<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
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material pursuant to Rule 14a-11(c) or Rule 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):
[_] No fee required
[x] 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:
common stock
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
333,333
----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$8,000,000 in cash is being paid and $1,500,000 in a promissory note
----------------------------------------------------------------------
and securities with a market value of $1,239,665.43 are being
----------------------------------------------------------------------
transferred in this acquisition
--------------------------------
4) Proposed maximum aggregate value of transactions:
$10,739,665.43
----------------------------------------------------------------------
5) Total fee paid:
$2,147.93
----------------------------------------------------------------------
[_] 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:
---------------------------------------------
2) Form, Schedule or Registration Statement No.:
---------------------------------------------
3) Filing Party:
---------------------------------------------
4) Date Filed:
---------------------------------------------
<PAGE>
OPTICAL SECURITY GROUP, INC
Suite 920
535 16th Street
Denver, Colorado 80202
(303) 534-4500
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD OCTOBER 11, 1999
To the Shareholders:
The annual meeting of the shareholders of Optical Security Group, Inc. (the
"Company") will be held at the offices of Optical Security Group, Inc., Suite
920, 535 16th Street, Denver, Colorado 80202 on October 11, 1999, at 10:00 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 LLP as the Company's independent
accountants for the fiscal year ending March 31, 2000.
(3) To consider and vote upon a proposal to approve the issuance of (a) 7,500
shares of Series C Convertible Preferred Stock (the "Series C Shares") and
warrants (the "Warrants") exercisable for a number of shares equal to the
number of shares of Common Stock issuable upon conversion of the Series C
Shares (at the initial conversion rate and initial exercise price, a right
to acquire 3 million shares of Common Stock), the proceeds of which will be
used to fund, in part, the Company's acquisition of 100% of the stock of
Bridgestone Technologies, Inc. and 19.9% of the membership interests of
each of Label Systems Acquisition, LLC and Keystone Imaging Technologies,
LLC; (b) the issuance of 333,333 shares of Common Stock, as payment of part
of the purchase price in the acquisition; and (c) the issuance of warrants
(the "Finder's Warrant") to purchase 87,486 shares of Common Stock, as
payment of a finder's fee in connection with the acquisition (collectively,
the "Securities").
(4) To transact such other business as may properly come before the meeting.
The board of directors has fixed the close of business on September 23, 1999,
as the record date for the determination of shareholders entitled to notice of
and to vote at the meeting.
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 card 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 returned a proxy.
OPTICAL SECURITY GROUP, INC.
September ___, 1999 By:__________________________
Julie A. Holland, Secretary
<PAGE>
THE ANNUAL REPORT TO SHAREHOLDERS INCLUDING FINANCIAL STATEMENTS ARE BEING
MAILED TO SHAREHOLDERS TOGETHER WITH THESE PROXY MATERIALS ON OR ABOUT SEPTEMBER
29, 1999.
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 PROMPTLY.
2
<PAGE>
OPTICAL SECURITY GROUP, INC.
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 Monday, October 11, 1999, at 10:00 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 at the offices of the Company, Suite 920, 535 16th 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 September 23, 1999, 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 fiscal year ended March 31, 1999,
are being mailed to shareholders of record on or about September 29, 1999.
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 judgment pursuant to discretionary authority granted in the
Proxies.
As of September 14, 1999, the Company had outstanding 6,185,514 shares of
common stock, par value $.005 per share (the "Common Stock") and 1,793 shares
of Series B 8% Cumulative Convertible Exchangeable Preferred Voting Stock, par
value $.01 per share (the "Series B Shares"). The holders of the Common Stock
are entitled to one vote for each share of Common Stock held by them. The
holders of the Series B Shares are entitled to 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 holders of the Series B Shares have the right to vote on
all matters in like manner as holders of the Common Stock. Jointly, the holders
of the Common Stock and the Series B Shares are entitled to a total of 6,484,347
votes (the Common Stock together with the Series B Shares, hereinafter referred
to as the "Voting Stock").
<PAGE>
The presence in person or by proxy of the holders of the Voting Stock
representing a majority of the Voting Stock will constitute a quorum.
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.
Forward Looking Statement
-------------------------
The financial information and other comments included in this Proxy Statement
contain "forward-looking" statements. Risks and uncertainties could cause the
Company's actual results to differ materially from the anticipated results
dicussed herein. These forward-looking statements include information and
projections concerning future results of the Company, and statements using words
such as "believes," "expects," "proposes," "plans," "intends," or similar
expressions. Factors that might cause such a difference include, but are not
limited to, the failure to sucessfully integrate Bridgestone (as difined below)
into the Company following the acquisition, thus not achieving the expected
synergies and other benefits that the Company hopes to achieve in the
acquisition, management's ability to manage and support the operations of the
Company following the acquisition, the timing and size of future acquisitions,
if any, changes in demand for the Company's products and services, market
acceptance of the Company's new product and services mix after the acquisition,
changes in the level of operating expenes, national or global economic
disruption related to Y2K, competitive conditions, and product supply. You are
cautioned not to place undue reliance on the forward-looking statements made
herein.
ELECTION OF DIRECTORS
The following table sets forth the name, age, and position with the Company
for each nominee for director:
Name Age Position with the Company
---- --- -------------------------
Richard H. Bard 51 Chairman of the Board, and Chief Executive Officer
Yash P. Gupta 46 Director
Martin T. Hart 63 Director
J. R. Holland, Jr. 55 Director
Richard D. Lamm 64 Director
Bruce I. Raben 46 Director
Mark T. Turnage 39 Director, President, and Chief Operating Officer
Richard H. Bard has been a director and chief executive officer of the Company
since September 1993. He was elected chairman of the board in April 1994. Mr.
Bard served as president from April 1994 to July 1997, and treasurer from
September 1993 to December 1994. Mr. Bard is also the chief executive officer
of Bard & Co., Inc., a diversified investment management company, and the
Chairman of iMPACT Creative Technologies, Inc., the purchaser of the Company's
lenticular printing business. From 1989 to 1991, Mr. Bard was vice-chairman of
ComputerLand Corporation and chief executive officer of ComputerLand
International, Inc (since merged with Inacom Corporation). From 1986 to 1988,
Mr. Bard was chairman and chief executive officer of Coast America Corporation,
the franchisor of Coast-to-Coast Hardware stores (since merged with TrueValue).
From 1978 to 1986, Mr. Bard was the president and chief operating officer of
FoxMeyer Corporation, a large pharmaceutical distributor and franchisor of drug
stores (since merged with McKesson Corporation). Mr. Bard is also a director of
Inacom Corporation.
2
<PAGE>
Yash P. Gupta was appointed to the board of directors on November 24, 1998. He
was also appointed to serve on the Audit Committee. From 1992 until August,
1999, Mr. Gupta served as dean and professor of management at the University of
Colorado at Denver, College of Business and Administration. In August, 1999, Mr.
Gupta became the dean of the Business School at the University of Washington.
Martin T. Hart has been a director since December 1993. He serves as the
chairman of the Compensation Committee, and as a member of the Audit and
Nominating Committees. Mr. Hart has been a Denver-based businessman and
investor for more than twenty-five years. He is also a director of Schuler
Homes, Inc., T. Netiks, P.J. America, Inc. and Ardent Software, Inc., and a
trustee of MassMutual Corporate Investors and MassMutual Participation
Investors.
J. R. Holland, Jr. has been a director since July 1994 and serves as chairman of
the Audit Committee, and as a member of the Nominating Committee. Since 1991,
he has been the managing director of Hunt Capital Group, L.L.C. and president
and chief executive officer of Unity Hunt, Inc., diversified investment
companies based in Dallas, Texas. He is also a director of Placid Holding
Company, Texas Capital Bancshares, Inc., and TNP Enterprises, Inc.
Richard D. Lamm has been a director since December 1993 and serves on the
Compensation Committee. He previously served as a director from 1989 through
1992. Since 1987, Mr. Lamm has been a professor and director of the Center for
Public Policy and Contemporary Issues at the University of Denver. Mr. Lamm
served as the governor of the state of Colorado from 1975 to 1987.
Bruce I. Raben has been a director since February 1995. He serves as chairman
of the Nominating Committee and is a member of the Compensation Committee.
Since February 1996, Mr. Raben has been a managing director of CIBC Oppenheimer
Securities Corp. in Los Angeles. From March 1990 until January 1996, he served
as the executive vice president and director of corporate finance at Jefferies &
Company, Inc., an investment banking firm. He is also a director of Equity
Marketing, Inc. and Global Crossing, Ltd.
Mark T. Turnage has been president and chief operating officer of the Company
since July 1, 1997. He was appointed to the board of directors on June 26,
1998. Mr. Turnage served as managing director of OpSec International from
November 1995 to July 1997 and prior to that as vice president of the Company
from July 1994 to July 1997.
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.
3
<PAGE>
Vote Required
- -------------
Provided a quorum is present at the meeting, the seven nominees receiving the
highest number of votes cast by the holders of the Voting Stock voting as one
class will be elected directors. Unless the Proxy contains contrary
instructions, it is intended that the Proxies will be voted for the election of
the nominees listed above.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF THE VOTING STOCK VOTE
"FOR" THE SEVEN NOMINEES LISTED ABOVE.
COMPANY MANAGEMENT
Executive Officers and Significant Employees
- --------------------------------------------
The following table sets forth the name, age, and position with the Company
of executive officers (other than executive officers listed as nominees) and
significant employees as of July 31, 1999:
Name Age Position
---- --- --------
Michael Brennan 56 President, OpSec Advantage
Edward Dietrich 46 Senior Vice President Sales and
Chief Operating Officer of OpSec U.S.
Gerald A. Melfi 48 Chief Accounting Officer, Treasurer,
and Assistant Secretary
Michael Brennan has been president of OpSec Advantage since May 1998. Prior to
that, Mr. Brennan was the president of Advantage Technology, Inc., the assets of
which were acquired by the Company in May 1998.
Edward Dietrich has been president and chief operating officer of OpSec U.S.
since July 1997, and senior vice president, sales since October 1996. Mr.
Dietrich served as vice president sales of OpSec U.S. from August 1994 to
October 1996. Mr. Dietrich was employed by American Banknote Holographics, Inc.
from February 1992 until August 1994 as the director of sales and marketing.
Gerald A. Melfi has been the chief accounting officer and treasurer of the
Company since 1993. Mr. Melfi also is employed as the chief financial officer
for Bard and Co., Inc., a diversified investment management company.
4
<PAGE>
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. Directors of the Company serve
in such capacity until the next annual meeting of the shareholders. The board
of directors met three times during the fiscal year ended March 31, 1999.
Except for Messrs. Hart and Lamm who each missed one meeting, each incumbent
director attended all of the board of directors' meetings.
The Company had a Compensation, Audit, and Nominating Committee during the
year ended March 31, 1999. Committee members are appointed to serve until the
next annual meeting of directors or until their successors are duly appointed.
The following table sets forth the names of the committee members as of July 31,
1999, and their terms on the committee.
Audit Committee Term
--------------- ----
J. R. Holland, Jr., Chairman Since December 15, 1994
Martin T. Hart Since December 15, 1994
Yash P. Gupta Since November 24, 1998
Compensation Committee Term
---------------------- ----
Martin T. Hart, Chairman Since December 15, 1994
Bruce Raben Since November 28, 1995
Richard D. Lamm Since November 24, 1998
Nominating Committee Term
-------------------- ----
Bruce Raben, Chairman Since October 23, 1996
Martin T. Hart Since October 23, 1996
J. R. Holland, Jr. Since October 23, 1996
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 twice during the fiscal year ended
March 31, 1999. Except for Mr. Lamm who missed one meeting, each committee
member attended all of the meetings.
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, makes recommendations upon completion of the audit, reviews the scope
and results of the Company's procedures for internal auditing, and reviews the
independence of the independent auditors. The Audit Committee met once during
the fiscal year ended March 31, 1999. All of the committee
5
<PAGE>
members attended the meeting.
The Nominating Committee met twice during the fiscal year ended March 31,
1999. All of the committee members attended the meeting. The nomination
committee selects the nominees for election to the board of directors at the
annual meeting of shareholders. The nominating committee will consider
recommendations for nominations from the shareholders. Recommendations for
nominations should be addressed to the Company, Attn: Nominating Committee, at
the address provided on the first page of this Proxy Statement and must be
received by the Company no later than May 31, 2000.
During the year ended March 31, 1999, 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
executive officers. The Company's officers serve at the discretion of the
Company's board of directors.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The Company believes that during the fiscal year ended March 31, 1999, its
directors, officers and greater than 10% beneficial owners complied with all
filing requirements under Section 16(a) of the Exchange Act.
6
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Executive Compensation
- ----------------------
The following table sets forth in summary form the compensation received during
each of the Company's last three completed fiscal years by the chief executive
officer of the Company and each of the Company's other executive officers (two
officers) whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers").
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------- Compensation
Awards
------------
Securities
Name and Underlying All Other
Principal Position Year Salary Options Compensation
- ------------------ ---- -------- ---------- ------------
<S> <C> <C> <C> <C>
Richard H. Bard 1999 $193,750 107,000 $ 1,250(1)
Chief Executive 1998 $175,000 50,000 --
Officer 1997 $150,000 342,878 --
Mark T. Turnage 1999 $148,333 50,000 $ 1,093(1)
President and 1998 $120,505 50,000 $11,519(2)
Chief Operating 1997 $ 77,600 80,000 $41,984(2)
Officer
Edward Dietrich 1999 $142,500 -- $36,667(3)
President and Chief 1998 $111,667 50,000 --
Operating Officer 1997 $ 80,625 50,000 --
OpSec U.S.; Sr.VP
Sales
</TABLE>
_______________________
(1) Matching amount paid by the Company under its 401(k) Plan, since January 1,
1999, the Plan's effective date.
(2) Fiscal 1998 and Fiscal 1997 housing allowance paid on behalf of Mr. Turnage
relating to his overseas assignment in the United Kingdom.
(3) Includes matching amount paid by the Company under its 401(k) Plan and
moving expenses paid by the Company in connection with Mr. Dietrich's
relocation to Maryland.
7
<PAGE>
Stock Options
- -------------
The following table sets forth information concerning stock options granted
during the fiscal year ended March 31, 1999, to the Named Executive Officers.
Each option represents the right to purchase one share of the Company's Common
Stock.
Options Granted in Last Fiscal Year
Individual Grants
% of Total
# Securities Options Granted
Underlying To Employees in Exercise Expiration
Name (1) Options Fiscal Year Price Date
- ---- ------------ --------------- -------- ---------------
Richard H. Bard 107,000 (2) 49% $6.00 August 31, 2003
Mark T. Turnage 50,000 (3) 23% $6.00 June 25, 2003
_______________________________________
(1) No stock options were granted to Mr. Dietrich.
(2) Issued under the Company's Nonqualified Stock Option Plan, pursuant to the
terms of his employment agreement to maintain his beneficial ownership.
(3) Issued under the Company's Incentive Stock Option Plan. Vesting ratably
over four years beginning June 16, 1999.
8
<PAGE>
Aggregated Option/Exercises in Last Fiscal Year
And Fiscal Year End Option/Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Exercised Unexercisable Unexercisable(1)
- ----------------- ---------------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Richard H. Bard 100,000 $427,500 1,092,878/0 $475,000/$0
Mark T. Turnage - - 122,500/127,500 $ 59,300/$0
Edward Dietrich - - 107,500/62,500 $ 59,300/$0
</TABLE>
_______________
(1) Market value of underlying securities based on the average of the high and
low bid of the Company's Common Stock on March 31, 1999, on NASDAQ of $5.50
per share minus the exercise price.
Long-Term Incentive Plans - Awards in Last Fiscal Year
- ------------------------------------------------------
There were no awards made to any Named Executive Officer under any long-
term incentive plans.
Employee Pension, Profit Sharing or Other Retirement Plans
- ----------------------------------------------------------
Effective January 1, 1999, the Company established a defined contribution
plan (the "401(k) Plan") that qualifies as a cash or deferred profit sharing
plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). Under the 401(k) Plan, participating employees may defer
from 1% to 15% of their pre-tax compensation, subject to the maximum allowed
under the Code. The Company will contribute $.50 for each dollar contributed by
the employee, up to a maximum contribution of 2% of the employee's defined
compensation.
Except for the 401(k) Plan, the Company does not have a defined benefit,
pension plan, profit sharing or other retirement plan.
9
<PAGE>
Compensation of Directors
- -------------------------
Standard Arrangements. Each director who is not an employee of the Company
---------------------
("an Outside Director"), upon election or re-election to the board of directors
at an annual meeting of the shareholders, is entitled to a grant of stock
options under the Company's Nonqualified Stock Option Plan to purchase 5,000
shares of Common Stock. The exercise price of the option shares is the greater
of $6.00 or the market price of the Common Stock on the date of the grant. The
options are immediately exercisable and expire five years from the date of the
grant. Outside Directors elected other than at the annual meeting of
shareholders are not entitled to such option grant. Outside Directors are also
eligible for discretional grants of stock options.
In addition, each Outside Director, upon election or re-election, is
entitled to receive $10,000 as compensation for services to be rendered as a
member of the board of directors. Outside Directors elected to the board of
directors, other than at the annual meeting of shareholders, are entitled to
receive a pro-rata portion of $10,000 based on the number of months remaining
until the next annual meeting of shareholders. Such amount is payable in cash,
or at the sole election of the Outside Director, in shares of Common Stock.
During the fiscal year ended March 31, 1999, Messrs. Hart and Lamm received
options to purchase 5,000 shares of Common Stock at an exercise price of $6.00
per share and $10,000 in cash for serving as directors. Mr. Raben received
options to purchase 5,000 shares of Common Stock at an exercise price of $6.00
per share and 1,667 shares of Common Stock (in lieu of $10,000 cash) for serving
as a director. Pursuant to Mr. Holland's employment arrangement with Hunt
Capital Group, L.L.C., any compensation for serving as a director must be paid
to Hunt. Therefore, in lieu of payment to Mr. Holland, $10,000 was paid to Hunt
and the options to purchase 5,000 Common Stock were issued to Hunt. Mr. Gupta,
who was appointed to the board after the annual meeting of shareholders,
received $8,110 as compensation for serving as a director.
Employment Contracts
- --------------------
Mr. Richard H. Bard, the Company's chief executive officer, is in the
fourth year of his employment contract, which expires on March 31, 2001. The
employment contract provides for a salary of $240,000 for the fourth and fifth
year of the contract, and bonuses at the discretion of the board of directors.
In addition to benefits available generally to other Company employees, Mr. Bard
is entitled to a $500 per month automobile allowance. If the Company terminates
Mr. Bard's employment agreement prior to the expiration of the contract, Mr.
Bard is entitled to a buy-out at 150% of the value of the contract at the time
of the termination. Effective May 14, 1999, Mr. Bard's employment agreement was
amended to delete the provision in his contract which entitled him to grants of
stock options in an amount sufficient to maintain his beneficial ownership of
the Common Stock as of December 31, 1995. In addition, the terms of the stock
bonus payable to Mr. Bard were amended to provide that Mr. Bard is entitled to a
bonus of 500,000 shares of Common Stock, if the Company is sold or merged prior
to March 31, 2006. Previously, Mr. Bard was entitled to a stock bonus of
250,000 shares of Common Stock, if the Company was sold or merged into another
company prior to March 31, 2003.
10
<PAGE>
No other executive officers have written employment contracts with the
Company or any termination or change of control benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the Compensation Committee members are employees or former
employees of the Company, and no executive officers of the Company participated
in deliberations of the Company's Compensation Committee concerning executive
officer compensation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following outlines certain relationships and related transactions
during the fiscal years ended March 31, 1998, and March 31, 1999.
Mr. Bard, the Company's chairman and chief executive officer, is a
director, officer, and a majority shareholder of iMPACT Creative Technologies,
Inc., which purchased the assets of the Company's lenticular printing business
on March 31, 1999. The purchase price for such assets was $857,313.00, subject
to certain adjustments following closing, and a five-year continuing royalty,
with minimum annual payments of $250,000.00. Additionally, if the business is
sold within seven years, the Company is entitled to 19% of the gross sales
proceeds, subject to certain adjustments.
The Company leases its Denver office spaces from 16th & Welton Investment,
Inc., a corporation owned by Mr. Bard and members of his immediate family. In
the fiscal years ended March 31, 1998, and March 31, 1999, the Company paid a
total of $88,142 and $96,377, respectively, under such leases. Unless renewed
or extended, the leases expire in 2000.
Mr. Michael Brennan, the president of OpSec Advantage, is an officer and
shareholder of Advantage Technology, Inc., the assets of which were acquired by
the Company in May 1998, in exchange for the Company's promissory note in the
amount of $2,000,000, which note was subsequently paid in full, the issuance of
300,000 shares of Common Stock, and the assumption of approximately $500,000 of
Advantage Technology's liabilities. In June 1999, pursuant to the stock
adjustment provisions in the purchase agreement, an additional 64,897 shares of
Common Stock were issued to Advantage Technology.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management.
- --------------------------------------------------------------
The following table sets forth, as of September 14, 1999, the number of and
percentage of outstanding shares of the Company's Common Stock, beneficially
owned by (a) all directors and nominees, naming them, (b) the Named Executive
Officers, (c) the directors and executive
11
<PAGE>
officers of the Company as a group, without naming them, and (d) persons or
groups known by the Company to own beneficially 5% or more of the Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- ---------------------------- ------------------------ -------- --------
<S> <C> <C> <C>
Advantage Technology, Inc. 364,897 Common 5.90
676 Patriot Lane
Lancaster, PA 17601
Richard H. Bard 1,945,341(1) Common 26.26
535 16th Street, Suite 920
Denver, CO 80202
Edward Dietrich 108,735(2) Common 1.73
535 16th Street, Suite 920
Denver, CO 80206
Yash P. Gupta 5,000(3) Common .08
Office of the Dean
University of Washington
Business School
Box 353200
124 MacKenzie Hall
Seattle, WA 98195-3200
Martin T. Hart 247,148(4) Common 3.96
875 Race Street
Denver, CO 80206
J.R. Holland, Jr. -0-(5) Common --
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
Hunt Capital Group, L.L.C. 858,929(5)(6) Common 13.16
4000 Thanksgiving Tower
1601 Elm Street
Dallas, TX 75201
Richard D. Lamm 63,879(7) Common 1.03
c/o University of Denver
2050 East Iliff, #224
Denver, CO 80208
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Title Percent
Beneficial Owner Beneficial Ownership of Class of Class
- ---------------------------- ------------------------ -------- --------
<S> <C> <C> <C>
Massachusetts Mutual Life 625,000(8) Common 9.90
Insurance Company
MassMutual High Yield
Partners Ltd.
MassMutual Corporate
Value Partners Limited
1295 State Street
Springfield, MA 01111
Gudrun Pasternak/ 466,668(9) Common 7.54
Hans M. Andresen
Halskestrasse 3-5
47877 Willich
Germany
Philena Enterprises, Inc./ 403,635(10) Common 6.52
Mark Bar
P. O. Box 6246
Denver, CO 80206
Bruce I. Raben 68,840(11) Common 1.10
Suite 2340
1999 Avenue of the Stars
Los Angeles, CA 90067
Mark T. Turnage 128,673(12) Common 2.04
535 16th Street, #920
Denver, CO 80202
All executive officers 3,834,479(13) Common 47.11
and directors as a group
</TABLE>
(10 persons)
_______________________
(1) Includes 20,000 shares held in an individual retirement account, and
150,000 shares held as custodian for a family member. In addition,
includes the right to acquire, currently or within 60 days, 1,222,878
shares of Common Stock.
(2) Includes the right to acquire, currently or within 60 days, 107,500 shares
of Common Stock.
(3) Includes the right to acquire, currently or within 60 days, 5,000 shares of
Common Stock.
13
<PAGE>
(4) Includes the right to acquire, currently or within 60 days, 59,000 shares
of Common Stock.
(5) Mr. Holland is the manager and president of Hunt. By virtue of his
position with Hunt, Mr. Holland is entitled to vote or direct the vote of
the shares held by Hunt. Pursuant to the Exchange Act, because he is able
to direct the vote of the shares held by Hunt, Mr. Holland is deemed to be
the beneficial owner of the shares held by Hunt. Mr. Holland has no
ownership interest in Hunt.
(6) Includes the right to acquire, currently or within 60 days, 340,000 shares
of Common Stock.
(7) Includes 1,401 shares held as trustee for family members and 35,000 shares
held by his spouse. In addition, includes the right to acquire, currently
or within 60 days, 6,538 shares of Common Stock.
(8) Includes the right to acquire, currently or within 60 days, 125,000 shares
of Common Stock.
(9) Gudrun Pasternak and Hans M. Andresen are husband and wife and each own
233,334 shares of Common Stock. Ms. Pasternak disclaims beneficial
ownership of the shares held by Ms. Andresen. Mr. Andresen disclaims
beneficial ownership of the shares held by Ms. Pasternak.
(10) Mr. Mark Bar is the president of Philena Enterprises, Inc. and, for
purposes of calculating the percentage of beneficial owner, the shares held
by Philena Enterprises, Inc., Mr. Bar, and Mr. Bar's spouse have been
aggregated.
(11) Includes the right to acquire, currently or within 60 days, 55,000 shares
of Common Stock.
(12) Includes 6,173 shares held as trustee for family members, and the right to
acquire, currently or within 60 days, 122,500 shares of Common Stock.
(13) Includes the right to acquire, currently or within 60 days, 1,953,416
shares of Common Stock.
14
<PAGE>
PROPOSAL 2: TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP
AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
The board of directors has selected Ernst & Young LLP, independent
certified public accountants, to audit the books and records of the Company for
its fiscal year ending March 31, 2000. A representative of Ernst & Young LLP is
not expected to be present at the shareholders meeting.
Vote Required
- -------------
Provided a quorum is present at the meeting, the affirmative vote of a
majority of holders of the Voting Stock represented at the meeting is required
to approve proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO RATIFY THE
APPOINTMENT OF ERNST & YOUNG LLP.
PROPOSAL 3: TO APPROVE THE ISSUANCE OF THE SECURITIES
The Company is seeking approval of the issuance of (a) 7,500 shares of
Series C Convertible Preferred Stock (the "Series C Shares") and warrants (the
"Warrants") exercisable for a number of shares equal to the number of shares of
Common Stock issuable upon conversion of the Series C Shares (at the initial
conversion rate and initial exercise price, a right to acquire 3 million shares
of Common Stock), the proceeds of which will be used to fund, in part, the
Acquisition, as defined below; (b) the issuance of 333,333 shares of Common
Stock, as payment of part of the purchase price in the Acquisition; and (c) the
issuance of warrants (the "Finder's Warrant") to purchase 87,486 shares of
Common Stock, as payment of a finder's fee in connection with the Acquisition
(collectively, the "Securities").
Purpose of the Issuance of the Securities.
- -----------------------------------------
Subject to shareholder approval, the Company proposes to issue the
Series C Shares and Warrants to certain institutional investors for a total
purchase price of $7.5 million. The Company intends to use the proceeds to
fund, in part, the purchase price for the Acquisition described below. Subject
to shareholder approval, the Company intends to issue 333,333 shares of Common
Stock, subject to adjustment as described below, as payment of part of the
purchase price in the Acquisition. The parties to the Acquisition have valued
the shares of Common Stock at $6.00 per share for purposes of the Acquisition.
Description of the Series C Shares.
- ----------------------------------
If proposal 3 is approved, the Company intends to amend its Amended
and Restated Articles of Incorporation to designate 7,500 shares of its
preferred stock as Series C Shares. The proposed material terms of the Series C
Shares are as follows:
15
<PAGE>
Rank.
- ----
The Series C Shares will rank pari passu with the previously issued
Series B Shares and will rank senior in all respects to all other equity
securities of the Company.
Dividends.
- ---------
The holders of the Series C Shares will be entitled to receive cash
dividends for each whole share of common stock issuable upon conversion, an
amount equal to the equivalent per share dividend declared on the Common Stock,
when and as declared by the board of directors.
Voting Rights.
- -------------
The holders of the Series C Shares will be entitled to one vote for
each whole share of Common Stock issuable upon conversion of their Series C
Shares. The holders of Series C Shares will have the right to vote on all
matters in like manner as holders of the Common Stock. The holders of the
Series C Shares also will be entitled to vote separately, as a class, on certain
matters as provided by Colorado law.
Conversion Right.
- ----------------
The holders of the Series C Shares will have the right to convert
their Series C Shares, valued at $1,000 per share, in whole or in part, at any
time, into shares of Common Stock of the Company at a conversion price of $5.00
per share of Common Stock (the "Conversion Price"). The Conversion Price is
subject to adjustment upon the occurrence of any of the following events: (1)
any subdivisions, combinations, or reclassifications of the Common Stock; (2)
any payment, issuance, or distribution by the Company to its shareholders of (a)
a stock dividend, (b) debt securities of the Company, or (c) assets (other than
cash dividends payable out of earnings or retained earnings in the ordinary
course of business); or (3) the Company's issuance of Common Stock, warrants,
rights to purchase Common Stock, or securities convertible into Common Stock
(except for shares subject to stock options under or reserved for option grants
under the Company's existing plans as currently approved) for a consideration
per share which is less than the then applicable Conversion Price. Such an
event is hereinafter referred to as a "Diluting Issuance." The Conversion Price
as adjusted for a Diluting Issuance, hereinafter is referred to as the "Adjusted
Conversion Price."
Liquidation Rights.
- ------------------
Upon the occurrence of a Liquidation Event (as defined below), the
holders of the Series C Shares will be entitled to receive, prior and in
preference to the holders of the Common Stock and any series of preferred stock
ranking junior to the Series C Shares, an amount equal to the greater of the
following: (1) the original purchase price per share of Series C Shares then
held by such holders, plus all declared but unpaid dividends; (2) the amount
that such holders would receive if they had previously converted the Series C
Shares to Common Stock; or, (3) an annualized return equal to 12% from the date
of the purchase of the Series C Shares through the date of the Liquidation Event
(the "Liquidation Amount"). A "Liquidation Event" will include
16
<PAGE>
the following: (1) a sale of all or substantially all of the operating assets of
the Company; (2) an event that causes the Company to become insolvent; (3) an
event that takes the Company private; (4) a change of control of the Company;
and (5) a merger or other business combination involving the Company in which
shareholders of the Company (as determined immediately prior to such
transaction) cease to own stock of the surviving entity that either (a)
possesses greater than 50% of the voting power of all classes of stock of such
entity that are entitled to vote, or (b) constitutes greater than 50% of the
total equity securities in such entity.
Redemption.
- ----------
On September 30, 2004, the Company will be required to redeem all of
the outstanding Series C Shares at par value plus accrued and unpaid dividends
(the "Redemption Value"). The Company, at its option, may redeem all, but not
less than all, of the then outstanding Series C Shares by paying the Redemption
Value in cash or in shares of registered, tradable Common Stock valued at 90% of
the average of the closing price for shares of the Common Stock on the NASDAQ
stock market or any national securities exchange for the 10 trading days
immediately preceding September 30, 2004. If not sooner redeemed or converted,
at the option of the holders of the Series C Shares, the Company will be
required to redeem the Series C Shares for the Liquidation Amount upon the
occurrence of a Liquidation Event.
The Company will have the right to require the holders of the Series C
Shares to convert their Series C Shares to Common Stock, at any time after
September 30, 2001, if the Common Stock has traded at 200% of the Conversion
Price or greater for 30 consecutive days, provided that the average daily volume
exceeds 50,000 shares.
Preemptive Rights.
- -----------------
Provided the holders of the Series C Shares have not converted their
Series C Shares into Common Stock, the holders of the Series C Shares will have
the right to purchase a number of shares of future offerings of equity
securities, warrants, or securities convertible into equity securities of the
Company that will enable them to maintain their fully diluted percentage
ownership of the Company at the offering price or the price being paid by a
third party (the "Preemptive Rights"). The Preemptive Rights do not apply to
the following: (1) shares issued to employees, officers, or directors upon
approval of the board of directors; (2) shares issued in connection with mergers
or acquisitions; or (3) shares issued in amounts less than $500,000 in any
single transaction where the purchase price of the shares is not less than the
Conversion Price or Adjusted Conversion Price, provided that the aggregate
amount of all such transactions does not exceed $1,000,000.
Restrictive Covenants.
- ---------------------
The Company will not be permitted, without the consent of the holders
of a majority of the Series C Shares to: (a) issue any class or series of equity
or equity-linked security in pari passu to the Series C Shares as to payment of
dividends or payment on liquidation or winding up of the Company; (b) enter into
any agreement which would restrict the Company's right to perform under the
purchase agreement pursuant to which the Series C Shares were issued; (c)
17
<PAGE>
incur debt or encumber its assets above the greater of (i) $15,000,000 or (ii)
3.5 times the latest 12-month adjusted EBITDA, (d) amend the Company's charter
or bylaws in any manner which would impair or reduce the rights of the Series C
Shares; (e) effect a merger or consolidation where the Company is not the
surviving corporation in such merger or consolidation or sell substantially all
of the assets of the Company; (f) liquidate or dissolve; (g) go private; (h)
redeem or repurchase any outstanding stock; or (i) enter into any other line of
business other than a business substantially similar or related to its existing
business. In the event the Company does not gain the consent of the holders of a
majority of the Series C Shares to effect a merger or consolidation where the
Company is not the surviving corporation from such merger or consolidation, the
Company will nevertheless have the right to engage in such transaction if it
purchases the Series C Shares by paying an amount equal to the greater of (a)
double the original purchase price per Series C Share then held by such holders,
plus all declared but unpaid dividends or (b) an annualized return equal to 25%
from the date of purchase through the date of such event.
Information Rights.
- ------------------
So long as the Series C Shares are outstanding, the Company will be
required to furnish to the holders (a) monthly financial statements discussing
the revenues and operations of the Company; (b) all publicly available financial
and news information prepared by the Company; (c) an officer's certificate of
compliance with the restrictive covenants on a quarterly basis; (d) audited
yearly financials within 90 days of year end; (e) quarterly financials within 45
days after the end of each quarter; and (f) additional information that they may
reasonably request. The Company also will be required to furnish all members of
the board of directors and the observers with (i) all management letters of
accountants; (ii) an annual budget for the following year before the prior
year's end; (iii) notification of defaults under material agreements; and (iv)
notice of material litigation.
Description of the Warrants.
- ---------------------------
The holders of the Series C Shares will also receive Warrants for a
number of shares of Common Stock equal to 100% of the number of shares of Common
Stock issuable upon conversion of their Series C Shares (currently, the right to
acquire 1,500,000 shares of Common Stock) subject to a Diluting Issuance. The
Warrants are exercisable at $3.50 per share of Common Stock subject to a
Diluting Issuance. The Warrants will expire on September 30, 2004. The
Warrants, other than those Warrants subject to the clawback, described below,
are exercisable immediately. The Warrants subject to the clawback are
exercisable only after determination of the amount of Warrants, if any, subject
to the clawback.
The holders of the Warrants will, at their option, be able to elect to
exercise the Warrants pursuant to a cashless "net" exercise in which shares of
Common Stock will be issued equal to the number of shares being exercised,
multiplied by the quotient of the difference of the market price of the Common
Stock minus the exercise price of the Shares, divided by the price of the Common
Stock. For purposes of the cashless "net" exercise, the market price of the
Common Stock will be deemed to be the average of the closing price for the
shares of Common Stock on the NASDAQ stock market or any national securities
exchange for the 10 trading days
18
<PAGE>
immediately preceding the date of the notice of the exercise of the Warrant.
Half of the Warrants will be subject to a potential "clawback"
provision under which such Warrants will be forfeited by the holders in the
event the Company achieves EBITDA (as defined below) of at least (i) $8.6
million in the fiscal year ending March 31, 2001, and (ii) a cumulative total of
$12.8 million for the fiscal years ending March 31, 2000, and March 31, 2001.
EBITDA means earnings before interest, taxes, depreciation and amortization of
the Company minus any extraordinary or non-recurring gains or income, and any
extraordinary or non-recurring losses, determined in accordance with U.S.
generally accepted accounting principles, consistently applied. EBITDA will
only include revenues from existing operations, including the operations of
Bridgestone acquired in the Acquisition, but will not include future royalty
income or other gains associated with the Company's discontinued lenticular
business. In the event the Company effects a merger or acquisition, the Company
and the holders of the warrants will attempt to agree on revised performance
targets.
Board of Directors.
- ------------------
If this proposal is approved, the Company has agreed to limit its
board of directors to eight members, a majority of which will be persons other
than employees of the Company and its subsidiaries. For so long as 50% or more
of the Series C Shares are outstanding, the institutional investors will have
the right to elect one member of the board of directors and to have another
person act as an observer to the proceedings of the board of directors.
Registration Rights.
- -------------------
The holders of the Series C Shares also will be granted registration
rights with respect to any Common Stock they hold or can receive upon conversion
of their Series C Shares. These rights will include: (1) one demand
registration on Form S-1; (2) two demand registrations on Form S-3; and, (3)
unlimited piggy back registrations. The registration rights agreement will also
include customary indemnification provisions and will provide that the Company
will pay all costs associated with such registration other than underwriting
discounts and selling commissions.
Tag-Along Rights.
- ----------------
The holders of the Series C Shares will have certain tag-along rights
in the event of material future sales of stock by certain management of the
Company.
Standstill and Breakup Fee.
- --------------------------
The Company will be required to pay a breakup fee to the proposed
purchasers of the Series C Shares in the amount of $250,000 if the issuance of
the Series C Shares and Warrants is not completed, unless it is not completed
for reasons of or based on actions by the proposed purchasers. The Company is
also required to pay the proposed purchasers' legal fees related to the issuance
of the Series C Shares and Warrants (which, without the Company's approval, will
not exceed $80,000), regardless of whether the transaction is completed.
19
<PAGE>
Finder's Warrants
- -----------------
If the Acquisition is consummated, the Company has agreed to issue the
Finder's Warrants, as partial compensation for advising and consulting services
with respect to the Acquisition. The Finder's Warrants will initially be
exercisable for 87,486 shares, at an initial exercise price of $3.77 per share.
The exercise price and the number of shares issuable under the Finder's Warrants
will be adjusted (a) if at any time prior to the full exercise of the Finder's
Warrant the Company (i) pays a dividend or makes a distribution on its shares of
Common Stock in shares of Common Stock (other than cash dividends or cash
dividends or distributions out of surplus or earnings); (ii) subdivides,
reclassifies, or recapitalizes its outstanding Common Stock into a greater
number of shares; or (iii) combines, reclassifies, or recapitalizes its
outstanding Common Stock into a smaller number of shares; (b) if the Company
issues rights, options, or warrants to all holders of its outstanding common
stock, without charge to such holders, entitling them to subscribe for or
purchase shares of Common Stock (or Common Stock equivalents or having a
conversion price per share) less than the lower of the exercise price or the
current market price of the Common Stock then in effect; or (c) in the case the
Company makes a distribution to the holders of Common Stock of assets or
evidences of its indebtedness (excluding cash dividends or distributions out of
earnings and dividends or distributions described in (a) above or Common Stock
subscription rights, options, or warrants for Common Stock or Common Stock
equivalents, excluding those referred to in (b). The Finder's Warrants will
expire ten years after the closing of the Acquisition.
Effect on Outstanding Securities and Rights.
- -------------------------------------------
The issuance of the Securities, will or may result in downward
adjustments to the conversion or exercise price of outstanding Series B Shares,
convertible debentures, and warrants previously issued by the Company. The
following table sets forth information regarding such adjustments based on
assumptions the Company deems to be reasonable under the circumstances. The
actual effect of the issuance of the Securities on the conversion or exercise
prices and the number of additional shares which such holders will actually
exercise or convert may differ, depending, among other things, upon the market
price of the Common Stock on the date of issuance of the Securities and
thereafter, and each holder's individual financial resources and investment
decision-making process.
20
<PAGE>
Conversion/Exercise Price Adjustments
<TABLE>
<CAPTION>
Current Adjusted Number of Shares Number of Shares
Conversion or Conversion or Convertible or Convertible or Exer-
Type of Security Exercise Price Exercise Price(1) Exercisable (Currently)(2) cisable (as Adjusted)(2)
- ------------------ -------------- ----------------- -------------------------- ------------------------
<S> <C> <C> <C> <C>
Series B Shares $6.00 $5.16(3) 298,833 347,480
Warrants $4.05 $3.91(3) 100,000 100,000
Warrants $6.00 $5.30(3) 125,000 125,000
Convertible
Debentures $6.50 $3.50(4) 426,154 791,429
Convertible
Debentures $6.00 $3.50(4) 83,333 142,857
</TABLE>
_________
(2) Assumes conversion or exercise in full.
(1) Includes adjustments for other issuances not previously meeting the
adjustment threshhold.
(3) To the extent the Warrants are cancelled due to the clawback, or the
Warrants or Finder's Warrants are not exercised prior to their expiration,
the conversion or exercise price will be increased by the prior adjustment
attributable to such cancelled warrants.
(4) Assumes exercise of the Warrants and that the current market price of the
shares is greater than $3.50 per share on the date the Warrants are issued.
Initially, the conversion price of the debentures will be lowered to $5.00
per share if the current market price of the Common Stock is greater than
$5.00 per share on the date the Series C Shares are issued. If the current
market price of the Common Stock on the date of issuance of the Series C
Shares and Warrants is less than $3.50 per share, no adjustment will be
required, or less than $5.00 per share, no initial adjustment will be
required.
21
<PAGE>
Vote Required.
- -------------
Provided a quorum is present at the meeting, the affirmative vote of a
majority of the holders of the Voting Stock represented in person or by proxy at
the meeting is required to approve Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF THE VOTING STOCK VOTE
"FOR" THE ISSUANCE OF THE SECURITIES.
THE PROPOSED ACQUISITION
The Company has entered into an agreement (the "Purchase Agreement") to
purchase 100% of the shares of capital stock of Bridgestone Technologies, Inc.,
a Delaware corporation ("Bridgestone") and 19.9% of the membership interests of
each of Label Systems Acquisition, LLC, a Connecticut limited liability company
("Label Systems") and Keystone Imaging Technologies, Inc., a Connecticut limited
liability company ("Keystone"); together with Label Systems, collectively, the
"LLCs"). Closing of the agreement is conditioned on the shareholders' approval
of proposal 3 and satisfaction of other conditions.
Description of Bridgestone and the LLCs.
- ---------------------------------------
Bridgestone is engaged in the business of providing security authentication
products, technology, and services for anti-counterfeiting and anti-diversion
purposes to corporate and government customers worldwide. Its products include
embossed security labels, data tracking, investigations, and compliance
monitoring services. Bridgestone was incorporated in 1995 under the name
Northern Lights Enterprises, Inc. Its name was changed to Bridgestone in 1997.
The LLCs are affiliates of Bridgestone, sharing common owners. Label
Systems is the parent of Label Systems, Inc. (the "Subsidiary") and is involved
in specialty converting and value added label products. Keystone, is a newly
formed limited liability company, which will continue to conduct the photo
polymer based authentication technologies business formerly in the research and
development at Label Systems and Bridgestone. Keystone will be capitalized at or
before closing.
There is no public trading market for the stock of Bridgestone or the
membership interests of the LLCs. The principal executive offices for
Bridgestone and the LLCs are located at 375 Howard Avenue, Bridgeport, CT 06605,
telephone (203) 366-1595.
Summary of the Purchase Agreement.
- ---------------------------------
The following is a summary of the material features of the Purchase
Agreement. This summary is qualified in its entirety by reference to the
Purchase Agreement, and certain selected exhibits thereto, copies of which are
attached as Annex A to this proxy statement and incorporated herein by
reference.
22
<PAGE>
The Purchase Agreement provides that, on satisfaction of certain conditions
including, among other things, the shareholders' approval of proposal 3 and the
Company's satisfactory completion of its due diligence, the Company will
purchase 100% of the shares of capital stock of Bridgestone, 19.9% of the
membership interests of each of Label Systems and Keystone, and existing
shareholder notes in the aggregate principal amount of $1,127,695 (the
"Acquisition") from Keystone Technologies, LLC, Kenneth P. Felis, Michael
Zubretsky, Richard Zucker, and Timothy Dolan (the "Sellers"). If all of the
conditions to the Acquisition are satisfied or waived, the closing of the
Purchase Agreement will be on October 12, 1999, effective September 30, 1999
(the "Effective Date"), unless extended by mutual agreement of the parties.
Purchase Price.
- --------------
The purchase price for the Acquisition is equal to two times "net embossed
holography revenues" of up to $9 million and 1.6 times such revenues in excess
of $9 million. "Net embossed holography revenues" means revenues derived from
existing and potential customers of Bridgestone identified by the Sellers for
the 11-month period following the Effective Date and the arithmetic average of
such revenues for the 11th , 12th, and 13th months following the Effective Date.
The purchase price will be decreased if the closing balance sheet of Bridgestone
does not reflect net tangible assets of at least $850,000 and will be increased
if the closing balance sheet of Bridgestone reflects net tangible assets in
excess of $1,050,000. Such adjustments will be made to the stock portion of the
purchase price described below.
The purchase price will be paid as follows: (a) $8 million in cash at
closing, (b) an adjustable non-negotiable promissory note in the initial
principal amount of $1.5 million, and (c) the issuance of 333,333 restricted
shares of Common Stock, as adjusted as set forth above (the "Stock"). The note
is subject to adjustment, but not below zero, retroactive to the Effective Date,
if the net embossed holography revenues are less than $6,250,000.
The Stock will be delivered to a mutually agreed upon escrow agent. The
Stock will be released to the Sellers 15 months following the closing, if net
embossed holography revenues exceed $1 million. The Stock will be returned to
the Company if net embossed holography revenues do not exceed $1 million. The
Company has guaranteed that the value of the Stock will be at least $6.00 per
share on the date 27 months after the Effective Date (the "Guaranteed Value").
If the value of the Stock is less than the Guaranteed Value, the Company will
issue additional shares of Common Stock to satisfy the difference.
The Sellers have the right to require the Company to repurchase all or a
portion of the Stock (the "Put"). The Put must be exercised between the 12
month anniversary of the closing and the 24 month anniversary of the Effective
Date. The purchase price for Stock re-transferred pursuant to the Put is 85% of
the Guaranteed Value. The Purchase Price is payable, at the election of the
Company, in cash or by re-transferring some or all of the membership interests
of Label Systems or Keystone based on a valuation formula determined by certain
revenues of Label Systems and Keystone and paying the difference, if any, in
cash. The Sellers also will be granted certain registration rights and tag-along
rights with respect to the Stock.
23
<PAGE>
The Purchase Agreement contains representations and warranties from the
Sellers relating to, among other things: (a) the due organization, valid
existence and good standing of each of Bridgestone, Label Systems, the
Subsidiary, and Keystone, and certain similar corporate matters; (b) the capital
structure of each of Bridgestone, Label Systems, the Subsidiary, and Keystone;
(c) the authorization and binding nature of Sellers' obligations; (d) conflicts
under the respective charters of Bridgestone, Label Systems, the Subsidiary, and
Keystone; (e) required consents or approvals and violations of any instruments
or law; (f) the financial statements of each of Bridgestone, Label Systems, the
Subsidiary and Keystone; (g) the condition and sufficiency of the assets held by
Bridgestone, Label Systems, the Subsidiary, and Keystone; (h) the property,
inventory, bank accounts and powers of attorney, records, employees and
consultants, litigation, intellectual property, computer systems, accounts
receivable, contracts, and insurance of each of Bridgestone, Label Systems, the
Subsidiary, and Keystone; (i) the absence of certain changes; (j) the payment of
taxes and filing of tax returns; (k) environmental and other liabilities; (l)
employment and employment practices; (m) compliance with zoning and planning
regulations; (n) employee benefit plans; (o) warranty claims; (p) finders fees;
(q) the absence of any illegal payments; and (r) the accuracy of information
supplied by the Sellers. The Sellers also made certain representations and
warranties with respect to the acquisition of the Stock, including, among other
things (a) each Seller's sophistication and investment intent; (b) public
documents of the Company having been made available to the Sellers; (c)
acknowledgment that the Stock is unregistered; (d) restrictive legend to be
placed on the certificates representing the Stock; and (e) the opportunity to
discuss the terms of the Stock and the business of the Company with members of
the Company's management.
Certain Covenants.
- -----------------
Pursuant to the Purchase Agreement, Sellers agreed to provide the Company
with access to certain information and to conduct the business of Bridgestone,
Label Systems, the Subsidiary, and Keystone in the normal course and in a manner
consistent with prudent business practices. Sellers also agreed not to solicit
or encourage any other acquisition proposals and to obtain all necessary third-
party consents to the Acquisition. The parties also agreed to use their
reasonable best efforts to consummate the transactions contemplated by the
Purchase Agreement. Bridgestone also agreed to terminate any real property
leases prior to closing.
Other Agreements.
- ----------------
The parties also agreed to enter into (a) a supply agreement pursuant to
which Bridgestone will supply Label Systems with its requirements for embossed
holographic material for use in servicing its Motorola, Inc. account after the
closing; (b) a transition services agreement whereby the Sellers will provide
Bridgestone with certain transitional services including, among other things,
the use of the Sellers' leased facilities located in Stowe, Vermont, and
Bridgeport, Connecticut, for a certain period following the closing for
training, shipping, customer and service support functions and the production at
the request of the Company of certain products; (c) Non-Competition and Cross-
Marketing Agreements to prevent certain Sellers from competing with the Company
for a period of five years; (d) Option Agreements to purchase all of the
membership interests of Label Systems and Keystone to the extent not owned
directly or indirectly by the Company; and (e) Employment Agreements between
certain Sellers
24
<PAGE>
and the Subsidiary, and between one Seller and Bridgestone after closing. The
Company will also be entitled to representation on the board of directors of the
Subsidiary and on the governing boards of Label Systems and Keystone. Initially,
Mr. Richard H. Bard, the Company's chairman and chief executive officer, will be
appointed to these positions.
The Company's option to purchase interests in Label Systems is exercisable
by the Company providing a preliminary exercise notice no later than 60 days
prior to the second anniversary of the Effective Date. The Company is then
entitled to conduct a due diligence investigation prior to issuing a final
exercise notice. If the Company issues a final exercise notice, closing of the
option exercise is to be held 90 days after the final exercise notice is sent.
The purchase price of the option is (a) the percentage of membership interests
being purchased multiplied by (b) (i) the net revenue received by Label Systems
during the 12 month period commencing on the first anniversary of the Effective
Date minus (ii) Label Systems debt as of the option exercise closing. The
Company will be obligated to pay an additional amount of purchase price equal to
the incremental revenues received by Label Systems for the 12-month period
commencing on the second anniversary of the Effective Date attributable to bona
fide prospective customers disclosed to the Company no later than the second
anniversary of the Effective Date.
The Company's option to purchase interests in Keystone is exercisable by
the Company providing a preliminary exercise notice no later than 60 days prior
to the second anniversary of the Effective Date. The Company is then entitled
to conduct a due diligence investigation prior to issuing a final exercise
notice. If the Company issues a final exercise notice, closing of the option
exercise is to be held 90 days after the final exercise notice is sent. The
purchase price of the option is (a) the percentage of membership interests being
purchased multiplied by (b) (i) two times the net revenue received by Keystone
from its Photo Polymer business during the 12 month period commencing on the
first anniversary of the Effective Date minus (ii) Keystone debt (except
ordinary course of business trade payables not past due) as of the option
exercise closing. The Company will be obligated to pay an additional amount of
purchase price equal to two times the incremental revenues received by Keystone
for the 12-month period commencing on the second anniversary of the Effective
Date attributable to bona fide prospective customers disclosed to the Company no
later than the second anniversary of the Effective Date.
Indemnification.
- ---------------
The Purchase Agreement provides that, the Sellers severally, in specified
proportions, shall defend, indemnify, and hold harmless the Company, each
director, officer, employee, or agent of the Company, its subsidiaries, and each
affiliate thereof, with respect to any loss, claim, liability, or damage
(including incidental and consequential damages), including reasonable attorneys
fees, costs, and expenses ("Damages"), arising from or in connection with (a)
any inaccuracy or breach of the representations, warranties, covenants, or
agreements made by the Sellers, Bridgestone, Label Systems, the Subsidiary, or
Keystone, contained in the Purchase Agreement, or any document delivered in
connection therewith; (b) the ownership, operation, management, or use of
Bridgestone, Label Systems, the Subsidiary, or Keystone, their businesses or
assets prior to the closing; (c) any products distributed or sold by
Bridgestone, Label Systems, the Subsidiary, or Keystone prior to the closing;
(d) the transfer to Label Systems, Inc. of any
25
<PAGE>
employee of Bridgestone; and (e) any acts or omissions of Bridgestone, Label
Systems, or the Subsidiary, or Keystone, prior to the closing or any events or
occurrences involving their assets, the operations of their business, or their
employees or former employees, taking place prior to the closing. Sellers also
agreed to indemnify the Company in connection with environmental matters.
Indemnification is not required unless the aggregate amount of Damages exceeds
$250,000 and is limited to a total of $2,000,000. These limits also apply to
claims for certain breaches of the transitional services agreement. The Company
agreed to defend, indemnify, and hold harmless each Seller, his heirs, legal
representatives, successors and assigns for any Damages arising out of or in
connection with (a) any inaccuracy or breach by the Company of any of its
representations, warranties, covenants, or agreements contained in the Purchase
Agreement or any documents delivered pursuant thereto; and (b) any acts or
omissions of Bridgestone after the effective date or occurrences involving the
assets, the operation of the business, or the employees or former employees of
Bridgestone taking place after the effective date.
Termination.
- -----------
The Purchase Agreement provides that it may be terminated and the
transactions contemplated abandoned by mutual consent of the parties, by (a)
either party if the closing has not occurred on or before October 15, 1999,
unless such failure is due to a breach of the Purchase Agreement by the party
seeking to terminate the Purchase Agreement; (b) by the Sellers if any
representations and warranties of the Company contained in the Purchase
Agreement are not true, or the Company has failed to fulfill its obligations;
and (c) by the Company if any of the representations and warranties of the
Sellers contained in the Purchase Agreement are not true or Sellers,
Bridgestone, Label Systems, or its subsidiary, or Keystone, have failed to
fulfill its obligations under the Purchase Agreement. The Company and the
Sellers have certain rights to cure under clauses (b) and (c) above.
Reasons for the Acquisition.
- ---------------------------
The board of directors of the Company believes that the Acquisition, by
combining the complementary product offerings, customer bases and other
resources of the Company and Bridgestone will position the Company to enjoy
greater growth and earnings than either company would have experienced
individually. After the Acquisition, the Company will be able to offer a
broader range of products, product features and technical solutions for its
customers which the board believes will enhance the Company's competitive
strength and increase its ability to satisfy the requirements of existing and
new customers. The board of directors also believes that the acquisition will
enable the Company to achieve efficiencies and economies of scale in product
manufacturing, sales and marketing, customer service, administration, research,
and other areas.
Company Stock Price.
- -------------------
On September 14, 1999, the day preceding the public announcement of the
proposed acquisition, the high and low bid of the Company's Common Stock on
NASDAQ was $3.813 per share and $3.625 per share, respectively.
26
<PAGE>
Accounting Treatment.
- --------------------
The Acquisition will be accounted for as a purchase. This means that the
acquired business will be entered on the Company's books at the current cost to
it and liabilities will be credited at their current values.
Material Federal Tax Consequences.
- ---------------------------------
Section 382 of the Internal Revenue Code limits the timing and annual
amount of net operating loss carry forwards of some acquired corporations which
can be used after the Acquisition. In general, use of such net operating losses
as a result of this transaction will be limited annually to an amount equal to
the value of Bridgestone at closing multiplied by an applicable percentage.
Accordingly, Bridgestone and the Company may be limited in their ability to
offset post-closing income by Bridgestone's pre-closing net operating losses, if
any. There should be no other material or unusual tax consequences to the
Company, or the Company's shareholders, as a result of the consummation of the
Acquisition.
Financial Statements of Bridgestone and Label Systems.
- -----------------------------------------------------
The audited financial statements of Bridgestone and the Subsidiary, the
only asset of Label Systems, for the fiscal years ended December 31, 1997 and
December 31, 1998, and the unaudited combined financial statements of
Bridgestone and Label Systems, as of June 30, 1999 and June 30, 1998, are set
forth in Annex B attached hereto and incorporated herein by this reference.
Pro Forma Financial Information.
- -------------------------------
The following unaudited pro forma condensed, combined financial statements
reflect adjustments to the historical consolidated balance sheets and statements
of operation of the Company and Bridgestone to give effect to the Acquisition,
using the purchase method of accounting for business combinations.
The unaudited pro forma condensed, combined statements of operations for
the year ended March 31, 1999, and for the three months ended June 30, 1999,
assume the Acquisition was effected on April 1, 1998. Bridgestone's December 31
fiscal year end financial statements have been combined with the Company's March
31 fiscal year end consolidated financial statements. Bridgestone's unaudited
financial statements for the three months ended June 30 have been combined with
the Company's unaudited consolidated financial statements for the three months
ended June 30.
The pro forma and pro forma combined adjustments are based upon available
information and certain assumptions that the Company believes are reasonable
under the circumstances. The unaudited pro forma combined condensed financial
information should be read in conjunction with the historical financial
statements of the Company and Bridgestone and the respective notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation of the Company," and "Management's Discussion and Analysis of
Financial Condition and Results of Operation of Bridgestone." The unaudited pro
forma combined
27
<PAGE>
condensed financial information is provided for information purposes only and
does not purport to be indicative of the results which would have been attained
had the Acquisition been completed on the date indicated, or which may be
expected to occur in the future.
28
<PAGE>
OPTICAL SECURITY GROUP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Optical Security Bridgestone
Group, Inc. Technologies, Inc. Pro forma
June 30, June 30, Pro forma Balance
1999 1999 Adjustments Sheet
---------------------------------------------------------- ------------
ASSETS (Note 2)
<S> <C> <C> <C> <C>
Current Assets
Cash $ 977,226 $ 91,379 $ 629,059 (a) $ 1,697,664
Accounts receivable, net 2,455,507 976,972 3,432,479
Inventory 1,369,561 745,008 2,114,569
Prepaid Exp 225,306 2,570 227,876
---------------------------------------------------------- ------------
5,027,600 1,815,929 629,059 7,472,588
Property and equipment, net 3,518,383 1,291,134 4,809,517
Other assets:
Investment in unconsolidated subsidiaries - - 2,000,000 (b) 2,000,000
Patents, net 276,765 10,908 287,673
Goodwill, net 4,316,026 - 7,116,505 (c) 11,432,531
Licenses and other intangible assets, net 399,296 1,947 (1,947) 399,296
Deposit and other assets 492,779 2,190 494,969
Net long-term assets of
discontinued operations - - 0
---------------------------------------------------------- ------------
Total Assets 14,030,849 3,122,108 9,743,617 26,896,574
========================================================== ============
LIABILITIES
Current Liabilities
Accounts payable 1,004,367 780,660 1,785,027
Accrued expenses 610,846 184,780 795,626
Current portion of capital leases 37,479 285 37,764
Current portion of long-term obligations 141,344 589,291 10,709 (d) 741,344
Net current liabilities of
discontinued operations 396,800 - 396,800
---------------------------------------------------------- ------------
2,190,836 1,555,016 10,709 3,756,561
Capital lease obligations 9,828 - 9,828
Long-term obligations 1,194,307 481,650 1,918,350 (d) 3,594,307
Convertible debentures 3,270,000 - 3,270,000
Due to shareholders - 1,037,145 (1,037,145) (e) 0
Deferred tax liability - 124,034 (124,034) (f) 0
Common stock subject to a put - - 1,700,000 (g) 1,700,000
Stockholders' equity:
Voting preferred stock 18 - 7,200,000 (h) 7,200,018
Common stock 30,603 21,000 (21,000) 30,603
Additional paid-in capital 23,859,374 - 23,859,374
Other comprehensive income 174,354 - 174,354
Accumulated deficit (16,698,471) 3,263 (3,263) (16,698,471)
Treasury stock (100,000) 100,000 0
---------------------------------------------------------- ------------
Total stockholders' equity 7,365,878 (75,737) 7,275,737 14,565,878
---------------------------------------------------------- ------------
Total liabilities and stockholders' equity $ 14,030,849 $3,122,108 $ 9,743,617 $ 26,896,574
========================================================== ============
</TABLE>
29
<PAGE>
<TABLE>
OPTICAL SECURITY GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Quarter Ended June 30, 1999
<S> <C> <C> <C> <C>
Optical Security Bridgestone Proforma
Group, Inc. Technologies, Inc. Statement
Quarter ended Quarter ended Proforma of
June 30, 1999 June 30, 1999 Adjustments Operations
--------------------------------------------------------------- ---------------
(Note 1)
Revenues $3,658,897 $1,788,120 ($900,000) (a) $4,547,017
Cost of goods sold 2,058,670 1,426,436 (1,062,316) (b) 2,422,790
---------------------------------------------------------------- --------------
Gross margin 1,600,227 361,684 162,316 2,124,227
Operating expenses:
Salaries and related costs 867,892 288,320 (218,670) (c) 937,542
Depreciation 70,994 - 70,994
Amortization 115,551 118,608 (d) 234,159
Other operating expenses 456,970 261,590 (153,740) (e) 564,820
---------------------------------------------------------------- --------------
Total operating expenses 1,511,407 549,910 (253,802) 1,807,515
---------------------------------------------------------------- --------------
Income from operations 88,820 (188,226) 416,118 316,712
Other income (expense):
Interest income 6,350 - 6,350
Interest expense (94,991) (20,063) (49,312) (f) (164,366)
Other income 134,440 - 134,440
Foreign currency gain (loss) (1,243) - (1,243)
---------------------------------------------------------------- --------------
Income before income taxes 133,376 (208,289) 366,806 291,893
Income tax (expense) benefit (g) 0
---------------------------------------------------------------- --------------
Income from continuing operations 133,376 (208,289) 366,806 291,893
Discontinued operations:
Loss from operations - - 0
Loss on disposal - - 0
----------------------------------------------------------------- --------------
Total loss from discontinued operations 0 0 0 0
----------------------------------------------------------------- --------------
Net income (loss) 133,376 (208,289) 366,806 291,893
Dividends on preferred stock 35,860 35,860
---------------------------------------------------------------- --------------
Net income (loss) applicable to common stock $97,516 ($208,289) $366,806 $256,033
================================================================ ==============
Earnings (loss) per share:
Basic: $0.02 $0.04
Diluted: $0.02 $0.03
Weighted average number of shares
outstanding:
Basic: 6,185,514 333,333 (h) 6,518,847
Diluted:
Weighted shares outstanding 6,185,514 333,333 6,518,847
Shares attributed to new preferred
shares 1,500,000 (i) 1,500,000
Shares attributed to options and
warrants 110,642 450,000 (j) 560,642
======================================= ==============
6,296,156 2,283,333 8,579,489
======================================= ==============
</TABLE>
30
<PAGE>
OPTICAL SECURITY GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
Optical Security Bridgestone Proforma
Group, Inc. Technologies, Inc. Statement
Year ended Year ended Proforma of
March 31, 1999 December 31, 1998 Adjustments Operations
----------------------------------------------------- ------------
(Note 1)
<S> <C> <C> <C> <C>
Revenues $14,172,133 $7,943,580 ($2,295,000) (a) $19,820,713
Cost of goods sold 7,919,501 5,115,806 (4,884,156) (b) 8,151,151
----------------------------------------------------- ------------
Gross margin 6,252,632 2,827,774 2,589,156 11,669,562
Operating expenses:
Salaries and related costs 2,972,955 1,351,806 (1,073,000) (c) 3,251,761
Depreciation 216,245 - 216,245
Amortization 340,083 - 474,434 (d) 814,517
Other operating expenses 1,949,361 1,452,589 (1,021,189) (e) 2,380,761
----------------------------------------------------- ------------
Total operating expenses 5,478,644 2,804,395 (1,619,755) 6,663,284
----------------------------------------------------- ------------
Income from operations 773,988 23,379 4,208,911 5,006,278
Other income (expense):
Interest income 33,447 - 33,447
Interest expense (291,563) (33,254) (244,246) (f) (569,063)
Other income 10,286 - 10,286
Foreign currency gain (loss) (8,395) - (8,395)
----------------------------------------------------- ------------
Income before income taxes 517,763 (9,875) 3,964,665 4,472,553
Income tax (expense) benefit 10,310 11,239 (g) 21,549
----------------------------------------------------- ------------
Income from continuing operations 528,073 1,364 3,964,665 4,494,102
Discontinued operations:
Loss from operations (1,648,146) - (1,648,146)
Loss on disposal (4,487,326) - (4,487,326)
----------------------------------------------------- ------------
Total loss from discontinued operations (6,135,472) 0 0 (6,135,472)
----------------------------------------------------- ------------
Net income (loss) (5,607,399) 1,364 3,964,665 (1,641,370)
Dividends on preferred stock 143,440 - 143,440
----------------------------------------------------- ------------
Net income (loss) applicable to common stock ($5,750,839) $1,364 $3,964,665 ($1,784,810)
===================================================== ============
Earnings (loss) per share:
Basic:
Continuing operations $0.06 $0.69
Discontinued operations ($1.03) ($0.98)
------------ ------------
Net income (loss) applicable to common ($0.97) ($0.28)
============ ============
Diluted:
Continuing operations $0.06 $0.52
Discontinued operations ($1.00) ($0.73)
------------ ------------
Net income (loss) applicable to common ($0.94) ($0.21)
============ ============
Weighted average number of shares outstanding:
Basic: 5,948,720 333,333 (h) 6,282,053
Diluted:
Weighted shares outstanding 5,948,720 333,333 6,282,053
Shares attributed to new preferred shares 1,500,000 (i) 1,500,000
Shares attributed to options and warrants 167,667 450,000 (j) 617,667
-------------------------------- ------------
6,116,387 2,283,333 8,399,720
================================ ============
</TABLE>
31
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. Pro forma adjustments giving effect to the Purchase in the unaudited pro
forma statements of operations reflect the following:
(a) Sales by Bridgestone to its largest customer include label printing
services provided by its affiliate, Label Systems, Inc. As agreed in
the Purchase Agreement, Label Systems will retain this customer and
Bridgestone will only provide the security portion of the product.
Bridgestone will reflect reduced sales revenue, but will benefit by
securing a higher margin on this portion of the finished product.
Gross sales to this customer were $3,095,000 and $1,216,000 for the
calendar year 1998 and the quarter ending June 30, 1999, respectively.
The revenues have been adjusted to 26% of total billing, or $800,000
and $316,000 on a pro forma basis for calendar year 1998 and the
quarter ending June 30, 1999, respectively.
(b) Effective with the purchase, the operations of Bridgestone will be
moved to an existing facility currently operated by OpSec in Parkton,
Maryland. This facility has the capacity to produce the products
previously manufactured at the Bridgestone facility upon existing
equipment, or equipment acquired as part of the purchase. Additional
staffing requirements are minimal. Some products will continue to be
made at the Bridgestone facility under a Transition Agreement for up
to four months after the sale. These products will be priced to yield
a direct margin of between 52% to 70%. On a blended basis, the direct
margin will be 59%. OpSec believes it will have equal or better
margins on the customer accounts acquired in the purchase. The
adjustment to cost of sales in the pro forma statement for the full
year and the interim period reflect the costs of products that will
yield the blended margin of 59%.
(c) Compensation and related costs for Bridgestone will be reduced
significantly after the purchase. Officer/shareholder compensation of
$600,000 and $150,000 for 1998 and the quarter ended June 30, 1999
will not continue. Other staffing requirements are minimal, as only 8
to 10 significant sales relationships are being transferred. Existing
office, accounting, and production management functions will not be
affected by the purchase and the merging of operations.
(d) Goodwill in the amount of $7.1 million on the purchase has been
reflected on the proforma balance sheet. Management has analyzed the
future benefits of the assets acquired and has arrived at a weighted
life of 15 years for the amortization period.
(e) After the purchase, Bridgestone's operations will be housed within an
existing OpSec facility. Besides savings in facilities administrative
costs, and professional fees, OpSec will also not maintain the same
level of research and development costs over and above those already
being incurred within OpSec. These costs in calendar 1998 alone for
Bridgestone were $124,084. OpSec has budgeted $431,000 for non-
compensation related costs, primarily for travel and marketing.
(f) OpSec expects to obtain a term loan from its existing banking
relationship. The amount included in this pro forma is $3.0 million,
but the combination with preferred stock could increase the term debt
to $3.5 million. The quoted interest rate at today's rates would be
9.25%. Annual interest expense for this term facility would be
$277,500. Term and revolving debt currently in Bridgestone would be
paid off upon the purchase. Interest in Bridgestone of $33,254 and
$20,063 for calendar 1998 and the quarter ended June 30, 1999,
respectively, has been eliminated upon the subsitution of the new
OpSec facility.
(g) Income tax expense has not been provided for. OpSec currently has a
net operating loss carryforward of in excess of $6 million. The 1998
pro forma statement of income is still in a loss position, and the net
income shown for the quarter ended June 30, 1999 is fully offset by
the existing net operating loss. However, the Company's ability to
utilize its net operating losses may be limited as a result of this
transaction.
32
<PAGE>
(h) Shares will be issued to the seller of Bridgestone as part of the
total consideration. The amount to be issued at closing is 333,333
shares valued at $6 per share. The number of shares is subject to
later adjustment under certain situations, which have not been
reflected here.
(i) Equity financing will supplement the bank term debt also to be used
for the purchase of Bridgestone. The proforma includes the issuance $5
preferred stock equivalent to 1,500,000 common shares. The preferred
shares would bear no dividend on an on-going basis, and are included
as a common stock equivalent. Existing preferred shares are not
currently included as common stock equivalents, and the dividend paid
quarterly adjusts net income available to common shareholders.
(j) 1,500,000 warrants will be issued to the holder of the new preferred
shares with an exercise price of $3.50 per share. The treasury method
of measuring the dilutive effect of these warrants would include
450,000 common shares in the total for diluted shares. Terms of the
warrants include the potential reduction in the total number of
exercisable warrants to 750,000 upon the achievement of a specified
EBITDA amount in future years. This potential reduction has been
ignored for purposes of these proforma statements of operations.
2. Pro forma adjustments giving effect to the Purchase in the unaudited pro
forma balance sheets reflect the following:
(a) The Company is seeking financing for this transaction from bank term
debt and the issuance of convertible preferred stock. The total
financing is expected to raise $10.5 million before costs. For
purposes of this pro forma balance sheet, the bank term debt is shown
at $3 million and the preferred stock at $7.5 million. These proceeds
will be used to pay for the purchase of Bridgestone in the esti-mated
amount of $8.5 million, including costs; the immediate payoff of
existing Bridgestone debt in the amount of $1,070,941; and, the cost
of financing of approximately $300,000. The remaining funds of
$629,059 will be utilized for working capital needs.
(b) As part of the purchase transaction, the Company will acquire a 19.9%
interest in two companies in addition to a 100% interest in
Bridgestone. Of the total purchase price, the amount of $2 million has
been assigned to these other investments.
(c) Goodwill in the amount of $7.1 million on the purchase which includes
transaction costs of $500,000 has been reflected on the proforma
balance sheet. Management has analyzed the future benefits of the
assets acquired and has arrived at a weighted life of 15 years for the
amortization period.
(d) Debt will increase $1,929,059 with the addition of the $3 million term
loan and the payoff of existing Bridgestone debt of $1,070,941.
Current debt will increase from $589,291 to $600,000, an increase of
$10,709, and long-term debt will increase $1,918,350. The Company's
note for $1.5 million of additional purchase consideration has not
been recognized as it is a contingent obligation.
(e) Existing loans owed by Bridgestone to its shareholders will be
assigned to the Company, and then be cancelled upon closing. The
effect is to increase the net asset value of Bridgestone by reducing
outstanding debt.
(f) The deferred tax liability of Bridgestone will have no effect to the
Company and has been eliminated for purposes of recording the purchase
adjustments, thereby reducing liabilities.
(g) The Company will issue 333,333 restricted shares of common stock,
subject to a put back to the Company, as part of the purchase price.
These shares will be valued at $6 per share before adjusting for a 15%
liquidity discount of $300,000. The par value at $ .005 is $1,667, and
the additional paid in capital amount is $1,698,333.
(h) The convertible preferred stock issue of $7.5 million has been reduced
to $7.2 million to reflect the estimated costs of issuance.
33
<PAGE>
Management Discussion and Analysis of Financial Condition and Results of
- ------------------------------------------------------------------------
Operation of Bridgestone.
- ------------------------
The following discussion and analysis was prepared using Bridgestone's
audited financial statements and Bridgestone's more detailed internal financial
information. In addition, certain categories that appear in Bridgestone's
audited financial statements have been reclassified for purposes of this
discussion and analysis.
Quarter Ended June 30, 1999: Revenues increased 12.53% to $1,788,120, an
- ---------------------------
increase of $199,053 over the quarter ended June 30,1998. Gross margins
decreased from 34.27% to 20.23% primarily as a result of a change in the mix of
business toward lower margin sales for printed label products, which are a
component of the final product. Sales concentration in the top three customers
was 93.12%, with the largest, a label and secure hologram customer accounting
for 68.01% of sales.
Operating expenses decreased 8.67% to $549,910, a decrease of $52,213.
Reductions in marketing expense of $74,119 and administrative expense of
$47,734, were offset by increases in compensation of $11,088, professional fees
of $30,728, and research and development costs of $12,886.
Year Ended December 31, 1998: Revenues increased.71% to $7,943,580, an increase
- ----------------------------
of $55,795. Gross margins increased from 27.36% to 35.6%. Sales concentration
in the top four customers was 82.85% of sales. The single largest customer
accounted for 38.96% of sales. Sales in the sports licensing market decreased
$515,000, offset by increases to other customers.
Operating expenses increased 42.24% to $2,837,649, an increase of $842,687.
This increase included the addition of compensation for the beneficial owners of
the company of $617,814, and increases of $118,515 in administrative expenses,
and $84,797 in research and development costs. Other wage increases of $679,148
were offset by reductions in marketing of $526,499 and $181,364 in professional
fees.
Year Ended December 31, 1997: Revenues increased 17.8% to $7,887,785, an
- ----------------------------
increase of $1,192,150. Gross margins decreased from 33.67% to 27.36% primarily
as a result of the mix of business. Sales concentration in the top four
customers was 75.51% The largest customer was 28.14% of sales.
Operating expenses increased 1.76% to $1,994,962, an increase of $34,441. No
cost categories showed any significant change.
34
<PAGE>
Liability and Capital Resources.
- -------------------------------
Quarter Ended June 30, 1999: The Company's working capital position at June 30,
- ---------------------------
1999 was $1,071,220, and its current ratio was 1.696 to 1. Included in working
capital was a cash position of $91,379. The Company's total debt decreased
$326,379 to $1,106,707 from the same quarter of the prior year.
Year Ended December 31, 1998: The Company's working capital position at
- ----------------------------
December 31, 1998 was $1,257,436 and its current ratio was 2.261 to 1. Cash
included in working capital was $22,485. Total debt decreased $807,044 over the
prior year end to $686,652.
Year Ended December 31, 1997: The Company's working capital position at
- ----------------------------
December 31, 1997 was $1,009,010, and its current ratio was 1.564 to 1. Cash
included in working capital was $369,387. Total debt increased to $1,493,696
with the addition of bank term debt.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-KSB
The Company's Annual Report on Form 10-KSB for the year ended March 31,
1999, 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 annual meeting of shareholders to be held in the
year 2000 must be received by the secretary of the Company no later than June
15, 2000.
INCORPORATION BY REFERENCE
Information regarding the Company, its audited financial statements for the
last two prior fiscal years and unaudited financial statements for the quarter
ended June 30, 1999, and the Management Discussion and Analysis of the Financial
Condition and Results of Operation of the Company are incorporated herein by
reference to the Company's 1999 Annual Report and quarterly report on Form 10-
QSB for the quarter ended June 30, 1999. Copies of the Company's 1999 Annual
Report and Form 10-QSB accompany this Proxy Statement.
35
<PAGE>
Annex A
-------
INDEX
I. Stock Purchase Agreement
II. Selected Exhibits to Stock Purchase Agreement
A. Note
B. Escrow Agreement
C. Registration Rights Agreement
E. Motorola Supply Agreement
F. Transitional Services Agreement
G-1. Non-Competition, Confidentiality and Cross-Marketing Agreement
G-2. Confidentiality and Non-Solicitation Agreement
H-1. Label Systems Option Agreement
H-2. Keystone Imaging Option Agreement
I. Zucker Employment Agreement
J. Release
<PAGE>
STOCK PURCHASE AGREEMENT
by and between
KEYSTONE TECHNOLOGIES, L.L.C.
KENNETH P. FELIS,
MICHAEL J. ZUBRETSKY,
RICHARD ZUCKER,
and
TIMOTHY DOLAN
as Sellers
and
OPTICAL SECURITY GROUP, INC.
as Buyer
September 15, 1999
<PAGE>
TABLE OF CONTENTS
1. PURCHASE AND SALE OF STOCK AND INTERESTS...... ......................... 1
----------------------------------------
2. PURCHASE PRICE AMOUNT................................................... 1
---------------------
2.1 Net Embossed Holography Revenues................................ 2
--------------------------------
2.2 Ordinary Course of Business Revenues............................ 2
------------------------------------
2.3 Audit Period.................................................... 2
------------
2.4 Calculation of Net Embossed Holography Revenues................. 2
-----------------------------------------------
2.5 Final Calculations.............................................. 2
------------------
3. PAYMENT OF PURCHASE PRICE.............................................. 2
-------------------------
3.1 Cash............................................................ 2
----
3.2 Note............................................................ 2
----
3.3 Note Adjustment................................................. 3
---------------
3.4 OpSec Stock..................................................... 3
-----------
3.5 OpSec Stock Value............................................... 3
-----------------
3.6 Sellers' Put Option............................................. 3
-------------------
3.7 Bridgestone Debt................................................ 4
----------------
3.8 [Intentionally Omitted.]........................................ 5
------------------------
3.9 Purchase Price Adjustment....................................... 5
-------------------------
3.10 Allocation of Purchase Price Among Sellers...................... 5
------------------------------------------
4. SELLERS' GENERAL REPRESENTATIONS, AND WARRANTIES........................ 5
------------------------------------------------
4.1 Bridgestone Organization; Standing.............................. 5
----------------------------------
4.2 Label Systems, LLC Organization; Standing....................... 5
-----------------------------------------
4.3 Label Systems, Inc. Organization; Standing...................... 6
------------------------------------------
4.4 Capitalization.................................................. 6
--------------
4.5 Shares and Interests............................................ 7
--------------------
4.6 Authority; Binding Obligation................................... 7
-----------------------------
4.7 No Violation.................................................... 7
------------
4.8 Licenses, Permits, and Authorizations........................... 7
-------------------------------------
4.9 Financial Statements............................................ 8
--------------------
4.10 Condition and Sufficiency of Assets............................. 8
-----------------------------------
4.11 Tangible Personal Property...................................... 9
--------------------------
4.12 Leased Property................................................. 9
---------------
4.13 Inventory....................................................... 9
---------
4.14 Bank Accounts and Powers of Attorney............................ 9
------------------------------------
4.15 Records.........................................................10
-------
4.16 Absence of Certain Changes......................................10
--------------------------
4.17 Employees and Consultants.......................................10
-------------------------
i
<PAGE>
4.18 Litigation......................................................11
----------
4.19 Contracts.......................................................11
---------
4.20 No Bankruptcy...................................................13
-------------
4.21 Tax Returns.....................................................13
-----------
4.22 Environmental Liability.........................................14
-----------------------
4.23 Compliance With Zoning and Planning Regulations.................16
-----------------------------------------------
4.24 Employment and Employment Practices.............................16
-----------------------------------
4.25 Accounts Receivable.............................................16
-------------------
4.26 Liabilities.....................................................16
-----------
4.27 Intellectual Property...........................................17
---------------------
4.28 Insurance.......................................................17
---------
4.29 Employee Benefit Plans..........................................18
----------------------
4.30 Warranty Claims.................................................18
---------------
4.31 Computer Programs...............................................18
-----------------
4.32 No Finder's Fee.................................................19
---------------
4.33 Illegal Payments................................................19
----------------
4.34 Shareholder Notes...............................................19
-----------------
4.35 Full Disclosure.................................................19
---------------
5. REPRESENTATIONS AND WARRANTIES OF SELLERS WITH RESPECT TO THE ACQUISITION
-------------------------------------------------------------------------
OF THE SHARES...........................................................19
-------------
5.1 Sophistication; Investment Intent...............................19
---------------------------------
5.2 Availability of Public Documents................................20
--------------------------------
5.3 Unregistered Shares.............................................20
-------------------
5.4 Restrictive Legend..............................................20
------------------
5.5 Opportunity to Discuss Terms....................................20
----------------------------
6. REPRESENTATIONS AND WARRANTIES OF BUYER.................................20
---------------------------------------
6.1 Good Standing; Organization.....................................20
---------------------------
6.2 Authority; Binding Obligation...................................20
-----------------------------
6.3 Governmental Consents...........................................21
---------------------
6.4 Capitalization..................................................21
--------------
6.5 No Violation....................................................21
------------
6.6 Litigation......................................................21
----------
6.7 No Bankruptcy...................................................21
-------------
6.8 No Finder's Fee.................................................21
---------------
6.9 Investment Intent...............................................22
-----------------
7. COVENANTS OF SELLERS....................................................22
--------------------
7.1 Access to Information...........................................22
---------------------
7.2 Conduct of Business.............................................22
-------------------
7.3 Acquisition Proposals...........................................23
---------------------
7.4 Third Party Consents............................................23
--------------------
ii
<PAGE>
8. ADDITIONAL AGREEMENTS AND COVENANTS........................................23
-----------------------------------
8.1 Reasonable Best Efforts........................................23
-----------------------
8.2 Performances...................................................24
------------
8.3 Confidentiality................................................24
---------------
8.4 Amendment of Schedules.........................................24
----------------------
8.6 Transition Services Agreement..................................25
-----------------------------
8.7 Non-Competition, Confidentiality and Cross-Marketing
----------------------------------------------------
Agreements.....................................................25
----------
8.8 Options to Purchase Imaging, LLC and Label Systems, LLC........25
-------------------------------------------------------
8.9 Zucker Employment Agreement....................................25
---------------------------
8.10 Zubretsky and Felis Employment Agreements......................25
-----------------------------------------
8.11 Board Representation...........................................25
--------------------
8.12 Bridgestone Premises Leases....................................25
---------------------------
8.13 Certain Bridgestone Obligations................................26
-------------------------------
8.14 Closing Balance Sheet of Bridgestone...........................26
------------------------------------
8.15 Inventory Count................................................26
---------------
8.16 Receivables Schedule...........................................26
--------------------
8.17 Customer Purchase Orders.......................................27
------------------------
8.18 Bridgestone Purchase Orders....................................27
---------------------------
8.19 Transfer of Assets of Photo Polymer Business...................27
--------------------------------------------
8.20 Releases.......................................................27
--------
9. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE...........................27
-------------------------------------------
9.1 Representations and Warranties True............................27
-----------------------------------
9.2 Covenants and Agreements Performed.............................27
----------------------------------
9.3 Opinion of Counsel to Sellers..................................28
-----------------------------
9.4 Approval of Counsel to Buyer...................................28
----------------------------
9.5 Due Diligence..................................................28
-------------
9.6 Other Documents................................................28
---------------
9.7 Legal Proceedings..............................................28
-----------------
9.8 Consents.......................................................28
--------
10. CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE.............................28
--------------------------------------------
10.1 Representations and Warranties True............................28
-----------------------------------
10.2 Covenants and Agreements Performed.............................28
----------------------------------
10.3 Approval of Counsel to Sellers.................................28
------------------------------
10.4 Opinion of Counsel to Buyer....................................29
---------------------------
10.5 Other Documents................................................29
---------------
10.6 Legal Proceedings..............................................29
-----------------
iii
<PAGE>
11. CLOSING.................................................................29
-------
11.1 General.......................................................29
-------
11.2 Closing Transactions..........................................29
--------------------
12. EXPENSES OF SALE........................................................30
----------------
13. BRIDGESTONE TAX MATTERS.................................................30
-----------------------
13.1 Liability for Taxes...........................................30
-------------------
13.2 Preparation and Filing of Tax Returns.........................31
-------------------------------------
13.3 Cooperation, Records..........................................31
--------------------
14. TERMINATION.............................................................32
-----------
14.1 Termination...................................................32
-----------
14.2 Effect of Termination.........................................33
---------------------
15. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION............................33
--------------------------------------------
15.1 Survival......................................................33
--------
15.2 Indemnification by Sellers....................................33
--------------------------
15.3 Indemnification by Sellers-Environmental Matters..............34
------------------------------------------------
15.4 Limitation on Damages.........................................34
---------------------
15.5 Indemnification by Buyer......................................34
------------------------
16. MISCELLANEOUS...........................................................35
-------------
16.1 Notices.......................................................35
-------
16.2 Governing Law.................................................36
-------------
16.3 Succession....................................................36
----------
16.4 Entireties....................................................36
----------
16.5 Severability..................................................36
------------
16.6 Cooperation...................................................37
-----------
16.7 Paragraph Headings............................................37
------------------
16.8 Amendment.....................................................37
---------
16.9 Press Releases and Public Announcements.......................37
---------------------------------------
16.10 Gender........................................................37
------
16.11 [Intentionally Omitted].......................................37
-----------------------
16.12 Counterparts; Facsimile Signatures............................37
----------------------------------
16.13 Remedies Not Exclusive........................................37
----------------------
16.14 Attorneys' Fees...............................................37
---------------
16.15 Waiver........................................................38
------
16.16 Time..........................................................38
----
iv
<PAGE>
Exhibits:
A. Note
B. Escrow Agreement
C. Registration Rights Agreement
D. Financial Statements
E. Motorola Supply Agreement
F. Transitional Services Agreement
G-1. Non-Competition, Confidentiality and Cross-Marketing Agreement
G-2. Confidentiality and Non-Solicitation Agreement
H-1. Label Systems Option Agreement
H-2. Imaging Option Agreement
I. Zucker Employment Agreement
J. Release
K. Wollmuth Maher & Deutsch LLP Opinion
L. Lohf, Shaiman & Jacobs, P.C. Opinion
v
<PAGE>
Schedules:
2.1-1 Embossed Holography Customers
2.1-2 Embossed Holography Prospective Customers
3.10 Allocation of Purchase Price Among Sellers
4.5 Shares and Interests
4.7 No Violation
4.8 Licenses, Permits, and Authorizations
4.10 Condition and Sufficiency of Assets
4.11 Tangible Personal Property
4.12 Leased Property
4.13 Inventory
4.14 Bank Accounts and Powers of Attorney
4.17 Employees and Consultants
4.18 Litigation
4.19 Contracts
4.21 Tax Returns
4.22 Environmental Liability
4.23 Intellectual Property
4.26 Liabilities
4.28 Insurance
4.29 Employee Benefit Plans
4.30 Warranty Claims
4.34 Shareholder Notes
8.19 Photo Polymer Business
15.2 Indemnification by Sellers
15.4 Limitation on Damages
vi
<PAGE>
This Stock Purchase Agreement (the "Agreement") is made and entered this
15th day of September, 1999, by and between KEYSTONE TECHNOLOGIES, L.L.C., a
Delaware limited liability company, KENNETH P. FELIS, MICHAEL J. ZUBRETSKY,
RICHARD ZUCKER, and TIMOTHY DOLAN (individually referred to by last name and
collectively as "Sellers"), OPTICAL SECURITY GROUP, INC. a Colorado corporation
("Buyer"), and concerning the stock of BRIDGESTONE TECHNOLOGIES, INC., a
Delaware corporation ("Bridgestone"), the membership interests of LABEL SYSTEMS
ACQUISITION LLC, a Connecticut limited liability company ("Label Systems, LLC")
and the membership interests of KEYSTONE IMAGING TECHNOLOGIES, L.L.C., a
Delaware limited liability company ("Imaging, LLC"). Label Systems, LLC and
Imaging, LLC are sometimes referred to herein collectively as the "LLCs."
R E C I T A L S:
---------------
A. Sellers own 100% of the issued and outstanding common stock of Bridgestone
and 100% of the membership interests of Label Systems, LLC and Imaging, LLC.
Label Systems, LLC owns 100% of the issued and outstanding common stock of Label
Systems, Inc., a Connecticut corporation ("Label Systems, Inc.").
B. Sellers wish to sell to Buyer, and Buyer wishes to purchase from Sellers,
all of the issued and outstanding common stock of Bridgestone (the "Bridgestone
Stock") and 19.9% of the membership interests of each of Label Systems, LLC and
Imaging, LLC (the "LLC Interests") subject to the conditions of this Agreement.
C. Sellers also wish to sell to Buyer and Buyer also wishes to purchase from
Sellers certain notes (the "Shareholder Notes"), which notes evidence
indebtedness owed by Bridgestone to the Sellers in the amounts set forth
opposite their names on Schedule 4.34.
NOW THEREFORE, in consideration of the Recitals, the mutual promises,
covenants, agreements, representations, and warranties contained in this
Agreement, and the monetary consideration described below, the receipt and
sufficiency of which are acknowledged, the parties, intending to be bound, agree
as follows:
1. PURCHASE AND SALE OF STOCK AND INTERESTS. On the Closing Date (as
----------------------------------------
defined below), Sellers shall sell, assign, convey and deliver to Buyer the
Bridgestone Stock, the LLC Interests, and the Shareholder Notes, and Buyer shall
purchase and acquire from Sellers the Bridgestone Stock, the LLC Interests, and
the Shareholder Notes, free and clear of all liens, pledges, or other
encumbrances.
2. PURCHASE PRICE AMOUNT. Buyer shall purchase the Bridgestone Stock,
---------------------
the LLC Interests, and the Shareholder Notes for a purchase price (the "Purchase
Price") equal to two times Net Embossed Holography Revenues (as defined below)
of up to $9 million, plus 1.6 times Net Embossed Holography Revenues (as defined
below) in excess of $9 million, all as calculated during the Audit Period (as
defined below). The Purchase Price is subject to the adjustment
1
<PAGE>
described in Section 3.9, but, in no event, shall the Purchase Price be less
than the consideration set forth in Sections 3.1, 3.4 (as adjusted pursuant to
Section 3.9) and 3.7.
2.1 Net Embossed Holography Revenues. "Net Embossed Holography
--------------------------------
Revenues" means all Ordinary Course of Business Revenues arising from the sale
of embossed holography products, excluding sales to affiliates, subsidiaries and
sister companies, and entities under common control ("Intercompany Sales"),
returns, claims, offsets, allowances and freight, arising from Bridgestone's
existing embossed holography business and received from existing customers
identified on Schedule 2.1-1 (and from prospective customers identified on
Schedule 2.1-2), and as calculated pursuant to Section 2.4, below.
2.2 Ordinary Course of Business Revenues. Unless otherwise approved
------------------------------------
mutually by Buyer and Sellers, "Ordinary Course of Business Revenues" means (a)
revenues generated in the ordinary course of Bridgestone's business from the
customers listed on Schedule 2.1-1, which Buyer hereby approves, and (b) other
revenues, from prospective customers listed on Schedule 2.1-2, from whom
Bridgestone has not previously received material revenue, based upon the
customer pricing listed on Schedule 2.1-2, which Buyer hereby approves.
2.3 Audit Period. "Audit Period" means the 13 month period
------------
commencing on the Effective Date.
2.4 Calculation of Net Embossed Holography Revenues. "Net Embossed
-----------------------------------------------
Holography Revenues" shall be equal to the sum of such revenues for the 11 month
period commencing on the Effective Date, plus the arithmetic average of such
revenues for the 11/th/, 12/th/ and 13/th/ months following the "Effective
Date," as defined in Section 11.1, below.
2.5 Final Calculations. The final calculations of Net Embossed
------------------
Holography Revenues must be confirmed by Ernst & Young LLP. The cost of the
accounting efforts will be borne by the Buyer.
3. PAYMENT OF PURCHASE PRICE. Buyer shall pay the Purchase Price as
-------------------------
follows:
3.1 Cash. Buyer shall pay to Sellers $8 million in cash or other
----
good funds at Closing.
3.2 Note. Buyer shall execute and deliver to Sellers its promissory
----
note (the "Note") in the initial principal amount of $1.5 million. The Note
shall be due and payable 27 months after the Effective Date, shall bear no
interest for the first 12 months, shall accrue interest on the principal amount
as adjusted pursuant to Section 3.3, at the Citibank N.A. Base Rate thereafter,
and shall be in the form prescribed by Exhibit A, attached hereto and
incorporated herein by reference, and shall be subject to adjustment, as
provided in Section 3.3, on the date which is 90 days after the first
anniversary of the Effective Date (the
2
<PAGE>
"Adjustment Date"). Buyer shall also pay to Sellers an amount equal to the
difference, if any, between Seller's federal and state income tax liability for
imputed interest over the first 12 months of the term of the Note, and Sellers'
federal and state tax liability if such imputed interest had been taxed at
capital gains rates.
3.3 Note Adjustment. The initial principal due on the Note shall be
---------------
adjusted, but not below zero, on the Adjustment Date, retroactively to the
Effective Date, to an amount equal to the Purchase Price Amount minus the
consideration, as adjusted, paid by the Buyer pursuant to Sections 3.1 (Cash),
3.4 (OpSec Stock), and 3.7 (Bridgestone Debt). If adequate information to
calculate the adjustment is not available to all parties on the Adjustment Date,
the parties will negotiate in good faith to extend the Adjustment Date and
provide sufficient information to calculate the adjustment.
3.4 OpSec Stock. Buyer shall deliver to a mutually acceptable
-----------
escrow agent at Closing 333,333 shares of fully paid and non-assessable
restricted Buyer common stock (the "OpSec Stock"), to be disbursed to Sellers on
the date 15 months after Closing, on the express condition that Net Embossed
Holography Revenues for the Audit Period exceed $1 million, which amount is to
be determined by the accounting firm of Lagana Roberge & Co.. If this condition
is not satisfied, the escrow agent shall return the OpSec Stock to Buyer upon
Buyer's written request to do so. The parties shall execute an escrow agreement
at Closing (the "Escrow Agreement") to effectuate the purposes of this Section
3.4, in the form of Exhibit B attached hereto and incorporated herein by
reference. The OpSec Stock shall be entitled to certain piggyback registration
rights and tag along rights in the event of a sale of all or substantially all
of the assets or stock of Buyer to a third party, or a merger in which Buyer
participates but is not the surviving entity. The registration and tag along
rights are as specified in the Registration Rights Agreement attached hereto as
Exhibit C and incorporated herein by reference.
3.5 OpSec Stock Value. Buyer guarantees that the OpSec Stock held
-----------------
by Sellers will have a Current Market Value of at least $2 million, i.e., $6.00
per share, on the date 27 months after the Effective Date (the "Value Date")
adjusted as provided in Section 3.9 (the "OpSec Stock Value"). "Current Market
Value" means the arithmetic average closing price of OpSec Stock on the relevant
NASDAQ Stock Market for 30 trading days prior to the Value Date. In the event
the Current Market Value on the Value Date is less than the OpSec Stock Value,
Buyer shall deliver a sufficient additional number of shares of OpSec Stock to
satisfy the difference unless Sellers have exercised the option described in
Section 3.6.
3.6 Sellers' Put Option. No sooner than 12 months after Closing and
-------------------
no later than 90 days prior to the Value Date, one or more of the Sellers (the
"Electing Sellers") may exercise the option to require Buyer to repurchase 50%
or more of each Electing Seller's OpSec Stock by providing written notice to
Buyer. The Electing Sellers' exercise of this option shall relieve Buyer of the
obligations set forth in Section 3.5 as to each Electing Seller. The repurchase
price for the OpSec Stock shall be 85% of the OpSec Stock Value per share,
payable by Buyer, no later than 30 days following the determination of the value
3
<PAGE>
of the LLC Interests as provided in Section 3.6.3 (the date of such payment
referred to as the "Put Closing Date"), at Buyer's sole discretion, either
3.6.1 In cash or other good funds, or
3.6.2 By re-transferring all or a portion of the LLC Interests to
the Electing Sellers up to their percentages set forth in Schedule
3.10, valued as provided in Section 3.6.3, and paying any deficiency
between the OpSec Stock Value and such value in cash or other good
funds.
3.6.3 The value of the LLC Interests shall be equal to the total
of the following:
(A) The percentage of membership interests of Imaging, LLC
being re-transferred to the Sellers multiplied by the sum of two
times (i) the Net Photo Polymer Revenues, as defined in the
Imaging, LLC Option Agreement, less Imaging, LLC's existing debt
(excluding accounts payable incurred in the ordinary course of
business which are not past due) on the Put Closing Date and (ii)
the Contingent Revenues, as defined in the Imaging, LLC Option
Agreement, if any. If Buyer does not give the Preliminary
Exercise Notice required under the Imaging, LLC Option Agreement,
in order to calculate the Contingent Revenues, Sellers shall
provide Buyer with a list of the Prospective Customers, as
defined in the Imaging, LLC Option Agreement, no later than the
Second Anniversary of the Effective Date.
(B) The percentage of membership interests of Label
Systems, LLC being re-transferred to the Sellers multiplied by
the sum of (i) the Net Revenues, as defined in the Label Systems,
LLC Option Agreement, less Label Systems, LLC's existing debt on
the Put Closing Date and (ii) the Contingent Revenues, as defined
in the Label Systems, LLC Option Agreement, if any. If Buyer does
not give the Preliminary Exercise Notice required under the Label
Systems, LLC Option Agreement, in order to calculate the
Contingent Revenues, Sellers shall provide Buyer with a list of
the Prospective Customers, as defined in the Label Systems, LLC
Option Agreement, no later than the Second Anniversary of the
Effective Date.
3.7 Bridgestone Debt. At Closing, Buyer shall accept Bridgestone
----------------
with its obligations under the Shareholder Notes, obligations incurred in the
ordinary course of business, and no more than $1 million owed to Fleet Bank.
This $1 million debt to Fleet Bank shall be considered part of the Purchase
Price.
4
<PAGE>
3.8 [Intentionally Omitted.]
------------------------
3.9 Purchase Price Adjustment. The Purchase Price Amount described
-------------------------
in Section 2, shall be reduced dollar for dollar to the extent the Final
Closing Balance Sheet, required by Section 8.14, does not reflect at least
$850,000 in Net Tangible Assets or increased dollar for dollar to the
extent the Final Closing Balance Sheet, required by Section 8.14, reflects
Net Tangible Assets over $1,050,000 (the "Purchase Price Adjustment"). The
Purchase Price Adjustment shall reduce or increase the OpSec Stock portion
of the Purchase Price described in Section 3.4. "Net Tangible Assets" means
the book value on the Effective Date, calculated using generally accepted
accounting principles consistently applied, of all of Bridgestone's
inventory, accounts receivable, cash, cash equivalents, and equipment,
minus all of Bridgestone's debts, accrued liabilities and other
obligations; provided that for purposes of this Section 3.9, Net Tangible
Assets shall be increased by the margin on customer orders not yet
recognized by Bridgestone for all Bridgestone's work in progress and
finished goods (whether or not shipped) which have not been invoiced prior
to Closing.
3.1 Allocation of Purchase Price Among Sellers. All payments made as
------------------------------------------
part of the Purchase Price shall be allocated and/or paid to Sellers in the
proportions set forth on Schedule 3.10.
4. SELLERS' GENERAL REPRESENTATIONS, AND WARRANTIES. Sellers jointly,
------------------------------------------------
severally, and individually, represent, and warrant to Buyer as follows:
4.1 Bridgestone Organization; Standing. Bridgestone is a
----------------------------------
corporation duly organized and in good standing under the laws of the state
of Delaware and (a) has all requisite corporate power and authority to
carry on its business as now conducted, (b) has all governmental and other
authorizations, licenses, or permits necessary to carry on its business as
now conducted, (c) has no subsidiaries and owns no security or similar
interests in any corporation or other entity, (d) has delivered to Buyer
complete and correct copies of its articles or certificate of
incorporation, and Bylaws as currently in effect.
4.2 Label Systems, LLC Organization; Standing. Label Systems, LLC is
-----------------------------------------
a limited liability company duly organized and in good standing under the
laws of the state of Connecticut and (a) has all requisite power and
authority to carry on its business as now conducted; (b) has all
governmental and other authorizations, licenses, or permits necessary to
carry on its business as now conducted, except where the failure to be so
qualified or licensed and in good standing would not have a Material
Adverse Effect, as defined below; (c) has no subsidiaries, other than Label
Systems, Inc., and owns no security or similar interests in any corporation
or other entity; (d) has delivered to Buyer complete and correct copies of
its articles of organization, operating agreement and bylaws as currently
in effect. For purposes of this Agreement, the term Material Adverse Effect
shall refer to any events, individually or in combination with other
events, which would have a material adverse effect on the financial
condition, business, earnings, assets, or condition of Bridgestone, Label
Systems, LLC, or Label Systems, Inc.
5
<PAGE>
4.3 Label Systems, Inc. Organization; Standing. Label Systems, Inc.
------------------------------------------
is a corporation duly organized and in good standing under the laws of the
state of Connecticut and (a) has all requisite corporate power and
authority to carry on its business as now conducted, (b) has all
governmental and other authorizations, licenses, or permits necessary to
carry on its business as now conducted, except where the failure to be so
qualified or licensed and in good standing would not have a Material
Adverse Effect, (c) has no subsidiaries and owns no security or similar
interests in any corporation or other entity, (d) has delivered to Buyer
complete and correct copies of its articles or certificate of
incorporation, and Bylaws as currently in effect.
4.3(a) Imaging, LLC Organization; Standing. Imaging, LLC is a
-----------------------------------
limited liability company duly organized and in good standing under the
laws of the state of Connecticut and (a) has all requisite power and
authority to carry on its business as now conducted, (b) has all
governmental and other authorizations, licenses, or permits necessary to
carry on its business as now conducted, except where the failure to be so
qualified or licensed and in good standing would not have a Material
Adverse Effect, (c) has no subsidiaries and owns no security or similar
interests in any corporation or other entity, (d) has delivered to Buyer
complete and correct copies of its articles of organization, operating
agreement and bylaws as currently in effect.
4.4 Capitalization. The authorized capital stock of Bridgestone
--------------
consists of 1,000 shares of common stock, no par value per share, of which
400 shares are issued and outstanding and no shares are held in
Bridgestone's treasury. The LLC Interests are described by owner,
percentage and capital account balances on Schedule 4.4. The authorized
capital stock of Label Systems, Inc. consists of 500 shares of common
stock, par value $100 per share, of which 100 shares are issued and
outstanding and no shares are held in Label Systems Inc.'s treasury. All
outstanding shares of the capital stock of Bridgestone and Label Systems,
Inc. and all the LLCs' membership interests have been validly issued and
are fully paid and nonassessable, and no shares of capital stock of
Bridgestone or Label Systems Inc. or membership interests of the LLCs are
subject to, nor have any been issued in violation of, pre-emptive or
similar rights. All issuances, sales, and repurchases of Bridgestone or
Label Systems Inc.'s capital stock and of the LLCs' membership interests
have been effected in compliance with applicable federal, state, and local
law including federal and state securities laws. Except as set forth in
this section, there are outstanding (a) no voting securities or other
shares of capital stock of Bridgestone or Label Systems Inc. or membership
or economic interests of the LLCs, (b) no securities of Bridgestone, the
LLCs or Label Systems, Inc. convertible into or exchangeable for voting
securities or other shares of capital stock of Bridgestone, Label Systems,
Inc. or interests in the LLCs, (c) no options or other rights to acquire
from Sellers, Bridgestone, the LLCs or Label Systems, Inc., and no
obligation of Sellers, Bridgestone, the LLCs or Label Systems, Inc. to
issue or sell, any voting securities or other shares of capital stock of
Bridgestone or Label Systems, Inc., or interests in the LLCs, or any
securities of Bridgestone, the LLCs or Label Systems, Inc. convertible into
or exchangeable for voting securities or capital stock, or interests, and
(d) no equity equivalents, interests in the ownership or earnings, or other
similar rights of or with respect to Bridgestone, the LLCs or Label
Systems, Inc. Except for the agreements
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identified on Schedule 4.4, no Seller is a party to, and none of them is aware
of, any buy-sell or voting agreement, voting trust, or similar agreement or
arrangement relating to the capital stock or interests of Bridgestone, the LLCs
or Label Systems, Inc.
4.5 Shares and Interests. Sellers are the only record and beneficial
--------------------
owners of the capital stock of Bridgestone and Label Systems, Inc. and the
interests in the LLCs. Each of the Sellers own the number of shares of capital
stock of Bridgestone and interests in the LLCs set forth opposite his or its
name on Schedule 4.5. Upon consummation of the transactions contemplated
hereby, Buyer will acquire good and marketable title to the Bridgestone Stock
and the LLC Interests, free and clear of any charge, claim, community property
interest, condition, equitable interest, lien, option, pledge, security
interest, restrictions, or other encumbrances of every type and description,
whether imposed by law, agreement, understanding, or otherwise.
4.6 Authority; Binding Obligation. This Agreement, and each document
-----------------------------
executed by Sellers in connection herewith, constitute the valid and binding
obligations of Sellers, enforceable in accordance with its terms, subject only
to applicable bankruptcy, insolvency, and other laws affecting the rights of
creditors generally, and the discretion of the courts in granting equitable
remedies.
4.7 No Violation. Except as set forth on Schedule 4.7, the
------------
execution, delivery, and performance of this Agreement and the consummation of
the transactions contemplated hereby by Sellers will not conflict with or result
in a breach of any provision of or default under, or give rise to any right of
termination, cancellation, or acceleration under the terms of, as the case may
be (a) Bridgestone's, Label Systems Inc.'s or the LLCs's charter, Bylaws, or
other governing instruments of Bridgestone, Label Systems, Inc. or the LLCs; (b)
any bond, mortgage, lien, lease, note, agreement, contract, commitment, license,
permit or other instrument to which Sellers, Bridgestone, Label Systems, Inc. or
the LLCs are parties; (c) any law, rule or regulation; or (d) any judgment,
order, writ, injunction or decree of any court, administrative agency or
governmental body, domestic or foreign, nor are Sellers aware of any violation
of the above.
4.8 Licenses, Permits, and Authorizations. Bridgestone, the LLCs and
-------------------------------------
Label Systems, Inc. have the licenses, permits, and authorizations shown on
Schedule 4.8 and, to the best of Sellers' knowledge, all governmental licenses,
permits, and authorizations (federal, state and local) necessary to conduct
their businesses, including all state authorizations to transact business as a
foreign corporation, and such licenses or permits are in full force and effect,
no violations are or have been recorded in respect of any of such licenses or
permits, and no proceeding is pending or, to the best of each Seller's
knowledge, threatened looking toward the revocation or limitation of any of such
licenses or permits, and Bridgestone, the LLCs and Label Systems, Inc. each have
complied in all material respects with the antitrust laws as they relate to the
purchase, distribution and sale of its products and services, and with all other
material laws, rules, regulations and orders applicable to their business.
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4.9 Financial Statements. Sellers have delivered to Buyer accurate
--------------------
and complete copies of audited balance sheets of Bridgestone and Label Systems,
Inc. as of December 31/st/, for each of the years 1996, 1997, and 1998, and for
Bridgestone the related audited statements of income, changes in shareholders
equity, and cash flows for each of the fiscal years then ended, and for Label
Systems, Inc.'s statements of income, changes in shareholders' equity, and cash
flows unaudited for fiscal years 1996 and 1997 and audited for fiscal year 1998,
together thereon with the report of Lagana, Roberge & Co., independent certified
public accountants (the "Historical Financial Statements") and Bridgestone's,
the LLCs', and Label Systems, Inc.'s unaudited balance sheets as of July 31,
1999, or for Imaging, LLC, as of its date of organization (the "Latest Balance
Sheets") and the related unaudited statements of income, stockholder equity and
cash flows for the 7-month period then ended (the "Latest Financial
Statements"), certified by Bridgestone's, the LLCs', and Label Systems, Inc.'s
chief financial officer or manager, (collectively, the "Financial Statements")
copies of which are attached hereto as Exhibit D. The Financial Statements (a)
have been prepared from the books and records of Bridgestone, the LLCs or Label
Systems, Inc., as the case may be, in conformity with generally accepted
accounting principles applicable in the United States, and (b) accurately and
fairly present, in all material respects, the financial position of Bridgestone,
the LLCs, and Label Systems, Inc., as of the respective dates thereof and the
results of operations and cash flows for the periods referenced in such
Financial Statements, subject to year-end adjustments, which will not be
material in the aggregate. The statements of income included in the Financial
Statements do not contain any items of special or nonrecurring income or any
other income not earned in the ordinary course of business except as expressly
specified therein, and include all adjustments, which consist only of normal
recurring accruals, necessary for such fair presentation. All financial
projections, forecasts, and other forward looking information ("Projections")
provided by Sellers to Buyer were, as of their respective dates, prepared in
good faith and on the basis that Sellers believed to be reasonable. Sellers
have based these Projections on their current expectations and projections about
future events and undertake no obligation to update or revise any Projections
after Closing, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the
Projections may not occur.
4.10 Condition and Sufficiency of Assets. Except as set forth on
-----------------------------------
Schedule 4.10, the properties owned, leased, or used by Bridgestone, the LLCs or
Label Systems, Inc., as the case may be, are (i) in the case of tangible assets
and properties, in good operating condition and repair (ordinary wear and tear
excepted) and have been maintained in accordance with standard industry
practice, (ii) suitable for the purposes used, and (iii) adequate and sufficient
for the normal operation of the business, as presently conducted. Bridgestone,
the LLCs or Label Systems, Inc. owns or has a valid leasehold interest in all
such properties. Such properties and their uses conform to all applicable
federal, state and local laws, except for such minor variations as do not impair
or interfere with the use of such properties for the purposes for which they are
employed by Bridgestone, the LLCs or Label Systems, Inc., as the case may be.
All such tangible properties are in Bridgestone's, the LLCs' or Label Systems,
Inc.'s possession or under their control.
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4.11 Tangible Personal Property. Set forth on Schedule 4.11,
--------------------------
separated by company, is a list, as of the most recent practical date, of all
items of furniture, equipment, machinery, computer hardware, materials, motor
vehicles, rolling stock, apparatus, tools, implements, appliances, and other
tangible personal property (other than spare parts, supplies, and inventories)
owned or leased by Bridgestone, the LLCs and Label Systems, Inc. and used or
held for use in connection with the operation of their businesses and with a
value in excess of $500.00 per item.
4.12 Leased Property. Set forth on Schedule 4.12, separated by
---------------
company, is a list of all leases under which Bridgestone, the LLCs or Label
Systems, Inc. is the lessee of real or personal property. Each of Bridgestone,
the LLCs or Label Systems, Inc., as the case may be, has good and valid
leasehold interest in all properties held by them under lease. Bridgestone, the
LLCs, and Label Systems, Inc. each have been in peaceable possession (or
remedied any claims relating thereto) of the property covered by each lease to
which they are a party since the commencement of the original term of such
lease. No waiver, indulgence, or postponement of Bridgestone's, the LLCs' or
Label Systems, Inc.'s obligations under any lease to which they are a party has
been granted by the lessee or the lessor's obligations thereunder by
Bridgestone, the LLCs or Label Systems, Inc.. Neither Bridgestone, the LLCs nor
Label Systems, Inc. is in breach or in default under, nor has any event occurred
which (with or without the giving of notice or the passage of time or both)
would constitute a default by Bridgestone, the LLCs, or Label Systems, Inc., as
the case may be under, any lease to which it is a party and neither Bridgestone,
the LLCs nor Label Systems, Inc. has received any notice from, or given any
notice to, any lessor indicating that it or such lessor is in breach of or in
default under any lease to which it is a party. To the best knowledge of
Sellers, none of the lessors under any such lease is in breach thereof or in
default thereunder. Bridgestone, the LLCs, or Label Systems, Inc., as the case
may be, has full right and power to occupy or possess, as the case may be, all
the property covered by each lease to which it is a party.
4.13 Inventory. Except as set forth on Schedule 4.13, all inventory
---------
and related supplies attributed any value on the Latest Balance Sheets, or
thereafter acquired and not disposed of in the ordinary course of business, are
in good condition and are merchantable for sale in the ordinary course of
business of Bridgestone, the LLCs, or Label Systems, Inc., as the case may be,
as first quality goods at normal markups, subject to any reserves on the Latest
Balance Sheets. None of such inventory is obsolete, discontinued, returned,
damaged, excess or of below standard quality or merchantability, except for
items consistent with past practice, that have been written down to realizable
market value or for which an adequate reserve has been established. Each item
of inventory is valued at the lower of cost or market on a first in first out
basis. The quantities of each item of inventory are not excessive and are
sufficient to serve adequately the customers of Bridgestone, the LLCs, or Label
Systems, Inc., as the case may be, in the ordinary course.
4.14 Bank Accounts and Powers of Attorney. Set forth on Schedule
------------------------------------
4.14, separated by company, are (a) the name and address of each bank or other
financial institution with which Bridgestone, the LLCs or Label Systems, Inc.
has an account or safe
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deposit box or vault, the account safe deposit box and vault numbers thereof,
and the purpose of each therefore, and the names of all persons authorized to
draw thereon or to have access thereto, (b) the names of all persons authorized
to borrow funds on behalf of Bridgestone, the LLCs or Label Systems, Inc., and
the names and addresses of all entities from which they are authorized to borrow
funds, and (c) the names of all persons, if any, holding proxies, powers of
attorney, or other like instruments from Bridgestone, the LLCs or Label Systems,
Inc. No such proxies, powers of attorney, or other like instruments are
irrevocable.
4.15 Records. All books of accounts, minute books, stock record
-------
books, ledgers, financial and other records of any kind ("Records") of
Bridgestone, the LLCs, and Label Systems, Inc. have been fully, properly and
accurately maintained to a standard appropriate for such Records, are in the
possession of Bridgestone, the LLCs, and Label Systems, Inc.; do not contain or
reflect any material inaccuracies or discrepancies; and provide a fair and
accurate representation of Bridgestone, the LLCs, and Label Systems, Inc.
4.16 Absence of Certain Changes. Since the date of the Latest
--------------------------
Financial Statements, there has not been (a) any sale, purchase, transfer, or
distribution of any material asset, or any other transaction, except in the
regular course of business, (b) any material increase in the compensation
payable or to become payable by Bridgestone, the LLCs, or Label Systems, Inc. to
any of its officers, managers, employees, or agents or any bonus payment or
arrangement made to or with any officers, managers, employees, or agents, (c)
any mortgage, pledge, or other voluntary encumbrance of any asset of
Bridgestone, the LLCs, or Label Systems, Inc., (d) any cancellation of debt or
waiver or release of any right or claim of Bridgestone, the LLCs, or Label
Systems, Inc., except in the ordinary course of business, (e) any labor dispute,
or any event or condition of any character, materially and adversely affecting
the business or prospects for the business, (f) any obligation or liability
incurred by Bridgestone, the LLCs, or Label Systems, Inc., except in the
ordinary course of business, or (g) any damage, destruction or loss, whether or
not covered by insurance, materially affecting Bridgestone's, the LLCs's, or
Label Systems, Inc.'s financial condition, assets, or business prospects. To
the best of each Seller's knowledge after investigation and diligent inquiry,
the Sellers have disclosed to Buyer all other events or conditions of any
character that has or might have a Material Adverse Effect on Bridgestone, the
LLCs, or Label Systems, Inc.'s condition, business, assets, or prospects.
4.17 Employees and Consultants. Attached as Schedule 4.17 is a true
-------------------------
and complete list of Bridgestone's, the LLCs', and Label Systems, Inc.'s current
directors, managers, officers, employees, agents, and consultants, including
their names, addresses, telephone numbers, job descriptions, and compensation
arrangements and vacation or other benefits accrued. Any employees employed, or
agents or consultants retained, pursuant to a written contract, covered by any
collective bargaining agreement or who are members of any labor union or are
represented by any collective bargaining agent are identified on Schedule 4.17
and copies of the current contracts or bargaining agreements have been furnished
to Buyer.
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4.18 Litigation. Except as set forth on Schedule 4.18, there is no:
----------
(a) action, suit, claim, proceeding, or investigation pending of which any
Seller, Bridgestone, the LLCs, or Label Systems, Inc. has received notice, or
threatened against or affecting Bridgestone, the LLCs, or Label Systems, Inc. or
that otherwise relates to or may affect the business of, or any of the assets
owned or used by them, or before any governmental department, commission, board,
bureau, agency, or instrumentality, domestic or foreign, or (b) governmental
investigation or inquiry pending or threatened against or affecting Bridgestone,
the LLCs, or Label Systems, Inc., and to the best of each Seller's knowledge,
there is no basis for any of the foregoing which could reasonably be expected to
give rise thereto. Except as set forth on Schedule 4.18, and except for any
such claim or other proceeding set forth in (a) and (b) above which would not
have a Material Adverse Effect, each of the claims, actions, suits, proceedings
and investigations listed on Schedule 4.18 has been reported to the proper
insurance carrier in accordance with the applicable insurance policy, if any,
and as necessary to secure coverage thereof.
4.19 Contracts.
---------
4.19.1 Schedule 4.19 contains a list, separated by company, of
all of the following leases, contracts, agreements, arrangements, and
understanding, whether written or oral, formal or informal, each of
which is material (the "Contracts"), to which Bridgestone, the LLCs,
or Label Systems, Inc. is a party or by which the business or any of
the assets owned or used by Bridgestone, the LLCs or Label Systems,
Inc. is bound:
4.19.1.1 Collective bargaining agreements, labor union
contracts, and similar agreements with employees as a group.
4.19.1.2 Employee benefit agreements, trusts, plans, funds,
or other arrangements of any nature.
4.19.1.3 Agreements with any current or former owner,
director, officer, manager, employee, consultant, or advisor, or
any of such persons affiliates.
4.19.1.4 Agreements between or among Bridgestone, the LLCs
or Label Systems, Inc., as the case may be, and any of their
affiliates.
4.19.1.5 Indentures, mortgages, security agreements, notes,
loan or credit agreements, or other agreements relating to the
borrowing of money by Bridgestone, the LLCs or Label Systems,
Inc., the direct or indirect guarantee or assumption by
Bridgestone, the LLCs or Label Systems, Inc. of any obligations
of others, or the direct or indirect guarantee or assumption by
any party of any obligation of Bridgestone, the LLCs or Label
Systems, Inc., including any agreement that has economic effect,
although not the legal form of any of the foregoing.
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4.19.1.6 Agreements relating to the acquisition or
disposition of assets, other than in the ordinary course of
business.
4.19.1.7 Agreements relating to the acquisition or
disposition of any interests in any business enterprise.
4.19.1.8 Agreements concerning the management or operation
of any real property (other than routine maintenance contracts).
4.19.1.9 Long term supply agreements and purchase
commitments.
4.19.1.10 Broker, distributor, dealer, sales, agency, and
research and development agreements.
4.19.1.11 Sales promotion, advertising, market research,
marketing, consulting, maintenance, service, and repair
agreements (except any such agreements that can be terminated by
the company without penalty on 30 days notice).
4.19.1.12 Partnership, joint venture, and profit sharing
agreements.
4.19.1.13 Agreements with any federal, state or local
government entity.
4.19.1.14 Agreements relating to the release or disposal of
hazardous material.
4.19.1.15 Agreements that involve the performance of
services or delivery of goods or materials by Bridgestone, the
LLCs, or Label Systems, Inc. of an amount or value in excess of
$500.00.
4.19.1.16 Agreements in the nature of a settlement or
conciliation arising out of any claim asserted by any other
person.
4.19.1.17 Agreements containing any covenant limiting the
freedom of the company to engage in any line of business or to
compete with any other person in any geographic area or during
any period of time.
4.19.1.18 Licensing agreements, or other contracts with
respect to patents, trademarks, copyrights, or other Intellectual
Property (as defined in Section 4.26), including agreements with
current or former employees,
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<PAGE>
consultants, or contractors regarding the appropriation or the
non-disclosure of any Intellectual Property.
4.19.1.19 Other agreements, whether or not made in the
ordinary course of business, that are material to the business,
assets, results of operations, condition (financial or
otherwise), or prospects of Bridgestone, the LLCs or Label
Systems, Inc.
4.19.2 Correct and complete copies of the Contracts have been
furnished to Buyer. Each such Contract is a valid and binding
agreement of Bridgestone, the LLCs, or Label Systems, Inc., as the
case may be, enforceable in accordance with its terms. Neither
Bridgestone, the LLCs, nor Label Systems, Inc. is in breach of or in
default under, nor has any event occurred which (with or without the
giving of notice or the passage of time or both) would constitute a
default by Bridgestone, the LLCs or Label Systems, Inc., as the case
may be, under, any material provision of any of the Contracts, and
neither Bridgestone, the LLCs, nor Label Systems, Inc. has received
any notice from, or given any notice to, any other party indicating
that Bridgestone, the LLCs or Label Systems, Inc., as the case may be,
is in breach of or in default under any such provision of any such
Contracts. To the best of each Seller's knowledge, no other party to
any of such Contracts is in breach of or in default under such
agreements, nor has any assertion been made by Sellers, Bridgestone,
the LLCs or Label Systems, Inc. of any such breach or default.
4.19.3 Neither Sellers, Bridgestone, the LLCs nor Label Systems,
Inc., as the case may be, has received notice of any plan or intention
of any other party to any Contracts to exercise any right of offset
with respect to, or any right to cancel or terminate any Contract, and
Sellers do not know of any fact or circumstance that would justify the
exercise by any such other party of such a right other than automatic
termination of such Contract in accordance with its terms. Neither
Sellers, Bridgestone, the LLCs nor Label Systems, Inc., as the case
may be, currently contemplates, or has reason to believe any other
person currently contemplates, any amendment or change to any
Contract.
4.20 No Bankruptcy. Neither Bridgestone, the LLCs, nor Label System,
-------------
Inc. has filed for any form of relief under the United States Bankruptcy Code or
analogous state laws, is insolvent, or has made a general assignment or
composition with respect to creditors. No order, execution, or other process
has been levied against Bridgestone, the LLCs or Label Systems, Inc. in any
action taken to repossess goods in any material amount. No steps have been
taken for the appointment of a receiver of any part of Bridgestone's, the LLCs'
or Label Systems, Inc.'s property.
4.21 Tax Returns. Except as set forth on Schedule 4.21, Bridgestone,
-----------
the LLCs and Label Systems, Inc. have each timely filed all tax returns,
information returns, and reports, required to be filed by them with all taxing
authorities to which they are subject. Imaging, LLC is newly formed and has not
yet been required to file tax returns and reports.
13
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Except for accruals for payroll taxes payable, income taxes payable, and
deferred taxes as set forth in the Latest Balance Sheets (collectively, the
"Accrued Taxes"), Bridgestone, the LLCs and Label Systems, Inc. has paid in
full all taxes (including taxes withheld from employees' salaries and other
withholding taxes and obligations), interest, penalties, assessments and
deficiencies owed by Bridgestone, the LLCs or Label Systems, Inc. to all
taxing authorities. Complete and correct copies of (a) the income tax
returns of Bridgestone, the LLCs and Label Systems, Inc. since ________,
19___, as filed by Bridgestone, the LLCs or Label Systems, Inc., as the
case may be, with the Internal Revenue Service (the "IRS"), and all state
taxing authorities (collectively, the "Returns"), (b) all audit reports
received by Bridgestone, the LLCs or Label Systems, Inc. during the last
five years and issued by the IRS or any state taxing authorities, and (c)
all consents and agreements entered into by Bridgestone, the LLCs or Label
Systems, Inc. during the last five years with the IRS or any state taxing
authorities (collectively, the "Tax Agreements") have been furnished to the
Buyer. All information reported on the Returns is true, accurate, and
complete. All claims by the IRS or any state taxing authority for taxes due
and payable by Bridgestone, the LLCs or Label Systems, Inc. have been paid
by Bridgestone, the LLCs or Label Systems, Inc. The provisions for the
accrued taxes are adequate for the payment of all of Bridgestone, the LLCs
or Label Systems, Inc., as the case may be, liabilities for unpaid taxes
(whether or not disputed). All federal income tax returns required to be
filed by Bridgestone, the LLCs or Label Systems, Inc. have either been
examined by the IRS, or the period during which any assessments may be made
by the IRS has expired without waiver or extension for all years through
Bridgestone's fiscal year ended ________, 19___, the LLCs's fiscal year
ended __________, 19___, and Label Systems, Inc.'s fiscal year ended
________, 19___, and any deficiencies or assessments claimed or made have
been paid, settled, or fully provided for in the Latest Financial
Statements. Sellers are not aware of any action, pending or contemplated,
by any taxing authority to collect any outstanding taxes due.
4.22 Environmental Liability.
-----------------------
4.22.1.1 Except as disclosed on Schedule 4.22, and except as such
would not have a Material Adverse Effect:
4.22.1.1 The properties, operations, and activities of
Bridgestone, the LLCs and Label Systems, Inc. comply with all
Applicable Environmental Laws (as defined below).
4.22.1.2 Bridgestone, the LLCs and Label Systems, Inc. and
their properties, operations, and activities are not subject to
any existing, pending, or, to the best of each Seller's
knowledge, threatened proceeding, action, or investigation under,
or to any remedial obligations under, any Applicable
Environmental Laws.
4.22.1.3 All permits, if any, required to be obtained by
Bridgestone, the LLCs or Label Systems, Inc. under any Applicable
Environmental Laws in connection with any aspect of Bridgestone,
the LLCs or Label Systems, Inc. business, including without
limitation those relating
14
<PAGE>
to the treatment, storage, disposal, or release of a hazardous
material (as defined below), have been duly obtained and are in
full force and effect, and Bridgestone, the LLCs, and Label
Systems, Inc. are in compliance with the terms and conditions of
all such permits.
4.22.1.4 Bridgestone, the LLCs and Label Systems, Inc. have
each satisfied and is currently in compliance with all Applicable
Environmental Laws, and neither Bridgestone, the LLCs nor Label
Systems, Inc. has received any notice of noncompliance with an
Applicable Environmental Laws.
4.22.1.5 There are no physical or environmental conditions
existing on any property owned or leased by Bridgestone, the LLCs
or Label Systems, Inc. or resulting from their operations or
activities, past or present, at any location, that would give
rise to any on-site or off-site remedial obligations under any
Applicable Environmental laws.
4.22.1.6 Since the effective date of the relative
requirements of Applicable Environmental Laws, all hazardous
materials generated by Bridgestone, the LLCs or Label Systems,
Inc. or used in connection with their properties, operations, or
activities have been transported only by carriers authorized
under Applicable Environmental Laws to treat, store, or dispose
of such materials, and, to the best of each Seller's knowledge,
such carriers and facilities have been and are operating in
compliance with such authorizations and are not the subject of
any existing, pending, or threatened proceeding, action, or
investigation in connection with any Applicable Environmental
Laws.
4.22.1.7 There has been no exposure of any person or
property to hazardous materials, nor has there been any release
of hazardous materials into the environment, by Bridgestone, the
LLCs or Label Systems, Inc. or in connection with their
properties, operations, or activities that could reasonably be
expected to give rise to any claim for damages or compensation.
4.22.1.8 Bridgestone, the LLCs and Label Systems, Inc. have
each made available to Buyer all internal and external
environmental audits and studies and all correspondence on
substantial environmental matters in the possession of
Bridgestone, the LLCs or Label Systems, Inc. relating to any of
their current or former properties, operations, or activities.
4.22.2 For purposes of this Agreement, "Applicable Environmental
Laws" mean any and all laws pertaining to health, safety, or the
environment in effect in any and all jurisdictions in which
Bridgestone, the LLCs or Label Systems, Inc. has conducted operations
or activities or owned or leased property, including, without
15
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limitation, the Clear Air Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, the Rivers and Harbors Act of 1899, as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery
Act of 1976, as amended, the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, any state law and other environmental
conservation or protection laws.
4.23 Compliance With Zoning and Planning Regulations. The use of all
-----------------------------------------------
of the material properties in or on which Bridgestone, the LLCs or Label
Systems, Inc. conducts their businesses, and all material machinery and
equipment therein and the conduct of any business therein complies in all
respects with all applicable zoning and planning statutes, regulations and
rules.
4.24 Employment and Employment Practices. Bridgestone, the LLCs and
-----------------------------------
Label Systems, Inc. each is in full compliance, except for any such non-
compliance which would not have a Material Adverse Effect, with all applicable
laws respecting employment and employment practices, terms and conditions of
employment, wages and hours, and nondiscrimination in employment and is not
engaged in any prohibited unfair labor practice. There is no labor strike,
dispute, slowdown, or work stoppage actually pending or threatened against or
involving Bridgestone, the LLCs or Label Systems, Inc., nor has Bridgestone, the
LLCs or Label Systems, Inc. experienced any work stoppage or any other labor
dispute during the last three years, except for any of the above which would not
have a Material Adverse Effect.
4.25 Accounts Receivable. All accounts receivable of Bridgestone, the
-------------------
LLCs and Label Systems, Inc. are set forth on Schedule 4.25. Except to the
extent reflected or reserved against in the Latest Balance Sheets, each of the
accounts receivable reflected on Bridgestone's, the LLCs's or Label Systems,
Inc.'s books and records (i) will have arisen out of sales in the ordinary
course of business made by Bridgestone, the LLCs or Label Systems, Inc. in
compliance with all applicable laws, rules and regulations, (ii) will be a valid
obligation owing by the respective account debtor thereunder to Bridgestone, the
LLCs or Label Systems, Inc., (iii) will not be subject to any valid defense,
offset or counterclaim, and (iv) will be collectible in full in the ordinary
course of business in an amount equal to not less than the face amount thereof
without referral to an attorney or collection agency. Sellers have not received
any notice or threat that any items previously shipped by Bridgestone, the LLCs
or Label Systems, Inc., for which payment has not yet been received are to be
returned for any reason, other than returns made in the ordinary course of
business or reserved against in the Latest Balance Sheets, and Sellers have no
reason to believe that unusual returns of any such items will occur subsequent
to the Closing Date.
4.26 Liabilities. Schedule 4.26 sets forth a true and complete list
-----------
for Bridgestone, the LLCs and Label Systems, Inc. of all of their respective
outstanding or accrued obligations
16
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for or under (a) accounts payable, (b) taxes of any and all types, (c) interest,
(d) capital leases, and (e) other liabilities.
4.27 Intellectual Property. Except as set forth on Schedule 4.27,
---------------------
neither Bridgestone, the LLCs nor Label Systems, Inc. has any material patents,
patent rights, patent applications, licenses of intellectual property as
licensee, trademarks, trademark rights, trade names, trade name rights, service
mark rights, copyrights, unpatented discoveries, processes, or inventions or
similar rights (collectively the "Intellectual Property"), nor requires any such
rights in order to conduct their businesses. Unless otherwise indicated on
Schedule 4.27, Bridgestone, the LLCs or Label Systems, Inc. owns the entire
right, title, and interest in and to the Intellectual Property and technology
used in their businesses (including, without limitation, the exclusive right to
use and license same) and each item constituting part of the Intellectual
Property which is owned by Bridgestone, the LLCs or Label Systems, Inc., has
been, to the extent indicated on Schedule 4.27, duly registered with, filed in
or issued by the trademark or patent office or such other governmental entity,
domestic or foreign, as are indicated on Schedule 4.27, and such registrations,
filings and issuances remain in full force and effect, except where the failure
to be so registered, filed or issued and in full force and effect, would not
have a Material Adverse Effect. Except as stated on Schedule 4.27, or as would
not have a Material Adverse Effect, there are no pending or threatened
proceedings or litigation or other adverse claims affecting or with respect to
the Intellectual Property. To the best of each Seller's knowledge, each of
Bridgestone's, the LLCs' or Label Systems, Inc.'s rights to its proprietary
software is free and clear of any claims of any employees, consultants, or
outside programmers. Schedule 4.27 lists all notices of or claims received by
Sellers, Bridgestone, the LLCs or Label Systems, Inc., during the past two years
that claim infringement, contributory infringement, inducement to infringe,
misappropriation or breach by Bridgestone, the LLCs or Label Systems, Inc. of
any domestic or foreign patent, patent application, patent, software or know-how
license, trade name, trademark, copyright, service mark, trademark registration
or application, service mark registration or application, copyright registration
or application, trade secret or other confidential proprietary information.
Except as disclosed on Schedule 4.27, or as would not have a Material Adverse
Effect, to the best of each Seller's knowledge after due investigation and
inquiry, neither Bridgestone, the LLCs nor Label Systems, Inc. is infringing, or
otherwise acting adversely to, the right of any person under or in respect to
any patent, license, trademark, trade name, service mark, copyright, or similar
intangible right.
4.28 Insurance. Schedule 4.28 lists all of the insurance policies of
---------
Bridgestone, the LLCs and Label Systems, Inc., (except health insurance and
disability insurance policies), setting forth with respect to each policy, the
name of the insurer, a description of the policy, the dollar amount of
coverages, the amount of premium, the date through which all premiums have been
paid, and the expiration date. Copies of all such insurance policies have been
furnished to Buyer. Each insurance policy relating to the insurance listed on
Schedule 4.28, is in full force and effect, is valid and enforceable, and
Bridgestone, the LLCs or Label Systems, Inc., as the case may be, is not in
breach or in default under any such policy. Sellers, Bridgestone, the LLCs or
Label Systems, Inc., has or have not received any notice of or any reason to
believe that there is or has been any actual, threatened, or
17
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contemplated termination or cancellation of any insurance policy listed on
Schedule 4.28. Except as listed on Schedule 4.28, no claims have been made under
any such insurance policy. Neither Bridgestone, the LLCs nor Label Systems, Inc.
has or have failed to give any notice or to present any claim under any
insurance policy in a due and timely fashion.
4.29 Employee Benefit Plans. Except as listed on Schedule 4.29,
----------------------
Bridgestone, the LLCs or Label Systems, Inc. has or have not adopted any
retirement, profit sharing, deferred compensation, stock option, bonus, group or
individual medical, dental, health, life insurance, survival benefit, or similar
plan or arrangement covering all or any of their employees. Copies of such
plans, identified on Schedule 4.29, have been furnished to Buyer. Each of the
arrangements set forth on Schedule 4.29 is referred to as an "Employee Benefit
Plan." Each Employee Benefit Plan is and has been maintained and operated in
compliance in all material respects with the terms of the respective plans and
with the requirements imposed by applicable law. Except as set forth on
Schedule 4.29, there is no pending or threatened legal action, proceeding, or
investigation, other than routine claims for benefits, concerning any Employee
Benefit Plan or any fiduciary or service provider and to the best of each
Seller's knowledge, there is no basis for any such legal action or proceeding.
Except as set forth on Schedule 4.29, there is no liability, contingent or
otherwise, for any Employee Benefit Plan other than insurance premiums satisfied
in due course. Each Employee Benefit Plan for which a separate fund is or is
required to be maintained, has been fully funded as required by the terms of the
Plan as of the end of the most recently completed plan year. The execution of
this Agreement and the consummation of the transactions contemplated will not
result in (a) any payment (whether severance pay or otherwise) becoming due from
any Employee Benefit Plan, or result in the vesting, acceleration of payment, or
increases in the amount of benefit, or (b) the employees, officers, and/or
directors of Buyer, as the owner of the Bridgestone Stock or the LLC Interests,
becoming eligible to receive benefits under such Employee Benefit Plans pursuant
to the terms of such Plans or under applicable law.
4.30 Warranty Claims. Except as listed on Schedule 4.30, there are no
---------------
material unresolved claims or claims asserted or threatened by Bridgestone's,
the LLCs' or Label Systems, Inc.'s customers for breach of express or implied
warranty, misrepresentation, or any other claims based on a defect in or failure
of services or products sold or leased by Bridgestone, the LLCs or Label
Systems, Inc.
4.31 Computer Programs. To the best knowledge of the Sellers, all
-----------------
computer or computer related hardware or software of Bridgestone, the LLCs and
Label Systems, Inc. (the "Computer System") is millennium compliant. For
purposes of this section "millennium compliant" means that the Computer System
(a) allows for the input of all dates in a four-digit format; (b) provides date
output in a four-digit format; (c) accommodates same-century and multi-century
date related formulas and calculations (including leap year calculations); (d)
function accurately and without interruption before, during, and after January
1, 2000, and (e) responds to two-digit date input in a way that resolves any
ambiguity as to century.
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4.32 No Finder's Fee. No finder, broker, agent, or other intermediary
---------------
has acted for or on behalf of any Seller in connection with the negotiation or
consummation of the transactions contemplated hereby.
4.33 Illegal Payments. To the best knowledge of Sellers, none of
----------------
Sellers, Bridgestone, the LLCs, Label Systems, Inc., or any director, officer,
manager, employee, or agent of Sellers, Bridgestone, the LLCs or Label Systems,
Inc., has, directly or indirectly, paid or delivered any fee, commission, or
other sum of money or item of property however characterized to any broker,
finder, agent, government official, or other person, in the United States or any
other country, in any manner related to the business or operations of
Bridgestone, the LLCs or Label Systems, Inc., which Sellers, Bridgestone, the
LLCs or Label Systems, Inc., or any such director, officer, employees, or agent
knows or has reasons to believe to have been illegal under any foreign, federal,
state or local law.
4.34 Shareholder Notes. Some or all of the Sellers are holders of
-----------------
promissory notes issued by Bridgestone in their favor; with the principal
amounts and accrued interest due thereunder as set forth in Schedule 4.34.
Copies of the Shareholder Notes have been delivered to Buyer. The Shareholder
Notes were duly authorized and constitute the valid and binding agreements of
Bridgestone. Upon consummation of the transactions contemplated hereby, Buyer
will acquire from Sellers all of Sellers' right, title, and interest in the
Shareholder Notes, free and clear of all liens, pledges, security interests, or
other encumbrances.
4.35 Full Disclosure. Sellers have provided Buyer with full access to
---------------
all books, accounts, records, and documents of or relating to Bridgestone, the
LLCs and Label Systems, Inc., their businesses and assets and have accurately
represented to Buyer the state of the business of each of Bridgestone, the LLCs
and Label Systems, Inc. and the state and quality of the customer relationships
of each Bridgestone, the LLCs and Label Systems, Inc. No representation or
warranty of Sellers contained in this Agreement contains any untrue statement of
a material fact or omits any material fact necessary to make the statements
contained herein or therein not false or misleading. There is no fact presently
known to Sellers that materially or adversely affects or in the future may
materially or adversely affect the business, assets, or operations of
Bridgestone, the LLCs or Label Systems, Inc. that has not been set forth in this
Agreement. This representation is subject to unforeseen future events not in
Sellers' reasonable control.
5. REPRESENTATIONS AND WARRANTIES OF SELLERS WITH RESPECT TO THE
-------------------------------------------------------------
ACQUISITION OF THE SHARES. In connection with the Sellers' acquisition of OpSec
- -------------------------
Stock, and any additional acquisition of OpSec Stock as provided in Section 3.5
(collectively, the "Shares"), each Seller represents and warrants as follows:
5.1 Sophistication; Investment Intent. Seller possesses the
---------------------------------
experience and sophistication as an investor which are adequate for the
evaluation of the merits and risks of the investment in the Shares. Seller has
determined that the acquisition of the Shares is
19
<PAGE>
appropriate for Seller. Seller is acquiring the Shares for his own account,
for investment, and not as a distributor of securities.
5.2 Availability of Public Documents. Seller acknowledges that Buyer
--------------------------------
has made available to Seller copies of Buyer's annual report on Form 10-KSB
for the year ended March 31, 1999, and any current reports on Form 8-K
filed to date (collectively, the "Public Documents"). Except as set forth
in the Public Documents, no representations, assurances, or warranties have
been made to the Seller, by Buyer, or by any of its officers, directors,
agents, employees, or affiliates, nor anyone else on its behalf,
concerning, among other things, future profitability of Buyer, or the tax
consequences of the Seller's ownership of the Shares, and in acquiring the
Shares, the Buyer is not relying upon any information, other than that
contained in the Public Documents, and the results of his own independent
investigation.
5.3 Unregistered Shares. Seller is aware that the Shares have not
-------------------
been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws or regulations in reliance
upon exemptions under the Securities Act and under exemptions under state
law. The Seller understands that he may not sell the Shares unless they are
registered or if an exemption from registration under the Securities Act,
such as by reason of Rule 144 thereunder, and any applicable state
securities laws or regulations, is available; the availability of which
must be established to the satisfaction of Buyer.
5.4 Restrictive Legend. Seller agrees that a legend may be placed on
------------------
any certificate or certificates evidencing the Shares, stating the Shares
have not been registered under the Securities Act and setting forth or
referring to the restrictions on transfers on sales thereof; and Buyer may
place stop transfer instructions against the Shares and the certificates
evidencing the Shares to restrict their transfer, except as prescribed by
the Securities Act.
5.5 Opportunity to Discuss Terms. Sellers have been provided the
----------------------------
opportunity to discuss the terms and conditions of the Shares and the
business of Buyer and with members of Buyer's management and to review all
relevant financial information, books, records, and other information
concerning Buyer and the Shares, including the Public Documents, such that
the Seller is familiar with the business, finances, and general prospects
for the future of the Buyer which they may consider significant for the
purposes of making an investment in the Shares.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
---------------------------------------
warrants to Sellers as follows:
6.1 Good Standing; Organization. Buyer is a corporation duly
---------------------------
organized, validly existing, and in good standing under the laws of the
state of Colorado, and has the power and authority to execute and perform
this Agreement.
6.2 Authority; Binding Obligation. Buyer has, by all necessary
-----------------------------
corporate actions, duly authorized the execution and performance of this
Agreement. This Agreement and each document executed by Buyer in connection
herewith constitute the valid and binding
20
<PAGE>
obligation of Buyer, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency and other laws affecting the rights of
creditors generally, and the discretion of the courts in granting equitable
remedies. Buyer's execution of this Agreement will not conflict with, result in
a breach of any provision of, or default under any contractual or other
obligation to which Buyer is a party or by which Buyer is bound, and will not
conflict with any provision of Buyer's Articles of Incorporation or Bylaws.
6.3 Governmental Consents. No consent, approval or authorization of,
---------------------
or registration, designation, or filing with any governmental authority, federal
or other, on the part of Buyer, is required in connection with the consummation
of the transactions contemplated by this Agreement.
6.4 Capitalization. The authorized capital stock of Buyer consists
--------------
of 17,500,000 shares, 15,000,000 of which are designated common stock, par value
$.005 per share, and 2,500,000 of which are designated preferred stock, par
value $.01 per share, 15,000 of which are designated Series B 8% Cumulative
Convertible Exchangeable Preferred Voting Stock. All outstanding shares of the
capital stock of Buyer have been validly issued and are fully paid and
nonassessable, and no shares of capital stock of Buyer have been issued in
violation of any pre-emptive or similar rights.
6.5 No Violation. The execution, delivery, and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby by Buyer
will not conflict with or result in a breach of any provision of or default
under, or give rise to any right of termination, cancellation, or acceleration
under the terms of (a) Buyer's charter, Bylaws, or other governing instruments;
(b) any bond, mortgage, lien, lease, note, agreement, contract, commitment,
license, permit or other instrument to which Buyer is a party; (c) any law,
rule or regulation; or (d) any judgment, order, writ, injunction or decree of
any court, administrative agency or governmental body, domestic or foreign,
except for such consents or waivers which have already been obtained and are in
full force and effect.
6.6 Litigation. Except as set forth in the Public Documents, there
----------
are no material legal proceedings pending to which the Buyer is a party or to
which any of its properties are subject.
6.7 No Bankruptcy. Buyer has not filed for any form of relief under
-------------
the United States Bankruptcy Code or analogous state laws. Buyer is not
insolvent, nor has it made a general assignment or composition with respect to
creditors. No order, execution, or other process has been levied against Buyer
in any action taken to repossess goods in any material amount. No steps have
been taken for the appointment of a receiver of any part of Buyer's property.
6.8 No Finder's Fee. Except for the Nassau Group, for whose fees, if
---------------
any, Buyer shall be responsible, no finder, broker, agent or other intermediary
has acted for or on behalf of Buyer in connection with the negotiation or
consummation of the transactions contemplated hereby.
21
<PAGE>
6.9 Investment Intent. Buyer is acquiring the Bridgestone Stock and
-----------------
the LLC Interests for its own account, for investment, and not as a
distributor of securities. Buyer is aware that the Bridgestone Stock and
the LLC Interests have not been registered under the Securities Act, or any
state securities laws and that such shares cannot be resold or otherwise
disposed of, except in compliance with applicable federal and state
securities laws.
7. COVENANTS OF SELLERS.
--------------------
7.1 Access to Information. Between the date of this Agreement and
---------------------
the Closing, Sellers shall (i) give Buyer and its authorized
representatives reasonable access to all employees, all plants, offices,
warehouses, and other facilities, and all books and records, of
Bridgestone, the LLCs and Label Systems, Inc.; (ii) permit Buyer and its
authorized representatives to make such inspections as they may reasonably
require; (iii) permit Buyer and its authorized representatives to speak
directly to customers of Bridgestone, the LLCs and Label Systems, Inc.; and
(iv) cause Bridgestone's and the LLCs' managers, and Label Systems, Inc.'s
officers to furnish Buyer and its authorized representatives with such
financial and operating data and other information with respect to
Bridgestone, the LLCs and Label Systems, Inc. as Buyer may from time to
time reasonably request; provided, however, that neither any investigation
conducted by Buyer pursuant to this section nor the results thereof shall
affect any representation or warranty of Sellers contained in this
Agreement or in any agreement, instrument, or document delivered pursuant
hereto or in connection herewith or Buyer's ability to rely thereon; and
provided further that Sellers shall have the right to have a representative
present at all times of any such inspections, interviews, and examinations
conducted at or on the offices or other facilities or properties of
Bridgestone, the LLCs or Label Systems, Inc.
7.2 Conduct of Business. During the period from the date of this
-------------------
Agreement to the Closing Date, or the date, if any, on which this Agreement
is earlier terminated, and except as otherwise authorized by the Buyer,
Bridgestone, the LLCs and Label Systems, Inc. shall operate their
businesses in the normal course and in a manner consistent with prudent
business practice. Sellers shall use their best efforts to maintain
satisfactory relationships with licensors, suppliers, distributors,
lessors, customers, and others having business relationships with
Bridgestone, the LLCs or Label Systems, Inc. Except as may be first
approved by Buyer, or as is otherwise permitted or required by this
Agreement, Sellers will cause Bridgestone, the LLCs and Label Systems, Inc.
to refrain from making any pension, retirement or insurance payment or
arrangement, and from agreeing to pay any bonus to accrue after the date of
this Agreement to or with any such persons except those that may have
already been accrued; and refrain from entering into any contract or
commitment, or buy, sell, or transfer inventory or equipment, except in the
ordinary course of business. During the period from the date of this
Agreement to the Closing Date, Buyer and Sellers shall confer on a regular
and frequent basis to report material operational matters and to report the
general status of ongoing operations. Sellers shall notify Buyer of any
unexpected emergency. Sellers shall not change the normal course of the
business of Bridgestone, the LLCs and Label Systems, Inc. or the operation
of their properties without the prior consent
22
<PAGE>
of the Buyer. Sellers shall notify Buyer promptly of any governmental
complaints, investigations, or hearings (or communications indicating that the
same may be contemplated), adjudicatory proceedings, budget meetings, or
submissions involving any material property of Bridgestone, the LLCs and Label
Systems, Inc., keep Buyer fully informed of and allow Buyer to participate in
such events, and provide Buyer's representatives prompt access to all materials
prepared in connection therewith.
7.3 Acquisition Proposals. From and after the date of this Agreement
---------------------
until the earlier of the Closing or the termination of this Agreement, neither
the Sellers nor any affiliate, director, officer, manager, employee, or
representative of Bridgestone, the LLCs or Label Systems, Inc. shall, directly
or indirectly, (i) solicit, initiate, or knowingly encourage any Acquisition
Proposal (as hereinafter defined) or (ii) engage in discussions or negotiations
with, or disclose any nonpublic information relating to Bridgestone, the LLCs or
Label Systems, Inc., to any person that is considering making or has made an
Acquisition Proposal. Sellers, shall, and shall cause Bridgestone, the LLCs and
Label Systems, Inc., to immediately cease and cause to be terminated any
existing activities, discussions, or negotiations with any persons conducted
heretofore with respect to any Acquisition Proposal and shall promptly request
each such person who has previously entered into a confidentiality agreement in
connection with an Acquisition Proposal to return to Sellers all confidential
information previously furnished to such person by or on behalf of Sellers,
Bridgestone, the LLCs or Label Systems, Inc. If Sellers, Bridgestone, the LLCs
or Label Systems, Inc., shall hereafter receive any Acquisition Proposal, Seller
shall immediately communicate the terms of such proposal to Buyer. The term
"Acquisition Proposal", as used in this Section 7.3 means any offer or proposal
for or any indication of interest in, a merger or other business combination
involving Bridgestone, the LLCs or Label Systems, Inc. or the acquisition of any
equity interest in, or substantial portion of the assets of Bridgestone, the
LLCs or Label Systems, Inc. other than the transactions contemplated by this
Agreement.
7.4 Third Party Consents. Sellers shall, and shall cause
--------------------
Bridgestone, the LLCs and Label Systems, Inc. to, use their reasonable best
efforts to obtain all consents, approvals, orders, authorizations, and waivers
of, and to effect all declarations, filings, and registrations with all third
parties (including all governmental entities) that are necessary, required, or
deemed by Buyer to be desirable to enable Sellers to transfer the Bridgestone
Stock and the LLC Interests to Buyer and to complete the transactions
contemplated hereby. All costs and expenses of obtaining or effecting any and
all of the consents, approvals, orders, authorizations, waivers, declarations,
filings, and registrations referred to in this Section 7.4 shall be borne by
Sellers.
8. ADDITIONAL AGREEMENTS AND COVENANTS.
-----------------------------------
8.1 Reasonable Best Efforts. Each party agrees that it will not
-----------------------
voluntarily undertake any course of action inconsistent with the provisions or
intent of this Agreement and will use its or his reasonable best efforts to
take, or cause to be taken all action and to do, or cause to be done, all things
reasonably necessary, proper, or advisable under applicable law to consummate
the transactions contemplated by this Agreement, including,
23
<PAGE>
without limitation, (i) cooperation in determining whether any consents,
approvals, orders, authorizations, waivers, declarations, filings, or
registrations of or with any governmental entity or third party are required in
connection with the consummation of the transactions contemplated hereby; (ii)
reasonable best efforts to defend, and cooperation in defending, all lawsuits or
other legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby; (iii) reasonable best efforts to cause to be
lifted or rescinded any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby; and (iv) the execution of any additional instruments necessary to
consummate the transactions contemplated hereby. Each Seller shall cooperate
with and assist Buyer and its authorized representatives in order to provide an
efficient and orderly transfer of the Bridgestone Stock and the LLC Interests
and to avoid any undue interruption in the activities and operations of the
business of Bridgestone, the LLCs or Label Systems, Inc. following the Closing.
8.2 Performances. As of the date of this Agreement, Buyer represents
------------
that, to its present knowledge, there is nothing that would prevent it from
satisfying its contractual obligations hereunder during the period from the
Effective Date to the date which is 27 months after the Effective Date, or the
date, if any, on which this Agreement is earlier terminated, subject to
unforeseen circumstances and events not within Buyer's reasonable control.
Buyer covenants that it has (or will have subsequent to the Effective Date) the
skills, expertise, know-how, and other resources to perform its obligations
hereunder and manufacture those products contemplated hereby such that
Bridgestone is able to adequately service those existing clients and prospective
clients listed on Schedules 2.1-1 and 2.1-2, subject to unforeseen circumstances
and events not within Buyer's reasonable control.
8.3 Confidentiality. Between the date of this Agreement and the
---------------
Closing, each party shall hold in confidence all information obtained in the
course of such party's investigation and due diligence review in connection with
this Agreement, on the terms and subject to the conditions contained in the
Confidentiality Agreement between the Buyer and Bridgestone dated October 23,
1998, as amended thereafter.
8.4 Amendment of Schedules. Each party agrees that, with respect to
----------------------
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until the Closing to supplement
or amend promptly the Schedules hereto with respect to any matter hereafter
arising or discovered which, if existing or known at the date of this Agreement,
would have been required to be set forth or described in the Schedules. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Section 9.1 and 10.1 have been
fulfilled, the Schedules hereby shall be deemed to include only that information
contained therein on the date of this Agreement and shall be deemed to exclude
all information contained in any supplement or amendment thereto; provided,
however, that if the Closing shall occur, then for purposes of Section 15.2, no
right of indemnification exists for Buyer for any matter which was corrected
pursuant to any such supplement or amendment at or prior to Closing.
24
<PAGE>
8.5 Motorola Supply Agreement. At or before Closing, Buyer and Label
-------------------------
Systems, Inc. intend to enter into a supply agreement pursuant to which Buyer
will supply all of Label Systems, Inc.'s requirements for embossed holographic
materials for use in servicing the Label Systems, Inc. Motorola account (the
"Motorola Supply Agreement"). The Motorola Supply Agreement will be
substantially in the form attached hereto as Exhibit E.
8.6 Transition Services Agreement. At Closing, the parties will
-----------------------------
execute an agreement under which Sellers will provide Bridgestone with
transitional services (the "Transitional Services Agreement"). The Transitional
Services Agreement will be substantially in the form attached hereto as Exhibit
F.
8.7 Non-Competition, Confidentiality and Cross-Marketing Agreements.
---------------------------------------------------------------
At Closing, the parties will execute a non-competition, confidentiality and
cross-marketing agreement (the "Non-Competition Agreements") concerning
holographic and photo polymer products of the type manufactured and supplied by
Sellers as of Closing. The Non-Competition Agreements will be substantially in
the form attached hereto as Exhibits G-1 and G-2.
8.8 Options to Purchase Imaging, LLC and Label Systems, LLC. The
-------------------------------------------------------
parties will execute option agreements (the "Option Agreements") at Closing
pursuant to which Buyer will be entitled to purchase all of the membership
interests of Imaging, LLC and Label Systems, LLC, to the extent not owned
directly or indirectly by Buyer. The Option Agreements will be substantially in
the form attached hereto as Exhibits H-1 and H-2 respectively.
8.9 Zucker Employment Agreement. At Closing, Bridgestone and Zucker
---------------------------
will enter into an employment agreement for a period of at least one year after
the Closing Date, pursuant to which Zucker will provide customer support
services. The Zucker employment agreement will be substantially in the form
attached hereto as Exhibit I.
8.10 Zubretsky and Felis Employment Agreements. Label Systems, Inc.
-----------------------------------------
will enter into employment agreements with Zubretsky and Felis in form and
content satisfactory to Buyer. Compensation for each of Zubretsky and Felis
shall be at $200,000 per year.
8.11 Board Representation. From and after the Effective Date, Buyer
--------------------
shall be entitled to board representation on the Label Systems, Inc.'s board of
directors and the LLCs' governing bodies equal to the greater of one seat, or
the number of seats which represents Buyer's pro rata ownership interest in each
of the LLCs. One such seat in each entity shall be occupied by Richard H. Bard.
Sellers will, and will cause Label Systems, Inc. and the LLCs to execute
agreements satisfactory to Buyer to confirm and evidence Buyer's right to the
board representation required by this Section 8.13.
8.12 Bridgestone Premises Leases. On or before Closing, Sellers shall
---------------------------
or shall cause Bridgestone to terminate any and all of its real property leases
effective as of the
25
<PAGE>
Closing. Sellers shall be responsible for and shall indemnify and hold Buyer
harmless from any and all termination fees or other amounts payable by
Bridgestone or Sellers in connection with the termination of such leases. To the
extent Buyer occupies any space leased or controlled by Sellers for more than 30
days after Closing, Buyer will pay Sellers the reasonable cost of such space.
8.13 Certain Bridgestone Obligations. On or before Closing, Sellers
-------------------------------
shall or shall cause Bridgestone to pay and collect in full any and all
intercompany debt or shareholder loans other than the Shareholder Notes.
8.14 Closing Balance Sheet of Bridgestone. Sellers shall deliver to
------------------------------------
Buyers a pro forma closing balance sheet of Bridgestone dated as of the
Effective Date (the "Pro Forma Closing Balance Sheet") at least seven business
days prior to the Closing. Within 60 days after Closing, Sellers shall make all
adjustments necessary to the Pro Forma Closing Balance Sheet and shall submit a
final unaudited balance sheet of Bridgestone as of the Effective Date, prepared
in accordance with generally accepted accounting principles (the "Final Closing
Balance Sheet"). The Pro Forma Closing Balance Sheet and the Final Closing
Balance Sheet shall not reflect any selling costs related to this Agreement
which are an obligation of the Sellers under Article 12 of this Agreement. The
Final Closing Balance Sheet shall be reviewed by Buyer's independent public
accountants and shall be deemed accepted by Buyer unless Buyer notifies the
Sellers in writing that it objects to the Final Closing Balance Sheet within 30
business days of receipt of the Final Closing Balance Sheet. If Buyer objects,
and the parties do not resolve the objection within 15 days, the objection will
be resolved by mandatory arbitration no later than 60 days after receipt of
Buyer's objections.
8.15 Inventory Count. For purposes of preparing the Final Closing
---------------
Balance Sheet, a physical count of the inventory owned by Bridgestone will be
conducted by Bridgestone as of the Effective Date and a schedule thereof (an
"Inventory Schedule") will be prepared by Bridgestone and verified by
representatives of the Buyer. The Inventory Schedule will be delivered to Buyer
with the Final Closing Balance Sheet. In making such physical count, the
following items of inventory shall be excluded: (a) all items which are damaged
or otherwise defective; (b) all items which are unsellable, discontinued, or
obsolete; (c) all items which are missing any components; (d) all items which
are not owned by Bridgestone but instead, are held in consignment from third
parties; and (e) all items which any third party has any security or other
interest that is not released other than any security interest relating to debt
assumed by Buyer hereunder at or prior to closing.
8.16 Receivables Schedule. Bridgestone shall deliver to Buyer with
--------------------
the Final Closing Balance Sheet, a schedule of its accounts receivable as of the
Effective Date, each of which shall be separately identified and properly
accrued on the books of Bridgestone as of the Effective Date. Each receivable
shall be reduced by (i) the total amount of customer credits reflected on
Bridgestone's books for the customers owing such receivable, and (ii) the amount
of uncollected service charges reflected on Bridgestone's books as owing by the
customer owing such receivable. Such schedule is referred to herein as the
"Receivables
26
<PAGE>
Schedule." The Receivables Schedule shall set forth the respective dates as
of which each of the receivables identified thereon was accrued on the
books of Bridgestone the total amount and number of each the invoices to
which such receivable relates, the total amount paid through the date of
the Receivables Schedule with respect to each such invoice, the total
amounts remaining to be paid under each such invoices, and the total amount
of customer credits and uncollected service charges existing with respect
to the customer owing such receivable. On or before delivery to Buyer of
the Receivables Schedule, Bridgestone shall have invoiced each of the
customers owing a receivable for the respective amounts owing by such
customers as of the date of the Receivables Schedule.
8.17 Customer Purchase Orders. Sellers covenant and agree that they
------------------------
shall furnish to Buyer, on or before the Closing, a schedule and copies of
all outstanding customer purchase orders received by Bridgestone through
the close of business on the Closing Date. Sellers covenant and agree that
they shall cause Bridgestone not to accept any customer purchase order
after the date hereof outside the ordinary course of business or involving
an amount in excess of $25,000.00 unless such acceptance has been approved
by the Buyer.
8.18 Bridgestone Purchase Orders. Bridgestone shall provide to Buyer
---------------------------
on or before the closing a true and correct list of outstanding purchase
orders of Bridgestone to its suppliers. Sellers covenant and agree that
they shall cause Bridgestone not to place any purchase orders after the
date hereof outside the ordinary course of business or involving an amount
in excess of $25,000.00, unless such purchase orders have been approved by
Buyer.
8.19 Transfer of Assets of Photo Polymer Business. No later than the
--------------------------------------------
Effective Date, Sellers shall cause all of the assets of the photo polymer
business conducted or proposed to be conducted by Bridgestone, the LLCs or
Label Systems, Inc. and described on Schedule 8.19 (the "Photo Polymer
Business") to be transferred to Imaging, LLC. The assets to be transferred
under this section are set forth on Schedule 8.19. The transfer shall be
accomplished in a manner acceptable to Buyer, in its sole discretion.
8.20 Releases. Sellers shall execute releases substantially in the
--------
form attached as Exhibit J.
9. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE. The obligation of Buyer
-------------------------------------------
to close this Agreement is subject to the satisfaction of the following
conditions at or before Closing except to the extent waived in writing by Buyer
at Closing:
9.1 Representations and Warranties True. Except as otherwise
-----------------------------------
permitted by this Agreement, all representations and warranties of Sellers
contained herein shall be correct on and as of the Effective Date and the
Closing Date as though made at that time.
9.2 Covenants and Agreements Performed. Sellers shall perform or
----------------------------------
cause to be performed, satisfy, and comply with all covenants, agreements,
and conditions required by this Agreement to be performed or complied with
by them on or before Closing.
27
<PAGE>
9.3 Opinion of Counsel to Sellers. Buyer shall have received an
-----------------------------
opinion of Wollmuth Maher & Deutsch LLP, legal counsel to Sellers, dated
the Effective Date, in the form of Exhibit K.
9.4 Approval of Counsel to Buyer. All legal matters in connection
----------------------------
with the consummation of the transactions contemplated hereby and all
agreements, instruments, and documents delivered in connection therewith
shall be reasonably satisfactory in form and substance to Lohf, Shaiman &
Jacobs, P.C., legal counsel to Buyer.
9.5 Due Diligence. The due diligence review relating to any customer
-------------
meetings or business strategy discussions to be conducted by Buyer
subsequent to the date hereof and prior to Closing with respect to
Bridgestone, the LLCs, and Label Systems, Inc. shall have been completed
and the results thereof shall be reasonably satisfactory to Buyer and its
counsel. The representations and warranties of Sellers shall remain binding
and enforceable, notwithstanding Buyer's satisfaction with its due
diligence review, and shall be unaffected by any information actually or
allegedly discovered, or able to be discovered, during such review.
9.6 Other Documents. Each document required to be delivered pursuant
---------------
to Section 8 on or before Closing must have been delivered.
9.7 Legal Proceedings. No proceeding shall, on the Effective Date,
-----------------
be pending or threatened seeking to restrain, prohibit, or obtain damages
or other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby.
9.8 Consents. Buyer shall have obtained all necessary approvals from
--------
its directors, shareholders, lenders, and state, municipal, and other
governmental authorities.
10. CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE. The obligation of
--------------------------------------------
Sellers to close this Agreement is subject to the satisfaction of the following
conditions at or before Closing except to the extent waived in writing by
Sellers at Closing:
10.1 Representations and Warranties True. Except as otherwise
-----------------------------------
permitted by this Agreement, all representations and warranties of Buyer
contained herein shall be correct on and as of the Effective Date as though made
at that time.
10.2 Covenants and Agreements Performed. Buyer shall perform or cause
----------------------------------
to be performed, satisfy, and comply with all covenants, agreements, and
conditions required by this Agreement to be performed or complied with by it on
or before Closing.
10.3 Approval of Counsel to Sellers. All legal matters in connection
------------------------------
with the consummation of the transactions contemplated hereby and all
agreements, instruments, and documents delivered in connection therewith shall
be reasonably satisfactory in form and substance to Wollmuth Maher & Deutsch
LLP, legal counsel to Sellers.
28
<PAGE>
10.4 Opinion of Counsel to Buyer. Sellers shall have received an
---------------------------
opinion of Lohf, Shaiman & Jacobs, P.C., legal counsel to Buyer, dated the
Effective Date, in the form of Exhibit L.
10.5 Other Documents. Each document required to be delivered pursuant
---------------
to Section 8 on or before Closing must have been delivered.
10.6 Legal Proceedings. No proceeding shall, on the Effective Date,
-----------------
be pending or threatened seeking to restrain, prohibit, or obtain damages or
other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby.
11. CLOSING.
-------
11.1 General. Closing of the transactions contemplated hereby shall
-------
take place at the offices of Lohf, Shaiman & Jacobs, P.C., 950 South Cherry
Street, Suite 900, Denver, Colorado 80246, or such other place as the parties
determine, on or before October 15, 1999, unless extended by written agreement
of the parties (the "Closing"; the date of such Closing, the "Closing Date").
All actions taken at Closing shall be considered effective as of September 30,
1999 (the "Effective Date"). All actions taken at Closing also has be deemed to
be taken simultaneously and no document, agreement or instrument shall be
considered to be delivered until all items which are to be delivered have been
delivered.
11.2 Closing Transactions. At Closing, the following will occur:
--------------------
11.2.1 Sellers will execute and deliver a certificate, dated the
Closing Date, certifying that (i) all of their warranties and
representations are true, correct and enforceable as of the Closing
Date, (ii) Sellers, Bridgestone, the LLCs or Label Systems, Inc., as
the case may be, have performed and complied with all covenants and
agreements required by this Agreement to be performed or complied with
by them or it on or prior to the Closing Date.
11.2.2 Buyer will deliver to Sellers, an opinion of Buyer's legal
counsel.
11.2.3 Label Systems, Inc. and Buyer will execute and deliver the
Motorola Supply Agreement.
11.2.4 Sellers and Buyer will execute and deliver the Non-
Competition Agreements.
11.2.5 Buyer and Zucker will execute and deliver the Employment
Agreement.
11.2.6 Sellers and Buyer will execute and deliver the Option
Agreements.
29
<PAGE>
11.2.7 Buyer will pay the purchase price to the extent due at
Closing as provided in Section 3.
11.2.8 Buyer will execute and deliver to Sellers the Registration
Rights Agreement.
11.2.9 Sellers will deliver to Buyer, an opinion of Sellers'
legal counsel.
11.2.10 Buyer shall have received the certificates, instruments,
and other documents listed below:
11.2.10.1 The certificates in Sellers' names representing
the Bridgestone Stock and the LLC Interests, duly endorsed for
transfer to Buyer and accompanied by appropriate stock powers.
11.2.10.2 The minute books, stock records, and corporate
seal of Bridgestone, certified as complete and correct as of the
Effective Date by the secretary or an assistant secretary of
Bridgestone.
11.2.10.3 The written resignation from the board of
directors of Bridgestone of each member of the board, such
resignation to be effective concurrently with the Closing on the
Effective Date.
11.2.10.4 The written resignation as an officer of
Bridgestone, of each officer of Bridgestone, such resignation to
be effective concurrently with the Closing on the Effective Date.
11.2.10.5 Releases executed by the Sellers.
11.2.11 The parties will execute and deliver such other documents
as may reasonably be required to carry out the intent of the
transaction contemplated by this Agreement.
12. EXPENSES OF SALE. Except as otherwise expressly provided in this
----------------
Agreement, each party shall be responsible for its or his own legal and
accounting fees and other expenses incident to the preparation, execution, and
performance of this Agreement and the transactions contemplated thereby.
13. BRIDGESTONE TAX MATTERS.
-----------------------
13.1 Liability for Taxes.
-------------------
13.1.1 Taxable Periods Ending on or Before the Effective Date.
------------------------------------------------------
Sellers shall be solely liable for, and shall indemnify and hold
harmless Buyer, and Bridgestone against, all Taxes (as defined below)
of Bridgestone due for all taxable years and
30
<PAGE>
periods ending on or before the Effective Date and for the portion of
any Straddle Period (as defined below) ending on the Effective Date;
provided, however, that Sellers shall not be liable for Taxes to the
extent such Taxes are specifically and fully reserved on the Closing
Balance Sheet. "Taxes" means any income taxes or similar assessments
or any sales, excise, occupation, use, ad valorem, property,
production, severance, transportation, employment, payroll, franchise,
or other tax imposed by any United States federal, state, or local, or
any foreign or provincial taxing authority, including any interest,
penalties, or additions attributable thereto.
13.1.2 Taxable Periods Commencing After the Effective Date.
---------------------------------------------------
Bridgestone shall be solely liable for all Taxes of Bridgestone for
all Taxable years and periods commencing after the Effective Date.
Bridgestone shall indemnify and hold harmless Sellers against any and
all Taxes for any taxable year or taxable period commencing after the
Effective Date due or payable by Bridgestone.
13.1.13 Taxable Periods Commencing Before and Ending After the
------------------------------------------------------
Effective Date. Buyer shall cause Bridgestone to pay all Taxes due
--------------
for any taxable year or taxable period commencing before and ending
after the Effective Date (the "Straddle Period"). Sellers shall pay
to Bridgestone an amount equal to the excess, if any, of (i) the Taxes
that would have been due if the Straddle Period had ended on the
Effective Date (using an interim-closing-of-the-books method except
that exemptions, allowances, and deductions that are otherwise
calculated on any annual basis (such as deductions for real estate
Taxes, depreciation, and depletion) shall be apportioned on a per diem
basis) over (ii) the sum of (a) the Taxes for the Straddle Period paid
prior to the Effective Date by Bridgestone or by Sellers with respect
to Bridgestone and (b) the Taxes reserved on the Final Closing Balance
Sheet.
13.2 Preparation and Filing of Tax Returns.
-------------------------------------
13.2.1 Taxable Periods Ending On or Before the Effective Date.
------------------------------------------------------
Sellers shall prepare and file all Tax Returns required to be filed
with respect to Bridgestone for all taxable periods ending on or
before the Effective Date.
13.2.2 Taxable Periods Ending After the Effective Date. Buyer
-----------------------------------------------
shall cause to be prepared and duly filed all tax returns of
Bridgestone for taxable periods ending after the Effective Date. Buyer
shall pay or cause to be paid all Taxes shown on such tax returns for
all periods covered by such tax returns, except that to the extent any
additional Taxes are due by Sellers for the Straddle Period, payment
shall be made in accordance with Section 13.1.3.
13.3 Cooperation, Records. Buyer and Sellers shall furnish or cause
--------------------
to be furnished to each other, upon request, as promptly as practicable, such
information (including access to books and other records) and assistance as is
reasonably necessary for the filing of any return, amended return or claim for
refund, for the preparation for or conduct of any audit, and for the prosecution
or defense of any claim, suit, or proceeding relating to
31
<PAGE>
any proposed Tax adjustment. Buyer and Sellers shall cooperate with each other
in good faith in the preparation of all tax returns and in the conduct of any
audit or other similar proceedings and each shall execute and deliver such
powers of attorney and other documents as are necessary to carry out this
intent. Each party shall provide the other with copies of all tax returns
described in Sections 13.2.1 and 13.2.3 at least 10 days prior to the due date
for filing such returns. The other party shall have the right to review such
returns. Sellers and Buyer agree to consult and resolve in good faith any issues
arising as a result of the review of such returns.
14. TERMINATION.
-----------
14.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated hereby abandoned at any time prior to the Closing in
the following manner:
14.1.1 By mutual written consent of Sellers and Buyer.
14.1.2 By either Sellers, as a group, or Buyer, if (a) the
Closing shall not have occurred on or before October 15, 1999; unless
such failure to close shall be due to a breach of this Agreement by
the party seeking to terminate this Agreement pursuant to this clause;
or (b) there shall be any statute, rule, or regulation that makes
consummation of the transactions contemplated hereby illegal or
otherwise prohibited or a governmental entity shall have issued an
order, decree, or ruling or taken any other action permanently
restraining, enjoining, or otherwise prohibiting the consummation of
the transactions contemplated hereby, and such order, decree, ruling,
or other action shall have become final and nonappealable.
14.1.3 By Sellers, if (i) any of the representations and
warranties of Buyer contained in this Agreement shall not be true and
correct when made or at any time prior to the Closing as if made at
and as of such time, or (ii) Buyer shall have failed to fulfill any of
its obligations under this Agreement, and, in the case of each of
clauses (i) and (ii), such misrepresentation, breach of warranty, or
failure (provided it can be cured) has not been cured within 30 days
of actual knowledge thereof by Buyer, and such misrepresentation,
breach of warranty, or failure has or may have a Material Adverse
Effect.
14.1.4 By Buyer, if (i) any of the representations and warranties
of Sellers contained in this Agreement shall not be true and correct
when made or at any time prior to the Closing as if made at and as of
such time, or (ii) Sellers, Bridgestone, the LLCs, or Label Systems,
Inc. shall have failed to fulfill any of its or their obligations
under this Agreement, and, in the case of each of clauses (i) and
(ii), such misrepresentation, breach of warranty, or failure (provided
it can be cured) has not been cured within 30 days of actual knowledge
thereof by Sellers, Bridgestone, the LLCs, or Label Systems, Inc., and
such misrepresentation, breach of warranty, or failure has or may have
a Material Adverse Effect.
32
<PAGE>
14.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement pursuant to Section 14.1 by Sellers or Buyer, written notice thereof
shall forthwith be given to the other party specifying the provision hereof
pursuant to which such termination is made, and this Agreement shall become void
and have no effect, except that the agreements contained in this Section, in
Section 8.2 and in Article 12 shall survive the termination hereof. Nothing
contained in this section shall relieve any party from liability for any breach
of this Agreement.
15. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.
--------------------------------------------
15.1 Survival. The right to make a claim for indemnification under
--------
this Agreement, or any other claim for breach of Sellers' obligations hereunder
through and including the Effective Date, shall survive the Closing for a period
of 18 months except that a claim for indemnification under Section 13 shall
continue to survive until the expiration date of the statute of limitations
applicable to any indemnified liability thereunder. The time limitations set
forth in this Section 15.1 shall not affect Buyer's right to assert claims for
fraud or misrepresentation.
15.2 Indemnification by Sellers. Sellers severally, in the
--------------------------
proportions set forth in Schedule 15.2, shall defend, indemnify, and hold
harmless Buyer, each director, officer, employee, or agent of Buyer, its
subsidiaries, and each affiliate thereof, and their respective heirs, legal
representatives, successors, and assigns (collectively, the "Buyer Group"), and
will pay to the Buyer Group the amount of, any loss, liability, claim, damage
(including incidental and consequential damages), expense (including costs of
investigation and defense and reasonable attorneys' fees) or diminution of
value, whether or not involving a third party claim (collectively, "Damages"),
arising, directly or indirectly, from or in connection with (a) any inaccuracy
in or breach of any of the representations, warranties, covenants, or agreements
made by the Sellers, Bridgestone, the LLCs or Label Systems, Inc. contained in
this Agreement, or in any certificate, instrument, or document delivered
pursuant hereto; (b) the ownership, operation, management or use of Bridgestone,
the LLCs or Label Systems, Inc., their businesses or assets prior to the Closing
Date; (c) any products distributed or sold by Bridgestone, the LLCs or Label
Systems, Inc. in connection with their businesses on or prior to the Closing
Date; (d) the transfer to Label Systems, Inc. of any employee of Bridgestone;
and (e) any acts or omissions of Bridgestone, the LLCs or Label Systems, Inc.
prior to the Closing Date or any events or occurrences involving their assets,
the operation of their businesses, or their employees or former employees taking
place prior to the Closing Date. In the event of a claim by any creditor or
other person or entity subject to this section, Buyer shall provide Sellers with
written notice of such claim in the manner set forth in Section 16.1 below,
within ten days of Buyer's receipt of the claim. Thereafter, Sellers shall have
a period of five days within which to notify Buyer in the manner provided for in
Section 16.1, that they desire to intercede on Buyer's behalf and defend the
claim at their sole cost (including without limitation, payment of any damages
awarded or agreed to, interest, penalties, court costs, and attorneys' fees).
If Sellers fail to so notify Buyer and to defend the claim, Buyer may defend
such claim at its cost and maintain an action against Sellers to recover all
Damages. A claim for indemnification not involving a third party
33
<PAGE>
claim, may be served by written notice from Buyer to Sellers in the manner
provided for in Section 16.1.
15.3 Indemnification by Sellers-Environmental Matters. In addition to
------------------------------------------------
the provisions of Section 16.2, Sellers severally, in the proportions set forth
in Schedule 15.2, shall defend, indemnify, and hold harmless the Buyer Group
for, and will pay to the Buyer Group the amount of, any Damages (including costs
of clean-up, containment, or other remediation) arising, directly or indirectly,
from or in connection with (a) the Sellers, Bridgestone's, the LLCs' or Label
Systems, Inc.'s ownership, or operation of any properties in which Sellers,
Bridgestone, the LLCs or Label Systems, Inc. has or had an interest on or prior
to the Closing Date, under any Applicable Environmental Laws, or (b) the
presence of hazardous materials on any property used by Sellers, Bridgestone,
the LLCs or Label Systems, Inc. or the use of any hazardous materials in
Bridgestone's, the LLCs' or Label Systems, Inc.'s business on or prior to the
Closing Date. Buyer will be entitled to control any clean-up and any related
legal proceeding or investigation with respect to which indemnity may be sought
under this Section 15.3.
15.4 Limitation on Damages. Except as otherwise provided in this
---------------------
Agreement, no amount shall be payable in indemnification under this Section 15,
or for breach of this Agreement, unless the aggregate amount of Damages in
respect of which the Sellers would be liable under this Section 15 exceed
$250,000 (the "Basket"). In the event that the Damages exceed the Basket, the
indemnified party shall be entitled to seek indemnification for only the amount
in excess of the Basket. The maximum amount of Damages for which Felis,
Zubretsky, Zucker, and Dolan would be liable under this Section 15 shall be an
amount equal to $2,000,000 to be shared severally in the proportions set forth
in Schedule 15.4.
15.5 Indemnification by Buyer. Buyer shall defend, indemnify, and
------------------------
hold harmless each Seller, and their respective heirs, legal representatives,
successors, and assigns, and will pay to Sellers the amount of any Damages
arising, directly or indirectly, from or in connection with (a) an inaccuracy in
or breach by Buyer of any of its representations, warranties, covenants, or
agreements contained in this Agreement or in any certificate, instrument or
document delivered pursuant hereto, and (b) any acts or omissions of Bridgestone
after the Effective Date or occurrences involving the assets, the operation of
the business, or the employees or former employees of Bridgestone taking place
after the Effective Date. In the event of claim by any creditor or other person
or entity subject to this section, Sellers shall provide Buyer with written
notice of such claim in the manner set forth in Section 16.1 below, within ten
days of its receipt of the claim. Thereafter, Buyer shall have a period of five
days within which to notify Sellers in the manner provided for in Section 16.1
that it desires to intercede on Sellers' behalf and defend the claim at its sole
cost (including without limitation, payment of any damages awarded or agreed to,
interest, penalties, court costs, and attorneys' fees). If Buyer fails to
notify Sellers and to defend the claim, Sellers may defend such claim at its
cost and maintain an action against Buyer to recover the Damages. A claim for
indemnification for any matter not involving a third party claim may be served
by written notice by Sellers to Buyer as provided in Section 16.1.
34
<PAGE>
16. MISCELLANEOUS.
-------------
16.1 Notices. Any notices provided or required under the terms of
-------
this Agreement shall be effective immediately when provided by verified
facsimile transmission or personal delivery one business day after being
deposited with a nationally recognized overnight courier, or five days after
being sent by first class mail, and addressed as follows:
If to Sellers:
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
35
<PAGE>
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12/th/ Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to Buyer:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
16.2 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ITS
RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE SUBSTANTIVE LAW OF ANY
OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF
THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK, STATE OF NEW YORK.
16.3 Succession. This Agreement shall be binding upon and shall enure
----------
to the benefit of the parties, their successors, assigns and legal
representatives.
16.4 Entireties. This Agreement constitutes the entire agreement
----------
between the parties. No modification of this Agreement shall be binding unless
in writing and signed by both parties.
16.5 Severability. If any provision of this Agreement is found to be
------------
illegal, or unenforceable for any reason whatsoever, this Agreement shall be
interpreted and construed without reference to such provision, and the balance
of this Agreement shall remain in full force and effect.
36
<PAGE>
16.6 Cooperation. The parties agree to execute such additional
-----------
documents and take such actions as may be required to effectuate the purposes of
this Agreement.
16.7 Paragraph Headings. The paragraph headings are inserted in this
------------------
Agreement for convenience only and are not intended to affect the terms of this
Agreement.
16.8 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed by or on behalf of all the parties hereto.
16.9 Press Releases and Public Announcements. No party shall issue
---------------------------------------
any press release or otherwise make any public announcement or disclose
information to any third party (except those agents or representatives of a
party directly involved in the transactions contemplated by this Agreement and
except as required by law), concerning this Agreement or the transactions
contemplated hereby, without the consent of the other party. Notwithstanding the
above, Buyer may disclose such information concerning this Agreement or the
transactions contemplated hereby without the Sellers' approval, if the Seller is
advised by its legal counsel that it must do so in order to comply with the
laws, rules, and regulations concerning publically traded entities. In such
case, Sellers shall be entitled to review and comment on the proposed press
release or announcement prior to its being issued.
16.10 Gender. Throughout this Agreement, where such meanings would be
------
appropriate, the masculine gender shall be deemed to include the feminine and
the neuter and singular shall be deemed to include the plural.
16.11 [Intentionally Omitted]
---------------------
16.12 Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in counterparts, each of which shall be deemed an original and which
together shall constitute a single instrument. This Agreement and each
document related hereto may be executed and delivered by telecopier or other
facsimile transmission all with the same force and effect as if the same was a
fully executed and delivered original manual counterpart.
16.13 Remedies Not Exclusive. Except as otherwise provided in this
----------------------
Agreement, the rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law. The rights and remedies of
any party based upon, arising out of, or otherwise in respect of any inaccuracy
in or breach of any representation, warranty, covenant, or agreement contained
in this Agreement shall in no way be limited by the fact that the act, omission,
occurrence, or other state of facts upon which any claim of any such inaccuracy
or breach is based may also be the subject matter of any other representation,
warranty, covenant, or agreement contained in this Agreement (or in any other
agreement between the parties) as to which there is no inaccuracy or breach.
16.14 Attorneys' Fees. If any party obtains or engages an attorney or
---------------
attorneys for the purpose of enforcing its rights under the terms of this
Agreement for negotiation, litigation, arbitration, or other alternative dispute
resolution procedure, the prevailing party
37
<PAGE>
shall be entitled to recover their or its attorneys' fees, costs, and
disbursements in addition to any other relief sought or awarded.
16.15 Waiver. Neither the failure nor any delay by any party in
------
exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of
such right, power, or privilege, or the exercise of any other right, power,
or privilege.
16.16 Time. Time is of the essence of this Agreement.
----
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
SELLERS:
KEYSTONE TECHNOLOGIES, L.L.C.
By:/s/Kenneth P. Felis and Michael J. Zubretsky
--------------------------------------------
Its: Managing Members
/s/ Kenneth P. Felis
----------------------------------------------
Kenneth P. Felis
/s/ Michael J. Zubretsky
---------------------------------------------
Michael J. Zubretsky
/s/ Richard Zucker
-----------------------------------------------
Richard Zucker
/s/ Timothy Dolan
-----------------------------------------------
Timothy Dolan
38
<PAGE>
BUYER:
OPTICAL SECURITY GROUP, INC.
By: /s/ Richard H. Bard
-----------------------------------------------
Richard H. Bard, Chairman
39
<PAGE>
EXHIBIT A
NON-NEGOTIABLE ADJUSTABLE SUBORDINATED PROMISSORY NOTE
------------------------------------------------------
Initial Amount:
$1,500,000.00 September ____, 1999
FOR VALUE RECEIVED, the undersigned, OPTICAL SECURITY GROUP, INC. a
Colorado corporation ("Maker"), of 535 16th Street, Suite 920, Denver, Colorado
80202, promises to pay KEYSTONE TECHNOLOGIES, L.L.C., a Delaware limited
liability company, KENNETH P. FELIS, MICHAEL J. ZUBRETSKY, RICHARD ZUCKER, and
TIMOTHY DOLAN (individually a "Holder" and collectively the "Holders"), the
principal sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00), as
adjusted, together with interest as provided below.
This Note is issued pursuant to the terms and conditions of the Stock
Purchase Agreement by and between the Holders and the Maker, dated as of the
date hereof (the "Purchase Agreement"). Certain terms used in this Note and not
defined herein shall have the meaning set forth in the Purchase Agreement. The
principal amount due on this Note is subject to retroactive adjustment of the
principal amount on the Adjustment Date as provided in Section 3.3 of the
Purchase Agreement.
Payment hereunder shall be made to Holders in the proportions specified in
Schedule 3.10 to the Purchase Agreement. Payments shall be made to the Holders
at the addresses specified below, or at such other places as they may designate
by written instructions to Maker.
1. Interest. The Note shall bear no interest from the date hereof
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through October 1, 2000. Thereafter, the Note shall accrue interest at the
Citibank, N.A., or its successors, base rate (the "Base Rate") adjusted
quarterly on the 15th day of January, April, July, and October each year.
2. Payment Dates. This Note shall be payable as follows:
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2.1 In quarterly payments of interest only, commencing on the
Adjustment Date, and continuing thereafter on the first day of April, July,
October, and January each year.
2.2 The entire balance of principal plus any accrued but unpaid
interest shall be due on January 1, 2002 (the ("Due Date"), unless sooner paid.
3. Application of Payments. Payments received for application to this
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Note shall be applied first to the payment of collection costs, if any, second
to the payment of accrued interest at the rate specified below, if any, third to
the payment of accrued interest at the rate specified above, and the balance
applied in reduction of the principal amount of this Note.
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4. Subordination.
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4.1 Holders covenant and agree, by acceptance hereof, that the
payment of the principal of and interest on this Note is expressly subordinated,
to the extent and in the manner hereinafter set forth, in right of payment of
the principal of and interest on all Senior Indebtedness (as hereinafter
defined).
4.2 As used in this Note, the term "Senior Indebtedness" shall mean
the principal of and premium, if any, and interest on (i) debts and obligations
of the Maker or any of its subsidiaries, whether secured or unsecured,
regardless of whether incurred on, before or after the date hereof, issued,
assumed or incurred for money borrowed from or guaranteed to banks, trust
companies, insurance companies, investment companies or other similar
institutional lenders, in each case evidenced by notes, debentures, or similar
written obligations whether or not issued under the provisions of an indenture
or similar instrument; (ii) any debts and obligations of the Maker, or any of
its subsidiaries, which are secured by purchase money liens on assets used in
the ordinary course of business by the Maker or any subsidiary; (iii) the 8%
Senior Subordinated Convertible Debentures issued by the Maker due May 31, 2005;
(iv) the 8% Subordinated Convertible Debenture issued by the Maker due December
10, 2005, issued to Renaissance US Growth and Income Trust, PLC; (iv) and any or
all renewals, extension or modification of any indebtedness described in clauses
(i) or (iv) above, unless by the terms of the instrument creating or evidencing
such indebtedness or such renewal, extension or modification, it is provided
that such indebtedness as so modified or amended or renewed or extended is not
superior in right of payment to this Note.
4.3 So long as any Senior Indebtedness is outstanding, no payment of
the principal of or interest on this Note shall be made and no property or
assets of the Maker shall be applied to the payment of this Note if there shall
exist under the Senior Indebtedness or under any agreement pursuant to which
Senior Indebtedness shall have been incurred any event of default which shall
not have been waived or cured as provided under the terms of any such agreement.
4.4 In the event of the termination of Maker's existence as a going
business, liquidation of the Maker, or bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or any other
marshalling of the assets and liabilities of the Maker, or in the event of any
default in the payment of any Senior Indebtedness as to which default the holder
thereof shall have given the Maker notice (hereinafter a "Proceeding"), then all
principal of and interest on the Senior Indebtedness, in respect of such Senior
Indebtedness, if any, shall first be paid in full before the Holders shall be
entitled to receive any payment or distribution in respect of the principal of
or interest on this Note. In any such Proceeding, any payment or distribution
of any kind or character, whether in cash, securities or other property, to
which the Holders would be entitled to if this Note were not subordinated to the
Senior Indebtedness shall be paid to the holders of the Senior Indebtedness for
application to the payment of the Senior Indebtedness until such Senior
Indebtedness shall have been paid in full. To the extent that the holders of
Senior Indebtedness have received payments which, but for the provisions of this
section, would have been paid to the Holders, then, upon payment in full of the
Senior Indebtedness, the Holders shall be subrogated to the rights of the
holders of the Senior Indebtedness to receive payments or distributions of cash,
property, or securities of the Maker applicable to the Senior Indebtedness until
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the principal of and interest on this Note shall be paid in full. For purposes
of such subrogation, no payments or distributions to the holders of the Senior
Indebtedness which, but for the provisions hereof, would have been payable or
distributable to the Holders, as between the Maker, its creditors (other than
the holders of the Senior Indebtedness) and the Holders, shall be deemed to be a
payment by the Maker to or on account of this Note.
4.5 Each of the Holders, by acceptance hereof, covenants and agrees
that such Holder will not accept or receive, nor authorize any other person to
accept or receive, for the benefit of such Holder, any payment of principal of
or interest on this Note which such Holder is not entitled to receive or retain
under any of the provisions of this Note. In the event that such Holder shall
receive any such payment or distribution which such Holder is not entitled to
retain under any of the foregoing subordination provisions, such Holder will
hold any amount so received in trust for the holders of the Senior Indebtedness,
and will forthwith turn over such payment or distribution (without liability for
interest thereon) to the holders of Senior Indebtedness in the form received to
be applied to the Senior Indebtedness.
4.6 Holders of any Senior Indebtedness may, at any time and from time
to time, without the consent of or notice to the Holders, without incurring
responsibility to the Holders and without impairing or releasing the obligations
of the Holders to the holders of the Senior Indebtedness, change or extend the
time of payment of, or renew or alter, any Senior Indebtedness, or otherwise
amend in any manner any agreement pursuant to which Senior Indebtedness shall
have been issued and exercise or refrain from exercising any rights against the
Maker and any other person.
4.7 No holder of Senior Indebtedness shall be prejudiced in its right
to enforce subordination of this Note by any act or failure to act by the Maker
or any other person in the custody of the assets or property of the Maker.
4.8 In the event of any default in the payment of any Senior
Indebtedness as to which default the holder thereof shall have given the Maker
notice, Holders agree that Holders will not (a) declare any indebtedness under
this Note to be due and payable or otherwise accelerate the maturity of this
Note, (b) commence or join in the commencement of any proceeding against the
Maker or any of its subsidiaries, or (c) commence any litigation against the
Maker to collect, or exercise any rights or remedies in respect of, this Note.
4.9 The provisions of this Section 4 regarding subordination are
solely for the purpose of defining the relative rights of the holders of Senior
Indebtedness on the one hand and the rights of the Holders on the other hand,
and none of such provisions shall impair, as between the Maker and the Holders,
the obligation of the Maker, which is unconditional and absolute, to pay to the
Holders the principal of and interest on this Note in accordance with its terms,
and no such provisions shall prevent the Holders from exercising all remedies
otherwise permitted by applicable law.
4.10 Holders, by acceptance hereof, covenant and agree that Holders
shall execute such additional documents and take such actions as may be required
to effectuate the purposes of
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this Section 4, including, but not limited to, additional documents reasonably
requested by any holder of Senior Indebtedness.
5. Ranking. The indebtedness evidenced by this Note shall rank equal to
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all indebtedness evidenced by notes or debentures of the Maker issued by the
Maker to third parties in connection with financing the transactions
contemplated by the Purchase Agreement, except as expressly provided in Section
4.
6. Default. Subject to the provisions of Section 4, the entire unpaid
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balance of the principal amount and all interest accrued and unpaid on this Note
shall, at the election of the Holders, be and become immediately due and payable
upon the occurrence of any of the following events (a "Default Event"):
6.1 The nonpayment by the Maker of interest when due as provided in
this Note, unless such delinquent payment is cured within five (5) business
days.
6.2 The nonpayment by the Maker of principal on the Due Date, or upon
acceleration.
6.3 The default by Maker on material Senior Indebtedness.
6.4 If the Maker (i) applies for or consents to the appointment of,
or if there shall be a taking of possession by, a receiver, custodian, trustee
or liquidator for the Maker or any of its property; (ii) becomes generally
unable to pay its debts as they become due; (iii) makes a general assignment for
the benefit of creditors or becomes insolvent; or (iv) files or is served with
any petition for relief under the Bankruptcy Code or any similar federal or
state statute.
6.5 The dissolution or termination of existence of the Maker.
7. Interest Rate Upon Default. Upon the occurrence of any Default Event,
--------------------------
the indebtedness evidenced by this Note shall bear interest at the rate of 3%
over the Base Rate. The Holders shall be entitled to collect all costs and
expenses of collection and/or suit, including, but not limited to reasonable
attorneys' fees.
8. Remedies. Each right, power or remedy of the Holders hereof upon the
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occurrence of any Default Event as provided for in this Note or now or hereafter
existing at law or in equity or by statute shall be cumulative and concurrent
and shall be in addition to every other right, power, or remedy provided for in
this Note or now or hereafter existing at law or in equity or by statute, and
the exercise or beginning of the exercise by the Holders or transferee hereof of
any one or more of such rights, powers or remedies shall not preclude the
simultaneous or later exercise by the Holders hereof of any or all such other
rights, powers or remedies.
9. Failure to Act and Waiver. No failure or delay by the Holders hereof
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to insist upon the strict performance of any term of this Note or to exercise
any right, power or remedy consequent upon a default hereunder shall constitute
a waiver of any such term or of any such breach, or
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preclude the Holders hereof from exercising any such right, power or remedy at
any later time or times. By accepting payment after the due date of any amount
payable under this Note, the Holders hereof shall not be deemed to waive the
right either to require payment when due of all other amounts payable under this
Note, or to declare a default for failure to effect such payment of any such
other amount. The failure of the Holders to give notice of any failure or breach
of the Maker under this Note shall not constitute a waiver of any right or
remedy in respect of such continuing failure or breach or any subsequent failure
or breach.
10. Prepayments. This Note may be prepaid at any time and from time to
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time in any amount or amounts, without penalty or additional interest charges.
Any partial prepayment shall be applied against the principal amount outstanding
and shall not postpone the due date of any subsequent payments or change the
amount of such payments.
11. Notices. Any notices provided or required under the terms of this
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Agreement shall be effective immediately when provided by verified facsimile
transmission or personal delivery one business day after being deposited with a
nationally recognized overnight courier, or five days after being sent by first
class mail, and addressed as follows:
If to Holders:
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
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Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to Maker:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
Any notice of communication shall be deemed given and received as of the date of
such delivery or mailing.
12. Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN
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ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
REGARD TO ITS RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE
SUBSTANTIVE LAW OF ANY OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO
ENFORCE THE TERMS OF THIS AGREEMENT SHALL BE PROPER ONLY IN THE CITY AND COUNTY
OF DENVER, STATE OF COLORADO, OR THE COUNTY OF NEW YORK, STATE OF NEW YORK.
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13. No Transfer. This Note shall not be transferred by the Holders
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except with the prior written consent of the Maker.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed.
MAKER:
OPTICAL SECURITY GROUP, INC.
By:
______________________________
Mark T. Turnage, President
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EXHIBIT B
ESCROW AGREEMENT
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This Escrow Agreement made and entered into this ____ day of October
1999 by and among Optical Security Group, Inc. ("OpSec"), a Colorado
corporation, Keystone Technologies, L.L.C., a Delaware limited liability company
("Keystone"), Richard Zucker ("Zucker"), Timothy Dolan ("Dolan" and, together
with Keystone and Zucker, the "Sellers") and ________________ ("Escrow Agent").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, OpSec and Sellers have entered into a stock purchase
agreement (the "SPA") dated as of October 1, 1999. Capitalized terms not
otherwise defined herein shall have the meaning assigned to them in the SPA; and
WHEREAS, the SPA requires that a portion of the consideration payable
at closing, namely, 333,333 shares of OpSec common stock (the "Shares"), be held
in escrow for 15 months pending a determination of whether the Net Embossed
Holography Revenues for the 13 month period beginning on the Closing Date exceed
$1 million.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
Section 1. The Escrow Agent hereby acknowledges receipt of the Shares
duly authorized and issued in the names of the Sellers (the "Escrow Documents")
to be held in escrow, pursuant to this Agreement.
Section 2. The Escrow Documents shall be released from escrow as
follows:
(a) If the Escrow Agent receives written confirmation from Don
Roberge that the Net Embossed Holography Revenues for the 13 month period
beginning on the Closing Date exceed $1 million, the Escrow Documents shall be
released from escrow and delivered by the Escrow Agent to the Sellers not
earlier than _______.
(b) If the Escrow Agent has not received evidence by ___________, 2001
that the that the Net Embossed Holography Revenues for the 13 month period
beginning on the Closing Date exceed $1 million by April 30, 2001, the Escrow
Documents shall be released from escrow and returned by the Escrow Agent to
OpSec.
Section 3. The following provisions shall control with respect to the
rights, duties, liabilities, privileges and immunities of the Escrow Agent:
(a) Escrow Agent is not a party to, and is not bound by or (except as
specifically provided herein) charged with notice of any agreement out of which
this escrow may arise.
(b) Escrow Agent in acting hereunder may assume the genuineness of any
written notice, request, waiver, consent, certificate, receipt, authorization,
power of attorney, or
<PAGE>
other paper or document which Escrow Agent in good faith believes to be genuine
and what it purports to be.
(c) Escrow Agent may consult with legal counsel in the event of any
dispute or question as to the construction of any of the provisions hereof or
its duties hereunder, and it shall incur no liability if it acts in accordance
with the opinion and instructions of such counsel as to such matters.
(d) In the event of any disagreement between any of the parties to
this Escrow Agreement, or between them or any of them and any other person or
entity resulting in adverse claims or demands being made in connection with the
subject matter of the escrow, or in the event that Escrow Agent, in good faith,
is in doubt as to what action it should take hereunder, Escrow Agent may refuse
to take any action hereunder, so long as such disagreement continues or such
doubt exists, and Escrow Agent shall be entitled either to:
(i) continue so to refrain from acting until (A) the rights of all
parties shall have been determined by a final and unappealable order of a
court of competent jurisdiction or by a final and unappealable award of
arbitrators, or (B) all differences shall have been adjusted and all doubt
resolved by agreement among all of the interested persons or entities; and
Escrow Agent shall have been notified thereof in writing signed by all such
persons or entities, or
(ii) file an interpleader action in any court of competent
jurisdiction in which event costs and expenses shall be borne by OpSec and
Sellers.
Section 4. The Escrow Agent shall not receive compensation for its
services hereunder, but shall be reimbursed for its expenses, such expenses to
be borne by OpSec and Sellers.
Section 5. The term of this Escrow Agreement shall commence on the
date first above written, and shall terminate upon the release of the Escrow
Documents.
Section 6. All notices, waivers, demands and advices in connection
with this Escrow Agreement shall be made in writing, with a copy to each party,
and shall be deemed delivered only upon receipt by the party to which addressed
at its address stated below (or to such other address as such party may
designate by notice to all other parties):
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To OpSec:
Optical Security Group, Inc.
535 16th Street, Suite 920
Denver, Colorado 80202
Attention: Richard H. Bard
Chairman and
Chief Executive Officer
To Sellers:
C/o Keystone Technologies, L.L.C.
375 Howard Avenue
Bridgeport, Connecticut 06605
Attention: Michael J. Zubretsky
Managing Member
To the Escrow Agent:
Attention:
Section 7. This Escrow Agreement shall be governed and construed in
accordance with the laws of the State of New York, without regard to conflict of
law principles, and may not be amended without the written consent of all the
parties hereto. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns.
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IN WITNESS WHEREOF, and in agreement hereto, the parties have executed this
Escrow Agreement as of the date first written above.
OPTICAL SECURITY GROUP, INC
By: _____________________________
Name:
Title:
KEYSTONE TECHNOLOGIES, L.L.C.
By: _____________________________
Name:
Title:
Richard Zucker
Timothy Dolan
_____________________________
AS ESCROW AGENT
By: _____________________________
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EXHIBIT C
REGISTRATION AND TAG-ALONG RIGHTS AGREEMENT
THIS AGREEMENT is made and entered into this 30th day of September, 1999, by
and between OPTICAL SECURITY GROUP, INC. (the "Company") and KEYSTONE
TECHNOLOGIES, L.L.C., KENNETH P. FELIS, MICHAEL J. ZUBRETSKY, RICHARD ZUCKER,
and TIMOTHY DOLAN (individually a "Holder" and collectively the "Holders").
RECITALS
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A. The parties have entered into a Stock Purchase Agreement (the "Purchase
Agreement") as of the date hereof. Certain terms used herein and not defined
herein shall have the meaning set forth in the Purchase Agreement.
B. Part of the consideration under the Purchase Agreement is the Company's
issuance of the OpSec Shares to the Holders.
C. The execution of this Agreement constitutes a material inducement for the
execution and performance of the Purchase Agreement by the Holders and is
ancillary to the Purchase Agreement.
THEREFORE, in consideration of the recitals, the closing of the transactions
contemplated by the Purchase Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Restrictive Legend. Each certificate representing the OpSec Shares shall,
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except as otherwise provided in this Section 1 or in Section 2, be stamped or
otherwise imprinted with a legend substantially in the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
Securities may not be offered for sale, sold, or otherwise transferred
except pursuant to an effective registration statement under the Act, or
pursuant to an exemption from registration under the Act, the availability
of which is to be established to the satisfaction of the Company.
A certificate shall not bear such legend if, in the opinion of counsel,
reasonably satisfactory to the Company, the OpSec Shares being sold thereby may
be publicly sold without registration under the Securities Act of 1933, as
amended (the "Securities Act").
<PAGE>
2. Notice of Proposed Transfer. Prior to any proposed transfer of any OpSec
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Shares (other than under the circumstances subscribed in Section 3), the Holder
thereof shall give written notice to the Company of his intention to effect such
transfer. Each such notice shall describe the manner of the proposed transfer
and, if requested by the Company, shall be accompanied by an opinion of counsel
reasonably satisfactory to the Company or such other evidence as may be
reasonably satisfactory to counsel to the Company to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon the Holder of such OpSec Shares shall be entitled to transfer such
OpSec Shares in accordance with the terms of its notice. Each certificate for
the OpSec Shares transferred as above provided shall bear the legend as set
forth in Section 1, except that such certificate shall not bear such legend if
(i) such transfer is in accordance with the provisions of Rule 144 (or any other
rule permitting any public sale without registration under the Securities Act),
or (ii) the opinion of counsel referred to above is to the further effect that
the transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such OpSec Shares in a public sale
without registration under the Securities Act. The restrictions provided for in
this Section 2 shall not apply to OpSec Shares which are not required to bear
the legend prescribed by Section 1 in accordance with the provisions of that
section.
3. Piggy-back Registration.
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3.1 If at any time between the first and second anniversaries of the
Effective Date, the Company proposes to register any of its securities under the
Securities Act other than by registration on a form relating to or in connection
with any (a) employee compensation, benefits, or benefit plans; (b) the
acquisition by purchase of the assets or stock of any other company or business
entity, merger or consolidation with any other company or business entity; or
(c) an exchange of the Company's common stock or other securities for its own
stock or the stock or securities of any other company; whether or not for sale
for its own account, it will at each such time, at least 20 days prior to filing
the registration statement, give written notice ("Registration Notice") to each
Holder of its intention to do so.
3.2 Upon the written request of each Holder (the "Holder Notice") made
within 10 days after the receipt of the Registration Notice, which notice shall
state the number of OpSec Shares of such Holder to be included in such
registration and such Holder's intended method of distribution, the Company will
include the OpSec Shares so requested in any such registration statement. Each
Holder requesting that such Holder's OpSec Shares be included in a registration
statement hereinafter referred to as a "Seller."
3.3 The Company will use reasonable efforts to effect the registration
under the Securities Act of such OpSec Shares, provided that if, at any time
after giving the Registration Notice and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to each Seller and, thereupon, (a) in the case of a determination
not to register, shall be relieved of its obligation to register such Seller's
OpSec Shares in connection with such registration (but not from
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its obligation to pay expenses in accordance with Section 4.4), and (b) in the
case of a determination to delay registration, shall be permitted to delay
registering any such OpSec Shares being registered pursuant to this Section 3,
for the same period as the delay in registering such other securities.
3.4 If the Company at any time proposes to register any of its securities
under the Securities Act as contemplated by this Section 3 and such securities
are to be distributed by or through one or more underwriters, at the option of
the Company or the proposed managing underwriter, the OpSec Shares requested to
be included by any Seller shall be included in such underwriting, on the same
terms and conditions as to underwriting discounts and commissions. A Seller
shall not be required to make any representations or warranties to or agreements
with the Company or the underwriter other than representations, warranties or
agreements regarding such Seller, the OpSec Shares or other securities of the
Company owned by such Seller, such Seller's intended method of distribution and
any representations, warranties or agreements required by law or by the
underwriter. Whether or not included in such underwriting, if so requested by
the proposed managing underwriter, a Seller (as to any other shares of common
stock of the Company owned by such Seller) shall join in any general agreement
by other participants in such offering to refrain from the sale of such common
stock for a limited time period following commencement of the offering pursuant
to such registration statement.
3.5 If (a) a registration pursuant to this Section 3 involves an
underwritten offering of the securities so being registered, whether or not for
sale of the account of the Company, to be distributed (on a firm commitment
basis) by or through one or more underwriters of recognized standing, whether or
not the OpSec Shares so requested to be registered for sale for the account of
any Seller are also to be included in such underwritten offering, and (b) the
managing underwriter of such underwritten offering shall inform the Company and
each Seller by letter of its belief that the number of securities requested to
be included in such registration exceeds the number which can be sold in (or
during the time of) such offering, then the securities to be registered shall be
reduced pro rata among the Company and all other persons requesting
registration.
3.6 Each Holder shall be limited to one "piggy-back" registration under
this Section 3, provided that all OpSec Shares held by such Holder are able to
be included in such registration, and such registration statement is declared
effective. If all of a Holder's OpSec Shares cannot be included in a single
registration, such Holder shall be entitled to additional "piggy-back"
registrations for such Holder's remaining unregistered OpSec Shares.
4. Registration Procedures; Expenses and Conditions.
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4.1 The Company shall use its best efforts (including, without
limitation, preparation of necessary post-effect amendments and supplements) to
cause the registration statement to remain effective until the earlier of (a)
the sale of all OpSec Shares being sold pursuant thereto, or (b) October 1,
2001.
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4.2 The Company shall furnish to each Seller or such Seller's managing
underwriter such number of copies of the prospectus as each Seller may
reasonably request in order to effect the sale of the OpSec Shares to be offered
and sold by such Seller; but only while the Company is required to cause the
registration statement to remain current.
4.3 The Company shall use its best efforts to qualify the offering under
applicable blue sky or other securities laws of such jurisdictions as may be
specified by each Seller; provided, however, that the Company shall not be
obligated to qualify as a foreign corporation to do business under the laws of
any jurisdiction in which it is not then qualified or to file any general
consent to service of process.
4.4 The Company shall bear all expenses in connection with registration of
the OpSec Shares pursuant to Section 3, other than fees and expenses, if any, of
counsel or other advisors to any Seller and any expenses related to the sale of
the OpSec Shares including, without limitation, broker's discounts, commissions,
or fees or any nature and transfer taxes or fees of any nature.
4.5 It shall be a condition precedent to the obligations of the Company to
take any action with respect to registering a Seller's OpSec Shares that such
Seller furnish the Company in writing such information regarding such Seller,
the OpSec Shares and other securities of the Company held by such Seller, and
the distribution of such securities as the Company may from time to time
reasonably request in writing.
4.6 Each Seller agrees to notify the Company, at any time when a prospectus
is required to be delivered under the Securities Act, upon discovery that, or
upon knowledge of the happening of any event a result of which, the prospectus
included in such registration statement, as then in effect, includes with
respect to such Seller, or which such Seller believes includes with respect to
the Company, an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make a statement
therein not misleading in light of the circumstances under which they were made.
4.7 Each Seller agrees to discontinue such Seller's disposition of OpSec
Shares pursuant to a registration statement relating to such Seller's OpSec
Shares, upon notice from the Company that it must amend or supplement the
registration statement based upon advice of counsel or administrative
requirement.
4.8 The Company shall not be required to register any Seller's OpSec Shares
pursuant to Section 3 if, in the opinion of counsel for the Company,
registration thereof is not necessary to permit the sale or disposition of all
OpSec Shares held by such Seller pursuant to Rule 144 under the Securities Act
or other exemptive rule or regulation affording a comparable exemption from
registration. Each Seller shall furnish such counsel with such information as
may reasonably be requested as a basis for determining whether to furnish such
opinion.
4
<PAGE>
5. Indemnification.
---------------
5.1 In the event any Seller's OpSec Shares are included in a registration
statement under Section 3, to the extent permitted by law, the Company will, and
hereby does, indemnify and hold harmless each Seller, each other person who
participates as an underwriter in the offering or sale of such securities and
each other person, if any, who controls such Seller within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such Seller or any underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which the Seller's OpSec Shares were registered
under the Securities Act, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement thereto, or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Company will reimburse each Seller and each such underwriter and controlling
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Seller
expressly for use in the preparation thereof, provided further that the Company
shall not be liable to any person who participates as an underwriter in the
offering or sale of OpSec Shares or any other person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or amended,
to the person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the sale
of OpSec Shares to such person if such statement or omission was corrected in
such final prospectus. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of a Seller or any such
underwriter or controlling person and shall survive the transfer of such
securities by a Seller.
5.2 In the event any Seller's Shares are included in a registration
statement under Section 3 to the extent permitted by law, each Seller, severally
and not jointly, will, and hereby does, indemnify and hold harmless each
underwriter, each person who controls such underwriter within the meaning of the
Securities Act, the Company, each director of the Company, each officer of the
Company who signs the registration statement and each other person, if any, who
controls the Company within the meaning of the Securities Act against any
losses, claims, damages, or liabilities, joint or several, to which the Company,
or such director, officer, underwriter, or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings, whether
5
<PAGE>
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement in, or omission from, such registration statement, any
preliminary prospectus, final prospectus, or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or omission
was made in reliance upon and in conformity with written information furnished
to the Company by such Seller expressly for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided that a Seller shall not be liable
to any person who participates as an underwriter in the offering or sale of
OpSec Shares or any other person, if any, who controls such underwriter within
the meaning of the Securities Act, in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of such person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended, to the person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of the OpSec Shares
to such person if such statement or omission was corrected in such final
prospectus. Such indemnity shall remain in full force and effect, regardless of
any investigation made by or on behalf of any underwriter, the Company or any
such director, officer or controlling person and shall survive the transfer or
such securities by a Seller.
5.3 Indemnification similar to that specified in the preceding
subdivisions of this Section 5 (with appropriate modifications) shall be given
by the Company and each Seller with respect to any required registration or
other qualification of securities under any federal or state law or regulation
of any governmental authority other than the Securities Act.
6. Changes in Common Stock. If, and as often as, there is any change in the
-----------------------
common stock of the Company by way of a stock split, stock dividend,
combination, or reclassification, or through a merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions hereof so that the rights and
privileges granted hereby shall continue with respect to the OpSec Shares as so
changed.
7. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Securities and Exchange Commission (the
"Commission") which may at any time permit the sale of the OpSec Shares to the
public without registration, at all times the Company agrees to (a) make and
keep public information available, as those terms are understood and defined in
Rule 144 under the Securities Act; and (b) use its best efforts to file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the Securities and Exchange Act of 1934, as
amended.
8. Tag-Along Rights. The Holders shall have the right to participate on a
----------------
basis equal with other holders of the Company's common stock in any sale of
substantially all of the outstanding capital stock of the Company and to a third
party or any merger transaction in which the Company is not the surviving
entity.
6
<PAGE>
9. Miscellaneous.
-------------
9.1 Succession. This Agreement shall be binding upon and inure to the
----------
benefit of the parties, their respective successors, assigns, and transferees.
Without limiting the generality of the foregoing, the registration rights
conferred in Section 3 inure to the benefit of any and all subsequent holders of
the OpSec Shares. Such subsequent holders, by taking and holding such OpSec
Shares, shall be conclusively deemed to have agreed to be bound by and to all of
the terms and provisions of this Agreement.
9.2 Entireties. This Agreement sets forth the entire agreement and
----------
understanding of the parties in respect of the subject matter hereof and
supersedes all prior agreements, arrangements, and understandings relating to
the subject matter hereof.
9.3 Counterparts; Facsimile Signatures. This Agreement may be executed
----------------------------------
in counterparts, each of which shall be deemed an original and which together
shall constitute a single instrument. This Agreement may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
9.4 Notices. Any notices provided or required under the terms of this
-------
Agreement shall be effective immediately when provided by verified facsimile
transmission or personal delivery one business day after being deposited with a
nationally recognized overnight courier, or five days after being sent by first
class mail, and addressed as follows:
If to Holders:
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
7
<PAGE>
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to the Company:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
9.6 Gender. Throughout this Agreement, where such meanings would be
------
appropriate, the masculine shall be deemed to include the feminine and the
neuter and the singular shall be deemed to include the plural.
8
<PAGE>
9.7 Modification; Waiver. This Agreement may not be modified or amended,
--------------------
no provision may be waived, without the written consent of the Holders of at
least 75% of the OpSec Shares.
9.8 Remedies - Attorneys' Fees. If any party obtains or engages an
--------------------------
attorney or attorneys for the purpose of enforcing its rights under the terms of
this Agreement for negotiation, litigation, arbitration, or other alternative
dispute resolution procedure, the prevailing party shall be entitled to recover
their or its attorneys' fees, costs, and disbursements in addition to any other
relief sought or awarded.
9.9 Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
--------------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ITS
RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE SUBSTANTIVE LAW OF ANY
OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF
THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK, STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date set
forth above.
THE COMPANY:
OPTICAL SECURITY GROUP, INC.
By:
_______________________________
Mark T. Turnage, President
HOLDERS:
KEYSTONE TECHNOLOGIES, L.L.C.
By: ________________________________
Its: ________________________________
___________________________________
Kenneth P. Felis
9
<PAGE>
___________________________________
Michael J. Zubretsky
___________________________________
Richard Zucker
___________________________________
Timothy Dolan
10
<PAGE>
EXHIBIT E
MOTOROLA SUPPLY AGREEMENT
This Supply Agreement ("Agreement") is entered into effective as of
October __, 1999, by and between Label Systems, Inc. (the "Company"), and
Bridgestone Technologies, Inc. ("BTI").
WHEREAS, the stock of BTI has been purchased by the Optical Security
Group, Inc. ("OpSec") pursuant to a stock purchase agreement dated as of October
1, 1999;
WHEREAS, prior to it purchase by OpSec, BTI and the Company were
commonly-controlled and BTI supplied the Company's requirements for tag tape
used to fulfill its contract with Motorola, Inc. (the "Motorola Tag Tape"); and
WHEREAS, the parties hereto wish to agree to terms pursuant to which
BTI will continue to supply the Company's requirements for Motorola Tag Tape on
a going-forward basis;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and BTI
hereby agree as follows:
ARTICLE I
TERMS
Section 1.01 BTI Preferred Provider Rights. For a period of 2 years
-----------------------------
beginning on the date hereof (the "Term") and renewable thereafter for
successive 12-month period so long as (i) BTI has not breached this Agreement in
any way and (ii) the Company still requires Motorola Tag Tape to fulfill it
requirements to Motorola, Inc., subject to the terms set forth herein, BTI will
have the exclusive right to supply all Motorola Tag Tape required by the
Company.
Section 1.02 Pricing. BTI's pricing to the Company for the Motorola
-------
Tag Tape shall be $2.75 per MSI, 129.
ARTICLE II
SPECIFICATIONS
Section 2.01 Contract Requirements. (a) BTI shall be required to
---------------------
supply the Motorola Tag Tape in compliance with the embossed holographic
material specifications, completion dates, and guidelines set forth in the
contract between the Company and Motorola.
<PAGE>
(b) In the event that BTI fails to satisfy the contract requirements
for Motorola Tag Tape (either as to quality or timing), (i) the Company will
provide BTI of notice of such failure and (ii) if BTI's production of the
Motorola Tag Tape does not meet such contract requirements within thirty days
after such notice, the Company shall be permitted to terminate this contract and
either (i) manufacture the Motorola Tag Tape itself or (ii) contract with a
third party (other than BTI) to supply its requirements for Motorola Tag Tape.
Section 2.02 Order Placement. The Company will transmit all orders
---------------
for products under this Agreement on mutually acceptable purchase order forms,
consistent with past practices.
Section 2.03 Shipping. (a) Risk of Loss. All shipments under this
--------
Agreement shall be F.O.B. the Company's warehouse facility. Title and risk with
respect to all orders and products shipped by BTI under this Agreement shall
pass to the Company upon delivery of the products by the carrier at the point
of delivery.
(b) Choice of Carrier. BTI will use the same delivery services that
it uses to ship holographic products to other third party customers.
(c) Payment of Shipping Costs and Taxes. BTI shall be responsible for
all shipping costs relating to delivery of the Motorola Tag Tape to the Company
and all taxes imposed on the sale of such products to the Company.
ARTICLE III
Billing and Payment
Section 3.01 Invoices and Account Reconciliation. BTI will provide
-----------------------------------
the Company with a monthly invoice detailing the delivery of Motorola Tag Tape
during the preceding month. Invoices are due and payable 30 days after the
invoice date.
ARTICLE IV
MISCELLANEOUS
Section 4.01 Termination. Either party may terminate this Agreement
-----------
with 90 days prior written notice upon a material breach of this agreement by
the other party which is not cured within 30 days after notice of such breach is
provided by the non-breaching party.
Section 4.02 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person or
by recorded delivery service addressed as follows:
2
<PAGE>
(a) if to the Company, addressed to:
Label Systems, Inc.
56 Cherry Street
Bridgeport, Connecticut 06605
Tel: (203) 333-5503
Fax: (203) 336-8570
Attention: Michael Zubretsky
with a copy to:
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue
New York, New York 10110
Tel: (212) 382-3300
Fax: (212) 382-0050
Attention: David H. Wollmuth
(b) if to BTI:
Bridgestone Technologies, Inc.
535 16th Street, Suite 920
Denver, Colorado 80202
Attention: Mark T. Turnage, President
Tel: (303) 534-4500
Fax: (303) 534-1010
with a copy to:
Charles H. Jacobs, Esq.
Lohf, Shaiman & Jacobs, P.C.
900 Cherry Towers
950 South Cherry Street
Denver, Colorado 80246
Tel: (303) 753-9000
Fax: (303) 753-9997
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
Section 4.03 Governing Law; Jurisdiction. This Agreement shall be
---------------------------
governed by and construed in accordance with the laws of the State of New York
without regard to its principles of conflicts of laws. Any dispute arising
under this Agreement shall be resolved in the United States federal courts
sitting in the city of New York, New York or if such courts shall not have
jurisdiction for any reason, the state courts sitting in such location.
3
<PAGE>
Section 4.04 Entire Agreement. This Agreement together with the
----------------
other agreements executed as of the date hereof by the parties hereto,
constitute the sole and entire agreement of the parties with respect to the
subject matter hereof and thereof.
Section 4.05 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 4.06 Headings. Article and Section headings used herein are
--------
for convenience of reference only, are not part of this Agreement and are not to
affect the construction of, or to be taken into consideration in interpreting
this Agreement.
Section 4.07 Severability. In the event any one or more of the
------------
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.
Section 4.08 Assignment. (a) Except as provided in Section 4.08
----------
(b), this Agreement, including any rights or obligations hereunder, may not be
assigned without the prior written consent of the non-assigning party.
(b) BTI shall be entitled to assign its rights and obligations
hereunder to OpSec or an affiliate of OpSec without the consent of the Company.
Section 4.09 No Third Party Beneficiaries. This Agreement shall be
----------------------------
binding upon and inure solely to the benefit of the parties hereto and their
permitted assigns and nothing herein, express or implied, is intended to or
shall confer upon any other Person any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
Section 4.10 Amendment. This Agreement may not be amended or
---------
modified except by an instrument in writing signed by each party hereto.
Section 4.11 Public Announcements. Except as required by law, no party
--------------------
to this Agreement shall make, or cause to be made, any press release or public
announcement in respect of this Agreement or the transactions contemplated
hereby or otherwise communicate with any other person without the prior written
consent of the other parties hereto (which consent shall not be unreasonably
withheld), and the parties hereto shall cooperate as to the timing and contents
of any such press release or public announcement.
4
<PAGE>
Section 4.12 Construction. Should an occasion arise in which
------------
interpretation of this Agreement becomes necessary, such construction or
interpretation shall not presume that the terms hereof be more strictly
construed against one party by reason of any rule of construction or authorship.
IN WITNESS WHEREOF, BTI and the Company have executed this Agreement
as of the day and year first above written.
BRIDGESTONE TECHNOLOGIES, INC.
By:
---------------------------
Name:
Title:
LABEL SYSTEMS, INC.
By:
---------------------------
Name:
Title:
5
<PAGE>
EXHIBIT F
TRANSITIONAL SERVICES AGREEMENT
This Agreement is made and entered into this ____ day of October, 1999, by
and between OPTICAL SECURITY GROUP, INC., a Colorado corporation ("Buyer"), and
LABEL SYSTEMS, INC. a Connecticut corporation ("Label Systems, Inc."), its
parent, Label Systems, LLC, a Connecticut limited liability company ("Label
Systems, LLC"), Keystone Imaging Technologies, LLC ("Keystone Imaging
Technologies, L.L.C."), and KEYSTONE TECHNOLOGIES, LLC, KENNETH P. FELIS,
MICHAEL J. ZUBRETSKY, RICHARD ZUCKER, and TIMOTHY DOLAN (collectively
"Sellers"). Label Systems, Inc., Label Systems, LLC, Keystone Imaging
Technologies, LLC, and Sellers, hereinafter collectively referred to as "Label
Systems Group").
RECITALS:
A. Buyer and Sellers have entered into a Stock Purchase Agreement (the
"Purchase Agreement") as of the date hereof, whereby Buyer acquired from Sellers
all of the capital stock of Bridgestone Technologies, Inc., a Delaware
corporation ("Bridgestone") and 19.9% of the membership interests in each of
Label Systems, LLC and Keystone Imaging Technologies, LLC. Certain terms used
herein and not defined herein shall have the meaning set forth in the Purchase
Agreement.
B. As part of the Purchase Agreement, it was agreed that Label Systems
Group would provide certain manufacturing services and support for Bridgestone
on behalf of Buyer for a period following the Closing Date of the Purchase
Agreement.
C. The execution of this Agreement constitutes a material inducement for
the execution and performance of the Purchase Agreement by Buyer and is
ancillary to the Purchase Agreement.
THEREFORE, in consideration of the recitals, the closing of the
transactions contemplated by the Purchase Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Equipment. For a period not to exceed four months following the
---------
Closing Date, except as this period may be extended pursuant to paragraph 8
below, equipment belonging to Bridgestone listed on Annex 1-A, attached hereto
and incorporated herein by this reference, shall remain at Label System Group's
Bridgeport facility located at 375 Howard Avenue, Bridgeport, Connecticut 06605
(the "Bridgeport Facility"). For a period not to exceed one month following the
Closing Date, except as this period may be extended pursuant to paragraph 8
below, the equipment belonging to Bridgestone listed on Annex 1-B shall remain
at Label System's Group's Vermont facility located at 192 Thomas Lane, Stowe,
Vermont 05672 (the "Vermont Facility"). During the period the Bridgestone
property remains at the Vermont Facility or Bridgeport Facility (collectively,
the "Facilities"), Label Systems Group, at its own expense,
<PAGE>
shall maintain, service, and keep in good repair each item of Bridgestone
equipment except for normal wear, tear, or depreciation. Label Systems Group
shall comply with all laws and regulations applicable to such items of equipment
and shall keep them free and clear of any claims, liens, or encumbrances. All
risks of loss or damage to each item of Bridgestone equipment shall be borne by
Label Systems Group. Label Systems Group shall, at its own expense, keep each
item of Bridgestone equipment insured, at its full value, against all risks of
loss or damage, with an insurance company acceptable to the Buyer. Label Systems
Group shall also bear any and all costs associated with maintaining the
Bridgeport Facility and the Vermont Facility, including, but not limited to,
payment of rent and utilities for the applicable four and one month periods.
2. Manufacturing. For a period not to exceed four months following the
-------------
Closing Date, unless otherwise agreed by the parties (the "Term"), at the
request of Buyer, Label Systems Group will produce non-Intel products on behalf
of Bridgestone. For a period not to exceed one year after the Closing Date,
unless extended by the parties ("the Intel Term"), Label Systems Group will
produce Intel products, on behalf of Bridgestone. All such products will meet
the quality, delivery, and other specifications required by Bridgestone and its
customers. Label Systems Group will bear all costs incurred in the production of
such products. Embossing shims shall be provided to Label Systems Group, by
Buyer, at its cost. During the Term and the Intel-Term, all orders for non-Intel
products will be processed at the Bridgeport Facility or Vermont Facilities.
Copies of all orders, along with schedules of manufacturing and shipping, will
be forwarded to Buyer within 24 hours. The price charged to Buyer for all non-
Intel completed products shall be priced to yield to Buyer a 60% direct
contribution margin on sales to Bridgestone customers. The price charged to
Buyer for all Intel completed products will be priced to yield to Buyer a 52%
direct contribution margin on sales to Bridgestone customers. Such orders will
be diligently, promptly, and efficiently processed in accordance with
Bridgestone's historic practices. At the completion of the Intel Term, Label
Systems Group will transfer the embossing module on its current embossing line
to Buyer and assist Buyer in assembly of a second embossing line.
3. Storage and Shipping. During the Term and the Intel-Term, storage and
--------------------
shipping of non-Intel products as requested by Buyer, shall remain at the
Facilities. Shipping information shall be forwarded to Buyer on a weekly basis
for billing purposes. Invoicing and collection of receivables shall be the
responsibility of Buyer. Label Systems Group shall, at such times as reasonably
requested by Buyer, permit Buyer's personnel to observe the shipping procedures
and shall train Buyer's personnel on shipping procedures. Label Systems Group
shall bear all cost for warehousing and shipping labor. Buyer will be
responsible for the direct cost of shipping.
4. Training. Upon Buyers request, Label Systems Group shall use its best
--------
efforts to train Buyer's personnel on the equipment located at the Facilities.
Such training is more specifically set forth on Annex 4 hereto and incorporated
herein by this reference. Buyer shall bear all costs associated with its
personnel involved in training including salary and travel expenses. Label
Systems Group shall bear all costs associated with its personnel involved in
training including salary and travel expenses.
2
<PAGE>
5. Inventory. As agreed by the parties, an inventory of Intel and
---------
non-Intel products shall be created to ensure the continuous supply of products
to Bridgestone customers during the period the Bridgestone equipment is
disassembled and reassembled at Buyer's facility.
6. Sales and Customer Services. During the Term, certain sales and
---------------------------
customer service functions may remain at the Bridgeport Facility and an office
will be provided for Mr. Richard Zucker at the Bridgeport Facility for the Intel
Term. Buyer, at its expense, shall supply sufficient personnel to perform such
services. Label Systems Group, at their expense, will provide sufficient
receptionist service, equipment, and office space for the performance of the
sales and customer service functions. Buyer shall pay customers service phone
line costs and all other incremental costs of Label Systems Group.
7. Consulting Services. For up to one year following the Closing Date,
-------------------
Label Systems, Group shall make available to Buyer, from time to time, as
reasonably requested by Buyer, upon reasonable notice, (a) the services of an
experienced production person, mutually agreed upon by the parties, and (b) an
experienced machine operator, mutually agreed on by the parties. Such consulting
services rendered at Buyer's facility shall not exceed more than two days a
month, unless mutually agreed by the parties. Consulting services over the
telephone shall be unlimited. Label Systems Group shall be responsible for all
costs associated with such consulting services, provided that Buyer shall be
responsible for all out-of-pocket expenses of Label Systems Group.
8. Buyer's Right to Extend. Buyer shall have the discretionary right
-----------------------
unilaterally to extend each or both of the periods identified in paragraph 1 and
each of the Terms up to 60 days.
9. Miscellaneous.
-------------
9.1 Succession. This Agreement shall be binding upon and inure to the
----------
benefit of the parties, their respective heirs, successors, assigns, and
transferees. Notwithstanding the above, Label Systems Group shall not be
entitled to assign or delegate their duties and obligations hereunder without
the prior written consent of Buyer. Buyer shall have the right to sell, assign
or transfer this Agreement with all its rights, title and interest herein to any
other person, firm or corporation at any time during the term of this Agreement.
Any such assignee of Buyer shall acquire all of the rights and assume all of the
obligations of Buyer under this Agreement.
9.2 Entireties. This Agreement sets forth the entire agreement and
----------
understanding of the parties in respect of the subject matter hereof and
supersedes all prior agreements, arrangements, and understandings relating to
the subject matter hereof.
9.3 Counterparts; Facsimile Signatures. This Agreement may be executed in
----------------------------------
counterparts, each of which shall be deemed an original and which together shall
constitute a single instrument. This Agreement may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
3
<PAGE>
9.4 Notices. Any notices provided or required under the terms of this
-------
Agreement shall be effective immediately when provided by verified facsimile
transmission or personal delivery, one business day after being deposited with a
nationally recognized overnight courier, or five days after being sent by first
class mail, and addressed as follows:
If to Label Systems Group:
Label Systems, LLC
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Label Systems, Inc.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
4
<PAGE>
Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to Buyer:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
9.5 Gender. Throughout this Agreement, where such meanings would be
------
appropriate, the masculine shall be deemed to include the feminine and the
neuter and the singular shall be deemed to include the plural.
9.6 Modification. This Agreement may not be modified or amended, and no
------------
provision may be waived, except by a written agreement executed by the party to
be charged with the amendment.
9.7 Waiver. Neither the failure nor any delay by any party in
------
exercising any right, power, or privilege under this Agreement or the documents
referred to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege, or the exercise of any other right, power, or privilege.
9.8 Remedies - Attorneys' Fees. Any and all claims asserted by Buyer
--------------------------
which arise from this Agreement (a) must be asserted no later than 90 days after
the expiration of the
5
<PAGE>
applicable Term, and not thereafter, and (b) shall be subject to the Damages
limitations and Basket provisions contained in Article 15 of the Purchase
Agreement. If any party obtains or engages an attorney or attorneys for the
purpose of enforcing its rights under the terms of this Agreement for
negotiation, litigation, arbitration, or other alternative dispute resolution
procedure, the prevailing party shall be entitled to recover their or its
attorneys' fees, costs, and disbursements in addition to any other relief sought
or awarded.
9.9 Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
--------------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ITS
RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE SUBSTANTIVE LAW OF ANY
OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF
THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK, STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth above.
BUYER:
OPTICAL SECURITY GROUP, INC.
By:_______________________________
Richard H. Bard, Chairman
LABEL SYSTEMS GROUP:
LABEL SYSTEMS, INC.
By:_______________________________
Its:______________________________
6
<PAGE>
LABEL SYSTEMS, LLC
By:______________________________
Its:_____________________________
KEYSTONE IMAGING
TECHNOLOGIES, LLC
By:______________________________
Its:_____________________________
KEYSTONE TECHNOLOGIES, LLC
By:______________________________
Its:_____________________________
_________________________________
Kenneth P. Felis
_________________________________
Michael J. Zubretsky
7
<PAGE>
_________________________________
Richard Zucker
_________________________________
Timothy Dolan
8
<PAGE>
EXHIBIT G-1
NON-COMPETITION, CONFIDENTIALITY AND
CROSS-MARKETING AGREEMENT
This Agreement is made and entered this _____ day of September, 1999, by
and between OPTICAL SECURITY GROUP, INC., a Colorado corporation ("Buyer") and
KEYSTONE TECHNOLOGIES, L.L.C., KENNETH P. FELIS, and MICHAEL J. ZUBRETSKY
(individually, a "Seller" and collectively, the "Sellers").
RECITALS:
A. Buyer and Sellers have entered into a Stock Purchase Agreement (the
"Purchase Agreement") effective as of the date hereof, whereby Buyer acquired
all of the capital stock of Bridgestone Technologies, Inc., a Delaware
corporation ("Bridgestone") and 19.9% of the membership interests in each of
Label Systems Acquisition, LLC, a Connecticut limited liability company, and
Keystone Imaging Technologies, L.L.C., a Delaware limited liability company
("Label Systems, LLC and Imaging, LLC"). Certain terms used herein and not
defined herein shall have the meaning set forth in the Purchase Agreement.
B. The execution of this Agreement constitutes a material inducement for
the execution and performance of the Purchase Agreement by Buyer and is
ancillary to the Purchase Agreement, and a portion of the purchase price
thereunder is allocated as consideration for the execution and performance of
this Agreement.
C. The Photo Polymer Business conducted by Imaging, LLC, and controlled by
the Sellers, and the embossed holographic business conducted by the Buyer and
its subsidiaries, including but not limited to Bridgestone, (the "OpSec
Group"), market their respective products to potential customers in the same
marketplace and, to the extent appropriate, the parties desire to market the
other party's products, as herein provided.
THEREFORE, in consideration of the Recitals, the closing of the
transactions contemplated by the Purchase Agreement and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Term. The term of this Agreement shall be for a period of five years
----
from the date hereof.
2. Non-Competition.
---------------
2.1 Except as permitted specifically by the Purchase Agreement,
during the term hereof, no Seller will, directly or indirectly, own, manage,
operate, control, be employed by, participate in, consult with, assist in the
recruitment of employees for, or be connected in any manner
<PAGE>
with the ownership, management, operation, or control of any business whose
products or services compete in whole or in part with the current products or
services offered by the OpSec Group within any geographic area in which the
OpSec Group currently conducts business.
2.2 Nothing contained in this Agreement shall be construed to
prohibit a Seller from (a) investing in not more than 1% of the stock, or other
securities listed on a national securities exchange or actively traded in the
over-the-counter market, of any corporation or other entity engaged in a
business or activity competitive with the OpSec Group, or (b) owning an interest
in and conducting business for Label Systems, LLC, or Imaging, LLC.
3. Non-Interference. During the term hereof, no Seller will, directly or
----------------
indirectly, either for himself or any other person or entity, (i) cause or
attempt to cause any employee of OpSec Group to leave the employ of OpSec Group,
(ii) in any way interfere with the relationship between the OpSec Group and any
employee, (iii) hire any employee or consultant of the OpSec Group, or any
former employee or consultant whose employment or retention by the OpSec Group
has ceased within six months prior to the date of such solicitation, or (iv)
interfere or attempt to interfere with any transaction in which the OpSec Group
is involved during the term of this Agreement. Notwithstanding the foregoing,
Sellers, or any of them, shall be entitled to employ Richard Zucker upon
termination of his employment with the OpSec Group.
4. Non-Solicitation. During the term hereof, no Seller will, directly or
----------------
indirectly, either for himself or any other person or entity, solicit, divert or
attempt to divert, any business of the OpSec Group or any customers, referral
sources, or suppliers of the OpSec Group to any competitor of OpSec Group.
5. Non-Disparagement. During the term hereof, no Seller will, disparage
-----------------
the OpSec Group, or any of their shareholders, directors, officers, employees,
or agents.
6. Confidentiality. Sellers each acknowledge that as officers, directors,
---------------
and shareholders of Bridgestone prior to Closing they acquired, developed and
utilized Confidential and Proprietary Information, as defined below, essential
to the successful operation of Bridgestone, which Confidential and Proprietary
Information remains the property of Bridgestone. Each Seller agrees that he or
it will not, during or after the term hereof, in whole or in part, disclose any
of the Confidential and Proprietary Information to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
nor shall he make use of any Confidential and Proprietary Information for his
own purposes or for the benefit of any person, firm, corporation, association or
other entity (except the OpSec Group) under any circumstances during the term
hereof, provided that, after the term hereof, these restrictions shall not apply
to such Confidential and Proprietary Information that is then in the public
domain (provided that such person was not responsible, directly or indirectly,
for such Confidential and Proprietary Information entering the public domain
without the OpSec Group's consent). For purposes of this Agreement,
"Confidential and Proprietary Information," means information, whether written
or otherwise, which has a business purpose and is not known or generally
available from sources outside Bridgestone, including but not limited to,
Bridgesone's internal structure, financial affairs, programs, software,
manuals, confidential reports, sales and marketing methods, manufacturing
processes and procedures, and pricing information; the
2
<PAGE>
identity of Bridgestone's present or prospective customers and customer lists;
the fees paid by such customers; Bridgestone's data relating to customer
purchases, practices, and procedures; Bridgestone's business arrangements,
costs, and sources of supply; information regarding earnings, forecasts,
reports, technical data, and marketing of or by Bridgestone; and all other
compilations of information included in the foregoing.
7. Scope and Reasonableness. The parties to this Agreement expressly
------------------------
agree and contract that it is not their intention to violate any policy,
statute, or common law. Sellers acknowledge that to accord Buyer the full
value under the Purchase Agreement, it is a condition to the consummation of the
transactions contemplated by the Purchase Agreement that the Sellers enter into
this Agreement with Buyer. The parties intend that the covenants in paragraphs
2 through 6 above shall be construed as a series of separate covenants. In the
event that this Agreement or any portion hereof is more restrictive than
permitted by applicable law, the parties request that the court of competent
jurisdiction fashion one or more substitute restrictions of permissible scope
that are consistent with the intent of the parties as evidenced by this
Agreement.
8. Cross-Marketing. Sellers shall cause Label Systems, LLC, Imaging,
---------------
LLC, and their affiliates, to the extent appropriate, to refer embossed
holographic business opportunities which come to its attention to OpSec Group.
The OpSec Group to the extent appropriate, will refer Photo Polymer Business
opportunities which come to its attention to Imaging, LLC.
9. Invalid Provisions. The parties agree that, in the event any provision
------------------
of this Agreement is found to be illegal or unenforceable, such provision shall
be severed or modified to the extent necessary to make it enforceable, and after
such severance or modification, the remainder of this Agreement shall remain in
full force and effect.
10. Remedies; Attorneys' Fees. The parties acknowledge that Sections 2
-------------------------
through 6 of this Agreement are essential for the protection of Buyer and that
any breach or threatened breach of those sections would cause immediate and
irreparable damage to the Buyer, for which monetary relief would be inadequate
or impossible to ascertain. Accordingly, the parties agree that, upon the
existence of any breach or threatened breach of Sections 2 through 6 hereof, the
Buyer may, without limitation of any other rights which the Buyer may have,
obtain a temporary restraining order, preliminary injunction or other
appropriate form of equitable relief to enforce those provisions. In the event
of any litigation arising out of any dispute concerning the interpretation or
enforcement of any provision of this Agreement, the prevailing party shall be
entitled to have paid by the party against whom judgment is entered all costs of
such litigation, including reasonable attorneys' fees.
11. Modification; Waiver. Any amendment to or modification of this
--------------------
Agreement and any waiver of any provisions hereof, shall be in writing. Any
waiver by Buyer of a breach of any provision of this Agreement shall not operate
or be construed as a waiver of any subsequent breach hereof.
12. Successors and Assigns. Sellers shall not be entitled to assign their
----------------------
rights and obligations hereunder. Buyer shall have the right to sell, assign or
transfer this Agreement with all its rights, title and interest herein to any
other person, firm or corporation which purchases the stock
3
<PAGE>
or substantially all of the assets of a member of the OpSec Group, at any time
during the term of this Agreement, and any such assignee shall acquire all of
the rights and assume all of the obligations of Buyer under this Agreement.
13. Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
--------------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ITS
RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE SUBSTANTIVE LAW OF ANY
OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF
THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK, STATE OF NEW YORK.
14. Counterparts; Facsimile Signatures. This Agreement may be executed
----------------------------------
in counterparts, each of which shall be deemed an original and which together
shall constitute a single instrument. This Agreement may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
15. Cumulative Remedies. No remedy conferred by any of the specific
-------------------
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute or otherwise. The election of any one or more remedies by Buyer
hereto shall not constitute a waiver of the right to pursue other available
remedies.
16. Construction. The titles appearing herein are used for convenience
------------
only and shall in no way change the meaning of this Agreement.
17. Gender. Throughout this Agreement, where such meanings would be
------
appropriate, the masculine gender shall be deemed to include the feminine and
the neuter and the singular shall be deemed to include the plural.
18. Time. Time is of the essence of this Agreement.
----
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
OPTICAL SECURITY GROUP, INC.
By:________________________________________
Mark T. Turnage, President
4
<PAGE>
SELLERS:
KEYSTONE TECHNOLOGIES, L.L.C.
By:_______________________________________
Its:________________________________________
__________________________________________
Kenneth P. Felis
__________________________________________
Michael J. Zubretsky
5
<PAGE>
EXHIBIT G-2
CONFIDENTIALITY AND
NON-SOLICITATION AGREEMENT
This Agreement is made and entered this _____ day of September, 1999, by
and between OPTICAL SECURITY GROUP, INC., a Colorado corporation ("Buyer"), and
TIMOTHY DOLAN ("Dolan"). Buyer and its subsidiaries, including but not limited
to Bridgestone, collectively referred to as the "OpSec Group."
RECITALS:
A. Buyer and Dolan are parties to a Stock Purchase Agreement (the
"Purchase Agreement") effective as of the date hereof, whereby Buyer acquired
all of the capital stock of Bridgestone Technologies, Inc., a Delaware
corporation ("Bridgestone") and 19.9% of the membership interests in each of
Label Systems Acquisition, LLC, a Connecticut limited liability company, and
Keystone Imaging Technologies, L.L.C., a Delaware limited liability company
("Label Systems, LLC and Imaging, LLC"). Certain terms used herein and not
defined herein shall have the meaning set forth in the Purchase Agreement.
B. The execution of this Agreement constitutes a material inducement for
the execution and performance of the Purchase Agreement by Buyer and is
ancillary to the Purchase Agreement, and a portion of the purchase price
thereunder is allocated as consideration for the execution and performance of
this Agreement.
THEREFORE, in consideration of the Recitals, the closing of the
transactions contemplated by the Purchase Agreement and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Term. The term of this Agreement shall be for a period of five years
----
from the date hereof.
2. Non-Interference. During the term hereof, Dolan will not, directly or
----------------
indirectly, either for himself or any other person or entity, (i) cause or
attempt to cause any employee of OpSec Group to leave the employ of OpSec Group,
(ii) in any way interfere with the relationship between the OpSec Group and any
employee, (iii) hire any employee or consultant of the OpSec Group, or any
former employee or consultant whose employment or retention by the OpSec Group
has ceased within six months prior to the date of such solicitation, or (iv)
interfere or attempt to interfere with any transaction in which the OpSec Group
is involved during the term of this Agreement.
3. Non-Solicitation. During the term hereof, Dolan will not, directly or
----------------
indirectly, either for himself or any other person or entity, solicit, divert or
attempt to divert, any business of the OpSec Group or any customers, referral
sources, or suppliers of the OpSec Group to any competitor of OpSec Group.
<PAGE>
4. Non-Disparagement. During the term hereof, Dolan will not disparage
-----------------
the OpSec Group, or any of their shareholders, directors, officers, employees,
or agents.
5. Confidentiality. Dolan acknowledges that as an officer, director, and
---------------
shareholder of Bridgestone prior to Closing he acquired, developed and utilized
Confidential and Proprietary Information, as defined below, essential to the
successful operation of Bridgestone, which Confidential and Proprietary
Information remains the property of Bridgestone. Dolan agrees that he will not,
during or after the term hereof, in whole or in part, disclose any of the
Confidential and Proprietary Information to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever, nor shall he
make use of any Confidential and Proprietary Information for his own purposes or
for the benefit of any person, firm, corporation, association, or other entity
(except the OpSec Group) under any circumstances during the term hereof,
provided that, after the term hereof, these restrictions shall not apply to such
Confidential and Proprietary Information that is then in the public domain
(provided that he was not responsible, directly or indirectly, for such
Confidential and Proprietary Information entering the public domain without the
OpSec Group's consent). For purposes of this Agreement, "Confidential and
Proprietary Information," means information, whether written or otherwise, which
has a business purpose and is not known or generally available from sources
outside Bridgestone, including but not limited to, Bridgestone=s internal
structure, financial affairs, programs, software, manuals, confidential reports,
sales and marketing methods, manufacturing processes and procedures, and pricing
information; the identity of Bridgestone's present or prospective customers and
customer lists; the fees paid by such customers; Bridgestone=s data relating to
customer purchases, practices, and procedures; Bridgestone's business
arrangements, costs, and sources of supply; information regarding earnings,
forecasts, reports, technical data, and marketing of or by Bridgestone; and all
other compilations of information included in the foregoing.
6. Scope and Reasonableness. The parties to this Agreement expressly
------------------------
agree and contract that it is not their intention to violate any policy,
statute, or common law. Dolan acknowledges that to accord Buyer the full value
under the Purchase Agreement, it is a condition to the consummation of the
transactions contemplated by the Purchase Agreement that Dolan enter into this
Agreement with Buyer. The parties intend that the covenants in paragraphs 2
through 5 above shall be construed as a series of separate covenants. In the
event that this Agreement or any portion hereof is more restrictive than
permitted by applicable law, the parties request that the court of competent
jurisdiction fashion one or more substitute restrictions of permissible scope
that are consistent with the intent of the parties as evidenced by this
Agreement.
7. Invalid Provisions. The parties agree that, in the event any provision
------------------
of this Agreement is found to be illegal or unenforceable, such provision shall
be severed or modified to the extent necessary to make it enforceable, and after
such severance or modification, the remainder of this Agreement shall remain in
full force and effect.
8. Remedies; Attorneys' Fees. The parties acknowledge that Sections 2
-------------------------
through 5 of this Agreement are essential for the protection of Buyer and that
any breach or threatened breach of those sections would cause immediate and
irreparable damage to the Buyer, for which monetary relief would be inadequate
or impossible to ascertain. Accordingly, the parties agree that, upon the
2
<PAGE>
existence of any breach or threatened breach of Sections 2 through 5 hereof, the
Buyer may, without limitation of any other rights which the Buyer may have,
obtain a temporary restraining order, preliminary injunction, or other
appropriate form of equitable relief to enforce those provisions. In the event
of any litigation arising out of any dispute concerning the interpretation or
enforcement of any provision of this Agreement, the prevailing party shall be
entitled to have paid by the party against whom judgment is entered all costs of
such litigation, including reasonable attorneys' fees.
9. Modification; Waiver. Any amendment to or modification of this
--------------------
Agreement and any waiver of any provisions hereof, shall be in writing. Any
waiver by Buyer of a breach of any provision of this Agreement shall not operate
or be construed as a waiver of any subsequent breach hereof.
10. Successors and Assigns. Dolan shall not be entitled to assign his
----------------------
rights and obligations hereunder. Buyer shall have the right to sell, assign,
or transfer this Agreement with all its rights, title, and interest herein to
any other person, firm, or corporation which purchases the stock or
substantially all of the assets of a member of the OpSec Group, at any time
during the term of this Agreement, and any such assignee shall acquire all of
the rights and assume all of the obligations of Buyer under this Agreement.
11. Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ITS
RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE SUBSTANTIVE LAW OF ANY
OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO ENFORCE THE TERMS OF
THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK, STATE OF NEW YORK.
12. Counterparts; Facsimile Signatures. This Agreement may be executed
----------------------------------
in counterparts, each of which shall be deemed an original and which together
shall constitute a single instrument. This Agreement may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
13. Cumulative Remedies. No remedy conferred by any of the specific
-------------------
provisions of this Agreement is intended to be exclusive of any other remedy,
and each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute or otherwise. The election of any one or more remedies by Buyer
hereto shall not constitute a waiver of the right to pursue other available
remedies.
14. Construction. The titles appearing herein are used for convenience
------------
only and shall in no way change the meaning of this Agreement.
15. Gender. Throughout this Agreement, where such meanings would be
------
appropriate, the masculine gender shall be deemed to include the feminine and
the neuter and the singular shall be deemed to include the plural.
3
<PAGE>
16. Time. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
OPTICAL SECURITY GROUP, INC.
By:________________________________________
Mark T. Turnage, President
__________________________________________
Timothy Dolan
4
<PAGE>
EXHIBIT H-1
LABEL SYSTEMS ACQUISITION, LLC OPTION AGREEMENT
This Agreement is made and entered into this ____ day of October,
1999, by and between OPTICAL SECURITY GROUP, INC., a Colorado corporation
("Optionee"), and KEYSTONE TECHNOLOGIES, L.L.C., KENNETH P. FELIS, MICHAEL J.
ZUBRETSKY, RICHARD ZUCKER, and TIMOTHY DOLAN (collectively "Sellers").
RECITALS:
A. Optionee and Sellers have entered into a Stock Purchase Agreement
(the "Purchase Agreement") as of the date hereof, whereby Optionee acquired from
Sellers all of the capital stock of Bridgestone Technologies, Inc., a Delaware
corporation ("Bridgestone"), 19.9% of the membership interests of Label Systems
Acquisition, LLC, a Connecticut limited liability company (Label Systems, LLC"),
and 19.9% of the membership interests of Keystone Imaging Technologies, L.L.C.,
a Delaware limited liability company. Certain terms used herein and not defined
herein shall have the meaning set forth in the Purchase Agreement.
B. As part of the Purchase Agreement, it was agreed that Optionee
would be granted an option to purchase from Sellers the remaining membership
interests in Label Systems, LLC.
C. The execution of this Agreement constitutes a material inducement
for the execution and performance of the Purchase Agreement by Optionee and is
ancillary to the Purchase Agreement.
Therefore, in consideration of the recitals, the closing of the
transactions contemplated by the Purchase Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Grant of Option. Sellers grant Optionee the right ("Option") to
----------------
acquire all of the membership interests of Label Systems, LLC (the "Interests")
not held by Optionee, for the purchase price set forth in Section 3. The Option
shall expire, and be of no further force or effect, if Optionee fails to give
the Preliminary Exercise Notice or Final Exercise Notice within the respective
periods provided below or if Optionee notifies Sellers in writing prior to the
Final Exercise Notice that it does not intend to exercise or to complete the
exercise of the Option.
<PAGE>
2. Method of Exercise.
-------------------
2.1 Preliminary Exercise. To exercise the Option, Optionee
---------------------
must provide written notice (the "Preliminary Exercise Notice") to Sellers no
later than 60 days prior to the second anniversary of the Effective Date of the
Purchase Agreement of its preliminary intent, subject to satisfactory results of
its due diligence, to exercise the Option. Upon receipt of the Preliminary
Exercise Notice, Sellers will provide to Optionee such due diligence information
as Optionee reasonably requests and shall afford Optionee access upon reasonable
request to all of the books and records, personnel, contracts, properties,
customers and venders of Label Systems, LLC. Sellers also shall provide a list
of bona fide prospective customers of Label Systems, LLC, reasonably acceptable
to Optionee ("Prospective Customers") for use in calculating the additional
Purchase Price as defined below. The Sellers shall use their best efforts to
provide the due diligence information requested within 15 business days of
receipt of the Preliminary Exercise Notice.
2.2 Final Exercise. If Optionee desires to complete the
---------------
Option exercise, it must provide written notice (the "Final Exercise Notice") to
Sellers no later than 30 days after the later of (a) the last receipt of due
diligence information requested by Optionee, or (b) the second anniversary of
the Effective Date of the Purchase Agreement. The Final Exercise Notice shall
set the closing date of the Option (the "Exercise Date"), which date shall be no
later than 90 days after Sellers' receipt of the Final Exercise Notice.
3. Initial Purchase Price. The initial purchase price for the
-----------------------
Option shall be equal to the percentage of Label Systems, LLC membership
interests not then owned by Optionee multiplied by the difference of (a) the Net
Revenues of Label Systems, LLC, as defined below, for the 12-month period
beginning on the first anniversary of the Effective Date of the Purchase
Agreement, and (b) Label Systems, LLC's debt existing on the Exercise Date. Net
Revenues of Label Systems, LLC means all revenues received in the ordinary
course of business of Label Systems, LLC, less revenues arising from
Intercompany Sales, sales to Optionee or its subsidiaries, claims, returns,
allowances, offsets, and freight for the 11-month period commencing on the first
anniversary of the Effective Date, plus the arithmetic average of such revenues
for the 23rd, 24th, and 25th month following the Effective Date.
4. Additional Purchase Price. Sellers also shall be paid an amount
--------------------------
equal to the percentage of Label Systems, LLC membership interests not then
owned by Optionee multiplied by Contingent Revenues, as defined below.
Contingent Revenues mean all revenues received in the ordinary course of
business of Label Systems, LLC arising from sales to Prospective Customers, less
claims, returns, allowances, offsets, and freight for the 11-month period
commencing on the second anniversary of the Effective Date, plus the arithmetic
average of such revenues for the 35th, 36th, and 37th month following the
Effective Date. Such Additional Purchase Price shall be paid in cash or other
good funds no later than 90 days after calculation of the Contingent Revenues is
completed.
2
<PAGE>
5. Method of Payment. One half of the initial purchase price will
------------------
be paid in cash or other good funds on the Exercise Date. The balance of the
initial purchase price shall be paid by delivery of Optionee's promissory note
on the Exercise Date. The promissory note shall bear interest at the Citibank,
N.A. base rate on the Exercise Date, shall be unsecured, and shall be due and
payable in one lump sum on the first anniversary of the Exercise Date. Such note
shall contain the normal provisions, including, but not limited to, acceleration
on default, payment of collection costs (including reasonable attorneys' fees)
on default, and shall provide that prepayment may be made at any time, without
penalty.
6. Closing. At closing, on the Exercise Date, the parties shall
--------
execute such documents as Optionee's counsel shall deem necessary to transfer to
Optionee good and marketable title, free and clear of all encumbrances except as
agreed by the parties. Such documents shall contain representations, warranties,
covenants and indemnities customary in a stock purchase transaction.
7. Conduct of Label Systems, LLC Business. From the date of this
---------------------------------------
Agreement until the Exercise Date or expiration of the Option, Sellers shall
cause the business of Label Systems, LLC to operate in the normal course and in
a manner consistent with prudent business practices. Sellers shall not permit
Label Systems, LLC to enter into any unusual contracts or make any unusual
commitments materially affecting the operations of Label Systems, LLC after the
date of the Preliminary Exercise Notice without Optionee's consent.
8. Restriction on Interests. Sellers shall not sell, give, assign,
-------------------------
mortgage, hypothecate, or otherwise transfer or encumber the Interests without
the written consent of Optionee. Sellers shall not permit Label Systems, LLC to
issue any additional membership interests, any economic interests, or any
warrants, options, or other rights to acquire any interest in Label Systems,
LLC.
9. Legend. So long as the Option has not been exercised or by its
-------
term expired, any certificates issued to Sellers representing the Interests
shall bear a legend in substantially the following form:
The sale, transfer or conveyance of the membership interests
represented by the within certificate is restricted pursuant to the
terms and conditions of an option granted to Optical Security
Group, Inc .
10. Miscellaneous.
--------------
10.1 Succession. This Agreement shall be binding upon and
-----------
inure to the benefit of the parties, their respective heirs, successors,
assigns, and transferees.
3
<PAGE>
10.2 Entireties. This Agreement sets forth the entire agreement and
-----------
understanding of the parties in respect of the subject matter hereof and
supersedes all prior agreements, arrangements, and understandings relating to
the subject matter hereof.
10.3 Counterparts; Facsimile Signatures. This Agreement may be
-----------------------------------
executed in counterparts, each of which shall be deemed an original and which
together shall constitute a single instrument. This Agreement may be executed
and delivered by telecopier or other facsimile transmission all with the same
force and effect as if the same was a fully executed and delivered original
manual counterpart.
10.4 Notices. Any notices provided or required under the terms
--------
of this Agreement shall be effective immediately when provided by verified
facsimile transmission or personal delivery, or one business day after being
deposited with a nationally recognized overnight courier, or five days after
being sent by first class mail, and addressed as follows:
If to Sellers:
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
4
<PAGE>
Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to Optionee:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
10.5 Gender. Throughout this Agreement, where such
-------
meanings would be appropriate, the masculine shall be deemed to include the
feminine and the neuter and the singular shall be deemed to include the plural.
10.6 Modification. This Agreement may not be modified or
-------------
amended, and no provision may be waived, except by a written agreement executed
by the party to be charged with the amendment.
10.7 Waiver. Neither the failure nor any delay by any
-------
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege, or the exercise of any other right, power, or privilege.
5
<PAGE>
10.8 Remedies - Attorneys' Fees. If any party obtains or
--------
engages an attorney or attorneys for the purpose of enforcing its rights under
the terms of this Agreement for negotiation, litigation, arbitration, or other
alternative dispute resolution procedure, the prevailing party shall be entitled
to recover their or its attorneys' fees, costs, and disbursements in addition to
any other relief sought or awarded.
10.9 Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED
--------------
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
REGARD TO ITS RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE
SUBSTANTIVE LAW OF ANY OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO
ENFORCE THE TERMS OF THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above.
OPTIONEE:
OPTICAL SECURITY GROUP, INC.
By:______________________________
Mark T. Turnage, President
SELLERS:
KEYSTONE TECHNOLOGIES, L.L.C.
By:______________________________
Its:_____________________________
_________________________________
Kenneth P. Felis
6
<PAGE>
_________________________________
Michael J. Zubretsky
_________________________________
Richard Zucker
_________________________________
Timothy Dolan
APPROVED:
LABEL SYSTEMS ACQUISITION, LLC
By:_______________________________
Its:_______________________________
7
<PAGE>
EXHIBIT H-2
KEYSTONE IMAGING TECHNOLOGIES, L.L.C. OPTION AGREEMENT
This Agreement is made and entered into this ____ day of October,
1999, by and between OPTICAL SECURITY GROUP, INC., a Colorado corporation
("Optionee"), and KEYSTONE TECHNOLOGIES, L.L.C., KENNETH P. FELIS, MICHAEL J.
ZUBRETSKY, RICHARD ZUCKER, and TIMOTHY DOLAN (collectively "Sellers").
RECITALS:
A. Optionee and Sellers have entered into a Stock Purchase Agreement
(the "Purchase Agreement") as of the date hereof, whereby Optionee acquired from
Sellers all of the capital stock of Bridgestone Technologies, Inc., a Delaware
corporation ("Bridgestone"), 19.9% of the membership interests of Label Systems
Acquisition, LLC, a Connecticut limited liability company, and 19.9% of the
membership interests of Keystone Imaging Technologies, L.L.C., a Delaware
limited liability company ("Imaging LLC"). Certain terms used herein and not
defined herein shall have the meaning set forth in the Purchase Agreement.
B. As part of the Purchase Agreement, it was agreed that Optionee
would be granted an option to purchase from Sellers the remaining membership
interests in Imaging, LLC.
C. The execution of this Agreement constitutes a material inducement
for the execution and performance of the Purchase Agreement by Optionee and is
ancillary to the Purchase Agreement.
Therefore, in consideration of the recitals, the closing of the
transactions contemplated by the Purchase Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Grant of Option. Sellers grant Optionee the right ("Option") to
---------------
acquire all of the membership interests of Imaging, LLC (the "Interests") not
held by Optionee for the purchase price set forth in Section 3. The Option shall
expire, and be of no further force or effect, if Optionee fails to give the
Preliminary Exercise Notice or Final Exercise Notice within the respective
periods provided below or if Optionee notifies Sellers in writing prior to the
Final Exercise Notice that it does not intend to exercise or to complete the
exercise of the Option.
<PAGE>
2. Method of Exercise.
------------------
2.1 Preliminary Exercise. To exercise the Option, Optionee must
--------------------
provide written notice (the "Preliminary Exercise Notice") to Sellers no later
than 60 days prior to the second anniversary of the Effective Date of the
Purchase Agreement of its preliminary intent, subject to satisfactory results of
its due diligence, to exercise the Option. Upon receipt of the Preliminary
Exercise Notice, Sellers will provide to Optionee such due diligence information
as Optionee reasonably requests and shall afford Optionee access upon reasonable
request to all of the books and records, personnel, contracts, properties,
customers and venders of Imaging, LLC. Sellers also shall provide a list of bona
fide prospective customers of Imaging, LLC, reasonably acceptable to Optionee
("Prospective Customers") for use in calculating the additional Purchase Price
as defined below. The Sellers shall use their best efforts to provide the due
diligence information requested within 15 business days of receipt of the
Preliminary Exercise Notice.
2.2 Final Exercise. If Optionee desires to complete the Option
--------------
exercise, it must provide written notice (the "Final Exercise Notice") to
Sellers no later than 30 days after the later of (a) the last receipt of due
diligence information requested by Optionee, or (b) the second anniversary of
the Effective Date of the Purchase Agreement. The Final Exercise Notice shall
set the closing date of the Option (the "Exercise Date"), which date shall be no
later than 90 days after Sellers' receipt of the Final Exercise Notice.
3. Initial Purchase Price. The initial purchase price for the Option
----------------------
shall be equal to the percentage of Imaging, LLC membership interests not then
owned by Optionee multiplied by the difference of (a) two times the Net Photo
Polymer Revenues, as defined below and (b) Imaging, LLC's debt (excluding trade
payables incurred in the ordinary course of business which are not past due)
existing on the Exercise Date. Net Photo Polymer Revenues means all revenues
received in the ordinary course of business of Imaging, LLC arising from its
Photo Polymer Business, less revenues arising from Intercompany Sales, sales to
Optionee or its subsidiaries, claims, returns, allowances, offsets, and freight,
for the 11-month period commencing on the first anniversary of the Effective
Date, plus the arithmetic average of such revenues for the 23rd , 24th, and 25th
month following the Effective Date.
4. Additional Purchase Price. Sellers also shall be paid an amount
-------------------------
equal to the percentage of Imaging, LLC membership interest not then owned by
Optionee multiplied by two times the Contingent Revenues, as defined below.
Contingent Revenues mean all revenues received in the ordinary course of
business of Imaging, LLC arising from sales to Prospective Customers arising
from its Photo Polymer Business, less claims, returns, allowances, offsets, and
freight for the 11-month period commencing on the second anniversary of the
Effective Date, plus the arithmetic average of such revenues for the 35th, 36th,
and 37th month following the Effective Date. Such Additional
2
<PAGE>
Purchase Price shall be paid in cash or other good funds no later than 90 days
after calculation of the Contingent Revenues is completed.
5. Method of Payment. One half of the initial purchase price will be
-----------------
paid in cash or other good funds on the Exercise Date. The balance of the
initial purchase price shall be paid by delivery of Optionee's promissory note
on the Exercise Date. The promissory note shall bear interest at the Citibank,
N.A. base rate on the Exercise Date, shall be unsecured, and shall be due and
payable in one lump sum on the first anniversary of the Exercise Date. Such note
shall contain the normal provisions, including, but not limited to, acceleration
on default, payment of collection costs (including reasonable attorneys' fees)
on default, and shall provide that prepayment may be made at any time, without
penalty.
6. Closing. At closing, on the Exercise Date, the parties shall
-------
execute such documents as Optionee's counsel shall deem necessary to transfer to
Optionee good and marketable title, free and clear of all encumbrances except as
agreed by the parties. Such documents shall contain representations, warranties,
covenants and indemnities customary in a stock purchase transaction.
7. Conduct of Imaging, LLC Business. From the date of this Agreement
--------------------------------
until the Exercise Date or expiration of the Option, Sellers shall cause the
business of Imaging, LLC to operate in the normal course and in a manner
consistent with prudent business practices. Sellers shall not permit Imaging,
LLC to enter into any unusual contracts or make any unusual commitments
materially affecting the operations of Imaging, LLC after the date of the
Preliminary Exercise Notice without Optionee's consent.
8. Restriction on Interests. Sellers shall not sell, give, assign,
------------------------
mortgage, hypothecate, or otherwise transfer or encumber the Interests without
the written consent of Optionee. Sellers shall not permit Imaging, LLC to issue
any additional membership interests, any economic interests, or any warrants,
options, or other rights to acquire any interest in Imaging, LLC.
9. Legend. So long as the Option has not been exercised or by its term
------
expired, any certificates issued to Sellers representing the Interests shall
bear a legend in substantially the following form:
The sale, transfer or conveyance of the membership interests
represented by the within certificate is restricted pursuant to the
terms and conditions of an option granted to Optical Security Group,
Inc.
3
<PAGE>
10. Miscellaneous.
-------------
10.1 Succession. This Agreement shall be binding upon and inure
----------
to the benefit of the parties, their respective heirs, successors, assigns, and
transferees.
10.2 Entireties. This Agreement sets forth the entire agreement
----------
and understanding of the parties in respect of the subject matter hereof and
supersedes all prior agreements, arrangements, and understandings relating to
the subject matter hereof.
10.3 Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in counterparts, each of which shall be deemed an original and which
together shall constitute a single instrument. This Agreement may be executed
and delivered by telecopier or other facsimile transmission all with the same
force and effect as if the same was a fully executed and delivered original
manual counterpart.
10.4 Notices. Any notices provided or required under the
-------
terms of this Agreement shall be effective immediately when provided by verified
facsimile transmission or personal delivery, or one business day after being
deposited with a nationally recognized overnight courier, or five days after
being sent by first class mail, and addressed as follows:
If to Sellers:
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Kenneth P. Felis
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (802) 253-2886
Michael J. Zubretsky
Co-Chairman
Keystone Technologies, L.L.C.
192 Thomas Lane
Stowe, VT 05672
Facsimile: (203) 333-9366
4
<PAGE>
Richard Zucker
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
Timothy Dolan
c/o Bridgestone Technologies, Inc.
375 Howard Avenue
Bridgeport, CT 06605
Facsimile: (203) 333-9366
with a copy to:
Rory M. Deutsch, Esq.
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue, 12th Floor
New York, New York 10110
Facsimile: (212) 382-0050
If to Optionee:
Optical Security Group, Inc.
Attention: Mark T. Turnage, President
535 16th Street, Suite 920
Denver, Colorado 80202
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs
Lohf, Shaiman & Jacobs, P.C.
950 South Cherry Street, Suite 900
Denver, Colorado 80246
Facsimile: (303) 753-9997
10.5 Gender. Throughout this Agreement, where such meanings
------
would be appropriate, the masculine shall be deemed to include the feminine and
the neuter and the singular shall be deemed to include the plural.
10.6 Modification. This Agreement may not be modified or amended,
------------
and no provision may be waived, except by a written agreement executed by the
party to be charged with the amendment.
5
<PAGE>
10.7 Waiver. Neither the failure nor any delay by any party in
------
exercising any right, power, or privilege under this Agreement or the documents
referred to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege, or the exercise of any other right, power, or privilege.
10.8 Remedies - Attorneys' Fees. If any party obtains or engages
--------------------------
an attorney or attorneys for the purpose of enforcing its rights under the terms
of this Agreement for negotiation, litigation, arbitration, or other alternative
dispute resolution procedure, the prevailing party shall be entitled to recover
their or its attorneys' fees, costs, and disbursements in addition to any other
relief sought or awarded.
10.9 Governing Law; Venue. THIS AGREEMENT SHALL BE CONSTRUED IN
--------------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
REGARD TO ITS RULES OF CONFLICT WHICH WOULD REQUIRE APPLICATION OF THE
SUBSTANTIVE LAW OF ANY OTHER JURISDICTION). VENUE FOR ANY PROCEEDING BROUGHT TO
ENFORCE THE TERMS OF THIS AGREEMENT SHALL BE PROPER IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above.
OPTIONEE:
OPTICAL SECURITY GROUP, INC.
By:____________________________________
Mark T. Turnage, President
SELLERS:
KEYSTONE TECHNOLOGIES, L.L.C.
By:____________________________________
Its:___________________________________
6
<PAGE>
___________________________________
Kenneth P. Felis
___________________________________
Michael J. Zubretsky
___________________________________
Richard Zucker
___________________________________
Timothy Dolan
APPROVED:
KEYSTONE IMAGING TECHNOLOGY, L.L.C.
By:_______________________________
Its:_______________________________
7
<PAGE>
EXHIBIT I
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made this _____ day of October, 1999 (the "Employment
Date"), by and between BRIDGESTONE TECHNOLOGIES, INC., a Delaware corporation
(the "Company"), and RICHARD ZUCKER (the "Employee"). This Agreement
supersedes and replaces all prior employment agreements between the parties
whether written or oral.
R E C I T A L S:
A. The Company is a wholly-owned subsidiary of Optical Security Group,
Inc., a Colorado corporation (the "Parent"), and is affiliated with other
subsidiaries (the "Affiliates") of the Parent. The Parent, the Company, and the
Affiliates are collectively referred to herein as the "OpSec Group."
B. Concurrently with the execution of this Agreement, Parent purchased all
of the capital stock of the Company pursuant to a Stock Purchase Agreement (the
"Purchase Agreement") between the Parent and Keystone Technologies, L.L.C.,
Kenneth P. Felis, Michael J. Zubretsky, Employee, and Timothy Dolan.
C. The execution of this Agreement constitutes a material inducement for
the execution and performance of the Purchase Agreement by the Parent.
D. The Company and the Employee desire to continue the Employee's
employment with the Company, on the terms and conditions set forth below.
THEREFORE, in consideration of the Recitals, the closing of the transactions
contemplated by the Purchase Agreement, the mutual promises contained herein,
and other good and valuable consideration, the parties, intending to be bound,
agree as follows:
1. Employment and Duties. The Company hereby agrees to employ Employee
----------------------
in a senior management and sales capacity. Employee's job title and description
shall be determined by the Company's board of directors from time to time. At
the time of execution of this Agreement, Employee is to be employed as Executive
Vice President. Employee's duties shall be to provide customer support services
including, but not limited to, transitioning business and prospects from the
Bridgeport, Connecticut Label Systems facility to the Parent's Parkton, Maryland
facility; developing and commercializing the Prospective Customers set forth in
Schedule 2.1-2 of the Purchase Agreement; and developing other projects and
customers as specified by and in coordination with the Company. Employee will
report to the president of Optical Security Industries, Inc., and coordinate his
activities with the goals and operating policies and procedures set by Parent.
Employee shall also perform all other duties necessary to perform the foregoing
responsibilities, and such other and further services for and on behalf of the
Company as may be assigned reasonably, from time to time, to the Employee by the
president of the Company or such other officer or supervisor as the president
shall designate. Employee hereby accepts employment
<PAGE>
by the Company and agrees diligently and faithfully to perform his duties
pursuant to this Agreement on a substantially full time basis. The Company shall
provide sufficient personnel, equipment, office space, and support necessary for
the performance of the Employee's duties. BY HIS SIGNATURE ON THIS AGREEMENT,
EMPLOYEE ACKNOWLEDGES THAT HE IS, AND WILL REMAIN DURING HIS PERIOD OF
EMPLOYMENT, AN EXECUTIVE AND MANAGEMENT EMPLOYEE, WITH RESPECT TO WHOM THE
NONCOMPETITION PROVISIONS OF THIS AGREEMENT WILL BE FULLY AND VALIDLY
ENFORCEABLE.
2. Term of Employment. The term of Employee's employment hereunder
-------------------
shall commence on the Employment Date and shall continue for a period of one
year (the "Initial Term"). Employee's employment hereunder shall terminate at
the end of the Initial Term unless extended by mutual agreement of the parties
or earlier terminated as provided below. The Company acknowledges and agrees
that during the Initial Term, Employee will be based in Bridgeport, Connecticut,
and may perform his duties from the Company's office there or from his home,
unless otherwise agreed by the parties.
3. Compensation.
-------------
3.1 Salary. As compensation for services, Employee shall be paid a
-------
salary of $165,000 per annum gross, subject to all federal, state and
municipal withholding requirements, payable in installments in arrears on
the Company's normal salary payment dates.
3.2 Benefits. Employee shall receive all other benefits generally
---------
available to employees of the Company from time to time, including without
limitation, life insurance, medical insurance benefits, and option plans,
as well as the right to participate in any qualified or non-qualified
deferred compensation or retirement plans created by the Company. The
Company does not promise to provide any of the foregoing fringe benefits,
but agrees that if provided, Employee shall have the right to participate.
Such participation shall be subject to all qualification, vesting and other
requirements of the plans. In addition, Employee shall receive a car
allowance not to exceed $600 per month.
3.3 Expense Reimbursement. Employee also shall be entitled to
----------------------
reimbursement from the Company of all expenses incurred in performing
duties hereunder, including, without limitation, meals, lodging, travel and
business entertainment, subject to the rules and regulations adopted by the
Company for the handling of such business expenses.
3.4 Commissions. Employer shall receive a commission equal to 1% of
------------
the gross sales price received by the Company on products sold to customers
other than customers listed on Schedule 2.1-1 and 2.1-2 of the Purchase
Agreement and for which Employee was primarily responsible and as approved by
Parent's management. Such commissions will cease upon the earlier of the second
anniversary of the Employment Date or Employee's termination of employment with
the Company. Such commissions shall be paid within 30 days of collection by
Company of such customer accounts.
2
<PAGE>
4. Leave With Pay. Employee shall be entitled to paid vacation and sick
---------------
days as provided in the Company's employee policy manual, as the same may be
amended from time to time.
5. Best Efforts of the Employee. Employee shall at all times faithfully,
-----------------------------
with diligence and to the best of his ability, experience and talents, perform
all duties required of and from him pursuant to the express and implicit terms
hereof to the reasonable satisfaction of the Company.
6. Covenants and Conditions.
-------------------------
6.1 Confidentiality. Employee acknowledges that due to Employee's
----------------
employment by the Company as an executive officer prior to the closing
of the Purchase Agreement, Employee has had access to, has acquired and
has assisted in developing the Company's confidential and proprietary
information and trade secrets, including but not limited to, the
Company's business operations; internal structure; financial affairs;
programs; manufacturing processes and procedures; lists of customers,
clients, and prospective customers; sales and marketing methods; and
pricing information. The Employee acknowledges that such confidential
and proprietary information has been and will continue to be of central
importance to the Company and that disclosure of it to or its use by
others could cause substantial loss to the Company. Employee
acknowledges that such confidential and proprietary information was
developed by Employee for the exclusive benefit of the Company, was the
exclusive confidential and proprietary asset of the Company, and
remained an asset of the Company after the closing of the Purchase
Agreement. Furthermore, as an Employee of the Company, Employee will
continue to have access to, acquire, and assist in developing,
confidential and proprietary information related to the business
operations of the OpSec Group. Accordingly, the Employee agrees as
follows:
6.1.1 Confidential Information of the Company. The Employee,
----------------------------------------
except with the prior written consent, or at the direction, of OpSec
Group, will not, directly or indirectly, at any time during or after
employment, use (except in connection with employment by the OpSec
Group) or disclose to any person or entity any confidential or
proprietary information of the OpSec Group which was obtained by the
Employee as a result of the Employee's employment with the OpSec Group
or in connection with the Company prior to the closing of the Purchase
Agreement and shall hold all of the same confidential. For purposes of
this Agreement, "confidential or proprietary information," means
information, whether written or otherwise, which has a business purpose
and is not known or generally available from sources outside the OpSec
Group, concerning, among other things, (a) the OpSec Group's business
operations, internal structure, and financial affairs, including, but
not limited to, its products, services, manufacturing processes and
procedures, employees, forecasts, sales and marketing methods, costs,
production arrangement, inventories, and sources of supply; (b) the
current, prospective, or past customers of the OpSec Group, their
buying habits, and the prices at which products or services are offered
or sold to them; (c) past, present, or future contracts held by the
OpSec Group respecting the
3
<PAGE>
business or operations of the OpSec Group or customers or potential
customers of the OpSec Group; or (d) the work performed by the
Employee for any customer of the OpSec Group; and (e) all other
compilations of information which relate to the business of the OpSec
Group.
6.1.2 Survival. The restrictions and obligations in the
---------
preceding subparagraph 6.1.1 shall survive in perpetuity the
termination of this Agreement and the termination of Employee's
employment by the Company.
6.2 Company Property. All contracts, agreements, financial books,
-----------------
records, instruments and documents; customer lists, memoranda, data,
reports, programs, software, tapes; rolodexes; telephone and address books;
research; bids; proposals; drawings; print-outs; graphs; listings;
programming; and any other instruments, records, or documents relating or
pertaining to (a) customers serviced by the OpSec Group; (b) any employee
of the OpSec Group; or (c) the services rendered by the Employee to the
OpSec Group, or in connection with the OpSec Group business (collectively
the "Records"), shall at all times be and remain the property of the OpSec
Group. Except as authorized by the OpSec Group, Employee agrees not to
retain or carry away from the premises of the OpSec Group any Records,
copies of Records, equipment, or any other materials or matter of any kind
which are the property of the OpSec Group. Upon the termination for any
reason of employment with the Company, Employee shall immediately turnover
to the Company all Records, copies of any Records, equipment, and other
materials or matter which are in the Employee's possession or control and
which are the property of the OpSec Group.
6.3 Developments. Employee acknowledges that all designs, drawings,
-------------
graphs, sketches, print-outs, formulas, software, inventions, discoveries,
innovations, new technology, or other developments (collectively called
"Developments") conceived or developed by Employee during the term of
employment, which Developments are related in any way to the business of
the OpSec Group then being conducted or proposed to be conducted by the
OpSec Group or to the business of any customer or prospective customer of
the OpSec Group, are and will be the exclusive property of the OpSec Group,
and shall be subject to the provisions of Section 6.1 of this Agreement.
Employee will promptly notify the Company of any such Developments.
Employee shall, when appropriate and upon request of the Company, actively
assist the OpSec Group in executing all papers and performing all other
lawful acts which the OpSec Group deems necessary or advisable for the
securing of legal protection for any such Developments, whether through
patent, copyright, or any other means. Employee further agrees that, upon
request of the OpSec Group, and at no charge, he will assign any rights
arising out of such Developments to the OpSec Group.
6.4 Papers, Drawings, and Other Documents. Employee agrees not to
--------------------------------------
make or permit to be made, except in the pursuance of his duties under the
terms of this Agreement and for the sole use and account of the OpSec
Group, any copies, abstracts, or summaries of any designs, papers,
drawings, or any other documents of any kind which may come into his
possession and which relate or refer to the OpSec Group or its business.
Employee grants
4
<PAGE>
to the OpSec Group all rights to possession and all title in and to any
such designs, papers, drawings, or other documents, or copies, abstracts,
or summaries thereof, which come into the possession of Employee within the
period of employment by the Company and which relate or refer to the OpSec
Group's business. Notwithstanding anything herein to the contrary, Employee
may retain any course materials Employee obtains from attending private or
college courses or seminars. If the Company desires a copy of such
materials, Employee shall provide it to the Company for copying, at the
Company's expense, upon reasonable notice to Employee.
6.5 Security Regulations. Employee agrees to abide by the Company's
---------------------
employment policies and all security regulations and rules of employment
adopted by the Company from time to time.
6.6 Covenant Not to Compete - During Employment. Employee agrees
--------------------------------------------
that during the term of this Agreement, he will not, (except through the
ownership of securities listed on a national securities exchange), directly
or indirectly, as a proprietor, director, officer, employee, partner,
stockholder, consultant, owner or otherwise, render services to or
participate in the affairs of any business which is competitive with or
substantially similar to the business conducted by the OpSec Group. For
purposes of this section, the "business of the OpSec Group" is (a) the
business of the OpSec Group as of the date hereof: the manufacturing and
marketing of highly sophisticated holographic and other security
technologies, including security laminates and optical coatings used in a
variety of security, document authentication, product protection; and anti-
tampering applications and (b) such other business in which OpSec Group may
engage in the future.
6.7 Covenant Not to Compete - After Employment. It is agreed that
-------------------------------------------
for a period of three years (the "Noncompete Period") following termination
of this Agreement for reasons of the Employee (including disability as
defined in Section 9) or for cause, as defined in Section 10, Employee will
not (except through the ownership of not more than 1% of the securities of
any entity listed on a national securities exchange, and except for
employment with Label Systems, Inc., or Keystone Imaging, L.L.C. ),
directly or indirectly, as proprietor, director, officer, employee,
partner, stockholder, consultant, owner or otherwise, compete with the
OpSec Group by engaging in the design, development, manufacture, sale, or
marketing of any products or services similar to those offered by the OpSec
Group to any person or entity including prospective customers during the
two years preceding the Employee's termination of employment, within the
geographic area in which the OpSec Group is conducting its business at the
time of Employee's termination of employment. For purposes of this
subsection, a "prospective customer" means a person or entity who made
inquiries regarding the OpSec Group's products or services or for whom the
OpSec Group prepared, or was in the process of preparing, a bid,
presentation, or other proposal. If this Agreement is terminated by the
Company for any reason other than for cause as defined in Section 10 or for
no reason, the Noncompete Period shall be reduced to one year following
termination of this Agreement.
5
<PAGE>
6.8 Non-Solicitation of Employees. Employee agrees that during the
------------------------------
term of this Employment and for a period of three years following
termination of this Agreement with or without cause, Employee will not
(except through the ownership of not more than 1% of the securities of any
entity listed on a national securities exchange), directly or indirectly,
as proprietor, director, officer, employee, partner, stockholder,
consultant, owner or otherwise, solicit or attempt to solicit or attempt to
influence any employee or independent contractor employed by the OpSec
Group to leave the employment of the OpSec Group or cease providing
services or otherwise terminate his, her, or its relationship with the
OpSec Group.
7. Scope and Reasonableness. The parties to this Agreement expressly
-------------------------
agree and contract that it is not their intention to violate any policy,
statute or common law. The parties intend that the covenants contained in
Section 6 above shall be construed as a series of separate covenants by
Employee, one for each county in each state in the geographic areas in
which the OpSec Group does business. The parties to this Agreement agree
that the limitations contained in Section 6 with respect to time,
geographical area and scope of activity are reasonable. However, if any
court shall determine that the time, geographical area and scope of
activity of any restriction contained in Section 6 is unenforceable, it is
the intention of the parties that such restrictive covenant set forth
herein shall not thereby be terminated but shall be deemed amended to the
extent required to render it valid and enforceable.
8. Representations of Employee. Employee hereby represents and warrants
----------------------------
that as of the date hereof, Employee is not a party to any agreement, contract,
or understanding, and that no facts or circumstances exist which would in any
way restrict or prohibit him from undertaking or performing any of Employee's
obligations under this Agreement. Furthermore, Employee understands and
acknowledges that Employee may have confidentiality obligations to prior
employers under common law, statute, or contract. Employee represents and
warrants that in the course of rendering services to the Company, Employee will
not use or otherwise disclose any confidential or proprietary information
obtained by him in connection with any prior employment. Employee shall
indemnify and hold the Company harmless from any claims, demands, costs or
liabilities (including attorneys' fees and disbursements) incurred by the
Company in connection with or resulting from Employee's breach of his
representations set forth in this Section 8.
9. Death or Disability of Employee. Employee's employment shall terminate
--------------------------------
immediately upon his death or in the event Employee becomes physically or
mentally disabled so as to become unable, for a period of more than 90
consecutive working days or for more than 90 working days in the aggregate
during any 12-month period, to perform his duties hereunder to the same extent
he performed them prior to the onset of such disability.
10. Termination for Cause. The Company reserves the right to terminate
----------------------
Employee's employment under this Agreement immediately if any of the following
occur:
10.1 Breach of this Agreement. Employee breaches or fails to
-------------------------
perform his obligations in accordance with the terms and conditions of this
Agreement.
6
<PAGE>
10.2 Felony - Other Act. Employee commits a felony or any other
-------------------
act abhorrent to the community which a reasonable person would consider
materially damaging to the reputation of the Company or its successors or
assigns.
10.3 Personal Dishonesty. Employee commits an act of personal
--------------------
dishonesty which was intended to personally enrich the Employee or members
of his family at the financial expense of the Company or its customers.
Termination as provided in subsections 10.1 through 10.3 above shall be deemed
"for cause"; provided however, that in the case of subsection 10.1, this conduct
shall not constitute cause until the Company shall have delivered to Employee
written notice setting forth Employee's deficiencies and Employee shall have not
taken reasonable steps to cure such deficiency within 30 days of such notice,
except that no such notice shall be required in connection with a breach of the
confidentiality provisions set forth in subsection 6.1 of the Agreement.
11. Termination for Reasons of Company or Employee. Either the Company or
-----------------------------------------------
the Employee may terminate this Agreement without cause by providing 30 days
written notice to the Employee or to the Company, as the case may be. In lieu
of giving notice, the Company may pay the Employee the salary he otherwise would
have received during the 30 day notice period, in which event, the Employee's
employment shall terminate immediately.
12. Assignment. This Agreement is personal in nature and the parties
-----------
hereto shall not, without the consent of the others, assign or transfer this
Agreement or any rights or obligations hereunder.
13. Construction. The titles appearing herein are used for purposes of
-------------
convenience only and shall in no way change the meaning of this Agreement.
14. Notices. All notices, demands, and other communications hereunder
--------
shall be deemed to have been duly given, if delivered by confirmed facsimile
transmission, personal delivery, one business day after being deposited with a
nationally recognized overnight courier or five days after being mailed,
certified or registered mail with postage prepaid.
If to Employee, address to:
Richard Zucker
_________________________
_________________________
7
<PAGE>
If to Company, address to:
Bridgestone Technologies, Inc.
535 16th Street, Suite 920
Denver, Colorado 80202
Attention: Mark T. Turnage, President
Facsimile: (303) 534-1010
with a copy to:
Charles H. Jacobs, Esq.
Lohf, Shaiman & Jacobs, P.C.
900 Cherry Towers
950 South Cherry Street
Denver, Colorado 80246
Facsimile: (303) 753-9997
or to such other address as either party may designate by written notice to the
other given from time to time in the manner herein provided.
15. Successors and Assigns. Subject to the provisions of Section 12,
-----------------------
above, the provisions of this Agreement shall inure to the benefit of, and be
binding upon, the Company or any corporation or other entity (a) to which the
Company may transfer all or substantially all its assets and business, or (b)
which shall manage the business and to which the Company may assign this
Agreement, in which case the term Company, as used herein, shall mean such
corporation or other entity.
16. Entire Agreement. This Agreement constitutes the full and complete
-----------------
understanding and agreement of the parties, supersedes all prior understandings
and agreements as to the employment of Employee, and cannot be amended, changed,
modified or terminated without the consent, in writing, of the parties hereto.
17. Nonwaiver. The waiver by either party of a breach of any term of this
----------
Agreement shall not operate or be construed as a waiver of any subsequent breach
thereof.
18. Severability. If any of the provisions of this Agreement shall be or
-------------
become invalid or illegal under any provision of applicable law or for any other
reason, the remainder of the Agreement shall not be affected and shall remain in
full force and effect.
19. Governing Law - Venue. This Agreement shall be governed by, and
----------------------
construed in accordance with, the laws of the state of Colorado. Venue for any
action brought in connection with this Agreement shall be proper in the city and
county of Denver, Colorado.
20. Litigation Expenses. If for any reason a dispute between the parties
--------------------
results in litigation or the use of any other alternative dispute resolution
procedure, the prevailing party shall be entitled to an award of reasonable
attorneys' fees, costs, and expenses.
8
<PAGE>
21. Personal Jurisdiction. Employee hereby irrevocably submits to the
----------------------
jurisdiction of the courts of the state of Colorado and the federal courts of
the United States of America located in the state of Colorado, in respect to the
interpretation and enforcement of the provisions of this Agreement, and hereby
waives and agrees not to assert as a defense in any action, suit, or proceeding,
for the interpretation or enforcement hereof, that it is not subject thereto or
such action, suit, or proceeding not be brought or is not maintainable in said
courts, or that the venue thereof may not be appropriate or that this Agreement
may not be enforced in or by said court.
22. Remedies for Breach. The parties acknowledge that breach of this
--------------------
Agreement by the Employee will result in immediate, substantial, and irreparable
harm to the Company. The parties therefore agree that the Company shall have,
in addition to any remedy available to them at law or in equity, the right to
enforce the terms of this Agreement by the remedy of specific performance or
injunction upon proper application to a court of competent jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
BRIDGESTONE TECHNOLOGIES, INC.
By:___________________________________
Mark T. Turnage, President
EMPLOYEE
______________________________________
Richard Zucker
<PAGE>
EXHIBIT J
RELEASE
IN CONSIDERATION of the closing of the Stock Purchase Agreement
("Agreement") by and between Optical Security Group, Inc., a Colorado
corporation ("Buyer") and Keystone Technologies, L.L.C., Kenneth P. Felis,
Michael J. Zubretsky, Richard Zucker, and Timothy Dolan for the purchase of all
of the outstanding capital stock of Bridgestone Technologies, Inc.
("Bridgestone"), and other good and valuable consideration, the receipt and
sufficiency of which is acknowledged, and pursuant to Section 8.22 of the
Agreement, the undersigned, for himself, his heirs, successors, assigns and
legal representatives, hereby fully and forever releases and discharges the
Buyer, its subsidiaries including Bridgestone, and its affiliates and their
respective stockholders, directors, officers, employees, agents, successors and
legal representatives from all claims, demands, rights, charges and causes of
action of any kind or nature (hereinafter referred to as "claims"), known or
unknown, liquidated or unliquidated, matured or unmatured, which the undersigned
had, now has or hereafter may have, arising out of or related to the
undersigned's status as employee, officer, director, landlord, or creditor of
Bridgestone (including the termination of the undersigned's employment,
irrespective of when the claims arose, except for the undersigned's right to the
undersigned's vested account balance in Bridgestone's retirement plans, and the
undersigned's right to elect continued health insurance under COBRA), and any
other matter which occurred prior to the date this Release is signed, including,
but not limited to, any and all employee discrimination claims, tort claims,
contract claims or claims under any state, federal or local law; provided,
however, that nothing contained herein shall operate to release any obligations
of Buyer or Bridgestone arising under the Purchase Agreement, or for any reason,
after the date hereof.
IN WITNESS WHEREOF, the undersigned has signed this Release this _____ day
of October, 1999.
_________________________________
<PAGE>
Annex B
-------
INDEX
I. Bridgestone Technologies, Inc. Audited Financial Statements for Years
Ended December 31, 1998 and 1997.
II. Label Systems, Inc. Audited Financial Statement for Year Ended December
31, 1998
III. Label Systems, Inc. Audited Financial Statement for Year Ended December
31, 1997
IV. Keystone Technologies Unaudited Financial Statement for June 30, 1999
V. Keystone Technologies Unaudited Financial Statement for June 30, 1998
<PAGE>
Annex B
BRIDGESTONE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
-----------------------------
Years Ended December 31, 1998 and 1997
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
----------------------
Years Ended December 31, 1998 and 1997
CONTENTS
------------------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Independent Auditors' Report 1
Financial Statements
Balance Sheets 2-3
Statements of Income and Retained Earnings 4
Statements of Cash Flows 5-6
Notes to Financial Statements 7-15
Supplementary Information
Schedule A - Cost of Revenues Earned 16
Schedule B - Selling, General and
Administrative Expenses 17
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Bridgestone Technologies, Inc.
Bridgeport, Connecticut 06605
We have audited the accompanying Balance Sheets of Bridgestone Technologies,
Inc. (a Delaware corporation) as of December 31, 1998 and 1997, and the related
Statements of Income and Retained Earnings, and Statements of Cash Flows for the
years then ended. These financial statements are the responsibility of the
management of Bridgestone Technologies, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bridgestone Technologies, Inc.,
as of December 31, 1998 and 1997, and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The supplemental information contained in Schedules
A & B on pages 16 and 17 is presented for the purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
- -------------------------------
Lagana, Roberge & Company
Certified Public Accountants
May 21, 1999
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
BALANCE SHEETS
-------------------------------------
December 31, 1998 and 1997
A S S E T S
-----------
<TABLE>
<CAPTION>
1998 1997
------------ -----------
CURRENT ASSETS
<S> <C> <C>
Cash on Hand and in Banks $ 22,485 $ 369,387
Accounts Receivable (Note 4) 865,927 1,502,746
Inventory (Note 5) 707,348 866,507
Due from Affiliate (Note 14) 652,863 49,869
Prepaid Expenses (Note 6) 5,713 10,990
----------- ----------
TOTAL CURRENT ASSETS 2,254,336 2,799,499
----------- ----------
NON-CURRENT ASSETS
Lab and Production Equipment 1,721,086 1,566,617
Office Equipment 181,334 152,288
Masters 584,000 488,000
----------- ----------
Subtotal 2,486,420 2,206,905
Less Accumulated Depreciation (1,096,840) (755,673)
----------- ----------
TOTAL NON-CURRENT ASSETS 1,389,580 1,451,232
----------- ----------
OTHER ASSETS
Capitalized Patent Costs 8,947 0
Capitalized Product Costs 0 60,745
Leasehold Improvements 85,033 69,453
Organizational Costs 1,947 1,947
----------- ----------
Subtotal 95,927 132,145
Less Accumulated Amortization (54,314) (76,146)
----------- ----------
Net 41,613 55,999
Deposits 2,190 2,190
----------- ----------
TOTAL OTHER ASSETS 43,803 58,189
----------- ----------
TOTAL ASSETS $ 3,687,719 $4,308,920
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
BALANCE SHEETS
---------------------------------------
December 31, 1998 and 1997
<TABLE>
<CAPTION>
L I A B I L I T I E S & S H A R E H O L D E R S ' E Q U I T Y
----------------------------------------------------------------
<S> <C> <C>
1998 1997
---- ----
CURRENT LIABILITIES
Accounts Payable $ 536,178 $ 923,524
Revolving Credit (Note 9) 250,000 0
Due to Affiliate (Note 14) 0 815,750
Note Payable - Current Portion 134,347 0
Accrued Expenses (Note 7) 93,886 44,698
Accrued Income Taxes (19,427) 3,620
Obligations Under Lease - Current Portion 1,916 2,897
---------- ----------
TOTAL CURRENT LIABILITIES 996,900 1,790,489
---------- ----------
NON-CURRENT LIABILITIES
Notes Payable (Note 9) 686,652 0
Obligations Under Lease (Note 13) 0 4,813
---------- ----------
Subtotal 686,652 4,813
Less Current Portion (134,347) (2,897)
---------- ----------
Net Long-Term Portion 552,305 1,916
Due to Shareholders (Note 8) 1,127,695 1,493,696
Deferred Taxes - Non Current Portion (Note 12) 124,034 137,398
---------- ----------
TOTAL NON-CURRENT LIABILITIES 1,804,034 1,633,010
---------- ----------
SHAREHOLDERS' EQUITY
Common Stock, No Par Value;
1,000 shares authorized;
400 shares issued and outstanding 21,000 21,000
Retained Earnings 965,785 964,421
---------- ----------
986,785 985,421
Less: Treasury Stock
(60 shares; Common Stock;
No Par Value) at cost (100,000) (100,000)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 886,785 885,421
---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,687,719 $4,308,920
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Contract Revenues Earned $7,943,580 $7,887,785
Cost of Revenues Earned (Schedule A) 5,115,806 5,729,987
---------- ----------
GROSS PROFIT 2,827,774 2,157,798
Selling, General & Administrative
Expenses (Schedule B) 2,837,649 1,994,962
---------- ----------
INCOME FROM OPERATIONS & BEFORE TAXES (9,875) 162,836
Other Income 0 15,199
Interest Income 0 1,393
---------- ----------
Total Other Income 0 16,592
---------- ----------
INCOME BEFORE TAXES (9,875) 179,428
Provision for Income Taxes 0 21,747
Income Tax Expense (Benefit) (11,239) 0
---------- ----------
NET INCOME AFTER TAXES 1,364 157,681
RETAINED EARNINGS, BEGINNING OF YEAR 964,421 806,740
---------- ----------
RETAINED EARNINGS, END OF YEAR $ 965,785 $ 964,421
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,364 $ 157,681
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation & Amortization 365,145 349,707
Increase (Decrease) in Deferred Taxes (13,364) 10,001
Increase in Allowance for Bad Debts 35,800 4,187
Increase in Allowance for Inventory Obsolescence 41,168 0
Changes in Operating Assets and Liabilities
(Increase) Decrease in Accounts Receivable 601,019 (381,525)
(Increase) Decrease in Inventory 117,991 (523,363)
(Increase) Decrease in Due from Affiliate (602,994) (49,869)
(Increase) Decrease in Employee Advances 0 450
(Increase) Decrease in Prepaid Taxes 0 3,876
(Increase) Decrease in Prepaid Expenses 5,277 (9,038)
(Increase) Decrease in Capitalized Costs 14,935 23,750
(Increase) Decrease in Patent Costs (8,947) 0
(Increase) Decrease in Deposits 0 1,000
Increase (Decrease) in Accounts Payable (387,346) (66,163)
Increase (Decrease) in Due to Affiliate (815,750) 815,750
Increase (Decrease) in Accrued Expenses 49,188 20,917
Increase (Decrease) in Income Taxes Payable (23,047) (39,807)
--------- ---------
Net Cash Provided by Operating Activities $(619,561) $ 317,554
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net Cash Provided by Operating Activities
(From Previous Page) $(619,561) $ 317,554
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (279,515) (326,029)
Purchase of Leasehold Improvements (15,580) (11,021)
--------- ---------
Net Cash Used in Investing Activities (295,095) (337,050)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Line 250,000 0
Proceeds from Long-Term Debt 750,000 0
Principal Payment on Long-Term Debt (63,348) 0
Increase (Decrease) in Loans to Shareholders 0 550,000
Increase (Decrease) in Amounts Due to Shareholders (366,001) (289,874)
Payment on Long-Term Obligations Under Lease (2,897) (2,469)
Purchase of Treasury Stock 0 (100,000)
--------- ---------
Net Cash Used in Financing Activities 567,754 157,657
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (346,902) 138,161
CASH, BEGINNING OF YEAR 369,387 231,226
--------- ---------
CASH, END OF YEAR $ 22,485 $ 369,387
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(1) Organization
------------
The Company was incorporated on February 22, 1995 in Delaware for
purposes of producing holographic materials for security and identification
uses. The Company has locations in Bridgeport, Connecticut and Stowe,
Vermont.
(2) Summary of significant accounting policies
------------------------------------------
Inventories
-----------
Inventories are valued at cost, determined using the first-in, first-
out method.
Equipment and improvements
--------------------------
Equipment is stated at cost, including the cost of significant
improvements and/or renovations that materially extend asset lives, and is
depreciated over the estimated useful lives of the related assets. The
cost of ordinary maintenance and repairs are charged to expense as
incurred. For financial reporting purposes, depreciation is provided for
on a straight line basis over the estimated useful life of the assets. For
income tax purposes, depreciation has been provided using the Modified
Accelerated Cost Recovery System (MACRS), which prescribes rates and
periods for items required after 1985.
Leasehold improvements
----------------------
Leasehold improvements are being amortized on a straight-line basis
over a period of 6 months to 120 months dependent upon the location of the
improvement and the date it was made. The same amortization method is used
for both income tax purposes and financial reporting purposes.
Capitalized product costs
-------------------------
Capitalized product costs are being amortized on a straight line basis
over a period of 36 months.
Capitalized patent costs
------------------------
Capitalized patent costs are being amortized on a straight line basis
over a period of 180 months.
-7-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(2) Summary of significant accounting policies (Continued)
------------------------------------------
Uninsured cash balances
-----------------------
The Company maintains cash balances at several banks. Cash accounts
at banks are insured by the FDIC of up to $100,000. As of December 31,
1997, amounts in excess of insured limits were $263,822 in one account.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Income taxes
------------
Income tax expense includes federal and state taxes currently payable
and deferred taxes arising from temporary differences between income for
financial reporting and income tax purposes. The differences result
principally from differences in depreciation between tax and financial
reporting purposes, allowances for uncollectible accounts and net operating
loss carryforwards.
(3) Supplemental disclosure of cash flow information
------------------------------------------------
1. Interest and income taxes paid
------------------------------
Cash paid for interest and income taxes for years ended December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Interest Expense $33,254 $ 1,995
Income Taxes $ 2,125 $11,746
</TABLE>
2. Cash and cash equivalents
-------------------------
Cash and Cash Equivalents include certificates of deposit with
annual maturities of one to three months.
-8-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(4) Accounts receivable
-------------------
Accounts receivable as of December 31, 1998 totalled $865,927, net of
reserve for uncollectible accounts of $125,800. Accounts receivable as of
December 31, 1997 totalled $1,502,746, net of reserve for uncollectible
accounts of $90,000. The Company charged the income statement for the
years ended December 31, 1998 and 1997 in the amounts of $21,887 and
$4,187, respectively, to provide for additions to its reserve for
uncollectible accounts.
(5) Inventory
---------
Inventory as of December 31, 1998 totalled $707,348 net of an
allowance for inventory obsolescence of $41,168. Inventory as of December
31, 1997 totalled $866,507 and did not include any allowance for
obsolescence. The Company charged the income statement for the year ended
December 31, 1998 in the amount of $41,168 to provide for the allowance for
obsolete inventory.
(6) Prepaid expenses
----------------
As of December 31, 1998 and 1997, prepaid expenses consisted of the
following:
1998 1997
------- -------
a) Prepaid Advertising/Marketing Costs $ 0 $ 7,594
b) Prepaid Insurance 5,713 3,396
------- -------
$ 5,713 $10,990
======= =======
(7) Accrued expenses
----------------
As of December 31, 1998 and 1997, accrued expenses consisted of the
following:
1998 1997
------- -------
a) Accrued Payroll Expenses $49,494 $29,576
b) Accrued Workers Compensation Audit Liability 0 15,122
c) Accrued Professional Fees 44,392 0
------- -------
$93,886 $44,698
======= =======
-9-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(8) Due to shareholders
-------------------
Amounts due to shareholders are payable on demand. The obligations are
evidenced by three notes to the Company's shareholders in the amounts of
$213,243, $887,329 and 683,086. During the year ended December 31, 1998 and
1997, a net total of $366,001 and $289,962, respectively, was repaid to the
officers. At December 31, 1998 and 1997, the total amounts due to
shareholders were $1,127,695 and $1,493,696, respectively. No interest has
been accrued or charged to expense for the periods ended December 31, 1998
and 1997. All amounts owed to the shareholders is subject to a
subordination requirement in favor of Fleet Bank.
(9) Notes payable
-------------
a) On June 26, 1998, the Company entered into a term loan agreement
with Fleet Bank in the amount of $500,000. The note is collateralized by a
shared first security interest in the assets of the corporation. The term of the
loan is five years and the note bears interest at 7.25% per year.
b) On June 26, 1998, the Company also entered into another term loan
agreement with Fleet Bank in the amount of $250,000. The note is collateralized
by a shared first security interest in the assets of the corporation. The term
of the loan is five years and the note bears interest at 7.25% per year.
c) The Company has available to it a $750,000 line of credit from
Fleet Bank. The interest rate charged on the line of credit is the bank's prime
rate. The note is collateralized by a shared first security interest in the
assets of the corporation. The amounts charged on the line of credit are due on
demand, and no later than June 26, 2000. As of December 31, 1998, the Company
owed $250,000 on the line of credit.
As of December 31, 1998, the schedule of five year debt maturities,
and the resultant note payable balances are as follows:
Year Ended Note Payable Balance Principal Paid
---------- -------------------- --------------
December 31, 1998 $686,652 $ N/A
December 31, 1999 552,034 134,618
December 31, 2000 407,617 144,417
December 31, 2001 252,377 155,240
December 31, 2002 85,495 166,882
Thereafter 0 85,495
-10-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(10) Unused operating loss carryforwards
-----------------------------------
The Company has available at December 31, 1998, $8,244 of unused
federal net operating loss carryforwards that may be applied against future
taxable income and that expire in 2018.
The Company has available at December 31, 1998, $73,484 of unused
Connecticut net operating loss carryforwards that may be applied against
future taxable income. The loss carryforwards expire $68,071 in 2002 and
$5,413 in 2004.
(11) Provision for bad debts
-----------------------
The amount charged to Bad Debt Expense on the income statement for
years ending December 31, 1998 and 1997 is the result of the write-off of
specific accounts known by the Company to be uncollectible. Also included
in this amount is the adjustment to the allowance for uncollectible
accounts more fully described in Note 4.
(12) Deferred income taxes
---------------------
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of Bridgestone
Technologies, Inc.'s assets and liabilities. The temporary differences
that give rise to the deferred tax assets and liabilities are as follows:
1998 1997
-------- --------
Allowance for doubtful accounts $125,800 $ 90,000
Capitalized costs 0 34,639
Depreciation 288,813 230,340
Intangible assets 268,000 280,000
Tax net operating loss carryforwards 80,111 68,071
-11-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
12) Deferred income taxes (Continued)
---------------------
The total deferred tax liabilities (assets) as of December 31, 1998
are as follows:
Federal State
--------- ---------
Current:
Deferred tax liabilities $ 2,573 $ 965
Deferred tax assets (20,107) (20,190)
Deferred tax asset valuation allowance 17,534 19,225
-------- --------
Net current deferred taxes $ 0 $ 0
Non-Current:
Deferred tax liabilities $128,349 $ 73,105
Deferred tax assets (47,400) (30,020)
Deferred tax asset valuation allowance 0 0
-------- --------
Net non-current deferred tax liability $ 80,949 $ 43,085
These amounts have been presented in the Company's financial
statements at December 31, 1998, as a non-current deferred tax liability of
$124,034.
The total deferred tax liabilities (assets) as of December 31, 1997
are as follows:
Federal State
--------- ---------
Current:
Deferred tax liabilities $ 207 $ 145
Deferred tax assets (13,500) (16,597)
Deferred tax asset valuation allowance 13,293 16,452
-------- --------
Net current deferred taxes $ 0 $ 0
Non-Current:
Deferred tax liabilities $116,656 $ 80,439
Deferred tax assets (35,116) (24,581)
Deferred tax asset valuation allowance 0 0
-------- --------
Net non-current deferred tax liability $ 81,540 $ 55,858
These amounts have been presented in the Company's financial
statements at December 31, 1997 as a non-current deferred tax liability of
$137,398.
-12-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(13) Leases
------
On July 11, 1996, the Company entered into a long-term capital lease
for a certain telephone system. The lease provides for monthly rental
payments over a period of 36 months. The end of lease option contained a
bargain purchase option.
As of December 31, 1998, the minimum lease payments required under the
Company's lease were as follows:
<TABLE>
Year Ending
December 31, Amount
------------ -------
<S> <C>
1999 $1,916
Thereafter 0
</TABLE>
As of December 31, 1997, the minimum lease payments required under the
Company's lease were as follows:
<TABLE>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1998 $2,897
1999 1,916
Thereafter 0
</TABLE>
On September 16, 1998, the Company entered into a two year lease
agreement with BMW Financial Services NA, Inc. for the lease of an
automobile for use by the Company's president. The Company accounts for the
lease as an operating lease. As of December 31, 1998, the minimum lease
payments required under the Company's lease were as follow:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1999 $14,179
2000 9,453
Thereafter 0
</TABLE>
-13-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(14) Related party transactions
--------------------------
The Company purchases a significant amount of its supplies and
materials from one certain supplier. On December 9, 1996, this entity was
purchased by the major shareholders of the Company, thereby rendering the
supplier an affiliate. For years ended December 31, 1998 and 1997 the
Company purchased $555,308 and $2,261,828, respectively, of materials from
this affiliate.
During the year ended December 31, 1998, the Company paid $1,418,744
to this affiliate. This was netted against the amounts due to the affiliate
and presented as $652,863 Due from Affiliate on the December 31, 1998
Balance Sheet.
As of December 31, 1997, the Company was owed $100,000 from this
affiliate. This amount has been netted against contracted purchases and
presented as $815,750 Due to Affiliate on the December 31, 1997 Balance
Sheet.
For the year ended December 31, 1997, there were $49,869 of costs
incurred by the affiliate which were paid by the Company. As of December
31, 1997, the affiliate had still not repaid the Company, and, as a result,
this amount is presented as Due from Affiliate on the December 31, 1997
Balance Sheet.
Following is a summary of transactions and balances with the affiliate
for 1998 and 1997:
1998 1997
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Accounts Receivable $ 40,119 $ 25,580
======== ==========
(Included in the Accompanying
Balance Sheet)
Due from Affiliate $652,863 $ 49,869
======== ==========
(Included in the Accompanying
Balance Sheet)
Accounts Payable $ 54,249 $ 210,621
======== ==========
(Included in the Accompanying
Balance Sheet)
Due to Affiliate $ 0 $ 815,750
======== ==========
(Included in the Accompanying
Balance Sheet)
Purchases from Affiliate $555,308 $2,261,828
======== ==========
</TABLE>
-14-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998 and 1997
(15) Merger
------
On September 29, 1997, the Company (formerly known as Northern Lights
Enterprises, Inc.) merged its business with Bridgestone Graphic
Technologies, Inc. and Innovative Equipment Technologies, Inc. in a
business combination accounted for under Accounting Principles Board
Opinion No. 16. After the transaction was completed, Bridgestone Graphic
Technologies, Inc. and Innovative Equipment Technologies, Inc. were
dissolved. The accompanying financial statements for 1997 are based on the
assumption that the companies were combined for the full year. Prior to
September 29, 1997, the Company, Bridgestone Graphic Technologies, Inc.,
and Innovative Equipment Technologies, Inc., in the ordinary course of
business, entered into certain transactions for the purchase and sale of
materials and for the leasing of equipment. These intercompany
transactions have been eliminated in the accompanying financial statements.
-15-
<PAGE>
SUPPLEMENTARY
INFORMATION
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
SCHEDULE A
----------
COST OF REVENUES EARNED
---------------------------------------------
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Material Purchases Consumed $3,337,327 $2,946,897
Direct and Indirect Labor 701,892 1,602,534
Printing Consumables 231,325 171,085
Freight-In 104,071 163,254
Lab Supplies 83,313 87,424
Metallizing 5,959 61,197
Mastering 0 17,883
Art Development 4,462 11,110
Rent 134,819 142,998
Utilities 27,113 32,008
Telephone 44,990 44,614
Commercial Insurance 16,724 57,669
Repairs and Maintenance 36,975 21,226
Incineration/Sanitation Expense 21,691 20,381
Depreciation and Amortization Expense 365,145 349,707
---------- ----------
TOTAL COST OF REVENUES EARNED $5,115,806 $5,729,987
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-16-
<PAGE>
BRIDGESTONE TECHNOLOGIES, INC.
SCHEDULE B
----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
--------------------------
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Management Salaries $ 617,814 $ 0
Office Salaries 358,734 0
Salesman Salaries and Expenses 101,464 0
Commissions 174,787 675,915
Consulting Fees 122,575 296,773
Freight-Out 213,864 174,111
Office Supplies and Expense 49,159 36,090
Postage and Office Shipping 20,538 70,189
Professional Fees 130,126 85,203
Merger Fees 71,633 110,200
Research and Development 306,345 39,287
Group Insurance 71,476 49,630
Travel Expenses 187,226 185,219
Advertising and Marketing 89,065 114,376
Dues and Subscriptions 11,834 16,232
Property Taxes 8,040 6,978
Interest Expense 33,254 1,995
Security Expense 96,512 2,621
Vehicle Expense 27,646 11,758
Employee Benefits 20,057 5,214
Computer Consulting 0 13,522
Miscellaneous 23,433 21,899
Bad Debt Expense 102,067 77,750
---------- ----------
TOTAL SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES $2,837,649 $1,994,962
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-17-
<PAGE>
LABEL SYSTEMS, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
-----------------------------
Year Ended December 31, 1998
21
<PAGE>
LABEL SYSTEMS, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
----------------------
Year Ended December 31, 1998
CONTENTS
--------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2-3
Statement of Income and Retained Earnings 4
Statement of Cash Flows 5-6
Notes to Financial Statements 7-10
Supplementary Information
Schedule A - Cost of Revenues Earned 11
Schedule B - Selling, General and
Administrative Expenses 12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Label Systems, Inc.
Bridgeport, Connecticut 06605
We have audited the accompanying Balance Sheet of Label Systems, Inc. (a
Connecticut corporation) as of December 31, 1998, and the related Statements of
Income and Retained Earnings and Cash Flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Label Systems, Inc., as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The supplemental information contained in
Schedules A & B on pages 11 and 12 is presented for the purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
- --------------------------------
Lagana, Roberge & Company
Certified Public Accountants
May 21, 1999
<PAGE>
LABEL SYSTEMS, INC.
BALANCE SHEET
------------
December 31, 1998
A S S E T S
-----------
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash on Hand and in Banks $ 8,825
Accounts Receivable (Note 4) 311,530
Inventory (Note 5) 264,765
Prepaid Insurance 9,459
----------
TOTAL CURRENT ASSETS 594,579
----------
NON-CURRENT ASSETS
Machinery and Equipment 2,260,632
Tooling 801,886
Computer, Furniture and Fixtures 293,162
Vehicles 16,096
----------
Subtotal 3,371,776
Less Accumulated Depreciation (963,255)
----------
TOTAL NON-CURRENT ASSETS 2,408,521
----------
OTHER ASSETS
Capitalized Patent Costs 13,365
Leasehold Improvements 346,512
----------
Subtotal 359,877
Less Accumulated Amortization (65,947)
----------
Net Capitalized Costs and
Leasehold Improvements 293,930
----------
TOTAL OTHER ASSETS 293,930
----------
TOTAL ASSETS $3,297,030
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
LABEL SYSTEMS, INC.
BALANCE SHEET
----------------
December 31, 1998
L I A B I L I T I E S & S T O C K H O L D E R S ' E Q U I T Y
----------------------------------------------------------------
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Accounts Payable $ 270,308
Accrued Expenses (Note 6) 49,209
Due to Affiliate (Note 9) 652,863
Accrued Income Taxes (3,639)
----------
TOTAL CURRENT LIABILITIES 968,741
----------
STOCKHOLDERS' EQUITY
Common Stock, $100 Par Value;
500 shares authorized;
100 shares issued and outstanding 10,000
Paid-In Capital 2,944,495
Retained Earnings (626,206)
----------
TOTAL STOCKHOLDERS' EQUITY 2,328,289
----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $3,297,030
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
--------------------
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Contract Revenues Earned $3,311,557
Cost of Revenues Earned (Schedule A) 3,341,789
----------
GROSS PROFIT (LOSS) (30,232)
Selling, General & Administrative
Expenses (Schedule B) 613,416
----------
INCOME (LOSS) FROM OPERATIONS & BEFORE TAXES (643,648)
Other Income 1,941
Provision for Income Taxes (11,361)
----------
NET INCOME (LOSS) AFTER TAXES (653,068)
RETAINED EARNINGS, BEGINNING OF YEAR 26,862
----------
RETAINED EARNINGS, END OF YEAR $(626,206)
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
--------------------
Year Ended December 31, 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Income (Loss) $(653,068)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation & Amortization 505,491
Decrease in Allowance for Uncollectible Accounts (41,593)
Increase in Allowance for Inventory Obsolescence 15,212
Changes in Operating Assets and Liabilities
(Increase) Decrease in Accounts Receivable 456,183
(Increase) Decrease in Inventory 53,979
(Increase) Decrease in Due from Affiliate 815,750
(Increase) Decrease in Prepaid Expenses (5,742)
(Increase) Decrease in Capitalized Costs (939)
Increase (Decrease) in Accounts Payable (473,834)
Increase (Decrease) in Accrued Expenses (98,923)
Increase (Decrease) in Income Taxes Payable (19,575)
Increase (Decrease) in Due to Affiliate 602,994
----------
Net Cash Provided by Operating Activities $1,155,935
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
---------------------
Year Ended December 31, 1998
Net Cash Provided by Operating Activities
(From Previous Page) $1,155,935
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (167,356)
----------
Net Cash Used in Investing Activities (167,356)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Paid in Capital (1,010,000)
----------
Net Cash Used in Financing Activities (1,010,000)
----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (21,421)
CASH, BEGINNING OF YEAR 30,246
-----------
CASH, END OF YEAR $ 8,825
===========
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998
(1) Organization
------------
The Company was incorporated on June 8, 1977 in Bridgeport,
Connecticut. The Company produces holographic materials and labels for
commercial application.
(2) Summary of significant accounting policies
------------------------------------------
Inventories
-----------
Inventories are valued at cost, determined using the first-in, first-
out method.
Equipment and improvements
--------------------------
Equipment is stated at cost, including the cost of significant
improvements and/or renovations that materially extend asset lives, and is
depreciated over the estimated useful lives of the related assets. The
cost of ordinary maintenance and repairs are charged to expense as
incurred. For financial reporting purposes, depreciation is provided for
on a straight line basis over the estimated useful life of the assets. For
income tax purposes, depreciation has been provided using the Modified
Accelerated Cost Recovery System (MACRS), which prescribes rates and
periods for items required after 1985.
Capitalized patent costs
------------------------
Capitalized patent costs are being amortized on a straight line basis
over a period of 15 years.
Leasehold improvements
----------------------
Leasehold improvements are being amortized on a straight line basis
over a period of 120 months. The same amortization method is used for both
income tax and financial reporting purposes.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
-7-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998
(2) Summary of significant accounting policies (Continued)
------------------------------------------
Income taxes
------------
Income tax expense includes federal and state taxes currently payable
and deferred taxes arising from temporary differences between income for
financial reporting and income tax purposes. The differences result
principally from differences in depreciation between tax and financial
reporting purposes, allowances for uncollectible accounts and net operating
loss carryforwards.
(3) Supplemental disclosure of cash flow information
------------------------------------------------
1. Interest and income taxes paid
------------------------------
Cash paid for interest and income taxes for years ended December
31, 1998 was as follows:
Interest Expense $34,685
Income Taxes Paid 11,361
2. Cash and cash equivalents
-------------------------
Cash and Cash Equivalents include certificates of deposit with
annual maturities of one to three months.
(4) Accounts receivable
-------------------
Accounts receivable as of December 31, 1998 totaled $311,530, net of
reserve for uncollectible accounts of $21,000.
(5) Inventory
---------
Inventory as of December 31, 1998 totaled $264,765, net of an
allowance for inventory obsolescence of $15,212. The Company charged the
income statement for the year ended December 31, 1998 in the amount of
$15,212 to provide for the allowance for obsolete inventory.
-8-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998
(6) Accrued expenses
----------------
As of December 31, 1998, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
a) Accrued Wages $16,631
b) Accrued Commissions 6,808
c) Accrued Personal Property Taxes 25,770
-------
</TABLE>
$49,209
=======
(7) Unused operating loss carryforwards
-----------------------------------
As of December 31, 1998, the Company has available $2,108,450, of
Federal net operating loss carryforwards that may be applied against future
federal taxable income. The loss carryforwards expire $1,068,673 in 2011,
$154,134 in 2012, and $885,643 in 2018.
The Company also has available at December 31, 1998, $3,629,874, of
Connecticut net operating loss carryforwards that may be applied against
future Connecticut taxable income. The loss carryforwards expire $368,866
in 1999, $1,169,180 in 2000, $1,079,348 in 2002, $138,198 in 2003, and
$874,282 in 2004.
(8) Provision for bad debts
-----------------------
The amount charged to Bad Debt Expense on the income statement is
generally the result of the write-off of specific accounts known by the
Company to be uncollectible. Also included in this amount is the
adjustment to the allowance for uncollectible accounts more fully described
in Note 4.
(9) Related party transactions
--------------------------
The Company makes a significant amount of its sales to one customer.
On December 9, 1996, this customer's major shareholders purchased the
Company, thereby rendering the customer an affiliate. For the year ending
December 31, 1998, the Company sold $555,308, respectively, of materials to
this affiliate.
-9-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1998
(10) Related party transactions (Continued)
--------------------------
During the year ended December 31, 1998, the Company borrowed
$1,418,744 from the affiliate. This amount was netted against the amounts
due from the affiliate and presented as $652,863 Due to Affiliate on the
December 31, 1998 Balance Sheet.
Following is a summary of transactions and balances with the affiliate
for year ending December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts Receivable $ 54,249
========
(Included in the Accompanying
Balance Sheet)
Accounts Payable $ 40,119
========
(Included in the Accompanying
Balance Sheet)
Due to Affiliate $652,863
========
(Included in the Accompanying
Balance Sheet)
Purchases from Affiliate $555,308
========
</TABLE>
(10) Economic Dependence
-------------------
A material part of the Company's revenues are derived from sales to
one affiliated customer, the loss of which could have a material effect on
the Company. For the year ended December 31, 1998, sales to this customer
accounted for approximately 17%, of the Company's total revenues.
-10-
<PAGE>
SUPPLEMENTARY
INFORMATION
<PAGE>
LABEL SYSTEMS, INC.
SCHEDULE A
----------
COST OF REVENUES EARNED
-----------------------
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Material Purchases Consumed $ 672,075
Direct and Indirect Labor 1,394,122
Freight In 18,118
Factory Supplies 45,625
Machinery Parts and Supplies 43,537
Equipment Rental 3,959
Rent 191,960
Insurance 172,264
Utilities 134,678
Telephone 36,379
Art Development 78,005
Repairs and Maintenance 45,948
Depreciation and Amortization Expense 505,119
----------
TOTAL COST OF REVENUES EARNED $3,341,789
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-11-
<PAGE>
LABEL SYSTEMS, INC.
SCHEDULE B
----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
------------------------------------------
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Commissions $ 67,197
Office Supplies and Expense 31,740
Delivery and Freight 13,340
Professional Fees 59,316
Merger Costs 33,577
Outside Services 4,325
Travel and Entertainment 12,913
Rubbish Removal 55,265
Research and Development 79,483
Interest Expense 34,685
Uniforms Rental 4,635
Advertising and Marketing 7,365
Miscellaneous 4,787
Salesman Expenses 67,510
Employee Benefits 45,770
Cleaning Supplies 5,415
Vehicle Expenses 5,485
Building Supplies and Maintenance 45,116
Environmental and Hazard Waste Expenses 27,251
Property Taxes 8,241
--------
TOTAL SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES $613,416
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-12-
<PAGE>
LABEL SYSTEMS, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
------------
Year Ended December 31, 1997
36
<PAGE>
LABEL SYSTEMS, INC.
FINANCIAL STATEMENTS
AND
SUPPLEMENTARY INFORMATION
----------------------
Year Ended December 31, 1997
CONTENTS
--------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Independent Auditors' Report 1
Financial Statements
Balance Sheets 2-3
Statements of Income and Retained Earnings 4
Statements of Cash Flows 5-6
Notes to Financial Statements 7-9
Supplementary Information
Independent Auditors' Report on Supplementary Information 10
Schedule A - Cost of Revenues Earned 11
Schedule B - Selling, General and
Administrative Expenses 12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Label Systems, Inc.
Bridgeport, Connecticut 06605
We have audited the accompanying balance sheet of Label Systems, Inc. (a
Connecticut corporation) as of December 31, 1997. This financial statement is
the responsibility of the management of Label Systems, Inc. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
Because we were not engaged to audit the statements of income, retained
earnings, and cash flows, we did not extend our auditing procedures to enable us
to express an opinion on results of operations and cash flows for the year ended
December 31, 1997. Accordingly, we express no opinion on them.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Label Systems, Inc., as of December
31, 1997, in conformity with generally accepted accounting principles.
- -------------------------------
Lagana, Roberge & Company
Certified Public Accountants
May 11, 1998
<PAGE>
LABEL SYSTEMS, INC.
BALANCE SHEETS
-------------
December 31, 1997
A S S E T S
-----------
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash on Hand and in Banks $ 30,246
Accounts Receivable (Note 4) 723,452
Due from Affiliate (Note 7) 815,750
Inventory 333,956
Prepaid Insurance 3,717
Miscellaneous Receivables 2,668
----------
TOTAL CURRENT ASSETS 1,909,789
----------
NON-CURRENT ASSETS
Machinery and Equipment 2,167,983
Tooling 777,879
Computer, Furniture and Fixtures 290,485
Vehicles 12,896
----------
Subtotal 3,249,243
Less Accumulated Depreciation (490,709)
----------
TOTAL NON-CURRENT ASSETS 2,758,534
----------
OTHER ASSETS
Capitalized Patent Costs 12,426
Leasehold Improvements 301,689
----------
Subtotal 314,115
Less Accumulated Amortization (33,002)
----------
Net Capitalized Costs and
Leasehold Improvements 281,113
Due from Shareholders 0
----------
TOTAL OTHER ASSETS 281,113
----------
TOTAL ASSETS $4,949,436
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
LABEL SYSTEMS, INC.
BALANCE SHEETS
--------------
December 31, 1997
L I A B I L I T I E S & S T O C K H O L D E R S ' E Q U I T Y
----------------------------------------------------------------
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Accounts Payable $ 744,142
Accrued Expenses 148,132
Due to Affiliate (Note 7) 49,869
Accrued Income Taxes 15,936
----------
TOTAL CURRENT LIABILITIES 958,079
----------
STOCKHOLDERS' EQUITY
Common Stock, $100 Par Value;
500 shares authorized;
100 shares issued and outstanding 10,000
Paid-In Capital 3,954,495
Retained Earnings 26,862
----------
TOTAL STOCKHOLDERS' EQUITY 3,991,357
----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $4,949,436
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Contract Revenues Earned $5,425,391
Cost of Revenues Earned (Schedule A) 4,117,904
----------
GROSS PROFIT (Loss) 1,307,487
Selling, General & Administrative
Expenses (Schedule B) 1,046,378
----------
INCOME FROM OPERATIONS & BEFORE TAXES 261,109
Other Income 0
Provision for Income Taxes 15,936
----------
NET INCOME (LOSS) AFTER TAXES 245,173
RETAINED EARNINGS, BEGINNING OF YEAR (218,311)
----------
RETAINED EARNINGS, END OF YEAR $ 26,862
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
------------------------
Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Income $ 245,173
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation & Amortization 484,585
Increase in Allowance for Inventory Obsolescence 0
Decrease in Allowance for Uncollectible Accounts 0
Changes in Operating Assets and Liabilities
Increase in Accounts Receivable (606,792)
Decrease in Inventory 148,535
Increase in Prepaid Expenses (3,717)
Increase in Capitalized Costs (12,426)
Increase in Accounts Payable 499,004
Decrease in Accrued Expenses (187,691)
Increase in Income Taxes Payable 15,686
Increase in Due to Affiliate 49,869
---------
Net Cash Provided by Operating Activities $ 632,226
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
LABEL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
-----------------------
Year Ended December 31, 1997
(Unaudited)
Net Cash Provided by Operating Activities
(From Previous Page) $ 632,226
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (164,412)
----------
Net Cash Used in Investing Activities (164,412)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Paid in Capital (500,000)
----------
Net Cash Used in Financing Activities (500,000)
----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (32,186)
CASH, BEGINNING OF YEAR 62,432
----------
CASH, END OF YEAR $ 30,246
==========
The accompanying notes are an integral part of the financial statements.
-6-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1997
(1) Organization
------------
The Company was incorporated on June 8, 1977 in Bridgeport,
Connecticut. The Company produces holographic materials and labels for
commercial application.
(2) Summary of significant accounting policies
------------------------------------------
Inventories
-----------
Inventories are valued at cost, determined using the first-in, first-
out method.
Equipment and improvements
--------------------------
Equipment is stated at cost, including the cost of significant
improvements and/or renovations that materially extend asset lives, and is
depreciated over the estimated useful lives of the related assets. The
cost of ordinary maintenance and repairs are charged to expense as
incurred. For financial reporting purposes, depreciation is provided for
on a straight line basis over the estimated useful life of the assets. For
income tax purposes, depreciation has been provided using the Modified
Accelerated Cost Recovery System (MACRS), which prescribes rates and
periods for items required after 1985.
Capitalized patent costs
------------------------
Capitalized patent costs are being amortized on a straight line basis
over a period of 15 years.
Leasehold improvements
----------------------
Leasehold improvements are being amortized on a straight line basis
over a period of 120 months. The same amortization method is used for both
income tax and financial reporting purposes.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
-7-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1997
(2) Summary of significant accounting policies (Continued)
------------------------------------------
Income taxes
------------
Income tax expense includes federal and state taxes currently payable
and deferred taxes arising from temporary differences between income for
financial reporting and income tax purposes. The differences result
principally from differences in depreciation between tax and financial
reporting purposes, allowances for uncollectible accounts and net operating
loss carryforwards.
(3) Supplemental disclosure of cash flow information
------------------------------------------------
1. Interest and income taxes paid
------------------------------
Cash paid for interest and income taxes for year ended December
31, 1997 were as follows:
Interest Expense $ 0
Income Taxes Paid 15,936
2. Cash and cash equivalents
-------------------------
Cash and Cash Equivalents include certificates of deposit with
annual maturities of one to three months.
(4) Accounts receivable
-------------------
Accounts receivable as of December 31, 1997 totalled $723,452, net of
reserve for uncollectible accounts of $62,593. The Company charged the
income statement for the year ended December 31, 1997 in the amount of
$62,593 to provide for additions to its reserve for uncollectible accounts.
(5) Unused operating loss carryforwards
-----------------------------------
As of December 31, 1997, the Company has available $1,233,918 of
Federal net operating loss carryforwards that may be applied against future
federal taxable income and that expire in 2012.
The Company also has available at December 31, 1997, $2,755,592 of
Connecticut net operating loss carryforwards that may be applied against
future Connecticut taxable income and that expire in various years from
1999 to 2002.
-8-
<PAGE>
LABEL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------
December 31, 1997
(6) Provision for bad debts
-----------------------
The amount charged to Bad Debt Expense on the income statement for
year ending December 31, 1997 is the result of the write-off of specific
accounts known by the Company to be uncollectible. Also included in this
amount is the adjustment to the allowance for uncollectible accounts more
fully described in Note 4.
(7) Related party transactions
--------------------------
The Company makes a significant amount of its sales to one customer.
On December 9, 1996, the customer's major shareholders purchased the
Company, thereby rendering the customer an affiliate. In addition, as of
December 31, 1997, the Company owed $100,000 to this affiliate. This loan
was netted against the contracted sales and reported as $815,750 as Due
from Affiliate on the accompanying Balance Sheet.
In addition to the sales mentioned above, the Company also sold
$1,181,911 of materials to the affiliate.
For the year ended December 31, 1997, there were $49,869 of costs
incurred by the Company which were paid by the affiliate. As of December
31, 1997, the Company had still not repaid the affiliate, and, as a result,
this amount is presented as Due to Affiliate on the Balance Sheet.
Following is a summary of transactions and balances with the affiliate
for 1997:
<TABLE>
<CAPTION>
<S> <C>
Due from Affiliate $1,026,371
==========
(Included in the Accompanying
Balance Sheet)
Sales to Affiliate $2,261,828
==========
Due to Affiliate
(Included in the Accompanying
Balance Sheet) $ 75,449
==========
</TABLE>
(8) Economic Dependence
-------------------
A material part of the Company's revenues are derived from sales to
one affiliated customer, the loss of which could have a material effect on
the Company. For the year ended December 31, 1997, sales to this customer
accounted for approximately 42% of the Company's total revenues.
-9-
<PAGE>
SUPPLEMENTARY
INFORMATION
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Board of Directors
Label Systems, Inc.
Bridgeport, CT 06605
Our report on our audit of the balance sheet of Label Systems, Inc. as of
December 31, 1997 appears on page one. That audit was made for the purpose of
forming an opinion on this financial statement. Schedules A and B that follow
are presented for purposes of additional analysis only and are not a required
part of the balance sheet. Such information has not been subjected to the
auditing procedures applied in the audit of the balance sheet, and, accordingly,
we express no opinion on it.
_________________________________________
Lagana, Roberge & Company
Certified Public Accountants
May 11, 1998
<PAGE>
LABEL SYSTEMS, INC.
SCHEDULE A
----------
COST OF REVENUES EARNED
---------------------------------------------
Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Material Purchases Consumed $1,484,532
Direct and Indirect Labor 1,422,345
Factory Supplies 48,904
Machinery Parts and Supplies 43,270
Equipment Rental 4,406
Rent 194,388
Insurance 162,238
Utilities 170,757
Telephone 23,081
Art Development 23,834
Repairs and Maintenance 55,564
Depreciation and Amortization Expense 484,585
----------
TOTAL COST OF REVENUES EARNED $4,117,904
==========
</TABLE>
-11-
<PAGE>
LABEL SYSTEMS, INC.
SCHEDULE B
----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
------------------------------------------
Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Commissions $102,298
Office Supplies and Expense 29,353
Delivery and Freight 9,586
Professional Fees 12,861
Outside Services 5,102
Travel and Entertainment 32,259
Rubbish Removal 43,873
Royalties 11,003
Research and Development 472,799
Postage 5,034
Uniforms Rental 4,650
Advertising and Marketing 3,353
Equipment Leases 9,503
Dues and Subscriptions 4,036
Miscellaneous 18,077
Bad Debt Expense 144,213
Salesman Expenses 4,273
Cleaning Supplies 3,418
Vehicle Expenses 2,266
Building Supplies and Maintenance 12,883
Environmental and Hazard Waste Expenses 18,685
Property Taxes 96,853
----------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $1,046,378
==========
</TABLE>
-12-
<PAGE>
<TABLE>
KEYSTONE TECHNOLIGIES, LLC
BALANCE SHEETS
June 30, 1999
ASSETS
Bridgestone Bridgestone
----------- -----------
CT VT Bridgestone Label Systems Eliminations Combined
-- -- ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash on Hand and in Banks 90,424 955 $91,379 $3,584 $94,963
Accounts Receivable (Net) Note 1 1,001,743 (24,771) 976,972 536,462 (212,141) 1,301,293
Inventory 745,008 0 745,008 293,810 1,038,818
Due from Officiers 0 0
Due from Affiliates Note 2 1,940,579 (1,146,791) 793,788 (70,000) (703,238) 20,550
Due from Label System Acquisition Note 3 0 0
Employee Loans/Advance 0 0
Prepaid Expenses 1,395 1,175 2,570 (4,814) (2,244)
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,779,149 (1,169,432) 2,609,717 759,042 (915,379) 2,453,380
NON-CURRENT ASSETS
Property and Equipment 1,264,607 1,280,323 2,544,930 3,552,818 6,097,748
Less Accumulated Depreciation (756,263) (520,827) (1,277,090) (1,240,755) (2,517,845)
-------------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS 508,344 759,496 1,267,840 2,312,063 0 3,579,903
OTHER ASSETS
Capitalized Research & Development Costs 0 0 0
Acquisition Costs/Merger Costs 0 6,323 6,323
Organizational Costs 1,947 1,947 1,947
Patent Costs 10,908 10,908 13,365 24,273
Leasehold Improvements 66,752 18,281 85,033 358,377 443,410
-------------------------------------------------------------------------------
Subtotal 77,660 20,228 97,888 378,065 0 475,953
Less Accumulated Amortization (41,901) (19,838) (61,739) (90,361) (152,100)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NET 35,759 390 36,149 287,704 0 323,853
-------------------------------------------------------------------------------
Deposit 2,190 2,190 0 2,190
TOTAL OTHER ASSETS 35,759 2,580 38,339 287,704 0 326,043
-------------------------------------------------------------------------------
TOTAL ASSETS 4,323,252 (407,356) $3,915,896 $3,358,809 ($915,379) $6,359,326
===============================================================================
</TABLE>
<PAGE>
<TABLE>
KEYSTONE TECHNOLIGIES, LLC
BALANCE SHEETS
June 30, 1999
LIABILITIES AND STOCKHOLDER'S EQUITY
Bridgestone Bridgestone
----------- -----------
CT VT Bridgestone Label Systems Eliminations Combined
-- -- ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts Payable Note 4 759,300 21,360 $780,660 $436,537 ($212,141) $1,005,056
Accrued Expense 204,207 204,207 43,627 247,834
Due to Officiers Note 5 0 0 0
Due to Affiliates Note 6 35,000 35,000 668,238 (703,238) 0
Accrued Income Taxes (14,586) (4,841) (19,427) (2,940) (22,367)
Deferred Taxes-Current Portion 0 0
Obligations Under Lease-Current Portion 285 285 285
Revolving Credit 450,000 450,000 450,000
Term Loan Current-Portion 139,291 139,291 139,291
----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,538,497 51,519 1,590,016 1,145,462 (915,379) 1,820,099
NON-CURRENT LIABILITIES
Term Loan 620,941 620,941 620,941
Less Current Portion Term Loan (139,291) (139,291) (139,291)
----------------------------------------------------------------------------------
Net Long-Term Portion Term Loan 481,650 481,650 481,650
Due to Officier 485,766 641,929 1,127,695 1,127,695
Deferred Taxes-Non Current Portion 124,034 124,034 124,034
----------------------------------------------------------------------------------
TOTAL NON-CURRENT LIABLITIES 1,091,450 641,929 1,733,379 0 0 1,733,379
STOCKHOLDERS' EQUITY
Capital Stock 10,000 11,000 21,000 10,000 31,000
Treasury Stock (100,000) (100,000) (100,000)
Paid-In-Surplus 0 2,944,495 2,944,495
Retained Earnings 1,783,305 (1,111,804) 671,501 (741,148) (69,647)
----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,693,305 (1,100,804) 592,501 2,213,347 0 2,805,848
----------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS'EQUITY 4,323,252 (407,356) $3,915,896 $3,358,809 ($915,379) $6,359,326
==================================================================================
</TABLE>
<PAGE>
KEYSTONE TECHNOLIGIES, LLC
Notes to Statements
06 Month Ended June, 1999
<TABLE>
<CAPTION>
Note 1: Accounts Receivable Note 4: Accounts Payable
<S> <C> <C> <C>
15,118 due to BGT VT from LS 15,118 due from LS to BGT VT
197,023 due to LS from BGT CT 197,023 due from BGT CT to LS
$212,141 $212,141
Note 2: Due from Affiliate Note 6: Due to Affiliate
$35,000 due to BGT CT from BGT VT $35,000 due from BGT VT to BGT CT
668,238 due to BGT CT from LS 668,238 due from Label Systems to BGT
$703,238 $703,238
Note 7: Contract Revenues
$1,108,609 sold by LS to BGT CT
Note 8: Materials Purchased
$1,108,609 purchased by BGT from LS
</TABLE>
<PAGE>
KEYSTONE TECHNOLIGIES, LLC
Income Statements
06 Months YTD 1999
<TABLE>
<CAPTION>
Bridgestone % % %
Total Sales Label Systems Sales Eliminations Combined Sales
<S> <C> <C> <C> <C> <C> <C> <C>
Contract Revenued Earned Note 7 $ 3,310,554 100.0% $2,069,181 100.0% ($1,108,609) $4,271,126 100.0%
Cost of Revenue Earned (Schedule A) 2,495,787 75.4% 1,849,412 89.4% ($1,108,609) $3,236,590 75.8%
-----------------------------------------------------------------------------------
GROSS PROFIT 814,767 24.6% 219,769 10.6% 0 1,034,536 24.2%
Selling, General & Administrative
Expenses (Schedule B) 1,109,051 33.5% 334,711 16.2% 0 1,443,762 33.8%
-----------------------------------------------------------------------------------
OPERATING INCOME (294,284) -8.9% (114,942) -5.6% 0 (409,226) -9.6%
Other Income 0 0.0% 0 0.0% 0 0 0.0%
-----------------------------------------------------------------------------------
INCOME FROM OPERATIONS AND
BEFORE TAXES (294,284) -8.9% (114,942) -5.6% 0 (409,226) -9.6%
Income Taxes $0 0.0% 0.0% $0 0.0%
NET INCOME AFTER TAXES (294,284) -8.9% (114,942) -5.6% (409,226) -9.6%
===================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
MEMO:
Add Back: Private Company Expenses $ 126,796 3.8% $61,847 3.0% 0 188,643 4.4%
-----------------------------------------------------------------------------------
EBIT (167,488) -5.1% (53,095) -2.6% 0 (220,563) -5.2%
===================================================================================
325,844 9.8% $301,914 14.6% 627,758
EBITDOS 158,356 4.8% 246,619 12.0% 407,175 9.5%
===================================================================================
</TABLE>
<PAGE>
KEYSTONE TECHNOLIGIES, LLC
Cash Flow
Fiscal 1999
<TABLE>
<CAPTION>
Jan-99 Feb-99 Mar-99 1st QTR
<S> <C> <C> <C> <C>
Income After Taxes (110,379) (127,574) 50,848 (187,105)
Add: Depreciation 76,316 76,311 76,231 228,858
Add: Amortization 5,632 5,931 5,655 17,218
Cash Generated from Operations (28,431) (45,332) 132,734 58,971
(Inc) Dec in Accounts Receivable (21,280) (82,078) (156,167) (259,525)
(Inc) Dec in Inventory (22,978) 4,019 (19,847) (38,806)
(Inc) Dec in Other Current Assets 1,374 (215) 2,351 3,510
Inc (Dec) in Accounts Payable 41,579 100,409 131,245 273,233
Inc (Dec) in Accrued Income Taxes
Inc (Dec) in Other Current Liabilities (84,405) 48,055 65,694 29,344
Less: Capital Expenditures (14,934) (24,180) (92,512) (131,626)
Research & Development Costs
Patent Costs
Acquisition Costs
Inc (Dec) in Long Term Liabilities
(Inc) Dec in Long Term Assets
Financial
Term Loan (10,965) (10,757) (11,226) (32,948)
Revolving Credit 100,000 100,000
Due from Keystone 70,000 70,000
Due to Officiers (15,500) (13,000) (17,000) (45,500)
Due from Label System Acquisition
Merger Costs
Net Cash Generation 14,460 (23,079) 35,272 26,653
Cash Beginning of the Month 31,310 45,770 22,691 31,310
Cash at the End of the Month 45,770 22,691 57,963 57,963
<CAPTION>
Apr-99 May-99 Jun-99 2nd QTR
<S> <C> <C> <C> <C>
Income After Taxes (8,029) (69,480) (144,612) (222,121)
Add: Depreciation 76,272 76,290 76,329 228,891
Add: Amortization 5,654 4,484 4,483 14,621
Cash Generated from Operations 73,897 11,294 (63,800) 21,391
(Inc) Dec in Accounts Receivable 103,748 (190,193) 125,963 39,518
(Inc) Dec in Inventory (12,163) 18,805 (34,539) (27,897)
(Inc) Dec in Other Current Assets 7,184 241 6,480 13,905
Inc (Dec) in Accounts Payable (33,756) (10,264) 65,527 21,507
Inc (Dec) in Accrued Income Taxes 699 699
Inc (Dec) in Other Current Liabilities (94,706) 131,898 36,573 73,765
Less: Capital Expenditures (43,932) (35,398) (40,461) (119,791)
Research & Development Costs
Patent Costs (1,463) (498) (1,961)
Acquisition Costs (3,928) 0 (2,395) (6,323)
Inc (Dec) in Long Term Liabilities
(Inc) Dec in Long Term Assets
Financial
Term Loan (10,894) (11,092) (10,777) (32,763)
Revolving Credit 100,000 100,000
Due from Keystone 0
Due to Officiers (12,200) (16,550) (16,300) (45,050)
Due from Label System Acquisition
Merger Costs
Net Cash Generation (28,213) (1,058) 66,271 37,000
Cash Beginning of the Month 57,963 29,750 28,692 57,963
Cash at the End of the Month 29,750 28,692 94,963 94,963
<CAPTION>
Jul-99 3rd QTR YTD
<S> <C> <C> <C>
Income After Taxes (76,658) (76,658) (485,884)
Add: Depreciation 76,193 76,193 533,942
Add: Amortization 4,483 4,483 36,322
Cash Generated from Operations 4,018 4,018 84,380
(Inc) Dec in Accounts Receivable 125,988 125,988 (94,019)
(Inc) Dec in Inventory 97,572 97,572 30,869
(Inc) Dec in Other Current Assets (22,403) (22,403) (4,988)
Inc (Dec) in Accounts Payable (145,475) (145,475) 149,265
Inc (Dec) in Accrued Income Taxes 0 699
Inc (Dec) in Other Current Liabilities (60,018) (60,018) 43,091
Less: Capital Expenditures (31,770) (31,770) (283,187)
Research & Development Costs
Patent Costs (2,580) (2,580) (4,541)
Acquisition Costs 0 (6,323)
Inc (Dec) in Long Term Liabilities
(Inc) Dec in Long Term Assets 2,190
Financial
Term Loan (11,474) (11,474) (77,185)
Revolving Credit 0 200,000
Due from Keystone 0 70,000
Due to Officiers (8,970) (8,970) (99,520)
Due from Label System Acquisition
Merger Costs
Net Cash Generation (52,922) (55,112) 8,541
Cash Beginning of the Month 94,963 94,963 31,310
Cash at the End of the Month 42,041 39,851 39,851
</TABLE>
<PAGE>
KEYSTONE TECHNOLIGIES, LLC
BALANCE SHEETS
June 30, 1998
ASSETS
<TABLE>
<CAPTION>
Bridgestone Bridgestone
CT VT Label Systems Eliminations Combined
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash on Hand and in Banks $501,198 $1,490 $61,170 $563,858
Accounts Receivable (Net) Note 1 871,431 95,434 1,154,758 (1,041,656) 1,079,967
Inventory 1,116,471 77,183 254,588 1,448,242
Due from Officiers 0 0
Due from Affiliates Note 2 1,867,979 49,869 510,000 (1,837,848) 590,000
Due from Label System Acquisition Note 3 502,659 502,659
Employee Loans/Advance 0
Prepaid Expenses 8,652 (1,947) 6,705
-----------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,365,731 223,976 2,481,228 (2,879,504) 4,191,431
NON-CURRENT ASSETS
Property and Equipment 1,091,548 1,209,978 3,179,332 5,480,858
Less Accumulated Depreciation (577,405) (343,780) (626,745) (1,547,930)
-----------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS 514,143 866,198 2,552,587 0 3,932,928
OTHER ASSETS
Capitalized Research & Development Costs 120,822 63,000 42,731 226,553
Capitalized Fees 0
Acquisition Costs/Merger Costs 48,984 13,030 62,014
Organizational Costs 1,947 1,947
Patent Costs 4,868 13,365 18,233
Leasehold Improvements 64,276 18,281 452,189 534,746
-----------------------------------------------------------------------
Subtotal 238,950 83,228 521,315 0 843,493
</TABLE>
Page 1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Less Accumulated Amortization (68,558) (34,071) (280,392) (383,021)
-------------------------------------------------------------------
NET 170,392 49,157 240,923 0 460,472
-------------------------------------------------------------------
Deposit 2,190 5,520 7,710
TOTAL OTHER ASSETS 170,392 51,347 246,443 0 468,182
-------------------------------------------------------------------
TOTAL ASSETS $5,050,266 $1,141,521 $5,280,258 (2,879,504) $8,592,541
===================================================================
</TABLE>
KEYSTONE TECHNOLIGIES, LLC
BALANCE SHEETS
June 30, 1998
LIABILITIES AND STOCKHOLDER'S EQUITY
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Bridgestone Bridgestone
CT VT Label Systems Eliminations Combined
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<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts Payable Note 4 $1,601,858 $88,580 $200,447 (933,722) $957,163
Accrued Expense 32,200 12,435 158,899 203,534
Due to Officiers Note 5 810,610 0 (107,934) 702,676
Due to Affiliates Note 6 601,364 1,236,484 (1,837,848) 0
Accrued Income Taxes 281,679 (7,625) 15,936 289,990
Deferred Taxes-Current Portion 0 0
Obligations Under Lease-Current Portion 3,138 3,138
Term Loan Current-Portion 0
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TOTAL CURRENT LIABILITIES 1,918,875 1,505,364 1,611,766 (2,879,504) 2,156,501
NON-CURRENT LIABILITIES
Obligations Under Lease 3,422 3,422
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Less Current Portion (3,138) (3,138)
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Net Long-Term Portion 284 0 0 0 284
Term Loan 750,000 750,000
Less Current Portion
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Net Long-Term Portion Term Loan 750,000 750,000
Due to Officier 683,086 683,086
Deferred Taxes-Non Current Portion 137,399 137,399
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TOTAL NON-CURRENT LIABLITIES 1,570,769 0 0 0 1,570,769
STOCKHOLDERS' EQUITY
Capital Stock 10,000 11,000 10,000 31,000
Treasury Stock (100,000) (100,000)
Paid-In-Surplus 0 (5,505) (5,505)
Retained Earnings 1,650,622 (374,843) 3,663,997 4,939,776
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TOTAL STOCKHOLDERS' EQUITY 1,560,622 (363,843) 3,668,492 0 4,865,271
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,050,266 $1,141,521 $5,280,258 (2,879,504) $8,592,541
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Fiscal 1998
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<CAPTION>
1st Qtr Apr-98 May-98 Jun-98 2nd Qtr YTD
<S> <C> <C> <C> <C> <C> <C>
Income After Taxes 336,864 (16,860) (169,810) (120,116) (306,786) 30,078
Add: Depreciation 230,795 77,621 77,824 75,627 231,072 461,867
Add: Amortization 56,615 18,980 18,980 18,981 56,941 113,556
Cash Generated from Operations 624,274 79,741 (73,006) (25,508) ($18,773) 605,501
(Inc) Dec in Accounts Receivable (198,845) 255,565 386,906 161,779 804,250 605,405
(Inc) Dec in Inventory 46,255 (40,779) (52,581) (169,449) (262,809) (216,554)
(Inc) Dec in Other Current Assets (3,824) 3,924 402 7,508 11,834 8,010
Inc (Dec) in Accounts Payable (156,609) (154,008) (27,205) 60,217 (120,996) (277,605)
Inc (Dec) in Accrued Income Taxes 280,927 39,479 (32,612) (9,735) (2,868) 278,059
Inc (Dec) in Other Current Liabilities (37,763) 11,838 (15,070) 2,726 (506) (38,269)
Less: Capital Expenditures (67,273) (50,014) (76,685) (25,567) (152,266) (219,539)
Research & Development Costs (86,946) (25,155) (27,250) (26,457) (78,862) (165,808)
Patent Costs (2,169) (90) (3,548) (3,638) (5,807)
Acquisition Costs (2,269) (2,269) (2,269)
Inc (Dec) in Long Term Liabilities (799) (303) (320) (210) (833) (1,632)
(Inc) Dec in Long Term Assets (5,520) (14,850) (14,850) (20,370)
Financial
Term Loan 750,000 750,000 750,000
Due to Officiers 200,000 (200,000) (200,000) 0
Due from Keystone (500,000) (10,000) (10,000) (510,000)
Due from Simian (20,000) (20,000) (15,000) (25,000) (60,000) (80,000)
Due from Label System Acquisition (500,000) (500,000) (500,000)
Merger Costs (40,000) (4,896) (4,896) (44,896)
Net Cash Generation 31,708 85,392 52,639 (5,513) 132,518 164,226
Cash Beginning of the Month 399,632 431,340 516,732 569,371 431,340 399,632
Cash at the End of the Month 431,340 516,732 569,371 563,858 563,858 563,858
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Page 1
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OPTICAL SECURITY GROUP, INC
ANNUAL MEETING OF SHAREHOLDERS PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
The undersigned appoints Richard H. Bard and Mark T. Turnage, 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/or Series
B 8% Cumulative Convertible Exchangeable Preferred Voting Stock of Optical
Security Group, Inc. held of record by the undersigned on September 23, 1999, at
the annual meeting of shareholders to be held on October 11, 1999, 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 nominee's name.
Richard H. Bard, Yash P. Gupta, Martin T. Hart, Richard D. Lamm,
J.R. Holland, Jr., Bruce I. Raben, Mark T. Turnage
2. To ratify the appointment of Ernst & Young LLP as the Company's independent
accountants, for the fiscal year ending March 31, 2000:
____ FOR ____ AGAINST ____ ABSTAIN
3. To approve the issuance of (a) 7,500 shares of Series C Convertible
Preferred Stock (the "Series C Shares") and warrants (the "Warrants")
exercisable for a number of shares equal to the number of shares of Common
Stock issuable upon conversion of the Series C Shares (at the initial
conversion rate and initial exercise price, a right to acquire 3 million
shares of Common Stock), the proceeds of which will be used to fund, in
part, the Company's acquisition of 100% of the stock of Bridgestone
Technologies, Inc. and 19.9% of the membership interests of each of Label
Systems Acquisition, LLC and Keystone Imaging Technologies, LLC; (b) the
issuance of 333,333 shares of Common Stock, as payment of part of the
purchase price in the acquisition; and (c) the issuance of warrants (the
"Finder's Warrant") to purchase 87,486 shares of Common Stock, as payment
of a finder's fee in connection with the acquisition (collectively, the
"Securities"):
____ FOR ____ AGAINST ____ ABSTAIN
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4. The proxies are authorized to vote upon such other business as may properly
come before the meeting or any and all adjournments thereof.
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, 2 AND 3.
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: _________________, 1999 ____________________________________________
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.
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