<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, 1997.
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)
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. YES [X] 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. [ ]
The issuer's revenue for its most recent fiscal year was $13,085,764.
The aggregate market value of the common stock held by non-affiliates of the
issuer, 2,638,231 shares of common stock, as of May 30, 1997, was approximately
$17,808,059, based on the average of the closing bid and ask prices of the
Issuer'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.
As of June 6, 1997, the issuer had 4,973,952 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X]
Exhibit Index found at page 21.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Optical Security Group, Inc., together with its subsidiaries (the
"Company"), is primarily engaged in the business of developing, producing and
marketing security labels, foils, and threads and non-security promotional
products containing sophisticated, optically variable embossed images and non-
security promotional products using its lenticular dimensional printing
processes. The Company was incorporated on August 4, 1988, as a Colorado
corporation under the name TSL Incorporated. The Company's name was changed to
Optical Security Group, Inc. on December 15, 1994.
On May 1, 1994, the Company acquired ELEF Plc, a United Kingdom
corporation, engaged in the design and production of holographic images and
products. ELEF Plc is now known as Optical Security Industries International,
Plc ("OpSec International").
On October 26, 1994, the Company acquired substantially all of the assets
of The Diffraction Company, a private Maryland corporation engaged in the
manufacture of diffraction patterns and embossed holographic foils, labels, and
laminates. The business is now carried out under Optical Security Industries,
Inc. ("OpSec U.S.").
On September 12, 1996, the Company formed Dimensional Printing Industries,
LLC ("DPI LLC") to manufacture dimensional printed products. The Company
initially owned 51% of the membership interests in DPI LLC. Prior to this
fiscal year ended March 31, 1997, the Company purchased the other 49% membership
interests in two transactions. Subsequent to the fiscal year end, the Company
liquidated DPI LLC and contributed its assets to Dimensional Printing
Industries, Inc. ("DPI Inc.), a newly formed Colorado corporation. The Company
is the 100% owner of DPI Inc.
Effective November 1, 1996, the Company acquired OpSec Pasternak & Partners
GmbH, a private company organized under the laws of Germany ("OP&P") engaged in
the distribution of value added packaging and point-of-sale material, including
holographic and lenticular products, in Europe and the Company's European sales
agent. Subsequently, OP&P was converted into OpSec Pasternak & Partner GmbH &
Co. KG, a German limited partnership, of which OpSec Pasternak & Partner Holding
GmbH ("OP&P Holding") is the general partner. (See also CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.)
On April 30, 1997, the Company purchased a manufacturing and office
facility located in Parkton, Maryland (the "Parkton Facility"). The Parkton
Facility consists of nine acres. The Company has commenced improvements on the
Parkton Facility
1
<PAGE>
including a 10,000 square foot addition. The Company intends to move its
manufacturing facilities from its Sparks, Maryland location to the Parkton
Facilities.
BUSINESS OF ISSUER
Products and Markets. The Company's products incorporate the Company's optical
- --------------------
imaging technology and proprietary methods and know-how. In general, the
Company markets its products to governments and private industry as security
devices for product and document protection, or as enhancements and/or
promotional devices for the consumer packaging industry or publishing industry.
Specialty Enforcement/Government Products. The Company's specialty
enforcement/government products are used by state and federal governments to
authenticate government documents, licenses, and permits. These products reduce
the problems of unauthorized issuance, counterfeiting and alteration 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 machine; and (c) protecting against unwanted
alteration of the data field using "fiber-tear" adhesives that destroy the
document if subjected to tampering.
Authenticating Products. The Company develops, produces, and sells
security labels, threads, and hot-stamping foils, which include sophisticated
optically variable embossed images for authentication of branded products and
documents of value. These security devices are difficult or impossible 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.
Value-Added/Promotional Products. The Company uses its embossed holography
and lenticular dimensional printing technology to produce products for on-
package product promotions, point of sale displays, packaging enhancements,
trading cards, illustrations for children's books, and other commercial non-
security uses.
Distribution Methods. The Company has sales offices in Denver, Colorado,
- --------------------
Hampshire, England, and Dusseldorf, Germany. The Company also distributes its
products using independent marketing agents and distributors in the United
States and throughout Western Europe and in parts of Eastern Europe, South
America, and Asia. The Company also sells its secured temporary registration
permits in the United States through the American Association of Motor Vehicle
Administrators ("AAMVA").
2
<PAGE>
Marketing Agreements. The Company has a non-exclusive license to sell
- ---------------------
ALPHA.DOT(R) security threads and microdots in North and South America from
Alphadot Technologies, Inc. based in Spokane, Washington. Alphadot
Technologies, Inc. is currently in bankruptcy proceedings.
Competitive Positioning and Methods of Competition. The Company is careful 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, product
effectiveness, market acceptance, cost, market approach, and product exposure.
Sources of Raw Materials. The Company has numerous sources for raw materials.
- ------------------------
Key suppliers include FLEXcon, Astor Universal, L.G. Kurz, WEB Technologies,
Adchem Corp., Holopak, Inc., and Rexham Extrusions. Adams-McClure, Inc. is the
exclusive printer of the Company's lenticular products in the United States.
Significant Customers. 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. The Company owns
- --------------------------------------------------------
eight U.S. patents of which two are related to security technology and six are
related to tamper-evident technology. The Company has nine U.S. patents pending
related to security technology. The Company has eight foreign filings relating
to U.S. patents of which four have been issued. The Company's first patent will
expire in 2007. The Company also holds copyrights on 53 of its diffraction and
holographic security patterns and has applied for copyright protection on an
additional 8 diffraction and holographic security patterns.
Government Regulation and Approval. No government approval is necessary to
- ----------------------------------
offer the Company's principal products or services.
Research and Development. The Company has been involved in research and
- ------------------------
development for a number of different technologies and products. 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.
Cost of Compliance With Environmental Laws. The Company's production 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.
3
<PAGE>
Employees. As of March 31, 1997, the Company employed 53 employees full-time,
- ---------
and 4 employees part time. The Company has employment contracts with various
management personnel. See Item 10, Executive Compensation.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's facilities are as follows:
Location Use
- -------- ---
535 16th Street Optical Security Group, Inc.
Suite 920 Corporate Office
Denver, Colorado 80202
Highview Business Center OpSec International
High Street International sales office
Bordon Hampshire GU35 OAX
UNITED KINGDOM
Bismarckstrasse 120 OpSec Pasternak & Partner GmbH
D-47799 Krefeld Co. KG/International sales office
GERMANY
2202 North Lakewood OpSec U.S.
Chicago, Illinois 60614 U.S. sales office
535 16th St., Suite 810 OpSec U.S.
Denver, Colorado 80202 U.S. sales office
DPI Inc.
Administrative and sales office
38 Loveton Circle OpSec U.S.
Sparks, Maryland 21152 Manufacturing facilities
Unit 4 Gelders Hall Road OpSec International
Shepshed Leicestershire Manufacturing facilities
LE12 9NH
UNITED KINGDOM
21132 Old York Road OpSec U.S.
Parkton, Maryland Manufacturing facilities
Except for the Parkton Facility, all of the facilities are leased. The
Parkton Facility was purchased on April 30, 1997, and was financed in part by
the Company's line-of-credit with Mercantile-Safe Deposit and Trust Company
("Mercantile"). The Company intends to replace such financing with tax-exempt
industrial development bond financing by the end of June 1997. The line-of-
credit is secured by the Company's assets including the Parkton Facility. (See
also MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION-Liquidity and Capital Resources.) The Company has commenced
improvements to the Parkton Facility including a 10,000 square foot addition.
4
<PAGE>
The facilities located at 535 16th Street, Suites 920 and 810, are leased
from a corporation of which Mr. Richard H. Bard is an officer and shareholder.
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.
5
<PAGE>
PART II
FORWARD LOOKING STATEMENTS
To the extent that financial information and management's discussion and
analysis of financial condition and results of operations contain forward-
looking statements, such statements involve risks and uncertainties which could
cause the Company's actual results to differ materially from the anticipated
results discussed herein. Factors that might cause such a difference include,
but are not limited to, changes in demand for the Company's products and
services, changes in the level of operating expenses, competitive conditions and
product supply. Recipients of this document are cautioned not to place undue
reliance on the forward-looking statements made herein.
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." 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.
<TABLE>
<CAPTION>
Year Ended March 31, 1997 High Low
------------------------- ----- -----
<S> <C> <C>
First Quarter ended 06/30/96 $6.25 $5.75
Second Quarter ended 09/30/96 $6.12 $5.62
Third Quarter ended 12/31/96 $6.07 $5.62
Fourth Quarter ended 03/31/97 $8.00 $5.50
Year Ended March 31, 1996 High Low
------------------------- ----- -----
First Quarter ended 06/30/95 $4.00 $2.00
Second Quarter ended 09/30/95 $6.00 $2.00
Third Quarter ended 12/31/95 $7.00 $5.00
Fourth Quarter ended 03/31/96 $6.87 $5.87
</TABLE>
As of June 6, 1997, there were 896 holders of record and approximately 1020
beneficial holders of the Company's common stock.
The Company has not paid any dividends on its common stock during 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
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.
6
<PAGE>
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.
RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 1997.
- --------------------------------
Revenues increased 46.1% to $13,085,764, mostly the result of new security-
related customers and the expansion into North America with the Company's
lenticular product offerings. Significant growth in sales occurred in security
product sales in the late third quarter and fourth quarter as the Company began
delivering security foils to American Express Travel Services to be applied to
its travelers' cheques; and, the National Football League began a program for
the Company to supply licensees with authenticating labels and garment tags. In
the specialty printing (lenticular) business, the Company decided in the third
quarter to acquire the capability to produce dimensional printing products.
Previously, the Company was an agent of Optigraphics, a division of Pinnacle
Brands, Inc., with a limited license to sell similar products in Western Europe.
As a result of the Company's production capabilities, significant new accounts
in the third and fourth quarter were added In North America, including General
Mills and Kelloggs.
Gross profit margins were slightly higher than the prior fiscal year and
generally represent the mix of business of the Company. This includes patented
and proprietary products with higher margins and commodity and promotional
products, typically with lesser margins. The acquisition of the Company's agent
in Germany, OP&P, during the third quarter helped the Company improve its margin
on those sales delivered directly to the customers as a result of the
acquisition. Gross margins were adversely affected by the inefficiencies in the
start-up of lenticular product manufacturing.
Operating expenses increased $1,134,212 to $4,052,331. Salaries and
related costs increased $371,864, including significant additions as a result of
the acquisition of OP&P and the start-up of lenticular product manufacturing.
Depreciation and amortization expenses increased to $519,109 from $242,453 in
the prior year. Other operating expenses increased $485,692, primarily the
result of increased travel, marketing and administrative expenses.
The Company had net interest income of $75,277 compared to net interest
expense of $38,956 in the prior year. The improvement was due to higher levels
of invested cash which was mostly the result of the Company's sale of Series B
Shares just prior to the fiscal year. Dividends on Series B Shares amounted to
$431,649, compared to $41,803 in the prior fiscal year. While the Company had
no
7
<PAGE>
United States federal income tax payable, the net tax expense of $36,189
resulted from trade and earnings taxes payable from its international
operations.
Fiscal Year Ended March 31, 1996.
- --------------------------------
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 five 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.
Salaries 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 expenses 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
8
<PAGE>
into preferred stock of the Company after one quarter, which reduced interest
expense which would have been incurred by $112,500. 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 substantial net operating losses for U.S. tax reporting
purposes and had no U.S. income tax liability. The United Kingdom subsidiary
had no current income tax liability for the fiscal year ended March 31, 1996,
and reported a tax benefit of $50,697, which represents a recovery of a portion
of foreign taxes accrued in the prior fiscal year of $82,995, less a deferred
tax liability of $32,300.
LIQUIDITY AND CAPITAL RESOURCES.
Fiscal Year Ended March 31, 1997.
- --------------------------------
During the year ended March 31, 1997, the Company raised $3,128,268, net of
offering costs from the issuance of common stock, and $679,086, net of offering
costs from the issuance of 775 Series B Shares. The funds were used to rebuild
working capital used to finance the German acquisition and the start-up of DPI
Inc. Such funds may also be used to expand facilities and for future
acquisitions. Total stockholders' equity increased 91.1% to $13,767,285, up
from $7,202,659.
The Company's working capital position at March 31, 1997, was $5,092,557,
resulting in a current ratio of 2.27-to-1. Included in this working capital
surplus was a cash position of $2,064,088. The Company's long-term debt
consisted of $6,507 of capital lease obligations.
The Company reported operating income of $291,509 and net income of
$345,180 for the year ended March 31, 1997. Excluding the non-cash expenses of
$519,109 for depreciation and amortization, operating income was $810,618 and
net income was $864,289 for the fiscal year.
Subsequent to the year end, the Company negotiated a $2 million revolving
line of credit with Mercantile. The credit facility is secured by the assets of
the Company. The Company intends to use such credit facility to finance
inventories and trade supplies. The credit facility was also used as bridge
financing to purchase the Parkton Facility. The Company intends to replace such
financing and has received from Mercantile a commitment for permanent financing
for the Parkton Facility. The commitment is for $1,235,000 with the loan
structured in the form of Industrial Development Bonds ("IDB"). The IDB will
also be used to finance improvements to the Parkton Facility. Closing on the
bond financing is anticipated to occur in June 1997. The revolving line and IDB
will be cross collateralized and cross defaulted.
9
<PAGE>
Fiscal Year Ended March 31, 1996.
--------------------------------
During the year ended March 31, 1996, the Company raised $3,811,950 net of
offering costs from the issuance of Series B Shares. The funds 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.
Total stockholders' equity increased 236.3% to $7,202,659, up from $2,141,856.
In April 1996, the Company raised $679,086 from the issuance of additional
Series B Shares. In addition, the Company issued Series B Shares in exchange
for $1,210,258 of convertible debt.
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.
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.
10
<PAGE>
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 of the Company, as
of June 16, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard H. Bard 49 Chairman of the Board, Chief
Executive Officer, and
President
Yoram Curiel 56 Director
Edward Dietrich 45 Senior Vice President - Sales
Catherine M. Gotwalt 41 Secretary
Martin T. Hart 61 Director
J. R. Holland, Jr. 53 Director
Richard D. Lamm 61 Director
Gerald A. Melfi 47 Chief Accounting and Principal
Financial Officer and Treasurer
Bruce I. Raben 43 Director
Mark T. Turnage 37 Vice President and Managing
Director of OpSec International
Frank M. Vrechek 53 Executive Vice President
</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. Effective July 1, 1997, Mr. Turnage will assume the duties of
president. Mr. Bard is also the chief executive officer of Bard & Co., Inc., a
diversified investment management company. Mr. Bard is also a director of
Polymedica Industries, Inc. and VanStar Corporation, formerly known as
Computerland Corporation.
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
11
<PAGE>
president and a director of a private company involved in the development of new
technologies.
EDWARD DIETRICH serves as senior vice president of sales. From August 1994
until October 1996, Mr. Dietrich served as vice president-sales of OpSec U.S.
Effective July 1, 1997, Mr. Dietrich will also assume the duties of president
and chief operating officer 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.
CATHERINE M. GOTWALT serves as the corporate secretary. She has served in this
capacity since 1989.
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
and Nominating Committee. Mr. Hart is a Denver-based businessman and investor.
He is also a director of Schuler Homes, Inc., PJ America, Inc. and PNB Financial
Group, the holding company for Pacific National Bank, 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. He is also a member of the Nominating Committee. Since
1991, he has been the manager, president, and chief executive officer of Hunt
Capital Group, L.L.C. and president and chief executive officer of Unity Hunt,
Inc., 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 Audit
Committee. 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. 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 and principal financial
officer and treasurer. 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. He serves as
chairperson of the Nominating Committee and is a member of 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.
12
<PAGE>
MARK T. TURNAGE serves as Managing Director of OpSec International and since
October 1996 has also served as vice president. From July 1994 until November
1995, Mr. Turnage served as vice president-corporate affairs. Effective July 1,
1997, Mr. Turnage will assume the duties of president and chief operating
officer. From 1991 to 1994, Mr. Turnage practiced law with the firm of Davis,
Graham & Stubbs in Denver, Colorado.
FRANK M. VRECHEK has served as executive vice president since October 23,
1996. From July 1, 1996 to October 23, 1996, he served as senior vice
president. From 1979 until its sale in 1995, Mr. Vrechek owned and operated a
private company which supplied premium products for United States consumer sales
promotion markets.
There are no family relationships among the Company's directors or executive
officers. The directors of the Company serve in such capacity until the next
annual meeting of the Company's shareholders. Committee members are appointed
by the board of directors to serve a one year term or until their successors
have been elected. Messrs. Bard and 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, 1997, its directors, officers and greater than 10%
beneficial owners have complied with all filing requirements under Section 16(a)
of the Exchange Act.
Mr. Holland failed to timely file one report, reporting the acquisition of
stock options. Hunt Capital Group, L.L.C. failed to timely file one report,
reporting the conversion of Series B Preferred Stock for shares of common stock.
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 the chief
executive officer of the company (such officer referred to as the "Named
Executive Officer"). During the fiscal year ended March 31, 1997, no other
executive officer received in salary and bonus an amount exceeding $100,000.
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.
13
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
------------------- Compensation
Awards
------------ All Other
Fiscal Options Compen-
Name Year Salary Bonus Granted sation
---- ------ ---------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Richard H. Bard 1997 $150,000 - 342,878 -
Chief Executive Officer 1996 $125,000 - 300,000 -
since 9/17/93 and 1995 $125,000 - 300,000 $121,250(1)
President since 4/1/94
</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 $2.85 per share (70% of market value at time of issue). Compensation
was recognized for the difference between the exercise price and the market
value at the time of grant.
Stock Options
- -------------
The following table sets forth information concerning stock options granted
during the fiscal year ended March 31, 1997, to the Named Executive Officer.
Each option represents the right to purchase one share of the Company's common
stock.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted Year ($/Sh) Date
- ---- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Richard H. Bard 105,614(1) 13% $6.00 10/22/01
90,264(1) 11% $6.50 12/16/01
147,000(1) 10% $7.63 03/26/02
- -----------------
</TABLE>
(1) Issued under the Nonqualified Stock Option Plan. The options vested on
October 23, 1996, December 17, 1996 and March 27, 1997.
14
<PAGE>
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended March 31, 1997, for the Named
Executive Officer and the fiscal year-end value of all unexercised in-the-money
options (regardless of when granted) held by such person.
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
Name On Exercise Realized Options Fiscal Year End
---- --------------- ------------ ----------- --------------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Richard H. Bard - - 976,212/66,667 $2,384,859/$211,331
</TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
There were no awards made to the Named Executive Officer under any long-
term incentive plans.
REPRICED OPTIONS
In the fiscal year ended March 31, 1997, 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. Effective July 1, 1997, outside directors are
---------------------
entitled to receive a director's fee of $1,000 per attendance at all regular
meetings on the board of directors. Additionally, directors serving as
committee members are entitled to receive a fee of $500 per attendance at each
regularly scheduled committee meeting.
Other Arrangements. During the year ended March 31, 1997, the Company
------------------
granted stock options to three non-officer directors under the Company's
Nonqualified Stock Option Plan, as follows:
15
<PAGE>
OPTIONS GRANTED TO NON-OFFICER DIRECTORS
IN FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Number of Market Price
Options Exercise on Date of Expiration
Name Granted Price Grant Date
- ---- ------- ----- ------------ ----------
<S> <C> <C> <C> <C>
Martin T. Hart 15,000 $6.00 $5.62 10/22/01
J.R. Holland, Jr. 15,000 $6.00 $5.62 10/22/01
Bruce I. Raben 15,000 $6.00 $5.62 10/22/01
</TABLE>
EMPLOYMENT CONTRACTS
Mr. Richard H. Bard, the Company's chief executive officer and president,
is in the second year of a three-year employment contract. Mr. Bard's
employment contract terminates March 31, 1999. The employment contract
provides for a salary of $150,000 for the first year, $175,000 for the second
year, and $200,000 for the third year. Mr. Bard is also entitled to bonuses in
such amount as the board of directors may determine. Additionally, Mr. Bard is
entitled to grants of additional options during the term of the contract in an
amount sufficient 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. If the Company is sold or merged into
another company prior to March 31, 2000, Mr. Bard is entitled to a stock bonus
of 250,000 shares of common stock. In addition to benefits available generally
to other Company employees, Mr. Bard is entitled to a $500 per month automobile
allowance 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. During the fiscal year ended March 31, 1997, no
bonus was granted to Mr. Bard; however, pursuant to the terms of his employment
contract, Mr. Bard was issued options to purchase a total of 342,878 shares of
common stock. [See EXECUTIVE COMPENSATION -Stock Options.]
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 4, 1997, the number of and
percentage of outstanding shares of the Company's common stock, beneficially
owned by (a) all directors and nominees, naming them, (b) the named executive
officer, (c) the directors and executive officers of the Company as a group,
without naming them, and (d) persons or groups known by the Company to own
beneficially 5% or more of the common stock:
16
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF TITLE PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS OF CLASS
- ---------------- -------------------- -------- ---------
<S> <C> <C> <C>
Richard H. Bard 1,691,677/(1)/ Common 27.85%
535 16th Street, Suite 920
Denver, CO 80206
Yoram Curiel 387,135/(2)/ Common 7.54%
535 16th Street, Suite 920
Denver, CO 80206
Martin T. Hart 242,148/(3)/ Common 4.79%
875 Race Street
Denver, CO 80206
J.R. Holland, Jr. 15,000/(4)(5)/ Common 00.30%
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
Hunt Capital Group, L.L.C. 838,929/(5)(6)/ Common 15.85%
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
Richard D. Lamm 71,583/(7)/ Common 1.43%
c/o University of Denver
2301 S. Gaylord St., 2nd Fl
Denver, CO 80208
Gudrun Pasternak/ 466,668/(8)/ Common 9.38%
Hans M. Andresen
Bismarckstrasse 120, Krefeld
Germany
Philena Enterprises, Inc./ 299,134/(9)/ Common 8.60%
Mark Bar
P. O. Box 6246, Denver, CO 80206
Bruce I. Raben 58,346/(10)/ Common 1.16%
Suite 2340
1999 Avenue of The Stars
Los Angeles, CA 90067
All executive officers 2,599,035/(11)/ Common 39.85%
and directors as a group
(11 persons)
</TABLE>
_______________________
(1) Includes 150,000 shares held by Richard H. Bard, IRA, and 20,000 shares
held as custodian for a minor child. In addition, includes the right to
acquire, currently or within 60 days, 1,099,212 shares of common stock.
17
<PAGE>
(2) Includes 15,534 shares held by Mr. Curiel's spouse and 65,392 shares held
by Dynagroup International, Inc., an affiliate of Mr. Curiel. In addition,
includes the right to acquire, currently or within 60 days, 163,334 shares
of common stock.
(3) Includes the right to acquire, currently or within 60 days, 79,000 shares
of common stock.
(4) Includes the right to acquire, currently or within 60 days, 15,000 shares
of common stock.
(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.
(6) Includes the right to acquire, currently or within 60 days, 320,000 shares
of common stock.
(7) Includes 9,470 shares held as trustee for his children and 10,200 shares
held by his spouse. In addition, includes the right to acquire, currently
or within 60 days, 25,000 shares of common stock.
(8) Gudrun Pasternak and Hans M. Andresen are husband and wife and each own
233,334 shares of common stock. Ms. Pasternak disclaims beneficial
ownership of the shares held by Ms. Andresen. Mr. Andresen disclaims
beneficial ownership of the shares held by Ms. Pasternak.
(9) Mr. Bar is the president of Philena Enterprises, Inc. and for purposes of
calculating the percentage of beneficial owner, the shares held by Philena
Enterprises, Inc. and Mr. Bar have been aggregated.
(10) Includes 6,000 shares held by Mr. Raben's spouse. Mr. Raben disclaims any
beneficial interest in these shares. In addition, includes the right to
acquire, currently or within 60 days, 40,000 shares of common stock.
(11) Includes the right to acquire, currently or within 60 days, 1,548,045
shares of common stock.
As of June 4, 1997, the Company also had outstanding 1,793 Series B, In
connection with the Company's early conversion incentive offer, the holders of
5,675 Series B Shares converted their Series B Shares into 945,833 shares of
common stock. In connection with such conversions, the Company issued warrants
to purchase 472,916 shares of common stock. (See Notes to Consolidated
Financial Statements--Note 4.)
The holders of the Series B Shares are entitled to one vote for each share
of common stock issuable upon conversion of the Series B Shares on all matters
to which holders of the common stock are entitled to vote. In addition, under
Colorado law, the holders are entitled to vote on certain matters, including
matters effecting the rights of the Series B Shares, as a class. No
18
<PAGE>
director or executive officer owns beneficially any Series B Shares. The
following table sets forth the number of and percentage of outstanding Series B
Shares beneficially owned by any person or groups known to the Company to own
beneficially 5% or more of the Series B Shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF TITLE PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS OF CLASS
- --------------------------- -------------------- --------- ---------
<S> <C> <C> <C>
Bank J. Vontobel & Co. AG 115 Series B 6.41%
Bahnhof STR 3 Preferred
8022 Zurich
Switzerland
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following outlines certain relationships and related transactions
during the fiscal years ended March 31, 1997, and March 31, 1996.
Effective March 27, 1997, the Company completed a private offering of
526,899 shares of common stock. The purchase price of such shares was $6.00 per
share. The purchasers of the shares were granted certain registration rights.
In the offering, Mr. Bard and Mr. Lamm together with his spouse, purchased
16,866 and 12,000 shares of common stock for a purchase price of $101,200 and
$72,000, respectively.
On December 16, 1996, the Company completed the purchase of all the shares
of OP&P. The purchase was effective as of November 1, 1996. Such shares were
held by Ms. Gudrun Pasternak and Mr. Hans M. Andresen. OP&P was a European
distributor of value-added packaging and point of sale material, including
lenticular and holographic products, authentication products, and security
materials and acted as the Company's European sales agent. The purchase price
for the stock was approximately U.S. $5,000,000 payable U.S. $1,200,000 in cash,
promissory notes aggregating U.S. $1,000,000, and the issuance of 466,668
unregistered shares of the Company's common stock, valued for the purposes of
the transaction at $2,800,000. In addition, in connection with the acquisition,
Ms. Pasternak & Mr. Andresen entered into three-year employment agreements with
OP&P. Such agreements provide for an annual salary of DM 100.000, from November
1, 1996, through October 31, 1997, DM 150.000 from November 1, 1997, through
October 31, 1998, and DM 200.000 from November 1, 1998, through October 31, 1999
(approximately, U.S. $58,000, $87,000, and $116,000 based on the current
exchange rate) for each Ms. Pasternak and Mr. Andresen.
On June 29, 1994, pursuant to investment agreements with the Company, Hunt
Capital Group, L.L.C. ("Hunt") and Mr. Bard, loaned the Company $750,000 and
$500,000, respectively. Such loans were reflected by convertible promissory
notes (the "Notes") due July 1, 2001. The Notes were secured by a pledge of the
stock of OpSec International and the Company's patents (the "Note Security").
19
<PAGE>
Hunt also 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. Mr. Bard also 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.
Effective July 1, 1995, the Notes were canceled and Note Security
terminated in exchange for the issuance of 240,000 and 160,000 shares of the
Company's Series A Convertible Preferred Stock (the "Series A Shares"). (Such
exchange hereinafter referred to as the "First Exchange.") The Series A Shares
were entitled to quarterly dividends beginning with the quarter ended 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.
The Series A Shares were convertible into stock of the Company at the rate of
one share of common stock for one Series A Share. In connection with the First
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.
Effective March 26, 1996, Hunt and Mr. Bard exchanged their Series A Shares
for 1,440 and 960 Series B Shares, respectively (the "Second Exchange").
Pursuant to the terms of the Second Exchange, the option agreements and guaranty
issued in the First Exchange were terminated.
Effective October 1, 1996, in connection with the Company's early
conversion incentive offered to all holders of the Series B Shares, Hunt and Mr.
Bard converted their Series B Shares into shares of common stock. Pursuant to
the incentive offer, they were issued warrants to purchase 120,000 and 80,000
shares of common stock, at an exercise price of $6.00 per share.
Mr. Bard has an employment agreement with the Company. (See Item 10.
EXECUTIVE COMPENSATION - EMPLOYMENT CONTRACTS.)
20
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements:
- --------------------
For a list of financial statements, see Index to Financial Statements, page
23.
(a) List of Exhibits required by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
Exhibit Exhibit Page
Number Name Reference
------ ---- ---------
<S> <C> <C>
21.1.1 List of Subsidiaries Filed herewith at
page number 21.1.1
27.1.1 Financial Data Schedule Filed herewith at
page number 27.1.1
</TABLE>
(b) Reports on Form 8-K during the Company's fourth fiscal quarter ending March
31, 1997.
<TABLE>
<CAPTION>
Date of Report Items Reported
-------------- --------------
<S> <C>
February 19, 1997 Item 7. Financial Statements for
OpSec Pasternak & Partner GmbH
</TABLE>
21
<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, 1997 and 1996, 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, 1997 and 1996, 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 30, 1997
F-1
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,064,088 $3,231,823
Accounts receivable, less allowance of
$91,287 and $20,773 in 1997 and 1996,
respectively 5,105,966 1,660,381
Inventory 1,626,752 421,759
Prepaid expenses 290,370 59,782
-----------------------
Total current assets 9,087,176 5,373,745
Property and equipment, net 940,959 579,002
Other assets:
Patents and patent applications, net of
accumulated amortization of $89,610 and
$65,786 in 1997 and 1996, respectively 315,471 272,331
Goodwill, net of accumulated amortization
of $343,605 and $128,465 in 1997 and 1996,
respectively 6,665,486 1,212,040
License and non-compete agreements, net
of accumulated amortization of $163,603 and
$90,056 in 1997 and 1996, respectively 662,216 589,978
Deposits and other 122,943 36,633
-----------------------
Total assets $17,794,251 $8,063,729
=======================
</TABLE>
See accompanying notes
F-2
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1997 1996
--------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,504,150 $ 573,250
Accrued expenses 474,893 201,784
Current portion of capital lease obligations 15,576 40,419
Notes payable 1,000,000 -
--------------------------
Total current liabilities 3,994,619 815,453
Deferred tax liability 25,840 32,300
Capital lease obligations 6,507 13,317
Stockholders' equity:
Voting convertible preferred stock, $0.01 par value
2,500,000 shares authorized; 1,793 and 6,693 Preferred
Series B shares issued and outstanding in
1997 and 1996, respectively
(preference in liquidation $1,954,370) 18 67
Common stock $0.005 par value:
15,000,000 shares authorized; 4,973,952
and 3,034,552 shares issued and outstanding
in 1997 and 1996, respectively 24,870 15,173
Additional paid-in capital 20,113,208 13,515,502
Foreign currency translation adjustment 51,382 7,641
Accumulated deficit (6,422,193) (6,335,724)
--------------------------
Total stockholders' equity 13,767,285 7,202,659
--------------------------
Total liabilities and stockholders' equity $17,794,251 $ 8,063,729
=========================
</TABLE>
Commitments (See Note 7)
See accompanying notes
F-3
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996
----------------------------
<S> <C> <C>
Revenues $ 13,085,764 $8,953,740
Cost of goods sold 8,741,924 6,045,094
----------- ----------
Gross margin 4,343,840 2,908,646
Operating expenses:
Salaries and related costs 1,961,348 1,589,484
Depreciation 144,739 94,895
Amortization 374,370 147,558
Other operating expenses 1,571,874 1,086,182
----------- ----------
Total operating expenses 4,052,331 2,918,119
----------- ----------
Income (loss) from operations 291,509 (9,473)
Other income (expense):
Interest expense (24,808) (64,699)
Interest income 100,085 25,743
Other 9,553 4,233
Foreign currency transaction income (loss) 5,030 (3,809)
----------- ----------
Total other income (expense) 89,860 (38,532)
Income (loss) before income taxes 381,369 (48,005)
----------- ----------
Income tax (expense) benefit (36,189) 50,697
----------- ----------
Net income $ 345,180 $ 2,692
=========== ==========
Dividends on preferred stock 431,649 41,803
----------- ----------
Net income (loss) applicable to common stock $ (86,469) $ (39,111)
=========== ===========
Net income (loss) per share of common stock:
Primary $ (.03) $ (0.01)
============ ===========
Weighted average number of shares outstanding:
Primary 3,381,037 3,023,282
============ ===========
</TABLE>
See accompanying notes
F-4
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Series A Preferred Series B Common Stock Paid-in Translation
Shares Amount Shares Amount Shares Amount Capital Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 - $ - - $ - 3,007,428 $15,036 $8,412,198 $11,235
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 - - - - - - - (3,594)
Net income - - - - - - - -
------------------------------------------------------------------------------------------
Balance at March 31, 1996 - - 6,693 67 3,034,552 15,173 13,515,502 7,641
Stock issued for cash:
Preferred Series B, net of
issuance costs of $95,914 - - 775 8 - - 679,078 -
Common stock, net of
issuance costs of $33,114 - - - - 526,899 2,635 3,125,633 -
Stock issued upon conversion:
Conversion of Preferred
Series B into common stock
net of issuance costs
of $4,672 - - (5,675) (57) 945,833 4,729 (4,672) -
Common stock issued
in business combination - - - - 466,668 2,333 2,797,667 -
Dividend declared on
Preferred Series B - - - - - - - -
Foreign currency translation
adjustment - - - - - - - 43,741
Net income - - - - - - - -
------------------------------------------------------------------------------------------
Balance at March 31, 1997 - $ - 1,793 $ 18 4,973,952 $24,870 $20,113,208 $51,382
==========================================================================================
Total
Stockholder's
Accumulated Equity
Deficit (Deficit)
<S> <C> <C>
Balance at March 31, 1995 $(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 B, net of issuance
costs of $39,742 - 1,210,258
Conversion of Preferred
Series A into Preferred
Series B - -
Stock issued for interest - 37,500
Options exercised - 43,800
Dividend declared on
Preferred Series B (41,803) (41,803)
Foreign currency translation
adjustment - (3,594)
Net income 2,692 2,692
--------------------------------
Balance at March 31, 1996 (6,335,724) 7,202,659
Stock issued for cash:
Preferred Series B, net of
issuance costs of $95,914 - 679,086
Common stock, net of
issuance costs of $33,114 - 3,128,268
Stock issued upon conversion:
Conversion of Preferred
Series B into common stock
net of issuance costs
of $4,672 - -
Common stock issued
in business combination - 2,800,000
Dividend declared on
Preferred Series B (431,649) (431,649)
Foreign currency translation
adjustment - 43,741
Net income 345,180 345,180
--------------------------------
Balance at March 31, 1997 $(6,422,193) $13,767,285
================================
</TABLE>
See accompanying notes
F-5
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 345,180 $ 2,692
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 519,109 242,453
Deferred tax expense (benefit) (6,460) 32,300
Common shares issued for interest - 37,500
Loss on disposition of equipment - 1,884
Change in operating assets and liabilities:
Accounts receivable (3,202,620) (360,373)
Inventory (1,204,992) (79,694)
Prepaid expenses (204,701) (2,345)
Accounts payable and accrued expenses 1,934,211 (262,679)
---------------------------
Net cash used in operating activities (1,820,273) (388,262)
INVESTING ACTIVITIES
Patent application costs (66,964) (10,068)
Acquisition - OpSec Pasternak & Partner GmbH (1,183,756) -
Acquisition - Dimensional Printing Industries, LLC (650,668) -
Property and equipment (418,352) (222,314)
Licensing agreements (195,414) -
Notes receivable (100,000) -
Other deposit and intangible assets, (107,832) (176,093)
---------------------------
Net cash used in investing activities (2,722,986) (408,475)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 3,128,268 43,800
Proceeds from issuance of preferred stock, net 679,086 3,811,950
Payments on notes and capital lease obligations (43,922) (264,818)
Payments of preferred stock dividends (431,649) (41,803)
---------------------------
Net cash provided by financing activities 3,331,783 3,549,129
Effect of exchange rate changes on cash flows 43,741 (3,594)
---------------------------
Net increase (decrease) in cash (1,167,735) 2,748,798
Cash, beginning of period 3,231,823 483,025
---------------------------
Cash, end of period $ 2,064,088 $3,231,823
===========================
</TABLE>
F-6
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996
-------------------------
<S> <C> <C>
Supplemental disclosure of cash flow activities
Interest paid $ 24,808 $ 27,199
Income taxes paid - 67,183
Conversion of subordinated notes into Preferred
Series A shares - 1,210,258
Common stock issued to acquire OpSec Pasternak &
Partner GmbH 2,800,000 -
Promissory note issued to acquire OpSec Pasternak &
Partner GmbH 1,000,000 -
Conversion of Preferred Series B shares into
common stock 3,908,294 -
Equipment acquired through capital lease transactions 12,268 -
</TABLE>
See accompanying notes
F-7
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
March 31, 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.
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.
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, 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
Vehicles 4
Property and equipment at March 31 consist of:
1997 1996
------------------------
Leasehold improvements $ 110,769 $ 105,310
Computer equipment 237,564 182,472
Other equipment and furniture 180,334 52,559
Production equipment 717,836 364,620
Vehicles 75,647 75,147
------------------------
1,322,150 780,108
Less accumulated depreciation (381,191) (201,106)
------------------------
$ 940,959 $ 579,002
========================
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, 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.
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.
F-9
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
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.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock, after preferred stock dividend requirements, for
the years ended March 31, 1997 and 1996, are based on weighted average shares of
common stock outstanding of 3,381,037 and 3,023,282, respectively. Common
equivalent shares from stock options and warrants are excluded from the
computations as their effect is antidilutive. The convertible preferred stock
is not considered to be a common equivalent.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred.
F-10
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS
Certain amounts in the March 31, 1996 financial statements were reclassified to
conform with the March 31, 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.
The following unaudited pro forma combined results of operations for fiscal
years 1997 and 1996 have been prepared assuming that the acquisition of OpSec
Pasternak 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 and, (ii) the interest expense related to the seller
financing of the purchase price.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Sales and royalty income $13,751,000 $9,742,000
Net income (loss) 254,995 42,000
Net income (loss) applicable to common stock (176,654) 197
Net income (loss) per share of common stock $ (.05) $ 0.00
</TABLE>
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 Preferred Series A shares in exchange for the cancellation of
$1.25 million of Convertible Subordinated Secured Notes.
F-11
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
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>
F-12
<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 March 31, 1997, the cumulative unpaid dividend on the
Series B Shares of $35,860 was declared and subsequently paid on April 1, 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 March 31, 1997 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 298,833
Stock option plans 2,431,414
Warrants 1,086,932
-----------
3,817,179
===========
</TABLE>
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 March 31, 1997. All ISOP and NSOP options granted in fiscal 1997
and 1996 were granted at an exercise price equal to or greater than fair market
value at the date of grant.
F-13
<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 years ended March 31, 1997 and 1996:
<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 $.25 - $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 $ .25-$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 $ .25-$7.63 $4.46
=====================================================
</TABLE>
The following is a summary of warrants granted, exercised and outstanding for
the fiscal years ended March 31, 1997, 1996 and 1995:
<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
=============
</TABLE>
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
F-14
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK BASED COMPENSATION (CONTINUED)
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 l997
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):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996
-------------------------
<S> <C> <C>
Pro forma net loss $ (758,695) $ (82,269)
Pro forma net loss applicable
to common stock (1,190,344) (124,072)
Pro forma earnings per share
Primary (.35) (.04)
</TABLE>
Exercise prices for options outstanding as of March 31, 1997 ranged from $.25 to
$7.63. The weighted-average remaining contractual life of those options is 3.28
years.
F-15
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. 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:
YEAR ENDED MARCH 31
1997 1996
------------------
Computer/production equipment $ 24,654 $12,112
Vehicles 79,035 75,147
------------------
103,689 87,259
Less accumulated amortization 60,529 35,375
------------------
$ 43,160 $51,884
==================
Future minimum payments for capitalized leases were as follows at March 31,
1997:
1998 $ 17,253
1999 5,153
2000 3,006
--------
Total minimum lease payments 25,412
Less amounts representing interest 3,329
--------
Present value of net minimum
lease payments 22,083
Less current maturities 15,576
--------
Long-term obligation $ 6,507
========
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 $321,225 and $278,708 in
1997 and 1996, respectively.
Future minimum lease payments under these noncancelable operating leases as of
March 31, 1997 are as follows:
1998 $289,884
1999 222,714
2000 188,038
2001 42,436
2002 8,210
Thereafter 30,788
--------
Total minimum lease payments $782,070
========
F-16
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. LEASES AND COMMITMENTS (CONTINUED)
During 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, 1997 and 1996 were
$48,955 and $41,946, respectively.
8. 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 (benefit) for income taxes is comprised of the following:
1997 1996
--------------------
Current:
Federal and state $ - $ -
Foreign 42,649 (82,997)
-------------------
42,649 (82,997)
Deferred:
Federal and state - -
Foreign (6,460) 32,300
-------------------
(6,460) 32,300
-------------------
$ 36,189 $(50,697)
===================
A reconciliation between the actual income tax expense (benefit) and income
taxes computed by applying the statutory tax rates for the years ended March 31
is as follows:
Year Ended March 31
1997 1996
----------------------
Computed expected tax expense
(benefit) $ 130,000 $ (16,000)
State income tax expense 28,000 3,000
Use of net operating loss
carryforwards (287,000) (34,000)
Non-deductible foreign losses 135,000 --
Other 30,189 (3,697)
----------------------
$ 36,189 $ (50,697)
======================
F-17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
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:
YEAR ENDED MARCH 31
1997 1996
-------------------------
Deferred tax liabilities:
Amortization $ 122,929 $ 110,181
Depreciation 4,309 954
-------------------------
Total deferred tax liabilities 127,238 111,135
Deferred tax assets:
Tax net operating loss carryforwards 1,828,280 2,138,087
Deferred wages/option grants 92,715 90,273
-------------------------
Total deferred tax assets 1,920,995 2,228,360
Valuation allowance for deferred tax assets (1,819,597) (2,149,525)
-------------------------
Total deferred tax assets 101,398 78,835
-------------------------
Net deferred tax liabilities $ 25,840 $ 32,300
=========================
At March 31, 1997, the Company has aggregate net operating loss carryforwards of
approximately $4,941,000 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
foreign subsidiaries as the Company intends to reinvest these undistributed
earnings. There were no undistributed earnings of foreign subsidiaries at
March 31, 1997.
9. SEGMENTS OF BUSINESS
The following table sets forth financial information for the Company's foreign
and domestic segments for the year ended March 31, 1997:
WESTERN
EUROPE DOMESTIC TOTAL
------------------------------------
Revenues $7,803,581 $5,282,183 $13,085,764
Income (loss) from operations (344,396) 635,905 291,509
Identifiable assets 9,767,830 8,026,413 17,794,251
F-18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENTS
On April 30, 1997, the Company purchased a manufacturing and office facility of
approximately 14,500 square feet in Baltimore County, Maryland. The site
consists of approximately 9 acres. The Company has commenced improvements to
the facility including a 10,000 square foot addition. All work should be
completed by October 31, 1997. Total cost of the property, including
improvements and expansion costs, will be approximately $1.5 million.
On April 30, 1997, the Company opened a revolving line of credit with
Mercantile-Safe Deposit & Trust Company in Baltimore, Maryland. The $2 million
facility is secured by the assets of the Company.
The Company has also received a commitment from Mercantile-Safe Deposit & Trust
Company to finance the purchase and improvements to the production facility
acquired in Baltimore County, Maryland. The commitment is for $1,235,000 and
will be in the form of Industrial Development Bonds ("IDB") authorized by
Baltimore County. All approvals have been obtained, and closing on the IDB
funding is anticipated to occur in mid-June 1997.
Shortly after year end, the Company 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.
F-19
<PAGE>
EXHIBIT 21.1.1
--------------
<TABLE>
<CAPTION>
STATE OF COUNTRY ASSUMED
NAME OF ORGANIZATION NAMES/DBA
- ---- ---------------- ---------
<S> <C> <C>
Optical Security Industries, Inc. Colorado OpSec U.S.
Optical Security Industries United Kingdom OpSec
International, Plc International, Plc
OpSec Pasternak & Partner Holding GmbH Germany -
OpSec Pasternak & Partner GmbH & Co., K.G. Germany -
Dimensional Printing Industries, Inc. Colorado -
TSL Incorporated Colorado -
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996
<PERIOD-START> APR-01-1996 APR-01-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 2,064,088 3,231,823
<SECURITIES> 0 0
<RECEIVABLES> 5,197,253 1,681,154
<ALLOWANCES> 91,287 20,773
<INVENTORY> 1,626,752 421,759
<CURRENT-ASSETS> 9,087,176 5,373,745
<PP&E> 1,322,150 780,108
<DEPRECIATION> 381,191 201,106
<TOTAL-ASSETS> 17,794,251 8,063,729
<CURRENT-LIABILITIES> 3,994,619 815,453
<BONDS> 0 0
0 0
18 67
<COMMON> 24,870 15,173
<OTHER-SE> 13,742,397 7,187,419
<TOTAL-LIABILITY-AND-EQUITY> 17,794,251 8,063,729
<SALES> 13,085,764 8,953,740
<TOTAL-REVENUES> 13,085,764 8,953,740
<CGS> 8,741,924 6,045,094
<TOTAL-COSTS> 4,052,331 2,918,119
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 24,808 64,699
<INCOME-PRETAX> 381,369 (48,005)
<INCOME-TAX> 36,189 (50,697)
<INCOME-CONTINUING> 345,180 2,692
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 345,180 2,692
<EPS-PRIMARY> (.03) (.01)
<EPS-DILUTED> 0 0
</TABLE>
