<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 September 30, 1999
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 6,185,514 September 30, 1999
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,240,040 $ 1,337,128
Accounts receivable, less allowance of $121,276 and
$124,349 at September 30, 1999 and March 31, 1999,
respectively 2,510,917 2,704,189
Inventory 1,290,407 1,443,912
Prepaid expenses 267,248 230,723
-----------------------------------
Total current assets 5,308,612 5,715,952
Property and equipment, net 3,694,881 3,406,972
Other assets:
Patents and patent applications, net of accumulated
amortization of $173,920 and $159,445 at September 30,
1999 and March 31, 1999, respectively 271,961 281,739
Goodwill, net of accumulated amortization of $611,743
and $490,457 at September 30, 1999 and March 31, 1999,
respectively 4,256,383 4,376,668
License and non-compete agreements, net of accumulated
amortization of $360,491 and $321,067 at September 30,
1999 and March 31, 1999, respectively 379,958 675,410
Deposits and other assets 705,253 228,126
Net long-term assets of discontinued operations - 109,318
-----------------------------------
Total assets $ 14,617,048 $ 14,794,185
===================================
</TABLE>
See accompanying notes
1 of 27
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,073,693 $ 970,140
Accrued expenses 654,594 511,009
Current portion of capital lease obligations 38,557 37,479
Current portion of long-term obligations 256,344 972,344
Net current liabilities of discontinued operations 241,168 841,363
------------------------------------
Total current liabilities 2,264,356 3,332,335
Capital lease obligations - 11,541
Long-term obligations 1,158,971 1,229,643
Convertible Debentures 3,270,000 3,270,000
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 $1,927,475) 18 18
Common stock, $0.005 par value:
15,000,000 shares authorized; 6,185,514 and 6,070,620
shares issued and outstanding at September 30, 1999
and March 31, 1999, respectively 30,928 30,353
Additional paid-in capital 23,853,396 23,662,560
Foreign currency translation adjustment 54,402 53,722
Accumulated deficit (16,015,023) (16,795,987)
------------------------------------
Total stockholders' equity 7,923,721 6,950,666
------------------------------------
Total liabilities and stockholders' equity $ 14,617,048 $ 14,794,185
====================================
</TABLE>
See accompanying notes
2 of 27
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,706,283 $ 3,978,560 $ 8,365,180 $ 7,062,150
Cost of goods sold 2,391,434 2,288,450 4,450,104 4,042,914
------------------------------- -------------------------------
Gross margin 2,314,849 1,690,110 3,915,076 3,019,236
Operating expenses:
Salaries and related costs 864,717 730,601 1,732,609 1,325,706
Depreciation 74,951 47,884 145,945 90,036
Amortization 115,936 79,747 231,487 142,773
Other operating expenses 523,185 507,164 980,155 853,919
------------------------------- -------------------------------
Total operating expenses 1,578,789 1,365,396 3,090,196 2,412,434
------------------------------- -------------------------------
Income from operations 736,060 324,714 824,880 606,802
Other income (expense)
Interest income 5,713 9,561 12,063 16,583
Interest expense (95,816) (81,915) (190,807) (117,433)
Other income 73,514 12,775 207,954 11,521
Foreign currency
transaction gain (loss) (163) (295) (1,406) (1,163)
------------------------------- -------------------------------
Total other income (expense) (16,752) (59,874) 27,804 (90,492)
------------------------------- -------------------------------
Income before income taxes 719,308 264,840 852,684 516,310
Income tax expense - - - -
------------------------------- -------------------------------
Income from continuing
operations 719,308 264,840 852,684 516,310
------------------------------- -------------------------------
Discontinued operations:
Loss from operations of
discontinued segment - - - -
------------------------------- -------------------------------
Net income 719,308 264,840 852,684 516,310
Dividends on preferred stock 35,860 35,860 71,720 71,720
------------------------------- -------------------------------
Net income applicable to
common stock $ 683,448 $ 228,980 $ 780,964 $ 444,590
=============================== ===============================
</TABLE>
3 of 27
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Operations (continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Earnings per share:
Basic:
Continuing operations $ 0.11 $ 0.04 $ 0.13 $ 0.07
Discontinued operations - - - -
------------------------------- -------------------------------
Net income applicable to
common stock $ 0.11 $ 0.04 $ 0.13 $ 0.07
=============================== ===============================
Diluted:
Continuing operations $ 0.11 $ 0.04 $ 0.13 $ 0.07
Discontinued operations - - - -
------------------------------- -------------------------------
Net income applicable to
common stock $ 0.11 $ 0.04 $ 0.13 $ 0.07
=============================== ===============================
Weighted average number of
shares outstanding:
Basic: 6,185,514 6,068,953 6,150,721 5,985,620
=============================== ===============================
Diluted:
Weighted shares
outstanding 6,185,514 6,068,953 6,150,721 5,985,620
Shares attributed to
options and warrants 22,848 209,964 27,171 209,964
------------------------------- -------------------------------
6,208,362 6,278,917 6,177,892 6,195,584
=============================== ===============================
</TABLE>
See accompanying notes
4 of 27
<PAGE>
Optical Security Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1999 1998
---------------------------------
<S> <C> <C>
Operating Activities
Net income $ 852,684 $ 516,310
Adjustments to reconcile net income to net cash provided
(used) in operating activities:
Depreciation and amortization 430,403 508,217
Changes in operating assets and liabilities:
Accounts receivable (329,149) (608,441)
Inventory 144,386 133,393
Prepaid expenses (34,735) 38,020
Accounts payable and accrued expenses 176,693 (438,994)
Reserve for discontinued operations - (1,105,581)
---------------------------------
Net cash provided (used) in operating activities 1,240,282 (957,076)
Investing activities
Patent application costs (4,696) (12,329)
Acquisition - OpSec Advantage, Inc., net of cash acquired - (2,528,561)
Purchase of property and equipment (403,877) (828,068)
Licensing agreements (374) -
Other deposits and intangible assets (241,554) 47,784
---------------------------------
Net cash used in investing activities (650,501) (3,321,174)
Financing activities
Proceeds from issuance of common stock, net - 1,263,119
Proceeds from the exercise of options 192,408
Proceeds from issuance of convertible debentures, net - 2,770,000
Change in line of credit facility (716,000) 120,155
Payments on notes and capital lease obligations (92,237) (42,205)
Payments of preferred stock dividends (71,720) (71,720)
---------------------------------
Net cash provided (used) by financing activities (687,549) 4,039,349
Effect of exchange rate on cash flows 680 20,912
---------------------------------
Net increase (decrease) in cash (97,088) (217,989)
Cash, beginning of period 1,337,128 797,388
---------------------------------
Cash, end of period $ 1,240,040 $ 579,399
=================================
Supplemental disclosure of cash flow activities
Interest paid $ 190,807 $ 117,433
Common stock issued to acquire OpSec Advantage, Inc. - 1,724,000
</TABLE>
See accompanying notes
5 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
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"), and Optical Security International
GmbH & Co., KG ("OSI") 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. The Company's principal
markets are the United States and Western Europe. Refer to Note 3 for
discussions regarding the Company's disposal of the lenticular products business
effective March 31, 1999.
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 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.
6 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounts Receivable
The Company grants credit to customers in the ordinary course of business
primarily in the United States and Western Europe. The Company periodically
performs credit analyses and monitors customers' financial condition in order to
reduce credit risk. Annual credit losses have been minimal and have consistently
been within management's expectations. The Company does not depend on any single
customer, or group of customers, for a significant part of its revenue. For the
quarter ended September 30, 1999, the licensees (as a group) of the National
Football League Properties ("NFLP") and 3M represented 15.5% and 6.7%,
respectively, of the Company's revenue. For the year ended March 31, 1999, the
NFLP, and American Express Co., represented approximately 17.7% and 6.2%,
respectively, of the Company's continuing revenue.
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, which
includes amortization of assets acquired through capital leases, 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
7 of 27
<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 consist of:
September March 31
1999 1999
-------------------------------
Land $ 317,182 $ 315,026
Buildings 1,376,448 1,342,677
Leasehold improvements 135,538 159,202
Computer equipment 426,684 376,632
Other equipment and furniture 342,922 160,580
Production equipment 2,056,530 1,793,377
Vehicles 19,299 19,347
-------------------------------
4,674,603 4,166,841
Less accumulated depreciation (979,722) (759,869)
-------------------------------
$ 3,694,881 $ 3,406,972
===============================
Goodwill and License Agreements
Goodwill represents the excess of purchase price over tangible and other
identifiable assets acquired, less liabilities assumed arising from business
combinations. Goodwill at September 30, 1999 is associated with the acquisition
of OpSec Advantage in fiscal 1999 and the acquisition of ELEF, Plc during fiscal
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, in its products, technology developed by others.
All goodwill associated with the lenticular business was written off in fiscal
1999 (See Footnote 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.
8 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Goodwill and License Agreements (continued)
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.
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. 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
Effective April 1, 1998, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 130, "Reporting Comprehensive Income" ("Statement
No. 130"). Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The
adoption of Statement No. 130 in fiscal year 1999 has no impact on the Company's
Consolidated Statements of Operations. The Company has elected to disclose
comprehensive income in the Consolidated Statements of Stockholders' Equity.
9 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
During 1997, the FASB issued Statement No. 131, "Disclosures about Segment
Reporting of an Enterprise and Related Information", which establishes standards
for the way 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.
The Company conducts business in one operating segment and determined its
operating segment based on the individual operations that the chief operating
decision maker reviews for purposes of assessing performance and making
operating decisions. These individual operations have been aggregated into one
segment because the Company believes doing so helps users understand the
Company's performance and assess its prospects. The combined operations have
similar economic characteristics and each operation has similar products,
services, customers and distribution methods. Accordingly, adoption of this
Statement during fiscal 1999 did not have a significant impact on the Company's
financial reporting related to segments.
Income Per Share of Common Stock
In 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS 128).
SFAS 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 exclude any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share are 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. Income per share for
the quarters ended September 30, 1999 and 1998, are based on weighted average
shares of common stock outstanding of 6,185,514 and 6,068,953, 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 and convertible debentures have been excluded from the
calculation as the effect, net of related dividend and interest requirements
would be antidilutive.
Research and Development
Research and development costs are expensed in the period incurred. During the
quarter ended September 30, 1999, the Company incurred $8,360 in costs exclusive
of compensation costs. Research and development costs for the quarter ended
September 1998 were $14,818, of which $7,608 was for continuing operations and
$7,210 was for discontinued operations.
10 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain amounts in the September 30, 1998 financial statements were reclassified
to conform with the September 30, 1999 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
of approximately $100,000, was approximately $4.3 million, including an initial
stock payment of 300,000 common shares of the Company valued at $1.7 million, a
promissory note of $2.0 million and the assumption of $452,000 in debt
obligations. The initial stock payment was subject to adjustment based upon its
fair market value at March 31, 1999, which resulted in the issuance of 64,897
additional shares effective June 15, 1999. The acquisition resulted in goodwill
of $3.5 million. 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.
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 $5.0 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 $1.0 million. The acquisition
resulted in goodwill of $5.0 million, the balance of which was written off in
fiscal 1999 upon the disposition of substantially all the assets of Dimensional
Printing Industries, Inc. ("DPI") (the lenticular products business). OpSec
Pasternak had previously operated as an independent broker selling the Company's
dimensional printed products in Europe.
During fiscal 1997, the Company formed DPI to manufacture dimensional printed
products. DPI was formed in September 1996, with the Company owning a 51%
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. Substantially
all of the assets of DPI were sold on March 31, 1999.
11 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. Discontinued Operations
In March 1998, the Company announced that it was discontinuing the lenticular
business of DPI, as it was not central to its core competency or strategy to
focus on the security authentication and anti-counterfeiting business.
Discontinuance of the lenticular business involved terminating the production of
lenticular products in Europe and consolidating lenticular production in Denver,
and was expected to improve efficiency and cost-effectiveness of the Company's
buying, manufacturing, and marketing. It also reduced the number of employees
required in operations. Until the disposition occurred on March 31, 1999, the
Company continued to operate the lenticular business. The purchasing group
included the Company's CEO among its investors. Consideration included cash of
$857,313, a 5-year royalty agreement calling for minimum annual payment of
$250,000, and a contingent interest of 19% of the net consideration received if
the lenticular business is resold within 7 years. The Company retained ownership
over certain assets, primarily the residual assets and liabilities of the German
and UK offices, which were not included in the sale, and certain other
receivables the Company intends to collect. Remaining liabilities include those
payables not assumed by the purchaser, as well as reserves established for
potential obligations and estimated closure costs for the German office. The
royalty interest and the contingent interest have been excluded from the gross
proceeds on the sale in accounting for the loss on disposal of this business
segment due to the uncertainty regarding future collectibility of such amounts.
The Company intends to recognize future amounts related to these contingent
sales proceeds in the period that cash collections become assured.
Assets and liabilities for the lenticular business have been segregated from
those of the continuing operation. The summarized presentation in the balance
sheet is more fully explained below:
<TABLE>
<CAPTION>
September March 31
1999 1999
--------------------------------
<S> <C> <C>
Net current assets (liabilities):
Accounts receivable, net $ 452,487 $ 164,745
Other current assets 12,323 4,994
Accounts payable (265,856) (310,053)
Accrued liabilities (440,121) (701,049)
--------------------------------
Net current assets (liabilities) $ (241,168) $ (841,363)
================================
Net long-term assets:
Property and equipment, net $ - $ 109,318
--------------------------------
Net long-term assets $ - $ 109,318
================================
</TABLE>
12 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt
Total debt outstanding is as follows:
<TABLE>
<CAPTON>
September March 31
1999 1999
--------------------------------
<S> <C> <C>
Revolving credit facility $ 115,000 $ 831,000
Economic Development Revenue Bonds 1,049,565 1,090,737
Capital expenditure facility 250,750 280,250
Debentures 3,270,000 3,270,000
--------------------------------
4,685,315 5,471,987
Less current maturities 256,344 972,344
--------------------------------
Long-term obligations $ 4,428,971 $ 4,499,643
================================
</TABLE>
The Company entered into a $2.0 million revolving credit facility secured by all
the assets of the Company with Mercantile-Safe Deposit and Trust Company on
April 30, 1997. The credit facility was modified on December 18, 1998, at which
time a $500,000 capital expenditure facility was approved. All borrowings under
the original facility are repayable upon demand. Advances on the line are based
on a percentage of eligible domestic accounts receivable. The facilities bear
interest at 1% over prime (9.25% at September 30, 1999).
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, were
financed through the issuance of Economic Development Revenue Bonds. The bond
issue amounting to $1,235,000 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 6.93%. The rate is subject to adjustment to
84% of the prime rate periodically announced by Mercantile-Safe Deposit and
Trust Company.
In May, 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 costs of $443,739. Warrants to purchase
24,000 shares at an exercise price of $6.00 per share were issued to purchasers
of common shares and a warrant for 60,982 shares at an exercise price of $7.20
was issued to the
13 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
underwriter. In December 1998, an additional $500,000 in Debentures were sold in
a similar transaction, with a warrant for 10,000 shares at an exercise price of
$6.00 issued to the debenture holder. A Registration Statement covering
1,445,733 shares of common stock associated with the Company's Debentures,
Warrants, and certain common stock issued in private placements was filed with
the Securities and Exchange Commission effective December 21, 1998.
The initial Debentures are convertible into common stock at $6.50 per share. The
December 1998 Debenture is convertible into common stock at $6.00 per share. The
Company may redeem the Debentures in whole or part commencing September 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. If not converted
earlier, the Debentures mature May 31, 2005.
Principal maturities of long-term debt each of the next five fiscal years and
thereafter are:
2000 $ 185,672
2001 141,344
2002 141,344
2003 141,344
2004 and thereafter 4,075,611
-----------
Total principal maturities $ 4,685,315
===========
5. 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.
14 of 27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
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 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. As of September 30, 1999 no shares have yet been redeemed, nor are any
currently redeemable.
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
15 of 27
<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 September 30, 1999, the cumulative unpaid dividend on the
Series B Shares of $35,860 was declared and subsequently paid in October 1999.
On May 14, 1999, the Company's chief executive officer entered into an amendment
to his employment contract with the Company, extending his contract until March
31, 2006, from March 31, 2001. If the Company is sold or merged into another
company prior to March 31, 2006, the chief executive officer is entitled to a
stock bonus of 500,000 shares of common stock pursuant to the amendment, which
eliminated an anti-dilutive clause.
Below is a summary of common stock issuable by the Company at September 30, 1999
for issuance upon the conversion of preferred stock and the exercise of the
various options and warrants:
Series B preferred stock 298,833
Debentures 509,487
Stock option plans 2,154,712
Stock Bonus Plan 60,000
Warrants 1,152,457
----------
4,175,489
==========
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 September 30, 1999. All ISOP and NSOP options granted in the
quarter ended September 30, 1999 were granted at an exercise price equal to or
greater than fair market value at the date of grant.
16 of 27
<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 September 30, 1999 and fiscal year ended March 31, 1999:
<TABLE>
<CAPTION>
Number of Shares Weighted
---------------------------------------- Average
ISOP NSOP Other Exercise Exercise Expiration
Options Price Price Date
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, March 31, 1998 1,064,033 1,136,212 13,334 $ .25-$7.63 $4.92
Options exercised 100,000 203,334 - $ .25-$1.10 $0.91
Options canceled 1,833 - - $ 5.75 $5.75
Options granted 90,000 127,000 - $ 6.00 $6.00 06/03-03/04
-----------------------------------------------------------------------------------------
Outstanding, March 31, 1999 1,052,200 1,059,878 13,334 $ 2.85-$7.63 $5.58
-----------------------------------------------------------------------------------------
Options exercised - 50,000 - $ 3.95 $3.95
Options canceled 81,125 - - $6.00 - $6.63 $6.06
-----------------------------------------------------------------------------------------
Outstanding, June 30, 1999 971,075 1,009,878 13,334 $2.85 - $7.63 $5.85
Options canceled 54,875 5,000 - $4.05 - $6.63 $5.41
Options granted 215,300 5,000 - $ 4.50 $4.50 06/04
-----------------------------------------------------------------------------------------
Outstanding, Sept. 30, 1999 1,131,500 1,009,878 13,334 $2.85 - $7.63 $5.49
=========================================================================================
</TABLE>
The following is a summary of warrants granted, exercised and outstanding and as
of Sept. 30, 1999:
<TABLE>
<CAPTION>
Warrants
--------------------------------------------------
Number of Shares Exercise Expiration
Price Date
<S> <C> <C> <C>
Outstanding, March 31, 1994 -
Issued for June 1994 financing 355,000 $ 5.00 06/01
Issued in ELEF, Plc acquisition 12,346 $ 4.05 05/04
Issued in ELEF, Plc acquisition 57,655 $ 5.00 05/04
Issued in The Diffraction Company acquisition 100,000 $ 4.05 10/01
Exercised 12,346 $ 4.05
--------------------------------------------------
Outstanding, March 31, 1995 512,655
Issued in conjunction with the Series B financing 85,860 $ 7.13 01/03
--------------------------------------------------
Outstanding, March 31, 1996 598,515
Issued in conjunction with the Series B financing 15,500 $ 7.13 01/03
Issued upon conversion of Series B shares 472,917 $ 6.00 03/02
--------------------------------------------------
Outstanding, March 31, 1997 1,086,932
Exercised 4,167 $ 6.00
--------------------------------------------------
Outstanding, March 31, 1998 1,082,765
Issued in conjunction with private placement 94,692 $6.00 - $7.20 06/08 - 12/08
Exercised 25,000 $ 6.00
--------------------------------------------------
Outstanding, March 31, 1999 and Sept. 30, 1999 1,152,457
================
</TABLE>
17 of 27
<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. Options generally 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 the three
months ended September 30, 1999 and 1998, 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 .436 and .431 for 1999 and 1998
respectively; and a weighted-average life of the option of 2.16 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.
18 of 27
<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:
Three Months Ended
September 30,
-----------------------------
1999 1998
-----------------------------
Pro forma net income $ 624,583 $ 159,933
Pro forma net income applicable to
common stock 588,723 124,073
Pro forma income (loss) per share:
Basic $ 0.10 $ 0.02
Diluted $ 0.09 $ 0.02
Exercise prices for options outstanding as of September 30, 1999 ranged from
$2.85 to $7.63. The weighted-average remaining contractual life of those options
is 2.16 years. At September 30, 1999, there were 676,834 options outstanding,
exercisable at a range of $2.85 to $4.50 per share, 490,000 options exercisable
between $5.00 to $5.75 per share and 987,878 options exercisable between $6.00
to $7.63 per share.
8. Segments of Business
The following table sets forth financial information for the Company's foreign
and domestic operations for the quarter ended September 30, 1999. The revenues
are to external customers and are reported by geographic destination.
North All
America Europe Other Total
---------------------------------------------------
Revenues $3,266,235 $ 941,164 $ 498,884 $4,706,283
===================================================
Long-lived assets $7,681,803 $1,626,632 $ - $9,308,435
===================================================
19 of 27
<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
The Consolidated Statements of Operations of the Company for the three and six
months ended September 30, 1999 and 1998 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 DPI, and the subsequent sale transaction completed in March 1999.
Quarter Ended September 30, 1999 Compared with Quarter Ended September 30, 1998
- -------------------------------------------------------------------------------
Net income for the three months ended September 30, 1999 was $719,308 compared
with net income of $264,840 for the three months ended September 30, 1998.
Revenues for the quarter ended September 30, 1999 increased 18.3% to $4,706,283
from $3,978,560 for the prior year quarter. Increases of approximately $389,000
and $500,000 were realized at the Company's Advantage and Germany sales
operations, respectively.
Gross margin for the current quarter increased to 49.2% from 42.5% in the year
earlier quarter. Significant improvements were due primarily to improved
purchasing economies and manufacturing efficiencies resulting from increased
sales volumes, and the effects of cost reduction programs put into effect
earlier in the year.
Operating expenses, including depreciation and amortization, increased $213,393
from the prior year quarter to $1,578,789. Compensation-related costs increased
$134,116 due to the full effect of staffing increases which occurred last year,
including security sales and customer support, and manufacturing management and
controller positions. Additionally, certain employee-related costs, previously
shared with the lenticular products division up to the time of its disposal, are
now being fully absorbed by the core security business.
Depreciation and amortization increased $63,256 to $190,887 in the current
period. The increases resulted primarily from higher production equipment
balances and, to a lesser degree, from higher amortization of financing costs.
Other operating expenses increased slightly to $523,185 from $507,164 in the
prior year and reflected higher marketing costs and professional fees in the
current quarter.
Interest expense for the quarter ended September 30, 1999 was $95,816 compared
with $81,915 for the year earlier quarter. The increase is primarily due to the
sale, in December 1998, of $500,000 of 8% senior convertible subordinated
debentures. Other income was $73,514 in the current quarter,
20 of 27
<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 September 30, 1999 Compared with Quarter Ended September 30, 1998
- -------------------------------------------------------------------------------
(continued)
- -----------
versus $12,775 in the prior year, and resulted mainly from a $100,000 recovery
of receivables previously reserved in the lenticular products division,
partially offset by professional fees and other lenticular administrative costs.
Dividends of $35,860 on the Series B Preferred Shares remained unchanged from
the prior year quarter. No income tax expense was recorded during the current or
prior year quarters in either the Company's domestic or international operations
due to the effect of net operating loss carryforwards.
Six Months Ended September 30, 1999 Compared With Six Months Ended September 30,
- --------------------------------------------------------------------------------
1998
- ----
Net income for the six months ended September 30, 1999 was $852,684 compared
with net income of $516,310 for the same period last year.
Revenues for the six-month period ended September 30, 1999 increased 18.5% to
$8,365,180 from $7,062,150 for the prior year period. OpSec Advantage, acquired
May 1, 1998, accounted for approximately $863,000 of the increase. The remaining
increase over the prior year was due to increased sales in the European market,
somewhat offset by lower sales to two major domestic customers during the first
quarter.
Current year-to-date gross margin increased to 46.8% from 42.8% for the prior
year period. The overall improvement was primarily due to improved purchasing
and manufacturing efficiencies resulting from increased sales volumes.
Total operating expenses, including depreciation and amortization, increased
$677,762 to $3,090,196 during the current six-month period. OpSec Advantage,
reporting for a full six months in the current year accounted for $144,097 of
the increase. Of the total operating expense increase over the prior year
period, compensation-related costs, excluding Advantage, represented $375,710,
or 55.4%, of the increase. Staffing increases, which occurred after the first
quarter of the prior year, included additions to security sales and support, a
new office in Germany, the mid-year addition of a senior vice president of
manufacturing and a manufacturing controller. Certain other employee-related
costs, shared with the discontinued lenticular division in the prior year, are
now being fully absorbed by the security business.
21 of 27
<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)
Six Months Ended September 30, 1999 Compared With Six Months Ended September 30,
- --------------------------------------------------------------------------------
1998 (continued)
- ----------------
Depreciation expense increased $55,909 to $145,945 for the current six-month
period. The increase resulted primarily from additional capital equipment
purchases. Amortization expense increased $88,714 to $231,487 for the current
period, due primarily to higher amortization of financing costs and a full six
months' of goodwill amortization on the Advantage purchase. Other operating
expenses increased $126,236 over the prior year period, reflecting a full six
months' of marketing and administrative costs at Advantage, and marketing and
travel costs of the new German office.
Interest expense for the six months ended September 30, 1999 was $190,807
compared with $117,433 for the year earlier period. The Company issued
debentures in May 1998, and again in December 1998, contributing $57,000 to the
increase. The remainder of the increase was due to the Company's capital
equipment loan facility. Other income for the current six-month period was
$207,954 compared with $11,521 for the prior year period. Included in the
current period was $176,500 of recovery of receivables previously reserved in
the discontinued lenticular division, and the first quarter recognition of
$62,500 of royalty income, resulting from the sale of the lenticular business.
No such income was recognized in the second quarter of this year, as the sale
agreement is being amended to provide for future payments to be based on
performance-related measures.
Preferred dividends for each of the six-month periods ending September 30, 1999
and 1998 were $71,720. No income tax expense was recorded in either period, due
to available net operating loss carryforwards.
Liquidity and Capital Resources
As of September 30, 1999, the Company had working capital of $3,044,256, and a
current ratio of 2.34-to-1, compared with working capital of $2,383,617, and a
current ration of 1.72-to-1, as of March 31, 1999. Included in the September 30,
1999 working capital were cash balances of $1,240,040.
22 of 27
<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)
Net cash provided by operating activities during the current six-month period
amounted to $1,240,282. During the period, the Company used $650,501 in
investing activities, including $403,877 of capital equipment purchases.
Included in these purchases was a $175,000 acquisition of a security laminate
business from a third party. The remaining purchases were comprised primarily of
replacement and other equipment necessary for capacity expansion.
The Company used $687,549 in financing activities during the six months ended
September 30, 1999. The Company's long-term debt at September 30, 1999 includes
$1,049,565 in bond financing, $3,270,000 in 8% Senior Debentures, a revolving
credit facility (with $115,000 outstanding), and a capital expenditure term loan
of $250,750. During the six months ended September 30, 1999, the Company reduced
outstanding debt and capital lease obligations by $808,237, including a net
reduction of $716,000 in the revolving credit facility. The balance of the
reduction resulted from normally scheduled principal payments.
The Company's working capital position at September 30, 1998 was $3,531,620,
including $579,399 of cash. During the six months ended September 30, 1998, the
Company received proceeds of $2,770,000 from the sale of 8% senior convertible
subordinated debentures, and $1,260,000 from the sale of common stock in a
private placement. During the period, the Company used approximately $2.5
million for the purchase of OpSec Advantage, while other investing activities of
approximately $800,000 consisted mainly of other manufacturing equipment
purchases.
In September 1999, the Company entered into an agreement to purchase 100% of the
stock of Bridgestone Technologies, Inc. ("Bridgestone"), and minority interests
in two Bridgestone affiliates. Bridgestone is engaged in the business of
providing security authentication products, technology and services for anti-
counterfeiting and anti-diversion purposes to corporate and government customers
worldwide. The purchase price, subject to certain adjustments, is equal to two
times "net embossed holography revenues," as defined, of up to $9 million and
1.6 times such revenues in excess of $9 million. The purchase price will be paid
as follows: (a) $8 million in cash at closing, (b) an adjustable non-negotiable
note in the initial principal amount of $1.5 million, and (c) the issuance of
333,333 restricted shares of the Company's common stock. Financing commitments,
subject to final documentation, have been received in order to complete the
transaction, which is expected to close on or before December 5, 1999.
23 of 27
<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)
Computerized Operations and the Year 2000
Until recently most computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is referred to as the "Year 2000 Issue" ("Y2K"). Since 1997,
the Company has been reviewing all internal, external and third party
informational technology ("IT") systems related to its business. The Company is
completing an internal IT evaluation and expects satisfactory results and is
currently reviewing external and third party IT systems for Y2K compliance.
External and third party evaluations include requiring compliance certificates
from vendors, suppliers and significant businesses related to the Company. To
date, all evaluations have uncovered minimum exposure to Y2K problems. The
Company currently estimates the internal Y2K cost at approximately $60,000,
which would include replacing hardware systems and upgrading software. Estimates
of external or third party Y2K expenses available at this time are immaterial,
however, the Company continues to review compliance. Management does not believe
the Company will have to modify or replace any significant portions of its
computer applications in order for the computer systems to function properly
with respect to the dates in the year 2000 and thereafter. However, a "worst
case" scenario may include the temporary interruption of research, development
and business due to the necessity of upgrading or replacing systems which are
not Y2K compliant. An interruption may lead to missed deadlines or delays in
research, development and FDA filings. The Company's contingency plan includes
the following:
. Regular back-up of all scientific and business related electronic data;
. Archival of critical business paperwork;
. Scheduling manufacturing campaigns not to extend or overlap the year 2000
time change; and,
. Upgrading security systems to be Y2K compliant (included in above dollar
amount).
Currently, the Company has determined that there is no significant exposure to
the Y2K issue, however, the Company continues to evaluate all IT systems for Y2K
compliance.
24 of 27
<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)
Safe Harbor
The information set forth in this report includes "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, and is subject to the safe harbor
created by those sections. Factors that could cause actual results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, changes in demand for the Company's products and services,
changes in the level of operating expenses, national or global economic
disruption related to Y2K, competitive conditions, product supply, the
availability of financing arrangements on terms acceptable to the Company, and
other factors detailed in the Company's Securities and Exchange Commissions
filings. Readers are cautioned not to place undue reliance on the forward-
looking statements made herein.
25 of 27
<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
------------------------------------------------------
27 Financial Data Schedule -
(b) Reports on Form 8-K:
None
26 of 27
<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: November 19, 1999 By: /s/ Richard H. Bard
------------------------------------
Richard H. Bard,
Chief Executive Officer and Director
Date: November 19, 1999 By: /s/ John A. Labate
------------------------------------
John A. Labate, Vice President,
Chief Financial Officer and
Treasurer
27 of 27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 1,240,040 1,337,128
<SECURITIES> 0 0
<RECEIVABLES> 2,632,193 2,828,538
<ALLOWANCES> 121,276 124,349
<INVENTORY> 1,290,407 1,443,912
<CURRENT-ASSETS> 5,308,612 5,715,952
<PP&E> 4,674,603 4,166,841
<DEPRECIATION> 979,722 759,869
<TOTAL-ASSETS> 14,617,048 14,794,185
<CURRENT-LIABILITIES> 2,264,356 3,332,335
<BONDS> 0 0
0 0
18 18
<COMMON> 30,928 30,353
<OTHER-SE> 7,892,775 6,920,295
<TOTAL-LIABILITY-AND-EQUITY> 14,617,048 14,794,185
<SALES> 4,706,283 3,978,560
<TOTAL-REVENUES> 4,706,283 3,978,560
<CGS> 2,391,434 2,288,450
<TOTAL-COSTS> 1,578,789 1,365,396
<OTHER-EXPENSES> (79,064) (22,041)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 95,816 81,915
<INCOME-PRETAX> 719,308 264,840
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 719,308 264,840
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 719,308 264,840
<EPS-BASIC> .11 .04
<EPS-DILUTED> .11 .04
</TABLE>
