<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Period Ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-17531
OPTICAL SECURITY GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1094032
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
535 16th Street, Suite 920
Denver Colorado 80202
(Address of Principal Executive Offices)
(303) 534-4500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding twelve months and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No .
APPLICABLE ONLY TO CORPORATE ISSUES:
Class of Stock No. of Shares Outstanding Date
Common 5,019,283 June 30, 1997
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30
1997 1996
--------------------------
ASSETS
Current assets:
Cash $1,512,351 $3,638,388
Accounts receivable, less allowance
of $88,648 and $18,260 at the quarter
ended June 30, 1997 and 1996,
respectively 4,673,696 1,872,091
Inventory 1,396,645 437,718
Prepaid expenses 382,309 94,435
--------------------------
Total current assets 7,965,001 6,042,632
Property and equipment, net 1,764,196 550,546
Other assets:
Patents and patent applications, net of
accumulated amortization of $95,610 and
$70,226 at the quarter ended June 30, 1997
and 1996, respectively 325,455 289,455
Goodwill, net of accumulated amortization of
$455,108 and $145,221 at the quarter ended
June 30, 1997 and 1996, respectively 6,553,983 1,195,284
License and non-compete agreements, net of
accumulated amortization of $185,176 and
$103,607 at the quarter ended June 30, 1997
and 1996, respectively 633,516 566,750
Deposits and other 367,407 36,638
--------------------------
Total assets 17,609,558 8,681,305
==========================
See accompanying notes
1 of 18
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30
1997 1996
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,294,491 $ 278,704
Accrued expenses 643,508 472,126
Current portion of capital lease obligations 6,000 40,421
Notes payable 613,729 -
--------------------------
Total current liabilities 3,557,728 791,251
Deferred tax liability 25,840 32,300
Capital lease obligations 4,070 10,050
Stockholders' equity:
Voting convertible preferred stock, $0.01 par value
2,500,000 shares authorized; 1,793 and 7,468
Series B shares issued and outstanding at
June 30, 1997 and 1996, respectively
(preference in liquidation $1,954,370) 18 75
Common stock $0.05 par value:
15,000,000 shares authorized; 5,019,283 and
3,034,552 shares issued and outstanding at
June 30, 1997 and 1996, respectively 25,096 15,173
Additional paid-in capital 20,133,204 14,215,824
Foreign currency translation adjustment 99,594 (5,471)
Accumulated deficit (6,235,992) (6,377,897)
--------------------------
Total stockholders' equity 14,021,920 7,847,704
--------------------------
Total liabilities and stockholders' equity $17,609,558 $8,681,305
==========================
See accompanying notes
2 of 18
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
(Unaudited)
Quarter Ended June 30
1997 1996
--------------------------------
Revenues $5,420,881 $2,326,574
Cost of goods sold 3,809,524 1,504,461
--------------------------------
Gross margin 1,611,357 822,113
Operating expenses:
Salaries and related costs 641,975 420,502
Depreciation 49,886 30,977
Amortization 137,857 34,816
Other operating expenses 545,177 267,002
--------------------------------
Total operating expenses 1,374,895 753,297
--------------------------------
Income from operations 236,462 68,816
Other income (expenses):
Interest expense (13,431) (3,740)
Interest income 5,663 41,435
Foreign currency transaction loss (3,445) (3,615)
--------------------------------
Total other income (expense) (11,213) 34,080
--------------------------------
Income before income taxes 225,249 102,896
Income tax (expense) benefit (3,189) -
--------------------------------
Net income 222,060 $ 102,896
================================
Dividends on preferred stock 35,860 145,071
--------------------------------
Net income (loss) applicable to common stock $ 186,200 $ (42,175)
================================
Net income (loss) per share of common stock:
Primary $ .04 $ (.01)
================================
Fully Diluted $ .03
===========
Weighted average number of shares outstanding:
Primary 5,019,283 3,034,552
================================
Fully Diluted 6,186,850
===========
See accompanying notes
3 of 18
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended June 30
1997 1996
---------------------------
OPERATING ACTIVITIES
Net income $ 222,060 $ 102,896
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 187,743 65,793
Deferred tax expense (benefit) - -
Change in operating assets and liabilities:
Accounts receivable 1,549,274 (211,708)
Inventory 267,607 (15,958)
Prepaid expenses (129,439) (34,727)
Accounts payable and accrued expenses (1,158,048) (24,204)
---------------------------
Net cash provided (used) in operating activities 939,197 (117,908)
INVESTING ACTIVITIES
Patent application costs (15,984) (21,564)
Property and equipment (870,308) (2,518)
Licensing agreements (432) -
Other deposits and intangible assets (220,487) 9,671
---------------------------
Net cash used in investing activities (1,107,211) (14,411)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 20,222 -
Proceeds from issuance of preferred stock, net - 700,333
Proceeds from line of credit 613,729 -
Payments on notes and capital lease obligations (1,012,013) (3,265)
Payments of preferred stock dividends (35,860) (145,071)
Cost of financing (18,013) -
---------------------------
Net cash provided (used) by financing activities (431,935) 551,997
Effect of exchange rate changes on cash flows 48,212 (13,113)
---------------------------
Net increase (decrease) in cash (551,737) 406,565
Cash, beginning of period 2,064,088 3,231,823
---------------------------
Cash, end of period $1,512,351 $3,638,388
===========================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITIES
Interest paid 13,431 3,740
Income taxes paid 3,189 -
See accompanying notes
4 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Optical Security Group, Inc. (the "Company"), is a technology company which,
through its principal subsidiaries, Optical Security Industries, Inc. ("OpSec
U.S."), Optical Security Industries International, Plc ("OpSec International"),
Dimensional Printing Industries, Inc. ("DPI") and OpSec Pasternak & Partner GmbH
& Co., KG ("OpSec Pasternak") 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 s principal markets are the United States and Western Europe.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FOREIGN CURRENCY
Foreign currency denominated assets and liabilities are translated into U.S.
dollar equivalents based on exchange rates prevailing at the end of each year.
Revenues and expenses are translated at average exchange rates during the year.
Aggregate foreign exchange gains and losses arising from the translation of
foreign currency denominated assets and liabilities are included in
stockholders' equity, and realized gains and losses are reflected in income. The
Company conducts business with various foreign entities. As such, the Company s
future profitability could be affected in the near term by fluctuating exchange
rates.
5 of 18
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Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company grants credit to customers in the ordinary course of business
primarily in the United States and Western Europe. The Company periodically
performs credit analyses and monitors customers' financial condition in order to
reduce credit risk. Annual credit losses have been minimal and have consistently
been within management's expectations.
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and notes payable
have fair values which approximate their recorded values as the financial
instruments are either short term in nature or carry interest rates which
approximate market rates.
PROPERTY AND EQUIPMENT
Property and equipment, which are stated at cost, 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:
YEARS
-------
Leasehold improvements 2-12
Computer equipment 5
Other equipment and furniture 5-7
Production equipment 5-10
Building 40
Vehicles 4
Property and equipment at June 30, 1997 consist of:
Land and building $ 709,488
Leasehold improvements 129,249
Computer equipment 264,247
Other equipment and furniture 186,669
Production equipment 813,145
Vehicles 88,126
----------
2,190,924
Less accumulated depreciation (426,728)
----------
1,764,196
==========
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 June 30, 1997 is associated with the acquisition of
OpSec Pasternak and the purchase of the minority interest in DPI in fiscal 1997,
and the acquisition of ELEF, Plc during fiscal year 1995.
6 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, and a license that allows the Company exclusive
rights to employ technology developed by others in its products.
Goodwill is being amortized on a straight-line basis over lives of 15 to 20
years. License agreements are being amortized over lives of 8 to 10 years.
Goodwill and license agreements are reviewed for impairment whenever events
indicate their carrying amount may not be recoverable. When the Company believes
that those assets may not be recoverable, it estimates the future cash flows to
be generated by the business associated with those assets. In the event that the
sum of the cash flows is less than the carrying amount of those assets, the
assets would be written down to their fair value, which is normally measured by
discounting estimated future cash flows.
INVENTORY
Inventory is stated at the lower of cost or market using the first-in, first-out
(FIFO) method. Inventory on hand consists principally of raw materials used in
embossing polyester films and foils and material used in dimensional printing.
Additionally, at year-end, a portion of the inventory consisted of work-in-
process and finished goods.
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
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" which is required to
be adopted on March 31, 1998. The Company has adopted the required method to
compute earnings per share and has restated all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement of Financial Accounting
Standard No. 128 on prior periods is not expected to be material.
7 of 18
<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 earnings or loss per share of common stock, after preferred stock
dividend requirements, for the periods ended June 30, 1997 and 1996, are based
on weighted average outstanding shares. Fully diluted earnings per share for the
period ended June 30, 1997 include common stock equivalents from stock options
and warrants, and the equivalent common shares that would result from the
conversion of preferred stock. Fully diluted loss per share for the period ended
June 30, 1996 was not computed as the effect of common stock equivalents is
antidilutive. Earnings and loss per share were computed for the current and
prior period under the Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" adopted by the Financial Accounting Standards Board in
February 1997.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred.
RECLASSIFICATIONS
Certain amounts in the June 30, 1996 financial statements were reclassified to
conform with the June 30, 1997 presentation.
2. BUSINESS COMBINATIONS
On December 10, 1996, the Company acquired 100% of the stock of OpSec Pasternak
& Partner, GmbH, a corporation based in Germany. The purchase price, net of
acquisition costs, was approximately $5 million, including 466,668 common shares
of the Company valued at $2.8 million, cash of $1.2 million, and a promissory
note bearing interest at 6% for $1 million. The acquisition resulted in goodwill
of $5,017,918. OpSec Pasternak had previously operated as an independent broker
selling the Company's dimensional printed products in Europe.
During fiscal 1997, the Company formed Dimensional Printing Industries, LLC to
manufacture dimensional printed products. DPI was formed in September 1996, with
the Company owning a 51% membership interest. The Company purchased the other
49% minority interest in two transactions before year end for a total cost of
$650,668, including all related acquisition costs, which have been recorded as
goodwill. DPI was converted to a corporation subsequent to year-end.
3. 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
8 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
Preferred Series A shares in exchange for the cancellation of $1.25 million of
Convertible Subordinated Secured Notes.
4. STOCKHOLDERS' EQUITY
Effective March 27, 1997, the Company completed a financing arrangement with a
group of individual investors, including officers and directors, and with
various institutional investors in which 526,899 common shares were issued at
$6.00 per share. The private placement resulted in total proceeds, net of
offering costs, of $3,128,268.
The Company also completed by March 15, 1997, the conversion of 5,675 shares of
Series B 8% Cumulative Convertible Exchangeable Preferred Voting Stock ("Series
B Shares") into common stock. The Company issued a total of 945,833 common
shares in the conversion. Warrants for 472,916 common shares exercisable at
$6.00 per share were also issued to those Series B shareholders electing to
convert early. The conversion included Series B Shares held by officers and
directors of the Company. A total of 400,000 common shares and 200,000 warrants
were issued to these related parties.
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 total proceeds of $4,491,036, 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 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
anniversary, $1,090
On or after the third anniversary date but
prior to the fourth anniversary date, 1,075
On or after the fourth anniversary date but
prior to the fifth anniversary date, 1,060
On or after the fifth anniversary date but
prior to the sixth anniversary date, 1,040
On or after the sixth anniversary date but
prior to the seventh anniversary date, 1,020
On or after the seventh anniversary date. 1,000
</TABLE>
9 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The Company is restricted from paying dividends on its common shares pursuant to
the terms of its Preferred Series B shares. No dividends or other payments can
be declared and paid on the common stock unless the Company also declares and
pays dividends on the shares of common stock issuable upon conversion of the
Series B shares and unless there are no accrued and unpaid dividends on the
Series B shares. On June 30, 1997, the cumulative unpaid dividend on the Series
B Shares of $35,860 was declared and subsequently paid on July 2, 1997. The
preferred dividend scheduled for fiscal 1998 on the reduced number of
outstanding Series B Shares will be $143,440.
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 at the time of termination.
Below is a summary of common stock reserved by the Company at June 30, 1997 for
issuance upon the conversion of preferred stock and the exercise of the various
options and warrants:
Series B preferred stock 298,833
Stock option plans 2,481,413
Warrants 1,082,765
---------
3,863,011
=========
5. STOCK OPTION PLANS AND STOCK WARRANTS
The Company has an Incentive Stock Option Plan ("ISOP") under which 2,000,000
shares of common stock are reserved for issuance. Under the ISOP 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 ("NSOP") under which 2,000,000 shares of common stock are reserved
for issuance at June 30, 1997. All ISOP and NSOP options were at an exercise
price equal to or greater than fair market value at the date of grant.
10 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTION PLANS AND STOCK WARRANTS (CONTINUED)
The following is a summary of stock options granted, exercised and outstanding
for the quarter ended June 30, 1997 and the two prior fiscal years:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
-------------------- OTHER EXERCISE EXERCISE EXPIRATION
ISOP NSOP OPTIONS PRICE PRICE DATE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, March 31, 1995 724,800 440,001 63,335 $.20-$5.00 $2.65
Options exercised 10,000 - - $4.38 4.38
Options canceled 123,400 - - $4.05-$5.00 4.28
Options granted 220,000 310,000 - $4.05-$5.75 5.67 7/96-3/01
--------------------------------------------------------------------------
Outstanding, March 31, 1996 811,400 750,001 63,335 $.20-$5.75 3.50
Options exercised - - - -
Options canceled 45,200 5,000 - $4.05-$6.00 5.64
Options granted 469,000 387,878 - $6.00-$7.63 6.34 6/01-3/02
--------------------------------------------------------------------------
Outstanding, March 31, 1997 1,235,200 1,132,879 63,335 $.20-$7.63 $4.46
==========================================================================
Options exercised - - 41,167 $.20
Options canceled - - 8,834 $.20
Options granted 100,000 - - $6.37 6.37 6/02
--------------------------------------------------------------------------
Outstanding, June 30, 1997 1,335,200 1,132,879 13,334 $.20-$7.63 $4.47
==========================================================================
</TABLE>
The following is a summary of warrants granted, exercised and outstanding for
the quarter ended June 30, 1997, and the three prior fiscal years:
<TABLE>
<CAPTION>
WARRANTS
---------------------------------------
NUMBER OF EXERCISE EXPIRATION
SHARES PRICE DATE
------------------------------------------
<S> <C> <C> <C>
Outstanding, March 31, 1994 -
Issued for June 1994 financing 355,000 $5.00 6/2001
Issued in ELEF, Plc acquisition 12,346 $4.05 5/2004
Issued in ELEF, Plc acquisition 57,655 $5.00 5/2004
Issued in The Diffraction Company
acquisition 100,000 $4.05 10/2001
Exercised 12,346 $4.05
-----------------------------------------
Outstanding, March 31, 1995 512,655
Issued in conjunction with the
Series B financing 85,860 $7.13 1/2003
----------
Outstanding, March 31, 1996 598,515
Issued in conjunction with the
Series B financing 15,500 $7.13 1/2003
Issued upon conversion of Series
B shares 472,917 $6.00 3/2002
---------
Outstanding, March 31, 1997 1,086,932
Exercised 4,167 $6.00
---------
Outstanding, June 30, 1997 1,082,765
=========
</TABLE>
11 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's ISOP and NSOP has authorized the grant of options to management
personnel and directors for up to 4,000,000 shares of the Company's common
stock. All options granted have 1-4 year terms and vest and become fully
exercisable at the end of 1-4 years of continued employment.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123 which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
March 31, 1995 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 5.52% to 6.49%; a dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of .212; and a weighted-average expected life of the option of 3.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options being neither transferable nor
unrestricted, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effects of
applying Statement 123 in the year of adoption are not likely to be
representative of the effects on pro forma net income for future years. The
Company's pro forma information follows (in thousands except for earnings per
share information):
QUARTER ENDED JUNE 30
1997 1996
---------------------
Pro forma net loss $ (206,092) $ (399,657)
Pro forma net loss applicable
to common stock (241,952) (544,278)
Pro forma earnings per share
Primary $ (.05) $ (.18)
12 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK BASED COMPENSATION (CONTINUED)
Exercise prices for options outstanding as of June 30, 1997 ranged from $.20 to
$7.63. The weighted-average remaining contractual li fe of those options is 3.28
years.
7. NOTES PAYABLE
During the quarter ended June 30, 1997, the Company opened a revolving credit
line with Mercantile-Safe Deposit and Trust Company in Baltimore, Maryland. The
$2 million facility is secured by the assets of the Company. At June 30, 1997,
the Company had drawn $613,729 used in the April 30, 1997 purchase of a
manufacturing and office facility in Baltimore County, Maryland, and used to
bridge the period until permanent financing was obtained in July 1997.
On July 22, 1997, the Company closed on the issuance of $1,235,000 in Economic
Development Revenue Bonds to finance the purchase and improvements to the
manufacturing facility acquired in Baltimore County, with Mercantile-Safe
Deposit and Trust Company funding the bond issue. The bridge loan provided by
the line-of-credit was paid off upon closing of the bond issue.
As of May 6, 1997, the Company had paid off, in full, the $1 million in short-
term debt that financed a portion of the OpSec Pasternak purchase. The payoff
was funded substantially through working capital of the Company.
13 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997
- ---------------------------
Revenues for the quarter ended June 30, 1997 were $5,420,881, a 133% increase
when compared to the revenues of $2,326,574 for the quarter ended June 30, 1996.
Sales grew in the holographic division with significant increases in revenues
resulting from authenticating label and tag sales for the NFL over-all licensing
program and Exelgram embossed foil sales for American Express travelers'
cheques. Strong revenue growth also occurred in OpSec's dimensional printing
division, as sales expanded based on the addition of internally controlled
manufacturing capabilities, both in the U.S. and Europe, and the purchase of the
Company's previously independent German sales agent.
Gross profits for the quarter ended June 30, 1997 increased 96% to $1,611,357
compared to $822,113 for the quarter ended June 30, 1996. The gross profit
margin of 29.7% decreased from the 35.3% for the comparable quarter of the prior
year. The gross profit margins are below historical performance levels, as
difficulties in our dimensional printing operations, (the processes and controls
of which were brought in-house in the second half of last year) produced a less
than optimal profit contribution. Improvements and controls that are being
implemented are expected to produce a gradual improvement in the overall profit
margin.
Operating expenses of $1,374,895 grew 82.5% compared to the prior fiscal year,
an increase of $621,598. All costs categories increased as a result of the
addition of the dimensional printing division to operations since the second
half of the last fiscal year, and the purchase of our German agent during the
third quarter of the prior fiscal year. Compensation and related costs increased
52.7% or $221,473, depreciation and amortization increased 185.4% or $121,950,
and all other operating expenses increased 104.2% or $278,175.
Net income for the quarter ended June 30, 1997 improved $119,164 to $222,060, as
compared to $102,896 for the quarter ended June 30, 1996. Interest expense
increased $9,691 as the Company added a revolving credit line. With the
conversion of 76% of the Series B Shares into common stock during the fourth
quarter of the prior fiscal year, the dividend payment decreased $109,211 to
$35,860. No significant tax liabilities were reported for the quarter. The
Company carries significant net operating losses for U.S. tax reporting
purposes.
QUARTER ENDED JUNE 30, 1996
- ---------------------------
RESULTS OF OPERATIONS
Revenues for the quarter ended June 30, 1996 were $2,326,574, an 11.56% decrease
when compared to the revenues of $2,630,564 for the quarter ended June 30, 1995.
Sales in OpSec International decreased 23.78% from the level of the prior year,
when some large promotional orders were billed. Sales in OpSec U.S. increased
13.12% for the quarter, including some delays in initial shipments in our
government products division which are expected to be realized in the balance of
the fiscal year.
14 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Gross profits for the quarter ended June 30, 1996 decreased 1.5% to $822,113 as
compared to $834,584 for the quarter ended June 30, 1995. The gross profit
margin of 35.34% increased from the 31.73% for the comparable quarter of the
prior year. This increase in the gross profit margin reflects a change in the
mix of business, with margins and profitability improving, as higher value-added
product sales are replacing some large promotional orders that were billed this
time last year. The Company is maintaining its historic margins on its base
security business and in those sales categories protected by patents and
proprietary technology.
Operating expenses of $753,297 grew 2.45% compared to the prior fiscal year, an
increase of $17,974. Increases in facility costs, professional fees and
marketing costs were offset in part by savings in compensation related costs,
insurance and travel expenses. Operating expenses are expected to rise as the
Company continues to supplement its marketing and sales efforts, and to improve
its facilities.
Net income for the quarter ended June 30, 1996 improved $87,901 to $102,896 as
compared to $14,995 for the quarter ended June 30, 1995. With the improvements
in the Company's liquidity position, all debts, with the exception of some
maturing capital leases, were paid off in the prior fiscal year. Interest
expense decreased $42,795, and interest earned on cash balances improved $37,990
for the quarter. With the completion of the offering of Series B Shares during
the quarter, the quarterly dividend on the Series B Shares of $145,071 exceeded
net income, resulting in a net loss applicable to common stock of $42,175.
LIQUIDITY AND CAPITAL RESOURCES
QUARTER ENDED JUNE 30, 1997
- ---------------------------
The Company's working capital position at June 30, 1997 was $4,407,273. Current
assets were 2.24-to-1 over current liabilities. In cluded in this working
capital surplus was a cash position of $1,512,351. The Company had no
significant long-term liabilities. The balance of the line of credit of $613,729
is serving as a bridge loan for the purchase of a new manufacturing facility
located in Maryland. Permanent long-term financing through Economic Development
Revenue Bonds of $1,235,000 was secured in July 1997 which retired the then
existing line of credit balance.
The Company's purchase of the new manufacturing facility occurred in April 1997
for a purchase price of $700,000. Improvements and additions will increase the
overall cost to approximately $1.5 million, with completion and occupancy
expected to occur by October 1997.
The Company paid off $1,000,000 in short-term debt that financed a portion of
the OpSec Pasternak purchase. The payoff was funded substantially through
working capital of the Company.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$426,423 and net income was $222,060. This compares to EBITDA and net income of
$172,429 and $102,896, respectively, in the prior year first quarter.
15 of 18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
QUARTER ENDED JUNE 30, 1996
- ---------------------------
During the quarter ended June 30, 1996, stockholders' equity increased 8.9% to
$7,847,704, up from $7,202,659. The Company completed its offering of Series B
Shares by adding $700,333 to equity, net of issuance costs. The total offering
raised $4,517,200, net of issuance costs.
The Company's working capital position at June 30, 1996 was $5,251,381, or 7.64-
to-1 over current liabilities. Included in this working capital surplus was a
cash position of $3,638,388. The Company's long-term debt consisted of $10,050
of capital leases maturing in fiscal 1998. Total long-term obligations decreased
$1,519,848 during the prior twelve months, with $1,250,000 having been converted
into Series B Shares. The working capital surplus may be used to expand
facilities and future acquisitions.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$134,609 and net income was $102,896. This compares to EBITDA and net income of
$160,968 and $14,995, respectively, in the prior year first quarter.
16 of 18
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits required by Item 601 of Regulation S-B:
Exhibit Exhibit Page
Number Name Reference
-------------------------------------------------------------
10.1.1 Purchase of Parkton Property Filed herewith at
page number 10.1.1
27.1.1 Financial Data Schedule Filed herewith at
page number 27.1.1
(b) Reports on Form 8-K during the Company's quarter ending June 30, 1997.
Date of Report Items Reported
-------------- --------------
None
17 of 18
<PAGE>
SIGNATURES
In accordance with 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: August 7, 1997 By: /s/ Richard H. Bard
--------------------------------
Richard H. Bard, Chief Executive
Officer and Director
Date: August 7, 1997 By: /s/ Gerald A. Melfi
--------------------------------
Gerald A. Melfi, Principal
Financial Officer
18 of 18
<PAGE>
EXHIBIT 10.1.1
AGREEMENT OF SALE
This Agreement of Sale, made this 5 day of September, 1996, between Parkton
Realty, Inc., Seller and Optical Security Industries, Inc., Buyer.
Witness that the said Seller does hereby bargain and sell unto the said
Buyer, and the latter does hereby purchase from the former the following
described property, situated and lying in Baltimore County, Maryland, described
on Exhibit "A", which is attached hereto and made a part hereof, 9.896 acres,
more or less, known as The George's Transfer building and all improvements
thereon, including an office/industrial building approximately 14,500 S.F., in
Fee Simple.
AGREEMENTS:
1. DEPOSIT: Fifty Thousand Dollars 00/100 ($50,000.00) in the form of a check
-------
has been paid by Buyer and will be held by KLNB, Inc. to be placed in an
interest bearing escrow account for the benefit of Buyer and applied as
partial payment of the Purchase Price.
2. PURCHASE PRICE: Seven Hundred Thousand Dollars 00/100 ($700,000.00) is
--------------
immediately available funds less the Deposit plus any accrued interest as
stated in Paragraph 1 above. On the date of Closing, Seller shall reimburse
Buyer with a credit of up to Sixteen Thousand Eight Hundred Dollars 00/100
($16,800.00) based on estimated costs, as listed below, that Buyer may
incur between the closing date and February 28, 1997. By March 31, 1997,
Buyer will provide a final accounting to Seller. When the actual costs are
known, any excess credit will be refunded to the Seller on or before April
15, 1997. The settlement of real estate taxes will be based on the most
recent assessment. Utility bills will be prorated for the period.
Per
Items Month Total
----- ------ -------
Water & Sewer $ 100 $ 300
Gas & Electricity 4,000 12,000
Real Property Taxes 1,000 3,000
Insurance 500 1,500
------ -------
Total $5,600 $16,800
10.1.1
<PAGE>
3. INCLUSION/EXCLUSION: The purchase price includes the following items: () if
-------------------
attached to the Property on the date of this Contract auxiliary generators,
lighting, heating, plumbing, ventilating, and air conditioning fixtures, TV
antennas, water softeners, smoke/fire/burglar alarms, security devices,
inside telephone wiring and connecting blocks/jacks, plants, mirrors, floor
coverings, intercom systems, build-in kitchen appliances, sprinkler systems
and controls; (b) if on the Property whether attached or not on the date of
this Contract, all well and septic systems and all associated plumbing,
pipes, connections and pumps, etc; storm windows, storm doors, window and
porch shades, awnings, blinds, screens, curtain rods, drapery rods, all
keys; and (c) all architectural and engineering drawings for the building
including any as-built drawings for alterations and additions.
The above-described included items "Inclusions" are to be conveyed to Buyer
by Seller by bill of sale at the closing, free and clear of all taxes,
liens and encumbrances.
4. CLOSING/SETTLEMENT: Closing or Settlement hereunder shall take place on
------------------
December 2, 1996, or earlier if mutually agreed.
5. INSPECTION PERIOD: Seller hereby agrees that Buyer shall have a period of
-----------------
sixty (60) days from the date hereof (the "Inspection Period") in which to
make any and all such studies and investigations of the Property as Buyer
deems necessary and appropriate, at Buyer's sole cost and expense. In the
event Buyer, in his sole and absolute discretion, determines that the
Property is not suitable for its proposed use as a manufacturing/office
facility, Buyer shall have the right and option to terminate this Agreement
upon written notice delivered to Seller before the expiration of the
Inspection Period, in which event, the deposit plus any accrued interest
shall promptly be refunded to Buyer, and neither party shall thereafter
have any further liability to the other. If Buyer elects to terminate this
Agreement, Buyer shall deliver to Seller copies of any reports, studies,
surveys, appraisals, tests, title examinations done in regard to the
Property during the Inspection Period. If Buyer fails to terminate this
Agreement prior to the expiration of the Inspection Period, Buyer shall
have accepted the Property in its current condition.
6. ACCESS TO PROPERTY: Buyer may enter upon the property at Buyer's sole risk
------------------
and expense to make whatever reasonable inspections and tests Buyer desires
of the Property. Upon the completion of all studies, tests and inspections,
Buyer shall restore the Property to its condition prior to its entry on the
Property. In addition, Buyer shall indemnify, defend and hold the Seller
harmless from and against any and all loss, damage, liability, costs and
expenses (including reasonable
10.1.2
<PAGE>
attorneys' fees) incurred by Seller for any loss, damage or injury to the
Property (including any mechanic's liens that might be filed against the
Property) and/or injury to or death of persons arising from the entry of
Buyer and its agents, employees or contractors upon the Property.
7. EVIDENCE OF TITLE: Buyer, at its expenses shall obtain a title insurance
-----------------
commitment for the Property during the Inspection Period issued by a title
insurance company of Buyer's choice containing copies of all instruments
listed in the schedule of exceptions, which title insurance commitment and
copies of exceptions are the Title Documents.
8. TITLE:
-----
a. Title Review. Buyer shall have the right to inspect the Title
------------
Documents. If the Title Documents disclose any matter affecting the
title to the Property or any exceptions to coverage that are not
acceptable to Buyer, then Buyer shall notify the Seller in writing of
such objectionable title matters prior to the expiration of the
Inspection Period or within five (5) days after receipt by Buyer of
any Title Documents adding new Exception(s) to the title commitment.
b. Matters Not Shown by the Public Records. Seller shall deliver to
---------------------------------------
Buyer, within fifteen (15) days from the date of this Agreement, true
copies of all lease(s) and survey(s) in Seller's possession pertaining
to the Property and shall disclose to Buyer all easements, liens or
other title matters not shown by the public records of which Seller
has actual knowledge. Buyer shall have the right to inspect the
Property to determine if any third party(s) has any right in the
Property not shown by the public record (such as an unrecorded
easement, unrecorded lease, or boundary line discrepancy). Written
notice of any unsatisfactory condition(s) disclosed by Seller or
revealed by such inspection shall be signed by or on behalf of Buyer
and given to Seller on or before the expiration of the Inspection
Period. If Seller does not receive Buyer's notice by said date, Buyer
accepts title subject to such rights, if any, of third parties of
which Buyer has actual knowledge.
c. Special Taxing Districts. In the event the Property is located within
------------------------
a special taxing district and Buyer desires to terminate this Contract
as a result, if written notice is given to Seller on or before the
date set forth in section 5, this Contract shall then terminate. If
Seller does not receive Buyer's notice by the date specified above,
Buyer accepts the effect of the Property's inclusion in such special
taxing district(s) and waives the right to so terminate.
10.1.3
<PAGE>
d. Right to Cure. If Seller receives notice of unmerchantability of title
-------------
or any other unsatisfactory title condition(s) as provided in
subsection (a) or (b) above, Seller shall use best efforts to correct
said unsatisfactory title condition(s) prior to the date of closing.
If Seller fails to correct said unsatisfactory title condition(s) on
or before the date of closing, this Contract shall then terminate;
provided, however, Buyer may, by written notice received by Seller, on
or before closing, waive objection to said unsatisfactory title
condition(s).
9. TRANSFER OF TITLE: Subject to tender or payment Settlement as required
-----------------
herein and compliance by Buyer with the other terms and provisions hereof,
Seller shall execute and deliver a good and sufficient special warranty
deed to Buyer, on Settlement, conveying the Property free and clear of all
taxes except the general taxes for the year of closing. Title shall be
conveyed free and clear of all liens for special improvements installed as
of the date of Buyer's signature hereon, whether assessed or not; except
(i) distribution utility easements (including cable TV), (ii) those matters
reflected by the Title Documents accepted by Buyer in accordance with
subsection 9(a), (iii) those rights, if any, of third parties in the
Property not shown by the public records in accordance with subsection
8(b), and (iv) subject to building and zoning regulations.
10. PAYMENT OF ENCUMBRANCES: Any encumbrance required to be paid shall be paid
-----------------------
by Seller at or before Settlement from the proceeds of this transaction or
from any other source.
11. POSSESSION: Possession of the Property shall be delivered to Buyer at
----------
Settlement.
12. SURVEY: Buyer shall, at Buyer's expense, have the right to have an
------
improvement survey of the Property showing the location of the Property,
the boundaries of the Property, the location of all easements of record
(with recording information shown) or apparent from a physical inspection
of the Property, all improvements locate don adjoining property which
encroach on the Property, all streets, roads and easements dedicated to
public usage and showing the number of acreage comprising the Property,
exclusive of dedicated streets, roads and public ways, and identify any
part of the Property located within a flood plain. The survey shall be
certified to Buyer, the Title Company and shall conform to ALTA standards.
10.1.4
<PAGE>
13. INSPECTION DOCUMENTS: Seller, at Seller's sole cost and expense, shall
--------------------
provide to Buyer as soon as possible but not later than fifteen (15) days
from the date of this Agreement all of the following items that Seller has
in its possession:
a. Copies of Certificate of Occupancy issued by the appropriate
governmental authority;
b. Evidence of compliance with zoning, local restrictions and building
permits;
c. Information pertaining to any pending or threatened litigation;
d. All environmental and soils reports in Seller's possession;
e. All service, management and maintenance contracts, employment
agreements, collective bargaining agreements and other agreements
relating to or affecting the Property;
f. Personal property inventory;
g. Copies of real estate tax bills for the years 1993, 1994 and 1995;
h. Copies of all warranties relating to the building including but not
limited to personal property, roof, well and septic systems, parking
lot, HVAC equipment, plumbing, etc.
i. Copies of insurance policies;
j. All maintenance and repair records for 1990 - 1995 and 1996 year to
date;
k. Such other documentation as reasonable requested by Buyer.
14. ENVIRONMENTAL REPORT: Buyer shall have thirty (30) days from the date of
--------------------
Seller's acceptance of this Contract to conduct a phase I Environmental
Study of the Property ("Environmental Contingency"). If said Environmental
Study describes a negative environmental impact upon or around the
Property, or if said Phase I study recommends a Phase II study be
conducted, Buyer may, at Buyer's option (i) order the Phase II study, in
which case the Inspection Period shall be extended for an additional thirty
(30) days, or (ii) cancel this Contract with Buyer's earnest money being
returned to Buyer and the parties hereto shall have no further rights or
duties
10.1.5
<PAGE>
hereunder, and Seller shall reimburse Buyer for the cost of the Phase I
Environmental Study, or (iii) waive the Environmental Condition and proceed
with the terms and conditions of this Contract. Seller or Sellers Agent
will provide a copy of 1st Unions Bank's copy of its environmental report
on the Property within 10 days of Seller's acceptance of this Contract.
15. SELLER'S REPRESENTATIONS AND WARRANTIES: Seller, to best of Seller's
---------------------------------------
knowledge, hereby represents and warrants to Buyer as follows (and it shall
be a condition for Buyer's obligation to acquire the Property that each of
the following representations and warranties shall be true and accurate in
all material respects as of the date of Settlement).
a. The Property is currently subdivided from the balance of all adjacent
tracts subject to all applicable rules and regulations in Baltimore
County and the State of Maryland.
b. The Property does not appear on the National Priorities List published
by the U.S. Environmental Protection Agency of the most recent lists
of hazardous waste sites published by the Maryland Department of the
Environment. To the best of Seller's Knowledge, the Property has not
been used as a landfill, nor have any hazardous materials or toxic
substances (as described in any applicable federal and/or state
environmental laws) been deposited or stored upon the Property.
c. There is no litigation pending, or to the best of Seller's knowledge,
threatened, which in any manner affects the Property.
d. There are no attachments, executions, assignments for the benefit of
creditors, receiverships, conservatorship or voluntary or involuntary
proceedings in bankruptcy or pursuant to any other debtor relief laws
contemplated by Seller or pending against Seller or the Property not
otherwise disclosed by a diligent search of the public records and
court files.
e. There are no contracts or other obligations outstanding for sale,
exchange or transfer of the Property or any portion thereof or that
will continue beyond the Settlement date.
f. Seller's parent company, Canton Investments is not a debtor in a
bankruptcy proceeding. Seller is not a debtor in or otherwise a party
to any bankruptcy proceeding. Seller has full authority to enter into
and consummate the transactions contemplated by this contract
10.1.6
<PAGE>
and need not seek or obtain Court approval to do so. On or before
September 15, 1996, Buyer requires that Seller provide to Buyer in a
form acceptable to Buyer an opinion of Seller's counsel that the
foregoing is true and correct.
16. ADJUSTMENTS: All adjustments and prorations should be as of Settlement.
-----------
Rent and water rent (except those paid at Settlement) shall be adjusted and
apportioned as of date of Settlement, and all general real estate taxes,
are to be adjusted and apportioned as of the date of Settlement.
17. APPRAISAL PROVISION: buyer shall have the sole option and election to
-------------------
terminate this Contract if the purchase price exceeds the Property's
valuation determined by an appraiser engaged by Buyer. This Contract shall
terminate by the Buyer giving Seller written termination notice and a copy
of such appraisal which confirms the Property's valuation is less than the
purchase price, on or before the expiration of the Inspection Period.
18. TIME OF ESSENCE/REMEDIES: Time is of the essence hereof. If any note or
------------------------
check received as earnest money hereunder or any other payments due
hereunder is not paid, honored or tendered when due, or if any other
obligation hereunder is not performed or waived as herein provided, there
shall be the following remedies:
a. IF BUYER IS IN DEFAULT:
All payments and things of value received hereunder shall be forfeited
by Buyer and retained on behalf of Seller and both parties shall
thereafter be released from all obligations hereunder. It is agreed
that such payments and things of value are liquidated damages and
(except as provided in subsection (c)) are seller's sole and only
remedy for Buyer's failure to perform the obligations of this
Contract. Seller expressly waives the remedies of specific performance
and additional damages.
b. IF SELLER IS IN DEFAULT;
Buyer may elect to treat this Contract as cancelled, in which case all
payments and things of value received hereunder shall be returned to
Buyer and Buyer may recover such damages as may be proper, or Buyer
may elect to treat this Contract as being in full force and effect and
Buyer shall have the right to specific performance or damages, or
both.
10.1.7
<PAGE>
c. COST AND EXPENSES:
Anything to the contrary herein notwithstanding, in the event of any
arbitration or litigation arising out of this Contract, the arbitrator
or court shall award to the prevailing party all reasonable costs and
expenses, including attorney fees.
19. EARNEST MONEY DISPUTE: Notwithstanding any termination of this Contract,
---------------------
Buyer and Seller agree that, in the event of any controversy regarding the
earnest money and things of value held by broker, or escrow agent, unless
mutual written instructions are received by the holder of the earnest money
and things of value, broker or escrow agent shall not be required to take
any action but may await any proceeding, or at broker's or escrow agent's
option and sole discretion, may interplead all parties and deposit any
monies or things of value into a court of competent jurisdiction and shall
recover court costs and reasonable attorney fees.
20. BUYER'S AND SELLER'S COSTS. Buyer shall pay all costs of preparing and
--------------------------
obtaining title insurance relating to the purchase of the Property. Buyer
shall provide an ALTA title insurance commitment with all of the standard
preprinted exceptions deleted. Each party shall be responsible for payment
of its respective attorney's and consultants' fees.
21. REAL ESTATE COMMISSIONS: Each party warrants and represents to the other
-----------------------
that it did not use the services of a real estate broker, agent or finder
in connection with this Agreement, insofar as pertains to the sale of the
Property to Buyer, except KLNB and that the Seller shall be responsible for
the payment of any commission payable to KLNB, Inc. arising out of the
transfer of the Prperty to Buyer. Each party agrees to defend, indemnify,
and hold the other party harmless from any claim for commissions or fees
arising by reason of the indemnifying party's breach of this warranty and
representation. The provisions of this paragrpah shall survive settlement
pursuant to this Agreement.
22. RISK OF LOSS: The herein described Property is to be held at the risk of
------------
the Seller until legal title has passed or possession has been given to
Buyer whichever shall sooner occur. If, prior to the time legal title has
passed or possession has been given to Buyer, all or a substantial part of
the Property is destroyed or damaged, without fault of the Buyer, then this
Contract, at the option of the Buyer, shall be null and void and of no
further effect, and all monies paid hereunder shall be returned promptly by
Seller to Buyer.
10.1.8
<PAGE>
23. PROHIBITIONS: After the date of the execution of this Contract, Seller
------------
shall not enter into any contract or document that would affect the
Property without the prior written consent of the Buyer.
24. INSURANCE: Seller shall maintain in full force and effect existing
---------
insurance coverage on the Property.
25. STAMPS, RECORDATION AND TRANSFER TAXES: The cost of all documentary stamps,
--------------------------------------
required by law, recordation tax and transfer tax, where required by law,
shall be paid equally by Buyer and Seller.
26. NOTICES: Every notice required or permitted to be sent hereunder shall be
-------
deemed given (i) upon delivery if personally delivered, or (ii) one
business day following deposit with a nationally recognized overnight
courier service, to the address set forth on the signature page hereof, or
such other address as may be designated by each party from time to time.
27. MISCELLANEOUS PROVISIONS:
------------------------
a. This Agreement contains the final and entire agreement between the
parties and neither they nor their agents shall be bound by any terms,
conditions or representations not contained herein, unless modified in
writing and executed by each of the parties.
b. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, representatives,
successors and assigns.
c. This Agreement must be executed by Seller and returned to Buyer within
five (5) business days following Buyer's execution hereof, or this
Agreement shall be null and void.
d. This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland.
e. This Agreement shall not be assignable by Buyer without the prior
written consent of Seller whose consent shall not be unreasonably
withheld or delayed.
28. NOTICE OF ACCEPTANCE: This Proposal shall expired unless accepted in
--------------------
writing, by Seller, as evidenced by their signatures below, and the Buyer
receives notice of such acceptance on or before September 6, 1996.
10.1.9
<PAGE>
Buyer: Optical Security Industries, Inc.
By: /s/Gerald A. Melfi, CAO
---------------------------------
Date of Execution: 8/31/96
------------------------
Address: Suite 920
535 16th Street
Denver, CO 80202
Seller:
By: P. McEvoy Cromwell, Esquire
--------------------------------
Date of Execution: 9/5/96
------------------------
Address:
----------------------------------
Witnessed by: /s/ Margaret I. Wood
The captions of this Contract are for convenience and reference only and in no
way define or limit the intent, rights or obligations of the parties hereunder.
The parties hereto hereby bind themselves, their heirs, personal
representatives, successors and assigns for the faithful performance of this
Contract.
NOTICE TO PURCHASER; YOU MAY BE ENTITLED TO RECEIVE COMPENSATION FROM THE REAL
- -------------------
ESTATE GUARANTY FUND OF THE MARYLAND REAL ESTATE COMMISSION, AN AMOUNT NOT TO
EXCEED $25,000.00, FOR ANY ACTUAL LOSS ARISING OUT OF THE TRANSACTION AND
RESULTING FROM THE UNLAWFUL ACT OF REAL ESTATE LICENSEE.
10.1.10
<PAGE>
COON & SHACH, LLC
ATTORNEYS AT LAW
NINE WEST MULBERRY STREET
BALTIMORE, MARYLAND 21201-4408
Telephone (410) 244-8800
Facsimile (410) 244-8801
November 13, 1996
VIA OVERNIGHT DELIVERY - AIRBORNE EXPRESS
Mr. Gerald A. Melfi, CAO
Optical Security Group, Inc.
535 16th Street, Suite 920
Denver, Colorado 80202
Re: Agreement of Sale - September 5, 1996
Optical Security Group, Inc.-Buyer/Parkton Realty, Inc.-Seller
The George's Transfer Building
--------------------------------------------------------------
Dear Melfi:
Enclosed please find two clean, executed copies of a letter agreement,
regarding the revision to the Agreement of Sale dated September 5, 1996,
pursuant to which Optical Security Group, Inc is to purchase certain real
property owned by the Parkton Realty, Inc., known as the George's Transfer
Building. Please execute both copies, retain one for yourself, and return one to
me via overnight delivery.
If you should have any questions, please do not hesitate to contact me.
Very truly yours,
/s/Marc E. Shack
Marc E. Shack
MES/jme
Enclosures
10.1.11
<PAGE>
COON & SHACH, LLC
ATTORNEYS AT LAW
NINE WEST MULBERRY STREET
BALTIMORE, MARYLAND 21201-4408
Telephone (410) 244-8800
Facsimile (410) 244-8801
November 12, 1996
VIA FACSIMILE (3030) 534-1010
Mr. Gerald A. Melfi, CAO
Optical Security Group, Inc.
535 16th Street, Suite 920
Denver, Colorado 80202
Re: Agreement of Sale - September 5, 1996
Optical Security Group, Inc.-Buyer/Parkton Realty, Inc.-Seller
The George's Transfer Building
--------------------------------------------------------------
Dear Melfi:
I am glad we have had the chance to speak directly over the last couple of
days with regard to the requests made in your November 4, 1996, correspondence
regarding the above referenced matter. As I stated to you on the phone, it is
Parkton Realty, Inc.'s desire to consummate the sale with your company for the
George's Transfer Building. However, there is a certain limits on the recovery
which Parkton Realty, Inc. can accept from the property.
1. Specifically, with regard to your correspondence, it is agreed
that the inspection period set forth in paragraph five of the Agreement of Sale
shall be extended to January 6, 1997.
2. The date of the closing/settlement set forth in paragraph four of
the Agreement of Sale shall be extended to February 5, 1997.
3. The second, third, and fourth sentences of paragraph two of the
Agreement of Sale are deleted and replaced with the following:
10.1.12
<PAGE>
a. On the date of closing, Seller shall reimburse Buyer with a
credit to the purchase Price set forth in sentence one of this paragraph in an
amount not to exceed Fifty Thousand ($50,000.00) Dollars based on the estimated
costs of any repairs, renovations, construction, road work, pond enlargement,
and/or asbestos abatement which is needed to be made to the Property and not
otherwise the responsibility of the Buyer pursuant to this Agreement of Sale
(the $50,000.00 credit set forth herein shall include the Sixteen Thousand Eight
Hundred ($16,800.00) Dollars listed below) the Buyer will provide a final
accounting to the Seller when the actual costs are known and any excess credit
will be refunded in cash to the Seller on or before June 30, 1997. In the event
the $50,000.00 credit set forth in this paragraph is not sufficient to the
Buyer, the Agreement of Sale will be terminated and the Seller will refund the
Buyer's deposit.
4. The time period for the Buyer to obtain an environmental report
shall be extended to January 6, 1997.
5. In all and other respects the Agreement of Sale shall remain in
full force and effect.
6. This letter shall supersede your correspondence of November 4,
1996.
The statements set forth in that correspondence that if a response was not
received 5:00 p.m., mountain standard time, on November 4, 1996, that the
Agreement would be considered terminated is revoked, and the Agreement remains
in full force and effect as set forth therein.
Very truly yours,
PARKTON REALTY, INC.
/s/ P. McEvoy Cromwell, President
---------------------------------
By: P. McEvoy Cromwell, President
APPROVED:
OPTICAL SECURITY GROUP, INC.
/s/Gerald A. Melfi
- ------------------------
By: Gerald A. Melfi, CAO
cc: Tom Renner (via fax: 296-2765)
10.1.13
<PAGE>
AMENDMENT
AGREEMENT OF SALE
DATED SEPTEMBER 5, 1996
PARKTON REALTY, INC., SELLER
AND
OPTICAL SECURITY INDUSTRIES, INC., BUYER
CONCERNING THE GEORGE'S TRANSFER BUILDING
BALTIMORE COUNTY, MARYLAND
The parties agree to the following amendment to the Agreement of Sale dated
September 5, 1996, as previously amended by letter agreement dated November 12,
1996, concerning The George's Transfer Building (the "Property"). In the event
of a conflict of interpretation between the language of this Amendment, the
Agreement of Sale and the previous amendment, the language of this Amendment
shall control.
l. Seller shall take all actions necessary to construct a storm
management facility serving Lot #3 on the Property, including the required
10,000 square foot addition. Such construction will be completed as soon as
possible after Closing, as defined below. In addition, Seller will post the
required surety or cash bond with Baltimore County no later than seven (7)
calendar days after Closing. The parties shall escrow or otherwise set aside out
of Seller's Closing proceeds sufficient funds to satisfy the bond requirements.
2. On or before March 31, 1997, Seller shall complete the necessary
asbestos abatement in the building situated on the Property consistent with the
requirements set forth in the asbestos survey conducted by Quality Analytical,
Inc., on January 8, 1997, and the supplemental report dated January 14, 1997. In
addition, the Seller shall be responsible for the entire cost of removal and
disposition of asbestos materials in the building's roof ("Roof Asbestos
Abatement"). Seller shall coordinate the timely Roof Asbestos Abatement with
Buyer's roofing contractor. To the extent determinable at Closing, the parties
shall escrow or otherwise set aside out of Seller's Closing proceeds sufficient
funds to pay for the Roof Asbestos Abatement.
3. On or before March 31, 1997, Seller will obtain from Baltimore County
an opinion letter, in form and substance satisfactory to Buyer, approving the
revision to the COG Plan and recorded plat as it pertains to the interior
driveway and cul-de-sac removal on the Property. Contemporaneously with this
opinion letter, Seller shall complete and record a revised plat showing the
approved revision.
10.1.14
<PAGE>
4. The Closing or settlement hereunder will be April 30, 1997, or earlier
if mutually agreed.
5. The inspection period will expire on March 31, 1997.
6. All of Seller's obligations hereunder shall survive Closing, and shall
not be merged in the deed of conveyance.
7. In all other respects the Agreement of Sale, as previously amended by
letter agreement dated November 12, 1996, shall remain unmodified and in full
force and effect.
BUYER: SELLER:
OPTICAL SECURITY INDUSTRIES, INC. PARKTON REALTY CORP.
By: /s/Gerald A. Melfi By: /s/ P. McEvoy Cromwell
------------------ ----------------------
Its: Chief Account Officer Its: President
---------------------- ----------
Date: February 21, 1997 Date: February 28, 1997
-------------------- -------------------
10.1.15
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<PAGE>
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<PERIOD-START> APR-01-1997 APR-01-1996
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