<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996.
Commission File No. 0-17531
Optical Security Group, Inc.
----------------------------
(Name of small business issuer in its charter)
COLORADO 84-1094032
- ---------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
535 - 16th Street, Suite 920
Denver, Colorado 80202
- ---------------------------------------- --------
(Address of principal executive offices) Zip Code
Issuer's telephone number: (303) 534-4500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
X
--- --
YES NO
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. []
State issuer's revenues for its most recent fiscal year. $8,953,740
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The aggregate market value of the voting stock held by non-affiliates of the
company, 2,296,491 shares as of May 15, 1996 was approximately $14,054,525,
based on the average of the closing bid and ask prices of the Registrant's
common stock as reported on the NASDAQ SmallCap Market System. Shares of voting
stock held by each officer and director and each person who owns 5% or more of
the outstanding voting stock have been excluded from this calculation in that
such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily conclusive.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date, May 15, 1996: 3,034,552.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
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Exhibit Index found at page 24.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
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., a United Kingdom corporation founded in 1981 (now known as
Optical Security Industries International, Plc or OpSec International). OpSec
International is a technology company involved in the design and production of
holographic images and products. In October 1994, the Company acquired
substantially all of the assets of The Diffraction Company, a Maryland
corporation (now known as Optical Security Industries, Inc. or OpSec US). OpSec
US is involved in the manufacture of diffraction patterns and embossed
holographic foils, labels and laminates. As used herein, unless the context
requires otherwise, the term "Company" includes Optical Security Group, Inc. and
its subsidiaries.
On December 15, 1994, the Company changed its name from TSL Incorporated to
Optical Security Group, Inc. Effective February 28, 1995, the Company amended
its Articles of Incorporation to effect a five-to-one reverse split of the
Company's common stock. Unless otherwise noted, all references to shares of
common stock have been adjusted to reflect the five-to-one reverse split.
The Company's common stock is listed on the NASDAQ SmallCap Market System
and currently trades under the symbol "OPSC." (See Item 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS).
BUSINESS OF ISSUER
General. The Company's primary business is developing, producing and
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marketing products that include its optical imaging technology. This includes
sophisticated holographic originations and embossing techniques primarily used
in security label applications; and, it includes dimensional printing that
incorporates graphic design, depth of field (3D) and motion, primarily used for
product promotion and packaging enhancement. Markets for the Company's security
products include (1) motor vehicle agencies of state and federal governments
which use the Company's patented authenticating devices to protect vehicle
registration documents; and (2) manufacturers of consumer products which use
security holographic labels and garment tags for protection against
counterfeiting and diversion (grey marketing). Markets for the Company's
commercial products include (1) consumer goods packaging companies which use the
Company's decorative holographic and dimensional printing for on-pack or in-pack
promotion and packaging enhancements; and (2) major publishers of children's
books for whom the Company produces holographic and dimensionally printed
illustration material.
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Selling Methods - Distribution.
------------------------------
OpSec US has sales and customer services offices in Chicago, Illinois and
Sparks, Maryland; and it has sales offices for its government products division
in Denver, Colorado. OpSec International has security sales and commercial sales
offices in Leicestershire and Hampshire, England, respectively.
The Company also distributes its products using independent, exclusive
marketing agents and distributors throughout Western Europe and in parts of
Eastern Europe, South America and Asia.
OpSec US and OpSec International act as trade suppliers of technology and
products to other industry-related entities. The Company receives both direct
revenues and royalties on an on-going basis from these activities. The Company
also sells its products through other formal and informal trade relationships.
The Company has formal supply agreements with Mead Packaging (Europe), Avery-
Dennison Corporation and 3M Corporation. The Company has royalty agreements with
Van Leer Packaging, Inc., L.G. Kurz, Gmbh, FLEXcon, Inc., and Holopak, Inc.
In February 1996, the Company entered into an agreement with the American
Association of Motor Vehicle Administrators (AAMVA) to sell the Company's
secured vehicle temporary registration permit to state motor vehicle
departments. The agreement allows AAMVA to offer volume discounts to its member
states.
Marketing Agreements. The Company is the exclusive European marketing agent
--------------------
for lenticular (dimensional printing, 3D) products manufactured by Optigraphics,
a division of Pinnacle Brands based in Dallas, Texas. The Company also has a
non-exclusive license to sell microdot products and technology in North and
South America from Alphadot Technologies, Inc. based in Spokane, Washington.
Product Development. The Company is developing new products, including
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security parking hang tags, title document security processes (under joint
development with 3M Corporation), and license plate tabs for the motor vehicle
market. The Company has an agreement with OptiTek, Inc. to co-develop and
license "holostorage," a method of encrypting and storing data in embossed
holographic labels. The Company also has a product development and marketing
agreement with P.P. Paynes, Plc. for holographically embossed covert images to
be applied to packaging tear strips.
Products. The Company's products incorporate its optical technology and
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proprietary methods. In general, the Company markets its products as security
devices for product and document protection, or as enhancements and/or
promotional devices for the consumer packaging industry.
The Company's products have applications in the following areas:
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1. Document Security Incorporating Write Resist and Holograms. The
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primary applications for the Company's patented combined use of write
resist over-laminates and holographic foils are in the protection and
authentication of temporary vehicle license tags, parking permits and auto
titles in the U.S. Many states face problems of unauthorized issuance,
counterfeiting and alteration of these documents. The Company's proprietary
product is viewed as effective in reducing these problems substantially by
(a) protecting the data field with a surface to which writing cannot adhere
("write resist tape or over-laminate"); (b) using a holographic foil strip
that will not reproduce in conventional copying machines; and (c)
protecting against unwanted alteration of the data field using "fiber-tear"
adhesives that destroy the document if subjected to tampering.
2. Security Labels, Laminates & Foils. The Company sells labels,
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laminates and foils ("security devices") which are used to authenticate
documents and products. These security devices are difficult to copy or
duplicate and may include tamper-evident features. Documents and products
utilizing these security devices are thus protected against counterfeiting,
alteration, tampering and diversion. Applications include (a) security
over-laminates for documents of value; (b) security foils on credit cards,
event tickets, and checks; and (c) security labels and tags for licensed
products, spirits, software, pharmaceuticals, component parts, and other
products subject to counterfeiting.
3. Lenticular Products. The Company sells and distributes lenticular
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(dimensional printing) products in Europe for on-package product
promotions, application in point of sale displays, packaging enhancement
and other commercial uses. Lenticular products combine printed media with
overlaminated lenses to produce special visual effects, including depth,
breadth of field and motion.
4. Decorative Diffraction Patterns and Holographic Foils and Labels. The
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Company's decorative diffraction patterns and holographic foils and labels
are used in product packaging, promotional materials, trading cards, point
of sale displays and other commercial non-security uses. These products are
licensed to converters and packaging companies or sold in bulk quantities
to customers. The Company's holographically embossed foils also are used to
illustrate children's books.
Competitive Positioning and Methods of Competition. The Company is careful
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in selecting market segments to exploit which are particularly receptive to the
Company's unique technology. This approach helps the Company operate in a highly
competitive environment in direct competition with businesses that are larger,
more well established, and have greater resources. The Company's ability to
compete depends upon correct market segment choices,
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product effectiveness, market acceptance, cost, market approach, and product
exposure.
Sources of Raw Materials. The Company has numerous sources for raw
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materials and supplies. Key suppliers include FLEXcon, Astor Universal, L.G.
Kurz, WEB Technologies, Adchem Corp., and Holopak, Inc.
Major Customers. Significant customers for the Company's security vehicle
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temporary registration products during the fiscal year included the states of
Colorado, Indiana, New Mexico, Maryland, West Virginia and the District of
Columbia. Security authenticating label customers included Glaxo, Wilson
Sporting Goods, The National Hockey League, The National Collegiate Athletic
Association and Major League Baseball. Customers using the Company's optical
imaging technology for promotion and/or product enhancement included several
major consumer goods manufacturers such as Coke, Pepsi Co., Kellogg's and EMI.
The Company does not depend on any single customer, or group of customers,
for a significant part of its revenue.
Patents, Trademarks, Licenses and Other Legal Agreements.
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The Company owns seven U.S. patents of which six are related to tamper-
evident technology and one is related to document security products. The Company
has six U. S. patents pending related to document security protection, and one
related to validation security labels. The Company has nine foreign filings
relating to U.S. patents of which six have been issued. The Company's first
patent will expire in 2007.
The Company also holds copyrights on 41 of its diffraction and holographic
security patterns and has applied for copyright protection on an additional 16
diffraction and holographic security patterns.
Government Regulation and Approval. No government approval is necessary to
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offer the Company's principal products or services.
Research and Development. The Company has been involved in research and
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development for a number of different technologies and products, and has spent
approximately $40,400 and $52,500 in the fiscal years ended March 31, 1996 and
1995, respectively, on research and development and patents. The Company
believes that it will continue to expend funds for research and development
activities in order to improve and broaden the Company's technologies, and
anticipates that it will spend approximately $100,000 on research and
development during the fiscal year ending March 31, 1997. These costs are
provided for by the Company's working capital and are not borne directly by the
Company's customers.
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Cost of Compliance With Environmental Laws. The Company's production
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facilities generate minimal non-toxic waste, which is disposed of in the manner
prescribed by applicable law. The Company also uses independent testing
laboratories or the laboratories of its development partners for research and
development, and these laboratories are responsible for environmental
compliance.
Employees. As of March 31, 1996, the Company employed 40 employees full-
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time, and 5 employees part time. The Company has employment contracts with
various management personnel. See Item 10, Executive Compensation.
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ITEM 2. DESCRIPTION OF PROPERTIES
Facilities
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The Company's corporate offices consists of approximately 4,275 square feet
located at 535 16th Street, Suite 920, Denver, Colorado 80202. Sales and support
operations for the government products division of OpSec US also are located at
the Company's corporate offices. This space is leased from a limited liability
company of which Richard H. Bard, the Company's chief executive officer, is a
member.
OpSec US leases approximately 11,600 square feet located at 38 Loveton
Circle, Sparks, Maryland 21152. Sales, manufacturing and administrative
operations are housed at this facility.
OpSec International leases two facilities located in the United Kingdom.
The sales and administrative offices occupy approximately 2,000 square feet
situated in Bordon, Hampshire England. The technical laboratories and production
facilities are located in approximately 12,000 square feet situated in
Leicestershire, England.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a
party or to which any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ SmallCap Market System
under the symbol "OPSC." Prior to September 8, 1995, the common stock was traded
in the over-the-counter market and listed on the National Association of
Securities Dealers OTC Bulletin Board under the symbol "OPSC." From February 28,
1995 until March 31, 1995, the common stock traded under the symbol "OPSCD" to
reflect a five-to-one reverse stock split effective February 28, 1995. The high
and low closing bid quotations on the common stock for the past two fiscal
years, as reported by the National Quotation Bureau Incorporated, are listed in
the table set forth below. The quotations reflect inter-dealer prices without
retail markup, markdown or commission, and may not necessarily represent actual
transactions. The quotations have been adjusted to reflect the retroactive
application of the Company's five-to-one reverse split of its common stock.
<TABLE>
<CAPTION>
Year Ended March 31, 1995 High Low
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<S> <C> <C>
Quarter ended 06/30/94 $5.95 $2.50
Quarter ended 09/30/94 $5.00 $2.50
Quarter ended 12/31/94 $5.65 $2.50
Quarter ended 03/31/95 $4.70 $2.50
<CAPTION>
Year Ended March 31, 1996 High Low
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<S> <C> <C>
Quarter ended 06/30/95 $4.00 $2.00
Quarter ended 09/30/95 $6.00 $2.00
Quarter ended 12/31/95 $7.00 $5.00
Quarter ended 03/31/96 $6.87 $5.87
</TABLE>
As of March 31, 1996, there were 907 holders of record and approximately
2,190 beneficial holders of the Company's common stock.
The Company has not paid any dividends on its common equity for the last
two fiscal years. Pursuant to the terms of its Series B 8% Cumulative
Convertible Exchangeable Preferred Voting Stock ("Series B Shares"), no
dividends or other payments can be declared and paid on the Company's common
stock unless the Company also declares and pays to the holders of Series B
Preferred Shares 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions should be read in conjunction with the Financial
Statements and Notes thereto.
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RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 1996
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Revenues for the year ended March 31, 1996 increased to $8,953,740, a
144.9% increase over revenues of $3,656,432 for the year ended March 31, 1995.
Fiscal 1996 represented the first year that consolidated operations included the
full-year results of operations for the two businesses (ELEF, Plc and The
Diffraction Company) acquired in the prior fiscal year. Sales grew 122.7% in the
United Kingdom subsidiary (owned 11 months in Fiscal 1995) and 329.6% for the
Maryland subsidiary (owned 5 months in Fiscal 1995). The Company experienced
significant growth in its U.S. sales of secure temporary vehicle permits and its
European sales of commercial holography and dimensional printing (lenticular
products).
Gross profits for the year ended March 31, 1996 increased 58.5% to
$2,908,646 as compared to $1,834,992 for the year ended March 31, 1995. The
gross profit margin for the current fiscal year of 32.49% declined from the
prior year margin of 50.19%. This decline in the gross profit margin reflects a
change in the mix of business, with the growth of lenticular sales contributing
lower margins than other business segments. The Company is maintaining its
historic margins on its base security business and in those sales categories
protected by patents or proprietary technology.
Operating expenses of $2,918,119 grew 5.4% compared to the prior fiscal
year. Full year operating expenses in the operating subsidiaries were $529,793
higher than in the prior year; however, because of a decrease in corporate
overhead of $380,271, total expenses grew by only $149,522. Included in these
operating costs is the full-year amortization of $121,225 for license agreements
and goodwill, an increase of $23,929 over the prior year's amortization.
Compensation and related costs increased $60,235 over the prior fiscal year.
This represents real growth of $265,485, adjusting for the prior year's non-cash
and one-time compensation costs of $205,250 relating to option grants. Most of
the growth in compensation base resulted from the inclusion of a full-year's
operations for the operating subsidiaries, and less significantly, general wage
or staff increases.
At the end of the fiscal year ended March 31, 1996, the Company had 45
employees, a decrease of one from the 46 employees at the end of the prior
fiscal year. Of this total, 8 employees are based in the corporate office, 19
employees in the United Kingdom and 18 employees in Maryland.
Interest expense declined 61% over the prior fiscal year, a decrease of
$102,670. The decrease in interest expense is the result of two major events
that occurred during this fiscal year. The first was the exchange of 12%
convertible debt of $1.25 million into preferred stock of the Company after one
quarter, which reduced interest expense that would have been incurred by
$112,500.
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The second was the issuance of additional preferred shares during the fourth
quarter of Fiscal 1996, which netted sufficient funds to pay off all remaining
debt, with the exception of maturing capital leases.
The Company carries significant net operating losses for U.S. tax reporting
purposes and had no U.S. income tax liability. The United Kingdom subsidiary has
no current income tax liability for this fiscal year and will report a tax
benefit of $50,697, which represents a recovery of a portion of foreign taxes
accrued in the prior fiscal year of $82,997 less a deferred tax liability of
$32,300.
Fiscal Year Ended March 31, 1995
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Results from operations in the year ended March 31, 1995 reflect much
different operations than were reported in prior years. During the year, the
Company completed two business combinations: the acquisition of 100% of the
stock of ELEF, Plc, a United Kingdom corporation involved in the design and
production of holographic images and products; and the acquisition of
substantially all of the assets of The Diffraction Company, a Maryland
corporation involved in the manufacture of diffraction patterns and embossed
holographic foils, labels and laminates. Both companies have had long-term
customer relationships and sales. Total revenues of $3,656,432 reflected partial
year operations for these two acquisitions, including eleven months for ELEF and
five months for The Diffraction Company.
Cost increases, exclusive of the acquired companies, were concentrated in
compensation, travel, marketing and administrative costs. Wages in the corporate
office increased $209,000. Of this total increase, $168,000 was the net increase
in non-cash compensation for the award of stock options, and the remaining
amount was incurred through the addition of three executives primarily to handle
marketing and contract administration.
During the year ended March 31, 1995, corporate administration costs
increased $75,000, travel increased $47,000 and marketing costs increased
$132,000. These cost increases were directly related to the increase in staff to
support the new acquisitions in marketing, finance, accounting and other
corporate support functions. Marketing costs were negligible in prior years.
During Fiscal 1995, the Company incurred some one-time costs related to the
corporate name change and extensive marketing aimed at federal and state
government agencies. The Company produced sales support tools, including
brochures, sample books, product descriptions and the like.
Interest expense increased $147,000 over the fiscal year ended March 31,
1994. Of this total, $112,500 was for interest on the convertible, secured notes
of $1.25 million issued in favor of Hunt Capital Group, L.L.C. and Richard H.
Bard. Terms of the notes called for interest to be paid 40% in cash and 60% in
common stock,
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at 70% of market price. To conserve the working capital of the Company, the
noteholders accepted and were paid in common stock for the entire interest due
during the year. Of the remaining increase in interest of $34,000, $19,000 was
incurred in connection with acquisition indebtedness, $29,000 was incurred in
connection with existing loans and capital leases in the acquired companies, and
other interest decreased $14,000 in connection with a related party note paid
off in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended March 31, 1996, stockholders' equity increased 236.3%
to $7,202,659, up from $2,141,856. The Company raised $3,811,950 net of offering
costs from the issuance of Series B Shares. In addition, the Company issued
Series B Shares in exchange for $1,210,258 of convertible debt. Proceeds from
the preferred stock offering were used to reduce debt and improve working
capital. Such funds may also be used to expand facilities and for future
acquisitions.
The Company's working capital position, at March 31, 1996, was $4,558,292,
or 6.59-to-1 over current liabilities. Included in this working capital surplus
was a cash position of $3,231,823. The Company's long-term debt consisted of
$13,317 of capital leases maturing in Fiscal 1998.
The Company reported an operating loss of $9,473 and net income of $2,692
for the year ended March 31, 1996. Excepting the non-cash expenses of $242,453
for depreciation and amortization, and common shares issued for interest of
$37,500, operating income was $232,980 and net income was $282,645 for the
fiscal year.
In the year ended March 31, 1995, the Company raised in excess of $4
million, $2.725 million from the issuance of shares of common stock, $106,000
received upon the exercise of warrants and options to purchase shares of common
stock, and $1.25 million received in exchange for two convertible, secured
notes. These funds were used to (a) eliminate the deficit in stockholders'
equity; (b) provide a substantial working capital surplus; (c) fund the cash
portion of the two business acquisitions; and (d) pay off short term debt and
deferred compensation that had accrued through March 31, 1994. As a result,
stockholders' equity increased from a deficit at March 31, 1994, to a surplus of
$2,141,856 at March 31, 1995. This does not include the effect of the conversion
rights under the convertible notes of $1.25 million.
The Company's working capital position at March 31, 1995 was $1,107,286, or
2.03-to-1 over current liabilities. At March 31, 1994, there was a working
capital deficit of $429,897.
The two business acquisitions required $2,232,000 in cash. 100,000 shares
of common stock valued at $280,000 were also issued, as well as warrants to
purchase 170,001 common shares. A note payable of $115,923 due in 18 months at
10% interest was incurred
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on the acquisition of The Diffraction Company's assets in October 1994.
The Company incurred an operating loss of $933,605 and a net loss of
$1,179,626 for the year ended March 31, 1995. Excepting the non-cash expenses of
$188,277 for depreciation and amortization, compensation on option grants of
$205,250 and interest of $112,500, the operating loss was $540,078 and the net
loss was $673,599 for the fiscal year. Operations included only eleven months
for ELEF and five months for The Diffraction Company.
The Company continuously assesses its need for additional capital as it
develops its products and markets. In the past, the Company has been successful
in obtaining additional debt and/or equity financing to continue and expand
operations. There is no guarantee that such financing will be available in the
future.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are included herein starting
at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Directors, executive officers and significant employees as of May 15, 1996
are as follows:
<TABLE>
<CAPTION>
Name Age Position
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<C> <C> <S>
Richard H. Bard 48 Chairman of the Board, Chief
Executive Officer, and
President
Mark Bar 47 Director
Yoram Curiel 55 Director
Edward Dietrich 43 Vice President of OpSec US
Catherine M. Gotwalt 40 Secretary
Martin T. Hart 60 Director
J. R. Holland, Jr. 52 Director
</TABLE>
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<TABLE>
<CAPTION>
<C> <C> <S>
Richard D. Lamm 60 Director
Gerald A. Melfi 45 Chief Accounting Officer and
Treasurer
Bruce I. Raben 42 Director
John J. Tipton 49 Director
Mark T. Turnage 35 Managing Director of OpSec
International
</TABLE>
RICHARD H. BARD has been a director and chief executive officer of the Company
since September 1993. He was elected president in April 1994, and chairman of
the board in April 1995. Mr. Bard served as treasurer from September 1993 to
December 1994. Mr. Bard is also the chief executive officer of Bard & Co., Inc.,
a diversified investment management company. From 1989 to 1991, Mr. Bard was
vice chairman of Computerland Corporation and chief executive officer of
Computerland International, Inc. From 1986 to 1988, Mr. Bard was chairman and
chief executive officer of Coast America Corporation, the franchisor of Coast-
to-Coast Hardware stores. From 1978 to 1986, Mr. Bard was the president and
chief operating officer of FoxMeyer Corporation, a large pharmaceutical
distributor and franchisor of drug stores. Mr. Bard is also a director of
Polymedica Industries, Inc. and VanStar Corporation, formerly known as
Computerland Corporation.
MARK BAR has been a director since March 1993. He served as chief executive
officer from March 1993 to September 1993 and as president from September 1993
to March 1994. Mr. Bar is a Denver-based businessman and investor.
YORAM CURIEL has been a director since August 1988. He currently serves as
director of technology. Previously, Mr. Curiel served as the Company's chief
technology officer, chief executive officer, president, and vice president of
product development. Mr. Curiel is the Company's founder, and he developed the
Company's tamper-evident packaging and document security technology. He is also
the president and a director of a private company involved in the development of
new technologies.
EDWARD DIETRICH serves as vice president of sales of OpSec U.S. Mr. Dietrich was
employed with American Bank Note Holographics, Inc. from February 1992 until
August 1994 as the director of sales and marketing/government markets. From June
1989 to February 1992, he was vice president of United States business
development for BusinessVision Management Systems, Inc., a computer software
company.
CATHERINE M. GOTWALT serves as the corporate secretary. She has served in this
capacity since 1989.
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MARTIN T. HART has been a director since December 1993. He serves as the
chairman of the Compensation Committee and as a member of the Audit Committee.
Mr. Hart has been a Denver-based businessman and investor for the past twenty-
seven years. He is also a director of Schuler Homes, Inc. and a trustee of
MassMutual Corporate Investors and MassMutual Participation Investors.
J. R. HOLLAND, JR. has been a director since July 1994 and serves as chairman of
the Audit Committee. Since 1991, he has been the chief executive officer and
president of Hunt Capital Group, L.L.C. and chief executive officer and
president of Unity Hunt, Inc., investment companies based in Dallas, Texas. He
is a director of Heartland Wireless Communications, Inc., Wireless One, Inc. and
TNP Enterprises, Inc.
RICHARD D. LAMM has been a director since December 1993 and serves on the
Compensation and Audit Committees. He previously served as a director from 1989
through 1992. Since 1987, Mr. Lamm has been a university professor and director
of the Center for Public Policy and Contemporary issues at the University of
Denver. He was a partner at Berliner, Boyle, Pablan, Zisser and Walter, P.C. and
O'Connor and Hannan, Attorneys at Law, from 1987 until 1992. Mr. Lamm served as
the governor of the state of Colorado from 1975 until 1987.
GERALD A. MELFI serves as the Company's chief accounting officer and treasurer.
Since February 1991, Mr. Melfi also is employed as the chief financial officer
for Bard & Co., Inc., a diversified investment management company.
BRUCE I. RABEN has been a director since February 1995 and serves on the
Compensation Committee. Since February 1996, Mr. Raben has been the managing
director of CIBC Wood Gundy Securities Corp. in Los Angeles. From March 1990
until January 1996, he served as the executive vice president and director of
corporate finance at Jefferies & Company, Inc., an investment banking firm. He
is also a director of Equity Marketing, Inc. and Terex Corporation.
JOHN J. TIPTON has been a director since March 1993, and serves on the
Compensation Committee. He also served as a director from 1989 to 1991. Since
February 1993, Mr. Tipton has been vice president, chief financial officer and
general counsel to Seven Circle Resorts, Inc., a resort and gaming casino
development and operation. From September 1992 to January 1993, Mr. Tipton was a
partner in the law firm of Baker and Hostetler. From January 1988 to August
1992, Mr. Tipton was the executive director of the Colorado Department of
Revenue.
MARK T. TURNAGE serves as Managing Director of OpSec International. From July
1994 until November 1995, Mr. Turnage served as vice president-corporate
affairs. From 1991 to 1994, Mr. Turnage practiced law with the firm of Davis,
Graham & Stubbs in Denver, Colorado.
13
<PAGE>
There are no family relationships among the Company's directors or
officers. The directors of the Company serve in such capacity until the next
annual meeting of the Company's shareholders or until their successors have been
dully elected and qualified. The committee members are appointed by the board of
directors to serve a one year term or until their successors have been elected.
Mr. Bard and Mr. Curiel have employment agreements with the Company. The
Company's other officers serve at the discretion of the Company's board of
directors.
To the Company's knowledge, none of the above listed individuals has been
involved in legal proceedings during the last five years that are material to an
evaluation of the ability or integrity of any director, executive officer,
promoter or control person.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company believes that, other than as disclosed below, during the fiscal
year ended March 31, 1996, its directors, officers and greater than 10%
beneficial owners have complied with all filing requirements under Section 16(a)
of the Exchange Act.
Mr. Turnage failed to timely file one report, reporting the acquisition of
stock options. Mr. Raben failed to timely file one report, reporting the
acquisition of stock options. Mr. Bard failed to timely file one report covering
the exchange of Series A Preferred Stock for Series B Preferred Stock. Hunt
Capital Group, L.L.C. failed to timely file two reports, one report covering the
exchange of the convertible subordinated note for Series A Preferred Stock, and
one report covering the exchange of Series A Preferred Stock for Series B
Preferred Stock.
14
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth in summary form the compensation received
during each of the Company's last three completed fiscal years by (i) the chief
executive officer of the company and (ii) by each other executive officer of the
company whose total salary and bonus exceeded $100,000 in the Company's fiscal
year ended March 31, 1996 (the officers listed below are referred to jointly as
the "Named Executive Officers"). All reference to shares of common stock and
stock prices have been adjusted to reflect the five-to-one reverse stock split
effective February 28, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Fiscal Options All Other
Name Year Salary Bonus Granted Compensation
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard H. Bard 1996 $125,000 - 300,000 -
Chief Executive Officer 1995 $125,000 - 300,000 $121,250/(1)/
since 9/93 and 1994 $ 54,166 $30,417 100,000 -
President since 4/94
Peter H.L. Woodd 1996 $ 56,144 $32,000/(2)/ - $180,000/(3)/
Executive Vice President 1995 $ 89,254 $21,344/(2)/ 60,000/(4)/ -
5/94-11/95 1994 - - - -
</TABLE>
_________________________
(1) This amount represents a grant of options to purchase 100,000 shares of
common stock under the Nonqualified Stock Option Plan at an exercise price
of $2.85 per share (70 percent of market value at time of issue).
Compensation was recognized for the difference between the exercise price
and the market value at the time of grant.
(2) Includes $32,000 for Fiscal 1996 and $16,900 for Fiscal 1995 for a housing
allowance paid on behalf of Mr. Woodd after his relocation to the Sparks
office.
(3) Includes a payment of $15,000 for consulting services, received following
the termination of Mr. Woodd, effective November 1, 1995, a payment of
$135,000 in exchange for Mr. Woodd's covenant not to compete with the
Company for 60 months, and $30,000 in settlement of any, and all, claims
for unreimbursed expenses.
15
<PAGE>
(4) In accordance with the terms of the Incentive Stock Option Plan, options
granted to Mr. Woodd in Fiscal 1995 were canceled 90 days after his
termination date of November 1, 1995.
Stock Options
- -------------
The following table sets forth information concerning stock options granted
during the fiscal year ended March 31, 1996, to the Named Executive Officers.
Each option represents the right to purchase one share of the Company's common
stock.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% of Total
Number of Options Market
Securities Granted to Exercise Price on
Underlying Employees or Base Date of
Options in Fiscal Price Grant Expiration
Name Granted Year ($/Sh) ($/Sh Date
- ---- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Richard H. Bard 300,000(1) 57% $5.75 $5.75 3/18/01
Peter H. Woodd - - - - -
</TABLE>
________________________
(1) Issued under the Nonqualified Stock Option Plan. The option vested on
March 19, 1996.
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended March 31, 1996, for each Named
Executive Officer and the fiscal year-end value of all unexercised in-the-money
options (regardless of when granted) held by these persons.
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of In-the-Money
Shares Acquired Dollar Value Unexercised Options at
On Exercise Realized Options Fiscal Year End
--------------- -------- ------- --------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Richard H. Bard - - 533,334/166,666 $753,335/$349,165
Peter H. L. Woodd - - 0/0 $0/$0
</TABLE>
16
<PAGE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
There were no awards made to the Named Executive Officers under any long-
term incentive plans.
REPRICED OPTIONS
In the fiscal year ended March 31, 1996, there were no actions taken
regarding the repricing of options relating to Executive Officer Compensation.
EMPLOYEE PENSION, PROFIT SHARING OR OTHER RETIREMENT PLANS
The Company does not have a defined benefit, pension plan, profit sharing
or other retirement plan.
COMPENSATION OF DIRECTORS
Standard Arrangements. The Company has no standard arrangement pursuant to
---------------------
which directors of the Company are compensated for any services provided as a
director or for committee participation or special assignments.
Other Arrangements. During the year ended March 31, 1996, the Company
------------------
granted stock options to one non-employee director under the Company's
Nonqualified Stock Option Plan, as follows:
OPTIONS GRANTED TO NON-EMPLOYEE DIRECTORS
IN FISCAL YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Number of Market Price
Options Exercise on Date of Expiration
Name Granted Price Grant Date
- ---- ------- ----- ------------ ----------
<S> <C> <C> <C> <C>
Bruce I. Raben 10,000(1) 5.75 5.75 03/18/01
</TABLE>
________________________
(1) 5,000 options vested on March 19, 1996, 1,666 options vest on March 19,
1997, 6,667 vest on March 19, 1998, and 6,667 options vest on March 19,
1999.
EMPLOYMENT CONTRACTS
On April 1, 1996, Richard H. Bard, the Company's chief executive officer
and president, entered into a new employment contract effective through March
31, 1999. Mr. Bard's previous employment agreement was to terminate on September
17, 1996. Under the terms of the contract, all options granted to Mr. Bard
through March 31, 1996 remain in full force and effect. Mr. Bard's salary is
$150,000 for the first year, $175,000 for the second year and
17
<PAGE>
$200,000 for the third year. As additional compensation, Mr. Bard will be
granted additional options during the term of the contract in sufficient amounts
to maintain Mr. Bard's percentage beneficial ownership of the Company's common
stock as of December 31, 1995, less common stock Mr. Bard sells or otherwise
disposes of after that date. Mr. Bard also is entitled to discretionary bonuses
in such amount as the board of directors may determine. The new employment
contract also provides that, if the Company is sold or merged into another
Company prior to March 31, 2000, Mr. Bard will receive a stock bonus of 250,000
shares. Additionally, under the terms of the employment contract, Mr. Bard
receives a $500 per month auto allowance, benefits available generally to other
Company employees, and reimbursement of expenses incurred on behalf of the
Company. If the Company terminates Mr. Bard's employment prior to the expiration
of the contract, Mr. Bard is entitled to a buyout at 150% of the value of the
contract at the time of termination.
Effective April 1, 1996, the Company amended Mr. Yoram Curiel's employment
agreement. The amended agreement deleted the previous requirements that Mr.
Curiel exercise certain stock options and the Company redeem a portion of Mr.
Curiel's stock. Under the amended agreement, Mr. Curiel's salary for the fiscal
year ended March 31, 1996 was $57,000, and his salary for the fiscal year ending
March 31, 1997 is set at $60,000. Mr. Curiel also is entitled to a $500 per
month automobile allowance. His employment agreement terminates on June 30,
1997.
On February 7, 1996, the Company executed an Employment Termination,
Consulting and Non-Competition Agreement with Mr. Peter H. L. Woodd, effective
November 1, 1995. Pursuant to the terms of the Agreement, Mr. Woodd's employment
relationship with Company terminated and he resigned as a member of the board of
directors, effective November 1, 1995. Mr. Woodd was retained as a consultant to
the Company for the six-month period ended April 31, 1996. He received a total
of $15,000 as compensation for required services. Mr. Woodd also is prohibited
from competing with the Company for a period of 60 months from the effective
date of the Agreement. In accordance with the Agreement, the Company paid Mr.
Woodd $135,000 for his non-competition covenant. As part of the Agreement, Mr.
Woodd also received $30,000 in settlement of any, and all, claims for
unreimbursed expenses.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the Company's knowledge, except for Messrs. Bar, Bard, Curiel and Hart,
the only persons or groups who own 5% or more of any class of the Company's
voting stock as of May 15, 1996, are the following:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ferri SA 750 B Preferred 10%
53 The Vivienne
Paris 75002, France
Hunt Capital Group, L.L.C. 718,928/(1)/ Common Stock 21%
1962 Thanksgiving Tower 1,440 B Preferred 19%
Dallas, TX 75201
Massachusetts Mutual Life 1,000 B Preferred 13%
Insurance Co.
1295 State St.
Springfield, MA 01111
MassMutual Corporate Value 500 B Preferred 6.7%
Partners
1295 State St.
Springfield, MA 01111
Octacvian Nominees Limited 750 B Preferred 10%
c/o Saffery Champness Mgmt. Int.
P. O. Box 141, LaTonelle House
St. Sampson GY1 3HS
Guernsey Channel Island
Philena Enterprises, Inc. 220,000/(2)/ Common Stock 7%
P. O. Box 6246
Denver, CO 80206
</TABLE>
(1) Includes 200,000 shares of common stock issuable upon the exercise of
warrants and 240,000 shares of common stock issuable upon conversion of
Series B Shares.
(2) Mr. Bar, a director of the Company, is the president of Philena
Enterprises, Inc.
19
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Except for Richard Bard, who owns 960 Series B Shares, 13% of the
outstanding Series B Shares, no director or named executive officer owns
beneficially any Series B Shares. The following table sets forth, as of May 15,
1996, the number of and percentage of outstanding shares of the Company's common
stock owned by each of the following named executive officers and directors, and
by all officers and directors as a group. Except as otherwise indicated, the
beneficial owners listed have sole voting and investment power with respect to
the shares they own beneficially.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
_________________________________________________________________
<S> <C> <C>
Mark Bar
P.O. Box 6246
Denver, CO 80206 443,635(1)(2) 14%
Richard H. Bard
535 16th Street
Suite 920
Denver, CO 80202 1,153,599(1)(3) 31%
Yoram Curiel
4500 Cherry Creek Drive S.
Suite 900
Denver, CO 80222 385,860(1)(4) 12%
Martin T. Hart
875 Race Street
Denver, CO 80206 212,149(1) 7%
J.R. Holland, Jr.
1962 Thanksgiving Tower
Dallas, TX 75201 0(5) 0%
Richard D. Lamm
c/o University of Denver
2301 S. Gaylord St., 2nd Fl.
Denver, CO 80208 52,917(1)(6) 2%
Bruce I. Raben
1999 Avenue of the Stars
Suite 1910
Los Angeles, CA 90067 35,013(1)(7) 1%
John J. Tipton
1512 Larimer St., Suite 300
Denver, CO 80202 121,334(1)(8) 4%
</TABLE>
20
<PAGE>
Table, continued
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
_________________________________________________________________
<S> <C> <C>
Peter H.L. Woodd
Tigwell Farm, East Meon
Petersfield
Hampshire GU32 1PJ
United Kingdom 110,001(1)(9) 4%
All executive officers
and directors as a group
(8 persons) 2,404,502 56%
</TABLE>
___________________________
(1) Includes shares of common stock issuable upon the exercise of stock
options, warrants and conversion rights granted to the persons listed above
which are presently exercisable or exercisable within 60 days, as follows:
<TABLE>
<CAPTION>
Shares Issuable Shares Issuable Shares Issuable
Upon Exercise Upon Exercise Upon Exercise of
Name of Stock Options of Warrants Conversion Rights Total
- ---- ---------------- --------------- ----------------- -------
<S> <C> <C> <C> <C>
Mark Bar 144,501 0 0 144,501
Richard H. Bard 533,334 43,000 160,000 736,337
Yoram Curiel 156,667 0 0 156,667
Martin T. Hart 18,334 39,000 0 57,334
Richard D. Lamm 18,334 0 0 18,334
Bruce I. Raben 16,667 0 0 16,667
John J. Tipton 113,334 0 0 113,334
Peter H.L. Woodd 0 57,655 0 57,655
</TABLE>
(2) Includes 220,000 shares held by Philena Enterprises, Inc., an affiliate of
Mr. Bar, and 69,134 shares held by Mr. Bar's spouse.
(3) Includes 150,000 shares held by Richard H. Bard, IRA, and 20,000 shares
held as custodian for a minor child.
(4) Includes 15,534 shares held by Mr. Curiel's spouse and 65,392 shares held
by Dynagroup International, Inc., an affiliate of Mr. Curiel.
(5) Mr. Holland is the manager and president of Hunt Capital Group, L.L.C.
Mr. Holland has no ownership interest in Hunt Capital Group, L.L.C. and
disclaims beneficial ownership of the shares held by Hunt Capital Group,
L.L.C.
21
<PAGE>
(6) Includes 9,470 shares held as trustee for his children.
(7) Includes 6,000 shares held by Mr. Raben's spouse. Mr. Raben disclaims any
beneficial interest in these shares.
(8) Includes 8,000 shares held by Mr. Tipton's wife. Mr. Tipton disclaims any
beneficial interest in these shares.
(9) Includes 4,000 shares and 7,000 warrants owned by Reredos F.T., 4,000
shares and 7,000 warrants owned by Reredos L.I.I., 1,840 shares and 3,220
warrants owned jointly with his spouse.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following outlines certain relationships and related transactions
during the fiscal years ended March 31, 1995 and March 31, 1996. All references
to share numbers and share price have been adjusted to reflect the five-to-one
reverse stock split effected on February 28, 1995.
Messrs. Bard and Curiel have employment agreements with the Company. (See
Item 10. EXECUTIVE COMPENSATION - EMPLOYMENT CONTRACTS.)
Effective July 1, 1995, the Company's convertible subordinated notes in the
amount of $750,000 and $500,000 (the "Notes") held by Hunt Capital Group, L.L.C.
("Hunt") and Mr. Bard were canceled in exchange for the issuance of 240,000 and
160,000 shares of Series A Convertible Preferred Stock ("Series A Shares"). Such
shares were entitled to quarterly dividends beginning with the quarter ending
September 30, 1996. The dividend rate was on a sliding scale beginning at a rate
of 14.60%, increasing 2% a year for the next four years, and 3% a year
thereafter. Such shares were convertible into stock of the Company at the rate
of one-for-one. In connection with such exchange Hunt and Mr. Bard were given
options to exchange their Series A Shares for stock in two of the Company's
subsidiaries in the event the Company failed to pay dividends on the Series A
Shares. The dividend also was guaranteed by one of the Company's subsidiaries.
Subsequently, Hunt and Mr. Bard exchanged their Series A Shares for 1,440 and
960 Series B Shares, respectively. Pursuant to the terms of this exchange, the
option agreements and guaranty issued in the first exchange were terminated.
The Notes were originally issued in June 1994 and were due on July 1, 2001.
(See Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.)
22
<PAGE>
In June 1994, in addition to the loans reflected by the Notes, Hunt
purchased 246,914 shares of common stock and a warrant to purchase an additional
200,000 shares of common stock at an exercise price of $5.00 per share for a
purchase price of $1,000,000 and Mr. Bard purchased 53,087 shares of common
stock and a warrant to purchase an additional 43,000 shares of common stock at
an exercise price of $5.00 per share for a purchase price of $215,000. Hunt and
Mr. Bard were granted certain registration rights with respect to their
investment. Such registration rights were not affected by the subsequent
exchanges. In addition, Mr. Holland was appointed to the Company's board of
directors, as Hunt's nominee.
Effective May 1, 1994, the Company acquired all the shares of ELEF Plc, now
known as OpSec International, a British corporation engaged in the production of
optical security products, including holography. The purchase price for such
shares was $250,000 in cash, a promissory note in the principal amount of
$1,250,000 bearing interest at the rate of 6% per annum, 40,000 shares of common
stock of the Company, and a warrant to purchase an additional 70,000 shares of
common stock of the Company at $10.00 per share. The exercise price of the
warrants subsequently was reduced to $4.05 per share. The Company paid the
balance of the promissory note on June 30, 1994. Pursuant to the terms of the
stock purchase agreement, Mr. Peter H.L. Woodd was appointed to the board of
directors of the Company and OpSec International entered into an employment
contract with Mr. Woodd. In Fiscal 1996, Mr. Woodd and the Company entered into
an Employment Termination, Consulting and Non-Competition Agreement with Mr.
Peter H. L. Woodd. (See Item 10. EXECUTIVE COMPENSATION - EMPLOYMENT CONTRACTS.)
During the fiscal year ended March 31, 1995, Messrs. Bard and Hart loaned
the Company $185,000 and $75,000, respectively. Each loan was represented by a
promissory note bearing interest at the rate of 12% per annum. The funds
received from Messrs. Bard and Hart were used to fund the acquisition of OpSec
International. On June 29, 1994, Mr. Bard canceled his note in exchange for
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. On June 29, 1994, Mr. Hart canceled his note in partial
satisfaction of the purchase price for the purchase from the Company of 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. In addition to the cancellation of his note, Mr. Hart paid $120,000 in
cash.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Financial Statements:
For a list of financial statements, see Index to Financial Statements, page
F-1.
<TABLE>
<CAPTION>
Exhibit Exhibit Page
Number Name Reference
------ ---- ---------
<S> <C> <C>
3.1.1 Amendment to the
Amended and Restated Filed Herewith at
Articles of page number 47
Incorporation
3.2.2 Amendment to the
Amended and Restated Incorporated by reference
Articles of to Form 8K filed on
Incorporation May 9, 1996
3.2.3 Amendment to the
Amended and Restated Incorporated by reference
Article of to Form 8K filed on
Incorporation May 9, 1996
10.1.1 Employment Contract Filed Herewith at
with Richard H. Bard page number 52
10.1.2 Amendment to Employment Filed Herewith at
Agreement with Yoram Curiel page number 62
10.6.1 Termination, Consulting
and Non-Competition
Agreement with Filed Herewith at
Mr. Peter H. L. Woodd page number 63
</TABLE>
b. Exhibits and Reports on Form 8-K: None
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Report of Independent Auditors F-1
Balance Sheets F-2
Statements of Operations F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flow F-6
Notes to Financial Statements F-8
</TABLE>
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
OPTICAL SECURITY GROUP, INC.
Registrant
Date: June 24, 1996 By: /s/Richard H. Bard
--------------------------------
Richard H. Bard, Chief Executive
Officer and Director
Date: June 24, 1996 By: /s/Gerald A. Melfi
--------------------------------
Gerald A. Melfi, Chief Accounting
Officer
Date: June 24, 1996 By: /s/Mark Bar
--------------------------------
Mark Bar, Director
Date: June 24, 1996 By: /s/Yoram Curiel
--------------------------------
Yoram Curiel, Director
Date: June 24, 1996 By:/s/Martin T. Hart
--------------------------------
Martin T. Hart, Director
Date: June 24, 1996 By:/s/J.R. Holland, Jr.
--------------------------------
J. R. Holland, Jr., Director
Date: June 24, 1996 By:/s/Richard D. Lamm
--------------------------------
Richard D. Lamm, Director
Date: June 24, 1996 By:/s/Bruce I. Raben
--------------------------------
Bruce I. Raben, Director
Date: June 24, 1996 By:/s/John J. Tipton
--------------------------------
John J. Tipton, Director
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Optical Security Group, Inc.
We have audited the accompanying consolidated balance sheets of Optical Security
Group, Inc. as of March 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Optical Security
Group, Inc. as of March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
May 10, 1996
F-1
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1996 1995
-----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $3,231,823 $ 483,025
Accounts receivable, less
allowance of $20,773 and $63,786
in 1996 and 1995, respectively 1,660,381 1,300,008
Inventory 421,759 342,065
Prepaid expenses 59,782 57,437
-----------------------
Total current assets 5,373,745 2,182,535
Property and equipment, net 579,002 453,467
Other assets:
Patent applications, net of
accumulated amortization
of $65,786 in 1996 and
$49,058 in 1995 272,331 278,991
Goodwill, net of accumulated
amortization of $128,465 and
$61,440 in 1996 and 1995,
respectively 1,212,040 1,279,065
License and non-compete
agreements, net of
accumulated amortization of
$90,056 and $35,856
in 1996 and 1995, respectively 589,978 506,165
Deposits and other 36,633 47,901
-----------------------
2,110,982 2,112,122
-----------------------
Total assets $8,063,729 $4,748,124
=======================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
1996 1995
-------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 573,250 $ 745,946
Accrued expenses 201,784 291,767
Current portion of capital
lease obligations 40,419 23,093
Current portion of long-term - 14,443
obligations -------------------------
Total current liabilities 815,453 1,075,249
Deferred tax liability 32,300 -
Capital lease obligations 13,317 47,920
Long-term obligations - 1,483,099
Commitments
Stockholders' equity:
Voting convertible preferred
stock, $0.01 par value:
2,500,000 shares authorized;
6,693 Preferred Series
B shares issued and
outstanding in 1996
(preference in liquidation
$7,295,370) 67 -
Common stock, $0.005 par value:
15,000,000 shares authorized;
3,034,552 and 3,007,428 shares
issued and outstanding in 1996
and 1995, respectively 15,173 15,036
Additional paid-in capital 13,515,502 8,412,198
Foreign currency translation
adjustment 7,641 11,235
Accumulated deficit (6,335,724) (6,296,613)
-------------------------
Total stockholders' equity 7,202,659 2,141,856
-------------------------
Total liabilities and stockholders' $ 8,063,729 $ 4,748,124
equity =========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
------------------------
<S> <C> <C>
Revenues $8,953,740 $ 3,656,432
Cost of goods sold 6,045,094 1,821,440
------------------------
Gross margin 2,908,646 1,834,992
Operating expenses:
Salaries and related costs 1,589,484 1,529,249
Depreciation and amortization 242,453 188,277
Other operating expenses 1,086,182 1,051,071
------------------------
Total operating expenses 2,918,119 2,768,597
------------------------
Loss from operations (9,473) (933,605)
Other income (expense):
Interest expense (64,699) (167,369)
Interest income 25,743 21,078
Other income (expense) 4,233 (7,873)
Foreign currency transaction loss (3,809) (22,264)
------------------------
(38,532) (176,428)
------------------------
Net loss before tax (48,005) (1,110,033)
Income tax benefit (expense) 50,697 (69,593)
------------------------
Net income (loss) $ 2,692 $(1,179,626)
========================
Net loss applicable to common stock $ (39,111) $(1,179,626)
========================
Net loss per share of common stock:
Primary $ (0.01) $ $(0.44)
========================
Weighted average number of shares
outstanding:
Primary 3,023,282 2,667,541
========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Series A Preferred Series B Common Stock Additional
----------------------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 - $ - - $ - 2,113,840 $10,569 $ 4,967,582
Fractional shares upon split - - - - 440 2 (2)
Stock issued for cash:
June 1994 493,826 2,469 1,997,531
December 1994 - - - - 179,012 895 724,105
Stock issued for services - - - - 5,063 25 19,975
Stock issued for interest - - - - 36,234 181 112,319
Stock issued in business
combinations - - - - 100,000 500 279,500
Options and warrants
exercised - - - - 79,013 395 105,938
Options granted for services - - - - - - 205,250
Foreign currency translation
adjustment - - - - - - -
Net loss - - - - - - -
--------------------------------------------------------------------------------------
Balance at March 31, 1995 - - - - 3,007,428 15,036 8,412,198
Stock issued for cash:
Preferred Series B, net of
issuance costs of $481,050 - - 4,293 43 - - 3,811,907
Stock issued upon conversion:
Conversion of subordinated
secured notes into Preferred
Series A, net of issuance
costs of $39,742 400,000 4,000 - - - - 1,206,258
Conversion of Preferred
Series A into Preferred
Series B (400,000) (4,000) 2,400 24 - - 3,976
Stock issued for interest - - - - 17,124 87 37,413
Options exercised - - - - 10,000 50 43,750
Dividend declared on
Preferred Series B - - - - - - -
Foreign currency translation
adjustment - - - - - - -
Net income - - - - - - -
------------------------------------------------------------------------------------------
Balance at March 31, 1996 - $ - 6,693 $67 3,034,552 $15,173 $13,515,502
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Foreign Total
Currency Stockholders'
Translation Accumulated Equity
Adjustment Deficit (Deficit)
---------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1994 $ - $(5,116,987) $ (138,836)
Fractional shares upon split - - -
Stock issued for cash:
June 1994 - - 2,000,000
December 1994 - - 725,000
Stock issued for services - - 20,000
Stock issued for interest - - 112,500
Stock issued in business
combinations - - 280,000
Options and warrants
exercised - - 106,333
Options granted for services - - 205,250
Foreign currency translation
adjustment 11,235 - 11,235
Net loss - (1,179,626) (1,179,626)
-----------------------------------------------
Balance at March 31, 1995 11,235 (6,296,613) 2,141,856
Stock issued for cash:
Preferred Series B, net of
issuance costs of $481,050 - - 3,811,950
Stock issued upon conversion:
Conversion of subordinated
secured notes into Preferred
Series A, net of issuance - - 1,210,258
costs of $39,742
Conversion of Preferred
Series A into Preferred - - -
Series B - - 37,500
Stock issued for interest - - 43,800
Options exercised
Dividend declared on
Preferred Series B - (41,803) (41,803)
Foreign currency translation
adjustment - - (3,594)
Net income (3,594) 2,692 2,692
-----------------------------------------------
Balance at March 31, 1996 $ 7,641 $(6,335,724) $ 7,202,659
===============================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,692 $(1,179,626)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 242,453 188,277
Deferred tax expense 32,300 --
Common shares issued for services -- 20,000
Common shares issued for interest 37,500 112,500
Stock options issued for services -- 205,250
Loss on disposition of equipment 1,884 4,508
Change in operating assets and
liabilities:
Accounts receivable (360,373) (703,943)
Inventory (79,694) (78,954)
Prepaid expenses (2,345) (12,578)
Accounts payable and accrued expenses (304,482) 239,631
--------------------------
Net cash used in operating activities (430,065) (1,204,935)
INVESTING ACTIVITIES
Patent application costs (10,068) (38,154)
Acquisition-ELEF, Plc -- (1,628,088)
Acquisition-The Diffraction Company -- (604,452)
Property and equipment (222,314) (223,036)
Other intangible assets, net (176,093) (38,933)
--------------------------
Net cash used in investing activities (408,475) (2,532,663)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 43,800 2,831,333
Proceeds from issuance of preferred stock, net 3,811,950 --
Proceeds from issuance of debt -- 1,471,241
Payments on notes and capital lease obligations (264,818) (159,713)
--------------------------
Net cash provided by financing activities 3,590,932 4,142,861
Effect of exchange rate changes on cash flows (3,594) 11,235
--------------------------
Net increase in cash 2,748,798 416,498
Cash, beginning of year 483,025 66,527
--------------------------
Cash, end of year $3,231,823 $ 483,025
==========================
</TABLE>
F-6
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
---------------------
<S> <C> <C>
Supplemental disclosure of cash flow activities:
Interest paid $ 27,199 $54,869
Income taxes paid 67,183 25,278
Conversion of subordinated notes into Preferred
Series A shares 1,210,258 --
</TABLE>
See accompanying notes.
F-7
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
March 31, 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, Plc ("OpSec U.K."), provides products and solutions to businesses
and governments for the problems of product tampering and counterfeiting,
diversion 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.
F-8
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
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. The ranges of estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements 2-12
Computer equipment 5
Other equipment and furniture 5-7
Production equipment 5-10
</TABLE>
Property and equipment at March 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------------------
<S> <C> <C>
Leasehold improvements $ 105,310 $ 19,142
Computer equipment 182,472 158,458
Other equipment and furniture 52,559 51,333
Production equipment 364,620 233,301
Vehicles 75,147 100,441
---------------------
780,108 562,675
Less accumulated depreciation (201,106) (109,208)
---------------------
$ 579,002 $ 453,467
=====================
</TABLE>
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 March 31, 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
F-9
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
It is possible the above estimates of future economic life of the Company's
patents, the amount of future revenues, or both, will be reduced significantly
in the near term due to alternative technologies developed by similar entities.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued two standards that will
be applicable to the Company beginning in fiscal year 1997, which the Company
has not yet adopted. 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.
F-10
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE OF COMMON STOCK
Primary loss per common share for the years ended March 31, 1996 and 1995 is
based on net loss after preferred stock dividend requirements, if any, and the
weighted average number of common shares outstanding during each of the years,
including stock options and warrants considered to be dilutive common stock
equivalents. The convertible preferred stock is not considered to be a common
stock equivalent. Fully diluted net loss per share was antidilutive in each of
the periods presented.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. Expenses
were $19,227 and $14,369 during 1996 and 1995, respectively.
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 March 31, 1995 financial statements were reclassified to
conform with the March 31, 1996 presentation.
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
F-11
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATIONS (CONTINUED)
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.
The following unaudited pro forma combined results of operations for fiscal year
1995 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 the 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>
YEAR ENDED MARCH 31
1995
-------------------
(Unaudited)
<S> <C>
Sales and royalty income $ 4,842,235
Net loss (1,053,665)
Net loss per share of common stock $ (0.39)
</TABLE>
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:
<TABLE>
<CAPTION>
(Note 4)
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>
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
F-12
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
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 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 years
ended March 31, 1996 and 1995 were $41,946 and $32,032, 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/
F-13
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stockholders of the Company. The Company received $725,000 in exchange for
179,012 common shares.
On April 1, 1996, the Company's chief executive officer and president, entered
into a new employment contract with the Company effective through March 31,
1999. The chief executive officer's previous employment agreement was to
terminate on September 17, 1996. Under the terms of the new contract, all
options granted to the chief executive officer through March 31, 1996 remain in
full force and effect. The chief executive officer's salary is $150,000 for the
first year, $175,000 for the second year and $200,000 for the third year. As
additional compensation, the chief executive officer will be granted additional
options during the term of the contract in sufficient amounts to maintain the
chief executive officer's percentage beneficial ownership of the Company's
common stock as of December 31, 1995, less common stock the chief executive
officer sells or otherwise disposes of after that date. The chief executive
officer also is entitled to discretionary bonuses in such amount as the board of
directors may determine. The new employment contract also provides that, if the
Company is sold or merged into another Company prior to March 31, 2000, the
chief executive officer will receive a stock bonus of 250,000 shares. If the
Company terminates the chief executive officer's employment prior to the
expiration of the contract, the chief executive officer is entitled to a buyout
at 150% of the value of the contract a the time of termination.
During fiscal 1996, the Company issued 6,693 shares of Preferred Series B Stock,
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. In conjunction with the issuance of the Preferred Series B, the Company
granted a warrant to purchase 85,860 shares of the Company's common stock at an
exercise price of $7.13 per share.
Subsequent to year end March 31, 1996, the Company completed its Preferred
Series B stock offering, issuing 775 shares at $1,000 per share, resulting in
proceeds of $705,250, net of issuance costs.
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
F-14
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
if the common stock trades at 150% of the conversion price for at least 30
consecutive trading days.
<TABLE>
<CAPTION>
Redemption
Date Redeemed Price
- ------------------------------------------------------------------------
<S> <C>
On or after March 30, 1998, but prior to the third $1,090
anniversary,
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
</TABLE>
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 March 31, 1996, the cumulative unpaid dividend on the
Preferred Series B of $41,803 was declared and subsequently paid on April 1,
1996.
Below is a summary of common stock reserved by the Company at March 31, 1996 for
issuance upon the conversion of preferred stock and the exercise of the various
options and warrants:
<TABLE>
<CAPTION>
<S> <C>
Series B preferred stock 1,115,522
Stock option plans 2,466,668
Warrants 598,515
---------
4,180,705
=========
</TABLE>
6. Stock Option Plans and Stock Warrants
The Company has an Incentive Stock Option Plan ("ISO") under which 1,000,000
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")
F-15
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plans and Stock Warrants (continued)
under which 650,000 shares of common stock were reserved for issuance at March
31, 1995. During fiscal 1996, the Company's Board of Directors reserved,
subject to stockholder approval, an additional 1,350,000 shares of common stock
for issuance under the NSO plan.
The following is a summary of stock options granted, exercised and outstanding
for the years ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
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 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:
<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 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 1-3/2003
-------
Outstanding, March 31, 1996 598,515
=======
</TABLE>
F-16
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. Long-Term Obligations
Long-term obligations, net of current maturities, were as follows:
<TABLE>
<CAPTION>
March 31
1996 1995
-----------------------
<S> <C> <C>
Convertible notes $ -- $1,250,000
Note payable -- 172,581
Notes payable -- 74,961
-----------------------
-- 1,497,542
Less current maturities -- 14,443
-----------------------
Total long-term debt $ -- $1,483,099
=======================
</TABLE>
8. Leases and Commitments
The Company leases several vehicles and computer equipment under long-term
leases classified as capital leases. The Company has the option to purchase the
equipment for a nominal cost at the termination of the lease. The assets
classified as capital leases are amortized over the shorter of the estimated
useful life of the property or the lease term.
Amortization related to these assets is included in depreciation for financial
reporting purposes.
Property and equipment include the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
Year ended March 31
1996 1995
-------------------
<S> <C> <C>
Computer equipment $12,112 $ 5,784
Vehicles 75,147 74,761
-------------------
87,259 80,545
Less accumulated amortization 35,375 16,069
-------------------
$51,884 $64,476
===================
</TABLE>
Future minimum payments for capitalized leases were as follows at March 31,
1996:
1997 $43,030
1998 12,656
-------
Total minimum lease payments 55,686
Less amounts representing interest 1,950
-------
Present value of net minimum
lease payments 53,736
Less current maturities 40,419
-------
Long-term obligation $13,317
=======
F-17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. Leases and Commitments (continued)
The Company leases various facilities and equipment under noncancelable
operating lease arrangements. The major facilities leases are for terms of 1 to
10 years. Rent expense under all operating leases was $278,708 and $176,319 in
1996 and 1995, respectively.
Future minimum lease payments under these noncancelable operating leases as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $258,604
1998 131,418
1999 97,377
2000 77,303
2001 38,733
Thereafter 36,255
--------
Total minimum lease payments $639,690
========
</TABLE>
9. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes ("SFAS No. 109").
Under the provisions of SFAS No. 109, a deferred tax liability or asset (net of
a valuation allowance) is provided in the financial statements by applying the
provisions of applicable tax laws to measure the deferred tax consequences of
temporary differences that will result in net taxable or deductible amounts in
future years as a result of events recognized in the financial statements in the
current or preceding years.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Current:
Federal and state $ -- $ --
Foreign (82,997) 69,593
-------------------------
(82,997) 69,593
Deferred:
Federal and state -- --
Foreign 32,300 --
-------------------------
32,300 --
-------------------------
$(50,697) $69,593
=========================
</TABLE>
F-18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
A reconciliation between the actual income tax expense or benefit and income
taxes computed by applying the statutory tax rates for the years ended March 31
is as follows:
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
--------------------------------
<S> <C> <C> <C>
1996
Computed income tax expense
(benefit) at U.S. statutory rates $ 994 $(32,855) $ (31,861)
Operating loss for which income
tax benefit is recognized (51,996) - (51,996)
Foreign loss 48,507 - 48,507
Other 2,495 (17,842) (15,347)
--------------------------------
$ - $(50,697) $ (50,697)
================================
1995
Computed income tax expense
(benefit) at U.S. statutory rates $(435,413) $ 58,002 $(377,411)
Operating loss for which no income
tax benefit is recognized 469,939 - 469,939
Foreign loss (37,309) - (37,309)
Other 2,783 11,591 14,374
--------------------------------
$ - $ 69,593 $ 69,593
================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
-------------------------
<S> <C> <C>
Deferred tax liabilities:
Amortization $ 110,181 $ 69,521
Tax over book depreciation 954 3,186
-------------------------
Total deferred tax liabilities 111,135 72,707
Deferred tax assets:
Tax net operating loss carryforwards 2,138,087 2,136,635
Deferred wages/option grants 90,273 90,123
-------------------------
Total deferred tax assets 2,228,360 2,226,758
Valuation allowance for deferred tax assets (2,149,525) (2,154,051)
-------------------------
Total deferred tax assets 78,835 72,707
Net deferred tax liabilities $ 32,300 $ -
=========================
</TABLE>
F-19
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
At March 31, 1996, the Company has aggregate net operating loss carryforwards of
approximately $5,779,000 for federal tax reporting purposes, which expire
beginning 2004 through 2011, if not utilized. The net operating loss
carryforward could be limited by certain subsequent sales of securities by the
Company or its stockholders.
The Company does not provide for income taxes on the unremitted earnings of the
foreign subsidiary as the Company intends to reinvest these undistributed
earnings of the foreign subsidiary. There were no undistributed earnings of the
foreign subsidiary at March 31, 1996.
10. SEGMENTS OF BUSINESS
The following table sets forth financial information for the Company's foreign
and domestic segments for the year ended March 31, 1996:
<TABLE>
<CAPTION>
WESTERN
EUROPE DOMESTIC TOTAL
-----------------------------------
<S> <C> <C> <C>
Revenues $5,795,168 $3,158,572 $8,953,740
Income (loss) from operations (22,034) 12,561 (9,473)
Identifiable assets 2,248,446 5,815,283 8,063,729
</TABLE>
F-20
<PAGE>
EXHIBIT 3.1
ARTICLE XI
Series A Convertible Preferred Stock
11.1 Number and Designation. Five hundred thousand shares of
----------------------
the preferred stock of the corporation shall be designated Series
A Convertible Preferred Stock (the "Series A Shares").
11.2 Dividends. The holders of the Series A Shares shall be
---------
entitled to receive cash dividends, when and as declared by the
board of directors, out of funds legally available therefor, as
follows:
<TABLE>
<CAPTION>
Period Dividend Rate Per Annum
- --------------------------------- -----------------------
<S> <C>
Year 1 ending June 30, 1996 0.00%
Year 2 ending June 30, 1997 14.60%
Year 3 ending June 30, 1998 16.60%
Year 4 ending June 30, 1999 18.60%
Year 5 ending June 30, 2000 20.60%
Year 6 ending June 30, 2001 22.60%
</TABLE>
The dividend rate shall increase 3% per year thereafter until all
Series A Shares have been redeemed.
Said dividend is payable quarterly each year beginning with the quarter ended
September 30, 1996, on the first day of October, January, April, and July in
each year. Dividends shall be cumulative from the date due. If the board of
directors fails to declare, or the corporation otherwise fails to pay, a
dividend for any quarter and such dividend payment is not made within 30 days of
the applicable payment date, such dividend shall accrue and bear interest at the
dividend rate, and become payable at the time the next dividend is due. Dividend
payments made by the corporation in any quarter shall first be applied to
accrued interest, second, to the dividend payment due that quarter and third to
any accrued but unpaid dividends, starting with the most recent accrued but
unpaid dividend.
11.3 Liquidation. In the event of any liquidation, dissolution or winding
-----------
up of the corporation, whether voluntary or involuntary, the holders of the
Series A Shares shall be entitled to receive, out of the assets of the
corporation available for distribution to its shareholders, an amount equal to
$3.125 per share of Series A Shares, plus all dividends accrued and unpaid up to
the date of such payment, and no more, before any payment shall be made or any
assets distributed to the holders of the corporation's common stock (the "Common
Stock"). If the assets of the corporation so distributable shall be insufficient
to permit payment of the amounts due to the holders of the Series A Shares and
the payment of amounts due to the holders of the Series B Cumulative Convertible
Exchangeable Preferred Voting Stock (the
1
<PAGE>
"Series B Shares") upon liquidation, dissolution or winding up of the
corporation, all of the assets shall be distributed ratably (based on the number
of shares of Common Stock each holder of the Series A Shares or Series B Shares
would be entitled to receive if such holders exercised their conversion rights)
among the holders of the Series A Shares and the Series B Shares. For the
purposes of this Section 11.3, the voluntary sale, lease, exchange or transfer
of all or substantially all of the corporation's property or assets, or its
consolidation or merger with any other corporation or corporations, shall not be
deemed a liquidation, dissolution or winding up of the corporation.
11.4 Voting Rights. Except to the extent required by the laws of Colorado,
-------------
the holders of the Series A Shares shall have no voting rights whatsoever.
11.5 Redemption. The Series A Shares shall be redeemable, in whole or in
----------
part, at the option of the corporation by resolution of the board of directors,
by lot or pro rata if less than all of the Series A Shares are being redeemed,
at any time and from time to time upon at least one year's prior written notice
to the record holders thereof, at the addresses of such holders as the same
appear on the records of the corporation, at the redemption price of $3.125 per
share, plus all dividends accrued and unpaid up to the date fixed for
redemption, and no more. If such notice of redemption shall have been duly given
and if, on or before the redemption date specified in such notice, the funds
necessary for such redemption shall have been set apart so as to be and continue
to be available therefor, then, notwithstanding that any certificates
representing Series A Shares called for redemption shall not have been
surrendered, such Series A Shares shall no longer be deemed outstanding and all
rights of the holders of such Series A Shares so called for redemption shall
forthwith on such redemption date, cease and terminate, except the right of the
holders thereof to receive the redemption price as specified above. In case less
than all the Series A Shares represented by any surrendered certificates are
redeemed, a new certificate shall be issued representing the unredeemed Series A
Shares. Series A Shares that have been redeemed as provided herein shall revert
to the status of authorized but unissued Series A Shares.
11.6 Conversion. The holders of the Series A Shares shall have the right,
----------
at their option, to convert Series A Shares into shares of the Common Stock at
any time and from time to time on the following terms and conditions:
11.6.1 Series A Shares shall be converted at the option of the holder
thereof into fully paid and nonassessable shares of the Common Stock at the rate
of one share of Common Stock for each Series A Share (the "Conversion Rate"),
subject to adjustment as provided in paragraph 11.6.4 below.
2
<PAGE>
11.6.2 The corporation shall not issue, in connection with the
conversion of Series A Shares, certificates for fractions, but in lieu thereof
shall pay to any person who would otherwise be entitled thereto an amount of
cash equal to such fraction multiplied by the Market Price (as hereinafter
defined) of the Common Stock on the last business day of the week preceding the
week in which the conversion privilege was deemed to have been exercised. As
used herein, "Market Price" means the average of the closing bid and asked
prices on such date as reported on a national stock exchange or over-the-counter
market.
11.6.3 In order for any holder of Series A Shares to convert the same
into Common Stock, the holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the corporation and shall give written
notice to the corporation that the holder elects to convert all or part of the
Series A Shares represented by the certificate or certificates and shall state
in writing therein the name or names in which the holder wishes the certificate
or certificates for Common Stock to be issued. The corporation will, as soon as
practicable thereafter, issue and deliver to such holder of the Series A Shares,
or to the holder's nominee or nominees, certificates for the full number of
shares of Common Stock to which the holder shall be entitled, together with cash
in lieu of any fraction of a Share as provided in paragraph 11.6.2 above. If
surrendered certificates for the Series A Shares are converted only in part, the
corporation will issue and deliver to the holder, or to the holder's nominee or
nominees, a new certificate or certificates representing the aggregate of the
unconverted Series A Shares. Series A Shares shall be deemed to have been
converted as of the date of the surrender of such Series A Shares for conversion
as provided above, and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such Common Stock on such date.
11.6.4 The Conversion Rate shall be subject to adjustment as
follows:
(i) In case the corporation shall (a) pay a dividend or make a
distribution on its Common Stock in shares of the capital stock of the
corporation, (b) subdivide or split its outstanding Common Stock, (c) combine
the outstanding Common Stock into a smaller number of shares, (d) issue by
reclassification of its Common Stock (whether pursuant to a merger or
consolidation or otherwise) any shares of the capital stock of the corporation,
or (e) issue Common Stock at a price less than $3.125 per share, or issue stock
purchase warrants or securities carrying conversion privileges at more favorable
terms than the Series A Shares, the number and kind of shares issuable upon
conversion of each Series A Share outstanding immediately prior thereto shall be
adjusted so that the holder of each Series A Share shall be entitled to receive
the kind and number of shares of Common Stock or other securities
3
<PAGE>
of the corporation which the holder would have owned or have been entitled to
receive after the happening of any of the events described above had such Series
A Share been converted in full immediately prior to the earlier of the happening
of such event or any record date with respect thereto. An adjustment made
pursuant to this paragraph (i) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event listed
above shall occur.
(ii) In case of any reclassification or similar change of
outstanding shares of Common Stock (other than as set forth in paragraph (i)
above), or in case of the consolidation or merger of the corporation with
another corporation, or the conveyance of all or substantially all of the assets
of the corporation, each Series A Share shall thereafter be convertible only
into the number of shares of stock or other securities or property, including
cash, to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Series A Shares would have been entitled upon such
reclassification, change, consolidation, merger or conveyance had such Series A
Shares been converted immediately prior to the effective date of such event;
and, in any such case, appropriate adjustments (as determined by the board of
directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of the Series
A Shares to the end that the provisions set forth herein (including provisions
with respect to changes in and other adjustments of the Conversion Rate) shall
thereafter be applicable, as nearly as may be reasonable, in relation to any
shares of stock or other securities thereafter deliverable upon the conversion
of the Series A Shares. The corporation shall not effect any such consolidation,
merger or sale unless, prior to or simultaneously with the consummation thereof,
the successor corporation or entity (if other than the corporation) resulting
from such consolidation or merger or the corporation or entity purchasing such
assets or other appropriate corporation or entity shall assume, by written
instrument, (a) the obligation to deliver to the holder of each Series A Share
such shares, securities, assets or cash as, in accordance with the foregoing
provisions, such holders may be entitled to purchase, and (b) the other
obligations hereunder.
(iii) Upon the expiration of any subscription rights or warrants
or the termination of any rights to convert or exchange any convertible
securities for which the Conversion Rate has previously been adjusted (without
exercise of such rights or warrants or conversion or exchange of such
convertible securities), the Conversion Rate shall forthwith be readjusted to
such Conversion Rate as would have been in effect at the time of such expiration
or termination, had such rights, warrants or convertible securities, to the
extent outstanding immediately prior to such expiration or termination, never
been issued.
4
<PAGE>
(iv) Except as specifically provided herein, no adjustment in the
Conversion Rate shall be made by reason of the issuance of shares of Common
Stock in exchange for cash, property or services.
(v) Whenever the Conversion Rate is adjusted as herein provided,
the corporation shall prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based, and such
certificate shall then be delivered to the holders of record of the Series A
Shares.
(vi) The adjustments herein provided for shall become effective
immediately following the record date for any event for which the record date is
designated and on the effective date for any other event.
11.6.5 So long as any Series A Shares remain outstanding, and the holders
thereof have the right to convert them into shares of Common Stock, the
corporation shall reserve from the authorized and unissued shares of its Common
Stock a sufficient number of shares to provide for such conversion.
11.6.6 In case of any call for redemption of any Series A Shares, as
provided in Section 11.5, the right of conversion provided in this Section 11.6
shall nevertheless continue, as to the Series A Shares called for redemption, up
to the date of redemption specified in the notice given in accordance with
Section 11.5.
11.6.7 Series A Shares that have been converted as provided herein shall
revert to the status of authorized but unissued Series A Shares.
5
<PAGE>
EXHIBIT 10.1.1
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made effective April 1, 1996 by and between Optical
Security Group, Inc. ("Company") and Richard H. Bard ("Employee") and supersedes
and replaces the Employment Agreement between the parties effective as of
September 17, 1993, and amended effective March 31, 1994.
R E C I T A L S:
---------------
1. Employee has been elected by the Board of Directors to continue as the
Company's Chief Executive Officer and President.
2. Employee desires to continue his employment with the Corporation.
THEREFORE, in consideration of the Recitals, the mutual promises contained
herein, and other good and valuable consideration, the parties intending to be
bound, agree as follows:
1. Employment and Duties. Company hereby agrees to employ Employee in a
---------------------
senior management capacity for the term of this Agreement. Employee's job title
and description shall be as determined by the Board of Directors from time to
time. At the time of execution of this Agreement, Employee is to be employed as
the Company's Chief Executive Officer and President. Employee hereby accepts
employment by Company and agrees diligently and faithfully to perform his duties
pursuant to this Agreement. Company shall provide sufficient personnel,
equipment, office space, and support necessary for performance of Employee's
duties. Employee's duties shall include the following: To oversee the general
strategic direction and management of the Company and all other duties necessary
to perform the foregoing responsibilities, with the advice and consent of the
Company's Board of Directors. In addition, Employee shall serve as a director of
the Company if so elected by the shareholders. By his signature on this
Agreement, Employee acknowledges that he is, and will remain during his period
of employment, an executive and management employee, with respect to whom the
non-competition provision of this Agreement will be fully valid and enforceable.
2. Term of Employment. Employee's employment hereunder shall be for a
------------------
term of three years commencing on April 1, 1996, unless earlier terminated under
the provisions of paragraphs 7 or 8 of this Agreement. The parties acknowledge
that Employee has been employed by the Company since September 17, 1993, under a
written employment agreement. This Agreement supersedes and replaces all
previous employment agreements, oral or written, between the parties except
paragraph 6, which applies retroactively to Employee's first date of employment.
1
<PAGE>
3. Compensation
------------
3-1. Salary. As compensation for services, Employee shall be
------
paid a salary of $150,000.00 for the first year, $175,000.00 for the
second year and $200,000 for the third year, subject to all federal,
state and municipal withholding requirements, payable in semi-monthly
installments in arrears on the Company's normal salary payment dates.
Employee's salary shall be reviewed annually and may be adjusted by
action of the Board of Directors of the Company, but the salary paid
in any year shall not be less than the prior year's salary plus an
appropriate cost of living adjustment.
3-2. Benefits. Employee shall receive all benefits generally
--------
available to employees of Company from time to time, including without
limitation, life insurance, expense accounts, medical insurance
benefits, disability insurance, as well as the right to participate in
any qualified or non-qualified deferred compensation or retirement
plans created by the Company. The Company does not promise to provide
any of the foregoing fringe benefits, but agrees that if provided,
Employee shall have the right to participate. Such participation shall
be subject to all qualification, vesting and other requirements of the
plans. Employee also shall be entitled to reimbursement from Company
of all reasonable expenses incurred in performing duties hereunder,
including, without limitation, meals, lodging, travel, and automobile
expense reimbursement for use of Employee's automobile for Company
business.
3-3. Automobile Allowance. To compensate Employee for use of
--------------------
his personal vehicle in connection with Company business, Employee
shall be entitled to an automobile allowance of $500.00 per month.
Payment shall be made on the 15th day of each month for the previous
month.
3-4. Officers and Directors Insurance. The Company shall make
--------------------------------
Employee a named insured under its directors and officers liability
insurance policy and shall maintain the policy throughout the term of
this Agreement for the benefit of Employee.
3-5. Bonus. Employee shall be entitled to annual bonuses in
-----
such amounts as may be determined by the Board of Directors. In
addition Employee shall be entitled to receive a stock bonus of
250,000 shares of the Company's common stock immediately prior to
closing of any of the following transactions before March 31, 2000:
(a) merger, consolidation, or share-for-share exchange with another
company and the Company is not the surviving entity or, (b) sale of
all or substantially all of the Company's assets in one transaction or
a series of connected transactions
2
<PAGE>
3-6. Anti-Dilution. As additional compensation, the Company
-------------
shall grant to Employee options to acquire Company common stock in
sufficient amounts to permit Employee to maintain his percentage
beneficial ownership of Company common stock as of December 31, 1995,
less common stock Employee sells or otherwise disposes of after such
date. Beneficial ownership shall have the same meaning as and shall be
determined in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934. Such options shall be granted no less frequently than
annually, and shall bear an exercise price equal to the market value
of the Company's publicly traded common stock as of the date of the
grant, unless granted through the Company's Incentive Stock Option
Plan, in which case the exercise price shall be 110% of the market
price.
3-6-1. All options granted pursuant to paragraph 3-6
shall be granted in accordance with the terms of the Nonqualified
Stock Option Plan and shall vest on the date of grant with an
expiration date of five years from date of grant. If, however,
said Plan does not provide a sufficient number of options to
effect the terms of paragraph 3-6, then all or the remaining
portion of the option grant shall be granted under the Incentive
Stock Option Plan, with a vesting date one year from date of
grant, and a 5 year expiration date.
3-6-2. All options granted pursuant to paragraph 3-6 are
subject to the provisions of paragraphs 3-7-1 and 3-7-2.
3-7. Stock Options. All stock options granted to Employee
-------------
through March 31, 1996, described on Exhibit A attached hereto and
incorporated herein by reference, shall remain in full force and
effect.
3-7-1. If the Corporation should merge, consolidate or
effect a share-for-share exchange with another company and the
Corporation will not be the surviving entity or should the
Corporation sell all or substan-tially all of its assets, then
immediately prior to any such transaction, all options set forth
in Exhibit A, or granted pursuant to paragraph 3-7 shall vest and
be immediately exercisable.
3-7-2. If the Employee dies or becomes permanently and
totally disabled prior to the expiration of any option set forth
in Exhibit A, or options granted pursuant to paragraph 3-7, then
all options shall vest and be immediately exercisable. The
Employee shall be considered permanently and totally disabled if
he is unable to conduct in the gainful activity in which he was
engaged prior to such disability by reason of any medically
determinable physical or mental impairment for a continuous
period of not less than six months. The Employee shall not be
considered to be permanently and totally disabled unless he
furnishes proof of the
3
<PAGE>
existence thereof in such form and manner, and at such times, as
the Corporation may require.
4. Extent of Services. Employee shall devote a majority of his time to
------------------
the performance of his duties under this Agreement. Notwithstanding the above,
the Company understands that the Employee is involved in other business
activities and nothing contained herein shall preclude the Employee from
engaging in such other business activities.
5. Covenants and Conditions.
------------------------
5-1. Confidentiality. Employee acknowledges the highly
---------------
confidential nature of certain aspects of the Company's business and
recognizes that certain confidential and proprietary information
belonging to the Company and the Company's clients, including patents,
trademarks, trade secrets, and other intellectual property rights will
be disclosed to him by the Company in the course of his employment. In
consideration of the continued employment of Employee, and as a
condition to the disclosure of such confidential and proprietary
information to Employee, Employee agrees to abide by the following
terms and conditions.
5-1-1. Customer-Related Information. Employee recognizes
----------------------------
and acknowledges that (a) the services the Company performs for
and the products it supplies to its customers are confidential,
and to enable the Company to perform those services and provide
those products, its customers and clients may furnish to the
Company confidential information concerning their affairs; (b)
the goodwill of the Company depends, among other things, upon its
keeping such services and information confidential, and
unauthorized disclosure of such information would irreparably
damage the Company; and (c) by reason of Employee's duties in
connection with employment by the Company, Employee may come into
possessions of information concerning the services performed and
products provided by the Company for its customer and clients,
whether or not Employee takes any direct part in or furnishes the
services and products. Accordingly, except as directed by the
Company, Employee will not at any time, during or after
employment disclose any such information or describe any such
services or products to any person, or permit any person to
examine or make copies of any reports or other documents prepared
by Employee or coming into Employee's possession by reason of
employment. Employee further agrees that all documents, papers,
memoranda and other matter in Employee's possession or control
that have to do in any way with the clients or customers of the
Company, and that came into Employee's possession or control by
reason of employment will be turned over to the Company upon
Employee's termination of employment.
4
<PAGE>
5-1-2. Survival. The restrictions and obligations in the
--------
preceding subparagraph 5-1-1 shall survive in perpetuity the
termination of this Agreement and the termination of Employee's
employment by the Company.
5-2. Company Property. Except as permitted by the Company in
----------------
furtherance of his duties under this Agreement, Employee agrees not to
retain or carry away from the premises of the Company any documents,
copies of documents, equipment or any other materials or matter of any
kind, including customer lists, which are the property of the Company.
Upon termination of employment with the Company for any reason,
Employee immediately shall turn over to the Company any and all policy
statements, documents, copies of documents, papers, memoranda,
equipment, and any other materials or matter which are in Employee's
possession or control and which are the property of the Company.
5-3. Developments-Trade Secrets. Employee acknowledges that all
--------------------------
inventions, discoveries, innovations, new technology, existing
technology or other developments (collectively called "Developments")
conceived or developed in whole or in part by Employee while employed
by the Company, and within one year thereafter, which Developments are
related in any way to the business of the Company , or to the business
of any client or customer of the Company, are and will be the
exclusive property of the Company, constitute trade secrets, and shall
be subject to the provisions of paragraph 5-1 of this Agreement.
Employee promptly will notify the Company of any such Developments.
Employee shall, when appropriate and upon request of the Company, at
the sole expense of the Company, actively assist the Company in
executing all papers and performing all other lawful acts which the
Company deems necessary or advisable for the securing of legal
protection for any such Developments, whether through patent,
copyright, or any other means. Employee further agrees that, upon
request of the Company, and at no charge, he will assign any rights
arising out of such Developments to the Company.
5-4. Papers, Drawings, and Other Documents. Employee agrees not
-------------------------------------
to make or permit to be made, except in pursuance of duties under the
terms of this Agreement and for the sole use and account of the
Company, any copies, abstracts, or summaries of any papers, drawings,
or any other documents of any kind which may come into his possession
and which relate or refer to the Company or its business. Employee
grants to the Company all rights to possession and all title in and to
any such papers, drawings, or other documents, or copies, abstracts,
or summaries thereof, which come into the possession of Employee
within the period of employment by the Company and which relate or
refer to the Company's business.
5
<PAGE>
5-5. Security Regulations. Employee agrees to abide by all
--------------------
security regulations adopted by the Company from time to time.
5-6. Covenant Not to Compete - During Employment. Employee
-------------------------------------------
agrees that during the term of this Agreement, he will not, (except
through the ownership of securities listed on a national securities
exchange), directly or indirectly, as a proprietor, officer, employee,
partner, stockholder, consultant, owner or otherwise, render services
to or participate in the affairs of any business which is competitive
with or substantially similar to the business of the Company.
5-7. Covenant Not to Compete - After Employment. It is agreed
------------------------------------------
that for a period of one year following termination, Employee will not
(except through the ownership of securities listed on a national
securities exchange), directly or indirectly, as proprietor, officer,
employee, partner, stockholder, consultant, owner or otherwise,
compete with Company by offering to Company's customers or potential
customers products or services described in Paragraph 4, above.
6. Death or Disability of Employee. Employee's employment shall terminate
-------------------------------
immediately upon his death or in the event Employee becomes physically or
mentally disabled so as to become unable for 6 months during any 12-month
period, to perform his duties hereunder.
7. Termination for Cause. Company reserves the right to terminate
---------------------
Employee's employment under this Agreement immediately if any of the following
occur:
7-1. Employee commits a felony or any other act abhorrent to
the community which a reasonable person would consider materially
damaging to the reputation of Company or its successors or assigns;
7.2. Employee materially fails to perform his obligations in
accordance with the terms and conditions of this Agreement.
8. Termination for Reasons of Employee. Employee may terminate this
-----------------------------------
Agreement without cause by providing 30 days written notice to Company.
9. Assignment. This Agreement is personal in nature and neither of the
----------
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder.
6
<PAGE>
10. Notice. All notices, demands and other communications hereunder shall
------
be deemed to have been duly given, if delivered by hand or mailed, certified or
registered mail with postage prepaid:
If to Employee, address to:
Richard H. Bard
222 Greystone Road
Evergreen, Colorado 80439
If to Company, to:
Optical Security Group, Inc.
Suite 920
535 16th Street
Denver, Colorado 80202
or to such other address as either party may designate by written notice to the
other.
11. Successors and Assigns.
----------------------
11.1. Subject to the provisions of paragraph 9, above, the
provisions of this Agreement shall inure to the benefit of, and be
binding upon, Company or any corporation or other entity (a) to which
Company may transfer all or substantially all it assets and business,
or (b) which shall manage the business and to which Company may assign
this Agreement, in which case Company, as used herein, shall mean such
corporation or other entity.
11.2. If the Corporation should merge, consolidate or effect a
share-for-share exchange with another company (and the Corporation
will not be the surviving entity) or should the Corporation sell all
or substantially all of its assets, then immediately prior to any such
transaction, all options set forth in Exhibit A shall vest and be
immediately exercisable.
12. Buy-Out By Company. If Employer terminates Employee's employment
------------------
hereunder prior to the expiration of the term of this Agreement as provided in
Section 2 above, Employee, or if Employee terminates his employment hereunder
prior to the expiration of the term of this Agreement because of any willful and
material breach of this Agreement or any amendment, supplement, or modification
hereof by Employer, Employee shall be entitled to a "Buy-Out" of this contract
unless such termination is pursuant to paragraph 6 or 7 hereof. Pursuant to a
buy-out by Company, Employee shall receive One Hundred and Fifty Percent (150% )
of the then present value of his remaining compensation hereunder , as
determined by the Company's outside accountant, no later than thirty (30) days
following Employees termination, applying generally accepted accounting
principles. The determination of the Company's outside accountant shall be
conclusive upon the parties. No other buy-out agreement
7
<PAGE>
shall be valid unless in writing and duly executed by both parties. The parties
further agree that the provisions of this Agreement may not be waived, except as
herein set forth.
It is expressly agreed that the above buy-out is not and does not
constitute a penalty; rather, damages under the specified circumstance are
difficult and not capable of being measured and this provision is an essential
part of this Employment Agreement. The above arrangement constitutes the
parties' agreement as to liquidated damages for the circumstances set forth.
13. Entire Agreement. This Agreement constitutes the full and complete
----------------
understanding and agreement of the parties, supersedes all prior understandings
and agreements as to the employment of Employee, and cannot be amended, changed,
modified or terminated without the consent, in writing, of the parties hereto.
This Agreement does not limit, or in any other way, effect the rights or
benefits granted to the parties in any other agreements between the parties
including, but not limited to, the grant of any stock options pursuant to stock
option agreements or agreements connected with the Employee's services as a
director of the Corporation.
14. Nonwaiver. The waiver of either party of a breach of any term of this
---------
Agreement shall not operate or be construed as a waiver of any subsequent breach
thereof.
15. Construction. Nothing in this Agreement contained shall be construed
------------
as to require the commission of any act contrary to law, and whereof there is
any conflict between any provision of this Agreement in any present or future
statute, law, ordinance, or regulation contrary to which the parties have no
legal right to contract, the latter shall prevail, but in such event, the
provision of this Agreement effected shall be curtailed and limited only to the
extent necessary to bring it within the requirement of the law.
16. Governing Law - Venue. This Agreement shall be governed by, and
---------------------
construed in accordance with, the laws of the State of Colorado. Venue for any
action brought in connection with this Agreement shall be proper in the Counties
of Denver or Arapahoe, State of Colorado.
17. Litigation Expenses. If for any reason a dispute between Company and
-------------------
Employee results in litigation, the prevailing party shall be entitled to an
award of reasonable attorneys' fees, costs, and expenses.
18. Remedies for Breach. The parties acknowledge that breach of this
-------------------
Agreement by Employee will result in immediate, substantial, and irreparable
harm to the Company, and there is no adequate remedy at law for such violation.
The parties therefore agree that the Company shall have, in addition to any
remedy available to the Company at law or in equity, the right to enforce the
terms of this agreement by the remedy of specific performance or injunction upon
proper application to a court of competent jurisdiction.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as specified above.
OPTICAL SECURITY GROUP, INC.
ATTEST:
By: /s/ Richard H. Bard
--------------------------
Richard H. Bard
Chief Executive Officer
/s/ Catherine M. Gotwaet
- ------------------------
Secretary
EMPLOYEE
By: /s/ Richard H. Bard
--------------------------
Richard H. Bard
9
<PAGE>
EXHIBIT A
Stock Options:
Options granted to Employee through March 31, 1996:
Incentive Stock Option Plan
EXERCISE
VESTED UNVESTED PRICE VESTING DATE EXPIRATION DATE
33,334 $1.10 09/17/94 09/17/98
33,333 $1.10 09/17/95 09/17/98
33,333 $1.10 09/17/96 09/17/98
66,667 $4.45 02/17/96 02/16/00
66,667 $4.45 02/17/97 02/16/00
66,666 $4.45 02/17/98 02/16/00
Nonqualified Stock Option Plan
100,000 $2.85 02/17/95 02/16/00
300,000 $5.75 03/19/96 03/18/01
10
<PAGE>
EXHIBIT 10.1.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Agreement is made effective April 1, 1996 by and through Optical
Security Group, Inc. (the "Company") and Yoram Curiel ("CURIEL") and is an
amendment to the Employment Agreement ("Agreement") by and between the Company
and Curiel effective April 1, 1995.
The Employment Agreement shall be modified as follows:
1. Compensation. Section 3-1 is hereby modified to read:
------------
Salary. As compensation for services, Employee shall be paid a
------
salary as follows:
$5,000.00 per month from April 1, 1995 through December 31, 1995;
$4,000.00 per month from January 1, 1996 through March 31, 1996;
$5,000.00 per month from April 1, 1996 through March 31, 1997;
$3,000.00 per month from April 1, 1997 through June 30, 1997;
2. Exercise of Options. It is hereby understood and agreed that Paragraph
-------------------
6 is canceled and deleted from said Agreement.
3. Sale of Stock. Paragraph 7 is hereby modified to read:
-------------
To the extent permitted by applicable law and regulations, the Company
shall assist Employee or his affiliates with the orderly sale of up to
150,000 shares of common stock of the Company beneficially now held by
Employee or his affiliates.
4. Stock Redemption. It is hereby understood and agreed that Paragraph 8
----------------
is canceled and deleted from said Agreement.
OPTICAL SECURITY GROUP, INC.
ATTEST:
/s/ Catherine M. Gotwalt By: /s/ Richard H. Bard
- ------------------------ ------------------------------
Secretary Richard H. Bard, President
EMPLOYEE
By: /s/ Yoram Curiel
------------------------------
Yoram Curiel
<PAGE>
EXHIBIT 10.6.1
EMPLOYMENT TERMINATION,
CONSULTING, AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT TERMINATION, CONSULTING, AND NON-COMPETITION
AGREEMENT is made and entered this 7th day of February, 1996,
---
effective as of November 1, 1995, by and between Optical Security
Group, Inc. ("OpSec Inc."), Optical Security Industries Plc ("OpSec
Plc"), and Peter H. L. Woodd ("Woodd").
RECITALS
A. OpSec Plc (formerly known as ELEF PLC) is a wholly owned subsidiary of
OpSec Inc. (formerly known as TSL Incorporated).
B. By a Contract of Employment ("Contract of Employment") executed as of
May 1, 1994, Woodd's terms of employment as an employee of OpSec Plc were
varied.
C. The Contract of Employment was part of a transaction in which OpSec
Inc. acquired all of the shares of ELEF pursuant to a Stock Purchase Agreement
executed as or May 1, 1994, between Woodd and OpSec Inc. Unless otherwise
stated, "OpSec" shall refer collectively to OpSec Inc. and all of its
subsidiaries.
D. Since June of 1994, Woodd has been a member of the board of directors
of OpSec Inc., has been managing director of OpSec Plc, and has served as an
officer and member of the boards of directors of certain of OpSec Inc.'s other
subsidiaries.
E. During April of 1995, Woodd's terms of employment were varied.
F. The parties have agreed that Woodd's employment relationship with
OpSec and specifically OpSec Plc shall be terminated and replaced with this
agreement.
THEREFORE, in consideration of the Recitals, the mutual promises and
undertakings set forth below, and other good and valuable consideration, the
receipt and sufficiency of which is acknowledged, the parties, intending to be
bound, agree as follows:
1. Employment Termination. The Contract of Employment, including Woodd's
----------------------
employment relationship with OpSec Inc., OpSec Plc, and any and all of its
subsidiaries is terminated effective November 1, 1995. Except as otherwise
provided in this agreement, any and all rights Woodd has or has had to
employment benefits and perquisites of employment are terminated as of November
1, 1995.
2. Consulting Arrangement. OpSec hereby engages Woodd as a consultant, to
----------------------
provide such services, if any, as Woodd and OpSec shall mutually agree, for a
period of six (6) months after November 1, 1995, in connection with (a)
assisting OpSec in the orderly
<PAGE>
transition to other employees and officers of OpSec of his relationships with
OpSec suppliers, customers and others, and (b) maintaining and enhancing OpSec's
relationships with its suppliers, customers and others. Woodd will report
directly to Richard H. Bard, OpSec's Chief Executive Officer.
3. Trade Secrets and Non-Competition. In order to protect the goodwill,
---------------------------------
trade secrets and trade connections of OpSec, Woodd covenants that he will not:
a. At any time disclose or make use of OpSec's trade secrets and
other confidential information which he may have acquired during the period
of his employment relating to the business, products (whether in
development or developed), processes, procedures, financial affairs, future
plans, contracts or terms of contracts, technical data, equipment, staff or
requirements of OpSec, whether or not that information was originated by
Woodd or disclosed to him intentionally or unintentionally by OpSec in the
course of his employment or otherwise, and whether or not he was authorized
to receive such information PROVIDED THAT the provisions of this
subparagraph shall cease to apply to information which enters the public
domain other than directly or indirectly by reason of the default of Woodd.
b. During the period of sixty (60) months commencing November 1,
1995, carry on, assist in carrying on or be engaged or otherwise interested
in, whether as a shareholder (loan creditor), director, consultant,
employee or self-employed person or in any other capacity, any business
which competes with any business carried on by OpSec at November 1, 1995.
This provision shall not prohibit Woodd from being the holder of or being
beneficially interested in shares or securities which are quoted on a Stock
Exchange or from carrying on, assisting in carrying on or being engaged or
otherwise interested in any business that does not utilize holographic
products including laser, dot matrix, or computer generated holography
techniques, or lenticular or dimensional printing techniques in the goods
or services it provides.
c. During the period of sixty (60) months commencing November 1,
1995, directly or indirectly solicit or seek to procure orders for any
goods or services that are competitive with goods or services offered by
OpSec at November 1, 1995, from any person, firm or company who or which
was a client or customer of OpSec during the period of his employment. This
provision shall not prohibit Woodd from soliciting or seeking to procure
orders for any goods or services that do not utilize holographic products
including laser, dot matrix, or computer generated holography techniques,
or lenticular or dimensional printing techniques.
2
<PAGE>
d. During the period of sixty (60) months commencing November 1,
1995, either on his own account or for any other person, firm or company,
solicit the services of, or endeavor to entice away from OpSec, any
director, employee or consultant of OpSec (whether or not such a person
would commit any breach of his contract of employment or engagement by
reason of leaving the service of OpSec) nor shall he knowingly employ, aid
or assist in, or procure the employment by any other person, firm or
company of any such person.
e. During the period of sixty (60) months commencing with November
1, 1995, directly or indirectly, do any business with or have any dealings
with any person, firm or company who or which was a client or customer of
OpSec during his employment with OpSec provided always that nothing
contained in this subparagraph shall be deemed to prohibit activities which
are not in competition with any business carried on by OpSec at the date of
this agreement, or which relate to goods or services that do not utilize
holographic products including laser, dot matrix, or computer generated
holography techniques, or lenticular or dimensional printing techniques.
f. During the period of sixty (60) months commencing with November
1, 1995, either on his own account or for any other person, firm or
company, directly or indirectly interfere with or attempt to interfere with
the business or employees of OpSec, or the relations subsisting between
OpSec and any person, firm or company who or which was at the date of this
agreement a client, customer, supplier, agent or distributor of or for
OpSec provided always that nothing contained in this subparagraph shall be
deemed to prohibit activities which are not in competition with any
business carried on by OpSec at the date of this agreement or which relate
to goods or services that do not utilize holographic products including
laser, dot matrix, or computer generated holography techniques, or
lenticular or dimensional printing techniques.
PROVIDED HOWEVER, that on April 30, 1997, Woodd shall be released
from the obligations set forth in paragraphs 3 (b), (c), (d), (e),
and (f), above, except to the extent that OpSec is able to prove
that non-compliance by Woodd with any of such obligations after
that date has or would have a material adverse effect on OpSec or
any of its subsidiaries.
Each of the parties hereto hereby acknowledges that the duration,
extent and application of the restrictions set forth above are
reasonable and no greater than necessary for the protection of the
goodwill, trade secrets and trade connections of OpSec, and that if
any of the restrictions contained above shall be found to be void
but would be valid if some part thereof were deleted, such
3
<PAGE>
restriction shall apply with such modifications as may be necessary
to make the restriction valid and effective.
The parties declare that the benefit of each of the covenants and
obligations on Woodd's part contained in each of the subparagraphs
of this paragraph 3 shall be deemed to be separate, distinct and
severable from each other and enforceable by OpSec accordingly.
4. Proprietary Materials. Woodd represents and warrants to
---------------------
OpSec that he has no OpSec proprietary materials in his possession,
including, but not limited to, OpSec customer lists, products,
product descriptions and specifications, drawings, accounting
information, contracts, contract information, OpSec credit cards,
office keys, equipment and supplies.
5. Compensation.
------------
a. Consulting Payments. OpSec (including OpSec Inc.
-------------------
and OpSec Plc) jointly and severally agree to cause to be pay
to Woodd $8,203.00 ( being $15,000.00 less $6,797.00 Woodd
acknowledges he already has received) in consideration for his
undertaking the obligations set forth in paragraph 2 above.
Said $8,203.00 shall be paid on or before February 9, 1996.
The parties declare that Woodd's entitlement to the said sum
becomes accrued and vested on the execution of this agreement
and will not be affected in any way by any subsequent event
whatsoever, including without limitation, death or incapacity
of Woodd, failure by Woodd to provide any services requested
by OpSec, or alleged or actual breach by Woodd of any term of
this agreement other than his breach of any covenant contained
in paragraph 3 above.
b. Non-competition Payment. OpSec (including OpSec
-----------------------
Inc. and OpSec Plc) jointly and severally agrees to pay Woodd
$135,000.00 (without set-off or counterclaim except as may
arise from his breach of any covenant contained in paragraph
3 above) as full payment for his non-competition covenants
contained in paragraph 3. Said $135,000.00 shall be paid in
one lump sum on or before February 9, 1996.
c. Pension Loan. OpSec (including OpSec Inc. and OpSec
------------
Plc) jointly and severally shall cause OpSec Plc to repay its
loan from Woodd's pension plan on or before February 9, 1996.
d. Health Insurance. OpSec (including OpSec Inc. and
----------------
OpSec Plc) jointly and severally agrees to cause Woodd's
health insurance plan, covering Woodd, his wife and his
children provided through Blue Cross, to continue and remain
in force through the earlier of the date Woodd withdraws from
the plan or April 30, 1997. OpSec Inc. and OpSec Plc jointly
4
<PAGE>
and severally agree to pay the premiums to maintain this plan
in force in a monthly amount not to exceed its monthly cost as
of November 1, 1995. Woodd will execute such reasonable
documents as OpSec may request, including but not limited to
COBRA forms, to effectuate the purposes of this subparagraph.
e. School Fees. OpSec (including OpSec Inc. and OpSec
-----------
Plc) jointly and severally agree to assume responsibility for
and indemnify Woodd against all outstanding liabilities in
respect of fees owed by Woodd, if any, to Ruxton School.
Woodd agrees to use all reasonable endeavors to assist OpSec
in disputing or settling any such liabilities provided that
such assistance shall in no way limit the liabilities assumed
by OpSec under this paragraph.
f. Expenses. Subject to sub-paragraph (e) above, OpSec
--------
(including OpSec Inc. and OpSec Plc) jointly and severally
agrees to pay to Woodd the sum of $30,000.00 on or before
February 9, 1996, in full and final satisfaction of any and
all claims Woodd has, or might have, in respect of
reimbursement of relocation expenses incurred by Woodd at the
request of OpSec prior to the termination of his employment
and legal fees, costs, and expenses incurred in negotiating
this agreement. In addition, OpSec (including OpSec Inc. and
OpSec Plc) jointly and severally agrees to reimburse to Woodd
any expenses reasonably and properly incurred by Woodd in the
course of providing consulting services to OpSec hereunder,
but in no event shall this sentence entitle Woodd to any
payment in respect to expenses incurred by Woodd prior to
termination of his employment. Woodd shall provide to OpSec
an itemized list of expenses actually incurred during the
period of his consulting services hereunder no later than
April 30, 1996. OpSec shall reimburse such expenses no later
than seven (7) business days after receiving Woodd's
itemization.
g. Acceleration. All sums from time to time payable by
------------
OpSec Inc. and/or OpSec Plc under the terms of this agreement
shall immediately be accelerated and be due if any of the
following events shall occur:
(i) Failure by OpSec Inc. and OpSec Plc to pay any
sum due hereunder on its due date as defined below;
(ii) Richard H. Bard ceasing to be Chief Executive
Officer of OpSec;
(iii) any steps being taken in relation to
bankruptcy, liquidation, receivership, administrative
receivership, administration, composition with creditors
or insolvency of OpSec Inc. or any of its subsidiaries or
5
<PAGE>
any analogous event under the laws of any relevant
jurisdiction; or,
(iv) OpSec Inc. (or any of its present subsidiaries)
coming under the control, direct or indirect, or any
person or entity that does not presently control the
same, PROVIDED THAT this subparagraph shall not apply to
any internal OpSec reorganization that does not involve
any change of ultimate control;
and, upon the occurrence of any of the foregoing events
described in subparagraphs 5(g)(i) or 5(g)(iii), Woodd shall
be released from all further obligations hereunder.
h. Method of Payment. All sums payable to Woodd
-----------------
hereunder shall be paid by check mailed to Woodd or to such
bank in the USA or elsewhere, or if requested by Woodd, by
wire transfer, as Woodd shall designate by informing OpSec in
writing.
i. Withholding - Taxes. OpSec will not withhold any
-------------------
amounts for taxes from the payments provided for in this
paragraph 5. Woodd agrees that it is his responsibility to
report all such payments properly to the relevant taxing
authorities, and he shall indemnify and hold OpSec harmless
from any and all applicable tax withholding requirements.
6. OpSec Shares, Warrants and Options. Woodd shall retain
----------------------------------
all of his current OpSec warrants, and options granted to and
vested in him prior to November 1, 1995, exercisable in accordance
with their terms. OpSec hereby acknowledges receipt of requests
dated November 16, 1995, from Woodd, Charlotte C. Woodd, Woodd and
Charlotte C. Woodd (jointly), the Reredos Corporations "Lit A/C"
and "FT A/C" (collectively "Requesting Parties"), all as holders of
OpSec common stock, to register all remaining shares held by each
such holder. Woodd agrees on behalf of the Requesting Parties that
such registration shall not be necessary prior to May 1, 1996, and
shall not then be required if the Requesting Parties are as able to
freely sell or otherwise dispose of their shares without
registration as with registration.
7. Directorship and Officer Resignation. By his signature
------------------------------------
to this agreement, Woodd resigns as an officer and director of
OpSec and each of its subsidiaries effective as of November 1,
1995. OpSec shall hold Woodd indemnified from any liabilities
Woodd may suffer as a result of his presence on the Board of
Directors of any OpSec entity from November 1, 1995, to the date
this agreement actually is signed. Such indemnity shall not extend
to violations of law knowingly committed by Woodd.
8. Mutual Release. Except as expressly provided herein,
--------------
execution of this agreement constitutes a full and final release,
6
<PAGE>
accord, and satisfaction of any and all claims, demands, and
obligations, including attorneys fees, costs and disbursements,
which (a) Woodd may have against OpSec, its affiliates,
subsidiaries, directors, officers, employees, agents, servants, and
legal representatives, and which (b) OpSec, its affiliates,
subsidiaries, directors, officers, and legal representatives may
have against Woodd, arising in any manner from Woodd's employment
with OpSec or his status as an officer and member of OpSec's board
of directors. These releases pertain to any and all matters from
the beginning of Woodd's relationship with OpSec's board of
directors. These releases pertain to any and all matters from the
beginning of Woodd's relationship with OpSec to the date of this
agreement, liquidated or unliquidated, matured or unmatured, known
or unknown, of any kind or nature. However, nothing herein shall
affect Woodd's rights in respect of his OpSec Inc. shares, warrants
and options including, without limitation, the registration rights
set forth in the Stock Purchase Agreement.
9. Miscellaneous.
-------------
a. Assignment. Neither this agreement nor any interest
----------
herein, or claim hereunder is assignable or transferable by
either party.
b. Succession. Subject to paragraph 9(a), this
----------
agreement shall be binding upon, and inure to the benefit of,
the parties, their heirs, successors, and legal
representatives.
c. Construction. The titles appearing herein are used
------------
for purpose of convenience only and shall in no way change the
meaning of this agreement.
d. Governing Law. This agreement shall be governed by
-------------
and construed under the laws of the state of Colorado. The
venue for any proceeding brought to enforce the terms of this
agreement shall be set in the City and County of Denver, state
of Colorado, and each party consents to the personal
jurisdiction of the courts sitting in such venue.
e. Entireties. This agreement constitutes the entire
----------
agreement between the parties. No modification of this
agreement shall be binding unless in writing and signed by
both parties.
f. Severability. If any provision of this agreement is
------------
found to be illegal, or unenforceable for any reason
whatsoever, the agreement shall be interpreted and construed
without reference to such provision, and the balance of the
agreement shall remain in full force and effect.
7
<PAGE>
g. Cooperation. The parties agree to execute such
-----------
additional documents and take such action as may be required
to effectuate the purposes of this agreement.
h. Remedies - Attorneys Fees. If either party obtains
-------------------------
or engages an attorney or attorneys for the purpose of
enforcing its rights under the terms of this agreement for
negotiation, litigation, arbitration, or other alternative
dispute resolution procedure, the substantially prevailing
party shall be entitled to recover its attorneys fees, costs,
and disbursements in addition to any other relief sought or
awarded.
i. Notices. Any notices provided or required under the
-------
terms of this agreement shall be effective immediately when
provided by facsimile transmission or personal delivery, or
three days after being placed in the United States mail with
postage prepaid, and addressed as follows:
If to OpSec,
Optical Security Group, Inc.
534 16th Street
Suite 920
Denver, Colorado 80202
Attention: Richard H. Bard, CEO
Fax: (303) 534-1010
with a copy to
Charles H. Jacobs, Esq.
950 South Cherry Street
Suite 900
Denver, Colorado 80222
Fax: (303) 753-9997
If to Woodd,
Mr. Peter H. L. Woodd
339 Stablers Church Road
Parkton, Maryland 21120
with a copy to,
Ian Fagelson, Esq.
Warner Cranston, Solicitors
Pickfords Wharf, Clink Street
London SE1 9DG
Great Britain
Fax: 44-171-403-4221
8
<PAGE>
j. Time. Time is of the essence of this agreement.
----
k. Counterparts. This agreement may be executed in
------------
counterparts without affecting its validity.
IN WITNESS WHEREOF, the parties have executed this Employment
Termination, Consulting, and Non-Competition Agreement on the date
first above written, effective as of November 1, 1995.
OPTICAL SECURITY GROUP, INC.,
OPTICAL SECURITY INDUSTRIES, PLC
AND ALL SUBSIDIARIES OF EACH
By: /s/ Richard H. Bard By: /s/ Peter H.L. Woodd
-------------------- --------------------
Richard H. Bard, CEO Peter H.L. Woodd
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
balance sheet and statement of operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> APR-01-1995 APR-01-1994
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 3,231,823 483,025
<SECURITIES> 0 0
<RECEIVABLES> 1,724,167 1,320,781
<ALLOWANCES> 63,786 20,773
<INVENTORY> 421,759 342,065
<CURRENT-ASSETS> 5,373,745 2,182,535
<PP&E> 780,108 562,675
<DEPRECIATION> 201,106 109,208
<TOTAL-ASSETS> 8,063,729 4,748,124
<CURRENT-LIABILITIES> 815,453 1,075,249
<BONDS> 13,317 1,531,019
<COMMON> 15,173 15,036
0 0
67 0
<OTHER-SE> 7,187,419 2,126,820
<TOTAL-LIABILITY-AND-EQUITY> 8,063,729 4,748,124
<SALES> 8,953,740 3,656,432
<TOTAL-REVENUES> 8,953,740 3,656,432
<CGS> 6,045,094 1,834,992
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,918,119 2,768,597
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 64,699 167,369
<INCOME-PRETAX> 0 0
<INCOME-TAX> (50,697) 69,593
<INCOME-CONTINUING> 2,692 (1,179,626)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,692 (1,179,626)
<EPS-PRIMARY> (.01) (.44)
<EPS-DILUTED> (.01) (.44)
</TABLE>
