<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One) CONFORMED
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Period Ended June 30, 1998
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 5,968,953 June 30, 1998
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30
1998 1997
----------- -----------
ASSETS
Current assets:
Cash $ 1,059,934 $ 1,512,351
Accounts receivable, less allowance
of $21,353 and $8,648 at the quarter
ended June 30, 1998 and 1997, respectively 2,596,620 1,793,837
Inventory 1,510,695 671,134
Prepaid expenses 169,918 209,984
Net current assets of discontinued operations 611,833 1,884,700
----------- -----------
Total current assets 5,949,000 6,072,006
Property and equipment, net 2,814,389 1,249,129
Other assets:
Patents and patent applications, net of
accumulated amortization of $104,327 and
$95,610 at the quarter ended June 30, 1998
and 1997, respectively 280,136 325,455
Goodwill, net of accumulated amortization of
$308,529 and $212,247 at the quarter ended
June 30, 1998 and 1997, respectively 4,537,134 1,128,258
License and non-compete agreements, net of
accumulated amortization of $261,015 and
$182,310 at the quarter ended June 30,
1998 and 1997, respectively 479,060 555,557
Deposits and other 160,374 402,214
Net long-term assets of discontinued operations 4,280,383 5,983,944
----------- -----------
Total assets 18,500,476 15,716,563
=========== ===========
See accompanying notes
1 of 26
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
June 30
1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,076,410 $ 813,907
Accrued expenses 592,762 231,097
Current portion of capital lease obligations 4,385 6,000
Current portion of long-term obligations 82,344 613,729
Allowance for operating losses of discontinued
operations 341,509 -
------------ ------------
Total current liabilities 2,097,410 1,664,733
Deferred tax liability - 25,840
Capital lease obligations 1,429 4,070
Long-term obligations 1,070,151 -
Convertible debentures 2,770,000 -
Stockholders' equity:
Voting convertible preferred stock, $0.01 par value:
2,500,000 shares authorized; 1,793 Preferred
Series B shares issued and outstanding
(preference in Liquidation $1,954,370) 18 18
Common stock, $0.005 par value:
15,000,000 shares authorized; 5,968,953 and
5,019,283 shares issued and outstanding at
June 30, 1998 and 1997, respectively 29,845 25,096
Additional paid-in capital 23,274,389 20,133,204
Foreign currency translation adjustment 86,770 99,594
Accumulated deficit (10,829,536) (6,235,992)
------------ ------------
Total stockholders' equity 12,561,486 14,021,920
------------ ------------
Total liabilities and stockholders' equity $ 18,500,476 $ 15,716,563
============ ============
</TABLE>
See accompanying notes
2 of 26
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30
1998 1997
---------- ----------
Revenues $3,083,590 $2,129,082
Cost of goods sold 1,754,464 1,234,867
---------- ----------
Gross margin 1,329,126 894,215
Operating expenses:
Salaries and related costs 595,105 311,188
Depreciation 42,152 20,452
Amortization 63,026 26,769
Other operating expenses 346,755 257,173
---------- ----------
Total operating expenses 1,047,038 615,582
---------- ----------
Income from operations 282,088 278,633
Other income (expense)
Interest income 7,022 5,230
Interest expense (35,518) (9,861)
Other (1,254) -
Foreign currency transaction income (868) (1,080)
---------- ----------
Total other expense (30,618) (5,711)
---------- ----------
Income before income taxes 251,470 272,922
Income tax expense - -
---------- ----------
Income from continuing operations 251,470 272,922
Discontinued operations:
Loss from operations of discontinued
segment - (50,862)
---------- ----------
Net income 251,470 222,060
Dividends on preferred stock 35,860 35,860
---------- ----------
Net income applicable to
common stock $ 215,610 $ 186,200
========== ==========
3 of 26
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations (continued)
(Unaudited)
Three Months Ended
June 30
1998 1997
---------- ----------
Earnings (loss) per share:
Basic:
Continuing operations $ 0.04 $ 0.05
Discontinued operations $ - $ (0.01)
---------- ----------
Net income applicable to common stock $ 0.04 $ 0.04
========== ==========
Diluted:
Continuing operations $ 0.03 $ 0.04
Discontinued operations $ - $ (0.01)
---------- ----------
Net income applicable to common stock $ 0.03 $ 0.03
========== ==========
Weighted average number of shares outstanding:
Basic: 5,968,953 5,019,283
========== ==========
Diluted:
Weighted shares outstanding 5,968,953 5,019,283
Shares attributed to options and warrants 289,964 1,167,567
---------- ----------
6,258,917 6,186,850
========== ==========
See accompanying notes
4 of 26
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net income 251,470 222,060
Adjustments to reconcile net
income to net cash
provided (used) in operating activities:
Depreciation and amortization 239,794 187,743
Changes in operating assets and liabilities
Accounts receivable 205,192 1,549,274
Inventory (56,008) 267,607
Prepaid expenses 136,183 (129,439)
Accounts payable and accrued expenses (759,904) (1,158,048)
Reserve for discontinued operations (558,491) -
---------- ----------
Net cash provided (used) in
operating activities (541,764) 939,197
INVESTING ACTIVITIES
Patent application costs (66) (15,984)
Acquisition - Advantage Technology, Inc. (2,488,227) -
Purchase of property and equipment (189,425) (870,308)
Licensing agreements - (432)
Other deposits and intangible assets 67,790 (220,487)
---------- ----------
Net cash used in investing activities (2,609,928) (1,107,211)
5 of 26
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
June 30
1998 1997
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common
stock, net 1,154,467 20,222
Proceeds from issuance of
convertible debentures, net 2,770,000 -
Loan proceeds 89,155 613,729
Payments on notes and capital
lease obligations (571,619) (1,012,013)
Cost of financing - (18,013)
Payments on preferred stock dividends (35,860) (35,860)
----------- -----------
Net cash provided (used) by
financing activities 3,406,143 (431,935)
Effect of exchange rate on cash flows 8,095 48,212
----------- -----------
Net increase (decrease) in cash 262,546 (551,737)
Cash, beginning of period 797,388 2,064,088
----------- -----------
Cash, end of period $ 1,059,934 $ 1,512,351
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITIES
Interest paid 35,518 13,431
Common stock issued to acquire
Advantage Technology, Inc. 1,724,000 -
Income taxes paid - 3,189
See accompanying notes
6 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
June 30, 1998
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"),
OpSec Advantage, Inc. ("OpSec Advantage"), 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 other commercial applications, including holography and
dimensional printing ("lenticular products") for book illustrations and for
consumer product promotions. The Company's principal markets are the United
States and Western Europe. Refer to Note 3 for discussions regarding the
Company's intent to dispose of the lenticular products business.
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 the
consolidated
7 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY (CONTINUED)
statements of operations. 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. With the exception of two unusual bad debt losses
aggregating $613,685 in the lenticular business, for fiscal year 1998, 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, accounts receivable,
accounts payable and long-term debt, 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
-------
Buildings 39
Leasehold improvements 2-12
Computer equipment 5
Other equipment and furniture 5-7
Production equipment 5-10
Vehicles 4
8 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment at June 30 consist of:
1998 1997
----------- -----------
Land $ 304,066 $ 304,066
Buildings 1,342,677 405,421
Leasehold improvements 126,528 122,075
Computer equipment 294,102 253,136
Other equipment and furniture 90,767 54,239
Production equipment 1,075,920 378,084
Vehicles 46,040 88,127
----------- -----------
3,280,100 1,605,148
Less accumulated depreciation (465,711) (356,019)
----------- -----------
$ 2,814,389 $ 1,249,129
=========== ===========
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, 1998 is associated with the acquisition of
OpSec Advantage in May 1998, the acquisition of OpSec Pasternak and the purchase
of a 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.
All goodwill associated with the lenticular business has been reclassified as
discontinued operations (see Note 3).
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, the assets
would be written down to their fair value, which is normally measured by
discounting estimated future cash flows.
9 of 26
<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 consisted principally of raw materials,
including polyester films and foils used in holographic label production and
lens material used in dimensional printing. A portion of the inventory
consisted of work-in-process and finished goods.
PATENTS AND PATENT APPLICATIONS
The Company capitalizes legal costs and other fees 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
due to alternative technologies developed by similar entities.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. In addition, this Statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
10 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Statement is effective for fiscal years beginning after December 15, 1997.
Management believes there will be no significant impact on the Company's
financial reporting as a result of adopting this Statement.
During 1997, the FASB issued Statement No. 131, Disclosures about Segment
Reporting of an Enterprise and Related Information, which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
This Statement is effective for fiscal years beginning after December 15, 1997.
Management does not expect any significant changes as a result of adopting this
Statement.
EARNINGS PER SHARE OF COMMON STOCK
In 1997, the FASB issued Statement No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The Company has
reported its income or loss per share for both continuing and discontinued
operations, after preferred stock dividend requirements. Earnings per share for
the quarters ended June 30, 1998 and 1997 is based on weighted average shares of
common stock outstanding of 5,968,953 and 5,019,283, respectively. Common
equivalent shares from stock options and warrants have been included in the
computation of income per share from continuing and discontinued operations for
diluted earnings per share in accordance with SFAS 128. The convertible
preferred stock has been excluded from the calculation as the effect, net of
related dividend requirements, would be antidilutive.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. During the
quarter ended June 30, 1998, the Company incurred $38,252 in costs, of which
$9,330 was for continuing operations and $28,922 was for discontinued
operations. Research and development costs for the quarter ended June 30, 1997
were immaterial.
11 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the June 30, 1997 financial statements were reclassified to
conform with the June 30, 1998 presentation.
2. BUSINESS COMBINATIONS
Effective May 1, 1998, the Company, through its subsidiary, OpSec Advantage,
purchased substantially all of the assets of Advantage Technology, Inc. ("ATI"),
based in Lancaster Pennsylvania. The purchase price, including acquisition
costs, was approximately $4.5 million, including common shares of the Company
valued at $2 million and a promissory note of $2 million. The acquisition
resulted in goodwill of $3,505,159. The Company used funds raised in a private
placement to pay off the $2 million note and $452,000 in debt obligations
assumed in the purchase. The purchase price is subject to certain adjustments
based on achieving certain revenue and earning targets. ATI has as its
principal technology, Advantage/TM/, a patented and proprietary optically
variable security coating that is applied to labels and over-laminates to
protect documents and products against counterfeiting, alteration and/or
tampering.
The following unaudited pro forma combined results of operations for the quarter
ended June 30, 1997 has been prepared assuming that the acquisition of OpSec
Advantage occurred at the beginning of the period. In preparing the proforma
data, adjustments have been made for: (I) the amortization of goodwill, and (ii)
the interest expense related to debentures issued to complete the purchase.
Sales and royalty income $2,861,968
Net income 117,915
Net income applicable to common stock 82,055
Earnings per share of common stock:
Basic $ 0.01
Diluted $ 0.01
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 $5,021,239. OpSec Pasternak had previously operated as an independent broker
selling the Company's dimensional printed products in Europe.
12 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATIONS (CONTINUED)
During fiscal 1997, the Company formed Dimensional Printing Industries, Inc. 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 during the fiscal year for a
total cost of $650,668, including all related acquisition costs, which have been
recorded as goodwill.
Both OpSec Pasternak and DPI are part of the lenticular segment, which is being
discontinued (see Note 3).
3. DISCONTINUED OPERATIONS
Since September 1996, the Company has operated a lenticular printing business
which drew upon the imaging expertise and resources employed in its security
business. In March 1998, the Company announced that it was discontinuing the
lenticular business, as it was not central to its core competency or strategy of
dominating the security authentication and anti-counterfeiting business.
Discontinuance of the lenticular business included the termination of the
production of lenticular products in Europe and consolidating lenticular
production management in Denver. The Company intends to sell, spin off to
existing shareholders in the form of a dividend, or otherwise dispose of the
lenticular business. Until such time as this occurs, the Company will continue
to finance the lenticular business. The Company's ability to spin off the
lenticular business may be limited due to restrictions in the Debentures issued
in the first quarter of fiscal 1999, which limit the Company's right to provide
start-up funding to a spun-off entity. The Company has estimated a loss on
disposal. As the utilization of prior and future losses for tax purposes is
uncertain, the loss on disposal, shown below, has not been reduced for possible
tax benefits.
Estimated loss on sale and related costs $1,560,000
Operating losses from April 1, 1998 to
anticipated disposal date 900,000
Reserve used in current quarter (558,491)
----------
Remaining reserve $1,901,509
==========
Sales of the lenticular business were $1,275,967 and $3,291,799 in the quarters
ended June 30, 1998 and 1997, respectively. The net operating loss for the same
periods were $558,491 and $50,862 in 1998 and 1997, respectively.
Assets and liabilities for the lenticular business have been segregated from
those of the continuing operation. The consolidated balance sheet and statement
of operations for the quarter ended June 30, 1997 have been restated to reflect
the discontinued operations. The summarized presentation in the balance sheet
is more fully explained below:
13 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
Quarter ended June 30
1998 1997
----------- -----------
Net current assets:
Accounts receivable, net $ 1,029,585 $ 2,878,859
Inventory 476,124 725,511
Other current assets 33,858 173,325
Accounts payable (829,860) (1,480,584)
Accrued expenses (97,874) (412,411)
Net current assets $ 611,833 $ 1,884,700
=========== ===========
Net long-term assets:
Property and equipment, net $ 643,742 $ 515,067
Goodwill and other intangible assets 5,196,641 5,468,877
Less estimated loss on sale (1,560,000) -
Net long-term assets $ 4,280,383 $ 5,983,944
=========== ===========
4. LONG-TERM DEBT
Total debt at quarter end was as follows:
Quarter ended June 30
1998 1997
----------- -----------
Revolving credit facility $ - $ 613,729
Economic Development Revenue Bonds 1,152,495 -
1,152,495 613,729
Less current maturities 82,344 613,729
Long-term obligations $ 1,070,151 $ -
=========== ===========
The Company entered into a $2 million revolving credit facility secured by all
the assets of the Company with Mercantile-Safe Deposit and Trust Company on
April 30, 1997. The agreement is for a three-year term, at which time all
borrowings are due in full. However, the loan is repayable upon demand.
Advances on the line are based on a percentage of eligible domestic accounts
receivable. The facility bears interest at 1% over prime (9.5% at June 30,
1998).
14 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
On April 30, 1997, the Company purchased a manufacturing and office facility in
Baltimore County, Maryland. The property, consisting of an existing building
with approximately 14,500 square feet on a nine-acre site and a newly
constructed 10,000- square-foot addition completed on November 30, 1997, was
financed through the issuance of Economic Development Revenue Bonds. The bond
issue was finalized on July 10, 1997 with Mercantile-Safe Deposit and Trust
Company acting as bondholder and trustee. The term of the bond issue is for 15
years. Principal in the amount of $6,862 is paid monthly plus interest at the
current rate of 7.14%. The rate is subject to adjustment to 84% of the prime
rate periodically announced by Mercantile-Safe Deposit and Trust Company.
In May 1997, the Company paid off the $1 million in short-term seller financing
of a portion of the OpSec Pasternak purchase. The payoff was funded through a
combination of working capital and the revolving credit facility.
Principal maturities of long-term debt for each of the next five fiscal years
and thereafter are:
1999 $ 61,758
2000 82,344
2001 82,344
2002 82,344
2003 and thereafter 761,361
-----------
Total principal maturities $ 1,070,151
===========
5. STOCKHOLDERS' EQUITY
During the quarter ended June 30, 1998, the Company sold $4,030,000 of
securities in a private placement. Of that amount, $2,770,000 was from the sale
of 8% Senior Subordinated Convertible Debentures, (the "Debentures") and
$1,260,000 was from the sale of 210,000 shares of common stock before
anticipated costs of $421,367. Warrants to purchase 24,000 shares at an
exercise price of $6.00 per share were issued to purchasers of common shares.
The Debentures are convertible into common stock at $6.50 per share. The
Company may redeem the Debentures in whole or part commencing June 1, 1999 at
109% of face value, with the premium declining 1.8% per year until July 1, 2004,
at which time redemptions may be made at face value.
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.
15 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
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 shares issued for cash at $1,000 per share and 2,400 shares
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.
Redemption
Date Redeemed Price
---------------------------------------------------------------
On or after March 30, 1998, but prior to the
third anniversary, $1,090
On or after the third anniversary date but
prior to the fourth anniversary date, 1,075
On or after the fourth anniversary date but
prior to the fifth anniversary date, 1,060
On or after the fifth anniversary date but
prior to the sixth anniversary date, 1,040
On or after the sixth anniversary date but
prior to the seventh anniversary date, 1,020
On or after the seventh anniversary date. 1,000
16 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Company is restricted from paying dividends on its common shares pursuant to
the terms of its Preferred Series B shares. No dividends or other payments can
be declared and paid on the common stock unless the Company also declares and
pays dividends on the shares of common stock issuable upon conversion of the
Series B shares and unless there are no accrued and unpaid dividends on the
Series B shares. On June 30, 1998, the cumulative unpaid dividend on the Series
B Shares of $35,860 was declared and subsequently paid in July 1998.
On July 16, 1998, the Company's chief executive officer entered into an
amendment to his employment contract with the Company extending his employment
for an additional two years. The chief executive officer is in the third year
of his employment contract which expires March 31, 2001. The employment contract
provides for a salary of $200,000 for the third year, $240,000 for the fourth
and fifth year, and bonuses in such amount as the board of directors may
determine. As additional compensation, the chief executive officer is entitled
to grants of stock options during the term of the contract in an amount
sufficient to maintain a 20% beneficial ownership of the common stock, his
beneficial ownership of the common stock as of December 31, 1995 ("Base
Ownership"). If the Company is sold or merged into another company prior to
March 31, 2003, the chief executive officer is entitled to a stock bonus of
250,000 shares of common stock. In addition to benefits available generally to
other Company employees, the chief executive officer is entitled to a $500 per
month automobile allowance and reimbursement of expenses incurred on behalf of
the Company. If the Company terminates the chief executive officer's employment
prior to the expiration of the contract, he 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, 1998 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 2,059,578
Warrants 1,081,765
---------
3,440,176
=========
6. 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, 1998. All ISOP and NSOP options granted in the quarter
ended June 30, 1998 and 1997 were granted at an exercise price equal to or
greater than fair market value at the date of grant.
17 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS AND STOCK WARRANTS (CONTINUED)
A Registration Statement covering the underlying common stock associated with
the Company's ISOP, NSOP and Stock Bonus Plans was filed with the Securities and
Exchange Commission effective July 23, 1998.
The following is a summary of stock options granted, exercised and outstanding
for the quarter ended June 30, 1998 and fiscal years ended March 31, 1998 and
1997:
<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, 1996 811,400 750,001 63,335 $ 0.20-$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 $ 0.20-$7.63 $4.46
Options exercised 164,666 46,667 41,167 $ 0.25-$7.64 $1.11
Options canceled 234,001 - 8,834 $ 0.20-$6.00 $5.71
Options granted 227,500 50,000 - $6.00-$6.624 $6.16
--------- --------- ------- ------------ --------
Outstanding, March 31, 1998 1,064,033 1,136,212 13,334 $ 0.25-$7.63 $4.92
Options exercised - 203,334 - $ 0.25-$1.00 $0.82
Options canceled 667 - - $ 5.75 $5.75
Options granted 50,000 - - $ 6.00 $6.00 6/02-1/03
--------- --------- ------- ------------ --------
Outstanding, June 30, 1998 1,113,366 932,878 13,334 $ 0.25-$7.63 $4.92
========= ========= ======= ============ ========
</TABLE>
The following is a summary of warrants granted, exercised and as of June 30,
1998 through 1998:
<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, March 31, 1998 1,082,765 $6.00 6/2008
Issued in conjunction with private placement 24,000 $6.00
Exercised 25,000
Outstanding, June 30, 1998 1,081,765
=========
</TABLE>
18 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. 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 have 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 1998
and 1997, 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 .431 and .212 in 1998 and 1997, respectively; and a weighted-
average life of the option of 2.6 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.
19 of 26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
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 No. 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:
QUARTER ENDED JUNE 30
1998 1997
-----------------------
Pro forma net income (loss) $146,563 $(206,092)
Pro forma net loss applicable to common stock 110,703 (241,952)
Pro forma loss per share:
Basic $ 0.02 $ (0.05)
Diluted $ 0.02 -
Exercise prices for options outstanding as of June 30, 1998 ranged from $0.25 to
$7.63. The weighted-average remaining contractual life of those options is 2.56
years. At June 30, 1998, there were 100,000 options outstanding, exercisable at
a range of $0.25 to $1.00 per share, 585,534 options exercisable between $2.85
to $5.00 per share and 1,374,044 options exercisable between $5.75 to $7.63 per
share.
8. SEGMENTS OF BUSINESS
The following table sets forth financial information for the Company's foreign
and domestic segments for the quarter ended June 30, 1998:
NORTH WESTERN ALL
AMERICA EUROPE OTHER TOTAL
----------- ---------- -------- -----------
Revenues:
Continuing operations $ 2,198,991 $ 312,329 $572,630 $ 3,083,950
Discontinued operations 387,994 887,612 - 1,275,606
$ 2,586,985 $1,199,941 $572,630 $ 4,359,556
=========== ========== ======== ===========
Identifiable assets:
Continuing operations $11,780,294 $1,152,270 $ _ $12,932,564
Discontinued operations 2,685,827 2,882,085 - 5,567,912
$14,466,121 $4,034,355 $ _ $18,500,476
=========== ========== ======== ===========
20 of 26
<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, 1998
- ---------------------------
The Consolidated Statements of Operations of the Company for the quarters ended
June 30, 1998 and 1997, reflect the revenues and expenses of its security
business. The lenticular business is reported as discontinued operations,
following the announcement in March 1998 of the Company's intent to sell, spin-
off to existing shareholders in the form of a dividend, or otherwise dispose of
the lenticular business. The quarter ended June 30, 1997 has been restated to
reflect the discontinuance of the lenticular business.
Revenues increased 44.8% to $3,083,590, and include two months of operations for
OpSec Advantage, acquired effective May 1, 1998, which contributed $702,996 of
sales to total sales for the quarter. OpSec Advantage provides security
coatings for application to labels and over-laminates used to protect documents
such as drivers' licenses and passports from counterfeiting, alteration, and/or
tampering. Sales of authenticating label and garment tags to licensees of the
National Hockey league commenced in the quarter, as the Company's licensed
product business continues to expand.
Gross margins increased slightly from 42% to 43.1%. Margins will vary with the
mix of business. Increased business with large base customers with lower margins
than on standard product lines have been offset with improved supplier
purchasing agreements.
Operating expenses increased $431,456 to $1,047,038, with OpSec Advantage
comprising $221,438 of the increase. Excluding OpSec Advantage, salaries and
related costs increased $158,055 to reflect staff additions to the Company's
security sales and customer support teams, as well as wage increases.
Depreciation and amortization increased $57,957, including $31,756 in OpSec
Advantage (mostly goodwill), and additional depreciation associated with
production equipment and the Parkton manufacturing facility. Other operating
expenses increased $89,582, including $63,820 in OpSec Advantage, and $25,762
from all other locations.
Net interest expense increased $23,865. The Company issued $2,770,000 in 8%
convertible debentures near the end of the quarter for funding the purchase of
OpSec Advantage. In addition, net interest expense reflects the addition of
debt financing for plant construction completed in the third quarter of the
prior year. Dividends on Series B shares of $35,860 remained unchanged compared
to the same quarter of the prior year. No income tax liability is anticipated
in either of the Company's domestic or international operations.
21 of 26
<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 (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarter Ended June 30, 1998 (continued)
- ---------------------------------------
Revenues for the quarter ended June 30, 1998 in the lenticular business
decreased to $1,275,997 from revenues of $3,291,799 for the quarter ended June
30, 1997. Operating expenses decreased $54,323 to $704,991. A loss reserve for
the current year was established at March 31, 1998. The current quarter loss of
$558,491 was offset against that reserve.
Quarter Ended June 30, 1997
- ---------------------------
Operations for the quarter ended June 30, 1997 have been restated to reflect the
discontinuance of the lenticular business announced in March, 1998.
Revenues for the quarter ended June 30, 1997 were $2,129,082, an 83% increase
when compared to the revenues of $1,162,943 for the quarter ended June 30, 1996.
Sales grew in the holographic security with significant increases in revenues
resulting from authenticating label and tag sales for the NFL over-all licensing
program and Exelgram/(R)/ embossed foil sales for American Express travelers'
cheques.
Gross profits for the quarter ended June 30, 1997 increased 66% to $894,215
compared to $539,070 for the quarter ended June 30, 1996. The gross profit
margin of 42% decreased from the 46% for the comparable quarter of the prior
year, as larger base customers with margins less than prior standards have been
added.
Operating expenses of $615,582 grew 6% compared to the same quarter of the prior
fiscal year, an increase of $35,266.
Net income for the quarter ended June 30, 1997 improved to $272,922, as compared
to a loss of $5,359 for the quarter ended June 30, 1996. Net interest expense
increased $42,326 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.
22 of 26
<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 (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarter Ended June 30, 1997 (continued)
- ---------------------------------------
Revenues for the quarter ended June 30, 1997, in the lenticular business
increased to $3,291,799 from revenues of $1,163,661 for the quarter ended June
30, 1996. Operating expenses increased to $759,314 from $172,981 primarily as a
result of the acquisition of OpSec Pasternak and the formation of DPI subsequent
to June 30, 1996. The loss for the current quarter of $50,862 compares to net
income of $108,205 for the same quarter of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Quarter Ended June 30, 1998
- ---------------------------
In June 1998, the Company completed the sale $4,030,000 of securities in a
private placement. Of that amount, $2,770,000 was from the sale of 8% senior
convertible subordinated debentures, and $1,260,000 was from the sale of 210,000
shares of common stock, before anticipated costs of $421,367. The Company used
approximately $2.5 million to complete the purchase of OpSec Advantage during
the quarter, with remaining proceeds used to reduce outstanding bank lines of
credit.
The Company's working capital position at June 30, 1998, was $3,851,590, and its
current ratio was 2.836-to-1. Included in the working capital surplus was a cash
position of $1,059,934. Included in current liabilities was a reserve of
$341,509 for anticipated losses in the current fiscal year in the lenticular
business. The Company's's long-term debt consisted of $1,059,934 in bond
financing and $2,770,000 in the newly issued convertible debentures.
The Company reported operating income of $282,088 and net income of $251,470
from its security business. Excluding non-cash expenses of $105,178, earnings
before interest, taxes, depreciation and amortization were $387,266.
QUARTER ENDED JUNE 30, 1997
- ---------------------------
Operations for the quarter ended June 30, 1997 have been restated to reflect the
discontinuance of the lenticular business announced in March 1998.
23 of 26
<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 (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Quarter Ended June 30, 1997 (continued)
- ---------------------------------------
The Company's working capital position at June 30, 1997 was $4,407,273. Current
assets were 3.647-to-1 over current liabilities. Included 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.
The security business generated earnings before interest, taxes, depreciation
and amortization (EBITDA) of $325,854 and net income was $272,922. The
discontinued lenticular business operated at a loss of $50,862. This compares to
EBITDA and net loss of $4,337 and $5,359, respectively, in the prior year first
quarter.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
Based on an internal review of its data processing, operating, manufacturing and
other computer-based systems, the Company does not currently believe that it
will experience any significant adverse effects or material unbudgeted costs
resulting from the inability of current technology to process properly the
change from the year 1999 to 2000. However, if the Company's suppliers and
customers cannot process properly the change from the year 1999 to 2000, the
company may be adversely affected.
24 of 26
<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
------- ---------------------------- ---------
10.2.1 Amendment to Richard H. Bard
Employment Agreement 27
27.1 Financial Data Schedule -
(b) Reports on Form 8-K:
Date of Report Items Reported
- -------------- --------------
May 29, 1998 2, 9
April 2, 1998 5
25 of 26
<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 13, 1998 By: /s/ Richard H. Bard
-------------------------------
Richard H. Bard,
Chief Executive Officer and
Director
Date: August 13, 1998 By: /s/ Gerald A. Melfi
-------------------------------
Gerald A. Melfi, Principal
Financial Officer
26 of 26
<PAGE>
EXHIBIT 10.2.1
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
This Agreement is made effective March 31, 1998, by and through Optical
Security Group, Inc. ("Company") and Richard Bard ("Employee") and is an
amendment to the Employment Agreement existing between the Company and Richard
Bard effective April 1, 1996.
The April 1, 1996 Agreement is hereby ratified and reaffirmed except as
hereinafter specifically modified:
1. Term of Employment. Section 2 is hereby modified to read:
Employee's employment hereunder shall be for a term of five years
commencing on April 1, 1996, unless earlier terminated under the provisions of
paragraphs 7 or 8 of this Agreement. The parties acknowledge that Employee has
been employed by the Company since September 17, 1993, under a written
employment agreement. This Agreement supersedes and replaces all previous
employment agreements, oral or written, between the parties except paragraph 6,
which applies retroactively to Employee's first date of employment.
2. Compensation. Section 3 is hereby modified to read:
Salary. As compensation for services, Employee shall be paid a salary of
$150,000.00 for the first year, $175,000.00 for the second year, $200,000.00 for
the third year and $240,000.00 for the fourth and fifth years, subject to all
federal, state and municipal withholding requirements, payable in semi-monthly
installments in arrears on the Company's normal salary payment dates.
Employee's salary shall be reviewed annually and may be adjusted by action of
the Board of Directors of the Company, but the salary in any year shall not be
less than the prior year's salary plus an appropriate cost of living adjustment.
3. Bonus. Section 3-5 is hereby modified to read:
Employee shall be entitled to annual bonuses in such amounts as may be
determined by the Board of Directors. In addition Employee shall be entitled to
receive a stock bonus of 250,000 shares of the Company's common stock
immediately prior to closing of any of the following transactions before March
31, 2003: (a) merger, consolidation, or share-for-share exchange with another
company and the Company is note surviving entity or, (b) sale of all or
substantially all of the Company's assets in one transaction or a series of
connected transactions.
IN WITNESS WHEREOF, the parties hereto have executed this agreement to be
effective as specified above.
OPTICAL SECURITY GROUP, INC.
/s/Richard H. Bard
------------------
Richard H. Bard,
ATTEST: Chief Executive Officer
/s/Richard H. Bard
------------------
/s/Catherine M. Gotwal Richard H. Bard
- ----------------------
Catherine M. Gotwalt
July 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 1,059,934 1,512,351
<SECURITIES> 0 0
<RECEIVABLES> 2,617,693 1,802,485
<ALLOWANCES> 21,353 8,648
<INVENTORY> 1,510,695 671,134
<CURRENT-ASSETS> 5,949,000 6,072,006
<PP&E> 3,280,100 1,605,148
<DEPRECIATION> 465,711 356,019
<TOTAL-ASSETS> 18,500,476 15,716,563
<CURRENT-LIABILITIES> 2,097,410 1,664,733
<BONDS> 0 0
0 0
18 18
<COMMON> 29,845 25,096
<OTHER-SE> 12,531,623 13,996,806
<TOTAL-LIABILITY-AND-EQUITY> 18,500,476 15,716,563
<SALES> 3,083,590 2,129,082
<TOTAL-REVENUES> 3,083,590 2,129,082
<CGS> 1,754,464 1,234,867
<TOTAL-COSTS> 1,047,038 615,582
<OTHER-EXPENSES> 2,122 1,080
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,496 4,631
<INCOME-PRETAX> 251,470 272,922
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 251,470 272,922
<DISCONTINUED> 0 (50,862)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 251,470 222,060
<EPS-PRIMARY> 0.04 0.04
<EPS-DILUTED> 0.03 0.03
</TABLE>
