000
common shares of the Company valued at $157,500, a note payable to the seller of
$115,923 due in eighteen months with interest at 10% per annum, and the balance
in cash. The cost of the acquisition has been allocated based on the relative
fair value of the assets acquired and liabilities assumed. This allocation has
resulted in an allocation to license agreements of $288,574. As additional
consideration paid in the acquisition of The Diffraction Company, warrants for
100,000 common shares of the Company, with an exercise price of $4.05 per share,
were issued to the seller.
The following unaudited pro forma combined results of operations for the quarter
ended September 30, 1995 and 1994 have been prepared assuming that the
acquisition of ELEF, Plc and the acquisition of the assets of The Diffraction
Company occurred at the beginning of each period. In preparing the pro forma
data, adjustments have been made for: (i) the amortization of goodwill and
license agreements; (ii) the interest expense related to the seller financing of
the purchase price; and (iii) the reduction in depreciation expense resulting
from purchase accounting.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales and royalty income $1,942,505 $1,042,700 $4,573,068 $2,478,900
Net (loss) (64,082) (248,000) (49,088) (222,000)
Per Share:
Net (loss) $ (.02) $ (.092) $ (.016) $ (.092)
</TABLE>
3. STOCKHOLDERS' EQUITY
On December 3, 1993, the Articles of Incorporation of the Company were amended
to increase the authorized capital stock of the Company from 2,000,000 to
10,000,000 shares (10,000,000 to 50,000,000 before giving effect to the
subsequent 1995 five-to-one reverse stock split. The par value of these shares
is $0.25 per share. On December 15, 1994, the Articles of Incorporation were
amended to increase the authorized capital stock of the Company from 10,000,000
to 15,000,000 shares effective February 28, 1995. The Company has an Incentive
Stock Option Plan (ISO) under which 1,400,000 shares of common stock were
reserved for issuance. Under the ISO plan, options may be granted to key
employees at prices not less than fair market value of the Company's stock at
date of grant. The Company also has a Nonqualified Stock Option Plan (NSO)
under which 650,000 shares of common stock were reserved for issuance.
9
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
3. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of stock options granted, exercised and outstanding
for the years ended March 31, 1995 and 1994, and the quarters ended June 30,
1995 and September 30, 1995:
<TABLE>
<CAPTION>
Number of shares Other Exercise Expiration
ISO NSO Options Price Date
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING, MARCH 31, 1993 - 250,000 88,333 $.20-$.32 3/95-9/2000
Options granted - - - -
Options canceled - 250,000 - $.20-$.40
Options granted 362,667 303,333 - $.25-$12.50 4/98-9/2000
---------------------------------
OUTSTANDING, MARCH 31, 1994 362,667 303,333 88,333 4/95-9/2000
Options granted 46,567 - 20,000 $.25-$1.10
Options canceled 60,000 53,333 5,000 $.25-$12.50
Options granted 468,800 190,000 - $4.05-$5.00 7/94-2/2000
Fractional shares from reverse
stock split - 1 2
---------------------------------
OUTSTANDING, MARCH 31, 1995 724,800 440,001 63,335
Options granted - - - $4.05 2/96-2/98
Options canceled 400 - - $3.75 5/96-5/99
Options granted 20,000 - -
--------------------------------
OUTSTANDING, JUNE 30, 1995 744,400 440,001 63,335
Options granted - - -
Options canceled 20,000 - - $3.75 5/96-5/99
Options granted - - -
--------------------------------
OUTSTANDING, SEPTEMBER 30, 1995 724,400 440,001 63,335
=================================
</TABLE>
10
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
3. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of warrants granted, exercised and outstanding for
the year ended March 31, 1995, and for the year-to-date period ended September
30, 1995. Warrants issued in the acquisition of ELEF, Plc were re-priced
effective July 1, 1995 to $5.00 from $10.00 per common share.
<TABLE>
<CAPTION>
WARRANTS
---------------------------------
NUMBER EXERCISE EXPIRATION
OF SHARES PRICE DATE
---------------------------------
<S> <C> <C> <C>
Outstanding, March 31, 1994 -
Issued for June 1994 financing 355,000 $5.00 6/2001
Issued in ELEF, Plc acquisition 12,346 $4.05 5/2004
Issued in ELEF, Plc acquisition 57,655 $5.00 5/2004
Issued in The Diffraction Company 100,000 $4.05 10/2001
acquisition
-------
525,001
Exercised December, 1994 12,346 $4.05
-------
Outstanding, September 30, 1995 512,655
=======
</TABLE>
All ISO options were granted with an exercise price equal to or greater than
fair market value at the date of grant. During fiscal year 1994, compensation
expense of $37,500 was recorded for 50,000 NSO option grants, representing the
difference between fair market value and the exercise price at the date of
grant. During fiscal 1995, compensation of $205,250 was recorded upon the
issuance of 50,000 stock options granted to certain directors and 100,000
options granted to an officer/director under the NSO.
In the event the Company sells substantially all of its assets prior to October
31, 1997, the Company's chief executive officer will receive, as a stock bonus,
50,000 shares of the common stock of the Company.
During the quarter ended June 30, 1995, the Company granted options under the
ISO to a newly hired executive for 20,000 common shares of the Company stock,
and cancelled options for 400 common shares. During the quarter ended September
30, 1995, options granted under the ISO for 20,000 common shares were cancelled.
11
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
4. RELATED PARTY TRANSACTIONS
Effective June 29, 1994, the Company completed a financing arrangement with a
group of individual investors and with Hunt Capital Group, L.L.C. The group of
individual investors includes certain officers/directors/shareholders. Part of
the individual funding was a condition of funding by Hunt Capital Group,
L.L.C., which also obtained a seat on the Board of Directors. The aggregate
funds raised totalled $3.25 million and consisted of the following newly issued
debt and equity securities:
<TABLE>
<CAPTION>
COMMON CONVERTIBLE
STOCK NOTES TOTAL
-------------------------------------
<S> <C> <C> <C>
Hunt Capital Group, L.L.C. $1,000,000 $ 750,000 $1,750,000
Individual investors 1,000,000 500,000 1,500,000
-------------------------------------
$2,000,000 $1,250,000 $3,250,000
=====================================
</TABLE>
In December 1994, the Company completed a private placement of common stock of
the Company. The group of individual investors includes certain
officers/directors/employees. The Company received $725,000 in exchange for
179,012 common shares.
The Company repaid a note payable to an officer/director/ shareholder that was
outstanding at the beginning of fiscal 1995 in the amount of $147,521.
The Company borrowed $185,000 from an officer/director/shareholder and $75,000
from a director/shareholder in May 1994. These loans bore interest at 12% until
repaid on June 29, 1994. The $185,000 note was repaid with 53,037 shares of the
Company's common stock and a warrant to purchase an additional 43,000 shares of
the Company's common stock at an exercise price of $5.00 per share. The $75,000
note was repaid with 48,148 shares of the Company's common stock and a warrant
to purchase an additional 39,000 shares of the Company's common stock at an
exercise price of $5.00 per share.
The Company issued a note payable of $1,250,000 to the seller of ELEF. The
seller has remained with the Company as an officer/director/shareholder. The
note payable bore interest at 6% until it was repaid from proceeds of the equity
and debt funding completed June 29, 1994.
12
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
4. RELATED PARTY TRANSACTIONS (CONTINUED)
During fiscal 1995, the Company relocated its corporate offices to an office
building owned in part by an officer/director/shareholder. The relocation was
required to accommodate the additional staff added during the year. Total rents
paid to the affiliate of the officer/director/shareholder during the fiscal year
ended March 31, 1995 were $32,032, and $18,000 through the quarter ended
September 30, 1995.
The Company is committed to issue Series A Convertible Preferred Stock in
exchange for $1,250,000 of Convertible Subordinated Secured Notes (the "Notes").
The preferred stock will be issued pursuant to two Exchange Agreements (the
"Agreements") between the Corporation and Hunt Capital Group, L.L.C. and Richard
H. Bard (the "Investors"). The exchange is effective as of July 1, 1995, and
has been reflected in the Company's financial statements.
The Company had previously issued two Convertible Subordinated Secured Notes
aggregating $1,250,000 on June 29, 1994 to Hunt Capital Group, L.L.C. for
$750,000, and to Richard H. Bard for $500,000. These Notes which bore interest
of 12% paid quarterly, were convertible into the common stock of the Company at
the rate of $4.05 per common share. These Notes will be cancelled in their
entirety upon the exchange for the Series A Convertible Preferred Stock.
The Articles of Incorporation previously authorized 2,500,000 shares of
preferred stock and authorized the Board of Directors to divide the preferred
stock into series and, with the limitations provided by statute, to fix by
resolution the voting powers, designations, preferences, and relative
participating, optional, or other special rights, and the qualifications,
limitations or restrictions of the shares of any series so established.
Based upon the authority of the Board of Directors, the Articles of
Incorporation are to be amended to define the rights of the Series A
Convertible Preferred Stock.
Under the Agreements between the Company and the Investors, the Corporation is
committed to issue the Series A Convertible Preferred Stock subject to the
following general terms:
(a) The Corporation is committed to issue 400,000 shares of Series A
Convertible Preferred Stock in exchange for the cancellation of the
Convertible Subordinated Secured Notes totaling $1,250,000;
(b) The Series A Convertible Preferred Stock is convertible into the
common stock of the Corporation at $3.125 per common share. The
conversion right provides for certain anti-dilutive measures;
13
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
4. RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Dividends shall be paid or accrued from July 1, 1995 as follows:
Year ending June 30, 1996 0.00%(no dividend/no accumulation)
Year ending June 30, 1997 14.60%
Year ending June 30, 1998 16.60%
Year ending June 30, 1999 18.60%
Year ending June 30, 2000 20.60%
Year ending June 30, 2001 22.50%
(d) The preferred stock is redeemable solely at the option of the Company with
a one year notice;
(e) The dividend rate will increment 3% per year after June 30, 2001, until
redeemed;
(f) The Corporation will immediately transfer all existing patents and all
future patents as applied for, into its subsidiary, TSL, Inc. TSL will
provide a dividend guaranty to the Investors.
(g) In the event the Company defaults on the payment of any dividend on the
Series A Shares and such default is not cured within 180 days of such
default, the Investors, at their option, shall have the right to exchange,
all but not less than all, of its Series A Shares for common shares of TSL
or Optical Security Industries, Inc. ("OpSec"). The number of common shares
of TSL or OpSec issued to the Investor upon exchange, shall equal the
greater of the minimum number of common shares of TSL or OpSec necessary to
approve any action, whether routine or extraordinary, submitted to a vote
of shareholders of TSL or OpSec or the number of common shares of OpSec or
TSL equal to the fair market value of the Series A shares converted.
(h) Registration rights granted pursuant to the Investment Agreement dated as
of June 29, 1994 remain in effect for common shares acquired pursuant to
the Investment Agreement, or pursuant to the exercise of warrants granted,
or upon conversion of the preferred stock issued in exchange for the
cancellation of the Notes.
14
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1995
- --------------------------------
Gross revenues increased 238% for the quarter to $1,942,505, an increase of
$1,368,644 over the second quarter of the prior year. For the six month period
ending September 30, 1995, sales increased 218% to $4,573,068, an increase of
$3,135,093. Six month revenues from the Company's United Kingdom subsidiary
have increased $1,859,716 over the prior year. Revenues generated by the U.S.-
based acquisition, which was not included in prior years operations, are
$1,423,400 for the six month period. These revenues are substantially ahead of
historical sales.
Operating expenses were $760,277 for the quarter compared to $758,323 for the
first quarter ending June 30, 1995. Operating expenses increased $266,309 for
the first quarter and $141,108 for the second quarter over prior years expenses,
or 37% for the six month period. Corporate operating expenses declined $78,000
for the six month period. The subsidiary companies' operating expenses were
primarily from the addition of a new operating subsidiary which was not included
in prior years operating expenses; increase in compensation schedules to retain
key staff; and, the addition of sales and customer support staff and facilities.
QUARTER ENDED JUNE 30, 1995
- ---------------------------
Gross revenues for the quarter were $2,630,564 compared to revenues for the same
quarter of the prior year of $864,114. Operations for the quarter include the
full operations for the two business acquisitions completed during the prior
year. Prior year sales included two months for ELEF, acquired May 1, 1994, and
no sales for The Diffraction Co., the assets of which were acquired October 31,
1994.
Operating expenses were $758,323 for the quarter, an increase of $266,309 over
the same quarter of the prior year. Of these increased expenses, $192,751 were
incurred in the business acquisition made after the end of the first quarter of
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
QUARTER ENDED SEPTEMBER 30, 1995
- --------------------------------
As of September 30, 1995, the Company had total current assets of $2,182,051 and
total current liabilities of $1,210,329, resulting in a working capital surplus
of $971,722 and a current ratio of 1.8 to 1. Seller financing from a business
acquisition of $172,588, maturing in April 1996, is now included in current
liabilities. Total liabilities declined $1,469,541 during the quarter upon the
exchange of convertible debt of $1,250,000 for Series A Preferred Convertible
Stock and the reduction in trade payables.
15
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
QUARTER ENDED JUNE 30, 1995
- ---------------------------
As of June 30, 1995, the Company had total current assets of $2,395,386 and
total current liabilities of $1,249,982, resulting in a working capital surplus
of $1,145,404 and a current ratio of 1.916 to 1. Long term debt decreased
$50,645 from the same period of the prior year.
16
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Form 8-K filed September 5, 1995 regarding the exchange of Convertible
Subordinated Secured Notes for Series A Convertible Preferred Stock.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL SECURITY GROUP, INC.
----------------------------
(Registrant)
DATED: 12/14/95 BY: /s/ Richard H. Bard
----------------- ----------------------------------
Richard H. Bard
President and Chief Executive
Officer
DATED: 12/14/95 BY: /s/ Gerald A. Melfi
----------------- ----------------------------------
Gerald A. Melfi
Controller and Principal Accounting
Officer
18
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> JUL-01-1995 JUL-01-1994
<PERIOD-END> SEP-30-1995 SEP-30-1994
<CASH> 571,502 0
<SECURITIES> 0 0
<RECEIVABLES> 1,224,206 0
<ALLOWANCES> 0 0
<INVENTORY> 303,236 0
<CURRENT-ASSETS> 2,182,051 0
<PP&E> 614,369 0
<DEPRECIATION> 162,350 0
<TOTAL-ASSETS> 4,679,635 0
<CURRENT-LIABILITIES> 1,210,329 0
<BONDS> 0 0
<COMMON> 8,464,734 0
0 0
1,250,000 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 4,679,635 0
<SALES> 1,942,505 573,861
<TOTAL-REVENUES> 1,942,505 573,861
<CGS> 1,224,925 216,081
<TOTAL-COSTS> 760,276 619,169
<OTHER-EXPENSES> (28,237) (15,935)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,147 46,419
<INCOME-PRETAX> (21,606) (291,873)
<INCOME-TAX> 42,476 17,946
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (64,082) (309,819)
<EPS-PRIMARY> (.02) (.115)
<EPS-DILUTED> (.02) (.115)
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