WEARSIDE security holograms firm Applied Optical Technologies is to cut 40 staff after issuing a second profits warning.

Shares in the Washington business tumbled on the news that current year profits would be "substantially below expectations". The latest profits warning follows an earlier announcement last August.

A failed attempt to cash in on the introduction of the new European currency has been blamed for the fresh warning.

The job losses are expected to be achieved after consultation with its 200 employees. The company hopes to save about £1m through the redundancies.

Mark Turnage, the newly-appointed group chief executive, who took over from David Tidmarsh, said: "It has been decided to restructure the existing European business. Consultations will be undertaken with a view to reducing the current headcount by some 40 employees. This restructuring is expected to result in cost savings in excess of £1m on an annualised basis."

The new management team also includes Rick Salomone as president of the US Holography operations, Tim Formoy as European sales director and Kim Hampson as European logistics manager.

These follow the appointment of Terry Corner as technical director last year.

Mr Turnage said: "The company has in recent months experienced deterioration in its European business. This has been due to the distraction of the euro and other business development opportunities.

"Our investments to position ourselves to provide security products for euro banknotes have yet to yield a return."

The company has already invested more than £500,000 on refitting its manufacturing facility with a security system better than one used by the Bank of England

Applied said products for the euro had been successfully trialled, but it was unlikely that substantial orders would be placed this year.

In its US markets, where it provides security protection for pharmaceutical products and national identity cards, Applied had performed well.

The deterioration in trading has caused analysts to cut forecasts for the year to March 2001, from pre-tax profits of £500,000 to a pre-tax loss of £1.3m.

Mr Turnage said: "The market for the company's products is still growing and margins in the general and high security business areas are being maintained. The new management team believes the group will regain its share of the European market, continue to grow US operations and win euro business.