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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Conformed
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1999.
Commission File No. 0-17531
OPTICAL SECURITY GROUP, INC.
(Name of small business issuer in its charter)
COLORADO 84-1094032
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
535 - 16th Street, Suite 920
Denver, Colorado 80202
(Address of principal executive offices)
Issuer's telephone number: (303) 534-4500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. YES [X]
NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was $14,172,133.
The aggregate market value of the common stock held by non-affiliates of the
issuer, 4,101,278 shares of common stock, as of June 2, 1999, was approximately
$15,892,452, based on the closing bid of $3.875 for the Issuer's common stock as
reported on The Nasdaq Stock MarketSM. Shares of common stock held by each
director, each officer named in Item 9, and each person who owns 10% or more of
the outstanding common stock have been excluded from this calculation in that
such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily conclusive.
As of June 24, 1999, the issuer had 6,185,514 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X]
Exhibit Index found at page 27.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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Optical Security Group, Inc., together with its subsidiaries (the
"Company"), is a leading provider of imaging technology and optical coatings
used in a variety of security, document authentication, product protection, and
anti-tampering applications. The Company was incorporated on August 4, 1988, as
a Colorado corporation under the name TSL Incorporated. In 1994, the Company
changed its name to Optical Security Group, Inc.
Business Development (Last Three Years)
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On March 31, 1999, the Company sold its lenticular business to Optipak,
Inc., now known as iMPACT Creative Technologies, Inc. Mr. Richard H. Bard, the
Company's chairman of the board and chief executive officer is a shareholder,
officer, and director of iMPACT. Unirock Management Corporation, assisted the
Company in connection with the transaction and opined upon the fairness of the
transaction to the Company's board of directors. The Company had announced in
March 1998, that it intended to sell or otherwise dispose of its lenticular
business so that it could focus on its core security business. [See Item 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and Item 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Discontinued Operations (lenticular business).]
Effective May 1, 1998, the Company, through OpSec Advantage, Inc.,
completed the purchase of substantially all of the assets of Advantage
Technology, Inc. Advantage Technology manufactured security products used
primarily for government document applications, such as driver's licenses,
passports, ID cards, and for tamper-evident labels. Advantage Technology
developed Advantage (TM), a chemical coating that cannot be duplicated by any
graphic technology available today. Revenues from OpSec Advantage since the date
of acquisition through March 31, 1999, were $4.1 million.
On April 30, 1997, the Company purchased a manufacturing and office
facility located in Parkton, Maryland. The Company completed its improvements
and moved its manufacturing facilities from Sparks, Maryland to the Parkton
facility by November 30, 1997. The purchase and improvements on the Parkton
facility were financed through the sale of Economic Development Revenue Bonds.
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Products
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The Company's products offer a range of visible (overt) and invisible
(covert) security technologies, which protect documents and products from
forgery and counterfeiting, deter tampering, provide immediate authentication,
and track and prevent diversion. The Company's security technologies include:
. Optically variable devices (OVDs)
. AdvantageTM
. Exelgram(TM)security images
. Alphadot(TM)micro-imaged dots and threads
. Microtext (diffractive and printed)
. UV inks, Fibers, Planchettes
. Invisible inks
. Information-bearing marks
. Direct-to-part marketing technology
. Tamper-evident resins
. Security printing
The Company's OVDs include traditional two and three dimensional
holograms, computer generated dot matrix holograms, and E-beam generated
Exelgrams. Advantage(TM) is a chemical coating created through an array of
chemical processes protected by patents that cannot be duplicated by any graphic
technology available today, including color laser copiers or computer digital
imaging. The coating causes the viewer to see different colors at different
viewing angles. Exelgram security images are sophisticated computer generated
OVDs in which the image is written using an electron beam.
The Company's security technologies can be used with a variety of
marking systems, including labels, hang tags, hot stamping foils, laminates,
plastic pouches, dots, threads, and direct-to-products. The Company owns patents
and copyrights for several of its technologies, products, and processes, and
holds licenses or other rights for others.
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Markets
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The following chart summarizes the Company's product areas, primary
markets, and applications.
Product Area Market Application
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Document Authentication Documents of Value Protection of travelers
cheques, credit cards, gift
certificates, and event
tickets from
counterfeiting
Document Authentication Government Documents Securing passports,
driver's licenses, and
other government-issued
documents from forgery
and alteration
Product Protection/ Licensed Products/ Protection of branded and
Authentication Fashion Industry licensed products against
counterfeiting and
diversion
Product Protection/ Parts Authentication Protection, authentication
Authentication and tracking of automotive,
aircraft, and other
component parts
Product Protection/ Pharmaceutical Industry/ Authentication and tamper
Authentication Agrochemicals evidence of pharmaceuticals
and agrochemicals
Distribution Methods. The Company has sales offices in Denver, Colorado;
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Parkton, Maryland; Lancaster, Pennsylvania; Shepshed, England; Willich, Germany;
the Netherlands; and Singapore. The Company also distributes its products using
independent marketing agents and distributors in the United States and
throughout Western Europe and in parts of Eastern Europe, South America, and
Asia. The Company also sells its secured temporary registration permits in the
United States through the American Association of Motor Vehicle Administrators.
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Competition
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The Company's competitors fall into the following categories:
1. Holographic Divisions of Large Security Printers. The Company's
largest competitors are the holography divisions of security printers
such as Thomas De la Rue (U.K.); and American Banknote Holographics, a
former division with American Banknote Corporation; and
Bundesdruckerei, a recently privatized German-base security printer.
2. Security Divisions of Large Diversified Manufacturers. Companies such
as Avery Dennison Corporation, Minnesota Mining and Manufacturing
Company (3M), and SICPA have proprietary technologies which are
offered as competition to OVD's.
3. Foil Manufacturers. Leonhard Kurz GmbH & Co. (Germany), Astor
Universal, a division of API Group Plc. (U.K.), Holopak Technologies,
Inc. (U.S.A.), and Crown Roll Leaf, Inc. (U.S.A.), manufacture
hot-stamped foils which are embossed holographically to provide
authentication of documents.
4. Other Companies that Focus on Document Security and Product
Authentication. The Company competes directly with other companies
that focus on document security and product authentication. These
companies include Bridgestone Technologies, Inc., Applied
Holographics, Inc., CFC International, Inc. and Hologram Industrie
(France).
The Company believes it is able to stay competitive with other
companies providing document security and product authentication by offering a
wide range of technologies, solutions and services to its clients. In addition,
by operating worldwide, the Company is able to offer customer sales, service and
support in more than 30 countries.
Sources of Raw Materials. The Company has numerous sources for raw materials.
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Key suppliers include FLEXcon Company, Astor, Avery Dennison, Crown Roll Leaf,
3M, and Dunmore Corporation.
Significant Customers. With the exception of the licensees (as a group) of the
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National Football League Properties, and American Express Co., representing
approximately 17.7% and 6.2%, respectively, of the Company's continuing revenue
in Fiscal 1999, the Company does not depend on any single customer, or group of
customers, for a significant part of its revenue.
Government Regulation and Approval. No government approval is necessary to offer
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the Company's principal products or services.
Research and Development. The Company has been involved in research and
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development for a number of different technologies and products. The Company
believes that it will continue to
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expend funds for research and development activities in order to improve and
broaden the Company's technologies.
Cost of Compliance With Environmental Laws. The Company's production facilities
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generate minimal non-toxic waste, which is disposed of in the manner prescribed
by applicable law. The Company also uses independent testing laboratories or the
laboratories of its development partners for research and development, and these
laboratories are responsible for environmental compliance.
Employees. As of March 31, 1999, the Company had 104 employees in the United
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States and Europe. During Fiscal 1999, the Company also used independent
marketing agents and distributors.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal facilities are as follows:
<TABLE>
<CAPTION>
Location Use
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<S> <C>
535 16th Street Optical Security Group, Inc.
Suite 920 Corporate Office
Denver, Colorado 80202
21132 Old York Road Optical Security Industries, Inc.
P.O. Box 700 OpSec U.S.
Parkton, Maryland 21120-0700 Manufacturing; sales office
1809 Olde Homestead Lane OpSec Advantage, Inc.
P. O. Box 10155 Manufacturing; sales office
Lancaster, Pennsylvania 17605-0155
Unit 4 Gelders Hall Road Optical Security Industries International Plc
Shepshed Leicestershire OpSec International
LE12 9NH Imaging facility; international sales office
United Kingdom
Halskestrasse 3-5 Optical Security International GmbH & Co. KG
47877 Willich International sales office
GERMANY
</TABLE>
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Except for the Parkton facility, all of the facilities are leased. The
facility located at 535 16th Street, Suite 920, Denver, Colorado 80202, is
leased from a corporation of which Mr. Richard H. Bard is an officer and
shareholder. (See Item 12. Certain Relationships and Related Transactions.)
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to the business, there are no
material legal proceedings pending to which the Company is a party or to which
any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
FORWARD LOOKING STATEMENTS
To the extent that financial information and management's discussion
and analysis of financial condition and results of operations contain
forward-looking statements, such statements involve risks and uncertainties
which could cause the Company's actual results to differ materially from the
anticipated results discussed herein. Factors that might cause such a difference
include, but are not limited to, changes in demand for the Company's products
and services, changes in the level of operating expenses, national or global
economic disruption related to Y2K, competitive conditions, and product supply.
You are cautioned not to place undue reliance on the forward-looking statements
made herein.
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
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The Company's common stock ("Common Stock") is traded on The Nasdaq
SmallCap Stock MarketSM under the symbol "OPSC." The following table sets forth,
on a per share basis, the range of high and low bid information for the Common
Stock for each quarter within the last two fiscal years, as reported by NASDAQ:
Year Ended March 31, 1999 High Low
First Quarter ended 06/30/98 $ 6.13 $ 5.25
Second Quarter ended 09/30/98 6.38 5.13
Third Quarter ended 12/31/98 6.25 4.25
Fourth Quarter ended 03/31/99 6.50 5.00
Year Ended March 31, 1998 High Low
First Quarter ended 06/30/97 $ 7.37 $ 6.12
Second Quarter ended 09/30/97 8.00 6.00
Third Quarter ended 12/31/97 7.25 5.75
Fourth Quarter ended 03/31/98 7.00 5.25
The quotations reflect inter-dealer prices without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
As of June 2, 1999, there were 841 holders of record and approximately
1,263 beneficial holders of the Company's Common Stock.
The Company has not paid any dividends on its Common Stock since
inception. Pursuant to the terms of its Series B 8% Cumulative Convertible
Exchangeable Preferred Voting Stock, no dividends or other payments can be
declared and paid on the Company's Common Stock unless there are no accrued and
unpaid dividends on the Series B Shares and unless the Company also declares and
pays to the holders of Series B Shares dividends on the shares of Common Stock
issuable upon conversion of the Series B Shares. The payment of cash dividends
on Common Stock is prohibited under the Company's loan agreement with
Mercantile-Safe Deposit and Trust Company and is also restricted under the terms
of the Company's 8% Senior Subordinated Convertible Debentures due May 31, 2005
(the "8% Senior Debentures").
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Recent Sales of Unregistered Securities
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In December 1998, the Company raised $500,000 from the sale of the
Company's 8% subordinated convertible debenture to an accredited/institutional
investor. In addition, such investor was issued a warrant to purchase 10,000
shares of Common Stock at an exercise price of $6.00 per share. The debenture is
convertible into shares of Common Stock commencing from the date of issuance, at
a conversion price of $6.50 per share, subject to certain anti-dilution
adjustments. The debenture is subordinate to certain senior indebtedness of the
Company and to the 8% Senior Debentures. Based on written representations and
warranties made by the purchaser, the Company made such sale in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
In June 1999, the Company issued an additional 64,897 shares of Common
Stock to Advantage Technology pursuant to the terms of the purchase agreement.
[See Item 1. "DESCRIPTION OF BUSINESS -- Business Development (Last Three
Years)" and Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION]. The purchase agreement provided that if the fair
market value of the shares of Common Stock issued to Advantage Technology as
part of the purchase price was less than $2,000,000 on March 31, 1999, the
Company would issue additional shares of Common Stock to Advantage Technology to
bring the fair market value of the shares held by Advantage Technology to
$2,000,000. Based on written representations and warranties made in the purchase
agreement, such issuance was made in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions should be read in conjunction with the
Financial Statements and Notes thereto.
Results of Operations
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Fiscal Year Ended March 31, 1999
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Two major events occurred during the fiscal year ended March 31, 1999.
The first, was the purchase, through a newly-formed subsidiary, OpSec Advantage,
Inc., of substantially all of the assets of Advantage Technology, Inc., based in
Lancaster, Pennsylvania, which operations were included in the Company's
consolidated operating results for 11 months of 1999. This acquisition is part
of a continuing effort to broaden the Company's security customer and product
base, and to develop or purchase patented or proprietary technology. The second
event was the disposition of the lenticular products segment on March 31, 1999
for cash and future consideration.
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Consolidated Statements of Operations of the Company for the fiscal
years ended March 31, 1999 and 1998, reflect the results of the operations of
the security business in detail. The lenticular business is reported as
discontinued operations, and includes operating losses for the periods then
ended, and loss on the disposal of the segment.
Revenues increased 44.6% to $14,172,133, an increase of $4,373,420. The
increase was contributed by OpSec Advantage and core business sales to new
customers of $5.4 million. However, this growth was partially offset by a $1.03
million decrease in sales to two major and continuing customers. Continuing
sales levels with these customers are expected to maintain or improve, subject
to improvements in the global economic outlook. The Company anticipates
continuing growth in new markets in Eastern Europe, South America and the Far
East. The next fiscal year will also benefit from a complete sales cycle with a
number of newly established customers.
Gross margins improved from 41.52% to 44.12%, primarily as a result of
improvements in manufacturing processes and raw material purchasing agreements.
Additional staff and resources added during the year enabled us to continue
reviewing manufacturing methods, and initiate improvements intended to maintain
or improve margins.
Operating expenses including depreciation and amortization increased
$2,471,510 to $5,478,644. OpSec Advantage accounted for 52% of the increase,
with the original core business growing 48%, or $1,178,443. Excluding OpSec
Advantage, the cost component that showed the greatest increase was compensation
and related costs, which increased $699,605, 59% of the total increase. New
staffing, including partial year employees from the prior fiscal year added
$526,000, reflected staff additions to the security sales and customer support
teams, a new office in Germany, the mid-year addition of a senior vice president
of manufacturing, and a manufacturing controller. Wage increases, board fees and
the addition of a 401(k) plan comprised the balance of the increase.
Depreciation and amortization increased $254,757, including $172,670
for OpSec Advantage. The balance of the increase, $82,087, was a net increase in
depreciation which related to the new manufacturing facility and loan costs
amortization, offset by a reduction in patent costs amortization.
Other operating expenses, excluding OpSec Advantage, increased
$466,751, including $120,000 in costs to support the lenticular division for
management services and overhead. The establishment of a German security sales
office accounted for $205,000 of the overall increase in administrative and
marketing costs with the balance of the increase spread throughout all other
sales and manufacturing facilities. Marketing and travel costs increased
$240,700, as the Company has placed an emphasis on increased customer contacts,
coordination of sales efforts with its independent agent sales force, and
introduction of new products and target markets. As a result, the Company has
established a more visible presence in the Far East, Eastern Europe and South
America, as well as in its traditional core markets in the U.S. and Western
Europe.
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Administrative costs increased $112,600, including $54,000 in Germany,
with the balance spread through all other locations. A charge for bad debts of
$107,000 was taken during the year. Historically, incurrence of bad debts among
security customers has been low, but with expanded sales to licensees of major
sporting franchises, as well as a broadened international sales base, the
Company anticipates higher than historical charges in the future.
The Company had net interest expense of $258,116, compared to net
interest expense of $143 in the prior year. The change results primarily from
the issuance of 8% Senior Debentures during the year, which earned interest of
$186,662, and a full-year of interest on mortgage indebtedness, which added
$46,360 to the total. The remaining interest was recognized on the revolving
credit facility and capital leases. Dividends on Series B Shares amounted to
$143,440, and remain unchanged from the prior fiscal year. No income tax
liability is anticipated in either the Company's domestic or international
operations for the near term due to the carry forward effect of recent net
operating losses.
Discontinued Operations (lenticular business):
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Revenues for the lenticular division, disposed of on March 31, 1999,
decreased to $3,659,876 from $7,129,686 for the prior fiscal year. The Company
believes that a number of factors contributed to the decreased sales, including
the bankruptcy filing of a major competitor, a reduction in promotional programs
due to world economic factors, and the effect of the Company's announcement of
its intent to dispose of this business segment. While efforts were on-going to
complete a disposition, the Company continued to serve traditional customers,
directed efforts toward development of proprietary and/or patented products, and
made strides in improving its manufacturing efficiency. Gross margins improved
from 16.44% in the prior fiscal year to 25.02%. Staff costs and operating
expenses were reduced $303,601, primarily as a result of withdrawing the
production capacity from Europe, and concentrating it in the United States. The
Company recognized a loss on disposal of $4,487,326 in the current year, and a
loss from operations of $1,648,146. Included in the loss is the write-off of
recorded goodwill originally recognized on the acquisition of the Company's
German subsidiary. This write-off was $4,364,000. The reserve for estimated
future operating losses and loss on sale of $2,460,000 established at March 31,
1998 was absorbed in the current year's results. Terms of the sale of the
lenticular segment provide for a purchase price of $857,313, subject to certain
adjustments following closing, a 5-year continuing royalty, with minimum annual
payments of $250,000, and a contingent interest of 19% of the gross sales
proceeds of the lenticular business if it is resold within 7 years. No estimate
of value was made for either the royalty interest or the 19% contingent interest
in the reported loss for the current year due to the uncertainty regarding
collection of such amounts in the future.
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Fiscal Year Ended March 31, 1998
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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 consuming critical resources
which will be more effectively utilized in the Company's security authentication
business. Discontinuance of the lenticular business involved terminating the
production of lenticular products in Europe and consolidating lenticular
administration, imaging and production management in Denver. The Company
announced its intention to sell, spin-off to existing shareholders in the form
of a dividend, or otherwise dispose of the lenticular business.
The Consolidated Statements of Operations of the Company for the fiscal
year ended March 31, 1998 reflect the revenues and expenses of the (continuing)
security business. The lenticular business was reported as discontinued
operations, and included losses for the periods then ended, and management's
estimate of loss on sale and anticipated operating losses from April 1, 1998, to
the anticipated disposal date.
Continuing revenues increased 61.7% to $9,798,713, and included the
full-year impact of sales of security foils to American Express Travel Services
(to be applied to its travelers' cheques) and the sale of authenticating labels
and garment tags to licensees of the National Football League. Both programs
began in the second half of the prior fiscal year, and are on-going. Expansion
of the Company's authentication program for (U.S.) States' temporary license
tags also contributed to this growth; and, new markets in both Eastern Europe
and South America provided new sales opportunities during the period. The
document authentication product line will be further augmented by the purchase
of substantially all of the assets of Advantage Technology, Inc. which was
consummated in May 1998. Advantage Technology 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.
Gross margins declined slightly from 43.26% to 41.52%, as the mix of
business shifted to include several large base customers at lesser margins than
on standard product lines. Improvements were made in purchasing agreements
throughout the year as volume levels could be ascertained.
Operating expenses increased $879,348 to $3,007,134. Salaries and
related costs increased $395,863, including several executive appointments, and
a significant addition to the Company's security sales and customer support
teams. Depreciation and amortization expenses increased to $301,571 from
$186,403. The increase resulted, in part from the write-off of certain patent
costs and the full-year amortization of license fees for new technology. Other
operating expenses increased $368,317, primarily the result of increased
marketing, travel, and administrative expenses. In addition, the Company
increased expenditures for research and development from $13,396 to $67,067.
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The Company had net interest expense of $143 compared to net interest
income of $101,700 in the prior year. This change resulted from the utilization
of cash resources to fund lenticular operations; the addition of debt financing
for plant construction; and working capital financing as the sales and
receivables base increased. Dividends on Series B Shares amounted to $143,440
compared to $431,649 in the prior fiscal year. No income tax liability was paid
in either the Company's domestic or international operations.
Revenues for the year ended March 31, 1998, in the lenticular business
increased to $7,129,685, a 1.47% increase over revenues of $7,026,610 for the
year ended March 31, 1997. Gross profit margins decreased to 16.44% compared to
24.51% in the prior fiscal year. Gross profit margins were adversely affected by
inefficiencies in the start-up of lenticular product manufacturing. Operating
expenses increased $2,299,297 to $4,223,841. This increase included full-year
operations for the lenticular production division and the European sales
division, both of which commenced operations in the third quarter of the prior
fiscal year. In addition, the division recognized bad debt expense of $613,685
due to the bankruptcy of two significant customers. Depreciation and
amortization expense increased $115,168, primarily due to the full-year
amortization of goodwill and the write-off of production tooling that was
initially developed.
Liquidity and Capital Resources
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Fiscal Year Ended March 31, 1999
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During the year the Company completed the acquisition of OpSec
Advantage for approximately $2.6 million, net of common stock issued, and added
$814,000 in production equipment to its manufacturing facilities. Funding was
provided primarily through a private placement of Common Stock and 8% Senior
Debentures for $4,030,000, net of issuance costs. Bank financing was expanded
with the addition of a capital expenditure line of' credit of $500,000, of which
$280,250 was outstanding at March 31, 1999. The credit facility provides that
the Company must meet certain financial covenants. During 1999 the Company was
out of compliance with several of the covenants. As of March 31, 1999, a waiver
of the violations was obtained from the lender and the agreement was amended to
ease the restrictions under such covenants.
The Company's working capital position at March 31, 1999 was
$2,383,617, and its current ratio was 1.715-to-1. Included in the working
capital surplus was a cash position of $1,337,128. The Company's long-term debt
increased $3,498,061 to $4,499,643, which includes debentures of $3,270,000 and
the capital expenditure facility of $221,250.
The Company reported operating income of $773,988 and income of
$528,073 from its continuing (security) operations. Earnings from continuing
operations before interest, taxes, depreciation, and amortization were
$1,365,654, as compared to $1,352,993 for the prior year. The lenticular
division reported a loss of $6,135,472 for fiscal year 1999, including loss from
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operations and loss on disposal. The reserve of $2,460,000 established at March
31, 1998 was fully utilized.
Fiscal Year Ended March 31, 1998
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The Company utilized a strong liquidity position at the beginning of
the fiscal year to fund the purchase and development of a new manufacturing
plant necessary for production for new security label customers; to pay off $1
million in seller financing on its German acquisition; and to obtain favorable
bond financing of $1,235,000 and a $2 million bank credit facility.
The Company's working capital position at March 31, 1998, was
$1,736,803, and its current ratio was 1.575-to-1. Included in the working
capital surplus was a cash position of $797,388. Included in current liabilities
was a reserve of $900,000 for anticipated losses in the next fiscal year in the
lenticular business. The Company's long-term debt consisted of $1,001,582 in
bond financing and $2,462 in capital lease obligations.
The Company reported operating income of $1,060,925 and net income of
$1,032,867 from its continuing (security) operations. Earnings from continuing
operations before interest, taxes, depreciation and amortization were
$1,362,496. The lenticular business operated at a loss of $3,052,382. A reserve
of $2,460,000 was also recorded to include an estimated loss on sale and a
reserve for losses prior to disposal. The total loss from discontinued
operations was $5,512,382. When combined with the net income from the continuing
(security) business, the Company reported a net loss of $4,479,515.
Computerized Operations and the Year 2000
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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. The Company estimates it will complete external and third party
evaluations by the second quarter of calendar year 1999. 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
13
<PAGE>
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 and development. 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 will continue to evaluate all IT systems for
Y2K compliance throughout calendar year 1999.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are included herein
starting at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
- --------------------------------
Directors, executive officers, and significant employees of the Company, as
of June 2, 1999, are as follows:
Name Age Position
---- --- --------
Richard H. Bard 51 Chairman of the Board and Chief
Executive Officer
Michael Brennan 56 President, OpSec Advantage
Edward Dietrich 46 Senior Vice President, Sales and
President and Chief Operating Officer of
OpSec U.S.
Yash P. Gupta 46 Director
Martin T. Hart 63 Director
J. R. Holland, Jr. 55 Director
Richard D. Lamm 64 Director
Gerald A. Melfi 48 Chief Accounting Officer, Treasurer
and Assistant Secretary
Bruce I. Raben 45 Director
Mark T. Turnage 38 President, Chief Operating Officer,
and Director
Richard H. Bard has been a director and chief executive officer of the Company
since September 1993. He was elected chairman of the board in April 1994. Mr.
Bard served as president from April 1994 to July 1997, and treasurer from
September 1993 to December 1994. Mr. Bard is also the chief executive officer of
Bard & Co., Inc., a diversified investment management company, and the Chairman
of iMPACT Creative Technologies, the purchaser of
15
<PAGE>
the Company's lenticular printing business. From 1989 to 1991, Mr. Bard was
vice-chairman of ComputerLand Corporation and chief executive officer of
ComputerLand International, Inc (since merged with Inacom Corporation). From
1986 to 1988, Mr. Bard was chairman and chief executive officer of Coast America
Corporation, the franchisor of Coast-to-Coast Hardware stores (since merged with
TrueValue). From 1978 to 1986, Mr. Bard was the president and chief operating
officer of FoxMeyer Corporation, a large pharmaceutical distributor and
franchisor of drug stores (since merged with McKesson Corporation). Mr. Bard is
also a director of Inacom Corporation.
Michael Brennan has been president of OpSec Advantage since May 1998. Prior to
that, Mr. Brennan was the president of Advantage Technology, Inc., the assets of
which were acquired by the Company in May 1998.
Edward Dietrich has been president and chief operating officer of OpSec U.S.
since July 1997, and senior vice president, sales since October 1996. Mr.
Dietrich served as vice president sales of OpSec U.S. from August 1994 to
October 1996. Mr. Dietrich was employed by American Banknote Holographics, Inc.
from February 1992 until August 1994 as the director of sales and marketing.
Yash P. Gupta was appointed to the board of directors on November 24, 1998. He
was also appointed to serve on the Audit Committee. Since 1992, Mr. Gupta has
served as dean and professor of management at the University of Colorado at
Denver, College of Business and Administration. Mr. Gupta has announced that in
the Fall, he will become the dean of the Business School at the University of
Washington.
Martin T. Hart has been a director since December 1993. He serves as the
chairman of the Compensation Committee, and as a member of the Audit Committee
and Nominating Committee. Mr. Hart has been a Denver-based businessman and
investor for more than twenty-five years. He is also a director of Schuler
Homes, Inc., T. Netiks, P.J. America, Inc. and Ardent Software, Inc., and a
trustee of MassMutual Corporate Investors and MassMutual Participation
Investors.
J. R. Holland, Jr. has been a director since July 1994 and serves as chairman of
the Audit Committee, and as a member of the Nominating Committee. Since 1991, he
has been the managing director of Hunt Capital Group, L.L.C. and president and
chief executive officer of Unity Hunt, Inc., diversified investment companies
based in Dallas, Texas. He is also a director of Placid Refining Company, Texas
Capital Bancshares, Inc., and TNP Enterprises, Inc.
Richard D. Lamm has been a director since December 1993 and serves on the
Compensation Committee. He previously served as a director from 1989 through
1992. Since 1987, Mr. Lamm has been a professor and director of the Center for
Public Policy and Contemporary Issues at the University of Denver. Mr. Lamm
served as the governor of the state of Colorado from 1975 to 1987.
16
<PAGE>
Gerald A. Melfi has been the chief accounting officer and treasurer of the
Company since 1993. Mr. Melfi also is employed as the chief financial officer
for Bard and Co., Inc., a diversified investment management company.
Bruce I. Raben has been a director since February 1995. He serves as chairman of
the Nominating Committee and is a member of the Compensation Committee. Since
February 1996, Mr. Raben has been a managing director of CIBC Oppenheimer
Securities Corp. in Los Angeles. From March 1990 until January 1996, he served
as the executive vice president and director of corporate finance at Jefferies &
Company, Inc., an investment banking firm. He is also a director of Equity
Marketing, Inc. and Global Crossing, Ltd.
Mark T. Turnage has been president and chief operating officer of the Company
since July 1, 1997. He was appointed to the board of directors on June 26, 1998.
Mr. Turnage served as managing director of OpSec International from November
1995 to July 1997 and prior to that as vice president from July 1994 to July
1997.
There are no family relationships among the Company's directors or
executive officers. The directors of the Company serve in such capacity until
the next annual meeting of the Company's shareholders. Committee members are
appointed by the board of directors to serve a one year term or until their
successors have been elected. Except for Mr. Bard, who has an employment
agreement with the Company, the Company's officers serve at the discretion of
the Company's board of directors.
To the Company's knowledge, none of the above listed individuals has
been involved in legal proceedings during the last five years that are material
to an evaluation of the ability or integrity of any director, executive officer,
promoter or control person.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The Company believes that during the fiscal year ended March 31, 1999,
its directors, officers and greater than 10% beneficial owners complied with all
filing requirements under Section 16(a) of the Exchange Act.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation
received during each of the Company's last three completed fiscal years by the
chief executive officer of the Company and each of the Company's other executive
officers (two officers) whose total annual salary and bonus exceeded $100,000
(the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-Term
------------------- Compensation
Awards
------
Securities
Name and Underlying All Other
Principal Position Year Salary Options Compensation
- ------------------ ---- ------ ------- ------------
Richard H. Bard 1999 $193,750 107,000 $ 1,250(1)
Chief Executive 1998 $175,000 50,000 --
Officer 1997 $150,000 342,878 --
Mark T. Turnage 1999 $148,333 50,000 $ 1,093(1)
President and 1998 $120,505 50,000 $ 11,519(2)
Chief Operating 1997 $ 77,600 80,000 $ 41,984(2)
Officer
Edward Dietrich 1999 $142,500 -- $ 36,667(3)
President and Chief 1998 $111,667 50,000 --
Operating Officer 1997 $ 80,625 50,000 --
OpSec U.S.; Sr.VP
Sales
- -----------------------
(1) Matching amount paid by the Company under its 401(k) Plan, since January 1,
1999, the Plan's effective date.
(2) Fiscal 1998 and Fiscal 1997 housing allowance paid on behalf of Mr. Turnage
relating to his overseas assignment in the United Kingdom.
(3) Includes matching amount paid by the Company under its 401(k) Plan and
moving expenses paid by the Company in connection with Mr. Dietrich's
relocation to Maryland.
18
<PAGE>
Stock Options
- -------------
The following table sets forth information concerning stock options
granted during the fiscal year ended March 31, 1999, to the Named Executive
Officers. Each option represents the right to purchase one share of the
Company's Common Stock.
Options Granted in Last Fiscal Year
Individual Grants
% of Total
# Securities Options Granted
Underlying To Employees in Exercise Expiration
Name (1) Options Fiscal Year Price Date
- ---- ------- ----------- ----- ----
Richard H. Bard 107,000 (2) 49% $6.00 August 31, 2003
Mark Turnage 50,000 (3) 23% $6.00 June 25, 2003
- ---------------------------------------
(1) No stock options were granted to Mr. Dietrich.
(2) Issued under the Company's Nonqualified Stock Option Plan, pursuant to the
terms of his employment agreement to maintain his beneficial ownership.
(3) Issued under the Company's Incentive Stock Option Plan. Vesting ratably
over four years beginning June 16, 1999.
19
<PAGE>
Stock Options
- -------------
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended March 31, 1999, for the Named
Executive Officer and the fiscal year-end value of all unexercised in-the-money
options (regardless of when granted) held by such person.
Aggregated Option/Exercises in Last Fiscal Year
And Fiscal Year End Option/Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Exercised Unexercisable Unexercisable(1)
- ---- -------------- --------- ------------- ----------------
<S> <C> <C> <C> <C>
Richard H. Bard 100,000 $427,500 1,092,878/0 $475,000/$0
Mark T. Turnage - - 122,500/127,500 $ 59,300/$0
Edward Dietrich - - 107,500/62,500 $ 59,300/$0
</TABLE>
- ---------------
(1) Market value of underlying securities based on the average of the high and
low bid of the Company's Common Stock on March 31, 1999, on NASDAQ of $5.50
per share minus the exercise price.
20
<PAGE>
Long-Term Incentive Plans - Awards in Last Fiscal Year
- ------------------------------------------------------
There were no awards made to any Named Executive Officer under any
long-term incentive plans.
Employee Pension, Profit Sharing or Other Retirement Plans
- ----------------------------------------------------------
Effective January 1, 1999, the Company established a defined
contribution plan (the "401(k) Plan") that qualifies as a cash or deferred
profit sharing plan under Sections 401(a) and 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). Under the 401(k) Plan, participating
employees may defer from 1% to 15% of their pre-tax compensation, subject to the
maximum allowed under the Code. The Company will contribute $.50 for each dollar
contributed by the employee, up to a maximum contribution of 2 1/2% of the
employee's defined compensation.
Except for the 401(k) Plan, the Company does not have a defined
benefit, pension plan, profit sharing or other retirement plan.
Compensation of Directors
- -------------------------
Standard Arrangements. Each director who is not an employee of the
---------------------
Company ("an Outside Director"), upon election or re-election to the board of
directors at an annual meeting of the shareholders, is entitled to a grant of
stock options under the Company's Nonqualified Stock Option Plan to purchase
5,000 shares of Common Stock. The exercise price of the option shares is the
greater of $6.00 or the market price of the Common Stock on the date of the
grant. The options are immediately exercisable and expire five years from the
date of the grant. Outside Directors elected other than at the annual meeting of
shareholders are not entitled to such option grant. Outside Directors are also
eligible for discretional grants of stock options.
In addition, each Outside Director, upon election or re-election, is
entitled to receive $10,000 as compensation for services to be rendered as a
member of the board of directors. Outside Directors elected to the board of
directors, other than at the annual meeting of shareholders, are entitled to
receive a pro-rata portion of $10,000 based on the number of months remaining
until the next annual meeting of shareholders. Such amount is payable in cash,
or at the sole election of the Outside Director, in shares of Common Stock.
During the fiscal year ended March 31, 1999, Messrs. Hart and Lamm
received options to purchase 5,000 shares of Common Stock at an exercise price
of $6.00 per share and $10,000 in cash for serving as directors. Mr. Raben
received options to purchase 5,000 shares of Common Stock at an exercise price
of $6.00 per share and 1,667 shares of Common Stock (in lieu of $10,000 cash)
for serving as a director. Pursuant to Mr. Holland's employment arrangement with
Hunt, any compensation for serving as a director must be paid to Hunt.
Therefore, in lieu of payment to Mr. Holland, $10,000 was paid to Hunt and the
options to purchase 5,000 Common Stock were issued to Hunt. Mr. Gupta, who was
appointed to the board after the annual meeting
21
<PAGE>
of shareholders, received $8,110 as compensation for serving as a director.
Employment Contracts
- --------------------
Mr. Richard H. Bard, the Company's chief executive officer, is in the
fourth year of his employment contract, which expires on March 31, 2001. The
employment contract provides for a salary of $240,000 for the fourth and fifth
year of the contract, and bonuses at the discretion of the board of directors.
In addition to benefits available generally to other Company employees, Mr. Bard
is entitled to a $500 per month automobile allowance. If the Company terminates
Mr. Bard's employment agreement prior to the expiration of the contract, Mr.
Bard is entitled to a buy-out at 150% of the value of the contract at the time
of the termination. Effective May 14, 1999, Mr. Bard's employment agreement was
amended to delete the provision in his contract which entitled him to grants of
stock options in an amount sufficient to maintain his beneficial ownership of
the Common Stock as of December 31, 1995. In addition, the terms of the stock
bonus payable to Mr. Bard were amended to provide that Mr. Bard is entitled to a
bonus of 500,000 shares of Common Stock, if the Company is sold or merged prior
to March 31, 2006. Previously, Mr. Bard was entitled to a stock bonus of 250,000
shares of Common Stock, if the Company was sold or merged into another company
prior to March 31, 2003.
No other executive officers have written employment contracts with the
Company or any termination or change of control benefits.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management.
- ---------------------------------------------------------------
The following table sets forth, as of June 24, 1999, the number of and
percentage of outstanding shares of the Company's Common Stock, beneficially
owned by (a) all directors and nominees, naming them, (b) the Named Executive
Officers, (c) the directors and executive officers of the Company as a group,
without naming them, and (d) persons or groups known by the Company to own
beneficially 5% or more of the Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- ---------------- -------------------- -------- --------
<S> <C> <C> <C>
Advantage Technology, Inc. 364,897 Common 5.90%
676 Patriot Lane
Lancaster, PA 17601
Richard H. Bard 1,945,341(1) Common 26.26%
535 16th Street, Suite 920
Denver, CO 80202
Edward Dietrich 108,735(2) Common 1.73%
535 16th Street, Suite 920
Denver, CO 80206
Yash P. Gupta -0- Common --
College of Business
University of Colorado
at Denver
P.O. Box 173364
Denver, CO 80217-3364
Martin T. Hart 247,148(3) Common 3.96%
875 Race Street
Denver, CO 80206
J.R. Holland, Jr -0-(4) Common --
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- ---------------- -------------------- -------- --------
<S> <C> <C> <C>
Hunt Capital Group, L.L.C 858,929(4)(5) Common 13.16%
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
Richard D. Lamm 63,879(6) Common 1.03%
c/o University of Denver
2050 East Iliff, #224
Denver, CO 80208
Massachusetts Mutual Life 625,000(7) Common 9.90%
Insurance Company
MassMutual High Yield
Partners Ltd.
MassMutual Corporate
Value Partners Limited
1295 State Street
Springfield, MA 01111
Gudrun Pasternak/ 466,668(8) Common 7.54%
Hans M. Andresen
Halskestrasse 3-5
47877 Willich
Germany
Philena Enterprises, Inc./ 403,635(9) Common 6.52%
Mark Bar
P. O. Box 6246
Denver, CO 80206
Bruce I. Raben 68,840(10) Common 1.10%
Suite 2340
1999 Avenue of the Stars
Los Angeles, CA 90067
Mark T. Turnage 128,673(11) Common 2.04%
535 16th Street, #920
Denver, CO 80202
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- ---------------- -------------------- -------- --------
<S> <C> <C> <C>
All executive officers 3,829,479(12) Common 47.08%
and directors as a group
(10 persons)
</TABLE>
- -----------------------
(1) Includes 20,000 shares held in an individual retirement account, and
150,000 shares held as custodian for a family member. In addition, includes
the right to acquire, currently or within 60 days, 1,222,878 shares of
Common Stock.
(2) Includes the right to acquire, currently or within 60 days, 107,500 shares
of Common Stock.
(3) Includes the right to acquire, currently or within 60 days, 59,000 shares
of Common Stock.
(4) Mr. Holland is the manager and president of Hunt. By virtue of his position
with Hunt, Mr. Holland is entitled to vote or direct the vote of the shares
held by Hunt. Pursuant to the Exchange Act, because he is able to direct
the vote of the shares held by Hunt, Mr. Holland is deemed to be the
beneficial owner of the shares held by Hunt. Mr. Holland has no ownership
interest in Hunt.
(5) Includes the right to acquire, currently or within 60 days, 340,000 shares
of Common Stock.
(6) Includes 1,401 shares held as trustee for family members and 35,000 shares
held by his spouse. In addition, includes the right to acquire, currently
or within 60 days, 6,538 shares of Common Stock.
(7) Includes the right to acquire, currently or within 60 days, 125,000 shares
of Common Stock.
(8) Gudrun Pasternak and Hans M. Andresen are husband and wife and each own
233,334 shares of Common Stock. Ms. Pasternak disclaims beneficial
ownership of the shares held by Ms. Andresen. Mr. Andresen disclaims
beneficial ownership of the shares held by Ms. Pasternak.
(9) Mr. Mark Bar is the president of Philena Enterprises, Inc. and, for
purposes of calculating the percentage of beneficial owner, the shares held
by Philena Enterprises, Inc., Mr. Bar, and Mr. Bar's spouse have been
aggregated.
25
<PAGE>
(10) Includes the right to acquire, currently or within 60 days, 55,000 shares
of Common Stock.
(11) Includes 6,173 shares held as trustee for family members, and the right to
acquire, currently or within 60 days, 122,500 shares of Common Stock.
(12) Includes the right to acquire, currently or within 60 days, 1,948,416
shares of Common Stock.
As of June 2, 1999, the Company also had outstanding 1,793 Series B Shares.
The holders of the Series B Shares are entitled to one vote for each share of
Common Stock issuable upon conversion of the Series B Shares (166.67 shares of
Common Stock for each Series B Share) on all matters to which holders of the
Common Stock are entitled to vote. As a group, the holders of the Series B
Shares have less than 5% of the votes on matters voted on by holders of the
Common Stock. In addition, under Colorado law, the holders are entitled to vote
on certain matters, including matters effecting the rights of the Series B
Shares, as a class. No director or executive officer owns beneficially any
Series B Shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following outlines certain relationships and related transactions
during the fiscal years ended March 31, 1998, and March 31, 1999.
Mr. Bard, the Company's chairman and chief executive officer, is a
director, officer, a majority shareholder of iMPACT, which purchased the assets
of the Company's lenticular printing business. [See Item 1. "DESCRIPTION OF
BUSINESS -- Business Development" (Last Three Years) and Item 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --
Discontinued Operations (lenticular business).]
The Company leases its Denver office spaces from 16th & Welton Investment,
Inc., a corporation owned by Mr. Bard and members of his immediate family. In
the fiscal years ended March 31, 1998, and March 31, 1999, the Company paid a
total of $88,142 and $96,377, respectively, under such leases. Unless renewed or
extended, the leases expire in 2000.
Mr. Bard has an employment agreement with the Company. [See Item 10.
EXECUTIVE COMPENSATION -- Employment Contracts.]
Mr. Michael Brennan, the president of OpSec Advantage, is an officer and
shareholder of Advantage Technology, Inc., the assets of which were acquired by
the Company in May 1998, in exchange for the Company's promissory note in the
amount of $2,000,000, which note was subsequently paid in full, the issuance of
300,000 shares of Common Stock, and the assumption
26
<PAGE>
of approximately $500,000 of Advantage Technology's liabilities. In June 1999,
pursuant to the stock adjustment provisions in the purchase agreement, an
additional 64,897 shares of Common Stock were issued to Advantage Technology.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements:
- --------------------
For a list of financial statements, see INDEX TO FINANCIAL STATEMENTS, page
31.
(a) List of Exhibits required by Item 601 of Regulation S-B:
Exhibits filed herewith:
-----------------------
Exhibit Exhibit Page
Number Name Reference
------ ---- ---------
10.2.1 Amendment to Employ- Filed herewith at 10.2.1
ment Agreement for
Richard H. Bard
21.1 List of Subsidiaries Filed herewith at 21.1.
23.1 Consent of Independent Filed herewith at 23.1
Auditors
27.1 Financial Data Schedule Filed herewith at 27.1
Exhibits incorporated by reference:
----------------------------------
Number Exhibit Date
of Exhibit Name Form Filed Number
---------- ---- ---- ----- ------
2.4.1 Asset Purchase Agreement 8-K 06/15/98 2.4.1
between OpSec Advantage
Inc. and Advantage
Technology, Incorporated
27
<PAGE>
2.4.2 First Amendment to 8-K 06/15/98 2.4.2
Asset Purchase Agreement
between OpSec Advantage
Inc. and Advantage
Technology, Incorporated
3(i) Amended and S-3/A 10/16/96 3.24
Restated Articles
of Incorporation
3(ii) Amended and 10-KSB 06/28/95 3.22
Restated Bylaws
4.1 Form of Debentures 8-K 06/15/98 4.1
(b) Reports on Form 8-K during the Company's fourth fiscal quarter ending March
31, 1998.
Date of Report Items Reported
-------------- --------------
None
28
<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.
Date: June 29, 1999 By: /s/ Richard H. Bard
------------------------------------------------
Richard H. Bard, Chief Executive
Officer and Director
Date: June 29, 1999 By: /s/ Gerald A. Melfi
------------------------------------------------
Gerald A. Melfi, Principal
Financial Officer
Date: June 29, 1999 By: /s/ Mark T. Turnage
------------------------------------------------
Mart T. Turnage, President,
Chief Operating Officer and Director
Date: June 29, 1999 By: /s/ Martin T. Hart
------------------------------------------------
Martin T. Hart, Director
Date: June 29, 1999 By: /s/ J.R. Holland, Jr.
------------------------------------------------
J. R. Holland, Jr., Director
Date: June 29, 1999 By: /s/ Richard D. Lamm
------------------------------------------------
Richard D. Lamm, Director
29
<PAGE>
Date: June 29, 1999 By: /s/ Bruce I. Raben
------------------------------------------------
Bruce I. Raben, Director
Date: June 29, 1999 By: /s/ Yash P. Gupta
------------------------------------------------
Yash P. Gupta, Director
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Table of Contents
- -----------------
Financial Statements: Page
----
Report of Independent Auditors F-1
Balance Sheets F-2
Statement of Operations F-4
Statement of Stockholders' Equity F-6
Statement of Cash Flow F-7
Notes to Financial Statements F-9
31
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Optical Security Group, Inc.
We have audited the accompanying consolidated balance sheets of Optical
Security Group, Inc. as of March 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Optical Security Group, Inc. as of March 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Denver, Colorado
May 28, 1999
F-1
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 1998
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $1,337,128 $797,388
Accounts receivable, less allowance of $124,349 and $19,353 in 1999
and 1998, respectively 2,704,189 2,143,303
Inventory 1,443,912 906,747
Prepaid expenses 230,723 262,956
Net current assets of discontinued operations - 647,685
-----------------------------------
Total current assets 5,715,952 4,758,079
Property and equipment, net 3,406,972 2,392,676
Other assets:
Patents and patent applications, net of accumulated amortization of
$159,445 and $98,327 in 1999 and 1998, respectively 281,739 259,475
Goodwill, net of accumulated amortization of $490,457 and $262,516
in 1999 and 1998, respectively 4,376,668 1,077,989
License and non-compete agreements, net of accumulated amortization
of $321,067 and $241,332 in 1999 and 1998, respectively 675,410 498,737
Deposits and other assets 228,126 207,895
Net long-term assets of discontinued operations 109,318 4,289,781
-----------------------------------
Total assets $14,794,185 $13,484,632
===================================
</TABLE>
F-2
<PAGE>
Optical Security Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 1998
----------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 970,140 $1,146,312
Accrued expenses 511,009 338,235
Current portion of capital lease obligations 37,479 4,385
Current portion of long-term obligations 972,344 632,344
Net current liabilities of discontinued operations 841,363 -
Allowance for operating losses of discontinued operations
- 900,000
----------------------------------
Total current liabilities 3,332,335 3,021,276
Capital lease obligations 11,541 2,462
Long-term obligations 1,229,643 1,001,582
Convertible debentures 3,270,000 -
Commitments
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; 6,070,620 and 5,230,619 shares issued and
outstanding in 1999 and 1998, respectively 30,353 26,153
Additional paid-in capital 23,662,560 20,399,614
Other comprehensive income 53,722 78,675
Accumulated deficit (16,795,987) (11,045,148)
----------------------------------
Total stockholders' equity 6,950,666 9,459,312
----------------------------------
Total liabilities and stockholders' equity $14,794,185 $ 13,484,632
==================================
</TABLE>
See accompanying notes
F-3
<PAGE>
Optical Security Group, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
------------------------------------
<S> <C> <C>
Revenues $14,172,133 $9,798,713
Cost of goods sold 7,919,501 5,730,654
------------------------------------
Gross margin 6,252,632 4,068,059
Operating expenses:
Salaries and related costs 2,972,955 1,548,604
Depreciation 216,245 113,720
Amortization 340,083 187,851
Other operating expenses 1,949,361 1,156,959
------------------------------------
Total operating expenses 5,478,644 3,007,134
------------------------------------
Income from operations 773,988 1,060,925
Other income (expense):
Interest income 33,447 36,929
Interest expense (291,563) (37,072)
Other income 10,286 (48,188)
Foreign currency transaction gain (loss) (8,395) 1,756
------------------------------------
Total other income (expense) (256,225) (46,575)
Income before income taxes 517,763 1,014,350
Income tax benefit 10,310 18,517
------------------------------------
Income from continuing operations 528,073 1,032,867
Discontinued operations:
Loss from operations of discontinued segment (1,648,146) (3,052,382)
Loss on disposal of business segment (4,487,326) (2,460,000)
-------------------------------------
Total loss from discontinued operations (6,135,472) (5,512,382)
-------------------------------------
Net loss (5,607,399) (4,479,515)
Dividends on preferred stock 143,440 143,440
------------------------------------
Net loss applicable to common stock $(5,750,839) $(4,622,955)
=====================================
</TABLE>
F-4
<PAGE>
Optical Security Group, Inc.
Consolidated Statement of Operations (Continued)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
--------------------------------
<S> <C> <C>
Earnings (loss) per share:
Basic:
Continuing operations $ 0.06 $ 0.18
Discontinued operations (1.03) (1.09)
---------------------------------
Net income (loss) applicable to common stock $ (0.97) $ (0.91)
=================================
Diluted:
Continuing operations $ 0.06 $ 0.15
Discontinued operations (1.00) (0.94)
--------------------------------
Net income (loss) applicable to common stock $ (0.94) $ (0.79)
=================================
Weighted average number of shares outstanding:
Basic: 5,948,720 5,056,039
================================
Diluted:
Weighted shares outstanding 5,948,720 5,056,039
Shares attributed to options and warrants 167,667 800,418
--------------------------------
6,116,387 5,856,457
================================
</TABLE>
See accompanying notes
F-5
<PAGE>
Optical Security Group, Inc.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Preferred Series B Common Stock Paid-In
Shares Amount Shares Amount Capital
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 1,793 $18 4,973,952 $24,870 $20,113,208
Warrants exercised - - 4,167 21 24,981
Options exercised - - 252,500 1,262 279,167
Issuance costs on prior year stock issue - - - - (17,742)
Dividend declared on Preferred Series B - - - - -
Other comprehensive income
Net loss - - - - -
Comprehensive loss
--------------------------------------------------------------------------
Balance at March 31, 1998 1,793 18 5,230,619 26,153 20,399,614
Common stock issued in business
combination - - 300,000 1,500 1,722,500
Common stock issued for cash, net of
issuance costs of $152,688 - - 210,000 1,050 1,106,262
Common stock issued to a director - - 1,667 8 9,992
Warrants exercised - - 25,000 125 149,875
Options exercised - - 303,334 1,517 274,317
Dividend declared on Preferred Series B - - - - -
Other comprehensive loss
Net loss - - - - -
Comprehensive loss
--------------------------------------------------------------------------
Balance at March 31, 1999 1,793 $18 6,070,620 $30,353 $23,662,560
==========================================================================
<CAPTION>
Other
Comprehen- Total
Accumulated sive Income Stockholders'
Deficit (Loss) Equity
----------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 $(6,422,193) $51,382 $13,767,285
Warrants exercised - - 25,002
Options exercised - - 280,429
Issuance costs on prior year stock issue - - (17,742)
Dividend declared on Preferred Series B (143,440) - (143,440)
Other comprehensive income 27,293 27,293
Net loss (4,479,515) - (4,479,515)
------------------
Comprehensive loss (4,452,222)
----------------------------------------------------
Balance at March 31, 1998 (11,045,148) 78,675 9,459,312
Common stock issued in business
combination - - 1,724,000
Common stock issued for cash, net of
issuance costs of $152,688 - - 1,107,312
Common stock issued to a director - - 10,000
Warrants exercised - - 150,000
Options exercised - - 275,834
Dividend declared on Preferred Series B (143,440) - (143,440)
Other comprehensive loss (24,953) (24,953)
Net loss (5,607,399) - (5,607,399)
-----------------
Comprehensive loss (5,632,352)
----------------------------------------------------
Balance at March 31, 1999 $(16,795,987) $53,722 $6,950,666
====================================================
</TABLE>
F-6
<PAGE>
Optical Security Group, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
------------------------------------
<S> <C> <C>
Operating activities
Net loss $(5,607,399) $(4,479,515)
Adjustments to reconcile net loss to net cash provided (used) in
operating activities:
Provision for loss from discontinued operations 2,027,326 2,460,000
Depreciation and amortization 1,455,731 945,064
Deferred tax benefit - (25,840)
Non-cash compensation, common stock issued to a director 10,000 -
Change in operating assets and liabilities:
Accounts receivable 941,108 1,952,812
Inventory 486,899 (18,465)
Prepaid expenses 104,242 (39,485)
Accounts payable and accrued expenses (855,450) (326,964)
------------------------------------
Net cash provided (used) in operating activities (1,437,543) 467,607
Investing activities
Patent application costs (23,382) (33,189)
Acquisition - OpSec Pasternak & Partner GmbH - (3,321)
Acquisition - OpSec Advantage, Inc., net of cash acquired (2,498,580) -
Purchases of property and equipment (1,317,328) (2,440,333)
Proceeds from the disposition of Dimensional Printing Industries, Inc. 857,313 -
Licensing agreements - (2,641)
Other deposits and intangible assets 5,324 42,391
------------------------------------
Net cash used in investing activities (2,976,653) (2,437,093)
Financing activities
Proceeds from issuance of common stock, net 1,533,146 287,689
Proceeds from issuance of convertible debentures 2,978,949 -
Loan proceeds and capital leases 731,555 1,695,845
Payments on notes and capital lease obligations (113,330) (1,077,155)
Cost of financing (7,991) (87,446)
Payments of preferred stock dividends (143,440) (143,440)
------------------------------------
Net cash provided by financing activities $ 4,978,889 $ 675,493
</TABLE>
F-7
<PAGE>
Optical Security Group, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
---------------------------------
<S> <C> <C>
Effect of exchange rate on cash flows $ (24,953) $ 27,293
---------------------------------
Net increase (decrease) in cash 539,740 (1,266,700)
Cash, beginning of year 797,388 2,064,088
---------------------------------
Cash, end of year $ 1,337,128 $797,388
=================================
Supplemental disclosure of cash flow activities:
Interest paid $ 291,563 $ 37,072
Common stock issued to acquire OpSec Advantage, Inc. 1,724,000 -
Equipment acquired through capital lease transactions 169,295 -
</TABLE>
F-8
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements
March 31, 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. In addition, the Company,
through Dimensional Printing Industries, Inc. ("DPI"), provided materials and
products for use in other commercial applications ("lenticular products"). Refer
to Note 3 for discussions regarding the Company's disposal 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 as other comprehensive income, 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 by fluctuating exchange rates.
F-9
<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. 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. For the year ended March 31, 1998, the Company had one customer,
the licensees (as a group) of the National Football League Properties, which
represented approximately 25% of the Company's continuing revenue. Except as
noted, the Company does not depend on any single customer, or group of
customers, for a significant part of its revenue. For the year ended March 31,
1999, the licensees (as a group) of the National Football League Properties, 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
F-10
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (Continued)
Property and equipment at March 31 consist of:
1999 1998
------------------------------
Land $315,026 $304,066
Buildings 1,342,677 1,342,677
Leasehold improvements 159,202 124,535
Computer equipment 376,632 292,653
Other equipment and furniture 160,580 57,616
Production equipment 1,793,377 622,543
Vehicles 19,347 46,040
------------------------------
4,166,841 2,790,130
Less accumulated depreciation (759,869) (397,454)
------------------------------
3,406,972 $2,392,676
==============================
Goodwill and License Agreements
Goodwill represents the excess of purchase price over tangible and other
identifiable assets acquired, less liabilities assumed arising from business
combinations. Goodwill at March 31, 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 reclassified as
discontinued operations at March 31, 1998, before being 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.
F-11
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (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. In the event that the
sum of the cash flows is less than the carrying amount of those assets, the
assets would be written down to their fair value, which is normally measured by
discounting estimated future cash flows.
Inventory
Inventory is stated at the lower of cost or market using the first-in, first-out
(FIFO) method. Inventory on hand 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.
Amortization expense in fiscal 1998 includes the $68,080 write-off of patents
that were considered to have no future benefit.
It is possible the above estimates of future economic life of the Company's
patents, the amount of future revenues, or both, could be reduced significantly
due to alternative technologies developed by the Company or 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.
F-12
<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.
Loss 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 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. Loss per share for the
years ended March 31, 1999 and 1998, are based on weighted average shares of
common stock outstanding of 5,948,720 and 5,056,039, 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.
F-13
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (Continued)
Research and Development
Research and development costs are expensed in the period incurred. During the
year ended March 31, 1999, the Company incurred $102,185 in costs of which
$31,300 was for continuing operations, and $70,885 was for discontinued
operations. Research and development costs for the fiscal year ended March 31,
1998 were $330,150 of which $67,067 was for continuing operations and $263,083
for discontinued operations.
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 the
fair market value at March 31, 1999, which will result 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, AdvantageTM, 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 twelve
months ended March 31, 1998 has been prepared assuming that the acquisition of
ATI occurred at the beginning of the period. In preparing the pro forma data,
adjustments have been made for: (i) the amortization of goodwill, and (ii) the
interest expense related to debentures issued to complete the purchase. The pro
forma results for the twelve-month period ended March 31, 1999 would
F-14
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. Business Combinations (continued)
not have been materially different than those shown in the accompanying
Statement of Operations.
Sales and royalty income $14,453,974
Income from continuing operations 1,015,689
Net loss (5,119,783)
Net loss applicable to common stock (5,263,223)
Earnings (loss) per share of common stock:
Basic $(0.88)
Diluted $(0.86)
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 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.
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 of
dominating 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.
F-15
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. Discontinued Operations (continued)
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.
At March 31, 1998, the Company estimated a loss on disposal and an operating
loss reserve as shown below. Both reserves were fully absorbed into the loss
reported in fiscal 1999 for discontinued operations.
Estimated loss on sale and related costs $1,560,000
Operating losses from April 1, 1998 to anticipated disposal
date 900,000
-------------
$2,460,000
=============
Sales of the lenticular business were $3,659,875 and $7,129,686 in the years
ended March 31, 1999 and 1998, respectively. The operating loss during fiscal
1999 to the actual disposal date and the loss on sale exceeded the amounts
estimated at March 31, 1998 by $1,648,146 and $4,487,326, respectively.
F-16
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. Discontinued Operations (continued)
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:
Year ended March 31
1999 1998
---------------------------------
Net current assets (liabilities):
Accounts receivable, net $164,745 $1,009,851
Inventory - 738,470
Other current assets 4,994 66,899
Accounts payable (310,053) (947,790)
Accrued liabilities (701,049) (219,745)
---------------------------------
Net current assets (liabilities) $(841,363) $647,685
=================================
Net long-term assets:
Property and equipment, net $109,318 $581,095
Goodwill and other intangible assets - 5,268,686
Less estimated loss on sale - (1,560,000)
---------------------------------
Net long-term assets $109,318 $4,289,781
=================================
4. Long-term Debt
Total debt at year-end was as follows:
Year ended March 31
1999 1998
---------------------------------
Revolving credit facility $831,000 $550,000
Economic Development Revenue Bonds 1,090,737 1,083,926
Capital expenditure facility 280,250 -
Debentures 3,270,000 -
---------------------------------
5,471,987 1,633,926
Less current maturities 972,344 632,344
---------------------------------
Long-term obligations $4,499,643 $1,001,582
=================================
F-17
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
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 percentage of eligible domestic accounts receivable. The facilities bear
interest at 1% over prime (8.75% at March 31, 1999). Advances on the capital
expenditure line, $280,250 at March 31, 1999, are amortized over 5 years. The
credit facility provides that the Company must meet certain financial covenants.
During 1999 the Company was out of compliance with several of the covenants. As
of March 31, 1999, a waiver of the violations was obtained from the lender and
the agreement was amended to ease the restrictions under such covenants.
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 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, 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
were issued to the 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
F-18
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
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 $972,344
2001 141,344
2002 141,344
2003 141,344
2004 and thereafter 4,075,611
-------------
Total principal maturities $5,471,987
=============
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.
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.
F-19
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
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 March 31, 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
The Company is restricted from paying dividends on its common shares pursuant to
the terms of its Preferred Series B shares. No dividends or other payments can
be declared and paid on the common stock unless the Company also declares and
pays dividends on the shares of common stock issuable upon conversion of the
Series B shares and unless there are no accrued and unpaid dividends on the
Series B shares. On March 31, 1999, the cumulative unpaid dividend on the Series
B Shares of $35,860 was declared and subsequently paid in April 1999.
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,
F-20
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
$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 was 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. 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.
Effective May 14, 1999, this anti-dilution clause was deleted from the contract
in exchange for increasing the number of shares issuable under the stock bonus
from 250,000 to 500,000 shares of common stock.
Below is a summary of common stock issuable by the Company at March 31, 1999 for
issuance upon the conversion of preferred stock and the exercise of the various
options and warrants:
Series B preferred stock 298,883
Debentures 509,486
Stock option plans 2,125,412
Stock Bonus Plan 60,000
Warrants 1,152,457
----------------
4,146,238
================
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 March 31, 1999. All ISOP and NSOP options granted in fiscal 1999
and 1998 were granted at an exercise price equal to or greater than fair market
value at the date of grant. The Company has maintained since 1993 a Stock Bonus
Plan, under which 60,000 shares of common stock are reserved for issuance to
enhance the Company's ability to attract, retain and reward directors, officers,
employees and consultants to the Company. To date, no awards of shares have been
made.
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.
F-21
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plans and Stock Warrants (continued)
The following is a summary of stock options granted, exercised and outstanding
for the years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
Number of Shares Average
------------------------- Other Exercise Expiration
ISOP NSOP Options Exercise Price Price Date
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding March 31, 1997 1,235,200 1,132,879 63,335 $.20-$7.63 $4.46
Options exercised 164,666 46,667 41,167 $.20-$5.75 $1.11
Options canceled 234,001 - 8,834 $.20-$6.00 $5.71
Options granted 227,500 50,000 - $6.00-$6.625 $6.16 06/02-01/03
------------------------------------------------------------------------------------
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
====================================================================================
</TABLE>
The following is a summary of warrants granted, exercised and outstanding for
the fiscal years ended March 31, 1995 through 1999:
<TABLE>
<CAPTION>
Warrants
-----------------------------------------------------
Exercise Expiration
Number of Shares 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 1,152,457
===============
</TABLE>
F-22
<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 has authorized the grant of options to management
personnel and directors for up to 4,000,000 shares of the Company's common
stock. All options granted have 1-4 year terms and vest and become fully
exercisable at the end of 1-4 years of continued employment.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123 which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
March 31, 1995 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 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 2.3 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.
F-23
<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 123 in the year of adoption are not likely to be
representative of the effects on pro forma net income for future years. The
Company's pro forma information follows (in thousands except for earnings per
share information):
Year ended March 31
1999 1998
-------------------------------
Pro forma net loss $(6,212,589) $(5,405,285)
Pro forma net loss applicable to common stock (6,356,029) (5,548,725)
Pro forma loss per share:
Basic $(1.07) $(1.10)
Diluted (1.04) (0.95)
Exercise prices for options outstanding as of March 31, 1999 ranged from $2.85
to $7.63. The weighted-average remaining contractual life of those options is
2.3 years. At March 31, 1999, there were 515,534 options outstanding,
exercisable at a range of $2.85 to $4.45 per share, 503,500 options exercisable
between $5.00 to $5.75 per share and 1,106,378 options exercisable between $6.00
to $7.63 per share.
8. Leases and Commitments
The Company has leased several vehicles and computer equipment under long-term
leases classified as capital leases. The Company has the option to purchase the
equipment for a nominal cost at the termination of the lease. The assets
classified as capital leases are depreciated over their estimated useful lives.
F-24
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. Leases and Commitments (continued)
Property and equipment include the following amounts for existing leases that
have been capitalized:
Year ended March 31
1999 1998
-------------------------------
Computer/production equipment $181,563 $12,268
Less accumulated depreciation 25,538 1,738
-------------------------------
$156,025 $10,530
===============================
Future minimum payments for capitalized leases were as follows at March 31,
1999:
2000 $45,958
2001 14,317
----------
Total minimum lease payments 60,275
Less amounts representing interest 11,255
----------
Present value of net minimum lease payments 49,020
Less current maturities 37,479
----------
Long-term obligation $11,541
==========
The Company leases various facilities, vehicles, and equipment under
noncancelable operating lease arrangements. The major facilities leases are for
terms of 1 to 10 years. Rent expense under all operating leases was $518,111 and
$329,156 in 1999 and 1998, respectively.
Future minimum lease payments under these noncancelable operating leases as of
March 31, 1999 are as follows:
2000 $285,342
2001 150,064
2002 66,661
2003 24,544
2004 16,021
Thereafter 46,551
--------------
Total minimum lease payments $589,183
==============
F-25
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. Leases and Commitments (continued)
The Company's corporate offices and DPI's operating office are located in an
office building owned in part by an officer/director/shareholder. Total rents
paid to the affiliate of the officer/director/shareholder during the years ended
March 31, 1999 and 1998 were $96,377 and $88,142, respectively.
9. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under
the provisions of SFAS No. 109, a deferred tax liability or asset (net of a
valuation allowance) is provided in the financial statements by applying the
provisions of applicable tax laws to measure the deferred tax consequences of
temporary differences that will result in net taxable or deductible amounts in
future years as a result of events recognized in the financial statements in the
current or preceding years.
The provision (benefit) for income taxes is comprised of the following:
1999 1998
-----------------------------
Current:
Federal and state $ - $7,323
Foreign (10,310) (12,332)
-----------------------------
(10,310) (5,009)
Deferred:
Federal and state - -
Foreign - (25,840)
-----------------------------
- (25,840)
-----------------------------
Total provision (benefit) (10,310) (30,849)
Less the net tax expense
(benefit) applicable to discontinued
operations - (12,332)
-----------------------------
Income tax benefit $(10,310) $(18,517)
=============================
F-26
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
A reconciliation between the actual income tax expense (benefit) and income
taxes computed by applying the statutory tax rates for the years ended March 31
is as follows:
Year ended March 31
1999 1998
--------------------------------
Computed expected tax expense (benefit) $(1,797,000) $(1,522,000)
State income tax expense (benefit) (50,000) (10,000)
Non-deductible foreign losses 1,220,000 1,507,000
Valuation allowance 554,000 -
Other 62,690 (5,849)
--------------------------------
$(10,310) $(30,849)
=================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
Year ended March 31
1999 1998
---------------------------
Deferred tax liabilities:
Amortization $ 91,958 $113,183
Depreciation 1,603 (1,106)
---------------------------
Total deferred tax liabilities 93,561 112,077
Deferred tax assets:
Tax net operating loss carryforwards 2,280,448 1,934,632
Deferred wages/option grants 89,910 89,911
---------------------------
Total deferred tax assets 2,370,358 2,024,543
Valuation allowance for deferred tax assets (2,276,797) (1,912,466)
---------------------------
Net deferred tax assets 93,561 112,077
===========================
$ - $ -
===========================
F-27
<PAGE>
Optical Security Group, Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
At March 31, 1999, the Company has aggregate net operating loss carryforwards of
approximately $6,163,000 for federal tax reporting purposes, which expire
beginning 2004 through 2019, if not utilized. Annual utilization of the net
operating loss carryforward could be limited by certain prior, as well as
subsequent sales of securities by the Company or its stockholders.
The Company does not provide for income taxes on the unremitted earnings of
foreign subsidiaries as the Company intends to reinvest these undistributed
earnings. There were no undistributed earnings of foreign subsidiaries at March
31, 1999.
10. Segments of Business
The following table sets forth-financial information for the Company's foreign
and domestic operations for the year ended March 31, 1999. The revenues are to
external customers and are reported by geographic destination.
<TABLE>
<CAPTION>
North All
America Western Europe Other Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Continuing operations $ 10,221,194 $ 1,843,029 $ 2,107,910 $ 14,172,133
Discontinued operations 2,217,121 1,442,754 - 3,659,875
----------------------------------------------------------------------------
$ 12,438,315 $ 3,285,783 $ 2,107,910 $ 17,832,008
============================================================================
Long-lived assets:
Continuing operations $ 7,143,658 $ 1,568,855 $ - $ 8,712,513
Discontinued operations - 109,318 - 109,318
----------------------------------------------------------------------------
$ 7,143,658 $ 1,678,173 $ - $ 8,821,831
============================================================================
</TABLE>
11. Employee Savings Plan
Effective January 1, 1999, the Company established a defined contribution plan
(the "401(k) Plan") which allows participants to contribute 1% to 15% of their
salary, subject to eligibility requirements and annual limits. The Company will
contribute $.50 for each dollar contributed by the employee, up to a maximum
contribution of 2 1/2% of the employee's salary. Except for the 401(k) Plan, the
Company does not have a defined benefit, pension plan, profit sharing or
retirement plan.
F-28
<PAGE>
EXHIBIT 10.2.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered effective May
14, 1999, by and between RICHARD H. BARD ("Employee") and OPTICAL SECURITY
GROUP, INC. (the "Company").
RECITALS
A. The parties entered into an Employment Agreement effective April 1,
1996, and an Amendment to Employment Agreement effective March 31,1998
(collectively the "Employment Agreement").
B. The parties wish to amend the Employment Agreement under the terms of
this Amendment.
THEREFORE, in consideration of the Recitals, the mutual considerations
described below, and other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties, intending to be bound, agree
as follows:
1. Paragraph 3-6 of the Employment Agreement is deleted in its entirety.
2. Paragraph 3-5 of the Employment Agreement is deleted in its entirety
and replaced with the following:
Bonus. Employee shall be entitled to annual bonuses in such
-----
amounts as may be determined by the Board of Directors. In addition,
Employee shall be entitled to receive a stock bonus of 500,000 shares
of the Company's common stock immediately prior to closing any of the
following transactions which occur on or before March 31, 2006: (a)
the merger, consolidation, or share-for-share exchange with another
company in which the Company is not the surviving entity, or (b) the
sale of all or substantially all of the Company's assets in one
transaction or a series of connected transactions. The provisions of
this paragraph shall survive termination or expiration of this
Agreement.
3. In all other respects, the Employment Agreement shall remain in full
force and effect, unmodified, and enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement effective May
14, 1999.
OPTICAL SECURITY GROUP, INC.
By: /s/ Mark T. Turnage /s/ Richard H. Bard
-------------------------------- -------------------------------
Mark T. Turnage, President Richard H. Bard
and Chief Operating Officer
<PAGE>
Exhibit 21.1.1
--------------
State of Country Assumed
Name of Organization Names/DBA
- ---- --------------- ---------
Optical Security Industries, Inc. Colorado OpSec U.S.
Optical Security Industries United Kingdom OpSec
International, Plc. International, Plc.
Optical Security International Germany --
GmbH & Co. KG
OpSec Advantage, Inc. Colorado --
Optical Security Industries Asia Pte Ltd. Singapore --
Dimensional Printing Industries, Inc. Colorado OpSec Creative
Technologies
TSL Incorporated Colorado --
21.1.1
<PAGE>
Exhibit 23.1
------------
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of Optical Security Group, Inc. and in the related prospectuses of
our report dated May 28, 1999, with respect to the consolidated financial
statements of Optical Security Group, Inc. included in the Annual Report (Form
10-KSB) for the year ended March 31, 1999:
1. Registration Statement on Form S-8 pertaining to the Optical Security
Group, Inc.'s Nonqualified Stock Option Plan, 1992 Incentive Stock Option
Plan, and Stock Bonus Plan.
2. Registration Statement on Form S-3 (No. 333-67939) pertaining to Optical
Security Group, Inc.
3. Registration Statement on Form S-3 (No. 333-12703) pertaining to Optical
Security Group, Inc.
Denver, Colorado
June 29, 1999 /s/ Ernst & Young LLP
---------------------
23.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 1,337,128 797,388
<SECURITIES> 0 0
<RECEIVABLES> 2,828,538 2,162,656
<ALLOWANCES> (124,349) (19,353)
<INVENTORY> 1,443,912 906,747
<CURRENT-ASSETS> 5,715,952 4,758,079
<PP&E> 4,166,841 2,790,130
<DEPRECIATION> (759,869) (397,454)
<TOTAL-ASSETS> 14,794,185 13,484,632
<CURRENT-LIABILITIES> 3,332,335 3,021,276
<BONDS> 0 0
0 0
18 18
<COMMON> 30,353 26,153
<OTHER-SE> 6,920,295 9,433,141
<TOTAL-LIABILITY-AND-EQUITY> 14,794,185 13,484,632
<SALES> 14,172,133 9,798,713
<TOTAL-REVENUES> 14,172,133 9,798,713
<CGS> 7,919,501 5,730,654
<TOTAL-COSTS> 5,478,644 3,007,134
<OTHER-EXPENSES> (1,891) 46,432
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 258,116 143
<INCOME-PRETAX> 0 0
<INCOME-TAX> (10,310) (18,517)
<INCOME-CONTINUING> 528,073 1,032,867
<DISCONTINUED> (6,135,472) (5,512,382)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,607,839) (4,622,955)
<EPS-BASIC> (0.97) (0.91)
<EPS-DILUTED> (0.94) (0.79)
</TABLE>
