<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Form S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
OPTICAL SECURITY GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Colorado 84-1094032
(State of other jurisdiction of Incorporation) (IRS Employer Identification No.)
535 16th Street, Suite 920
Denver, Colorado 80202
(303) 534-4500
(Address, including zip code, and telephone number including
area code of registrant's principal executive offices.)
Catherine M. Gotwalt, Secretary Copy to:
Optical Security Group, Inc. Charles H. Jacobs, Esq.
535 16th Street, Suite 920 Jane M. Harm, Esq.
Denver, Colorado 80202 Lohf, Shaiman & Jacobs, P.C.
(303) 534-4500 950 S. Cherry Street, Suite 920
(Address, including zip code, telephone number, including Denver, Colorado 80222
area code of registrant's agent for service of process) (303) 753-9000
</TABLE>
Approximate date of commencement of proposed sale to the public: From time to
------------
time after the effective date of this Registration Statement.
- ------------------------------------------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]_______________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of each class of Proposed maximum Proposed maximum
Securities to be Amount to be aggregate price per _ aggregate offering Amount of
registered registered share price registration fee
- ---------------------- ------------ ------------------- ------------------ ----------------
Common Stock 1,657,002(1) $5.88(2) $9,743,171.76 $3,359.71
</TABLE>
(1) Includes 412,346 shares of common stock currently outstanding and 1,244,656
shares issuable upon currently convertible Series B 8% cumulative convertible
exchangeable preferred voting stock ("Series B Shares"). The number of shares of
common stock issuable upon conversion of the Series B Shares is subject to
certain adjustments. (See "Description of Common Stock.")
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended. The proposed
maximum offering price is based upon $5.88, the average of the bid and asked
prices reported on the NASDQ market system on September 24, 1996.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY FORM S-3
FILED AS PART OF REGISTRATION STATEMENT
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Item
Number
in Form
S-3 Item Caption in Form S-3 Caption in Prospectus
- ------- ------------------------ ---------------------
<S> <C> <C>
1 Forepart of Registration Statement and Cover Page
Outside Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages Inside Front Cover Page;
of Prospectus Table of Contents
3 Summary of Information; Risk Factors and Prospectus Summary;
Ratio of Earnings to Fixed Charges Risk Factors
4 Use of Proceeds Use of Proceeds
5 Determination of Offering Price Cover Page
6 Dilution Inapplicable
7 Selling Security Holders Selling Security Holders
8 Plan of Distribution Plan of Distribution
9 Description of Security to be Registered Inapplicable
10 Interests of Named Experts and Counsel Legal Matters; Experts
11 Material Changes The Company
12 Incorporation of Certain Information by Incorporation of Certain
Reference Information by Reference
13 Disclosure of Commission Position on Indemnification of
Indemnification for Securities Act Directors and Officers
Liabilities
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, ____________ ____, 1996
PROSPECTUS
1,657,002 Shares
OPTICAL SECURITY GROUP, INC.
Common Stock, Par Value $.005 Per Share
This prospectus relates to the offer for sale of 1,657,002 shares
(the "Shares") of common stock (the "Common Stock"), including
1,244,656 shares of Common Stock issuable upon conversion of
Series B 8% Cumulative Convertible Exchangeable Preferred Voting
Stock (the "Series B Shares"), of Optical Security Group, Inc., a
Colorado corporation (the "Company"), from time to time after the
date hereof by certain stockholders of the Company or by their
transferees, pledgees, donees, or successors (collectively, the
"Selling Security Holders" and individually, a "Selling Security
Holder"). The Company will not receive any proceeds from the
sale of the Shares offered hereby.
THE SECURITIES BEING SOLD HEREWITH ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES EXCHANGE COMMISSION OR ANY STATE'S SECURITY COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE'S
SECURITY COMMISSION PASSED UPON THE ACCURACY OF ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Shares will be offered by the Selling Security Holders for
resale by this Prospectus from time to time after the date hereof
in one or more transactions in the over-the-counter market at
prices obtainable at the time of sale or in privately negotiated
transactions at prices determined by negotiation. The Selling
Security Holders may effect such transactions by selling these
Shares to or through broker dealers, and such broker dealers may
receive compensation in the form of underwriting discounts,
concessions or commissions (which commissions may be in excess of
customary commissions). (See "PLAN OF DISTRIBUTION.") Any
broker-dealers that participate in the distribution of the Shares
may be deemed to be underwriters and any commissions received by
them and any profit on the resale of shares sold by them may be
deemed to be underwriting discounts and commissions under the
Security Act of 1933, as amended (the "Security Act"). Each of
the Selling Security Holders may also be deemed to be an
underwriter as defined in the Securities Act.
The Company's Common Stock is traded in the over-the-counter market and quoted
on the NASDAQ SmallCap Market System under the symbol "OPSC." Prior to this
offering, however, the public market for the Company's Common Stock has been
highly illiquid, and there can be no assurance that a more viable public market
will develop in the future. On September 24, 1996, the bid and asked price of
the Company's Common Stock as quoted on NASDAQ were $6.13 and $5.63,
respectively.
Expenses relating to the offering are estimated to be $25,000.00
to be paid by the Company.
The date of this Prospectus is September 24, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith files reports, proxy statements, and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices at 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
information may also be accessed on the World Wide Web at
http://www.sec.gov.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities
Act, with respect to the securities offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain items of which are contained in Schedules and Exhibits to the
Registration Statement as permitted by the Rules and Regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement, including the Schedules and Exhibits filed as a
part thereof, which may be obtained from the Commission upon payment
of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-KSB for the year ended
March 31, 1996, proxy statement dated July 26, 1996, and Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996 are
incorporated herein by reference and made a part hereof.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of
this Prospectus and prior to the termination of the offering of the Shares
shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of filing of such documents. Any
statement contained herein or a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document
which also is or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
2
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The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the oral or
written request of such person, a copy (without exhibits, unless such
exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates) of any and all information that has
been incorporated by reference in this Prospectus. Written or telephone
requests for such information should be directed to Catherine M.
Gotwalt, Secretary, Optical Security Group, Inc., 535 Sixteenth Street,
Suite 920, Denver, Colorado 80202, telephone number (303) 534-4500.
3
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements and notes thereto appearing elsewhere or incorporated by
reference in this Prospectus.
THE COMPANY
The Company is primarily engaged in developing, producing, and marketing
products that contain its optical imaging technology. This technology involves
sophisticated holographic origination and embossing techniques and dimensional
printing that incorporates graphic design, depth of field (3D) and motion.
The Company's principal executive offices are located at 535 Sixteenth
Street, Suite 920, Denver, CO 80202 [telephone number (303) 534-4500].
THE OFFERING
Shares offered by Selling Security Holders 1,657,002
Common Stock outstanding at September 15, 1996/1/ 4,279,208
NASDAQ symbol: OPSC
Proceeds to the Company None
______________________
/1/ Assumes the conversion of all Series B Shares into Common Stock of the
Company at the current conversion rate. See "DESCRIPTION OF CAPITAL STOCK -
Series B Shares."
RISK FACTORS
The Offering involves a high degree of risk. Prospective investors should
carefully consider the factors set forth under "Risk Factors."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following financial summary should be read in conjunction with
the financial statements for the fiscal years ended March 31, 1996,
1995, and 1994 and for the quarters ended June 30, 1995 and 1996,
and accompanying notes, appearing elsewhere in this Prospectus or
incorporated herein by reference.
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<CAPTION>
Fiscal Year Ended
--------------------------------------------
March 31, March 31, March 31,
1994 1995/(1)/ 1996/(2)/
<S> <C> <C> <C>
Statement of Operations Data:
Net sales $ 112,461 $3,656,432 $8,953,740
Net income (loss) (918,702) (1,179,626) 2,692
Net income (loss) per share ($.50) ($0.44) ($0.01)
Net loss applicable to
common stock (918,702) (1,179,626) (39,111)
Common dividend per share -- -- --
Preferred dividend per share -- -- $6.25
Weighted average common
stock outstanding 1,843,097 2,667,541 3,023,282
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
June 30, June 30,
1995 1996
<S> <C> <C>
Statement of Operations Data:
Net sales $2,630,564 $2,326,574
Net income (loss) 14,995 102,896
Net income (loss) per share -- ($0.01)
Net loss applicable to common stock 14,995 (42,175)
Common dividend per share -- --
Preferred dividend per share -- $19.43
Weighted average common stock
outstanding 3,007,428 3,034,552
Balance Sheet Data: June 30, 1996
-------------
Working capital $ 5,251,381
Total assets 8,681,305
Total long-term debt 10,050
Shareholders' equity 7,847,704
</TABLE>
______________________
/1/ Reflects the acquisition of and the results of operations of ELEF, Plc for
eleven months and The Diffraction Company for five months. Such businesses were
acquired during the fiscal year.
/2/ Reflects the full-year results of operations of ELEF, Plc and The
Diffraction Company, which were acquired in the prior fiscal year.
5
<PAGE>
RISK FACTORS
The Shares involve a high degree of risk and no one should invest in these
Shares who cannot afford a complete loss of his or her entire investment.
Several risk factors regarding these securities are set forth below. However,
the investor is cautioned that this list is not necessarily complete and that
the investor should consult with his or her professional advisor prior to
investing in these Shares.
Recent Expansion
- ----------------
Although the Company was incorporated in 1988, the focus of the Company's
business has changed substantially since the addition of new management in 1993
and the acquisition of ELEF, Plc, and the assets of The Diffraction Company in
1994. The Company faces many general risks associated with operating a new
business.
Operating Losses
- ----------------
For the year ended March 31, 1996, the Company reported an operating loss of
$9,473 and net income of $2,692. In the year ended March 31, 1995, the Company
incurred an operating loss of $933,605 and a net loss of $1,179,626. While the
Company's revenues have increased substantially since the acquisition of ELEF,
Plc and The Diffraction Company, there can be no assurance that the Company will
be able to generate sufficient operating revenues. In the past, the Company had
been successful in obtaining additional financing to continue and expand
operations. There is no guarantee that operating revenues will be sufficient or
that additional financing will be available in the future to continue the
Company's operations.
Reliance on Key Management Personnel
- ------------------------------------
Because of the Company's size and limited financial resources, it does not have
second level management personnel to replace key management personnel or their
services. To attract key management personnel the Company has been required to
include stock options and other incentives to enhance their compensation
packages. There can be no assurance that the Company can attract experienced
management personnel by any other reasonable means. In addition, the future
success of the Company will be largely dependent on the efforts of Mr. Richard
H. Bard, its president, chairman of the board and chief executive officer.
Although Mr. Bard has entered into an employment contract with the Company, the
loss of his services for any reason would have a material adverse effect on the
Company. There can be no assurance that the terms and length of Mr. Bard's
continuing employment contract or the employment contracts of other key
personnel, will be sufficient to ensure their continued employment with the
Company or that they satisfactorily perform the duties required by such
contracts. The Company has no key man insurance on Mr. Bard, or any other
employee or director of the Company.
6
<PAGE>
Competition and Technology Uncertain
- ------------------------------------
The Company competes against companies that are larger, better funded
and which possess other attributes contributing to a competitive advantage
over the Company, including longer operational histories, more
established customers and supplier relationships, more established and
mature channels of product manufacture and distribution, and better
access to capital. In addition, the Company relies on agents and certain
relationships to market its products in many parts of the world. There
can be no assurance that these relationships will remain in place or be
successful. The Company could not, without materially impairing
profitability, replace these relationships with personnel of its own in the
event any such relationships were terminated or substantially modified.
The Company's holographic-based technologies for product authentication
compete with other technologies such as sophisticated inks, radio
frequency tagged labels, chemical taggants, and other products. In certain
cases, the Company's holographic-based technologies may not be
considered an effective solution to product authentication problems.
Similarly, the Company's tampering technologies compete with other
methods of addressing product tampering. There can be no assurance
that the Company's technologies are or will become widely accepted as
effective and economical approaches to product authentication
applications and to elimination of product tampering.
Limited Patent and Trade Mark Protection; Possible Company Infringement
- -----------------------------------------------------------------------
The Company's business depends in substantial part upon the continuing
validity and viability of its patents, trademarks, copyrights, and other
intellectual property. The Company holds patents for its tamper-resistant
technology and its document anti-counterfeiting technology and copyrights
on many of its diffraction and holographic security patterns. While the
Company believes each of its patents, trademarks, and copyrights is valid
and enforceable, there can be no assurance that the Company will be
successful in any patent, trademark, or copyright infringement actions
against any infringers. Additionally, the Company is unaware that it is,
or may be, infringing upon any intellectual property right of any third
party. Nevertheless, in the event any infringement should be discovered,
the operation prospects of the Company could be materially adversely
affected.
International Scope of Company's Business
- -----------------------------------------
The Company and its subsidiaries operate in numerous foreign markets
and countries including Canada, Europe, Asia, the Middle East, South
America, and Mexico. The Company has not obtained patent, trademark,
or other protection in every foreign country in which it has customers or
potential markets. There can be no assurance that such protection will
be available when sought by the Company. In addition, the Company's
future depends substantially upon its ability to continue to serve
customers in diverse locations. Its ability to do so may be effected
materially by changes in governments, domestic and foreign trading
negotiations, tariffs, domestic and foreign tax law and administration, and
other such matters which cannot reasonably be foreseen by the Company
and which the Company cannot prevent. There can be no assurance that
the Company will be able to continue to market, sell, and distribute its
product internationally.
7
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Preferred Stock Authorized
- --------------------------
The Company's Amended and Restated Second Articles of Incorporation
(the "Articles of Incorporation") authorize the issuance of a maximum of
2,500,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock"). The board of directors has the authority to divide the Preferred
Stock into series and to fix and determine the relative rights and
preferences of the shares of any such series. Currently, the only Preferred
Stock designated is the Series B Shares. Although there is no plan to
issue any other series of Preferred Stock at any time in the foreseeable
future, the terms of any additional series of preferred stock may operate
to the disadvantage of holders of the Shares.
Series B Shares
- ---------------
The Series B Shares have certain dividend and liquidation rights which
may impact the Company's ability to pay dividends on the Shares or make
any payments to the holders of the Shares in the event of liquidation.
Additionally, the holders of the Series B Shares have the right upon
default of the payment of dividends to exchange the Series B Shares for
debentures. In the event of dissolution and liquidation, holders of the
debentures would be entitled to payment before holders of the Company's
capital stock. See "DESCRIPTION OF CAPITAL STOCK-Series B
Shares."
Control of the Company
- ----------------------
After completion of this Offering, the current officers and directors will
own beneficially approximately 41% of the Common Stock assuming all
of the Shares are sold hereunder. Thus, the current officers and directors
will continue to have a substantial role in the election of directors and, in
general, the determination of the outcome of any matter submitted to a
vote of the Company shareholders for approval.
Shares Eligible for Resale
- --------------------------
Of the presently outstanding shares of Common Stock, excluding the
Shares registered in this Offering, approximately 1,508,467 shares are
"restricted securities" as that term is defined by Rule 144 promulgated
under the Securities Act, and may be sold only in compliance with such
Rule or pursuant to registration under the Securities Act or pursuant to
another exemption therefrom. The Company is unable to predict the
effect that sales made under Rule 144, pursuant to future registration
statements or otherwise, may have on the prevailing market price for the
Company's securities, although it is likely that sales of a large number of
securities would materially affect the market price. In addition, the
Company has issued options and warrants to purchase Common Stock. If
such options or warrants are exercised, the number of shares of Common
Stock outstanding that are restricted securities will be increased.
Furthermore, the Company has granted to certain holders registration
rights for Common Stock not covered by this Offering. The Company is
unable to predict the effect that registration of such shares will have on
the prevailing market price for the Common Stock.
8
<PAGE>
USE OF PROCEEDS
The Company will not receive any portion of the proceeds of the resale of the
shares by the Selling Security Holders.
SELLING SECURITY HOLDERS
The following chart sets forth the names of the Selling Security Holders, their
relationship to the Company, the number of Shares of Common Stock owned
beneficially prior to the Offering, and the number of Shares offered in the
Offering. In view of the fact that the Selling Security Holders may continue to
hold all or a part of the Shares offered hereunder and because currently there
are no agreements, arrangements or undertakings with respect to the sale of the
Shares, no estimate can be given for each Selling Security Holder as to the
number of Shares beneficially owned after the Offering or the percentage of
Shares owned after the Offering.
Number of Shares Number of
Name of Selling Beneficially Owned Shares
Security Holder (1) Prior to the Offering Offered (2)
- ------------------- --------------------- -----------
Richard H. Bard(3) 1,153,599(4) 213,087
Hunt Capital Group, Inc.(5) 718,928(6) 486,913
Christopher W. Wynd(7) 15,974(8) 5,990
Constance W. Wynd(7) 15,974(8) 5,990
Hugh C. Wynd(7) 96,107(9) 36,040
Catherine M. Wynd(7) 15,974(8) 5,990
Matthew B. Wynd(7) 15,974(8) 5,990
Peter H.L. Woodd(10) 67,760(11) 36,986
Charlotte C. Woodd(10) 5,060(12) 1,840
Peter H.L. Woodd and
Charlotte C. Woodd (10) 15,180(13) 5,520
Reredos FT A/C (10) 11,000(14) 4,000
Reredos LIT A/C (10) 11,000(14) 4,000
Robert W. Baird & Co., Inc. 5,000 5,000
Massachusetts Mutual Life
Insurance Co. 166,666
Mass Mutual Corporate
Value Partners Ltd. 83,333 83,333
Delaware Charter Guarantee & Trust Co.
FBO Richard Fleming, IRA (15) 41,575 4,166
NIB Strating Financial Markets N.V. 2,500 2,500
9
<PAGE>
Number of Shares Number of
Name of Selling Beneficially Owned Shares
Security Holder (1) Prior to the Offering Offered (2)
- ------------------- --------------------- -----------
Ferri SA (For Delecourt) 125,000 125,000
Bankhaus Krentschker & Co. 16,666 16,666
Van Moer Santerre 8,333 8,333
Credit Lyonnais (Swisse) S.A. 28,333 28,333
C.A.M.A.T. 50,000 50,000
Swedbank (Luxembourg) S.A. 30,000 30,000
Creditanstalt-Bankverein 11,666 11,666
Bank J. Vontobel & Co. AG 19,166 19,166
Bank der Osterreichischen 23,332 23,332
Michaux Gestion 50,000 50,000
Giuseppe Ciardi 25,000 25,000
Banque SCS Alliance S.A. 16,666 16,666
Bank Sal Oppenheim 6,666 6,666
Octavian Nominees Limited 125,000 125,000
Ellis A.G. 4,166 4,166
Marie-Pascale Molema 4,166 4,166
Pierce Lambert 4,166 4,166
Sultan Al-Shehail 8,333 8,333
Tudor Investments Ltd. 3,333 3,333
Cameo Trust Corporation Limited 8,333 8,333
Barwick Limited 14,666 14,666
_________________________________
(1) Except as expressly set forth in the footnotes to the table, no Selling
Security Holder has had a relationship with the Company within the past
three years.
(2) Assumes the conversion of all Series B Shares into Common Stock
of the Company at the current conversion rate. The conversion rate is
subject to adjustment upon the occurrence of certain events. See
"DESCRIPTION OF CAPITAL STOCK - Series B Shares."
(3) Mr. Bard is a director, president and chief executive officer of the
Company.
(4) Includes 533,334 shares of Common Stock issuable upon exercise of
Stock Options, 43,000 shares of Common Stock issuable upon exercise of
Warrants, 150,000 shares of Common Stock held by Richard H. Bard,
IRA, and 20,000 shares of Common Stock held as custodian for minor
child.
10
<PAGE>
(5) J.R. Holland, Jr., a director of the Company, is the manager and president
of Hunt Capital Group, L.L.C. ("Hunt"). Mr. Holland has no ownership interest in
Hunt and disclaims beneficial ownership of shares held by Hunt.
(6) Includes 200,000 shares of Common Stock issuable upon the exercise of
warrants.
(7) Catherine M. Wynd, Christopher W. Wynd, and Matthew B. Wynd are siblings.
Their parents are Constance W. Wynd and Hugh C. Wynd. The Wynds were the owners
of The Diffraction Company and acquired their shares of Common Stock in
connection with the Company's acquisition of The Diffraction Company's assets.
Hugh C. Wynd was a member of the Company's advisory board from October 26, 1994,
until the board was discontinued on June 18, 1996.
(8) Includes 9,984 shares of Common Stock issuable upon exercise of warrants.
(9) Includes 60,067 shares issuable upon exercise of Warrants.
(10) Peter H. L. Woodd is married to Charlotte C. Woodd. Reredos F/T AC and
Reredos LIT A/C are trustees under certain trusts for benefit of Mr. Woodd and
his family members. Mr. and Mrs. Woodd and Reredos F/T AC and Reredos LIT A/C
were the owners of ELEF, Plc and acquired their interests in the Company in
connection with the Company's acquisition of ELEF, Plc. Mr. Woodd served as an
officer and director of the Company from May 1, 1994, to November 1, 1995, and
as a consultant to the Company from November 1, 1995, to April 30, 1996.
(11) Includes 30,774 shares of Common Stock issuable upon exercise of warrants.
(12) Includes 3,220 shares of Common Stock issuable upon exercise of warrants.
(13) Includes 9,660 shares of Common Stock issuable upon exercise of warrants.
(14) Includes 7,000 shares of Common Stock issuable upon exercise of warrants.
(15) Mr. Fleming served on the Company's advisory board from July 25,1994, until
the board was discontinued on June 18, 1996. He also served as Vice President of
the Company from January 1994 to June 1994.
11
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PLAN OF DISTRIBUTION
These Shares will be offered by the Selling Security Holders for resale by this
Prospectus from time to time after the date hereof in one or more transactions
in the over-the-counter market, in negotiated transactions or private
transactions, or otherwise, or a combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The Selling Security Holders may effect
such transactions by selling their Shares to or through broker-dealers, and such
broker-dealers may receive commissions in the form of underwriting discounts,
concessions or commissions (which compensation may be in excess of customary
commissions).
If the Company is notified by Selling Security Holders that any material
arrangement has been entered into with an underwriter or broker-dealer for the
Shares, a supplemental prospectus will be filed, if required, disclosing such of
the following information as the Company believes appropriate: (1) the name of
the participating underwriters, (2) the number of Shares involved, (3) the price
at which such Shares are to be sold, (4) the commissions paid or discounts or
concessions allowed to such underwriters, and (5) other facts material to the
transaction.
The Company has been advised by the Selling Security Holders that they may
continue to hold some of the Shares for investment purposes. However, the
Selling Security Holders have not determined how many Shares they will hold for
investment and how many Shares they will sell.
The Company has agreed to use its best efforts to take all actions necessary to
allow the distribution pursuant to this Prospectus to continue until the earlier
of (i) the sale of all of the Shares hereunder, or (ii) January 19, 1999.
DESCRIPTION OF CAPITAL STOCK
Common Stock
- ------------
The Company is authorized to issue 15,000,000 shares of Common Stock, par value
$.005 per share. As of August 1, 1996, 3,034,552 shares of Common Stock were
issued and outstanding. Each share of Common Stock is entitled to one vote at
all meetings of shareholders. All shares of Common Stock are equal to each other
with respect to liquidation rights and dividend rights. In the event of
liquidation, dissolution or winding up of the Company, holders of the Common
Stock will be entitled to receive, on a pro rata basis, all assets of the
Company remaining after satisfaction of all liabilities and all liquidation
preferences granted to holders of the Preferred Stock. The Company has never
paid any dividends on its Common Stock.
12
<PAGE>
Preferred Stock
- ---------------
The Company is authorized to issue 2,500,000 shares of Preferred Stock. The
Company's Articles of Incorporation grant the board of directors of the Company
the authority to divide the Preferred Stock into series and to fix and determine
the relative rights and preferences of the shares of any such series so
established, to the full extent permitted by the laws of the State of Colorado
and the Articles of Incorporation, with respect to, among other things (a) the
number of shares of Preferred Stock to constitute such series and the
distinctive designations thereof, (b) the rate and preference of dividends, if
any, the time of the payment of dividends, whether dividends are cumulative, and
the dates from which any dividend shall accrue, (c) whether shares of Preferred
Stock may be redeemed, and, if so, the redemption price and the terms and the
price of their redemption, (d) the liquidation preferences payable on the
Preferred Stock in the event of involuntary or voluntary liquidation, (e)
sinking fund or other provisions, if any, for the redemption or purchase of the
Preferred Stock, (f) the terms and conditions by which the Preferred Stock may
be converted, if the Preferred Stock of any series are issued with the privilege
of conversion, and (g) voting rights, if any. Currently, the Company has
designated Series B Shares. The Series B Shares provide that the Company may not
create a series of Preferred Stock superior in right to the Series B Shares.
Series B Shares
- ---------------
Holders of the Series B Shares are entitled to 8% cumulative dividends payable
quarterly and to convert their Series B Shares into shares of Common Stock at
any time prior to redemption by the Company or exchange for debentures, all as
described below. The conversion price of the Series B Shares is $6.00 per share
of Common Stock. For conversion purposes, Series B Shares are valued at
$1,000.00 per share, plus accrued but unpaid dividends. The conversion price is
subject to a one time adjustment in March of 1998 if the trading price for the
Company's Common Stock falls below the conversion price; however, the adjusted
conversion price will not be less than $4.00 per share.
The conversion price, or adjusted conversion price is subject to adjustment upon
the occurrence of certain events, including: (a) payment by the Company of a
dividend or distribution on its Common Stock, (b) subdivision or split of the
Company's outstanding Common Stock, (c) combination of the outstanding Common
Stock into a smaller number of shares, (d) reclassification of the Common Stock,
or (e) issuance of Common Stock at a price less than the trading price of the
Common Stock at the time of issuance or issuance of stock purchase warrants or
securities carrying conversion privileges on more favorable terms than the
Series B Shares.
The holders of the Series B Shares are entitled to vote on all matters in like
manner to the holders of the Common Stock, and are entitled to one vote for each
share of Common Stock issuable upon conversion of the Series B Shares. Upon
liquidation, the Series B Shares are entitled to an amount equal to the
redemption price, plus accrued dividends before payment is made on stock ranking
junior to the Series B Shares.
13
<PAGE>
On or after March 30, 1998, the Company may redeem the Series B
Shares if the closing bid and asked prices of the Common Stock is 150%
of the conversion price for 30 consecutive trading days commencing not
more than 60 days prior to the date a redemption notice is mailed. The
redemption price for each Series B Share is as follows:
DATE REDEEMED REDEMPTION PRICE
------------- ----------------
After March 30, 1998 but prior
to January 19, 1999 $ 1,090.00
On or after January 19, 1999 but prior
to January 19, 2000 1,075.00
On or after January 19, 2000 but prior
to January 19, 2001 1,060.00
On or after January 19, 2001 but prior
to January 19, 2002 1,040.00
On or after January 19, 2002 but prior
to January 19, 2003 1,020.00
On or after January 19, 2003 but prior
to January 19, 2004 1,000.00
plus cumulative dividends up to the date of the redemption.
Pursuant to the terms of the Series B Shares, payment of dividends or
other payments (excluding payments on liquidation) on the Company's
Common Stock are prohibited 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.
The Company has the right to require the exchange of the Series B
Shares for debentures any time after January 19, 1997, upon 10 days prior
written notice to the holders of the Series B Shares. In addition, the
holders of the Series B Shares have the right to exchange their Series B
Shares for debentures in the event the Company fails to declare and pay
required dividends on the Series B Shares, and such payment is not made
within 10 days following the dividend payment date. The exchange rate
for any such exchange is set at $1,000.00 principal amount of debenture
for each Series B Share surrendered. Cumulative dividends will be added
to the principal amount of debentures unless the Company pays such
cumulative dividends in cash at the time of exchange. The debentures
will bear interest at the rate of 8% per annum, payable quarterly, and will
be convertible into shares of Common Stock on the same terms and
conditions as the Series B Shares.
14
<PAGE>
If the Company requires the exchange of the Series B Shares for
debentures before January 19, 2000, the principal amount due on the
debentures must be paid in three annual installments beginning on
January 19, 2001, and ending January 19, 2003. If the Company requires
the exchange of the Series B Shares for debentures after January 19,
2000, or if a holder of the Series B Shares exercises such holder's right to
exchange the Series B Shares for debentures, the principal amount of the
debentures must be paid in three annual installments beginning on the
one-year anniversary of such exchange and ending on the three-year
anniversary of such exchange.
The debentures will be subordinated in right of payment to any senior
indebtedness of the Company. If the Company is in default on the
debentures, the holders of 15% in principal amount of the debentures
then outstanding may declare the principal of all such debentures to be
due and payable. The debentures will prohibit the Company from
merging into another entity or transferring all, or substantially all, of its
assets unless (a) the Company will be the surviving entity, or the successor
entity will be a United States corporation or shall expressly assume all of
the obligations of the Company under the debentures, (b) no event of
default shall have occurred and be continuing, and (c) the assuming
corporation has a net worth not less than the consolidated net worth of
the Company.
The debentures will also prohibit the Company from (a) declaring or
paying any dividends unless the Company also pays additional interest on
the debentures in an amount equal to the amount of dividend that would
be payable to the holders of the debentures had such holders converted
the debentures into shares of Common Stock; (b) purchasing, redeeming
or otherwise acquiring or retiring for value any equity interest of the
Company or its subsidiaries; (c) permitting any wholly-owned subsidiary
to declare or pay any dividend on or make any distribution to the holders
of any of its shares of capital stock; or (d) permitting any subsidiary to
purchase, redeem or otherwise acquire or retire for value any equity
interest of such subsidiary, if at the time of such action an event of
default shall have occurred and be continuing or shall occur as a result
thereof or if upon giving effect to such payment the aggregate amount
expended exceeds certain amounts.
Pursuant to the terms of Subscription Agreements between the Company
and the purchasers of the Series B Shares, the Company agreed to file
with the Commission a registration statement for the sale of the shares of
Common Stock underlying the Series B Shares and to use its best efforts
to have such registration statement declared effective.
Stock Option Plans
- ------------------
At the Company's annual meeting held August 16, 1996, the shareholders
approved amendments to the Company's Incentive Stock Option Plan and
Non-Qualified Stock Option Plan, increasing the number of shares
authorized under each plan to 2,000,000 shares of Common Stock.
15
<PAGE>
Transfer Agent
- --------------
The Company's transfer agent is American Securities Transfer and Trust,
Inc., located at 938 Quail Street, Suite 101, Lakewood, Colorado 80215.
THE COMPANY
General
- -------
The Company is engaged primarily in developing, producing and
marketing products that include its optical imaging technology. This
technology includes sophisticated holographic originations used in security
label applications and embossing techniques and dimensional printing that
incorporates graphic design, depth of field (3D) and motion used for
product promotion and packaging enhancement.
The Company's principal executive offices are located at 535 Sixteenth
Street, Suite 920, Denver, Colorado 80202, and its telephone number is
(303) 534-4500.
Recent Developments
- -------------------
Effective June 21, 1996, the Company entered into an eight year, exclusive
license agreement (the "Agreement") with Alpha Dot Systems, LLC ("Alpha Dot").
Alpha Dot holds an exclusive license from PT Licensing, LLC ("PT") to
manufacture, distribute and sublicense products using proprietary technology and
processes for the miniaturization, micro-printing, replication, application and
retrieval of informa tion in microdots, microstrips of indicia and tags under
the trademarks or tradenames "Alpha Dot" and "Identify America" and others (the
"Licensed Products"). The Licensed Products are used to authenticate and
identify products to which they are attached and into which they are
incorporated.
In connection with the Agreement, the Company (a) acquired a 12 1/2% ownership
interest in PT, (b) obtained a right of first refusal to acquire the membership
interests or assets of Alpha Dot, and (c) loaned $100,000.00 to Alpha Dot. The
loan is evidenced by a promissory note and is convertible by the Company into
membership interests of Alpha Dot at any time after June 21, 1998. The
conversion price is based upon 80% of the fair market value of Alpha Dot at the
time of the exercise of the conversion privilege. The note is secured by all of
Alpha Dot's tangible and intangible property, including its right under its
exclusive sale, distribution and manufacturing agreements with PT.
Effective July 1, 1996, the board of directors appointed Frank M. Vrechek as
senior vice president-operations. Mr. Vrechek's initial compensation is $100,000
per year. He also received options to purchase 100,000 shares of Common Stock
under the Company's Incentive Stock Option Plan, at an exercise price of $5.87
per share. The options vest in increments of 25,000 shares on July 1, 1997, July
1, 1998, July 1, 1999 and July 1, 2000. Mr. Vrechek owned and operated a private
company engaged in product importing from 1979 until the company's sale in 1995.
16
<PAGE>
On July 17, 1996, the Company merged two of its subsidiaries, VisiLink, Inc. and
Optical Security Industries, Inc., into the Company, with the Company being the
surviving corporation. Additionally, on July 17, 1996, the Company's wholly-
owned subsidiary, Light Fantastic, Inc., changed its name to Optical Security
Industries, Inc. Currently, the Company's two principal operating subsidiaries
are Optical Security Industries, Inc., a Colorado corporation, which does
business under the trade name OpSec U.S., and Optical Security Industries
International, Plc, a United Kingdom corporation, which does business under the
name OpSec International.
LEGAL MATTERS
The validity of the Shares being offered hereby will be passed upon for the
Company by Lohf, Shaiman & Jacobs, P.C., 900 Cherry Tower, 950 South Cherry
Street, Denver, Colorado 80222.
EXPERTS
The financial statements of Optical Security Group, Inc. appearing in Optical
Security Group, Inc.'s Annual Report (Form 10-KSB) for the year ended March 31,
1996, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon, included therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company provide for indemnification of officers and directors
to the maximum extent allowable under Colorado law. The Company has also agreed
to indemnify the Selling Security Holders from certain liabilities including
those arising under the Securities Act. Insofar as the indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to such provisions, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
17
<PAGE>
No person is authorized to give any information or to make any representation
other than those contained in this Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the Shares offered by this Prospectus or an
offer to sell or a solicitation of an offer to buy the Shares in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstance create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Available information . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of certain
documents by reference . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Selling Security Holders . . . . . . . . . . . . . . . . . . . . . . . 9
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 12
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . 12
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Indemnification of
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . 17
1,657,002 SHARES
OPTICAL SECURITY
GROUP, INC.
__________
PROSPECTUS
__________
--------- ----, 1996
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee $3,359.71
Legal fees and expenses 12,000*
Accounting fees and expenses 5,000
Blue Sky fees and expenses 1,000*
Printing costs 3,000*
Miscellaneous 640.29
TOTAL 25,000
______________________
* Estimated
<PAGE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
This description is qualified in its entirety by the provisions in the Company's
Articles of Incorporation and Bylaws and the relevant sections of Colorado law.
As authorized under Colorado law, the Company's Articles of Incorporation
eliminate the personal liability of a director to the Company and its
shareholders for monetary damages for any breach of fiduciary duty as a
director, except for liability of a director to the Company and its shareholders
for monetary damages for any breach of the director's duty of loyalty to the
Company or to its shareholders, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, unlawful
distributions, or any transaction from which the director directly or indirectly
derives proper personal benefit. This provision does not limit or eliminate the
rights of the Company or any shareholder to seek non-monetary relief such as an
injunction or recision in the event of a breach of director's duty of care.
The Company's Bylaws provide that the Company shall indemnify any individual or
entity who was, is, or is threatened to be made, a named defendant or respondent
in a proceeding by reason of the fact that he or she is or was a director,
officer, or employee of the Company and any individual who, while a director,
officer or employee of the Company is or was serving at the request of the
Company as a director, officer, partner, trustee, employee, fiduciary, or agent
of any other foreign or domestic corporation or of any partnership joint
venture, trust or other enterprise against liability incurred, relating to or as
a result of the proceeding to the extent permitted by law including
circumstances in which indemnification would be (1) discretionary under Colorado
law or limited or (2) subject to particular standards of conduct under Colorado
law. The Bylaws also provide that the Company shall pay to the fullest extent
permitted by law including circumstances in which advancement of expenses would
be (a) discretionary under Colorado law or (b) limited or subject to a
particular standards of conduct under Colorado law, amounts to cover expenses
incurred by the party in, relating to, or as a result of such proceeding, in
advance of its final disposition.
The Company has purchased and maintains insurance for its officers and directors
against certain liabilities, including liabilities under the Securities Act. The
effect of such insurance, subject to certain exclusions, is to indemnify any
officer or director of the Company against expenses, judgments, fines, attorney
fees and other amounts paid in settlements incurred by him.
<PAGE>
ITEM 16. EXHIBITS
Exhibit Page
Number Exhibit Name Reference
------- ------------ ---------
3.2.4 Amended and Second Restated File herewith at
Articles of Incorporation page number _____
5 Opinion of Lohf, Shaiman *
& Jacobs, P.C.
23.1 Consent of Ernst & Young, LLP File herewith at
page number _____
* To be filed by amendment.
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Company pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions discussed in Item 14 of this
registration statement, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against
<PAGE>
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company Registrant
certifies that it has reasonable grounds to believe that it meets all
requirements for filing on Form S-3-and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city and county of Denver, Colorado on this 24th day of
September, 1996.
OPTICAL SECURITY GROUP, INC.
By: /s/Richard H. Bard
--------------------------
Richard H. Bard, President
<PAGE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Date: September 24, 1996 By:/s/Richard H. Bard
-------------------------------
Richard H. Bard, Chief Executive
Officer and Director
Date: September 24, 1996 By:/s/Gerald A. Melfi
-------------------------------
Gerald A. Melfi
Chief Accounting Officer
Date: September 24, 1996 By:/s/Mark Bar
-------------------------------
Mark Bar, Director
Date: September 24, 1996 By:/s/Yoram Curiel
-------------------------------
Yoram Curiel, Director
Date: September 24, 1996 By:/s/Martin T. Hart
-------------------------------
Martin T. Hart, Director
Date: September 24, 1996 By:/s/J.R. Holland, Jr.
-------------------------------
J.R. Holland, Jr., Director
Date: September 24, 1996 By:/s/Richard D. Lamm
-------------------------------
Richard D. Lamm, Director
Date: September 24, 1996 By:/s/Bruce I. Raben
-------------------------------
Bruce I. Raben, Director
Date: September 24, 1996 By:/s/John J. Tipton
-------------------------------
John J. Tipton, Director
<PAGE>
EXHIBIT 3.2.4
AMENDED AND SECOND RESTATED
ARTICLES OF INCORPORATION
OF
OPTICAL SECURITY GROUP, INC.
OPTICAL SECURITY GROUP, INC., a Colorado corporation (the "Company"), pursuant
to (S)(S) 7-110-103 and 7-110-107 of the Colorado Business Corporation Act,
hereby amends and restates its Articles of Incorporation, as amended. These
Amended and Restated Articles of Incorporation correctly set forth the
provisions of the Articles of Incorporation and supersede the original Articles
of Incorporation and all amendments thereto.
Such amendments and additions were duly adopted by the shareholders of the
Company at the annual meeting of shareholders. The number of votes cast for the
amendments contained in these Amended and Restated Articles of Incorporation by
each voting group entitled to vote separately on the amendment was sufficient
for approval by that voting group.
The Articles of Incorporation are amended by striking Articles I through XII
in their entirety, and by substituting the following:
ARTICLE I
NAME OF CORPORATION
-------------------
The name of the corporation is Optical Security Group, Inc.
ARTICLE II
DIRECTORS
---------
2.1 The number of directors shall be fixed in accordance with the Bylaws.
2.2 A director of the corporation shall not be liable to the corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereon is not permitted under the Colorado Business Corporation Act, as the
same exists or may be hereafter amended. Any repeal or modification of this
Section 2.2 of Article II by the shareholders of the Corporation shall be
prospective only and shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
<PAGE>
ARTICLE III
CAPITAL STOCK
-------------
3.1 The total number of shares of all classes which the corporation has the
authority to issue is 17,500,000, of which 15,000,000 shares shall be common
stock, par value $.005 per share, and 2,500,000 shares shall be preferred stock,
par value $.01 per share.
3.2 The board of directors of the corporation shall have the authority to
divide the preferred stock into series and, with the limitations provided by
statute, to fix by resolution the voting powers, designation, preferences, and
relative participating, optional, or other special rights, and the
qualifications, limitations or restrictions of the shares of any series so
established.
3.3 Each outstanding share of common stock shall be entitled to one vote and
each fractional share of common stock shall be entitled to a corresponding
fractional vote on each matter submitted to a vote of the shareholders. A
majority of the shares of common stock entitled to vote, represented in person
or by proxy, shall constitute a quorum at a meeting of shareholders. Except as
otherwise provided by the Articles of Incorporation, or the Colorado Business
Corporation Act, if a quorum is present, the affirmative vote of a majority of
shares represented at the meeting and entitled to vote on the subject matter
shall be the act of the shareholders. When, with respect to any action to be
taken by the shareholders of this corporation, the provisions of the Colorado
Corporation Code would have required the vote of the holders of two-thirds of
the outstanding shares of the shares entitled to vote thereon, or of any class
or series, such action may be taken by the vote or concurrence of a majority of
such shares or class or series thereto.
ARTICLE IV
VOTING
------
No cumulative voting in the election of directors shall be allowed.
ARTICLE V
PREEMPTIVE RIGHTS
-----------------
The shareholders shall have no preemptive or preferential rights to acquire
any unissued or treasury shares of stock of the corporation, securities
convertible into shares, or securities carrying stock purchase options or
warrants to acquire any unissued shares of stock of the corporation.
2
<PAGE>
ARTICLE VI
SHARE TRANSFER RESTRICTIONS
---------------------------
At the time of issuance, the corporation shall have the right to impose
restrictions upon the transfer of any of its authorized shares or any interest
therein. The board of directors is hereby authorized on behalf of the
corporation to exercise the corporation's right to so impose such restrictions
by agreement or otherwise.
ARTICLE VII
PRINCIPAL OFFICE
----------------
The principal office of the corporation is Suite 920, 535 16th Street, Denver,
Colorado 80202.
ARTICLE VIII
SERIES B 8% CUMULATIVE CONVERTIBLE EXCHANGEABLE
-----------------------------------------------
PREFERRED VOTING STOCK
----------------------
8.1 Number and Designation. Fifteen thousand shares of the preferred stock
shall be designated Series B 8% Cumulative Convertible Exchangeable Preferred
Voting Stock (the "Series B Shares").
8.2 Dividends. The holders of the Series B Shares shall be entitled to
receive cash dividends at the rate of 8% per annum, when and as declared by the
board of directors, out of funds legally available therefor. Said dividend is
payable quarterly each year beginning with the quarter ended March 31, 1996, on
the first day of April, July, October, and January in each year. Dividends shall
be cumulative from the date due so that, if the board of directors fails to
declare or the corporation fails to pay, a dividend for any quarter, such
dividend shall accrue and become payable at the time the next dividend is due.
Dividend payments made by the corporation in any quarter shall first be applied
to the dividend payment due that quarter and then toward any accrued but unpaid
dividends, starting with the most recent accrued but unpaid dividend. Accruals
of dividends shall not bear interest.
8.3 Liquidation. Upon liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, the holders of the Series B
Shares shall be entitled to receive, out of the assets of the corporation
available for distribution to its shareholders, an amount equal to the
Redemption Price, as defined below, plus all dividends accrued and unpaid up to
the date of such payment, and no more, before any payment shall be made or any
assets distributed to the holders of any stock ranking on liquidation junior to
the Series B Shares. If the assets of the
3
<PAGE>
corporation so distributable shall be insufficient to permit full payment of
such amounts to the holders of the Series B Shares and full payment of amounts
due to holders of the corporation's Series A Convertible Preferred Stock
("Series A Shares") upon liquidation, dissolution, or winding up of the
corporation, all of the assets shall be distributed ratably (based on the number
of shares of common stock of the corporation ["Common Stock"] each holder of the
Series A Shares or Series B Shares would be entitled to receive if such holder
exercised such holder's conversion right) among the holders of the Series B
Shares and Series A Shares. For the purposes of this Section 8.3, the voluntary
sale, lease, exchange or transfer of all or substantially all of the
corporation's property or assets, or its consolidation or merger with any other
corporation or corporations, shall not be deemed a liquidation, dissolution or
winding up of the corporation and the Series B Shares shall remain outstanding
with the same rights and preferences as set forth herein, except as provided in
paragraph 8.6.5(ii).
8.4 Voting Rights.
8.4.1 Each holder of Series B Shares shall have one vote for each
share of Common Stock that such holder would then be entitled to receive if such
holder were to convert such holder's Series B Shares into Common Stock pursuant
to Section 8.6, and shall have the right to vote on all matters in like manner
as the holders of Common Stock.
8.4.2 The holders of the Series B Shares shall be entitled to vote
separately, as a class, on certain matters as provided by Colorado law.
8.5 Redemption.
8.5.1 (i) From January 19, 1996, the initial closing date of the
corporation's private offering of the Series B Shares (the "Initial Closing
Date") until March 29, 1998, the corporation may not redeem the Series B Shares.
(ii) Unless prohibited by Colorado law, on or after March 30,
1998, the corporation may redeem, pro rata if less than all of the Series B
Shares are being redeemed, at the redemption price and in the manner set forth
below only if the closing bid and asked prices of the Common Stock on the
National Association of Securities Dealer's Inc. Automated Quotation Service or
any national stock exchange or over-the-counter exchange where the Common Stock
is subsequently listed ("NASDAQ"), is 150% of the Conversion Price (as defined
in Subsection 8.6.1) for 30 consecutive trading days commencing not more than 60
days prior to the date of mailing the redemption notice to holders pursuant to
Subsection 8.5.2.
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8.5.2 The corporation shall notify holders of the Series B Shares in
writing at least 30 days prior to the date set for redemption (the "Redemption
Date"), at the addresses of such holders as the same appear on the records of
the corporation. Such notice shall set forth (a) the Redemption Date, (b) the
redemption price, (c) the number of Series B Shares being redeemed, (d) the
place where such holders are to surrender to the corporation such holder's
certificate or certificates representing the Series B Shares being redeemed, and
(e) the holders' rights to convert Series B Shares as provided in Section 8.6 up
to the Redemption Date.
8.5.3 The redemption price for each Series B Share is as follows:
Date Redeemed Redemption Price
------------- ----------------
On or after March 30, 1998, but
prior to the third anniversary of
the Initial Closing Date $1,090
On or after the third anniversary
of the Initial Closing Date but
prior to the fourth anniversary of
the Initial Closing Date $1,075
On or after the fourth anniversary
of the Initial Closing Date but
prior to the fifth anniversary of
the Initial Closing Date $1,060
On or after the fifth anniversary
of the Initial Closing Date but
prior to the sixth anniversary of
the Initial Closing Date $1,040
On or after the sixth anniversary
of the Initial Closing Date but
prior to the seventh anniversary of
the Initial Closing Date $1,020
On or after the seventh anniversary
of the Initial Closing Date $1,000
plus cumulative dividends up to the Redemption Date.
8.5.4 If the corporation shall have been duly given notice of redemption
as provided in Subsection 8.5.2, and if, on or before the Redemption Date
specified in such notice, the funds necessary for such redemption shall have
been delivered to the Company's transfer agent or other redemption agent so as
to be available therefor; then, notwithstanding that any certificates
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representing Series B Shares called for redemption shall not have been
surrendered, such Series B Shares shall no longer be deemed outstanding and all
rights of the holders of such Series B Shares so called for redemption shall
forthwith on such Redemption Date, cease and terminate, except the right of the
holders thereof to receive the redemption price as specified above. In case less
than all the Series B Shares represented by any surrendered certificates are
redeemed, a new certificate shall be issued representing the unredeemed Series B
Shares.
8.5.5 Series B Shares that have been redeemed as provided in this
section shall revert to the status of authorized but unissued Series B Shares.
8.6 Conversion. At any time, and from time to time, each holder of
Series B Shares shall have the right and option to convert any or all whole
Series B Shares into shares of Common Stock on the following terms and
conditions:
8.6.1 Series B Shares may be converted at the option of the holder
thereof into fully paid and nonassessable shares of Common Stock at the
conversion price, determined as hereinafter provided, shall be in effect at the
time of conversion. Each Series B Share shall be valued for the purpose of such
conversion at $1,000 per share. The price at which the Common Stock shall be
delivered, upon conversion (the "Conversion Price"), shall be $6.00 per share.
8.6.2 In the event the average closing bid and asked prices of the
Common Stock for the 60 trading days immediately preceding the second
anniversary of the Initial Closing Date is less than the Conversion Price (such
price referred to as the "Second Anniversary Price"), 60 days after the second
anniversary of the Initial Closing Date, the Conversion Price shall be adjusted
to the greater of (a) the Second Anniversary Price or (b) $4.00 per share (such
adjusted price referred to as the "Adjusted Conversion Price").
8.6.3 The corporation shall not issue, in connection with the conversion
of Series B Shares, certificates for fractions, but in lieu thereof shall pay to
any person who would otherwise be entitled thereto an amount of cash equal to
such fraction multiplied by the Market Price (as hereinafter defined) of the
Common Stock on the last business day of the week preceding the week in which
the conversion privilege is or is deemed to have been exercised. As used herein,
"Market Price" means the average of the closing bid and asked prices as reported
on NASDAQ.
8.6.4 In order for any holder of Series B Shares to convert the same
into Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the corporation's transfer agent. Such
certificate shall be
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accompanied by written notice setting forth the number of Series B shares
represented by the certificate or certificates which the holder wishes to
convert and the name or names in which such holder wishes the certificate or
certificates for Common Stock to be issued. The corporation's transfer agent
will, as soon as practicable thereafter, issue and deliver to such holder of the
Series B Shares, or to such holder's nominee or nominees, certificates for the
full number of shares of Common Stock to which such holder shall be so entitled,
together with cash in lieu of any fraction of a share as provided in paragraph
8.6.3 above. If surrendered certificates for the Series B Shares are converted
only in part, the corporation will issue and deliver to the holder, or to such
holder's nominee or nominees, a new certificate or certificates representing the
aggregate of the unconverted Series B Shares. The Series B Shares shall be
deemed to have been converted as of the date of the surrender of such shares for
conversion as provided above, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock on such date.
8.6.5 The Conversion Price, or the Adjusted Conversion Price, as the
case may be, shall be subject to adjustment as follows:
(i) In case the corporation shall (a) pay a dividend or make a
distribution on its Common Stock in shares of the capital stock of the
corporation, (b) subdivide or split its outstanding Common Stock, (c) combine
the outstanding Common Stock into a smaller number of shares, or (d) issue by
reclassification of its Common Stock (whether pursuant to a merger or
consolidation or otherwise) any shares of the capital stock of the corporation,
the number and kind of shares issuable upon conversion of each Series B Share
outstanding immediately prior thereto shall be adjusted so that the holder of
each Series B Share shall be entitled to receive the kind and number of shares
of Common Stock or other securities of the corporation which such holder would
have owned or have been entitled to receive after the happening of any of the
events described above had such Series B Shares been converted in full
immediately prior to the earlier of the happening of such event or any record
date with respect thereto. In the event of any adjustment of the total number of
shares of Common Stock issuable upon the conversion of then outstanding Series B
Shares pursuant to this subsection, the Conversion Price or the Adjusted
Conversion Price, as the case may be, shall be adjusted to be the amount
resulting from multiplying the Conversion Price, or the Adjusted Conversion
Price, as the case may be, prior to the adjustment by a fraction, the
denominator of which is the number of shares of Common Stock (including
fractional shares of Common Stock) issuable upon converting such Series B Shares
immediately after such adjustment, and the numerator of which is the number of
shares issuable upon conversion of such Series B Shares in full
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immediately prior to such adjustment. An adjustment made pursuant to this
paragraph (i) shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(ii) In case of any reclassification or similar change of
outstanding shares of Common Stock (other than as set forth in paragraph (i)
above), or in case of the consolidation or merger of the corporation with
another corporation, or the conveyance of all or substantially all of the assets
of the corporation, each Series B Share shall thereafter be convertible only
into the number of shares of stock or other securities or property, including
cash, to which a holder of the number of shares of Common Stock of the
corporation deliverable upon conversion of such Series B Shares would have been
entitled upon such reclassification, change, consolidation, merger or
conveyance had such share been converted immediately prior to the effective date
of such event; and, in any such case, appropriate adjustments (as determined by
the board of directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of Series B Shares to the end that the provisions set forth herein
(including provisions with respect to changes in and other adjustments of the
Conversion Price or Adjusted Conversion Price, as the case may be) shall
thereafter be applicable, as nearly as may be reasonably practicable, in
relation to any shares of stock or other securities thereafter deliverable upon
the conversion of Series B Shares. The corporation shall not effect any such
consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor corporation or entity (if other than the
corporation) resulting from such consolidation or merger or the corporation or
entity purchasing such assets or other appropriate corporation or entity shall
assume, by written instrument, the obligation to deliver to the holder of each
Series B Share such shares, securities, assets or cash as, in accordance with
the foregoing provisions, such holders may be entitled to, and the other
obligations hereunder.
(iii) In case the corporation shall issue Common Stock at a
price less than the current Market Price, the Conversion Price or Adjusted
Conversion Price, as the case may be, shall be adjusted by multiplying it by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding, on a fully diluted basis immediately prior to such event, plus the
number of shares of Common Stock which the aggregate consideration for the total
number of such additional shares would purchase at the Market Price, and the
denominator of which shall be the number of shares of Common Stock outstanding,
on a fully diluted basis immediately prior to such event, plus the number of
such additional shares of Common Stock issued at a price less than current
Market Price.
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(iv) In case the corporation shall issue stock purchase
warrants or securities carrying conversion privileges at a conversion price more
favorable than the Conversion Price or the Adjusted Conversion Price, if in
effect at the time of such issuance, for the Series B Shares, the Conversion
Price or Adjusted Conversion Price, as the case may be, shall be adjusted by
multiplying it by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding, on a fully diluted basis immediately prior
to such event, plus the number of shares of Common Stock which the aggregate
consideration for the total number of such shares issuable pursuant to warrants
or convertible securities would purchase at the Conversion Price or the Adjusted
Conversion Price, if in effect at the time of such event, and the denominator of
which shall be the number of shares of Common Stock outstanding, on a fully
diluted basis immediately prior to such event, plus the number of such
additional shares issuable pursuant to such warrants or convertible securities.
Stock purchase warrants or convertible securities shall be deemed to carry more
favorable conversion privileges if the amount determined by dividing (1) the
total amount, if any, received or receivable by the corporation as consideration
for the granting of such warrants or the issuing of such convertible securities,
plus the minimum aggregate amount of additional consideration, if any, payable
to the corporation upon exercise of such warrants or conversion of such
convertible securities, by (2) the total maximum number of common shares
issuable upon exercise of such warrants or upon the conversion of such
convertible securities is less than the amount determined by applying the same
formula to the Series B Shares.
(v) No adjustment in the Conversion Price or Adjusted
Conversion Price, as the case may be, shall be required unless such adjustment
(plus any adjustments not previously made by reason of this paragraph (iii))
would require an increase or decrease of at least 3% of the Conversion Price or
the Adjusted Conversion Price, as the case may be, in effect at the time such
adjustment would otherwise be required to be made. Any adjustments that are not
required to be made by reason of this paragraph (iii) shall be carried forward
and taken into account in any subsequent adjustment. All adjustments in the
Conversion Price, or the Adjusted Conversion Price, as the case may be, shall be
carried out to the nearest cent.
(vi) Upon the expiration of any subscription rights or
warrants or the termination of any rights to convert or exchange any convertible
securities on account of which the Conversion Price or Adjusted Conversion
Price, as the case may be, has previously been adjusted (without exercise of
such rights or warrants or conversion or exchange of such convertible
securities), the Conversion Price, or the Adjusted Conversion Price, as the case
may be, shall forthwith be readjusted to such Conversion Price, or the Adjusted
Conversion Price, as the case may be, as would have been in effect at the time
of such expiration or termination, had
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such rights, warrants or convertible securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(vii) Except as specifically provided herein, no adjustment
in the Conversion Price or Adjusted Conversion Price, as the case may be, shall
be made by reason of the issuance of shares of Common Stock in exchange for
cash, property or services.
(viii) Whenever the Conversion Price or Adjusted Conversion
Price, as the case may be, is adjusted as herein provided, the corporation shall
prepare a certificate setting forth such adjustment and showing in detail the
facts upon which such adjustment is based, and such certificate shall then be
delivered to the holders of record of the Series B Shares.
(ix) The adjustments herein provided for shall become
effective immediately following the record date for any event for which the
record date is designated and on the effective date for any other event.
8.6.6 So long as any of the Series B Shares remain outstanding,
and the holders thereof have the right to convert them into shares of Common
Stock, the corporation shall reserve from the authorized and unissued shares of
its Common Stock a sufficient number of shares to provide for such conversion.
8.6.7 In case of any call for redemption of any Series B Shares,
as provided in Section 8.5, the right of conversion provided in this Section 8.6
shall nevertheless continue, as to the shares called for redemption, up to the
Redemption Date.
8.6.8 Series B Shares that have been converted as provided herein
shall revert to the status of authorized but unissued Series B Shares.
8.7 The Corporation's Right to Exchange Series B Shares for Debentures.
8.7.1 Any time after the first anniversary of the Initial Closing
Date, the corporation, upon ten days' prior written notice to the holders of
Series B Shares, may exchange, in whole or in part, the Series B Shares into
senior subordinated convertible debentures ("Debentures"), pro rata if less than
all of the Series B Shares are being exchanged, at the exchange rate set forth
in Section 8.9 and in the manner set forth below.
8.7.2 The corporation shall notify the holders of the Series B
Shares in writing at least ten days prior to the date set for exchange (the
"Exchange Date"), at the address of such holders as the same appear on the
records of the corporation. Such
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notice shall set forth (a) the Exchange Date, (b) the number of Series B Shares
being exchanged, and (c) the place where such holders are to surrender to the
corporation such holder's certificate or certificates representing the Series B
Shares being exchanged.
8.7.3 If the corporation duly gives notice of the exchange, as
provided in Subsection 8.7.2, then, notwithstanding that any certificates
representing the Series B Shares called for exchange shall not have been
surrendered, such Series B Shares shall no longer be deemed outstanding, and all
rights of the holders of such Series B Shares so called for exchange shall forth
with, at such exchange date, cease and terminate, except the right of the
holders thereof to receive the Debentures, together with cash, if the Company
opts to pay cumulative dividends in cash as provided in Section 8.9. In case
less than all of the Series B Shares represented by any surrendered certificate
are exchanged, a new certificate shall be issued representing the unexchanged
Series B Shares.
8.7.4 Series B Shares that have been exchanged as provided in
this section shall revert to the status of authorized but unissued Series B
Shares.
8.8 Holders' Right to Exchange Series B Shares for Debenture.
8.8.1 In the event the corporation fails to declare and pay
dividends on the Series B Shares, and such payment is not made within ten days
following the dividend payment date, each holder of the Series B Shares shall
have the right to exchange any or all whole Series B Shares into Debentures at
the exchange rate set forth in Section 8.9 and in the manner set forth below.
8.8.2 In order for any holder of Series B Shares to exchange the
same into a Debenture representing the Series B Shares, the holder shall
surrender the certificate or certificates representing the Series B Shares, duly
endorsed, at the office of the corporation's transfer agent (the date of receipt
by the corporation's transfer agent of such surrendered certificate referred to
herein as the "Holder's Exchange Date.") Such certificate shall be accompanied
by written notice setting forth the number of Series B Shares represented by the
certificate or certificates which the holder elects to exchange and the name or
names in which the holder wishes the Debentures to be issued. The corporation's
transfer agent will, as soon as practical thereafter, issue and deliver to such
holder of the Series B Shares, or to such holder's nominee or nominees, the
Debentures, together with cash, if any, for payment of the cumulative but unpaid
dividends. If surrendered certificates for the Series B Shares are exchanged
only in part, the corporation will issue and deliver to the holder, or to such
holder's nominee or nominees, a new certificate or
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certificates representing the aggregate of the unexchanged Series B Shares. The
Series B Shares shall be deemed to be exchanged as of the Holder's Exchange
Date, and the person or persons entitled to receive the Debenture upon such
exchange shall be treated for all purposes as the record holder or holders of
such Debentures on the Holder's Exchange Date.
8.8.3 Series B Shares that have been exchanged as provided in
this section shall revert to the status of authorized but unissued Series B
Shares.
8.9 Exchange Rate. Series B Shares shall be exchanged at an exchange
rate of $1,000 principal for each Series B Share surrendered. The amount of
cumulative dividends shall be added to the principal amount of the Debentures
except that, at the option of the corporation, in lieu of exchanging cumulative
dividends into principal, the corporation may pay the cumulative dividends in
cash.
8.10 Terms of the Debentures.
8.10.1 The Debentures will bear interest at the rate of 8% per
annum, payable quarterly, on the first day of April, July, October, and January
in each year. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
8.10.2 The Debentures will be convertible into shares of Common
Stock at any time and from time to time on the same terms and conditions as the
Series B Shares. The shares of Common Stock issuable upon conversion of the
Debentures will have the same registration rights as the shares of Common Stock
issuable upon conversion of the Series B Shares.
8.10.3 If the corporation exchanges the Series B Shares into
Debentures as provided in Section 8.7 prior to the fourth anniversary of the
Initial Closing Date, at the end of the fifth year following the Initial Closing
Date, the corporation shall pay, on a pro rata basis, one-third of the principal
amount of the Debentures, plus accrued but unpaid interest up to the date of
such payment. At the end of the sixth year following the Initial Closing Date,
the corporation shall pay, on a pro rata basis, one-half of the remaining
principal amount of the Debentures, plus accrued but unpaid interest up to the
date of such payment. At the end of the seventh year following the Initial
Closing Date, the corporation shall pay the balance due on the Debentures.
8.10.4 If the corporation exchanges the Series B Shares into
Debentures, as provided in Section 8.7, after the fourth anniversary of the
Initial Closing Date or if a holder of the Series B Shares exercises such
holder's right to exchange the Series B Shares for Debentures pursuant to
Section 8.8, the
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corporation shall, on the one-year anniversary of the Exchange Date or the
Holder's Exchange Date, as the case may be, pay on a pro rata basis, one-third
of the principal amount of the Debentures plus accrued but unpaid interest up to
the date of such payment. On the second anniversary of the Exchange Date, or the
Holder's Exchange Date, as the case may be, the corporation shall pay, on a pro
rata basis, one-half of the remaining principal amount of the Debentures, plus
accrued but unpaid interest up to the date of such payment. On the third
anniversary of the Exchange Date, or the Holder's Exchange Date, as the case may
be, the corporation shall pay the balance due on the Debentures.
8.10.5 The Debentures will be subordinated in right of payment to
all Senior Indebtedness. "Senior Indebtedness" means Indebtedness of the
corporation outstanding at any time for money borrowed from a bank, insurance
company or other lender not subordinated by its terms to the Debentures.
"Indebtedness" means any debt of the corporation for borrowed money, capitalized
leases and purchase money obligations or evidenced by a note, debenture, letter
of credit or similar instrument given in connection with the acquisition, other
than in the ordinary course of business, of any property or assets; any debt of
any subsidiary of the corporation described in the preceding definition which
the corporation has guaranteed or for which it is otherwise liable; and any
amendment, renewal, extension or refunding of any such debt. The Debentures do
not prohibit the corporation from incurring additional Indebtedness, including
Senior Indebtedness.
8.10.6 (i) If the corporation files a voluntary petition for
relief under any bankruptcy law or if any involuntary petition for relief under
any bankruptcy law is filed against the corporation and such involuntary
petition is not dismissed within 60 days of the date of filing, the outstanding
principal of all Debentures shall at once, without any action by the holders, be
due and payable.
(ii) If an Event of Default (as defined below) shall have
occurred and be continuing, the holders of 15% in principal amount of the
Debentures then outstanding may declare the principal of all such Debentures to
be due and payable; provided, however, that if any and all defaults shall have
been remedied, the holders of a majority in aggregate principal amount of
Debentures then outstanding may waive such defaults and rescind and annul such
declaration and its consequences.
(iii) "Event of Default" means (a) a default for in excess
of 10 days in payment of any principal or interest installment on the Debenture;
(b) a default on the Debentures other than a default under (a) above for 30 days
after written notice to the corporation by the holders of 15% in principal
amount of the outstanding Debentures, in the performance of any other covenant
or agreement in the Debentures; (c) a default under any bond,
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debenture, note or other evidence of indebtedness for money borrowed by the
corporation or under any mortgage, indenture, or instrument under which there
may be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the corporation (excluding real property leases), which
default shall constitute a failure to pay any portion of interest or principal
when due after any applicable grace period or shall have resulted in such
indebtedness becoming or being declared due and payable without such
indebtedness having been discharged or such acceleration having been rescinded
or annulled, and the aggregate indebtedness in default exceeds $250,000; (d)
certain events of bankruptcy, insolvency, and reorganization; and (e) the
suspension or termination of the corporation's reporting obligations pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. An Event
of Default shall not be deemed to have occurred until the corporation shall have
had the opportunity to fully contest claims asserted by third parties related to
(c) above.
8.10.7 The Debentures shall provide that the corporation may not
be consolidated with or merged into another entity, or transfer all or
substantially all of its assets in one or more related transactions, unless (i)
the corporation shall be the surviving entity, or the successor shall be a
United States corporation or shall expressly assume all the obligations of the
corporation under the Debentures, (ii) immediately after giving effect to such
transaction, no Event of Default shall have occurred and be continuing, and
(iii) the assuming corporation has a net worth not less than the consolidated
net worth of the corporation.
8.10.8 (i) For purposes of Subsection 8.10.8, the following terms
shall have the meanings set forth below:
"Consolidated Net Income" means, for any period, the aggregate of
the Net Income of the corporation and its subsidiaries for such period, on a
consolidated basis, determined in accordance with generally accepted accounting
principles; provided that (i) the Net Income of any person which is not a
subsidiary or is accounted for by the corporation by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the corporation or a subsidiary, and (ii) the Net Income
of any person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded.
"Disqualified Stock" means capital stock subject to mandatory
redemption or redemption at the option of the holder, in either case prior to
the maturity of the Debentures.
"Equity Interests" mean capital stock or warrants, options or other
rights to acquire capital stock.
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"Net Income" means the net income (loss) of such corporation,
subsidiary, or person, determined in accordance with generally accepted
accounting principles; excluding, however, from the determination of Net Income,
any gain (but not loss) realized upon the sale or other disposition (including,
without limitation, dispositions pursuant to leaseback transactions, except any
gain from such leaseback transaction may be amortized into Net Income over the
term of the lease) of any real property or equipment of such corporation,
subsidiary, or person which is not sold or otherwise disposed of in the ordinary
course of business, or of any capital stock of the corporation, subsidiary, or
person owned by such corporation, subsidiary, or person.
(ii) The Debentures shall provide that the corporation
may not (a) declare or pay any dividend or make any distribution on its capital
stock of any class (except on its Series A Shares and Series B Shares) or to its
shareholders (other than dividends or distributions payable in shares of capital
stock of the corporation) unless the corporation shall also pay additional
interest on the Debentures in an amount equal to the amount of the dividend that
would then be payable to the holders of the Debentures had such holders
converted the Debentures into shares of Common Stock; (b) purchase, redeem, or
otherwise acquire or retire for value any Equity Interests of the corporation,
any subsidiary or other affiliate (other than any such Equity Interests, owned
by the corporation or any subsidiary), other than its obligation to repurchase
certain shares of Common Stock held by Mr. Yoram Curiel pursuant to agreements
between the corporation and Mr. Curiel; (c) permit any wholly-owned subsidiary
to declare or pay any dividend on, or make any distribution to the holders of
any shares of its capital stock except to the corporation or a subsidiary (other
than dividends or distributions payable in capital stock of it or the
corporation); or (d) permit any subsidiary to purchase, redeem or otherwise
acquire or retire for value any Equity Interests of such subsidiary, the
corporation or any affiliate of any of them (other than any such Equity
Interests owned by the corporation or any subsidiary), if at the time of such
action, an Event of Default shall have occurred and be continuing, or shall
occur as a consequence thereof, or if upon giving effect to such payment the
aggregate amount expended for all such payments (the amount expended for such
purposes, if other than cash, to be conclusively determined by the board of
directors as evidenced by a board resolution) shall exceed the sum of (1) 25% of
the aggregate Consolidated Net Income of the corporation accrued during fiscal
quarters ending subsequent to the Initial Closing Date; (2) the aggregate net
proceeds, including cash and the fair market value of property other than cash,
received by the corporation from the issue or sale, after the Initial Closing
Date, of capital stock of the corporation (other than Disqualified Stock) or of
warrants to purchase such capital stock (other than warrants to purchase such
Disqualified Stock), other than in connection with the conversion of any Series
B Shares or Debentures; (3) the aggregate
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net proceeds received by the corporation subsequent to the Initial Closing Date
from the issue or sale of any debt securities or Disqualified Stock of the
corporation, if, at such time, such debt securities, or Disqualified Stock, as
the case may be, have been converted into capital stock of the corporation; or
(4) $250,000.
8.10.9 The Debentures shall provide that neither the corporation
nor any of its subsidiaries may engage in any transaction with an affiliate of
the corporation on terms less favorable to the corporation or such subsidiary
than that which might be obtained at the time of such transaction from unrelated
entities.
8.11 Rank. No class of capital stock or securities convertible into
capital stock shall be issued which has superior rights to the Series B Shares
as to distributions, liquidation, or both. If Series A Shares are issued,
Article 11 shall be amended to have terms equal to or subordinate to Series B
Shares.
8.12 Restriction on Payment of Dividends on Common Stock. No dividends or
other payments (excluding payments to be made on liquidation pursuant to Section
8.3) shall be declared and paid on the Common Stock unless the corporation shall
also declare and pay 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.
8.13 Furnish Reports. As soon as practicable after available (but, in
the case of the corporation's Annual Report to Stockholders, within 120 days
after the end of each fiscal year of the corporation), the corporation will
furnish to the holders of the Series B Shares or the Debentures, one copy of (a)
its Annual Report to Stockholders which Annual Report shall contain financial
statements audited in accordance with generally accepted accounting principles
by a firm of certified public accountants), (b) if not included in substance in
the Annual Report to Stockholders, its Annual Report of Form 10-K, and (c) any
Quarterly Reports to Stockholders, and if not included in substance in its
Quarterly Reports to Stockholders, its quarterly reports on Form 10-Q.
EXECUTED this 16th day of August, 1996.
OPTICAL SECURITY GROUP, INC.
By:/s/ CATHERINE M. GOTWALT
-------------------------
Catherine M. Gotwalt
Secretary
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Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Optical Security
Group, Inc. for the registration of 1,657,002 shares of its common stock and to
the incorporation by reference therein of our report dated May 10, 1996, with
respect to the financial statements of Optical Security Group, Inc. included in
its Annual Report (Form 10-KSB) for the year ended March 31, 1996, filed with
the Securities and Exchange Commission.
Denver, Colorado
September 20, 1996 Ernst & Young LLP
Exhibit 23.1
