<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
[_] Definitive Proxy Statement Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
OPTICAL SECURITY GROUP, INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------
(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
Optical Security Group, Inc.
535 16th Street
Suite 920
Denver, CO 80202
(303) 534-4500
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD AUGUST 16, 1996
To the Shareholders:
The annual meeting of the shareholders of Optical Security
Group, Inc. (the "Company") will be held in the Bluebell Room, 37th
Floor, Denver Petroleum Club, 555 17th Street, Denver, Colorado
80202 on August 16, 1996, at 9:00 A.M., for the following purposes:
(1) To elect the Company's board of directors for the ensuing
year.
(2) To ratify the appointment of Ernst & Young as the
Company's independent accountants for the fiscal year
ending March 31, 1997.
(3) To consider and act upon a proposal to amend and restate
the Company's Amended and Restated Articles of
Incorporation, as amended, in order, among other things,
to (a) consolidate the Articles into one document, (b)
delete the provisions regarding duration, purposes and
powers, and Series A Convertible Preferred Stock, and (c)
approve amendments to the terms of the Series B 8%
Cumulative Convertible Exchangeable Preferred Voting
Stock, all as more fully described in the attached Proxy
Statement.
(4) To consider and act upon a proposal to amend the
Company's Non-Qualified Stock Option Plan ("NSOP") to
increase the number of shares of common stock subject to
the NSOP.
(5) To consider and act upon a proposal to amend the
Company's Incentive Stock Option Plan ("ISOP") to
increase the number of shares of common stock subject to
the ISOP.
(6) To transact such other business as may properly come
before the meeting.
The board of directors has fixed the close of business on July
1, 1996, as the record date for the determination of shareholders
entitled to notice of and to vote at the meeting.
<PAGE>
All shareholders are cordially invited to attend the meeting in
person. However, to assure adequate representation at the meeting,
you are urged to sign and return the enclosed Proxy as soon as
possible in the postage pre-paid envelope enclosed. Any
shareholder attending the meeting may vote in person, even if he or
she has return a Proxy.
OPTICAL SECURITY GROUP, INC.
July 16, 1996 By: /s/ Catherine M. Gotwalt
---------------------------------
Catherine M. Gotwalt, Secretary
THE ANNUAL REPORT TO SHAREHOLDERS INCLUDING FINANCIAL STATEMENTS
ARE BEING MAILED TO SHAREHOLDERS TOGETHER WITH THESE PROXY
MATERIALS ON OR ABOUT JULY 16, 1996.
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THE
ENCLOSED PROXY, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
TO SAVE THE COST OF FURTHER SOLICITATION, PLEASE MAIL YOUR PROXY
CARD PROMPTLY.
2
<PAGE>
OPTICAL SECURITY GROUP
535 16th Street
Suite 920
Denver, CO 80202
(303) 534-4500
PROXY STATEMENT
The enclosed proxy is solicited by the board of directors of
Optical Security Group, Inc. (the "Company") for use at the annual
meeting of shareholders to be held on Friday, August 16, 1996, at
9:00 a.m., local time, or at any adjournments of such meeting for
the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Shareholders. The annual meeting will be held in
the Bluebell Room, 37th Floor, Denver Petroleum Club, 555 17th
Street, Denver, Colorado 80202.
If the proxy is executed and returned, it will be voted at the
meeting in accordance with any accompanying instructions, and if no
specification is made, the proxy will be voted for the proposals
set forth in the accompanying Notice of Annual Meeting of
Shareholders. Shareholders who execute proxies may revoke them at
any time before they are voted, either by writing to the Company at
the address set forth above or in person at the time of the
meeting. Additionally, a shareholder may revoke a previous proxy
by duly executing a proxy bearing a later date.
The close of business on July 1, 1996, has been fixed as the
record date for determining the shareholders entitled to notice of
and to vote at the meeting. Only shareholders of record at the
close of business on that date will be entitled to vote at the
meeting and any adjournment thereof. This Proxy Statement, the
Proxy, Notice of Annual Meeting of Shareholders, and Annual Report,
including financial statements for the 1996 fiscal year, are being
mailed to shareholders of record on or about July 16, 1996.
Management of the Company does not intend to present and does
not have reason to believe that others will present any other items
of business at the annual meeting. However, if other matters are
properly presented to the meeting for a vote, the persons named in
the proxies will vote the proxies in accordance with their best
judgement pursuant to discretionary authority granted in the
proxies.
The Company's common stock and Series B 8% Cumulative
Convertible Exchangeable Preferred Voting Stock ("Series B Shares")
have voting rights. As of May 15, 1996, the Company had
outstanding 3,034,552 shares of common stock and 7,468 Series B
Shares. The holders of the common stock are entitled to a total of
3,034,552 votes--one vote for each share of common stock held by
them. The holders of the Series B Shares are entitled to a total
1
<PAGE>
of 1,244,666 votes--one vote for each share of common stock
issuable to the holders of the Series B Shares upon conversion of
their Series B Shares. (The common stock issuable upon conversion
of the Series B Shares is referred to herein as "Conversion Stock".
The outstanding common stock and the Conversion Stock is referred
to herein jointly as the "Voting Stock.")
The presence in person or by proxy of the holders of shares
representing a majority of the Voting Stock will constitute a
quorum. Provided a quorum is present, the eight nominees receiving
the highest number of votes cast by the holders of the Voting Stock
voting as one class will be elected directors. The affirmative
vote cast by the holders of a majority of the shares of the Voting
Stock present in person or represented by proxy at the meeting,
voting as one class, shall be required to ratify the appointment of
the Company's auditors and to approve the proposals to amend the
Company's Non-Qualified Stock Option Plan ("NSOP") and Incentive
Stock Option Plan ("ISOP"). To approve the proposal to amend and
restate the Company's Amended and Restated Articles, as amended
(the "Articles") the affirmative vote of a majority of the Voting
Stock voting as one class and the affirmative vote of a majority of
the Series B Shares voting as a class is required.
The cost of preparing, printing and mailing the enclosed Proxy,
accompanying Notice, Proxy Statement, Annual Report, and all other
costs in connection with solicitation of proxies will be paid by
the Company including any additional solicitation made by letter,
telephone, or telegraph. Failure of a quorum to be present at the
meeting will necessitate adjournment and will subject the Company
to additional expense.
ELECTION OF DIRECTORS
Unless the proxy contains contrary instructions, it is intended
that the proxies will be voted for the election of the nominees
listed below to serve until the next annual meeting of shareholders
and until their successors shall be elected and shall qualify.
Abstentions and shares held by a broker in "street name" ("Broker
Shares") that are not voted in the election of directors will not
be included in determining the number of votes cast.
All nominees have consented to serve if elected. In case any
nominee shall be unable or shall fail to act as a director, the
persons named as proxies shall have full discretion to vote for
such other person or persons as may be nominated.
The following table sets forth the name, age, and position with
the Company for each nominee for director:
2
<PAGE>
Name Age Position
---- --- --------
Richard H. Bard 48 Chairman of the Board, Chief
Executive Officer, and
President
Mark Bar 47 Director
Yoram Curiel 55 Director and Director of
Technology
Martin T. Hart 60 Director
J. R. Holland, Jr. 52 Director
Richard D. Lamm 60 Director
Bruce I. Raben 42 Director
John J. Tipton 49 Director
Richard H. Bard has been a director and chief executive officer of
the Company since September 1993. He was elected president in
April 1994, and chairman of the board in April 1995. Mr. Bard
served as treasurer from September 1993 to December 1994. Mr. Bard
is also the chief executive officer of Bard & Co., Inc., a
diversified investment management company. From 1989 to 1991, Mr.
Bard was vice chairman of Computerland Corporation and chief
executive officer of Computerland International, Inc. From 1986 to
1988, Mr. Bard was chairman and chief executive officer of Coast
America Corporation, the franchisor of Coast-to-Coast Hardware
stores. From 1978 to 1986, Mr. Bard was the president and chief
operating officer of FoxMeyer Corporation, a large pharmaceutical
distributor and franchisor of drug stores. Mr. Bard is also a
director of Polymedica Industries, Inc. and VanStar Corporation,
formerly known as Computerland Corporation.
Mark Bar has been a director since March 1993. He served as chief
executive officer from March 1993 to September 1993 and as
president from September 1993 to March 1994. Mr. Bar is a Denver-based
businessman and investor.
Yoram Curiel has been a director since August 1988. He currently
serves as director of technology. Previously, Mr. Curiel served as
the Company's chief technology officer, chief executive officer,
president, and vice president of product development. Mr. Curiel
is the Company's founder, and he developed the Company's tamper-evident
packaging and document security technology. He is also the president and a
director of a private company involved in the development of new technologies.
Martin T. Hart has been a director since December 1993. He serves
as the chairman of the Compensation Committee and as a member of
the Audit Committee. Mr. Hart has been a Denver-based businessman
and investor for the past twenty-seven years. He is also a
director of Schuler Homes, Inc. and a trustee of MassMutual
Corporate Investors and MassMutual Participation Investors.
3
<PAGE>
J. R. Holland, Jr. has been a director since July 1994 and serves
as chairman of the Audit Committee. Since 1991, he has been the
chief executive officer and president of Hunt Capital Group, L.L.C.
and chief executive officer and president of Unity Hunt, Inc.,
investment companies based in Dallas, Texas. He is a director of
Heartland Wireless Communications, Inc., Wireless One, Inc. and TNP
Enterprises, Inc.
Richard D. Lamm has been a director since December 1993 and serves
on the Compensation and Audit Committees. He previously served as
a director from 1989 through 1992. Since 1987, Mr. Lamm has been
a university professor and director of the Center for Public Policy
and Contemporary issues at the University of Denver. He was a
partner at Berliner, Boyle, Pablan, Zisser and Walter, P.C. and
O'Connor and Hannan, Attorneys at Law, from 1987 until 1992. Mr.
Lamm served as the governor of the state of Colorado from 1975
until 1987.
Bruce I. Raben has been a director since February 1995 and serves
on the Compensation Committee. Since February 1996, Mr. Raben has
been the managing director of CIBC Wood Gundy Securities Corp. in
Los Angeles. From March 1990 until January 1996, he served as the
executive vice president and director of corporate finance at
Jefferies & Company, Inc., an investment banking firm. He is also
a director of Equity Marketing, Inc. and Terex Corporation.
John J. Tipton has been a director since March 1993, and serves on
the Compensation Committee. He also served as a director from 1989
to 1991. Since February 1993, Mr. Tipton has been vice president,
chief financial officer and general counsel to Seven Circle
Resorts, Inc., a resort and gaming casino development and
operation. From September 1992 to January 1993, Mr. Tipton was a
partner in the law firm of Baker and Hostetler. From January 1988
to August 1992, Mr. Tipton was the executive director of the
Colorado Department of Revenue.
4
<PAGE>
COMPANY MANAGEMENT
A. Other Directors, Executive Officers, and Significant Employees
The following table sets forth the name, age, and position with
the Company for executive officers (other than executive officers
listed as nominees), and significant employees:
Name Age Position
---- --- --------
Edward Dietrich 43 Vice President
Catherine M. Gotwalt 40 Secretary
Gerald A. Melfi 45 Chief Accounting Officer and
Treasurer
Mark T. Turnage 35 Managing Director of OpSec
International
Edward Dietrich serves as vice president of sales of OpSec U.S.
Mr. Dietrich was employed with American Bank Note Holographics,
Inc. from February 1992 until August 1994 as the director of sales
and marketing/government markets. From June 1989 to February 1992,
he was vice president of United States business development for
BusinessVision Management Systems, Inc., a computer software
company.
Catherine M. Gotwalt serves as the corporate secretary. She has
served in this capacity since 1989.
Gerald A. Melfi serves as the Company's chief accounting officer
and treasurer. Since February 1991, Mr. Melfi also is employed as
the chief financial officer for Bard & Co., Inc., a diversified
investment management company.
Mark T. Turnage serves as Managing Director of OpSec International
From July 1994 until November 1995, Mr. Turnage served as vice
president-corporate affairs. From 1991 to 1994, Mr. Turnage
practiced law with the firm of Davis, Graham & Stubbs in Denver,
Colorado.
B. Corporate Governance
The board of directors has the responsibility for establishing
broad corporate policies and for the overall performance of the
Company, taking into consideration the interest of the
shareholders. The board of directors met seven times during the
fiscal year ended March 31, 1996. Messrs. Bar, Lamm, and Holland
did not attend two meetings and Mr. Tipton did not attend three
meetings. Peter H. Woodd, who resigned as a director effective
November 1995, did not attend four meetings during the last year of
his term in office.
The Company had a Compensation Committee and an Audit during the
year ending March 31, 1996. Members of the Compensation and Audit
Committees are appointed to serve a one year term. The following
table sets forth the names and terms of those directors:
5
<PAGE>
Audit Committee Term
--------------- ----
J. R. Holland, Jr., Chairman Since December 15, 1994
Martin Hart Since December 15, 1994
Richard Lamm Since December 15, 1994
Compensation Committee Term
---------------------- ----
Martin Hart, Chairman Since December 15, 1994
Richard Lamm Since December 15, 1994
Bruce Raben Since November 28, 1995
John Tipton Since December 15, 1994
The Compensation Committee is responsible for establishing and
reviewing policies governing salaries, bonuses, incentive
compensation and the terms and conditions of employment of senior
executives and other key employees. In addition, the Compensation
Committee is responsible for oversight of the Company's stock
option plans. The Compensation Committee receives recommendations
from management and brings its recommendations to the full board of
directors.
The Compensation Committee met three times during the fiscal
year ended March 31, 1996. None of the Compensation Committee
members are executive officers of the Company, and no executive
officers of the Company participated in deliberations of the
Company's board of directors concerning executive officer
compensation.
The Audit Committee confers with the Company's independent
accountants to review the plan and scope of their proposed Company
audit as well as their findings and recommendations upon completion
of the audit. The Audit Committee met one time during the fiscal
year ended March 31, 1996.
During the year ended March 31, 1996, no director of the Company
was also an executive officer of another entity which had an
executive officer of the Company serving as a director of such
entity, or as a member of the compensation committee of such
entity.
There are no family relationships among the Company's directors
or officers. The directors of the Company serve in such capacity
until the next annual meeting of the Company's shareholders or
until their successors have been dully elected and qualified. The
committee members are appointed by the board of directors to serve
a one year term or until their successors have been elected. The
Company's officers serve at the discretion of the Company's board
of directors.
C. Compliance with Section 16(a) of the Exchange Act
The Company believes that, other than as disclosed below, during
the fiscal year ended March 31, 1996, its directors, officers and
greater than 10% beneficial owners have complied with all filing
requirements under Section 16(a) of the Exchange Act.
6
<PAGE>
Mr. Turnage failed to timely file one report, reporting the
acquisition of stock options. Mr. Raben failed to timely file one
report, reporting the acquisition of stock options. Mr. Bard
failed to timely file one report covering the exchange of Series A
Preferred Stock for Series B Preferred Stock. Hunt Capital Group,
L.L.C. failed to timely file two reports, one report covering the
exchange of the convertible subordinated note for Series A
Preferred Stock, and one report covering the exchange of Series A
Preferred Stock for Series B Preferred Stock.
D. Executive Compensation
The following tables set forth in summary form the compensation
received during each of the Company's last three completed fiscal
years by (i) the chief executive officer of the company and (ii) by
each other executive officer of the company whose total salary and
bonus exceeded $100,000 in the Company's fiscal year ended March
31, 1996 (the officers listed below are referred to jointly as the
"Named Executive Officers"). All reference to shares of common
stock and stock prices have been adjusted to reflect the five-to-one reverse
stock split effective February 28, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards
Fiscal Options All Other
Name Year Salary Bonus Granted Compensation
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Richard H. Bard 1996 $125,000 - 300,000 -
Chief Executive Officer 1995 $125,000 - 300,000 $121,250(1)
since 9/93 and 1994 $ 54,166 $30,417 100,000 -
President since 4/94
Peter H.L. Woodd 1996 $ 56,144 $32,000(2) - $180,000(3)
Executive Vice President 1995 $ 89,254 $21,344(2) 60,000(4) -
5/94-11/95 1994 - - - -
</TABLE>
_________________________
(1) This amount represents a grant of options to purchase 100,000
shares of common stock under the Nonqualified Stock Option
Plan at an exercise price of $2.85 per share (70 percent of
market value at time of issue). Compensation was recognized
for the difference between the exercise price and the market
value at the time of grant.
(2) Includes $32,000 for Fiscal 1996 and $16,900 for Fiscal 1995
for a housing allowance paid on behalf of Mr. Woodd after his
relocation to the Sparks office.
7
<PAGE>
(3) Includes a payment of $15,000 for consulting services,
received following the termination of Mr. Woodd, effective
November 1, 1995, a payment of $135,000 in exchange for Mr.
Woodd's covenant not to compete with the Company for 60
months, and $30,000 in settlement of any, and all, claims for
unreimbursed expenses.
(4) In accordance with the terms of the Incentive Stock Option
Plan, options granted to Mr. Woodd in Fiscal 1995 were
canceled 90 days after his termination date of November 1,
1995.
Stock Options
The following table sets forth information concerning stock
options granted during the fiscal year ended March 31, 1996, to the
Named Executive Officers. Each option represents the right to
purchase one share of the Company's common stock.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% of Total
Number of Options Market
Securities Granted to Exercise Price on
Underlying Employees or Base Date of
Options in Fiscal Price Grant Expiration
Name Granted Year ($/Sh) ($/Sh) Date
- ---- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Richard H. Bard 300,000(1) 57% $5.75 $5.75 3/18/01
Peter H. Woodd - - - - -
</TABLE>
________________________
(1) Issued under the Nonqualified Stock Option Plan. The option
vested on March 19, 1996.
The following table sets forth information concerning each
exercise of stock options during the fiscal year ended March 31,
1996, for each Named Executive Officer and the fiscal year-end
value of all unexercised in-the-money options (regardless of when
granted) held by these persons.
8
<PAGE>
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of In-the-Money
Shares Acquired Dollar Value Unexercised Options at
On Exercise Realized Options Fiscal Year End
--------------- ------------ ------------- --------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Richard H. Bard - - 533,334/166,666 $753,335/$349,165
Peter H. L. Woodd - - 0/0 $0/$0
</TABLE>
Long-Term Incentive Plans - Awards in Last Fiscal Year
There were no awards made to the Named Executive Officers under
any long-term incentive plans.
Repriced Options
In the fiscal year ended March 31, 1996, there were no actions
taken regarding the repricing of options relating to Executive
Officer Compensation.
Employee Pension, Profit Sharing or Other Retirement Plans
The Company does not have a defined benefit, pension plan,
profit sharing or other retirement plan.
E. Compensation of Directors
Standard Arrangements. The Company has no standard arrangement
pursuant to which directors of the Company are compensated for any
services provided as a director or for committee participation or
special assignments.
Other Arrangements. During the year ended March 31, 1996, the
Company granted stock options to one non-employee director under the
Company's Nonqualified Stock Option Plan, as follows:
9
<PAGE>
OPTIONS GRANTED TO NON-EMPLOYEE DIRECTORS
IN FISCAL YEAR ENDED MARCH 31, 1996
Number of Market Price
Options Exercise on Date of Expiration
Name Granted Price Grant Date
- ---- --------- -------- ---------- ----------
Bruce I. Raben 10,000(1) 5.75 5.75 03/18/01
________________________
(1) 5,000 options vested on March 19, 1996, 1,666 options vest on
March 19, 1997, 6,667 vest on March 19, 1998, and 6,667
options vest on March 19, 1999.
F. Employment Contracts
On April 1, 1996, Richard H. Bard, the Company's chief executive
officer and president, entered into a new employment contract
effective through March 31, 1999. Mr. Bard's previous employment
agreement was to terminate on September 17, 1996. Under the terms
of the contract, all options granted to Mr. Bard through March 31,
1996 remain in full force and effect. Mr. Bard's salary is
$150,000 for the first year, $175,000 for the second year and
$200,000 for the third year. As additional compensation, Mr. Bard
will be granted additional options during the term of the contract
in sufficient amounts to maintain Mr. Bard's percentage beneficial
ownership of the Company's common stock as of December 31, 1995,
less common stock Mr. Bard sells or otherwise disposes of after
that date. Mr. Bard also is entitled to discretionary bonuses in
such amount as the board of directors may determine. The new
employment contract also provides that, if the Company is sold or
merged into another Company prior to March 31, 2000, Mr. Bard will
receive a stock bonus of 250,000 shares. Additionally, under the
terms of the employment contract, Mr. Bard receives a $500 per
month auto allowance, benefits available generally to other Company
employees, and reimbursement of expenses incurred on behalf of the
Company. If the Company terminates Mr. Bard's employment prior to
the expiration of the contract, Mr. Bard is entitled to a buyout at
150% of the value of the contract at the time of termination.
Effective April 1, 1996, the Company amended Mr. Yoram Curiel's
employment agreement. The amended agreement deleted the previous
requirements that Mr. Curiel exercise certain stock options and the
Company redeem a portion of Mr. Curiel's stock. Under the amended
agreement, Mr. Curiel's salary for the fiscal year ended March 31,
1996 was $57,000, and his salary for the fiscal year ending March
31, 1997 is set at $60,000. Mr. Curiel also is entitled to a $500
per month automobile allowance. His employment agreement
terminates on June 30, 1997.
10
<PAGE>
On February 7, 1996, the Company executed an Employment
Termination, Consulting and Non-Competition Agreement with Mr.
Peter H. L. Woodd, effective November 1, 1995. Pursuant to the
terms of the Agreement, Mr. Woodd's employment relationship with
Company terminated and he resigned as a member of the board of
directors, effective November 1, 1995. Mr. Woodd was retained as
a consultant to the Company for the six-month period ended April
31, 1996. He received a total of $15,000 as compensation for
required services. Mr. Woodd also is prohibited from competing
with the Company for a period of 60 months from the effective date
of the Agreement. In accordance with the Agreement, the Company
paid Mr. Woodd $135,000 for his non-competition covenant. As part
of the Agreement, Mr. Woodd also received $30,000 in settlement of
any, and all, claims for unreimbursed expenses.
G. Certain Relationships and Related Transactions
The following outlines certain relationships and related
transactions during the fiscal years ended March 31, 1995 and March
31, 1996. All references to share numbers and share price have
been adjusted to reflect the five-to-one reverse stock split
effected on February 28, 1995.
Messrs. Bard and Curiel have employment agreements with the
Company.
Effective July 1, 1995, the Company's convertible subordinated
notes in the amount of $750,000 and $500,000 (the "Notes") held by
Hunt Capital Group, L.L.C. ("Hunt") and Mr. Bard were canceled in
exchange for the issuance of 240,000 and 160,000 shares of Series
A Convertible Preferred Stock ("Series A Shares"). Such shares
were entitled to quarterly dividends beginning with the quarter
ending September 30, 1996. The dividend rate was on a sliding
scale beginning at a rate of 14.60%, increasing 2% a year for the
next four years, and 3% a year thereafter. Such shares were
convertible into stock of the Company at the rate of one-for-one.
In connection with such exchange Hunt and Mr. Bard were given
options to exchange their Series A Shares for stock in two of the
Company's subsidiaries in the event the Company failed to pay
dividends on the Series A Shares. The dividend also was guaranteed
by one of the Company's subsidiaries. Subsequently, Hunt and Mr.
Bard exchanged their Series A Shares for 1,440 and 960 Series B
Shares, respectively. Pursuant to the terms of this exchange, the
option agreements and guaranty issued in the first exchange were
terminated.
The Notes were originally issued in June 1994 and were due on
July 1, 2001.
In June 1994, in addition to the loans reflected by the Notes,
Hunt purchased 246,914 shares of common stock and a warrant to
purchase an additional 200,000 shares of common stock at an
exercise price of $5.00 per share for a purchase price of
11
<PAGE>
$1,000,000 and Mr. Bard purchased 53,087 shares of common stock and
a warrant to purchase an additional 43,000 shares of common stock
at an exercise price of $5.00 per share for a purchase price of
$215,000. Hunt and Mr. Bard were granted certain registration
rights with respect to their investment. Such registration rights
were not affected by the subsequent exchanges. In addition, Mr.
Holland was appointed to the Company's board of directors, as
Hunt's nominee.
Effective May 1, 1994, the Company acquired all the shares of
ELEF Plc, now known as Optical Security Industries International,
Plc ("OpSec International"), a British corporation engaged in the
production of optical security products, including holography. The
purchase price for such shares was $250,000 in cash, a promissory
note in the principal amount of $1,250,000 bearing interest at the
rate of 6% per annum, 40,000 shares of common stock of the Company,
and a warrant to purchase an additional 70,000 shares of common
stock of the Company at $10.00 per share. The exercise price of
the warrants subsequently was reduced to $4.05 per share. The
Company paid the balance of the promissory note on June 30, 1994.
Pursuant to the terms of the stock purchase agreement, Mr. Peter
H.L. Woodd was appointed to the board of directors of the Company
and OpSec International entered into an employment contract with
Mr. Woodd. In Fiscal 1996, Mr. Woodd and the Company entered into
an Employment Termination, Consulting and Non-Competition Agreement
with Mr. Peter H. L. Woodd.
During the fiscal year ended March 31, 1995, Messrs. Bard and
Hart loaned the Company $185,000 and $75,000, respectively. Each
loan was represented by a promissory note bearing interest at the
rate of 12% per annum. The funds received from Messrs. Bard and
Hart were used to fund the acquisition of OpSec International. On
June 29, 1994, Mr. Bard canceled his note in exchange for 53,037
shares, of the Company's common stock and a warrant to purchase an
additional 43,000 shares of the Company's common stock at an
exercise price of $5.00 per share. On June 29, 1994, Mr. Hart
canceled his note in partial satisfaction of the purchase price for
the purchase from the Company of 48,148 shares of the Company's
common stock and a warrant to purchase an additional 39,000 shares
of the Company's common stock at an exercise price of $5.00 per
share. In addition to the cancellation of his note, Mr. Hart paid
$120,000 in cash.
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
To the Company's knowledge, except for Messrs. Bar, Bard, Curiel
and Hart, the only persons or groups who own 5% or more of any
class of the Company's voting stock as of May 15, 1996, are the
following:
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
______________________________________________________________________________
Ferri SA 750 B Preferred 10%
53 The Vivienne
Paris 75002, France
Hunt Capital Group, L.L.C. 718,928(1) Common Stock 21%
1962 Thanksgiving Tower 1,440 B Preferred 19%
Dallas, TX 75201
Massachusetts Mutual Life 1,000 Preferred 13%
Insurance Co.
1295 State St.
Springfield, MA 01111
MassMutual Corporate Value 500 B Preferred 6.7%
Partners
1295 State St.
Springfield, MA 01111
Octacvian Nominees Limited 750 B Preferred 10%
c/o Saffery Champness Mgmt. Int.
P. O. Box 141, LaTonelle House
St. Sampson GY1 3HS
Guernsey Channel Island
Philena Enterprises, Inc. 220,000(2) Common Stock 7%
P. O. Box 6246
Denver, CO 80206
(1) Includes 200,000 shares of common stock issuable upon the exercise of
warrants and 240,000 shares of common stock issuable upon conversion of
Series B Shares.
(2) Mr. Bar, a director of the Company, is the president of Philena
Enterprises, Inc.
13
<PAGE>
Security Ownership of Management
Except for Richard Bard, who owns 960 Series B Shares, 13% of
the outstanding Series B Shares, no director or named executive
officer owns beneficially any Series B Shares. The following table
sets forth, as of May 15, 1996, the number of and percentage of
outstanding shares of the Company's common stock owned by each of
the following named executive officers and directors, and by all
officers and directors as a group. Except as otherwise indicated,
the beneficial owners listed have sole voting and investment power
with respect to the shares they own beneficially.
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
__________________________________________________________________
Mark Bar
P.O. Box 6246
Denver, CO 80206 443,635(1)(2) 14%
Richard H. Bard
535 16th Street
Suite 920
Denver, CO 80202 1,153,599(1)(3) 31%
Yoram Curiel
4500 Cherry Creek Drive S.
Suite 900
Denver, CO 80222 385,860(1)(4) 12%
Martin T. Hart
875 Race Street
Denver, CO 80206 212,149(1) 7%
J.R. Holland, Jr.
1962 Thanksgiving Tower
Dallas, TX 75201 0(5) 0%
Richard D. Lamm
c/o University of Denver
2301 S. Gaylord St., 2nd Fl.
Denver, CO 80208 52,917(1)(6) 2%
Bruce I. Raben
1999 Avenue of the Stars
Suite 1910
Los Angeles, CA 90067 35,013(1)(7) 1%
John J. Tipton
1512 Larimer St., Suite 300
Denver, CO 80202 121,334(1)(8) 4%
14
<PAGE>
Table, continued
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
__________________________________________________________________
Peter H.L. Woodd
Tigwell Farm, East Meon
Petersfield
Hampshire GU32 1PJ
United Kingdom 110,001(1)(9) 4%
All executive officers
and directors as a group
(8 persons) 2,404,502 56%
___________________________
(1) Includes shares of common stock issuable upon the exercise of stock
options, warrants and conversion rights granted to the persons listed
above which are presently exercisable or exercisable within 60 days, as
follows:
<TABLE>
<CAPTION>
Shares Issuable Shares Issuable Shares Issuable
Upon Exercise Upon Exercise Upon Exercise of
Name of Stock Options of Warrants Conversion Rights Total
- ---- ---------------- --------------- ----------------- -------
<S> <C> <C> <C> <C>
Mark Bar 144,501 0 0 144,501
Richard H. Bard 533,334 43,000 160,000 736,337
Yoram Curiel 156,667 0 0 156,667
Martin T. Hart 18,334 39,000 0 57,334
Richard D. Lamm 18,334 0 0 18,334
Bruce I. Raben 16,667 0 0 16,667
John J. Tipton 113,334 0 0 113,334
Peter H.L. Woodd 0 57,655 0 57,655
</TABLE>
(2) Includes 220,000 shares held by Philena Enterprises, Inc., an affiliate of
Mr. Bar, and 69,134 shares held by Mr. Bar's spouse.
(3) Includes 150,000 shares held by Richard H. Bard, IRA, and 20,000 shares
held as custodian for a minor child.
(4) Includes 15,534 shares held by Mr. Curiel's spouse and 65,392 shares held
by Dynagroup International, Inc., an affiliate of Mr. Curiel.
(5) Mr. Holland is the manager and president of Hunt Capital Group, L.L.C.
Mr. Holland has no ownership interest in Hunt Capital Group, L.L.C. and
disclaims beneficial ownership of the shares held by Hunt Capital Group,
L.L.C.
15
<PAGE>
(6) Includes 9,470 shares held as trustee for his children.
(7) Includes 6,000 shares held by Mr. Raben's spouse. Mr. Raben disclaims any
beneficial interest in these shares.
(8) Includes 8,000 shares held by Mr. Tipton's wife. Mr. Tipton disclaims any
beneficial interest in these shares.
(9) Includes 4,000 shares and 7,000 warrants owned by Reredos F.T., 4,000
shares and 7,000 warrants owned by Reredos L.I.I., 1,840 shares and 3,220
warrants owned jointly with his spouse.
PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG
AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
The board of directors has selected Ernst & Young, independent
certified public accountants, to audit the books and records of the
Company for fiscal year ending March 31, 1997. A representative of
Ernst & Young is not expected to be present at the shareholders
meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO RATIFY
THE APPOINTMENT OF ERNST & YOUNG.
PROPOSAL TO APPROVE AMENDED AND SECOND RESTATED
ARTICLES OF INCORPORATION
At the annual meeting, the shareholders will be asked to approve
the Amended and Second Restated Articles of Incorporation of the
Company (the "Amended Articles"). A copy of the Amended Articles
are attached as Exhibit A.
In connection with the exchange of its Notes, the Company
amended its Articles to designate and set the terms of the Series
A Shares. Subsequently, the Series A Shares were exchanged for
Series B Shares.
In connection with its private placements of Series B Shares,
the board amended the Articles to designate and set the terms of
the Series B Shares. In connection with the sale of Series B
Shares to certain later investors, the board, subject to
shareholder approval, amended the terms of the Series B Shares.
The board believes such terms were more favorable to the holders of
the Series B Shares than the previous terms. As of May 15, 1996,
there were 7,468 Series B Shares outstanding.
The board of directors believes it is in the best interest of
the Company to amend and restate the Company's Articles. By
amending and restating the Articles, the Company's Articles can be
consolidated and obsolete provisions can be deleted. If approved,
16
<PAGE>
the Amended Articles will be effective upon filing with the
Colorado Secretary of State.
Deletion of Certain Provisions
The Articles contain historical provisions regarding the
duration of the Company's existence, its purposes and powers. Such
provisions are no longer required in the Company's Articles.
Deletion of these items will have no effect on the Company.
The Company amended its Articles to designate and set the terms
of the Series A Shares which were issued to Mr. Bard and Hunt in
exchange for the Notes. Subsequently, Mr. Bard and Hunt exchanged
their Series A Shares for Series B Shares. (See CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.) Currently, there are no
Series A Shares outstanding and the Company has no intent to issue
any additional Series A Shares. Therefore, the board proposes to
delete the provisions regarding the Series A Shares.
Terms of the Series B Shares
The Series B Shares provide for dividends at the rate of 8% per
annum payable quarterly, beginning with the quarter ended March 31,
1996. The Series B Shares are convertible into shares of common
stock at the option of the holder at any time prior to redemption
or exchange. The conversion price of the Shares is $6 per share of
common stock, with the Shares being valued at $1,000 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 per
share. The holders of the Series B Shares are entitled to one vote
for each share of common stock issuable upon conversion of the
Series B Shares. Upon liquidation, the Series B Shares are
entitled to an amount equal to the redemption price, plus accrued
dividends, before payment is made on any stock ranking junior to
the Series B Shares. The Company also has certain rights to
exchange the Series B Shares for debentures after January 19, 1997.
These terms are not affected by the amendment.
As amended, the Series B Shares provide that holders of the
Series B Shares have the right to exchange their Series B Shares
for debentures if the Company fails to declare or pay dividends on
the Series B Shares and dividends are not paid within 10 days of
the dividend payment date. The exchange rate is $1,000 principal
amount of debenture per Series B Share exchanged. Previously the
Series B Shares provided that if the Company failed only to pay
dividends and such default was not cured within ten days, holders
of the Shares could exchange the Shares for debentures. The rate
of exchange was not affected by the amendment.
The amended Series B Shares provide that the Company is
prohibited from redeeming the Series B Shares until March 30, 1998.
17
<PAGE>
On or after March 30, 1998, the Company may redeem the Series B
Shares only if the closing bid and ask prices of the common stock
is 150% of the conversion price for 30 consecutive trading days
commencing not more than 60 days prior to mailing a redemption
notice. Previously, the Series B were subject to redemption by the
Company commencing on January 19, 1998. Series B Shares were
redeemable by the Company prior to that date only if the common
stock traded at or above 150% of the conversion price for 20
consecutive trading days commencing not more than 60 days prior to
mailing a redemption notice.
The redemption price for each Series B Share, as amended, is as
follows:
Date Redeemed Redemption Price
After March 30, 1998 but
prior to Jan. 19, 1999 $1,090
On or after Jan. 19, 1999 but
prior to Jan. 19, 2000 1,075
On or after Jan. 19, 2000 but
prior to Jan. 19, 2001 1,060
On or after Jan. 19, 2001 but
prior to Jan. 19, 2002 1,040
On or after Jan. 19, 2002 but
prior to Jan. 19, 2003 1,020
On or after Jan. 19, 2003 1,000, plus cumulative
dividends up to the date of redemption
The only change to the redemption schedule is a change reflecting
that no redemption can occur before March 30, 1998.
As amended, the Series B Shares provide that if the Company
redeems or exchanges less than all of the Series B Shares, such
redemption or exchange must be pro rata. Prior to the amendment
redemption or exchange by lot or pro rata was permitted.
As amended, if the Series B Shares are exchanged for debentures,
the number of holders required to declare a default under certain
circumstances is decreased from the holders of 25% to holders of
15% in principal amount of the outstanding debentures.
As amended, payment of dividends or other payments (excluding
payments upon liquidation) on the Company's common stock is
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
18
<PAGE>
the Series B Shares. A similar prohibition will be included in the
terms of the debentures.
The amended terms of the Series B Shares also require that the
Company send to the holders certain periodic and annual reports
prepared by the Company. The initial terms of the Series B Shares
had no such provision; however, the Company had a contractual
obligation to provide such information during the period a
registration statement covering the underlying common stock was in
effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE TO
APPROVE THE AMENDED ARTICLES.
PROPOSAL TO AMEND THE COMPANY'S NON-QUALIFIED STOCK OPTION
PLAN ("NSOP") AND THE INCENTIVE STOCK OPTION PLAN ("ISOP")
At the meeting, shareholders will be asked to consider and vote
upon proposals to amend the NSOP and ISOP (jointly referred to
herein as the "Plans") to increase the number of shares of common
stock reserved for issuance under the Plans.
The Company has used, and intends to continue to use stock
options as an important incentive device to motivate and reward its
officers, directors, consultants and employees. The Company
believes that the potential represented by the stock options
enhance the Company's ability to attract and retain such persons.
The Company also intends to use stock options available under
the NSOP to compensate Mr. Bard if required to do so under the
terms of his employment contract. (See COMPANY MANAGEMENT--Employment
Contracts.) If the amendment to the NSOP is not approved by the shareholders,
the board of directors proposes to issue options to Mr. Bard under the ISOP, if
required to do so under the terms of his employment contract.
NSOP
The board of directors proposes to amend the NSOP to increase
the number of shares authorized under the NSOP from 650,000 shares
to 2,000,000 shares of common stock. As of March 31, 1996, options
to purchase 750,001 shares of common stock have been issued under
the NSOP. This amount includes the March 19, 1996, grant to Mr.
Bard of an option to purchase 300,000 shares of common stock,
pursuant to his employment agreement. Such grant was conditioned
on the shareholders' approval of the amendment to the NSOP.
The NSOP provides for the granting of non-qualified stock
options to acquire common stock of the Company. The terms and
conditions of individual options may vary, subject to the following
guidelines: (i) options may be granted to the Company's employee,
directors, officers, consultants or advisers, provided that bona
fide services are be rendered by consultants or advisers and such
19
<PAGE>
services are not be in connection with the offer or sale of
securities in a capital-raising transaction; (ii) the option price
of the option cannot be less than the par value of the Company's
common stock; and (iii) the term of the option may not exceed 10
years from the date of the grant thereof.
The NSOP is not intended to qualify as an incentive stock option
plan within the meaning of Section 422 of the Internal Revenue
Code, as amended (the "Code"). An optionee who exercises a non-qualified option
will, at the time of exercise, recognize as taxable ordinary income an amount
equal to the excess of fair market value of the shares on the date of exercise
over the exercise price. Such amount ordinarily will be deductible by the
Company in the same year, provided the Company satisfies certain federal income
tax information reporting requirements.
ISOP
The board of directors proposes to amend the ISOP to increase
the number of shares authorized under the ISOP from 1,400,000 to
2,000,000 shares of common stock. As of March 31, 1996, options to
purchase a total of 811,400 shares of common stock had been issued
under the ISOP.
The ISOP provides for the granting of options which are intended
to qualify as "incentive stock options" within the meaning of
Section 422 of the Code. The terms and conditions of the
individual options may vary, subject to the following guidelines:
(i) options may be granted only to persons who are employees of the
Company or its subsidiaries and only in connection with such
person's employment; (ii) the option price cannot be less than 100%
of the fair market value of the Company's common stock at the time
of granting the option; and (iii) the term of the option may not
exceed 10 years from the date of the grant thereof. However, if
the optionee, at the time of the option, owns 10% or more of the
voting stock, the purchase price of the option cannot be less than
110% of the fair market value of the stock at the time of the grant
and the maximum period for exercising the option cannot exceed five
years from the date of the grant.
Provided an optionee does not make a disposition of the shares
acquired pursuant to an exercise of an incentive stock option until
after a date which is both one year after the transfer of shares to
such optionee and two years after the grant of the option, such
optionee will realize no taxable income as a result of the grant or
exercise of such option. Upon any disposition of such shares, any
gain or loss realized will be treated as a long-term capital gain
or loss. The optionee, however, will recognize the spread between
the fair market value of the common stock at exercise, and the
exercise price, as an item of adjustment for alternative minimum
tax purposes. The Company will not be entitled to a deduction for
federal income tax purposes with respect to the issuance of such
20
<PAGE>
incentive stock options, the transfer of shares upon their exercise
or the ultimate disposition of such shares.
If shares subject to incentive stock options are disposed of
prior to the expiration of the above time periods, the optionee
will recognize as ordinary income in the year in which the
disqualifying disposition occurs, the amount of which will
generally be the lesser of (i) the excess of the market value of
the shares on the date of exercise over the exercise price and (ii)
the gain recognized on such disposition. Such amount will
ordinarily be deductible by the Company for federal income tax
purposes in the same year, provided the Company satisfies certain
federal income tax information reporting requirements. In
addition, the excess, if any, of the amount realized on a
disqualifying disposition over the market value of the shares on
the date of exercise will be treated as a capital gain.
Administration; Amendments
The Plans are administered by the Compensation Committee of the
board of directors. The Compensation Committee's authority
includes the authority to select persons to whom options are
granted, establish the number of shares subject to the grant,
determine the time and conditions subject to which the options may
be exercised, determine the form of consideration that may be used
to purchase shares of common stock upon exercise of any option,
accelerate the time when outstanding options may be exercised, and
interpret the Plans and decide on any matters arising thereunder.
The board of directors may alter, suspend or discontinue the
Plans, but, without shareholder approval, may not make any
alteration or amendment which (a) abolishes the Committee, changes
the qualifications of its members or withdraws the administration
of the Plans from its supervision, (b) makes any material change in
the class of eligible persons, (c) increases the total number of
shares reserved for purposes of the Plans, (d) increases the total
number of shares for which an option or options may be granted to
any one employee, (e) extends the Plans or the maximum option
period, (f) decreases the minimum option price, or (g) materially
increases the benefits accruing to persons participating in the
Plans.
Options Issued Under the Plans
The following table sets forth, as of March 31, 1996, the number
of shares of common stock underlying options granted to the
Company's executive officers, directors, executive officers as a
group, all non-executive officer directors as a group, and all non-executive
employees, including officers who are not executive officers, as a group:
21
<PAGE>
Number of Shares Number of Shares
Underlying Options Underlying Options
Name and Position Granted Under the ISOP Granted Under the NSOP
- ----------------- ---------------------- ----------------------
Richard H. Bard 300,000 400,0001
CEO and President
Mark Bar 0 103,334
Director
Yoram Curiel 190,000 0
Director, Director of Technology
Edward Dietrich 70,000 0
Vice President
Catherine M. Gotwalt 12,000 0
Secretary
Martin T. Hart 0 25,000
Director
J. R. Holland, Jr. 0 0
Director
Richard D. Lamm 0 25,000
Director
Gerald A. Melfi 25,000 0
Chief Accounting Officer
and Treasurer
Bruce I. Raben 0 35,000
Director
John J. Tipton 0 100,000
Director
Mark T. Turnage 0 70,000
Managing Director of
OpSec UK
Executive Officers 667,000 400,000
(as a group)
All current directors 0 288,334
who are not executive
officers (as a group)
Non-executive employees, 144,400 5,000
including all current
officers who are not
executive officers (as a group)
/1/ Assumes the amendment to the NSOP is approved by the shareholders.
22
<PAGE>
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-KSB for the year ended
March 31, 1996, will be sent to any shareholder of the Company upon
request. Requests for a copy of this report should be addressed to
the secretary of the Company at the address provided on the first
page of this proxy statement.
SHAREHOLDER PROPOSALS
Any shareholder proposal which may properly be included in the
proxy solicitation material for the 1997 annual meeting of
shareholders must be received by the secretary of the Company no
later than March 18, 1997.
23
<PAGE>
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.
1
<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
or treasury 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
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
3
<PAGE>
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 multi-
plied 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, certifi-
cates 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 certifi-
cates 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 corpo-
ration, 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 reclassifica-
tion, 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 deter-
mined 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 Deben-
tures, 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 corpor-
ation 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 ______ day of _____________, 1996.
OPTICAL SECURITY GROUP, INC.
By:
------------------------------
Richard H. Bard, Chief
Executive Officer and
President
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<PAGE>
OPTICAL SECURITY GROUP, INC.
ANNUAL MEETING OF SHAREHOLDERS
PROXY
(Solicited on Behalf of the Board of Directors)
The undersigned appoints Richard H. Bard or Gerald A. Melfi,
as proxies, each with the power to appoint his substitute and
authorizes them to represent and to vote as designated below all of
the shares of common stock and Series B 8% Cumulative Convertible
Exchangeable Preferred Voting Stock of Optical Security Group, Inc.
held of record by the undersigned on July 1, 1996, at the annual
meeting of shareholders to be held on August 16, 1996, or any
adjournments thereof.
1. Election of Directors:
___ For all nominees listed ____ WITHHOLD AUTHORITY
below (except as marked to vote for all
to contrary below) nominees below
Instructions: To withhold authority to vote for any nominee,
strike a line through the nominees name.
Mark Bar, Richard H. Bard, Yoram Curiel, Martin T. Hart,
Richard D. Lamm, J. R. Holland, Jr., Bruce I. Raben, John J.
Tipton.
2. To ratify the appointment of Ernst & Young, as the
Company's independent accountants, for the fiscal year
ending March 31, 1997:
____ FOR ____ AGAINST ____ ABSTAIN
3. To approve the amendment and restatement of the Articles
of Incorporation, as set forth in Exhibit A:
____ FOR ____ AGAINST ____ ABSTAIN
4. To approve the amendment to the Company's Non-Qualified
Stock Option Plan:
____ FOR ____ AGAINST ____ ABSTAIN
5. To approve the amendment to the Company's Incentive Stock
Option Plan:
____ FOR ____ AGAINST ____ ABSTAIN
6. The proxies are authorized to vote upon such other
business as may properly come before the meeting or any
and all adjournments thereof:
____ FOR ____ AGAINST ____ ABSTAIN
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<PAGE>
This Proxy, when properly executed, will be voted in the
manner directed herein by the undersigned shareholder(s). IF NO
INDICATION IS MADE, THIS PROXY WILL BE VOTED FOR 1 THROUGH 5 AND
THE PROXIES WILL VOTE ON ANY PROPOSAL UNDER 6 IN THEIR DISCRETION
AND IN THEIR BEST JUDGEMENT.
Please sign exactly as your name appears herein. When shares
are held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee, or guardian, please
give full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. If a
partnership or limited liability company, please sign in
partnership or limited liability company name by authorized person.
Dated: , 1996
------------------ -------------------------------
Signature
-------------------------------
Signature (if held jointly)
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY, USING THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO
ATTEND THE ANNUAL MEETING.
2
