<PAGE>
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 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, CO 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 December 31, 1995
Series A Convertible Preferred 400,000 December 31, 1995
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
CURRENT ASSETS:
Cash $ 376,857
Accounts receivable, net 1,278,350
Inventory 456,179
Prepaid expenses and other 91,006
----------
TOTAL CURRENT ASSETS 2,202,392
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $183,876 429,289
OTHER ASSETS:
Patents and patent applications, net of
accumulated amortization of $64,681 277,405
Goodwill, net of accumulated
amortization of $111,706 1,228,799
License agreements, net of accumulated
amortization of $76,646 465,015
Deposits and other assets 168,960
----------
2,140,179
----------
TOTAL ASSETS $4,771,860
==========
</TABLE>
2 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and finance leases 195,674
Accounts payable 589,385
Accruals and other liabilities 535,775
----------
TOTAL CURRENT LIABILITIES 1,320,834
OTHER LIABILITIES:
Notes payable and finance leases 75,921
----------
TOTAL LIABILITIES 1,396,755
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; 400,000 issued and outstanding 1,212,656
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 (4,587)
Accumulated deficit (6,297,698)
----------
TOTAL STOCKHOLDERS' EQUITY 3,375,105
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,771,860
==========
</TABLE>
See Notes to Consolidated Financial Statement
3 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended Nine Months Ended
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $2,884,012 $ 821,039 $7,457,081 $2,259,014
Cost of sales 2,090,020 379,191 5,087,925 848,140
---------- ---------- ---------- ----------
Gross profit 793,992 441,848 2,369,156 1,410,874
Operating expenses
Salaries, benefits and taxes 388,839 421,359 1,227,783 1,029,116
Depreciation and amortization 63,003 43,550 186,819 135,229
Other operating expenses 281,733 280,497 837,572 692,244
---------- ---------- ---------- ----------
Total Expenses 733,575 745,406 2,252,174 1,856,589
---------- ---------- ---------- ----------
Net operating income 60,417 (303,558) 116,982 (445,715)
Interest income 1,572 5,048 8,660 16,644
Other income 1,226 (10,758) 18,738 (18,442)
Interest expense (7,827) (47,480) (61,509) (121,971)
---------- ---------- ---------- ----------
Net income (loss) before tax 55,388 (356,748) 82,871 (569,484)
Income tax expense
(benefit) 7,386 ( 6,832) 83,956 64,908
---------- ---------- ---------- ----------
Net income (loss) 48,002 (349,916) ( 1,085) (634,392)
========== ========== ========== ==========
Net income (loss) per share $ .016 $ (.123) $ (.000) $ (.242)
========== ========== ========== ==========
Weighted average number of
shares outstanding 3,024,552 2,842,401 3,015,990 2,624,510
========== ========== ========== ==========
Fully diluted earnings
per share $ .011
==========
Weighted average number of
shares outstanding
(fully diluted) 4,461,970
==========
</TABLE>
See Notes to Consolidated Financial Statements.
4 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Nine Months Ended December 31,
------------------------------
1995 1994
------------ --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,085) $ (634,392)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 186,819 135,229
Common shares issued for services - 20,000
Common shares issued for interest 37,500 75,000
Stock options issued for services - 153,937
Change in operating assets and
liabilities:
Accounts receivable 21,658 (200,471)
Inventory (114,115) (16,264)
Prepaid and other assets (71,380) (3,244)
Accounts payable and
accrued expenses 87,447 (296,898)
------------ --------------
Net cash used by operating activities 146,844 (767,103)
INVESTING ACTIVITIES:
Patent costs (14,036) (33,152)
Acquisition - ELEF, Plc - (1,685,263)
Acquisition - The Diffraction Co. - (555,422)
Property and equipment (76,170) (181,180)
Proceeds from disposition of equipment 22,684 13,990
Other intangible assets - (38,933)
------------ --------------
Net cash used by investing activities (67,552) (2,479,960)
FINANCIAL ACTIVITIES:
Cost of conversion of debt
into preferred stock (Series A) $ (9,441) $ -
Issuance costs incurred for
preferred stock (Series B) $(113,267) -
Proceeds from issuance of common stock - 2,826,333
Proceeds from issuance of debt - 1,365,923
Payments on notes and capital
lease obligations (46,960) (173,606)
------------ --------------
Net cash provided by financing
activities (169,668) 4,018,650
Effect of exchange rate changes on
cash flows (15,822) -
------------ --------------
Net increase (decrease) in cash (106,168) 771,587
Cash, beginning of period 483,025 66,527
------------ --------------
Cash, end of period $ 376,857 $ 838,114
============ ==============
</TABLE>
See Notes to Consolidated Financial Statements
5 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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, 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., 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 patterns and embossed holographic
foils, labels and laminates. Both entities sell non-security products under the
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 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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 December 31, 1995 is associated with the acquisition
of ELEF Plc. ("ELEF) during the fiscal year ended March 31, 1995. 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 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS AND PATENT APPLICATIONS
The Company's patents and 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 INCOME OR LOSS PER COMMON SHARE
Net income per common share is computed on the basis of the weighted average
number of shares of common stock outstanding, and common share equivalents
during the period. Common share equivalents relate to the dilutive effect of
exercisable options, warrants and conversion rights.
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 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 and 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 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. 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 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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.
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 are
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 are reserved for issuance.
The following is a summary of stock options granted, exercised and outstanding
for the years ended March 31, 1995, 1994, and 1993, and the quarters ended June
30 1995, September 30, 1995 and December 31, 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
</TABLE>
9 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Number of shares Other Exercise Expiration
ISO NSO Options Price Date
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Options granted 50,000 - - $5.00 11/96-11/99
Options canceled 40,000 - - $3.75 7/96-2/98
Options granted - - -
_________________________
OUTSTANDING, DECEMBER 31, 1995 734,400 440,001 63,335
=========================
</TABLE>
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 December
31, 1995. Warrants issued in the acquisition of ELEF 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, FYE March 31, 1995 512,655
and at December 31, 1995 =======
</TABLE>
10 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. STOCKHOLDERS' EQUITY (CONTINUED)
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.
During the quarters ended September 30, 1995 and December 31, 1995,
ISO options for 20,000 and 40,000 common shares, respectively, were
cancelled upon termination of employment. During the quarter ended
December 31, 1995, the Company granted options under the ISO to a
newly hired executive and a continuing employee.
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 $1,250,00 $3,250,000
========== ============ ==========
</TABLE>
11 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
During fiscal 1995 and again in fiscal 1996, 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 and the
addition of a materials laboratory. Total rents paid to the
affiliate of the officer/director/shareholder during the fiscal
year ended March 31, 1995 were $32,032, and $29,275 through the
quarter ended December 31, 1995.
The Company issued Series A Convertible Preferred Stock ("Series A
Shares") in exchange for $1,250,000 of Convertible Subordinated
Secured Notes (the "Notes"). The Series A Shares were 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. Costs of
$37,344 incurred in raising the funds and in arranging the exchange
have been written off against the proceeds of the issue.
The Company had previously issued the Notes on June 29, 1994 to
Hunt Capital Group, L.L.C. for $750,000, and to Richard H. Bard for
$500,000 pursuant to an Investment Agreement. The 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. The
Notes will be cancelled in their entirety upon the exchange for the
Series A Shares.
12 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. RELATED PARTY TRANSACTIONS (CONTINUED)
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 have been amended to define the rights of the Series
A Shares.
Under the Agreements between the Company and the Investors, the
Corporation issued the Series A Shares subject to the following
general terms:
(a) The Corporation issued 400,000 shares of Series A Convertible
Preferred Stock in exchange for the cancellation of the Notes
totaling $1,250,000;
(b) The Series A Shares is convertible into the common stock of the
Corporation at $3.125 per common share. The conversion right
provides for certain anti-dilutive measures;
(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 Series A Shares are 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 TSL. TSL will provide a
dividend guaranty to the Investors.
13 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. RELATED PARTY TRANSACTIONS (CONTINUED)
(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 OpSec. The number of common shares of TSL or
OpSec issued to the Investors 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 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1995
Gross revenues increased 251% for the quarter to $2,884,012, an increase of
$2,062,973 over the third quarter of the prior year. For the nine month period
ended December 31, 1995, sales increased 230% to $7,457,081, an increase of
$5,198,067. Nine month revenues from the Company's United Kingdom subsidiary
have increased $3,277,300 over the prior year. Revenues generated by the U.S.-
based acquisition, which was not included in prior years operations until the
third quarter, are $2,438,412 for the nine month period. These revenues are
substantially ahead of historical sales.
Operating expenses were $733,575 for the quarter compared to $760,277 for the
second quarter ending September 30, 1995. Year to date operating expenses
increased $395,586 over the prior years expenses. Corporate operating expenses
declined $227,476 for the nine month period. The increase in the company's
operating expenses resulted primarily from the addition of a new operating
subsidiary which was not included in prior years operating expenses, and which
comprises $332,329 of the increase; an increase in compensation schedules to
retain key staff; and, the addition of sales and customer support staff and
facilities.
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
ended 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 the prior years
expenses, or 37% for the six month period. Corporate operating expenses declined
$78,000 for the six month period. The increase in the company's operating
expenses were primarily from the addition of a new operating subsidiary which
was not included in prior years operating expenses; an increase in compensation
schedules to retain key staff; and, the addition of sales and customer support
staff and facilities.
15 of 18
<PAGE>
OPTICAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
related to The Diffraction Company, were incurred in the business acquisition
made after the end of the first quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
QUARTER ENDED DECEMBER 31, 1995
- --------------------------------
As of December 31, 1995, the Company had total current assets of $2,202,392 and
total current liabilities of $1,320,834, resulting in a working capital surplus
of $881,558 and a current ratio of 1.67 to 1. Seller financing from a business
acquisition of $172,581, maturing in April 1996, is included in current
liabilities.
During the quarter, the Company commenced an offering for Series B Convertible
Preferred Stock. The Company is seeking to raise between $2,000,000 and
$8,000,000. During the current quarter, the Company incurred $113,267 in costs
and deposits. On January 19, 1996, the Company received $2,230,000 in proceeds
from the stock issuance, and will continue its efforts for additional proceeds
through February, 1996.
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 included in current
liabilities. Total liabilities declined $1,469,541 during the quarter as a
result of the exchange of convertible debt of $1,250,000 for Series A Preferred
Convertible Stock and the reduction in trade payables.
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 of 18
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
17 of 18
<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: 2/5/96 BY: /s/ RICHARD H. BARD
------ -----------------------------
Richard H. Bard
President and Chief Executive
Officer
DATED: 2/5/96 BY: /s/ GERALD A. MELFI
------ -----------------------------
Gerald A. Melfi
Controller and Principal
Accounting Officer
18 of 18
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10QSB-3RD QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<CASH> 376,857 0
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