<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 September 30, 1996
------------------
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)
N/A
---
(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 23 or 15 (d) of the Securities Exchange Act of
1934, during the preceding Twelve months and (2) has been subject to the filing
requirement for the past 90 days.
Yes ___ No___.
APPLICABLE ONLY TO CORPORATE ISSUES:
Class of Stock No. of Shares Outstanding Date
- -------------- ------------------------- ----
Common 3,034,552 September 30, 1996
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
Unaudited
September 30,
1996 1995
--------------------------------
Assets
Current Assets:
Cash $3,079,531 $ 571,502
Accounts receivables, less allowance of
$18,852 and $29,216 at the quarter ended
September 30, 1996 and 1995, respectively 2,571,433 1,224,206
Inventory 594,391 303,236
Prepaid expenses 114,032 83,107
--------- ---------
Total current assets 6,359,387 2,182,051
Property and equipment, net 546,084 452,019
Other assets:
Patents and patent applications, net of
accumulated amortization of $74,666 and
$58,658 at the quarter ended September
30, 1996 and 1995, respectively 300,124 275,274
Goodwill, net of accumulated amortization
of $161,976 and $94,951 at the quarter ended
September 30, 1996 and 1995, respectively 1,178,529 1,245,554
License and non-compete agreements, net
of accumulated amortization of $123,285 and
$63,049 at the quarter ended September 30,
1996 and 1995, respectively 614,149 478,612
Deposits and other 218,327 46,125
---------- ----------
Total assets $9,216,600 $4,679,635
========== ==========
1 of 17
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
Unaudited
September 30,
1996 1995
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 614,560 $ 694,300
Accruals and other liabilities 680,577 315,219
Current portion of capital lease obligations 14,400 23,093
Current portion of long-term obligations - 177,717
---------- ----------
Total current liabilities 1,309,537 1,210,329
Deferred tax liability 32,300 -
Capital lease obligations 2,846 43,673
Long-term obligations - 56,337
Commitments
Minority interest in consolidated subsidiary 6,932 -
Stockholders' equity:
Voting convertible preferred stock, $0.01 par value
2,500,000 shares authorized; 7,468 Preferred Series B
shares issued and outstanding at September 30, 1996
(preference in liquidation $8,140,120) 75 400
Common stock $0.005 par value:
15,000,000 shares authorized; 3,034,552
and 3,024,552 shares issued and outstanding
at September 30, 1996 and 1995, respectively 15,173 15,123
Additional paid-in capital 14,196,991 9,699,211
Foreign currency translation adjustment (316) 261
Accumulated deficit (6,346,938) (6,345,699)
---------- ---------
Total stockholders' equity 7,864,985 3,369,296
---------- ---------
Total liabilities and stockholders' equity $9,216,600 $4,679,635
========= =========
See accompany notes
2 of 17
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
----------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues $2,709,787 $1,942,505 $5,036,297 $4,573,068
Cost of goods sold 1,683,792 1,224,925 3,188,252 2,997,905
---------- ---------- ---------- ----------
Gross margin 1,025,995 717,580 1,848,045 1,575,163
Operating expenses:
Salaries and related costs 471,759 418,177 892,263 838,944
Depreciation and amortization 72,231 62,109 138,023 123,816
Other operating expenses 329,310 279,990 596,312 555,839
---------- ---------- ---------- ----------
Total operating expenses 873,300 760,276 1,626,598 1,518,599
Income (loss) from operations 152,695 (42,696) 221,447 56,564
Other income (expense):
Interest expense (613) (7,147) (4,353) (53,682)
Interest income 35,199 3,643 76,634 7,088
Other income or expense - 24,594 - 17,512
Foreign currency transaction loss 33 - (3,582) -
---------- ---------- ---------- ----------
Income (loss) before minority interest 187,314 (21,606) 290,146 27,482
Minority interest in net income of
consolidated subsidiary (6,932) - (6,932) -
---------- ---------- ---------- ----------
Income (loss) before income taxes 180,382 (21,606) 283,214 27,482
Income tax benefit (expense) - (42,476) - (76,570)
---------- ---------- ---------- ----------
Net income (loss) 180,382 (64,082) 283,214 (49,088)
========== ========== ========== ==========
Net income (loss) applicable
to common stock 31,022 (64,082) (11,217) (49,088)
========== ========== ========== ==========
Net income (loss) per share
of common stock:
Primary $ .01 $ (.02) $ - $ (.02)
========== ========== ========== ==========
Fully diluted $ .01
==========
Weighted average number of
shares outstanding:
Primary 3,034,552 3,024,552 3,034,552 3,015,990
==========
Fully diluted 3,813,550
==========
</TABLE>
See accompanying notes
3 of 17
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------------ -----------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) 180,382 (64,082) 283,214 (49,088)
Adjustments to reconcile net
net income (loss) to net cash
used in operating activities:
Depreciation and amortization 72,231 62,109 138,023 123,816
Minority interest in consolidated subsidiary 6,932 - 6,932 -
Common shares issued for interest - 37,500 - 37,500
Change in operating assets and liabilities:
Accounts receivable (1,093,764) 408,830 (811,051) 75,802
Inventory (156,673) (11,015) (172,631) 38,829
Prepaid expenses (12,404) (7,836) (37,413) (21,789)
Accounts payable and accrued expenses 1,038,663 (197,300) 520,104 (22,113)
Deposits and other assets and liabilities (52,491) (1,472) (52,572) -
----------- --------- ---------- --------
Net cash provided (used) in operating activities (17,124) 226,734 (125,394) 182,957
INVESTING ACTIVITIES
Patent application costs (15,109) (4,060) (36,673) (5,883)
Property and equipment (26,251) (15,943) (28,769) (51,694)
Licensing agreements (195,414) - (195,414) -
Notes receivable (100,000) - (100,000) -
Other intangible assets, net (8,696) (1,551) (8,696) (2,174)
----------- --------- ---------- --------
Net cash provided (used) in investing activities (345,470) (21,554) (369,552) (59,751)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net (18,833) - 681,500 -
Payments on notes and capital lease obligations (33,225) (5,824) (36,490) (23,817)
Dividend on preferred stock (149,360) - (294,431) -
----------- --------- ---------- --------
Net cash provided (used) by financing activities (201,418) (5,824) 350,579 (23,817)
Effect of exchange rate changes on cash flows 5,155 (4,603) (7,925) (10,912)
----------- --------- ---------- --------
Net increase (decrease) in cash (558,857) 194,753 (152,292) 88,477
Cash, beginning of period 3,638,388 376,749 3,231,823 483,025
----------- --------- ---------- --------
Cash, end of period $3,079,531 $571,502 $3,079,531 $571,502
=========== ========= ========== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITIES
Interest paid 613 7,147 4,353 16,182
</TABLE>
See accompanying notes
4 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Optical Security Group, Inc. (the "Company"), formerly known as TSL
Incorporated, is a technology company which, through its principal subsidiaries,
Optical Security Industries, Inc. ("OpSec U.S.") and Optical Security Industries
International, Plc ("OpSec International"), provides products and solutions to
businesses and governments for the problems of product tampering and
counterfeiting, 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 changed its name in December 1994 to promote
better name recognition by its current and target customer base that was
significantly enlarged following the two business acquisitions that occurred
during fiscal year 1995. The Company's principal markets are the United States
and Western Europe.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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 year.
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. The
Company conducts business with various foreign entities. As such, the Company's
future profitability could be affected in the near term by fluctuating exchange
rates.
5 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1996 is associated with the acquisition
of ELEF, Plc during fiscal year 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.
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.
PATENTS AND PATENT APPLICATIONS
The Company capitalizes legal costs directly incurred in pursuing patent
applications. When such application results in an issued patent, the related
costs are amortized over the remaining legal life of the patent, using the
straight-line method. On a periodic basis, the Company reviews its issued
patents and pending patent applications, and if it determines to abandon a
patent application, or that an issued patent no longer has economic value, the
unamortized balance in patent costs relating to that patent is expensed.
6 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued two standards that will
be applicable to the Company beginning in fiscal year 1997. Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"), is
not expected to have a significant impact on the Company. Statement of Financial
Accounting Standard No. 123, Accounting and Disclosure of Stock-Based
Compensation ("SFAS No. 123"), gives companies the option to either follow fair
value accounting or to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations.
The Company has elected to continue to follow APB No. 25 for future stock
options and stock-based awards.
INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per common share is computed by dividing net income (loss)
applicable to common stock (net income less preferred dividends) by the weighted
average number of common shares outstanding during the period. Common share
equivalents were only included in the computation for the quarter ended
September 30, 1996, and were excluded from the net loss per share for prior
periods and for the six month period ended September 30, 1996 since their effect
would be anti-dilutive. The Series B stock is not considered a common stock
equivalent in any period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred.
REVERSE STOCK SPLIT
On December 15, 1994, the Company's Board of Directors authorized a one-to-five
reverse stock split of its outstanding common stock, effective for stockholders
of record on February 28, 1995. The amendment of the Company's Restated
Certificate of Incorporation adjusted the Company's authorized capital stock to
15,000,000 shares of $0.005 par value common stock, and 2,500,000 shares of
$0.01 par value preferred stock. All references in the accompanying financial
statements to the number of shares, per share amounts, stock option and warrant
data, and market prices of the Company's common stock have been retroactively
restated to reflect the reverse stock split.
RECLASSIFICATIONS
Certain amounts in the September 30, 1995 financial statements were reclassified
to conform with the September 30, 1996 presentation.
7 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements.
2. BUSINESS COMBINATIONS
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.
The acquisition resulted in goodwill and license agreements of $1,340,505 and
$253,447, respectively. On October 21, 1994, the Company's 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 and the balance in cash. The acquisition resulted in
an allocation of the excess purchase price over net assets to license agreements
of $288,574.
3. 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 investor
group included certain officers/directors/shareholders. The total 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 totaled
$3.25 million and consisted of the following issued debt and equity securities:
(Note 4)
Common Convertible
Stock Notes Total
---------- ------------ -----------
Hunt Capital Group, L.L.C. $1,000,000 $ 750,000 $1,750,000
Individual investors 1,000,000 500,000 1,500,000
---------- ------------ -----------
$2,00,000 $1,250,000 $3,250,000
========== ============ ===========
8 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
3. RELATED PARTY TRANSACTIONS (CONTINUED)
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 45,679 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 18,518 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 conversion of notes to common stock was
based on the fair market value of the stock at the date of conversion. The
Company issued a note payable of $1,250,000 to the seller of ELEF, Plc, who
remained with the Company as an officer/director through October 31, 1995. 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 office buildings owned in part by an
officer/director/shareholder. The relocations were required to accommodate the
additional staff added and to consolidate operations into one location. Total
rents paid to the affiliate of the officer/director/shareholder during the six
month period ended September 30, 1996 and 1995 were $23,560 and $18,000,
respectively.
4. CONVERTIBLE SUBORDINATED NOTES
During fiscal 1995, the Company issued $1.25 million of Convertible Subordinated
Secured Notes to related parties. These notes, which bore interest at 12% per
annum, paid quarterly, were convertible into the Company's common stock at the
rate of $4.05 per common share. For the first two years, the noteholders were
entitled to receive 60% of the interest payment in the form of the Company s
common stock, valued at 70% of the average public trading price on the 30 days
preceding the interest due date, and 40% in cash. In the interest of preserving
the Company's working capital position, the noteholders waived the cash portion
of the quarterly interest, and accepted 100% of the payment in the Company's
common stock through June 30, 1995. Effective July 1, 1995, the Company issued
400,000 shares of Preferred Series A shares in exchange for the cancellation of
$1.25 million of Convertible Subordinated Secured Notes.
5. STOCKHOLDERS' EQUITY
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.
In December 1994, the Company completed a private placement of common stock of
the Company. The group of individual investors includes certain
officers/directors/shareholders of the Company. The Company received $725,000 in
exchange for 179,012 common shares.
9 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
5. STOCKHOLDERS' EQUITY (CONTINUED)
During fiscal 1996, the Company issued 6,693 shares of Series B 8% Cumulative
Convertible Exchangeable Preferred Voting Stock ("Series B Shares"), including
4,293 issued for cash at $1,000 per share, and 2,400 issued in exchange and full
cancellation for the previously outstanding Preferred Series A shares. During
the quarter ended June 30, 1996, the Company completed this Series B stock
offering, issuing 775 shares at $1,000 per share, resulting in total proceeds of
$4,498,367, net of issuance costs.
In conjunction with the issuance of the Series B Shares, the Company granted
warrants to purchase 85,860 shares and 15,500 shares of the Company's common
stock at an exercise price of $7.13 per share.
The Series B shareholders have voting rights equal to the number of common
shares that would be held if converted. The Series B shares are convertible into
shares of the Company's common stock at a conversion price of $6.00 per common
share. Each Series B share can be converted into 166.67 common shares. The
Series B shares are entitled to receive an 8% per annum cumulative dividend
payable out of legally available funds.
At the option of the Company, upon 30 days prior written notice, the Series B
shares are redeemable, in whole or in part, from time to time, commencing on or
after March 30, 1998 at the redemption price set forth in the following table.
The shares are redeemable if the common stock trades at 150% of the conversion
price for at least 30 consecutive trading days.
Redemption
Date Redeemed Price
- ----------------------------------------------------------------------------
On or after March 30, 1998, but prior to the third
anniversary, $1,090
On or after the third anniversary date but
prior to the fourth anniversary date, 1,075
On or after the fourth anniversary date but
prior to the fifth anniversary date, 1,060
On or after the fifth anniversary date but
prior to the sixth anniversary date, 1,040
On or after the sixth anniversary date but
prior to the seventh anniversary date, 1,020
On or after the seventh anniversary date, 1,000
10 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Company is restricted from paying dividends on its common shares pursuant to
the terms of its Preferred Series B shares. No dividends or other payments can
be declared and paid on the common stock unless the Company also declares and
pays dividends on the shares of common stock issuable upon conversion of the
Series B shares and unless there are no accrued and unpaid dividends on the
Series B shares. On September 30, 1996, the cumulative unpaid dividend on the
Preferred Series B shares of $149,360 was declared and subsequently paid on
October 1, 1996.
Below is a summary of common stock reserved by the Company at September 30, 1996
for issuance upon the conversion of preferred stock and the exercise of the
various options and warrants:
Series B preferred stock 1,244,667
Stock option plans 4,066,668
Warrants 614,015
---------
5,925,350
=========
6. STOCK OPTION PLANS AND STOCK WARRANTS
The Company has an Incentive Stock Option Plan ("ISO") under which 2,000,000
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 2,000,000 shares of common stock were reserved
for issuance at September 30, 1996.The shares reserved for the ISO and NSO Plans
were increased at the annual meeting of shareholders on August 16, 1996.
The following is a summary of stock options granted, exercised and outstanding
for the years ended March 31, 1996 and 1995, and the six month period ended
September 30, 1996:
11 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
6. STOCK OPTION PLANS AND STOCK WARRANTS (CONTINUED)
<TABLE>
Number of Shares
----------------- Other Exercise Expiration
ISO NSO Options Price Date
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding, March 31, 1994 362,667 303,333 88,333 $0.20-$12.50 4/95-9/2000
Options exercised 46,667 - 20,000 $0.25-$1.10
Options canceled 60,000 53,333 5,000 $0.25-$12.50
Options granted 468,800 190,000 - $4.05-$5.00 7/94-2/2000
Fractional shares from
reverse split - 1 2
------------------------------
Outstanding, March 31, 1995 724,800 440,001 63,335
Options exercised 10,000 - - $4.38
Options canceled 123,400 - - $4.05-$5.00
Options granted 220,000 310,000 - $4.05-$5.75 7/96-3/99
------------------------------
Outstanding, March 31, 1996 811,400 750,001 3,335
Options exercised - - -
Options canceled 3,200 5,000 - $4.38-$5.75 3/97-7/99
Options granted 100,000 - - $6.00 7/97-7/2000
------------------------------
Outstanding, September 30, 1996 908,200 745,001 63,335
==============================
</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 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.
The following is a summary of warrants granted, exercised and outstanding for
the years ended March 31, 1996 and 1995, and the six month period ended
September 30, 1996:
<TABLE>
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
acquisition 100,000 $4.05 10/2001
Exercised 12,346 $4.05
----------------------------------
Outstanding, March 31, 1995 512,655
Issued in conjunction with the
Series B financing 85,860 $7.13 1/2003
-------
Outstanding, March 31, 1996 598,515
Issued in conjunction with the
Series B financing 15,500 $7.13 1/2003
-------
Outstanding, September 30, 1996 614,015
=======
</TABLE>
12 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended September 30, 1996
- --------------------------------
Revenues for the quarter ended September 30, 1996 were $2,709,787, a 39.5%
increase when compared to revenues of $1,942,505 for the quarter ended September
30, 1995. Gross profits for the quarter ended September 30, 1996 increased 42.9%
to $1,025,995 compared to $717,580 for the quarter ended September 30, 1995. The
gross profit margin of 37.86% increased from 36.94% for the comparable quarter
of the prior year. The growth in revenues, gross profits and margins resulted
from (1) new customer orders for the Company's specialty enforcement products,
primarily for U.S. state motor vehicle entities, (2) continued growth in
authenticating security labels, especially for customers involved in sports
licensing and pharmaceutical manufacturing, and (3) the first significant orders
in the U.S. market for the Company's value-added point-of-purchase products,
including a signifi cant order for a major cereal company.
Operating expenses of $873,300 grew 14.9% compared to the prior fiscal year, an
increase of $113,024. Compensation increased $53,582 as the Company has added
staff primarily to support the Company's efforts in product marketing and
manufacturing. It is anticipated that additional staff will be added throughout
the balance of the year. Other operating expenses increased $59,442, and
included increases in travel expenses of $29,931, marketing of $20,677, and
depreciation and amortization of $10,122.
Net income of $180,382 for the quarter ended September 30, 1996 was an increase
of $244,464 compared to a loss of $64,082 for the quarter ended September 30,
1995. With the improvement in the Company's liquidity position, all debts, with
the exception of some maturing capital leases, were paid off in the prior fiscal
year. Interest expense decreased $6,534, and interest earned increased $31,556.
The Company established a new subsidiary, Dimensional Printing Industries, LLC
("DPI"), during the quarter ended September 30, 1996. The Company owns 51% of
DPI, but will receive 70% of income or loss during the period that it has an
outstanding loan to its co-member in DPI. The income allocable to the 30%
minority interest in the quarter ended September 30, 1996, resulted in a
reduction in net income of $6,932.
Net income applicable to common stock reflects dividends paid on the Company's
Series B stock. Dividends were paid amounting to $149,360 and $294,431 for the
quarter and six month periods ended September 30, 1996, respectively.
13 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------
Quarter Ended September 30, 1996 (continued)
- -------------------------------------------
The Company carries significant net operating losses for U.S. tax reporting
purposes and had no U.S. income tax liability. OpSec International also had no
current income tax liability for the quarter, or the six month period ended
September 30, 1996.
Quarter Ended June 30, 1996
- ---------------------------
Revenues for the quarter ended June 30, 1996 were $2,326,574, an 11.56% decrease
when compared to the revenues of $2,630,564 for the quarter ended June 30, 1995.
Sales in OpSec International decreased 23.78% from the level of the prior year,
when some large promotional orders were billed. Sales in OpSec U.S. increased
13.12% for the quarter, including some delays in initial shipments in our
government products division which are expected to be realized in the balance of
the fiscal year.
Gross profits for the quarter ended June 30, 1996 decreased 1.5% to $822,113 as
compared to $834,584 for the quarter ended June 30, 1995. The gross profit
margin of 35.34% increased from the 31.73% for the comparable quarter of the
prior year. This increase in the gross profit margin reflects a change in the
mix of business, with margins and profitability improving, as higher value-added
product sales are replacing some large promotional orders that were billed this
time last year. The Company is maintaining its historic margins on its base
security business and in those sales categories protected by patents and
proprietary technology.
Operating expenses of $753,297 grew 2.45% compared to the prior fiscal year, an
increase of $17,974. Increases in facility costs, professional fees and
marketing costs were offset in part by savings in compensation related costs,
insurance and travel expenses. Operating expenses are expected to rise as the
Company continues to supplement its marketing and sales efforts, and to improve
its facilities.
Net income for the quarter ended June 30, 1996 improved $87,901 to $102,896 as
compared to $14,995 for the quarter ended June 30, 1995. With the improvement in
the Company's liquidity position, all debts, with the exception of some maturing
capital leases, were paid off in the prior fiscal year. Interest expense
decreased $42,795, and interest earned on cash balances improved $37,990 for the
quarter. With the completion of the offering of Series B Shares during the
quarter, the quarterly dividend on the Series B Shares of $145,071 exceeded net
income, resulting in a net loss applicable to common stock of $42,175.
14 of 17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------
Quarter Ended June 30, 1996
- ---------------------------
The Company carries significant net operating losses for U.S. tax reporting
purposes and had no U.S. income tax liability. OpSec International also had no
current income tax liability for the quarter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Quarter Ended September 30, 1996
- --------------------------------
The Company's current assets position at September 30, 1996 was $6,359,387 or
4.85-to-1 over current liabilities. Working capital surplus was $5,049,850
including a cash position of $3,079,531. The Company's long-term debt consisted
of $2,846 of capital leases maturing in fiscal 1998. Total long-term obligations
decreased $64,864 during the prior twelve months. The working capital surplus
may be used to fund the growth of the Company's operations, including additional
facilities and for future acquisitions.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$224,926 and net income was $180,382. This compares to EBITDA and net loss of
$19,413 and $(64,082), respectively, in the prior year second quarter.
Quarter Ended June 30, 1996
- ---------------------------
During the quarter ended June 30, 1996, stockholders' equity increased 8.9% to
$7,847,704, up from $7,202,659. The Company completed its offering of Series B
shares by adding $700,333 to equity, net of issuance costs. The total offering
raised $4,517,200, net of issuance costs.
The Company's working capital position at June 30, 1996 was $5,251,111, or 7.64-
to-1 over current liabilities. Included in this working capital surplus was a
cash position of $3,638,388. The Company's long-term debt consisted of $10,050
of capital leases maturing in fiscal 1998. Total long-term obligations decreased
$1,519,848 during the prior twelve months, with $1,250,000 having been converted
into Series B shares. The working capital surplus may be used to expand
facilities and for future acquisitions.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$134,609 and net income was $102,896. This compares to EBITDA and net income of
$160,968 and $14,995, respectively, in the prior year first quarter.
15 of 17
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
21.1 Subsidiaries Filed herewith at page 21.1
16 of 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: BY: /s/Richard H. Bard
-------------------------------------
Richard H. Bard
President and Chief Executive Officer
DATED: BY: /s/Gerald A. Melfi
-------------------------------------
Gerald A. Melfi
Controller and Principal Accounting
Officer
17 of 17
<PAGE>
Exhibit 21.1
------------
<TABLE>
<CAPTION>
State or County Assumed
Name of Incorporation Names
---- ---------------- -------
<S> <C> <C>
Optical Security Industries, Inc. Colorado OpSec U.S.
Optical Security Industries International, Plc United Kingdom OpSec International
TSL Incorporated Colorado -
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 3,079,531 571,502
<SECURITIES> 0 0
<RECEIVABLES> 2,590,285 1,253,422
<ALLOWANCES> 18,852 29,216
<INVENTORY> 594,391 303,236
<CURRENT-ASSETS> 6,359,387 2,182,051
<PP&E> 808,877 614,369
<DEPRECIATION> 262,793 162,350
<TOTAL-ASSETS> 9,216,600 4,679,635
<CURRENT-LIABILITIES> 1,309,537 1,210,329
<BONDS> 0 0
0 0
75 400
<COMMON> 15,173 15,123
<OTHER-SE> 7,849,737 3,353,773
<TOTAL-LIABILITY-AND-EQUITY> 9,216,600 4,679,635
<SALES> 2,709,787 1,942,505
<TOTAL-REVENUES> 2,709,787 1,942,505
<CGS> 1,683,792 1,224,925
<TOTAL-COSTS> 873,300 760,276
<OTHER-EXPENSES> 6,932 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 613 7,147
<INCOME-PRETAX> 180,382 (21,606)
<INCOME-TAX> 0 42,476
<INCOME-CONTINUING> 180,382 (64,082)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 180,382 (64,082)
<EPS-PRIMARY> .01 (.02)
<EPS-DILUTED> .01 0
</TABLE>
