<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 12, 1998
---------------
Optical Security Group, Inc.
(Exact name of registrant as specified in its charter)
Colorado 0-17531 84-1094032
- --------------------------------------------------------------------------------
(State of other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
535 16th Street, Suite 920, Denver, Colorado 80202
---------------------------------------------------
(Address of principal executive offices)
Registrant's Telephone number, including area code (303) 534-4500
----------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2 - ACQUISITION OR DISPOSITION OF ASSETS
On May 29, 1998, Optical Security Group, Inc. (the "Registrant") through
its wholly-owned subsidiary, OpSec Advantage, Inc., a Colorado corporation
("OpSec Advantage"), completed the purchase of substantially all of the assets
of Advantage Technology, Inc. ("Advantage"), a Pennsylvania corporation. The
acquisition was effective as of May 1, 1998.
The financial statements and proforma financial statements are hereby filed
under this amendment to the Form 8-K filing dated May 29, 1998.
ITEM 7 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of business acquired.
(b) Pro forma financial information.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPTICAL SECURITY GROUP, INC.
Date: August 12, 1998 By: \s\ Richard H. Bard
-----------------------------
Richard H. Bard, CEO
Date: August 12, 1998 By: \s\ Gerald A. Melfi
-----------------------------
Gerald A. Melfi,
Principal Financial Officer
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
FINANCIAL REPORT
April 30, 1998
Exhibit 99.1
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3-4
Statements of Income 5
Statements of Retained Earnings 5
Statements of Cash Flows 6
Notes to Financial Statements 7-14
INDEPENDENT AUDITORS' REPORT ON THE
SUPPLEMENTARY DATA 15
SUPPLEMENTARY DATA
Balance Sheet Detail
Prepaid expenses 16
Accrued expenses and other payables 16
Income Statement Detail
Cost of sales 17
Selling expenses 18
General and administrative expenses 18
Other income 19
</TABLE>
<PAGE>
[LETTERHEAD OF SIMON LEVER & COMPANY APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Advantage Technology, Inc.
Lancaster, Pennsylvania
We have audited the accompanying balance sheets of Advantage Technology,
Inc. as of April 30, 1998 and December 31, 1997 and 1996, and the related
statements of income, retained earnings and cash flows for the four months and
years then ended, respectively. 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 audits 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 financial position of Advantage
Technology, Inc. as of April 30, 1998 and December 31, 1997 and 1996, and the
results of its operations and its cash flows for the four months and years then
ended, respectively, in conformity with generally accepted accounting
principles.
As disclosed in Note 9 to the financial statements, Advantage
Technology, Inc. sold substantially all of its assets effective as of May 1,
1998. The accompanying financial statements do not include any adjustments
related to the sale of the Company's assets.
/s/ SIMON LEVER & COMPANY
SIMON LEVER & COMPANY
July 2, 1998
-2-
<PAGE>
FINANCIAL STATEMENTS
ADVANTAGE TECHNOLOGY, INC.
BALANCE SHEETS
April 30, 1998 and December 31, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
$ $ $
--------- --------- ---------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS (NOTE 5) 29,934 203,568 62,588
ACCOUNTS RECEIVABLE (NOTES 4 AND 5) 659,746 455,107 473,874
LOAN RECEIVABLE EMPLOYEE (NOTES 4 AND 5) 0 0 1,000
INVENTORIES (NOTES 2, 4 AND 5) 285,594 241,910 217,829
PREPAID EXPENSES (NOTE 5) 10,104 0 3,900
PREPAID CORPORATE TAXES (NOTE 5) 200 0 0
--------- --------- ---------
TOTAL CURRENT ASSETS 985,578 900,585 759,191
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $588,681-1998; $574,488-1997;
$490,801-1996 (NOTES 3, 4 AND 5) 399,849 406,597 460,683
--------- --------- ---------
OTHER ASSETS
CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE
(NOTES 4 AND 5) 17,809 18,240 18,125
SOFTWARE COSTS, NET OF ACCUMULATED AMORTIZATION
OF $12,796-1998; $12,393-1997; $9,951-1996
(NOTES 4 AND 5) 0 403 2,845
DEFERRED MORTGAGE AND SETTLEMENT COSTS, NET OF
ACCUMULATED AMORTIZATION OF $4,316-1998;
$3,921-1997; $2,736-1996 (NOTES 4 AND 5) 1,359 1,754 2,939
SECURITY DEPOSITS (NOTES 4 AND 5) 3,510 2,760 2,760
PATENTS, NET OF ACCUMULATED AMORTIZATION OF
$32,581-1998; $30,931-1997; $25,982-1996
(NOTES 4 AND 5) 27,419 29,069 34,018
--------- --------- ---------
TOTAL OTHER ASSETS 50,097 52,226 60,687
--------- --------- ---------
TOTAL ASSETS 1,435,524 1,359,408 1,280,561
============ ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
BALANCE SHEETS
APRIL 30, 1998 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
$ $ $
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES
NOTES PAYABLE (NOTE 4) 225,000 225,000 228,000
CURRENT MATURITIES OF LONG-TERM DEBT (NOTE 5) 242,644 304,980 491,988
ACCOUNTS PAYABLE 586,662 412,909 420,845
DEFERRED REVENUE 2,856 19,425 0
ACCRUED EXPENSES AND OTHER PAYABLES 113,980 81,539 87,018
--------- --------- ---------
TOTAL CURRENT LIABILITIES 1,171,142 1,043,853 1,227,851
--------- --------- ---------
LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 5)
--------- --------- ---------
STOCKHOLDERS' EQUITY
CONTRIBUTED CAPITAL
COMMON STOCK, VOTING, NO PAR VALUE; STATED
VALUE PER SHARE $.10; AUTHORIZED 2,000,000
SHARES; ISSUED AND OUTSTANDING 367,240 SHARES 36,724 36,724 36,724
COMMON STOCK, NON-VOTING, NO PAR VALUE; STATED
VALUE PER SHARE $.10; AUTHORIZED 1,000,000
SHARES; ISSUED AND OUTSTANDING 23,440 SHARES 2,344 2,344 2,344
ADDITIONAL PAID-IN CAPITAL 10,932 10,932 10,932
RETAINED EARNINGS 214,382 265,555 2,710
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 264,382 315,555 52,710
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,435,524 1,359,408 1,280,561
========================================== ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
STATEMENTS OF INCOME
FOUR MONTHS ENDED APRIL 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
$ % $ % $ %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
NET SALES (NOTE 6) 1,330,446 100.0 4,143,891 100.0 2,890,386 100.0
COST OF SALES 895,850 67.2 2,634,285 63.6 2,094,816 72.5
---------- ----- ---------- ----- ---------- -----
GROSS PROFIT 434,596 32.8 1,509,606 36.4 795,570 27.5
---------- ----- ---------- ----- ---------- -----
COST OF OPERATIONS
SELLING EXPENSES 82,188 6.2 386,788 9.4 184,560 6.4
GENERAL AND ADMINISTRATIVE
EXPENSES 280,540 21.1 777,194 18.7 765,392 26.5
---------- ----- ---------- ----- ---------- -----
TOTAL COST OF OPERATIONS 362,728 27.3 1,163,982 28.1 949,952 32.9
---------- ----- ---------- ----- ---------- -----
OPERATING INCOME (LOSS) 71,868 5.5 345,624 8.3 (154,382) (5.4)
OTHER INCOME 6,691 0.5 579 0.0 1,226 0.0
---------- ----- ---------- ----- ---------- -----
INCOME (LOSS) BEFORE
INTEREST EXPENSE 78,559 6.0 346,203 8.3 (153,156) (5.4)
INTEREST EXPENSE 16,435 1.2 68,654 1.7 80,742 2.8
---------- ----- ---------- ----- ---------- -----
NET INCOME (LOSS) 62,124 4.8 277,549 6.6 (233,898) (8.2)
================= ========== ===== ========== ===== ========== =====
</TABLE>
STATEMENTS OF RETAINED EARNINGS
FOUR MONTHS ENDED APRIL 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
$ $ $
-------- ------- --------
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR 265,555 2,710 236,608
NET INCOME (LOSS) 62,124 277,549 (233,898)
S CORPORATION DISTRIBUTIONS (113,297) (14,704) 0
-------- ------- --------
BALANCE, END OF YEAR 214,382 265,555 2,710
==================== ======== ======= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED APRIL 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) 62,124 277,549 (233,898)
NONCASH EXPENSES INCLUDED IN NET INCOME (LOSS):
DEPRECIATION 28,428 83,687 85,115
AMORTIZATION 2,448 8,576 8,596
GAIN ON SALE OF EQUIPMENT (50)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (204,639) 18,767 (102,358)
(INCREASE) DECREASE IN INVENTORIES (43,684) (24,081) 160,610
(INCREASE) DECREASE IN PREPAID EXPENSES (10,104) 3,900 2,459
(INCREASE) DECREASE IN PREPAID CORPORATE TAXES (200) 244
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 173,753 (7,936) 276,090
INCREASE (DECREASE) IN DEFERRED REVENUE (16,569) 19,425
INCREASE (DECREASE) IN ACCRUED EXPENSES AND
OTHER PAYABLES 32,441 (5,479) 10,854
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,948 374,408 207,712
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
DECREASE IN LOAN RECEIVABLE - EMPLOYEE 1,000
PROCEEDS FROM SALE OF EQUIPMENT 50
PURCHASE OF PROPERTY AND EQUIPMENT (21,680) (29,601) (51,267)
(INCREASE) DECREASE IN CASH SURRENDER VALUE OF
OFFICERS' LIFE INSURANCE 431 (115) (2,074)
(INCREASE) DECREASE IN SECURITY DEPOSITS (750) 700
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (21,949) (28,716) (52,641)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
NET BORROWINGS (PAYMENTS) ON REVOLVING CREDIT
AGREEMENTS (3,000) 69,000
PRINCIPAL PAYMENTS ON LONG-TERM BORROWINGS (62,336) (187,008) (187,008)
S CORPORATION DISTRIBUTIONS (113,297) (14,704)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (175,633) (204,712) (118,008)
--------- --------- ---------
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING,
INVESTING AND FINANCING ACTIVITIES (173,634) 140,980 37,063
CASH AND CASH EQUIVALENTS:
BEGINNING 203,568 62,588 25,525
--------- --------- ---------
ENDING 29,934 203,568 62,588
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
INTEREST 17,030 69,978 81,497
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Business - The Company is engaged in the development, manufacture,
------------------
and sale of graphic visual security products that deter counterfeiting and
product tampering. The products include tamper-resistant labels, transit
tickets, and numerous personal identification items such as pouches and
laminates for photo ID cards, driver licenses and passports. The Company
services and distributes its products worldwide in both the government and
private sector.
Estimates - The preparation of financial statements in conformity with
---------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, the Company
-------------------------
considers all Treasury bills, certificates of deposit and money market funds
purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable The Company utilizes the direct write-off method to
-------------------
record accounts receivable which are deemed uncollectible. Under this method,
the Company charges operations for the amount of any accounts receivable which
become worthless during the year. This method is not materially different from
the allowance method.
Inventory Valuation - Inventories are valued at the lower of cost or market.
-------------------
Inventory cost is determined as follows:
Raw materials are determined by the first-in, first-out method.
Work-in-process is determined by accumulating the cost of raw materials,
labor and overhead costs of each job.
Finished goods are determined at the contract price of each completed job,
after removing the gross profit expected to be realized.
Property and Equipment - Property and equipment are stated at cost.
----------------------
Expenditures for renewals and improvements that significantly add to productive
capacity or extend the useful life of an asset are capitalized. Maintenance and
repairs are charged to expense as incurred. When depreciable properties are
retired or otherwise disposed of, the cost and related accumulated depreciation
are eliminated from the accounts and the resultant gain or loss is reflected in
income. Depreciation is computed by the straight-line method for all depreciable
assets at rates based on estimated service lives.
-7-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies - Continued
- ---------------------------------------------------
Long-Lived Assets - Long-lived assets to be held and used are reviewed for
-----------------
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment losses on
assets to be held and used are recognized based on the fair value of the asset
and long-lived assets to be disposed of are reported at the lower of carrying
amount or fair value less the cost to sell.
Software Costs - Software costs are stated at cost less accumulated
--------------
amortization, which is calculated by the straight-line method over 60 months.
Mortgage Settlement Costs Mortgage settlement costs are amortized on a
-------------------------
straight-line basis over the terms of the mortgages.
Patents Patents are amortized on a straight-line basis over their remaining
-------
lives, ranging from six to seven years.
Income Taxes - Effective July 7, 1988, the Company elected, for federal tax
------------
purposes, to be taxed as an S Corporation; therefore, items of income and
deduction and tax credits will flow through to the stockholders' individual tax
returns. The Company elected to be taxed as an S Corporation for state tax
purposes effective January 1, 1990.
Simplified Employee Pension Plan - The Company has a simplified employee
--------------------------------
pension plan. The Company does not match the employees' contributions to the
plan.
NOTE 2 Inventories
- -------------------
Inventories at April 30, 1998 and December 31, 1997 and 1996 consist of the
following:
1998 1997 1996
-------- -------- --------
$ $ $
-------- -------- --------
Raw materials 201,894 193,660 165,620
Work-in-process 74,278 45,345 42,258
Finished goods 9,422 2,905 9,951
-------- -------- --------
Total 285,594 241,910 217,829
----- -------- -------- --------
-8-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 Property and Equipment
- ------------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998
-----------------------------------
Asset Accumulated Net Book
Costs Depreciation Value
----------- -------------- --------
At April 30, 1998 $ $ $
----------- -------------- --------
<S> <C> <C> <C>
Leasehold improvements 22,333 7,732 14,601
Production equipment 848,691 492,010 356,681
Marketing equipment 4,306 4,306 0
Office furniture and fixtures 105,599 77,032 28,567
Vehicles 7,601 7,601 0
----------- -------------- --------
Total 988,530 588,681 399,849
- ----- ----------- -------------- --------
1997
-----------------------------------
Asset Accumulated Net Book
Costs Depreciation Value
----------- -------------- --------
At December 31, 1997 $ $ $
----------- -------------- --------
Leasehold improvements 22,333 7,244 15,089
Production equipment 832,980 467,971 365,009
Marketing equipment 4,306 4,306 0
Office furniture and fixtures 113,865 87,494 26,371
Vehicles 7,601 7,473 128
----------- -------------- --------
Total 981,085 574,488 406,597
- ----- ----------- -------------- --------
1996
-----------------------------------
Asset Accumulated Net Book
Costs Depreciation Value
----------- -------------- --------
At December 31, 1996 $ $ $
----------- -------------- --------
Leasehold improvements 22,333 5,779 16,554
Production equipment 808,205 400,648 407,557
Marketing equipment 4,306 4,306 0
Office furniture and fixtures 109,039 74,115 34,924
Vehicles 7,601 5,953 1,648
----------- -------------- --------
Total 951,484 490,801 460,683
- ----- ----------- -------------- --------
</TABLE>
Depreciation expense for the four months ended April 30, 1998 and years
ended December 31, 1997 and 1996 was $28,428, $83,687 and $85,115, respectively.
-9-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 Notes Payable
- ---------------------
Notes payable consists of the following at April 30, 1998, December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
$ $ $
------- ------- -------
<S> <C> <C> <C>
Notes payable representing borrowings on a $250,000 revolving line of credit
financing arrangement with Summit Bank; interest is calculated at the Bank's
prime commercial rate plus 1.0%, payable monthly; collateralized by a
security agreement and financing statement covering accounts receivable,
inventories, property and equipment, general intangibles, contract rights,
the personal guarantees of the Company's stockholders, and the assignment of
life insurance policies covering the stockholders; the Company is required to
maintain certain quick, current, debt to tangible net worth and cash flows to
current maturities of long-term debt ratios and the Company is subject to
limitations as to annual capital expenditures; at April 30, 1998 and December
31, 1997 and 1996, the Company's current, quick and cash flows to current
maturities of long-term debt ratios were less than the ratios required by the
Bank and the Company's debt to tangible net worth ratio exceeded the ratio
required by the Bank which are violations of the loan agreement
225,000 225,000 228,000
-------- -------- --------
Total 225,000 225,000 228,000
-------- -------- --------
NOTE 5 Long-Term Debt
- ----------------------
Long-term debt consists of the following at April 30, 1998, December 31, 1997
and 1996:
1998 1997 1996
------- ------- -------
$ $ $
------- ------- -------
Term loan payable to Summit Bank in monthly installments of $5,000 plus
interest at the Bank's prime rate plus 1.5% through February, 2000;
collateralized by a security agreement and financing statement covering all
the Company's assets, the personal guarantees of the Company's stockholders,
and the assignment of life insurance policies
</TABLE>
-10-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - Long Term Debt - Continued
- -----------------------
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
$ $ $
------- ------- -------
<S> <C> <C> <C>
covering the stockholders; the Company is required to maintain certain quick,
current, debt to tangible net worth and cash flows to current maturities of
long-term debt ratios and is subject to limitations as to annual capital
expenditures; at April 30, 1998 and December 31, 1997 and 1996, the Company's
current, quick and cash flows to current maturities of long-term debt ratios
were less than the ratios required by the Bank and the Company's debt to
tangible net worth ratio exceeded the ratio required by the Bank which are
violations of the loan agreement; therefore, the total debt has been
classified as a current maturity. 110,000 130,000 190,000
Term loan payable to Summit Bank in monthly installments of $7,500 plus
interest at the fixed rate of 7.5%, through November, 1998; collateralized by
a security agreement and financing statement covering accounts receivable,
inventories, property and equipment, general intangibles, contract rights and
the personal guarantees of the Company's stockholders; the Company is
required to maintain certain quick, current, debt to tangible net worth and
cash flows to current maturities of long-term debt ratios; subject to
prepayment penalties; at April 30, 1998 and December 31, 1997 and 1996, the
Company's current, quick and cash flows to current maturities of long-term
debt ratios were less than the ratios required by the Bank and the Company's
debt to tangible net worth ratio exceeded the ratio required by the Bank
which are violations of the loan agreement; therefore, the total debt has
been classified as a current maturity 52,500 82,500 172,500
</TABLE>
-11-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - Long-Term Debt - Continued
- -----------------------
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
$ $ $
------- ------- -------
<S> <C> <C> <C>
Term loan payable to Summit Bank in monthly installments of $3,084 plus
interest at the Bank's prime rate plus 1.5% through June, 2000;
collateralized by a security agreement and financing statement covering all
the Company's assets and the personal guarantees of the Company's
stockholders; the Company is required to maintain certain quick, current,
debt to tangible net worth and cash flows to current maturities of long-term
debt ratios and is subject to limitations as to annual capital expenditures;
at April 30, 1998 and December 31, 1997 and 1996, the Company's current,
quick and cash flows to current maturities of long-term debt ratios were less
than the ratios required by the Bank and the Company's debt to tangible net
worth ratio exceeded the ratio required by the Bank which are violations of
the loan agreement; therefore, the total debt has been classified as a
current maturity 80,144 92,480 129,488
------- ------- -------
Total 242,644 304,980 491,988
Less current maturities 242,644 304,980 491,988
------- ------- -------
Net Long-Term Debt 0 0 0
------------------ ------- ------- -------
</TABLE>
At April 30, 1998 and December 31, 1997 and 1996, the Company also had a
$21,328 unused continuing commercial letter of credit agreement with Summit Bank
to be drawn upon as needed. The letter of credit expired when the Company was
sold.
Each of the above obligations payable to Summit Bank are cross-collateralized
with all other obligations payable to Summit Bank.
Scheduled maturities during the next three years and in the aggregate are:
1999-$149,508; 2000-$87,008; 2001-$6,128.
-12-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 Major Customers
- -----------------------
Net sales for the four months ended April 30, 1998 and years ended December
31, 1997 and 1996 included sales to customers, each of which accounted for 10%
or more of the total net sales of the Company for the four months and years
ended as disclosed in the following schedules:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Number of customers accounting for 10%
or more of net sales 2 2 1
Total net sales to the above customers,
each individually accounting for 10%
or more of the Company's total net
sales $356,749 $1,131,268 $479,159
</TABLE>
NOTE 7 Operating Leases
- ------------------------
The Company leases its premises under the terms of an operating lease
agreement effective through September 30, 1998. The total minimum rental
commitment at April 30, 1998 including common area maintenance charges on this
lease is as follows: 1998-$42,404.
Total rental expense under this lease including common area maintenance
charges for the four months ended April 30, 1998 and the years ended December
31, 1997 and 1996 was $33,960, $103,376 and $105,130, respectively.
The Company leased a vehicle under an operating lease expiring in January
1998. The lease required monthly rental expense of $624.
Total rental expense under this vehicle lease for the four months ended April
30, 1998 and the years ended December 31, 1997 and 1996 was $624, $3,472 and
$5,505, respectively, net of employee reimbursements for personal use of this
vehicle.
In February, 1998 the Company leased a vehicle under an operating lease
requiring monthly rental expense of $713. The Company incurred rental expense,
including a down payment, of $3,223 on this lease through April 30, 1998, at
which time the lease payments were assumed by the respective employee.
NOTE 8 Reclassification of Prior Year's Financial Statements
- -------------------------------------------------------------
Certain reclassifications of prior year balances have been made to conform
with the current year's presentation.
-13-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 Subsequent Event
- ------------------------
Effective as of May 1, 1998, the Company sold substantially all of its assets
for $2,000,000 and 300,000 shares of the buyer's stock, pursuant to a
registration rights agreement. The buyer also assumed certain liabilities of
the Company. Concurrent with the sale, a resolution will be drafted by the
Board of Directors to liquidate the Company. The financial statements do not
include any adjustments related to the sale of the Company's assets.
-14-
<PAGE>
[LETTERHEAD OF SIMON LEVER & COMPANY APPEARS HERE]
INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY DATA
To the Board of Directors
Advantage Technology, Inc.
Lancaster, Pennsylvania
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary data is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. The supplementary data on pages 16-19 has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ SIMON LEVER & COMPANY
SIMON LEVER & COMPANY
July 2, 1998
-15-
<PAGE>
SUPPLEMENTARY DATA
ADVANTAGE TECHNOLOGY, INC.
BALANCE SHEET DETAIL
APRIL 30, 1998 AND DECEMBER 31, 1997 AND 1996
SEE INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
$ $ $
-------- ------- --------
<S> <C> <C> <C>
PREPAID EXPENSES
INSURANCE 6,653 0 0
PATENT TAXES 3,451 0 1,226
PERFORMANCE BOND 0 0 474
TRADE SHOW EXPENSE 0 0 2,200
-------- ------- -------
TOTAL PREPAID EXPENSES 10,104 0 3,900
======================= ======== ======= =======
ACCRUED EXPENSES AND OTHER PAYABLES
WAGES AND ATTENDANCE BONUSES 57,413 27,709 31,681
ACCRUED VACATION 44,175 40,737 44,103
PAYROLL TAXES AND OTHER PAYROLL WITHHOLDINGS 8,242 2,886 2,216
UNITED WAY 156 557 595
PENSION WITHHOLDING PAYABLE 300 0 (150)
INTEREST 3,694 4,289 5,613
INSURANCE 0 5,298 2,957
CORPORATE TAXES 0 63 3
-------- ------- -------
TOTAL ACCRUED EXPENSES AND OTHER PAYABLES 113,980 81,539 87,018
========================================== ======== ======= =======
</TABLE>
-16-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
INCOME STATEMENT DETAIL
FOUR MONTHS ENDED APRIL 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
SEE INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
--------- ---- ---------- ---- ---------- ----
COST OF SALES
RAW MATERIALS
BEGINNING INVENTORY 193,660 165,620 306,056
PURCHASES 628,973 1,749,236 1,088,680
CONVERTING EXPENSE 34,828 95,688 149,179
FREIGHT IN 4,526 9,038 6,159
--------- ---------- ----------
TOTAL 861,987 2,019,582 1,550,074
LESS ENDING INVENTORY (201,894) (193,660) (165,620)
--------- ---------- ----------
COST OF RAW MATERIALS USED 660,093 49.6 1,825,922 44.0 1,384,454 47.9
--------- ---- ---------- ---- ---------- ----
DIRECT LABOR 117,110 8.8 326,541 7.9 264,531 9.2
--------- ---- ---------- ---- ---------- ----
MANUFACTURING
PAYROLL TAXES 15,067 29,410 26,379
HOSPITALIZATION 8,973 18,776 30,379
WORKERS' COMPENSATION 1,684 16,772 16,135
OUTSIDE LABOR 9,155 49,477 12,540
ARTWORK 268 2,716 2,139
FREIGHT OUT 38,857 135,496 89,724
INSPECTION FEES 0 9,000 0
BUILDING RENTAL 27,209 82,701 84,104
SMALL TOOLS AND PRODUCTION
SUPPLIES 6,875 14,646 11,437
UTILITIES 7,752 23,195 22,146
TRAVEL 225 0 0
WASTE REMOVAL 1,837 1,994 2,867
DAMAGED MATERIAL 0 0 4,860
MAINTENANCE AND REPAIRS 1,125 1,630 2,337
MAINTENANCE LABOR 11,031 24,727 53,030
DEPRECIATION 24,039 67,323 67,580
--------- ---------- ----------
TOTAL MANUFACTURING
EXPENSES 154,097 11.5 477,863 11.5 425,657 14.7
--------- ---- ---------- ---- ---------- ----
TOTAL MANUFACTURING COSTS 931,300 69.9 2,630,326 63.4 2,074,642 71.8
PLUS BEGINNING INVENTORY WIP 45,345 3.4 42,258 1.1 61,429 2.1
LESS ENDING INVENTORY WIP (74,278) (5.6) (45,345) (1.1) (42,258) (1.5)
--------- ---- ---------- ---- ---------- ----
TOTAL COST OF GOODS
MANUFACTURED 902,367 67.7 2,627,239 63.4 2,093,813 72.4
BEGINNING INVENTORY
- FINISHED GOODS 2,905 0.2 9,951 0.2 10,954 0.4
ENDING INVENTORY
- FINISHED GOODS (9,422) (0.7) (2,905) __ (9,951) (0.3)
--------- ---- ---------- ---- ---------- ----
TOTAL COST OF SALES 895,850 67.2 2,634,285 63.6 2,094,816 72.5
=================== ========= ===== ========== ==== ========== ====
</TABLE>
-17-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
INCOME STATEMENT DETAIL
FOUR MONTHS ENDED APRIL 30, 1998 AND YEARS ENDED DECEMBER 31, 1997 AND 1996
SEE INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
$ % $ % $ %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
SELLING EXPENSES
SALES SALARIES AND COMMISSIONS 39,026 3.0 78,843 1.9 79,816 2.8
PAYROLL TAXES 3,880 0.3 6,544 0.2 6,419 0.2
WORKERS' COMPENSATION 116 0.0 360 0.0 375 0.0
MARKETING FEES 275 0.0 0 0.0 6,000 0.2
ADVERTISING AND PROMOTION 10,740 0.8 20,863 0.5 26,800 0.9
SAMPLES 971 0.0 3,976 0.1 5,521 0.2
TELEPHONE 2,422 0.2 7,255 0.2 8,072 0.3
TRAVEL AND ENTERTAINMENT 10,149 0.8 22,952 0.6 43,062 1.5
VEHICLE EXPENSE 1,413 0.1 3,806 0.1 2,412 0.1
DUES AND SUBSCRIPTIONS 917 0.1 230 0.0 1,415 0.0
COMMISSIONS 7,292 0.5 238,720 5.8 0 0.0
FREIGHT 42 0.0 1,238 0.0 2,295 0.1
OFFICE EXPENSE 4,945 0.4 2,001 0.0 2,013 0.1
DEPRECIATION 0 0.0 0 0.0 360 0.0
-------- ---- -------- ---- -------- ----
TOTAL SELLING EXPENSES 82,188 6.2 386,788 9.4 184,560 6.4
====================== ======== ==== ======== ==== ======== ====
GENERAL AND ADMINISTRATIVE EXPENSES
OFFICERS' SALARIES 55,731 4.2 204,004 4.9 150,658 5.3
OFFICE SALARIES 95,924 7.2 239,300 5.8 263,135 9.1
WAREHOUSE SALARIES 7,294 0.6 23,327 0.6 23,033 0.8
ATTENDANCE AND OTHER BONUSES 0 0.0 10,939 0.3 3,038 0.1
OUTSIDE LABOR AND CONSULTING 0 0.0 3,352 0.1 0 0.0
PAYROLL TAXES 18,720 1.4 37,571 0.9 37,735 1.3
HOSPITALIZATION 7,124 0.5 18,329 0.4 29,186 1.0
WORKERS' COMPENSATION 136 0.0 1,290 0.0 1,245 0.0
EMPLOYEE BENEFITS 171 0.0 1,417 0.0 791 0.0
TRAINING 906 0.1 1,042 0.0 0 0.0
OFFICERS' LIFE INSURANCE 6,071 0.5 16,805 0.4 14,847 0.5
GENERAL INSURANCE 2,979 0.2 8,160 0.2 9,980 0.3
BUILDING RENTAL 6,751 0.5 20,675 0.5 21,026 0.7
UTILITIES 1,938 0.2 5,799 0.1 5,536 0.2
TRAVEL AND ENTERTAINMENT 1,258 0.1 1,931 0.0 421 0.0
TELEPHONE 5,641 0.4 14,961 0.4 16,187 0.6
OFFICE EXPENSE 4,031 0.3 11,662 0.3 14,157 0.5
VEHICLE EXPENSE 3,688 0.3 3,472 0.1 5,505 0.2
RESEARCH AND DEVELOPMENT 5,655 0.4 12,178 0.3 20,621 0.7
PROFESSIONAL SERVICES 38,195 2.9 63,315 1.5 82,342 2.9
COMPUTER MAINTENANCE 481 0.0 622 0.0 1,016 0.0
DUES AND SUBSCRIPTIONS 175 0.0 6,232 0.2 3,071 0.1
OTHER TAXES 911 0.1 21,544 0.5 13,290 0.5
BAD DEBT EXPENSE 7,955 0.6 10,983 0.3 14,640 0.5
JANITORIAL SUPPLIES 1,716 0.1 5,220 0.1 5,179 0.2
DEPRECIATION 4,389 0.3 16,364 0.4 17,175 0.6
AMORTIZATION 2,448 0.2 8,576 0.2 8,596 0.3
BANK SERVICE CHARGES 232 0.0 2,196 0.1 1,150 0.0
MISCELLANEOUS EXPENSE 20 0.0 5,928 0.1 1,832 0.1
-------- ---- -------- ---- -------- ----
Total General and
=================
Administrative Expenses 280,540 21.1 777,194 18.7 765,392 26.5
======================= ======== ==== ======== ==== ======== ====
</TABLE>
-18-
<PAGE>
ADVANTAGE TECHNOLOGY, INC.
INCOME STATEMENT DETAIL
Four Months Ended April 30, 1998 and Years Ended December 31, 1997 and 1996
See Independent Auditors' Report on the Supplementary Data
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ------------
$ % $ % $ %
------ --- ---- --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
OTHER INCOME
Interest 2,917 0.2 416 0.0 960 0.0
Miscellaneous 3,724 0.3 163 0.0 266 0.0
Gain on sale of equipment 50 0.0 0 0.0 0 0.0
------ --- ---- --- ------ ---
Total Other Income 6,691 0.5 579 0.0 1,226 0.0
================== ====== === ==== === ====== ===
</TABLE>
-19-
<PAGE>
Exhibit 99.2
Item 7 - Financial Statements and Exhibits
A. Effective May 1, 1998, Optical Security Group, Inc. ("OpSec") acquired
substantially all of the assets of Advantage Technology, Inc. ("ATI") based in
Lancaster, Pennsylvania. The purchase price, including acquisition costs, was
approximately $4.5 million, including common shares of the Company valued at $2
million (before discount), cash of $2 million and assumption of $452,000 in debt
obligations. The purchase price is subject to certain adjustments based on
achieving certain revenue and earnings targets.
The Company completed a private placement by June 30, 1998 in which it issued
$4,030,000 in securities, including $2,770,000 in 8% Senior Subordinated
Convertible Debentures (the "Debentures") and $1,260,000 from the sale of
210,000 shares of common stock. The funds raised in this placement were used to
complete the acquisition of ATI.
B. Audited Financial Statements
ATI reports operations on a calendar year basis. The attached audited financial
statements include the balance sheets of ATI as of April 30, 1998 and December
31, 1997 and 1996, and the related statements of income, retained earnings and
cash flows for the four months and years then ended, respectively. ATI sold
substantially all of its assets effective as of May 1, 1998.
C. Proforma Balance Sheet - The audited balance sheet of ATI as of April 30,
1998 is shown below. Purchase adjustments have been made to these starting
balances.
<TABLE>
<CAPTION>
Audited Proforma
Balance Purchase Balance
Sheet Adjustments Sheet
----------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 985,578 $ (200) $ 985,378
Fixed assets, net 399,849 (14,600) 385,249
Goodwill - 3,504,700 3,504,700
Other intangible assets 27,419 - 27,419
Deposits and other assets 22,678 4,106 26,784
----------------------------------------------------------
1,435,524 3,494,006 4,929,530
==========================================================
Current liabilities Note 1 1,171,142 (472,663) 698,479
Long-term debt - - -
Shareholders' equity 264,382 3,966,669 4,231,051
----------------------------------------------------------
$1,435,524 $3,494,006 $4,929,530
==========================================================
</TABLE>
Note 1: Adjusted for the payoff of assumed debt at purchase
<PAGE>
D. Proforma Consolidated Balance Sheet:
The schedule below combines ATI's balance sheet as of April 30, 1998 with
OpSec's balance sheet as of March 31, 1998. The adjusting entries reflect the
allocation of the purchase price and goodwill recognized on the purchase. In
addition, equity and debt securities issued to facilitate the purchase have also
been reflected as adjustments.
<TABLE>
<CAPTION>
OpSec ATI Adjusting Proforma
3/31/98 4/30/98 Entries Consolidated
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets $ 4,758,079 $ 985,578 $1,127,906 $ 6,871,563
Fixed assets, net 2,392,676 399,849 (14,600) 2,777,925
Goodwill 1,077,989 - 3,504,700 4,582,689
Other intangible assets 758,212 27,419 785,631
Deposits/other assets 4,497,676 22,678 4,106 4,524,460
----------------------------------------------------------------------------
13,484,632 1,435,524 4,622,112 19,542,268
============================================================================
Current liabilities 3,021,276 1,171,142 (1,022,663) 3,169,755 a
Long-term debt 1,004,044 - 2,770,000 3,774,044 b
Shareholders' equity 9,459,312 264,382 2,874,775 12,598,469 c
----------------------------------------------------------------------------
$13,484,632 $1,435,524 $4,622,112 $19,542,268
============================================================================
a. Includes paydown of assumed ATI debt and $550,000 paydown
of OpSec' line of credit from private placement proceeds.
b. $2,770,000 in new 8% Debentures issued by OpSec.
c. Includes net proceeds from the private placement and shares
issued to purchase ATI.
</TABLE>
<PAGE>
E. Proforma Income Statement - ATI "Stand-Alone" Statement
The audited income statement of ATI for the year ended December 31, 1997 is
shown below. For purposes of combining like-periods with OpSec's fiscal year
ending March 31, 1998, the stand-alone statement for ATI is adjusted below:
<TABLE>
<CAPTION>
Less: Plus: Proforma
FYE Qtr Ended Qtr Ended FYE
12/31/97 3/31/97 3/31/98 3/31/98
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $4,143,891 $782,618 $1,056,873 $4,418,146
Gross profit 1,509,606 284,588 421,448 1,646,466
Operating expenses 1,163,982 250,346 283,668 1,197,304
----------------------------------------------------------------------
Net operating income 345,624 34,242 137,780 449,162
Other income (expense)
- Interest expense, net (68,654) (17,325) (10,089) (61,418)
- Other income 579 579
----------------------------------------------------------------------
Net income $ 277,549 $ 16,917 $ 127,691 $ 388,323
=====================================================
Purchase Adjustments:
Goodwill amortization (20 year life on $3.5 million) (175,235)
Interest on existing debt (paid off at closing) 61,418
Interest on debentures ($2,770,000 @ 8%) (221,600)
-----------------
Net income (adjusted) $ 52,906
=================
</TABLE>
<PAGE>
F. Proforma Consolidated Income Statement for FYE 3/31/98:
The ATI proforma statement of income from section E, above, is combined with
OpSec's statement of income for its fiscal year ending March 31, 1998. Proforma
net income reflects: a) goodwill amortization and interest incurred on newly
issued debentures, and b) earnings per share reflects shares issued in the
private placement as well as shares issued in the acquisition of ATI.
<TABLE>
<CAPTION>
OpSec ATI Consolidated
----------------------------------------------------
<S> <C> <C> <C>
Revenue $9,798,713 $4,418,146 $14,216,859
Gross profit 4,068,059 1,646,466 5,714,525
Operating expenses 3,007,134 1,197,304 4,204,438
----------------------------------------------------
Net operating income 1,060,925 449,162 1,510,087
Other income (expense)
- Interest expense, net (143) (61,418) (61,561)
- Other income (46,402) 579 (45,823)
- Income tax benefit 18,517 18,517
----------------------------------------------------
Net income from
continuing operations 1,032,897 388,323 1,421,220
Dividends on preferred stock 143,440 143,440
----------------------------------------------------
Net income available to common: $ 889,457 $ 388,323 $ 1,277,780
====================================================
Purchase Adjustments:
Goodwill amortization (20 year life on $3.5 million) (175,235)
Interest on existing debt (paid off at closing) 61,561
Interest on debentures ($2,770,000 @ 8%) (221,600)
-----------------
Net income (adjusted) $ 942,506
=================
Earnings per share (continuing operations):
Basic: $0.18 $0.17
================= =================
Diluted: $0.15 $0.15
================= =================
Weighted average shares outsanding:
Basic: 5,056,039 510,000 5,566,039
====================================================
Diluted: 5,856,457 510,000 6,366,457
====================================================
Note: 210,000 common shares issued in private placement, and
300,000 common shares issued to sellers' of ATI.
</TABLE>
