<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, VIA EDGAR ON JUNE 8, 1998
REGISTRATION NO. 333-49029
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------
OSAGE SYSTEMS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4374983
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7373
(PRIMARY STANDARD CLASSIFICATION CODE
NUMBER)
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE AND PRINCIPAL
PLACE OF BUSINESS)
Mr. Jack R. Leadbeater
1661 East Camelback Road
Suite 245
Phoenix, AZ 85016
(602) 274-1299
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
(215) 665-3873
--------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
following effectiveness of this Registration Statement.
--------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: / X /
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement in the same offering: / /
--------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: / /
--------------------
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
--------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: / /
------------------------------------------------
------------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 3
OSAGE SYSTEMS GROUP, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS OR PAGE
- ---------------------------------------------- ------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Forepart of the Registration Statement; Outside
of Prospectus..................................................... Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus.......... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risks.................................... Prospectus Summary; Risk Factors; Summary
Consolidated Financial Data
4. Use of Proceeds.................................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.................................. Cover Page of Prospectus; Plan of Distribution
6. Dilution......................................................... Not Applicable
7. Selling Security Holders......................................... Selling Security Holders
8. Plan of Distribution............................................. Cover Page of Prospectus; Plan of Distribution;
Risk Factors
9. Legal Proceedings................................................ Business
10. Directors, Executive Officers, Promoters and Control Persons..... Management
11. Security Ownership of Certain Beneficial Owners and Management... Principal Stockholders and Selling Security
Holders
12. Description of Securities........................................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Description of Securities;
Plan of Distribution
13. Interest of Named Experts and Counsel............................ Not Applicable
14. Disclosure of Commission Position on Indemnification for Limitations on Directors' Liabilities,
Securities Act Liabilities........................................ Indemnification and Directors' and Officers'
Insurance; Part II; Item 24 - Indemnification
of Directors and Officers
15. Organization Within Last Five Years.............................. Not Applicable
16. Description of Business.......................................... Business
17. Management's Discussion and Analysis of Financial Condition and Management's Discussion and Analysis or Plan of
Results of Operations............................................. Operation
18. Description of Property.......................................... Business
19. Certain Relationships and Related Transactions................... Certain Relationships and Related Transactions
20. Market Price For Common Equity and Related Stockholder Matters... Market Price for the Company's Common Equity;
Description of Securities
21. Executive Compensation........................................... Management
22. Financial Statements............................................. Capitalization; Summary Financial Information;
Market Price for the Company's Common Equity;
Financial Statements
23. Changes in and Disagreements with Accountants on Accounting and Experts
Financial Disclosure..............................................
</TABLE>
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, not shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
DATED JUNE 8, 1998
OSAGE SYSTEMS GROUP, INC.
---------------
4,351,982 Shares of Common Stock
offered by certain Selling Security Holders,
subject to adjustment as described herein.
----------------
This Prospectus relates to the sale of 4,351,982 shares, subject to adjustment
as described under "SELLING SECURITY HOLDERS" below, of common stock, $.01 par
value per share (the "Common Stock") of OSAGE SYSTEMS GROUP, INC. (the
"Company"), all of which are being offered by the holders thereof identified as
"Selling Security Holders" in this Prospectus, including 131,000 shares offered
by certain directors and executive officers and 1,350,000 shares offered by
certain principal stockholders. The shares of Common Stock offered hereby
include: (i) 2,901,997 shares of Common Stock; (ii) 1,220,000 shares of Common
Stock, subject to adjustment, which may be issued upon the conversion, if at
all, of the Company's outstanding Series A $3.00 Convertible Preferred Stock
(the "Series A Shares"); and (iii) 229,985 shares of Common Stock, subject to
adjustment, which may be issued upon the conversion of the Company's outstanding
Series C Convertible Preferred Stock (the "Series C Shares"). The shares of
Common Stock, Series A Shares and Series C Shares were previously issued by the
Company in private placement transactions. See "SELLING SECURITY HOLDERS" and
"DESCRIPTION OF SECURITIES." Certain of the shares of Common Stock being offered
by the Selling Security Holders are subject to restrictions upon resale. See
"PLAN OF DISTRIBUTION - RESTRICTIONS UPON RESALE."
The Shares of Common Stock may be offered by the Selling Security Holders
identified in this Prospectus or by donees, pledgees, transferees, or other
successors in interest, for sale from time to time by the holders in regular
brokerage transactions, either directly or through brokers or to dealers, in
private sales or negotiated transactions, or otherwise, at prices related to
then prevailing market prices. The Company will not receive any of the proceeds
of the sale of shares of Common Stock by the Selling Security Holders. All
expenses of the registration of such securities will be borne by the Company.
The Selling Security Holders, and not the Company, will pay or assume all
applicable brokerage commissions or other costs of sale as may be incurred in
the sale of such securities. See "SELLING SECURITY HOLDERS."
<PAGE> 5
The Company will assume no responsibility for the sale of the shares of Common
Stock of the Selling Security Holders, nor can there be any assurances that a
liquid trading market will exist for the sale of the shares of Common Stock to
be offered by the Selling Security Holders. See "RISK FACTORS."
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"OSGE." On June 3, 1998, the last reported bid price of the Common Stock was
$5.00 per share. See "MARKET PRICE FOR THE COMPANY'S COMMON EQUITY."
No person is authorized to give any information or to make any representations,
other than as contained herein, in connection with the offer made in this
Prospectus, and any information or representation not contained herein must not
be relied upon as having been authorized by the Company or the Selling Security
Holders. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any security other than the Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy any shares of Common Stock offered hereby to any person in any
jurisdiction where it is unlawful to make such an offer or solicitation to such
person. Neither the delivery of this Prospectus nor any sale hereunder shall
under any circumstances create any implication that information contained herein
is correct as of any time subsequent to the date hereof.
--------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF
THIS PROSPECTUS.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------- -------------------------- ------------------------------ -----------------------------
Price to Underwriting Discounts Proceeds to the Selling
Class of Security Public and Commissions Security Holders
- ----------------------------- -------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
Shares of
Common Stock $5.00 (1) $21,759,910 (2)
- ----------------------------- -------------------------- ------------------------------ -----------------------------
</TABLE>
(1) Does not give effect to ordinary brokerage commissions or other costs
of sale that will be borne solely by the Selling Security Holders.
(2) Represents the anticipated sale by the Selling Security Holders at
$5.00 per share, the closing bid price of the Company's Common Stock on
the OTC Bulletin Board on June 3, 1998. There can be no assurances,
however that the Selling Security Holders will be able to sell their
shares of Common Stock at this price, or that a liquid market will
exist for the Company's Common Stock. The Company will realize no
proceeds upon the sale of shares of Common Stock by the Selling
Security Holders.
-----------------------
The date of this Prospectus is ________, 1998
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the caption "RISK FACTORS." Unless the context
otherwise requires, the "Company" refers to Osage Systems Group, Inc. and its
wholly-owned subsidiaries, Osage Computer Group, Inc. ("Osage"), Solsource
Computers, Inc. ("Solsource"), H. V. Jones, Inc. ("HV") and Open System
Technologies, Inc. ("OST").
THE COMPANY
Through its wholly-owned subsidiaries, the Company is a provider of
network computing solutions. The Company markets a broad range of information
technology services and products intended to transform discrete hardware and
software components into an integrated system. The Company offers integration
services which assist customers in dealing with issues during the entire life
cycle of their systems, including system architecture and design, product
acquisition, configuration and implementation, ongoing operational support, and
evolutions in technology. The Company provides solutions to complex information
technology problems including system availability and performance,
UNIX/Microsoft Windows NT integration, client server database implementation,
electronic mail and messaging, system and network security, and
Internet/intranet and world wide web application deployment.
The Company's ability to deliver integrated solutions is principally
attributable to its technical expertise and its value-added reseller
relationships with industry-leading vendors of information technology products
such as Sun Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and
Microsoft. To date, most of its revenues have been derived from the resale of
products. The Company has also established relationships with leading
aggregators of computer hardware and software products. These relationships
enable it to provide its clients with competitive product pricing, ready product
availability and services such as electronic product ordering, product
configuration and testing and product warehousing and delivery.
The Company's customer base varies from relatively small companies to
Fortune 500 and other large and mid-sized companies. The Company's customer base
is generally located in the southwestern United States, primarily in Texas,
Arizona and Southern California; with an emphasis on industries such as
semi-conductor manufacturing, publishing, hospitality, distribution, military,
education, and state and local government.
Management believes that the relationships of value-added resellers
with certain industry-leading technology vendors provide them with access to
resources such as technical training, technical documentation, evaluation units
and leading-edge industry information. These resources represent significant
value to large and mid-sized companies that typically do not maintain such
in-house resources. Management also believes that reduced cost, increased
productivity and broader sales coverage, particularly in the burgeoning middle
market, is motivating technology vendors to sell their products through the
value-added channel. Given
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<PAGE> 7
these market forces, management believes that value-added resellers such as the
Company will be well positioned to capitalize on anticipated growth in the
industry.
Given the size and highly fragmented composition of the industry, the
Company believes there is an opportunity to implement a market roll-up program
through the selective, strategic acquisition of other companies with
complementary businesses in a revenue range of $5 million to $15 million per
annum. Management believes that companies in this range of revenues may be
receptive to the Company's acquisition program as often they are too small to be
identified as acquisition targets of larger public companies or to attempt
independently their own public offering. In particular, the Company intends to
focus its acquisition strategy on candidates which have strong relationships
with key technology vendors, a proven record of delivering high-quality network
computing solutions and a customer base of large and mid-sized companies.
The Company commenced its acquisition program with the acquisition of
Solsource and HV Jones on March 17, 1998 and the further acquisition of OST on
April 24, 1998. In addition, the Company has recently signed a letter of intent
to acquire an additional company and is actively engaged in discussions with
several other acquisition candidates. The acquisition subject to the letter of
intent, however, remains in the preliminary stages and is subject to due
diligence review and other conditions to closing. See "BUSINESS - Recent
Acquisitions." The success of the acquisition program will likely be dependent
upon, among other factors, the Company's ability to secure additional financing
through the sale of debt or equity securities, and the development of an active
trading market for the Company's securities, neither of which can be assured.
See "RISK FACTORS."
BACKGROUND
The Company was originally incorporated as "Pacific Rim Entertainment,
Inc."("Pacific Rim") under the laws of Delaware in 1992. From 1992 through
1996, Pacific Rim had been engaged principally in the animated film production
business. After several years of losses following its initial public offering in
1993, Pacific Rim suspended its business operations in 1996 and remained
inactive while it sought to identify a strategic business combination with a
private operating company. In December 1997, Pacific Rim acquired Osage Computer
Group, Inc. ("Osage"), an Arizona corporation, which had been in the computer
systems integration business since 1989. The acquisition was completed through a
merger of Osage with and into a wholly-owned subsidiary of Pacific Rim which
became effective on December 22, 1997 (the "Merger"). Thereafter, Pacific Rim
assumed the historic operations of Osage and on March 10, 1998, changed its name
to "Osage Systems Group, Inc." (the "Company"). The executive offices of the
Company are located at 1661 East Camelback Road, Suite 245, Phoenix, Arizona
85016, and its telephone number is (602) 274-1299.
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders:.................. 4,351,982 shares
Common Stock to be outstanding after the Offering:................. 8,463,613 shares(1)
Proceeds:.......................................................... The Company will not receive any of the
proceeds from the sale of shares by
Selling Stockholders.
Trading Symbol (OTC Bulletin Board)............................... OSGE
</TABLE>
- ---------------------------
(1) The Company presently has 7,013,628 shares of Common Stock outstanding.
The number of shares outstanding may increase as a result of this
offering as 1,449,985 additional shares, subject to adjustment, may be
issued upon the conversion of the Series A Shares and Series C Shares.
The number of outstanding shares does not include 500,000 shares of
Common Stock reserved for issuance pursuant to the conversion of the
Company's Series B $3.00 Convertible Preferred Stock (the "Series B
Shares") issued in the Merger and 1,300,000 shares of Common Stock
reserved for issuance pursuant to the exercise of outstanding stock
options; nor does it include shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding Redeemable Warrants.
See "DESCRIPTION OF SECURITIES."
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated historical financial data for the year ended
December 31, 1997 has been derived from the consolidated financial statements of
the Company which have been audited by Deloitte & Touche LLP, independent
auditors, as is described in their report included elsewhere in this Prospectus.
The summary consolidated historical financial data for the two years in the
period ended December 31, 1996 has been derived from the consolidated financial
statements of the Company which have been audited by Pearce, Gray & Rudd,
independent auditors, as is described in their report included elsewhere in this
Prospectus. The summary consolidated financial data for the three months ended
March 31, 1998 and 1997 has been derived from the unaudited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements, and in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations and
financial position for such periods. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. The unaudited pro forma
consolidated financial data presented below gives effect to all businesses
acquired by the Company through April 24, 1998 as if these acquisitions were
consummated as of January 1, 1997. The pro forma results of operations are not
necessarily indicative of the results that would have occurred had the
acquisitions been consummated as of the beginning of the period presented or
that might be attained in the future. The following data should be read in
conjunction with "Management's Discussion and Analysis or Plan of Operation" and
the actual and pro forma consolidated financial statements of the Company
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
----------
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
-------------------------- -----------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- -------------------- ------------------
Pro Pro
Historical Forma (2) Historical Forma(2)
---------- --------- ---------- --------
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $7,392 $9,908 $14,191 $2,240 $8,932 $5,642 $9,470
Gross profit 1,176 2,214 2,521 494 2,011 1,062 1,851
Operating income (loss) 118 71 (286) 55 117 (161) (531)
Net income (loss) 77 35 (293) 57 202 (87) (429)
Net income (loss) per share:
Basic $.02 $.01 $(.06) $.01 $.04 $(.02) $(.07)
==== ==== ====== ==== ==== ====== ======
Diluted $.02 $.01 $(.06) $.01 $.04 $(.02) $(.07)
==== ==== ====== ==== ==== ====== ======
Weighted average number of
shares outstanding 4,916,400 4,868,200 4,820,000 5,342,472 5,725,806 5,342,472 5,725,806
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- -----------------------
BALANCE SHEET DATA: Pro
Historical Forma(2)
---------- --------
<S> <C> <C> <C>
Cash and cash equivalents $2,576 $2,498 $223
Working capital 2,075 2,315 818
Total assets 4,880 12,719 16,874
Shareholders' equity 2,162 6,652 9,224
</TABLE>
- ---------------------
(1) The financial data presented above reflects the relevant Statement of
Income data and Balance Sheet data of Osage. Osage became publicly held
by virtue of the Merger on December 22, 1997 with Pacific Rim, an
inactive public company. Since, as a result of the Merger, the former
stockholders of Osage acquired a controlling interest in Pacific Rim,
the Merger has been accounted for as a "reverse acquisition."
Accordingly, for financial statement presentation purposes, Osage is
viewed as the continuing entity and the related business combination is
viewed as a recapitalization of Osage, rather than an acquisition by
Pacific Rim.
(2) Assumes that the acquisitions of HV, Solsource and OST occurred as of
January 1, 1997.
6
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the shares of Common
Stock offered hereby should carefully review the following risk factors as well
as the other information set forth in this Prospectus.
This Prospectus contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Pro forma information
contained within this Prospectus, to the extent it is predictive of the
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions may also be characterized as forward-looking
statements. Although forward-looking statements are based on assumptions made,
and information believed, by management to be reasonable, no assurance can be
given that such statements will prove to be correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
projected or expected. Such risks and uncertainties are described under the
headings "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," "BUSINESS"
and in the risk factors set forth below.
1. Risks Related to Acquisition Strategy. The Company intends to grow
primarily through the acquisition of additional value-added reseller businesses.
Increased competition for acquisition candidates may develop in which event
there may be fewer acquisition opportunities available to the Company as well as
higher acquisition prices. There can be no assurance that the Company will be
able to identify, acquire or profitably manage additional businesses or
successfully integrate acquired businesses, if any, into the Company without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of risks, including possible adverse effects on
the Company's operating results, diversion of management resources, failure to
retain key personnel, risks associated with unanticipated liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Performance of, or other problems at, a single acquired
company could have an adverse effect on the Company's national sales and
marketing initiative. In addition, there can be no assurance that the Company or
other value-added reseller businesses acquired in the future will achieve
anticipated revenues and earnings.
2. Need for Additional Financing; Risks Related to Acquisition
Financing. Management believes that the Company has sufficient capital to
implement its acquisition strategy in the near term. However, it is anticipated
that in order to pursue the Company's acquisition strategy in the long term, the
Company will continue to require additional financing, which the Company intends
to obtain through a combination of traditional debt financing, the issuance of
its shares and the placement of debt and equity securities. The Company intends
to finance some portion of its future acquisitions by using shares of its Common
Stock for all or a substantial portion of the consideration to be paid. In the
event that the Common Stock does not attain or maintain a sufficient market
value, or potential acquisition candidates are otherwise
7
<PAGE> 11
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to maintain its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings.
3. Additional Dilution Associated with Outstanding Securities. There
are currently 1,449,985 shares of Common Stock, subject to adjustment, issuable
upon the exercise of the Series A Shares and the Series C Shares covered by this
Prospectus. Excluding the 500,000 shares of Common Stock issuable upon the
conversion of the Series B Shares and the 1,300,000 shares of Common Stock
issuable upon the exercise of outstanding stock options, the conversion of the
Series A Shares and Series C Shares would have the effect of increasing the
outstanding shares of the Company's Common Stock from 7,013,628 to 8,463,613.
The Company is unable to predict the effect, if any, that the future sale of
such shares, or the availability of such shares for future sale, will have on
the market price for the Company's Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such influx
of shares into the market could occur, could adversely effect the market price
of the Common Stock and could impair the Company's future ability to obtain
capital through offerings of equity securities or to accomplish its acquisition
strategy. See "ADDITIONAL DILUTION ASSOCIATED WITH ACQUISITION STRATEGY."
4. Additional Dilution Associated with Acquisition Strategy. The
Company is likely to require additional financing to fund its acquisition
strategy which may entail the issuance of additional shares of Common Stock or
common stock equivalents, which would have the effect of further increasing the
number of shares outstanding. See "NEED FOR ADDITIONAL FINANCING; RISKS RELATED
TO ACQUISITION FINANCING." The acquisitions that were recently completed provide
for the issuance of earn-out shares with an aggregate value of $3.7 million
based upon the future net income of Solsource and HV Jones. In addition, at an
assumed market price of $6.00 per share, an acquisition which is currently
pending contemplates the issuance of approximately 333,334 shares of Common
Stock, plus earn-out shares with a value of up to an additional $3.0 million in
value if certain sales revenue and net income targets are achieved. See
"BUSINESS ACQUISITION STRATEGY." Accordingly, in connection with the pending
transactions and future acquisitions, if any, the Company will likely undertake
the issuance of more shares of Common Stock without notice to the then existing
stockholders. This may be done in order to, among others, facilitate a business
combination, acquire assets or stock of another business, compensate employees
or consultants or for other valid business reasons in the discretion of the
Company's Board of Directors.
5. Historical Losses of Acquired Companies. During the first quarter
of 1998, the Company acquired Solsource and HV. Both of these companies had
incurred historic losses for their respective fiscal years ended January 31,
1998 and December 31, 1997. Although management believes that these
companies may be able to operate profitably in the future as a result of the
business and operating synergies created as a result of the business
combination with the Company, there can be no assurances to this effect.
Continued losses by these companies would likely have an adverse effect on the
Company's overall results of operations and liquidity.
6. Variability of Performance. The Company has experienced, and is
expected to continue experiencing, quarterly variations in revenues and
operating income as a result of many factors, including the timing of projects
or purchases from customers, hiring of personnel and additional selling, general
and administrative expenses incurred to support the Company's growth. In
connection with certain projects, the Company could incur costs in periods prior
to recognizing revenues under those contracts. In addition, the Company must
plan its operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecast in any quarter would likely adversely affect the
Company's operating results for the quarter.
8
<PAGE> 12
7. Substantial Reliance on Key Customers. The Company's customer base
has been and continues to be highly concentrated, with its largest customer
accounting for 44% and 65% of net sales in the fiscal years ended December 31,
1996 and 1997, respectively. Based upon historical and recent results and
existing relationships with customers, the Company believes that a substantial
portion of its net sales and gross profits will continue to be derived from
sales to the Company's largest customers. There are no ongoing written
commitments by such customers to purchase products and services from the
Company. The Company has service contracts with many of its large customers to
provide systems integration and other services. In general, such service
contracts are project-based and terminable upon relatively short notice. There
can be no assurance that the Company's service customers will continue to enter
into service contracts with the Company or that existing contracts will not be
terminated. All product sales by the Company are made on a purchase order basis.
A significant reduction in orders from any of the Company's largest customers
could have a material adverse effect on the Company's results of operations.
There can be no assurance that the Company's largest customers will continue to
place orders with the Company or that orders by such customers will continue at
their previous levels.
8. Dependence on Key Personnel. The success of the Company for the
foreseeable future will depend largely on the continued services of its key
executive officers and leading salespersons. The Company is particularly
dependent upon Jack Leadbeater, Chief Executive Officer of the Company and David
Olson, Chief Operating Officer of the Company, because of their industry
knowledge, marketing skills and relationships with major vendors and customers.
The Company has employment agreements with each of Messrs. Leadbeater and Olson,
which contain a non-competition covenant which survive their actual term of
employment for a term of one year. The Company maintains, and is the beneficiary
of, life insurance policies each in the amount of $500,000 on the lives of
Messrs. Leadbeater and Olson. There can be no assurance that the departure of
such key personnel would not have a material adverse effect on the Company's
results of operations. Furthermore, there can be no assurance that the Company
will be successful in attracting and retaining the personnel it requires to
conduct its operations or to meet its future needs to accommodate growth
successfully.
9. Competitive Market for Technical Personnel. The Company's success
depends in part on its ability to attract, hire, train and retain qualified
managerial, technical and sales and marketing personnel, particularly for
systems integration and support services. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining the technical personnel it requires to conduct and
expand its operations successfully. The Company's results of operations could be
materially adversely affected if the Company were unable to attract, hire, train
and retain qualified personnel.
10. Dependence on Suppliers. The Company's business depends upon an
adequate supply of hardware, software products and computer systems at
competitive prices and on reasonable terms for resale by the Company.
Consequently, the Company's results of operations are dependent, in part, upon
the demand for, price of, technical capabilities of and quality of the products
available for resale. The Company's principal suppliers are Sun Microsystems,
Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft.
9
<PAGE> 13
To mitigate against a risk of product shortage, the Company will
procure some hardware and software products from multiple sources for the
products it sells. Some products are available from only a single source, as
manufacturers elect to provide a direct relationship with system integrators.
The Company has supply contracts with its vendors and purchases hardware and
software products, and computer systems on a purchase order basis. As a result,
there can be no assurance that such products will continue to be available as
required by the Company at prices or on terms acceptable to the Company.
Although the Company has not experienced significant problems with its
suppliers in the past, there can be no assurance that such relationships will
continue or that, in the event of a termination of its relationships with its
suppliers, it would be able to obtain alternative sources of supply for most
products without a material disruption in the Company's ability to provide
products to its customers. Any material disruption of the Company's supply of
products would have a material adverse effect on the Company's results of
operations.
11. Dependence on Continued Authorization to Resell and Provide
Manufacturer-Authorized Products and Services. The Company's future success in
both product sales and services and support offerings will depend largely on its
continued status as an approved reseller of products and its continued
authorization as a service provider. With respect to many of the Company's
hardware and software product sales, the Company maintains the highest levels of
sales and service authorizations with many industry-leading manufacturers,
including Sun Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard,
and Microsoft. Without such sales and service authorizations, the Company would
be unable to provide the range of products and services currently offered by the
Company. In general, the agreements between the Company and such manufacturers
include termination provisions ranging from immediate termination to termination
upon 90 days prior written notice. In addition, many of such agreements are
based upon the Company's ability to sell a certain volume of each manufacturer's
products and services. There can be no assurance that such manufacturers will
continue to authorize the Company as an approved reseller or service provider.
12. Year 2000 Issues. The Company is presently attempting to respond to
Year 2000 issues. Year 2000 issues are the result of computer programs being
written using two digits rather than four to define the applicable year
associated with the program or an associated computation. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities. Management expects to have substantially
all of the systems application changes completed within the next 12 months and
believes that its level of preparedness is appropriate.
The total cost to the Company of these Year 2000 compliance
issues is not anticipated to be material to its financial position or results of
operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
10
<PAGE> 14
third party modification plans and other factors. However, there can be no
assurances that these estimates will be achieved and actual results could differ
from those plans.
13. Dividends. No dividends have been paid by the Company since
inception and the payment of dividends is not contemplated in the foreseeable
future. The payment of future dividends will be directly dependent upon the
earnings of the Company, its financial needs and other similarly unpredictable
factors. Earnings, if any, are expected to be retained to finance and develop
the Company's business.
14. No Legal or Tax Advice. Any purchasers of the Company's Common
Stock should consult with their respective counsel, accountant or business
adviser as to legal, tax and related matters concerning investment in the Common
Stock offered hereby. An investment in the Common Stock may involve certain
material federal and state tax consequences.
15. Limited Public Market. Although the Company's Common Stock is
listed for trading on the OTC Bulletin Board, there is currently only limited
trading in the Company's Common Stock. There can be no assurances that a regular
trading market will develop or be maintained for the Company's Common Stock.
16. Substantial Voting Power of Principal Stockholders. The former
stockholders of Osage, including, principally, Jack Leadbeater and David Olson,
have voting control over up to 3.1 million shares of Common Stock. In addition,
pursuant to the terms of Pacific Rim's acquisition of Osage, the former
stockholders of Osage, as the holders of the Series B Shares, are entitled to
elect a majority of the Board of Directors subject to certain performance
criteria. See "PRINCIPAL STOCKHOLDERS - MATERIAL VOTING ARRANGEMENTS."
17. Effect of Certain Anti-Takeover Provisions. Certain provisions of
the Company's Certificate of Incorporation and the General Corporation Law of
the State of Delaware (the "GCL") could deter a change in management of the
Company or render more difficult an attempt to obtain control of the Company.
For example, the Company is subject to the provisions of the GCL that prohibits
a public Delaware corporation from engaging in a broad range of business
combinations with a person who, together with affiliates and associates, owns
15% or more of the corporation's outstanding voting shares (an "interested
stockholder") for three years after the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. The Company's Certificate of Incorporation includes undesignated
Preferred Stock, which may enable the Board to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise.
In addition, the Company has proposed to amend its Certificate of
Incorporation, (1) to provide for the classification of the Board of Directors
into three different classes, and (2) to provide that directors shall only be
removed for cause and by a supermajority vote of stockholders and to require
consent of the Board of Directors to amend the Certificate of Incorporation.
These proposals, if approved at the Company's Annual Meeting of Stockholders
currently scheduled for June 12, 1998, could delay or frustrate the removal of
incumbent directors and could make difficult a change in control transaction,
even if such an event could be viewed as beneficial by the Company's
stockholders. There can be no assurances, however, that such proposals will be
approved by the requisite vote of stockholders. See "DESCRIPTION OF SECURITIES
- - PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT."
18. Intense Competition. The Company encounters intense competition
from numerous other systems integration companies. Many of the Company's
competitors are larger and have greater financial and other resources and are
better known to consumers than the Company. There can be no assurance that the
Company will be able to continue to compete successfully in its markets.
11
<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
by the Selling Security Holders.
MARKET PRICE FOR THE COMPANY'S COMMON EQUITY
The Company's Common Stock is listed on the OTC Bulletin Board under
the symbol "OSGE." The following table sets forth the range of the high and low
closing bid prices of the Common Stock.
<TABLE>
<CAPTION>
Common Stock(1)(2)
High Low
---- ---
<S> <C> <C>
1996
1st Quarter $0.01 $ 0.01
2nd Quarter $0.03 $ 0.01
3rd Quarter $0.03 $ 0.03
4th Quarter $0.10 $ 0.03
1997
1st Quarter $0.25 $ 0.10
2nd Quarter $0.25 $ 0.25
3rd Quarter $0.37 $ 0.25
4th Quarter (through December 22, 1997) $0.37(3) $ 0.12(3)
4th Quarter (December 23, 1997
through December 31, 1997) $4.00(4) $ 4.00(4)
1998
1st Quarter $7.50 $ 4.00
</TABLE>
- ---------------------------
(1) All per share data reflect the cumulative effect of a 1 for 10 and a 1
for 20 reverse stock split.
(2) Represents the high and low bid prices of the Company's Common Stock as
reported by the OTC Bulletin Board. Such prices are inter-dealer prices
without retail mark-ups or commissions and may not represent actual
transactions.
(3) Reflects the trading price prior to the effective date of the Merger
with Osage.
(4) Reflects the trading price following the effective date of the Merger
with Osage.
- ---------------------------
The last reported bid price of the Common Stock was $5.00 as reported
on the OTC Bulletin Board on June 3, 1998.
RECORD HOLDERS
As of May 12, 1998, there were approximately 209 holders of record of
the Common Stock. Based upon depository requests in connection with the
distribution of a Proxy Statement dated May 12, 1998, the Company believes the
number of beneficial owners of its Common Stock exceeds 943.
DIVIDENDS
The Company has not paid any cash dividends, to date, and has no
intention to pay any cash dividends on its Common Stock in the foreseeable
future. The declaration and payment of dividends is subject to the discretion of
the Board of Directors and to certain limitations under the General Corporation
Law of the State of Delaware. The timing, amount and form of dividends, if any,
will depend, among other things, on the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Board of Directors.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. This table should be reviewed in conjunction with the Company's
financial statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
(IN THOUSANDS)
--------------
<S> <C>
Long-term debt $296
Shareholders' equity:
Series A Preferred stock, $100 stated value; 122 shares authorized
and outstanding; total liquidation preference $3,660,000 12
Series B Preferred stock, $100 stated value; 50 shares authorized
and outstanding; total liquidation preference $1,500,000 5
Series C Preferred stock, $50 stated value; 105.3 shares authorized
and outstanding; total liquidation preference $1,579,500 5
Common stock, $0.01 par value; 10,000,000 shares authorized;
5,570,000 shares issued and outstanding 56
Additional paid-in capital 7,336
Accumulated deficit (762)
-----
Total shareholders' equity 6,652
-----
Total capitalization $6,948
======
</TABLE>
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Osage became publicly held by virtue of the Merger into a wholly-owned
subsidiary of Pacific Rim Entertainment, Inc. ("Pacific Rim") on December 22,
1997. Pacific Rim had been an inactive public company at the time of the Merger.
Osage had been a provider of network computing solutions since 1989. Following
the Merger, Pacific Rim assumed the continuing operations of Osage and on March
10, 1998, changed its name to "Osage Systems Group, Inc." (the "Company").
Since, as a result of the Merger, the former stockholders of Osage acquired a
controlling interest in Pacific Rim, the Merger has been accounted for as a
"reverse acquisition." Accordingly, for financial statement presentation
purposes, Osage is viewed as the continuing entity and the related business
combination is viewed as a recapitalization of Osage, rather than an acquisition
by Pacific Rim.
Through its operating subsidiaries, the Company markets a broad range
of information technology products and services intended to transform discrete
hardware and software components into an integrated system. The Company's
ability to deliver integrated solutions is principally attributable to its
technical expertise and its value-added reseller agreements with
industry-leading vendors of information technology products such as Sun
Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft.
The Company has also established relationships with leading aggregators of
computer hardware and software products. These agreements enable the Company to
provide its clients with competitive product pricing, ready product availability
and services. To date, most of its net sales have been derived from the resale
of products from these vendors, however, the Company anticipates that as it
continues to increase the technical expertise of its service personnel and
broaden the geographic base of its marketing coverage, an increasing percentage
of its net sales in the future will be derived from the services and support
component of its business.
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth, through acquisition and
accelerated internal growth. The Company is currently pursuing an aggressive
acquisition strategy to enhance its position in its current markets and acquire
operations in new markets. This strategy will focus on acquiring candidates who
have a proven record of delivering high-quality technical services, a customer
base of large and mid-sized companies and which may benefit from the Company's
long-term growth strategy and status as a public company. See "BUSINESS -
ACQUISITION STRATEGY."
14
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------- --------------------------
% OF % OF % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
----------- --------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 7,391,969 100.0% $ 9,908,379 100.0% $ 14,191,203 100.0%
COST OF SALES 6,215,830 84.1% 7,694,775 77.7% 11,670,066 82.2%
----------- --------- ----------- --------- ------------ ---------
Gross profit 1,176,139 15.9% 2,213,604 22.3% 2,521,137 17.8%
----------- --------- ----------- --------- ------------ ---------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,058,410 14.3% 2,142,974 21.6% 2,807,340 19.8%
----------- --------- ----------- --------- ------------ ---------
INCOME (LOSS) FROM OPERATIONS 117,729 1.6% 70,630 .7% (286,203) (2.0%)
INTEREST EXPENSE (9,256) (.1%) (26,230) (.3%) (9,731) (.1%)
----------- --------- ----------- --------- ------------ ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 108,473 1.5% 44,400 .4% (295,934) (2.1%)
PROVISION (BENEFIT) FOR INCOME
TAXES 31,042 .5% 9,464 -- (3,000) --
----------- --------- ----------- ---------- ------------ ----------
NET INCOME (LOSS) $ 77,431 1.0% $ 34,936 .4% ($ 292,934) (2.1%)
=========== ========= =========== ========== ============ ==========
NET INCOME (LOSS) PER SHARE:
Basic $ .02 $ .01 $ (.06)
=========== =========== ============
Diluted $ .02 $ .01 $ (.06)
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------------------------------------------
1997 1998
---------------------------------------------- ----------------------------------------------
% OF PRO % OF % OF PRO % OF
HISTORICAL NET SALES FORMA(1) NET SALES HISTORICAL NET SALES FORMA(1) NET SALES
---------- --------- -------- --------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $2,239,778 100.0% $8,932,096 100.0% $5,641,932 100.0% $9,470,187 100.0%
COST OF SALES 1,745,355 77.9% 6,921,384 77.5% 4,580,010 81.2% 7,619,544 80.5%
---------- --------- -------- --------- ---------- --------- -------- ---------
Gross profit 494,423 22.1% 2,010,712 22.5% 1,061,922 18.8% 1,850,643 19.5%
---------- --------- -------- --------- ---------- --------- -------- ---------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 439,262 19.6% 1,893,485 21.2% 1,222,988 21.7% 2,382,077 25.2%
---------- --------- -------- --------- ---------- --------- -------- ---------
INCOME (LOSS) FROM OPERATIONS 55,161 2.5% 117,227 1.3% (161,066) (2.9%) (531,434) (5.7%)
INTEREST INCOME (NET) 2,303 .1% 5,942 .1% 35,550 .7% 18,707 .3%
---------- --------- -------- --------- ---------- --------- -------- ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 57,464 2.6% 123,169 1.4% (125,516) (2.2%) (512,727) (5.4%)
PROVISION (BENEFIT) FOR INCOME
TAXES - (78,342) (.9%) (39,000) (.7%) (84,093) (.9%)
---------- --------- -------- --------- ---------- --------- --------- ---------
NET INCOME (LOSS) 57,464 2.6% 201,511 2.3% (86,516) (1.5%) (428,634) (4.5%)
========== ========= ======== ========= ========== ========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic .01 .04 (.02) (.07)
========== ========= ========= =========
Diluted .01 .04 (.02) (.07)
========== ========= ========= =========
</TABLE>
- ---------------------------
(1) Assumes that the acquisitions of HV, Solsource and OST occurred as of
January 1, 1997.
15
<PAGE> 19
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Net sales increased by 152%, or $3.4 million to $5.6 million,
for the three months ended March 31, 1998 as compared to $2.2 million for the
same prior year period. This increase in net sales was principally attributable
to increased product sales to new and existing customers as the Company
experienced favorable market acceptance of new products introduced by the
Company's major vendors. In addition, the Company opened a new regional sales
office that resulted in increased revenues. Consulting revenues remained
relatively flat for the three months ended March 31, 1998 as compared to the
same prior year period.
The Company's net sales are expected to increase during 1998 as the
Company implements its acquisition strategy. Towards this end, the Company
completed the acquisition of Solsource and HV during the first quarter of 1998.
These acquisitions were accounted for using the purchase method of accounting
for business combinations. Accordingly, the Company's historical results of
operations include only the net sales of Solsource and HV from the date of
acquisition (March 17, 1998) through the end of the quarter. During the second
quarter of 1998, the Company acquired Open System Technologies, Inc. ("OST"). In
addition, the Company has entered into a letter of intent to acquire an
additional company and is actively involved in discussions with additional
potential acquisition targets. There can be no assurances that the acquisition
subject to the letter of intent will be completed since the underlying
transaction is preliminary in nature and subject to due diligence review and
other conditions to closing. During 1997, Solsource, HV and OST realized net
sales of $7.2 million, $5.6 million and $11.9 million, respectively. On a pro
forma basis, the Company would have realized net sales of approximately $39
million during 1997 had all of these acquisitions occurred as of January 1,
1997.
The Company's acquisition strategy relies primarily upon identifying
target companies that fit within its acquisition criteria and having sufficient
financing available to complete its planned acquisitions. Although the Company
has sufficient financing available to complete its pending acquisition, there
can be no assurances that sufficient financing will be secured so as to
facilitate the continuation of the Company's acquisition program on a
longer-term basis. Furthermore, due to the early stages of this program, there
can be no assurances as to the long-term impact of the Company's acquisition
strategy on the gross profits or net income of the Company.
Gross Profit. The Company's cost of sales include primarily, in the
case of product sales, the cost to the Company of products acquired for resale,
and in the case of services and support revenue, salaries and related costs. The
Company's gross profit increased by 115% or $.6 million to $1.1 million for the
three months ended March 31, 1998 as compared to $.5 million for the same prior
year period. Gross profit margin decreased to approximately 18.8% during the
three months ended March 31, 1998, as compared to approximately 22.1%
experienced during the same prior year period. During 1997 and the first quarter
of 1998, the Company experienced an overall decrease in its gross profit margin.
This decrease was primarily due to cost reductions passed on to the Company's
customers from its major vendors as a result of an increase in demand for the
Company's products which occurred as certain customers increased their volume of
purchases. Management believes that in the long term it will be able to sustain
or improve its profit margin as a result of its focus on providing a broad
spectrum of products, services and support packages, and through a greater
emphasis on consulting and support services, which typically have a higher
profit margin.
16
<PAGE> 20
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions, employee
benefits, travel, promotion and related marketing costs. Selling, general and
administrative expenses increased by 178% or $.8 million to $1.2 million for the
three months ended March 31, 1998 as compared to $.4 million for the same prior
year period. This increase in expenses is primarily attributable to the
expansion of the Company's infrastructure as it became publicly-held by virtue
of the Merger during the fourth quarter of 1997, including increased
administrative personnel and increased travel and promotion expenses associated
with the growth of the business. During the three months ended March 31, 1998,
as a percent of net sales, selling, general and administrative expenses
increased to approximately 21.7%, from 19.6% experienced during the same prior
year period.
During the fourth quarter of 1997 and the first quarter of 1998, the
Company increased its fixed payroll with the addition of three executive level
personnel. This had the effect of resulting in an increase in the Company's
selling, general and administrative expense as a percentage of net sales. This
increase is likely to be offset in the near-term as the Company's revenues
increase.
As part of the Merger consideration, Pacific Rim granted options to
purchase 800,000 shares of its Common Stock to the former stockholders of Osage.
These options were granted at an exercise price of $3.00, vest once the future
earnings of the Company attain certain agreed upon levels and are contingent
upon the holder's continued employment by the Company. During the first quarter
of 1998, the Company recorded no compensation expense associated with the
granting of these options since the vesting of the options was not probable at
any time during this period. However, management believes that the Company will
record compensation expense in the future if the earnings of the Company achieve
agreed upon levels and other events occur that lead management to believe that
vesting of the options is a probable occurrence. The expense, when recorded,
could have an adverse effect on the Company's income for financial accounting
purposes, as it would approximate the difference between the exercise price of
the options and the fair market value of the Company's Common Stock at that
time. This would have no effect, however, on the Company's cash flow from
operations as the vesting of the options is a non-cash event, and ultimately,
the exercise of the options would provide a capital infusion to the Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Net sales increased by 43.2%, or $4.3 million to $14.2
million, for the year ended December 31, 1997 as compared to $9.9 million for
the prior year. This increase in net sales was principally attributable to
increased product sales to new and existing customers as the Company experienced
favorable market acceptance of new products introduced by the Company's major
vendors. In addition, the Company opened a new regional sales office which
resulted in increased revenues. Consulting revenues increased 81.3% to $390,600
for the year ended December 31,1997 as compared to $215,500 for the prior year.
This increase was primarily attributable to demand for the Company's consulting
services and technical support resulting from the Company's increased focus on
the service component of its revenue base.
17
<PAGE> 21
Gross Profit. The Company's cost of sales includes primarily, in the
case of product sales, the cost to the Company of products acquired for resale,
and in the case of services and support revenue, salaries and related costs. The
Company's gross profit increased by 13.9% or $.3 million to $2.5 million for the
year ended December 31, 1997 as compared to $2.2 million for the prior year.
Gross profit margin decreased to approximately 17.8% during the year ended
December 31, 1997, as compared to approximately 22.3% experienced during the
prior year. During 1997, the Company experienced an overall decrease in its
gross profit margin. This decrease was primarily due to cost reductions passed
on to the Company's customers from its major vendors as a result of an increase
in demand for the Company's products which occurred as certain customers
increased their volume of purchases. Management believes that in the long term
it will be able to sustain its profit margin as a result of its focus on
providing a broad spectrum of products, services and support packages, and
through a greater emphasis upon consulting and support services which typically
have a higher profit margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, sales person
compensation, employee benefits, travel, promotion and related marketing costs.
Selling, general and administrative expenses increased by 31.0% or $.7 million
to $2.8 million for the year ended December 31, 1997 as compared to $2.1 million
for the prior year. This increase in expenses is primarily attributable to the
expansion of the Company's infrastructure as it became publicly-held by virtue
of the Merger transaction during the fourth quarter of 1997, including increased
administrative personnel and increased travel and promotion expenses associated
with the growth of the business. This included a non-cash charge of $300,000
attributable to the granting of shares of Common Stock to one of the Company's
executive officers. During 1997, as a percent of net sales, selling, general and
administrative expenses decreased to approximately 19.8%, from 21.6% experienced
during the prior year.
During the fourth quarter of 1997 and the first quarter of 1998, the
Company increased its fixed payroll by the addition of three executive level
personnel. This may have the effect in the short-term of resulting in an
increase in the Company's selling, general and administrative expense as a
percentage of net sales. This increase is likely to be offset in the near-term
as the Company's revenues increase.
18
<PAGE> 22
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the nine (9) quarters through March 31, 1998.
This information is derived from unaudited quarterly consolidated financial
statements of the Company that include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for such periods. Such information
should be read in conjunction with the audited Consolidated Financial Statements
of the Company and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 1,201,310 $ 2,055,097 $ 2,602,370 $ 4,049,602 $ 2,155,180 $ 3,036,574
Gross profit 309,738 377,343 636,068 890,455 494,422 598,605
Selling, general
and administrative
expenses 283,830 299,331 433,371 1,126,442 439,261 447,510
Income (loss) from
operations 25,908 78,012 202,697 (235,987) 55,161 151,095
Interest expense (2,019) (12,192) (7,976) (4,043) (2,303) (359)
Provision (benefit)
for income taxes 9,464
Net income (loss) $ 23,889 $ 65,820 $ 194,721 $ (249,494) $ 52,858 $ 150,736
QUARTER ENDED
----------------------------------------
Sept. 30, Dec. 31, Mar. 31,
1997 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 3,273,151 $ 5,726,298 $5,641,932
Gross profit 678,665 749,445 1,061,922
Selling, general
and administrative
expenses 609,242 1,311,327 1,222,988
Income (loss) from
operations 69,423 (561,882) (161,066)
Interest expense (382) (6,687) 35,550
Provision (benefit)
for income taxes (3,000) (39,000)
Net income (loss) $ 69,041 $ (565,569) $ (86,516)
</TABLE>
The Company's historical operating results have varied from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue in any fiscal quarter would result in
lower profitability in that quarter. A variety of factors, many of which are
19
<PAGE> 23
not within the Company's control, influence the Company's quarterly operating
results, including seasonal patterns of hardware and software capital spending
by customers, information technology outsourcing trends, the timing, size and
stage of projects, new service introductions by the Company or its competitors,
levels of market acceptance for the Company's products or services or the hiring
of additional staff. Operating results also may be impacted by the timing of
revenues and changes in the Company's utilization rates. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future performance. The Company
anticipates that its business will continue to be subject to such seasonal
variations.
BACKLOG
The Company normally ships systems promptly after receiving an order
and therefore does not customarily have a significant backlog.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily from cash
generated by operations and, to a lesser extent, with funds from borrowings
under the Company's revolving line of credit. For the three months ended March
31, 1998, cash flow used in operating activities was $932,000, compared to
$106,300 provided by operating activities for the same prior year period. The
Company's cash flow from operations during this period had been negatively
affected primarily by the increase in accounts receivable and inventories offset
by an increase in the level of accounts payable. For the three months ended
March 31, 1998, accounts receivable increased $1,174,700 and accounts payable
increased $576,700.
For the year ended December 31, 1997, cash flow from operations was
$142,800, after the payment of bonuses of $570,300. During the year ended
December 31, 1997, cash flow from operations was $504,300, after the payment of
bonuses of $652,000. The Company's cash flow from operations has been positively
affected primarily by the increase in net sales, together with increases in the
collection of accounts receivable and in the level of accounts payable. For the
year ended December 31, 1997, accounts receivable increased $35,100 with
accounts payable increasing $309,100 from December 31, 1996.
The Company's working capital was $2,315,400 at March 31, 1998, as
compared to $2,074,800 at December 31, 1997. The increase in the Company's
working capital during the period is principally attributable to the net
proceeds received from a private placement of the Company's Common Stock of
approximately $1.97 million that was completed during the first quarter of 1998
and, to a lesser extent, the growth of the Company's revenues during the period.
The proceeds of the private placement were used primarily by the Company to
finance the cash payments of approximately $700,000 utilized in connection with
the acquisitions completed during the first quarter of 1998. An additional
$750,000 was applied by the Company to support the operations and pay-off
short-term debt of HV Jones.
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The Company's working capital was $2,074,800 at December 31, 1997, as
compared to a level of $210,900 at December 31, 1996. The increase in the
Company's working capital during such period is principally attributable to the
net proceeds received from a private placement of $3.66 million that was
completed during the fourth quarter of 1997, and, to a lesser extent, to the
growth of the Company's revenues during the period. A portion of the proceeds of
the private placement was used by the Company to: (i) retire approximately
$450,000 of short-term debt; (ii) pay the $500,000 cash component of the Merger
consideration to the former Osage stockholders; and (iii) pay $160,000 of fees
and expenses associated with the transaction.
A $500,000 revolving credit facility was terminated by the Company in
connection with the Merger. The Company is currently negotiating with several
banks to secure a new credit facility. There can be no assurance, however, that
the Company will obtain such facility on favorable terms, if at all. Management
believes that its ability to finance operations, as well as facilitate working
capital used to finance acquisitions, will be enhanced through obtaining an
adequate credit facility. Failure to obtain an adequate credit facility for more
than the short term may have an adverse effect upon the Company's ability to
finance its operations and acquisitions.
The Company believes that its current working capital and the
anticipated cash flow from operations will be adequate to fund operations for
the near term. However, the Company has commenced an aggressive acquisition
strategy which is likely to require additional financing in the near term. The
Company intends to finance these acquisitions primarily through the use of cash,
funds from lines of credit, if and when available, and shares of its Common
Stock or other securities. In the event that the Company's Common Stock does not
attain or maintain a sufficient market value or potential acquisition candidates
are otherwise unwilling to accept the Company's securities as part of the
purchase price for the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to continue its
acquisition program. If the Company does not have sufficient cash resources,
through either operations or from debt facilities, its growth could be limited
unless it is able to obtain such additional capital.
The Company has recently initiated its acquisition program with the
acquisition of Solsource, HV Jones and OST. See "BUSINESS - RECENT
ACQUISITIONS." The Solsource acquisition was completed for the purchase price of
$1.1 million; payable $200,000 in cash and $900,000 in newly issued shares of
Common Stock priced at $6.00 per share. The HV Jones acquisition was completed
for the purchase price of $1,975,000; payable $395,000 in cash and $1.58 million
in preferred stock that converts into Common Stock during the next four quarters
at a conversion rate equal to the lower of $6.87 per share or a 33% premium over
the average closing price of the Company's Common Stock for the 10 trading days
prior to each date of conversion. The OST acquisition was completed for the
purchase price of $5.26 million; payable $2.5 million in cash at the closing,
$260,000 in 1999, $2.0 million in newly issued shares of Common Stock priced at
$6.00 per share and $500,000 in a key employee retention program.
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YEAR 2000 MATTERS
The Company is presently attempting to respond to Year 2000 issues.
Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year associated with the
program or an associated computation. Any of the Company's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. Management expects to have substantially all of the systems
application changes completed within the next 12 months and believes that its
level of preparedness is appropriate.
The total cost to the Company of these Year 2000 compliance issues is
not anticipated to be material to its financial position or results of
operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurances that these estimates will be achieved and actual results could differ
from those plans.
IMPACT OF INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"), which is effective for financial
statements for periods beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The adoption of this statement on January 1, 1998 had no
impact on the Company's financial statement presentation or related disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS 131")
which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company operates in one business segment and does not believe
that SFAS 131 will require additional disclosures when adopted.
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BUSINESS
GENERAL
The Company was originally incorporated as Pacific Rim under the laws
of Delaware in 1992. From 1992 through 1996, Pacific Rim had been engaged
principally in the animated film production business. After several years of
losses following its initial public offering in 1993, Pacific Rim suspended its
business operations in 1996 and remained inactive while it sought to identify a
strategic business combination with a private operating company. Pacific Rim
acquired, and thereafter, assumed the historic business of Osage in the Merger
that became effective on December 22, 1997. Osage had been a provider of network
computing solutions since 1989.
Through its operating subsidiaries, the Company markets a broad range
of information technology products and services intended to transform discrete
hardware and software components into an integrated system. The Company offers
integration services which assist customers in dealing with issues during the
entire life cycle of their systems; including system architecture and design,
product acquisition, configuration and implementation, ongoing operational
support, and evolutions in technology. The Company provides solutions to complex
information technology problems including system availability and performance,
UNIX/Microsoft Windows NT integration, client server database implementation,
electronic mail and messaging, system and network security, and
Internet/intranet and world wide web application deployment.
The Company's ability to deliver integrated solutions has enabled it to
establish a customer base ranging from relatively small companies to Fortune 500
and other mid-sized companies. The Company's customer base is generally located
in the southwestern United States, primarily in Texas, Arizona and Southern
California; with an emphasis in industries such as semi-conductor,
manufacturing, publishing, hospitality, distribution, military, education and
state and local government.
Management believes that its success is attributed principally to its
technical expertise, marketplace relationships, vendor alliances, direct sales
strategy and customer service orientation. The Company intends to grow primarily
through the acquisition of other value-added reseller businesses with similar
characteristics to the Company, and leveraging the common pool of resources
created by such acquisitions.
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INDUSTRY BACKGROUND
Dealing with the forces of change such as eroding profit margins,
shrinking business cycles and increased global competition has become a central
issue for businesses. Organizations of all sizes have recognized information
technology as being a competitive advantage in coping with such market forces.
These organizations have also realized that systems built on networked
technology, including client server databases, internet protocol ("IP") based
networks and the Internet/intranet systems can be more effective in enabling
this competitive advantage than are legacy systems built on older technology.
The increasingly complex nature and rapid change in technology has
created increased demand for companies with the expertise to design, integrate,
implement and manage the technology. This requires the services of a systems
integrator that has the proper blend of vendor relationships, resources,
technical expertise, products and services to integrate these technologies. In
recognition of the increasing complexity of computer systems and technologies,
growing numbers of technology users have been utilizing systems integrators to
coordinate information technology services and products. According to the
Computer Industry Report dated July 1997, the systems integration market is
forecast to grow 11% incrementally worldwide between 1996 and 2001 and 12%
incrementally in the United States for the same period. This service segment is
estimated to account for $60 billion of the worldwide Information Technology
market in 2001.
Management further believes that the relationships of value-added
resellers with certain industry-leading technology vendors provide them with
access to resources such as technical training, technical documentation,
evaluation units and leading-edge industry information. These resources
represent significant value to large and mid-sized companies that typically do
not maintain such in-house resources. Management also believes that reduced
cost, increased productivity and broader sales coverage, particularly in the
burgeoning middle market, is motivating technology vendors to sell their
products through the value-added channel. Given these market forces, management
believes that value-added resellers such as the Company will be well positioned
to capitalize on anticipated growth in the industry.
BUSINESS STRATEGY
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth through acquisition and
accelerated internal growth. The Company intends to carryout the following
strategies.
Expanding New and Existing Markets through Acquisitions: The Company is
currently pursuing an aggressive acquisition strategy to enhance its position in
its current markets and acquire operations in new markets. In particular, the
Company will focus its acquisition strategy on candidates that have a proven
record of delivering high-quality technical services, a customer base of large
and mid-sized companies and which may benefit from the synergies offered by the
Company's acquisition strategy. Management believes the Company will have many
acquisition
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opportunities in a fragmented market and be able to offer the management of
these acquisition candidates an opportunity to continue operating their
respective businesses as well as to participate in a company with a growth
strategy and liquid trading market for its securities. The Company looks forward
to expanding into new and existing markets by acquiring well-established
value-added resellers that are leaders in their regional markets. Given the size
and highly fragmented composition of the industry, the Company believes that
there is an opportunity to implement a market roll-up program within the
value-added reseller industry.
Accelerating Internal Growth: A key component of the Company's strategy is to
accelerate internal growth of the Company's existing business as well as the
existing business of its acquisitions. The Company expects that internal growth
can be accelerated by:
Applying Additional Resources to Current Operations. The value-added
reseller organizations which the Company expects to acquire are
primarily small, privately held companies. The Company intends to
facilitate internal growth of these acquisitions by providing them with
access to capital resources and technical expertise in product
procurement and integration services. Management recognizes that the
Company's capital resources are presently limited and anticipates that
future financing activities will be required to increase its capital
resources. There is a risk that the Company will be unable to secure
such additional resources. See "RISK FACTORS."
Leverage Additional Opportunity Through the Collective Skill Set. While
the collective skills of the acquired companies may have a high degree
of overlap there will also be technical and market areas which are
unique to particular companies. The Company intends to create an
environment in which each of the acquired companies is able to
cross-leverage their unique skills and markets for the benefit of the
entire organization. Management considers that this will result in
increased operating efficiencies without proportionate increases in
administrative costs.
Increase Services Revenues. The Company plans to implement a marketing
initiative designed to increase services revenues through the
development of standardized service packages. The Company intends to
create standardized service packages in several areas, including
systems administration, database administration, security and systems
and network performance tuning. Management believes that such service
packages will make the Company's products and services more
cost-effective and accessible to customers as well as increase the
Company's profit margins.
Development of Identity. The Company intends to produce marketing
materials and develop the market image and reputation of the Company as
a "national organization" of regional companies, with the goal of
providing business opportunities which would not normally be available
to a regional company.
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ACQUISITION STRATEGY
The Company believes there are many attractive acquisition candidates
in its industry because of the highly fragmented composition of the marketplace,
the industry participants' need for capital and their owners' desire for
liquidity. The Company is pursuing an aggressive acquisition program to
consolidate and enhance its position in its current market and to acquire
operations in new markets.
Initially, the Company intends to expand its business through
selective, strategic acquisitions of other companies with complementary
businesses in a revenue range of $5 million to $15 million per annum. Management
believes that companies in this range of revenues may be receptive to the
Company's acquisition program as often they are too small to be identified as
acquisition targets of larger public companies or to attempt independently their
own public offerings. In particular, the Company intends to focus its
acquisition strategy on candidates which have a strong relationship with key
technology vendors, a proven record of delivering high-quality network computing
solutions and a customer base of large and mid-sized companies.
The Company believes it can successfully implement its acquisition
strategy due to: (i) the highly fragmented composition of the market; (ii) its
strategy for creating a national company, which should enhance the acquired
company's ability to compete in its local and regional market through an
expansion of offered services and lower operating costs; (iii) the additional
capital that management anticipates will become available for internal growth;
(iv) the potential for increased profitability as a result of the Company's
centralization of certain administrative functions, greater purchasing power,
and economies of scale; (v) the Company's status as a public corporation; (vi) a
decentralized management strategy, which should, in most cases, enable the
acquired company's management to remain involved in the operation of the
Company; and (vii) the ability to utilize its experienced management in
identifying acquisition opportunities.
A "platform acquisition" is defined by management as one that creates a
significant presence for the Company in a new geographic market. The Company
intends, where possible, to make a platform acquisition in a targeted market by
acquiring an established, high quality local company. The Company will retain
the management as well as the operating, sales and technical personnel of a
platform acquisition to maintain continuity of operations and customer service.
The Company will seek to increase an acquired company's revenues and improve its
profitability by implementing the Company's operating strategies for internal
growth.
A "tuck-in" acquisition on the other hand will more likely occur in an
existing market, will be smaller than a platform acquisition and will enable the
Company to offer additional services or expand into secondary markets within the
region already served. When justified by the size and business line of an
existing market acquisition, the Company expects to retain the management, along
with the operating, sales and technical personnel of the acquired company while
seeking to improve that company's profitability by implementing the Company's
operating strategies. The Company also contemplates effecting tuck-in
acquisitions of small companies or individual systems integration operations in
existing markets. In most instances, operations
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acquired by tuck-in acquisition can be integrated into the Company's existing
operations in that market, resulting in elimination of duplicative overhead and
operating costs.
RECENT ACQUISITIONS
The Company commenced its acquisition program with the acquisition of
Osage and has recently acquired Solsource, HV Jones and OST. Solsource is a
systems integrator headquartered in Carlsbad, California with principal sales
offices in Northern and Southern California. Solsource has two operating
divisions within the company. A presentation division provides portable UNIX
laptops and high end data projection equipment into the mobil computing
marketplace. A systems integration division provides complete hardware, software
and service solutions to address data and network security problems in large and
small commercial organizations. Solsource also provides specialized services for
security audits, firewall penetration testing and anti-virus protection. It
distributes hardware and software products from well known manufacturers such as
Sun Microsystems, Cisco Systems, Microsoft, Netscape, Checkpoint and Trend
Micro. In 1996, Solsource was ranked by Inc. Magazine as the 21st fastest
growing private company in America. Solsource employs approximately 30 people
and during its most recent fiscal year, realized revenues of $7.3 million.
The Solsource acquisition was completed for a purchase price of $1.1
million; payable $200,000 in cash and $900,000 in agreed-upon value of newly
issued common shares priced at $6.00 per share. Additional earn-out shares may
be issued if Solsource achieves certain performance targets.
HV Jones is a complex systems integrator headquartered in Houston,
Texas, with a sales and development office in Austin, Texas. HV Jones provides
proprietary services and turnkey technology infrastructure solutions in the
areas of business assessment, enterprise resource planning, interoperability,
database, networking and security. A major focus of its services is the
enterprise wide interoperability between UNIX and NT environments. This
includes: networking, server platforms, databases and systems management
interoperability services. Another major focus of HV Jones is providing the
complete data center infrastructure necessary to support enterprise resource
planning solutions such as SAP. Its market focus is on the middle market
(Fortune 1000 - 5000) in the sectors of manufacturing, distribution, medical,
telecommunications and general business. HV Jones represents hardware and
software products from well known manufacturers such as Hewlett Packard, Sun
Microsystems, Netscape, Silicon Graphics, Oracle, Cisco Systems, Ascend and
Digital Equipment Corp. HV Jones employs approximately 20 people and during its
most recent fiscal year, realized revenues of $5.6 million.
The HV Jones acquisition was completed for a purchase price of
$1,975,000; payable $395,000 in cash and $1.58 million in preferred stock that
converts into common stock during the next four quarters at a conversion rate
equal to the lower of $6.87 or a 33% premium over the average closing price of
the Company's common stock for the ten (10) trading days prior to each date of
conversion. Additional earn-out shares may be issued if HV Jones achieves
certain performance targets.
OST has been in the systems integration business since 1992 and is
headquartered in Pompano Beach, FL, with a satellite software sales office in
Melbourne, FL. OST installs open-system computer products that provide
businesses with comprehensive solutions for Network Integration, Internet
Access, System Security, Network and Systems Management, including
Enterprise-wide Backup. OST is a value-added reseller for Sun Microsystems,
Hewlett-Packard and Lawson Software. Lawson Software is a provider of
client-server accounting, human resources, materials management and distribution
management software and is a leader in web-based financial applications. In
1997, OST was ranked by the South Florida Business Journal as the 23rd fastest
growing high-tech company and the 28th fastest growing company in South
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Florida. OST employs 24 people and during its most recent fiscal year,
realized revenues of $11.9 million.
The OST acquisition was completed for a purchase price of $5.26
million; payable $2.5 million in cash at closing, $260,000 in cash during 1999,
$2.0 million in agreed upon value of newly issued common shares priced at $6.00
per share and $500,000 in a key employee retention program.
On a proforma basis, the Company would have realized net sales of
approximately $39.0 million during 1997 had each of these acquisitions occurred
as of January 1, 1997.
The Company believes that the acquisition of these companies will
enhance its client base through expansion into new markets in California,
Texas and South Florida.
PRODUCTS AND SERVICES
The Company is a provider of network computing solutions. The Company
markets a broad range of information technology products and services intended
to transform discrete hardware and software components into an integrated
system. The Company offers integration services which assist customers in
dealing with issues during the entire life cycle of their systems, including
system architecture and design, product acquisition, configuration and
implementation, ongoing operational support, and evolutions in technology. The
Company provides solutions to complex information technology problems including
system availability and performance, UNIX/Microsoft Windows NT integration,
client server database implementation, electronic mail and messaging, system and
network security, and internet/intranet and world wide web application
deployment.
The Company's customer base varies in range from relatively small
companies to Fortune 500 and other large and mid-sized companies. They are
geographically located in the southwestern United States, primarily in Texas,
Arizona, and Southern California and the Southeastern United States, primarily
in South Florida; and they span various industries including semi-conductor
manufacturing, publishing, hospitality, distribution, military, education, and
state and local government.
The Company's ability to deliver integrated solutions is principally
attributable to its technical expertise and its value-added reseller agreements
with industry-leading vendors of information technology products such as Sun
Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft. To
date, most of its revenues have been derived from the resale of products from
these vendors. Additional sales are accrued to small, niche vendors whose
products augment those of the three major vendors in areas such as backup
management, security and network and infrastructure management. The Company has
also established relationships with leading aggregators of computer hardware and
software products. These agreements enable the Company to provide its clients
with competitive product pricing, ready product availability and services such
as electronic product ordering, product configuration and testing and product
warehousing and delivery.
The Company plans to implement a marketing initiative designed to
increase services revenues through the development of standardized service
packages. The Company intends to create standardized service packages in several
areas, including systems administration, database administration, security and
systems and network performance tuning. Management believes that such service
packages will make the Company's products and services more cost-effective and
accessible to customers as well as increase the Company's profit margins.
The Company has a strategy for providing products and services in four
practice areas. They are: Network Interoperability; Security; Electronic
Messaging and Electronic Commerce;
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and Database and Application Integration. The Company's business strategy is to
combine market-leading products with its highly skilled technical personnel to
deliver comprehensive information technology solutions based within these
practice areas to new and existing clients.
Network Interoperability
Management believes there is a tremendous opportunity for system
integrators in view of the split in the business community over the use of
computer operating systems between UNIX or Microsoft Windows NT. UNIX appears to
have captured a larger share of the enterprise computing environment, whereas
Windows NT has a larger percentage of the workgroup server and desktop market.
The traditional enterprise application such as financial applications,
distribution, manufacturing and order entry are typically run in a UNIX or
mainframe environment, whereas the workgroup technologies that have been
commonly deployed on the internet have been typically rendered on the Windows NT
platform. In order for applications such as SAP, BAAN and Peoplesoft to be made
available over the internet, UNIX and Windows NT must be effectively integrated
to a reliable and stable computing infrastructure. This creates tremendous
opportunities for systems integrators such as the Company to provide network
interoperability services to middle market and Fortune 1000 companies.
The Company designs networks, conducts performance audits, integrates
differing technologies and provides consulting services for issues such as data
backup and restore, disaster recovery, and server consolidation. All of these
services are designed to drive product sales in the areas of enterprise and
departmental servers, software licenses, network components, UNIX workstations,
and related equipment.
Security
The growth in internet activity and connections has provided a huge
opportunity for business, however, at the same time it has exposed businesses to
risk through unauthorized access to corporate data which is mission-critical and
confidential. It is more important now than ever to ensure that customer
networks and data are secure. The Company has built a practice around data and
network security which is a rapidly growing market. The service and product
offerings in this area are numerous. From a product standpoint, the Company
offers software for firewalls, virus protection, attack recognition, content
protection, network monitoring, data encryption, and user authentication. From a
services perspective, the Company's offerings include services to build a
security policy, design and implement security solutions, perform penetration
testing, carry out security audits, and provide training and support.
Electronic Messaging and Electronic Commerce
While messaging and electronic commerce are different, they share the
same underlying technologies and quite often go hand-in-hand. The advent of the
internet has brought electronic messaging (e-mail) to virtually every aspect of
business. While growth in this area has paved the way for companies to do
business over the internet (inter-company communication as well as business to
business electronic commerce), it has also created a technology management
nightmare for corporations around the world. Products from a multitude of
hardware and
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software vendors has created a mixture of incompatible technologies. The Company
helps these customers design, and build messaging networks that will become the
infrastructure not only for e-mail, but for Electronic Commerce as well. E-mail
is no longer being looked at as a novelty. It is now being viewed by many medium
and large-sized companies as a necessity. Unfortunately, these systems have not
been designed with the features that are necessary to achieve compatibility
among systems. The Company provides the correct mix of computer hardware,
software and expertise to design and implement messaging networks and systems.
The Company can help evaluate, select, test, design, implement, and support
networks for a variety of end users from small single location users to large
industrial multi-location users.
Database and Application Integration
As data has proliferated within corporations, it has done so using many
formats, technologies, and system platforms. For example, manufacturing and
distribution information may be stored on a mainframe or enterprise UNIX system
while sales and marketing information is likely stored on personal computers in
small departmental networks and product information is being stored on UNIX
based engineering workstations and networks. This data is often fragmented,
stored in many different products and formats, and can be difficult to access
and consolidate. Data needs to be integrated with information that is currently
available on a company's web-site, and made accessible in a secure manner. This
has created a need to develop systems that will standardize and centralize data
storage and delivery techniques. The Company offers products and services that
are designed to accomplish this. These services include database installation,
performance tuning, database design, database management and administration, as
well as data migration.
SALES AND MARKETING
The Company currently focuses its marketing and sales efforts on
referrals from vendors and major corporations through its direct sales and
marketing staff. The Company believes that its direct sales and support,
including having salespersons serve as client-relationship managers, lead to
better account penetration and management, better communications and long-term
relationships with its clients and more opportunities for follow-on sales of
products and services to its existing client base. To date, the Company has
focused its sales and marketing efforts on large and mid-sized customers within
the Southwestern United States, principally Arizona, California and Texas; and
the Southeastern United States, principally South Florida.
As part of its business strategy, the Company intends to expand the
size of the Company's sales and marketing staff. Historically, the Company has
conducted limited marketing. Most efforts have been through referrals from
vendors and direct sales calls made by individual sales personnel. Each
salesperson's compensation is commission-based. Sales personnel derive sales
leads from individual business contacts, the marketing department's efforts and
from customer referrals from suppliers and vendors, many of whom receive
requests from clients seeking an authorized reseller to design and install their
new systems.
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The Company benefits from the name recognition of the products that it
sells and has successfully utilized its relationships with vendors and
manufacturers to build strong product and service sales. Management expects to
continue to utilize these relationships. Additional business opportunities with
some of its major clients may develop as a result of the implementation of the
Company's acquisition strategy.
The Company intends to hire additional sales and service personnel as
the business grows. The Company's sales and marketing focus continues to be
technology-driven, with systems engineers participating with direct sales
personnel as part of a team approach to sales and marketing. Sales personnel
also participate in training programs designed to introduce new products and new
versions of existing products and to provide industry information and sales
technique instruction. Management believes that it maintains a competitive
advantage by continually educating its sales force on the latest technologies
and through the increased role of high-level engineers in the sales process.
In addition, management has plans to develop a marketing department
dedicated to facilitating the sales process. External marketing efforts would
continue to include brochures, direct mail programs, formulation of marketing
strategies designed to create new business opportunities, development of sales
presentation materials and follow-up of prospects introduced to the Company by
its existing clients and vendors.
COMPETITION
The information technology value-added channel is comprised of a large
number of participants and is subject to rapid change and intense competition.
The Company will face competition from system integrators, value-added
resellers, local and regional network services firms, telecommunications
providers, network equipment vendors and computer system vendors, many of which
have significantly greater financial, technical and marketing resources and
greater name recognition and generate greater revenue than the Company does. The
Company expects to continue to face, additional competition from new entrants
into its markets. Increased competition may result in price reductions, fewer
client projects, underutilization of Company personnel, reduced operating
margins and loss of market share, any of which could materially adversely effect
its business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors. The failure of the Company to compete successfully would
have a material adverse effect on its business, operating results and financial
condition.
FACILITIES
The Company owns no real property and currently leases all of its
office space. The Company leases the office space that houses its executive
offices in Phoenix, Arizona, totaling approximately 8,900 square feet. The lease
expires in August 1999. The Company uses this facility for its executive,
marketing, administrative, finance and management personnel. The Company also
leases a small office in Tucson, Arizona as a sales facility. The Solsource
operations occupy approximately 5,600 square feet of leased office facilities in
Carlsbad,
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California. The HV Jones operations occupy approximately 5,900 square
feet of leased office facilities in Houston, Texas and Austin, Texas. The OST
operations occupy approximately 9,600 square feet of leased office facilities
in Pompano Beach, Florida. The Company believes that it has sufficient space for
its current and anticipated
near-term needs.
PERSONNEL
As of May 8, 1998, the Company employed 94 persons, of whom 41 were
engaged in sales and marketing, 29 were engaged in providing the Company's
technical services and 24 were engaged in finance, administration and management
functions.
None of the Company's employees is covered by a collective bargaining
agreement. There is increasing competition for experienced technical
professionals and sales and marketing personnel. The Company's future success
will depend in part on its ability to continue to attract, retain and motivate
highly qualified personnel. See "RISK FACTORS." The Company considers relations
with its employees to be good.
LEGAL PROCEEDINGS
There are currently no legal proceedings pending to which the Company
is a party or to which any of its properties is subject.
33
<PAGE> 37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Leadbeater 43 Chairman of the Board and Chief Executive
Officer
David S. Olson 40 Director, Chief Operating Officer and President
Michael G. Glynn 41 Director, Executive Vice President
John Iorillo 31 Director, Chief Financial Officer
Andrew P. Panzo 33 Director
</TABLE>
The following is a brief summary of the business experience of the
foregoing directors and executive officers.
JACK R. LEADBEATER
Mr. Leadbeater became Chairman and Chief Executive Officer of the
Company on the effective date of the Merger on December 22, 1997. Mr. Leadbeater
remains President and a director of Osage, positions he has held since 1993.
From 1987 to 1993, Mr. Leadbeater served as President of a privately held
computer systems integration company. Prior to 1987, Mr. Leadbeater was employed
as a regional sales manager by MAI Canada Ltd., an international manufacturer of
mini-computers. Mr. Leadbeater is a graduate of the University of Manitoba,
Canada with a Business/Commerce degree and a major in Marketing.
34
<PAGE> 38
DAVID S. OLSON
Mr. Olson became director, President and Chief Operating Officer of the
Company on the effective date of the Merger on December 22, 1997. Mr. Olson
remains a director and Executive Vice-President/General Manager of Osage,
positions he has held since 1993. From 1989 to 1993, Mr. Olson served as an
Executive Vice-President of a privately held computer systems integration
company. Prior to 1989, he was employed by Sun Microsystems Canada Ltd. where
his responsibilities included sales as well as market development in the
petroleum exploration market. Prior to joining Sun Microsystems, Mr. Olson was
an Account Manager at Digital Equipment, Canada where he sold information
processing technology to major national accounts in the petroleum exploration
market. Mr. Olson is a graduate of the University of Calgary, Canada with a
Bachelor of Science degree and a major in Computer Science.
MICHAEL G. GLYNN
Mr. Glynn became a director of the Company on March 10, 1998. Mr. Glynn
became an Executive Vice-President of the Company on the effective date of the
Merger on December 22, 1997. During 1997, Mr. Glynn served as Director of Sales
for the Southwest region of United States for Compuware, a publicly-traded
software manufacturer. From 1996 to 1997, Mr. Glynn served as Senior Vice
President and Chief Operating Officer of Prologic Management Systems, a
publicly-traded software development company. From 1993 to 1996, he was Director
of Sales and International Business Development at Access Technologies (formerly
Access Graphics, a division of Lockheed Martin), an aggregator of computer
software and hardware. From 1991 to 1993, Mr. Glynn served on the Football staff
at the University of Colorado. Mr. Glynn is a graduate from the University of
Notre Dame with a Bachelor of Arts degree in the Program of Liberal Studies and
Languages and a Master of Divinity degree. He is also continuing his graduate
work at Northwestern University's JL Kellogg Graduate School of Management.
JOHN IORILLO
Mr. Iorillo became Chief Financial Officer of the Company on February
16, 1998 and a director on March 27, 1998. From 1990 to 1998, Mr. Iorillo was
employed as a certified public accountant by Deloitte and Touche LLP where his
responsibilities included the oversight of audit engagements, participation in
various merger and acquisition projects and other related activities. Mr.
Iorillo is a graduate of Cleveland State University with a Bachelor of Business
Administration degree in Accounting with a minor in Economics.
ANDREW P. PANZO
Mr. Panzo became a director of the Company during December 1997. Mr.
Panzo is President of American Maple Leaf Financial Corporation in Philadelphia,
Pennsylvania, an investment banking firm which specializes in emerging growth
companies. He is also a director of The Eastwind Group, Inc., a public company.
Mr. Panzo is a graduate of the University of Connecticut and has a Masters
degree in International Business and Finance from Temple University.
PROPOSAL TO ESTABLISH A CLASSIFIED BOARD
The Company intends to submit for stockholder approval at its next
annual meeting of stockholders scheduled for June 12, 1998, proposals to, among
others: (i) approve an amendment to the Company's Certificate of Incorporation
(the "Certificate") to provide for the classification of the Company's Board of
Directors into three different classes and to establish procedures for filling
vacancies on the Board; and (ii) approve an Amendment to the Certificate to
provide that directors shall only be removed for cause and by a supermajority
vote of stockholders and to require the consent of the Board to any further
amendments to the Certificate.
35
<PAGE> 39
If the Amendment to the Certificate to provide for a classified Board
is adopted, the Board of Directors will be divided into three classes. Jack
Leadbeater and David Olson will be elected for a term expiring at the Company's
2001 annual meeting. John Iorillo will be elected for a term expiring at the
Company's 2000 annual meeting and Michael Glynn and Andrew Panzo will be elected
for a term expiring at the Company's 1999 annual meeting; and in each case,
until their successors are duly elected and qualified. At each annual meeting
after the 1998 annual meeting, directors will be elected to succeed those
directors whose terms have been expired and each person so elected will serve
for a three year term.
DIRECTORS' COMPENSATION
The Company currently has no policy with respect to the granting of
fees to directors in connection with their service to the Company. However, the
Company may reimburse directors for their cost of travel and lodging to attend
meetings of the Board of Directors or committees thereof. In connection with
their service as directors of the Company, each of Messrs. Steven B. Rosner,
Bernard Buchwalter, Ike Suri and Richard Someck received 1,000 shares of Common
Stock of the Company during the fiscal year ended December 31, 1997. Prior to or
in connection with the effective date of the Merger, Messrs. Buchwalter, Suri
and Someck resigned as directors of the Company. Mr. Rosner subsequently
resigned as a director on March 27, 1998.
36
<PAGE> 40
EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
--------------------------- ---------------
ANNUAL COMPENSATION RESTRICTED
------------------- STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD(S)($) SARS(#) COMPENSATION($)
- --------------------------- ---- ------ ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
JACK R. LEADBEATER 1997 $89,967(1) -0- 351,057(2) $261,463
Chairman of the Board and Chief 1996 $49,417 N/A N/A $236,335
Executive Officer 1995 $ 55,000
DAVID S. OLSON 1997 $89,967(3) -0- 351,057(2) $261,463
Director, Chief Operating Officer 1996 $64,417 N/A N/A $236,335
and President 1995 $25,000 $ 55,000
MICHAEL G. GLYNN 1997 -(4)- -0-(5) 100,000(6) -0-
Director and Executive Vice 1996 N/A N/A N/A N/A
President
STEVEN B. ROSNER 1997 -0- $ 100(7) -0- $100,000(8)
Former President, Secretary and 1996 -0- -0- -0- -0-
Director 1995 -0- -0- -0- -0-
</TABLE>
- ----------------------------
(1) Reflects Mr. Leadbeater's compensation during 1997, 1996 and 1995 as an
officer and director of Osage. As of December 22,1997, Mr. Leadbeater
entered into an employment agreement with the Company pursuant to which
his scheduled base compensation for 1998 is $200,000. See "EMPLOYMENT
ARRANGEMENTS."
(2) Includes options to purchase 332,000 shares of Common Stock granted as
part of the Merger. Also includes options to purchase 19,057 shares of
Common Stock granted immediately following the Merger.
(3) Reflects Mr. Olson's compensation as an officer and director of Osage
during 1997, 1996 and 1995. As of December 22, 1997, Mr. Olson entered
into an employment agreement with the Company pursuant to which his
scheduled base compensation for 1998 is $200,000. See "EMPLOYMENT
ARRANGEMENTS."
(4) Mr. Glynn became an officer of the Company on December 22, 1997. Mr.
Glynn's scheduled compensation for 1998 is $200,000. Mr. Glynn entered
into an employment agreement with the Company as of December 22, 1997.
See "EMPLOYMENT ARRANGEMENTS."
(5) Does not include 200,000 shares of Common Stock being held by the
Company which are subject to release at the rate of 100,000 shares on
each of December 22, 1998 and 1999; provided that Mr. Glynn remains
employed by the Company on those dates.
(6) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock.
(7) Represents the fair market value of 1,000 shares of Common Stock
granted to Mr. Rosner during the year ended December 31, 1997 in
connection with his service as a director of Pacific Rim.
37
<PAGE> 41
(8) Mr. Rosner had been the President and a director of Pacific Rim since
January 1997. He resigned his position as an officer of Pacific Rim
effective upon the Merger, and resigned as a director on March 27,
1998. While the directors and executive officers of Pacific Rim
received no annual compensation during the fiscal years ended December
31, 1997, 1996 and 1995, Mr. Rosner received $100,000 during the fiscal
year ended December 31, 1997 in consideration for the provision of
Pacific Rim's executive offices, reimbursement of certain expenses on
behalf of Pacific Rim and for consulting services by Mr. Rosner in
connection with the financial and administrative reorganization of
Pacific Rim. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Messrs. Leadbeater,
Olson, Glynn and Iorillo. Each of Messrs. Leadbeater, Olson and Glynn are
provided with an annual salary of $200,000. The agreement with Mr. Iorillo
provides for an annual salary of $100,000. Each of Messrs. Leadbeater and Olson
are employed for an initial term of three years, commencing December 1997 with
successive year-to-year renewals in the event that neither they, nor the
Company, elect to terminate the agreement after the initial term. Each of
Messrs. Glynn and Iorillo are employed for an initial term of one year
commencing December 1997 and February 1998, respectively, with successive
year-to-year renewals in the event that the agreement is not earlier terminated.
The employment agreements of Messrs. Leadbeater, Olson, Glynn and Iorillo
contain non-competition and non-solicitation provisions which survive their
actual employment for a term of one year. Mr. Glynn has been granted 200,000
shares under his employment arrangement; 100,000 of which vest at the end of his
first year of employment and the remainder of which vest at the end of his
second year of employment. Each of Messrs. Glynn and Iorillo were also granted
options to purchase 100,000 shares of Common Stock of the Company.
STOCK OPTIONS
The Company's 1993 Stock Option Plan provides for the issuance of both
"Incentive Stock Options" as well as "Nonqualified Options" to be issued to
employees, consultants and others. An aggregate of 100,000 shares of Common
Stock were reserved for issuance under this plan. No options have been granted
under this plan since inception.
The Company also adopted the "Outside Directors Stock Option Plan"
pursuant to which options to purchase an aggregate of 2,500 shares of Common
Stock have been authorized on an annual basis to each outside director who has
served during the immediately preceding year. No options have been granted under
this plan since inception.
In connection with the Merger, Pacific Rim granted the former
stockholders of Osage options to purchase 800,000 shares of Common Stock. Such
options have a term of six years and an exercise price of $3.00 per share. The
options vest: (i) 50% once the Company's audited
38
<PAGE> 42
financial statements reflect annual earnings for the preceding year of no less
than $.20 per share and (ii) 100% once the Company's audited financial
statements reflect annual earnings for the preceding year of no less than $.30
per share.
Under the terms of their respective employment agreements, each of
Messrs. Glynn and Iorillo were granted options to purchase 100,000 shares of
Common Stock. Mr. Glynn's options are subject to the same exercise price and
vesting criteria as the options granted pursuant to the Merger. Mr. Iorillo's
options are subject to an exercise price of $5.00 per share, are scheduled to
expire on January 1, 2002 and vest upon the earlier of: (i) January 1, 2001,
provided Mr. Iorillo remains continuously employed by the Company; (ii) fifty
percent (50%) of the options, however, shall vest earlier than January 1, 2001,
provided that at such earlier date the Company's annual earnings equal or exceed
$.20 per share; and (iii) one hundred percent (100%) of the options, however,
shall vest earlier than January 1, 2001, provided that at such earlier date the
Company's annual earnings equal or exceed $.30 per share.
Immediately following the Merger, the Company issued to various
employees and agents, including Messrs. Leadbeater and Olson, options to
purchase in the aggregate 100,000 shares of Common Stock at an exercise price of
$3.00 per share. Such options have a term of two years and vest at various rates
during such period in accordance with the terms of the respective option
agreements.
The Company intends to submit for stockholder approval at its next
annual meeting of stockholders scheduled for June 12, 1998, a proposal to amend
the 1993 Stock Option Plan to increase the number of shares available for
issuance pursuant to grants thereunder from 100,000 to 2,000,000.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Based solely on its review of copies of forms filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, and written representations from
certain reporting persons, the Company believes that during fiscal 1997 all
reporting persons timely complied with all filing requirements applicable to
them, except for certain reports, which include: (i) a Form 3, and Forms 4 and 5
for Mr. Rosner; and (ii) a Form 3 and Forms 4 and 5 for each of Messrs. Bernard
Buchwalter, Ike Suri and Richard Someck. Messrs. Buchwalter, Suri and Someck
resigned as directors prior to or in connection with the Merger.
39
<PAGE> 43
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
-------------------------------------
Individual Grants
-------------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Option/SARs Employees in Base Price Expiration
Name Granted(#)(1) Fiscal Year ($/Sh) Date
- ---- ------------- ----------- ------ ----
<S> <C> <C> <C> <C>
Jack R. Leadbeater 19,057 1.9% $3.00 December 19, 2000
Jack R. Leadbeater 332,000 33.2% $3.00 December 19, 2003
David S. Olson 332,000 33.2% $3.00 December 19, 2003
David S. Olson 19,057 1.9% $3.00 December 19, 2000
Michael G. Glynn 100,000 10% $3.00 December 19, 2003
Steven B. Rosner -0- N/A N/A N/A
- ------------------------
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Options/SARs In-the-Money Options/SARs
at FY-End (#) at
Shares Shares FY-End ($)
Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized ($) Unexercisable Unexercisable (2)
- ---- ----------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C>
Jack R. Leadbeater -0- -0- (E)0/(U)351,057 (E)$0/(U)$351,057
David S. Olson -0- -0- (E)0/(U)351,057 (E)$0/(U)$351,057
Michael G. Glynn -0- -0- (E)0/(U)100,000 (E)$0/(U)$100,000(3)
Steven B. Rosner -0- -0- (E)0/(U)0 (E)$0/(U)$0
- ------------------------
</TABLE>
(1) As part of the purchase price in the Merger, each of Messrs. Leadbeater
and Olson were granted options to purchase 332,000 shares of Common
Stock. Such options have a term of six years commencing in December
1997 and an exercise price of $3.00 per share. Provided Messrs.
Leadbeater and Olson remained employed by the Company, the options
vest: (i) 50% once the Company's audited financial statements reflect
annual earnings for the preceding year of no less than $.20 per share
and (ii) 100% once the Company's audited financial statements reflect
annual earnings for the preceding year of no less than $.30 per year.
Messrs. Leadbeater and Olson were also each granted options to purchase
19,057 shares of the Company's Common Stock immediately following the
Merger. These options vested upon grant.
(2) Based upon the high bid price ($4.00 per share) of the Company's Common
Stock on the last reported trading date during the year ended December
31, 1997 as reported on the OTC Bulletin Board.
40
<PAGE> 44
(3) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock. Such
options have a term of six years commencing in December 1997 and an
exercise price of $3.00 per share. Provided that Mr. Glynn remains
employed by the Company, the options vest: (i) 50% once the Company's
audited financial statements reflect annual earnings for the preceding
year of no less than $.20 per share and (ii) 100%, once the Company's
audited financial statements reflect annual earnings for the preceding
year of no less than $.30 per year.
41
<PAGE> 45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with Messrs. Leadbeater, Olson,
Glynn and Iorillo. The terms of Mr. Glynn's agreement include the grant of
options to purchase 100,000 shares of Common Stock which have not vested and the
grant of 200,000 shares of Common Stock which have not vested. The terms of Mr.
Iorillo's agreement includes the grant of options to purchase 100,000 shares of
Common Stock which have not vested. See "MANAGEMENT - EMPLOYMENT ARRANGEMENTS."
CONSULTING SERVICES
Mr. Rosner received $100,000 during the fiscal year ended December 31,
1997 in consideration for the provision of Pacific Rim's executive offices prior
to the Merger, reimbursement of certain expenses on behalf of Pacific Rim and
for consulting services by Mr. Rosner in connection with the financial and
administrative reorganization of Pacific Rim.
SALE OF COMMON STOCK
During November 1997, Pacific Rim sold shares of Common Stock in a
private placement transaction at a purchase price of $.10 per share which
generated net proceeds in excess of $300,000. In such private placement
transaction, Mr. Rosner purchased 190,000 shares at a purchase price of $19,000.
In addition, two Delaware limited partnerships, of which Mr. Rosner is the sole
general partner, purchased in the aggregate 691,692 shares of Common Stock at a
purchase price of $69,169. See "PRINCIPAL STOCKHOLDERS."
42
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 5, 1998, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange Commission, has reason to believe may
be deemed the beneficial owners of more than 5% of the Company outstanding
Common Stock. Also set forth in the table is the beneficial ownership of all
shares of the Company's outstanding stock, as of such date, of all officers and
directors, individually and as a group.
<TABLE>
<CAPTION>
Shares Owned Percentage of
Beneficially Outstanding
Name and Address and of Record Shares
(1)
------------- ----------------
<S> <C> <C>
Jack R. Leadbeater .................................. 683,057(2) 9.4%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
David S. Olson ...................................... 683,057(2) 9.4%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Michael G. Glynn .................................... (3) 0%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
John Iorillo ........................................ (4) 0%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Andrew P. Panzo ..................................... 21,000(5) (*)
2 Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Steven B. Rosner .................................... 617,850(6) 8.8%
1220 Mirabeau Lane
Gladwyne, PA 19035
PRE Investors, L.P. ................................. 375,000(7) 5.3%
c/o Steven B. Rosner
1220 Mirabeau Lane
Gladwyne, PA 19035
Michael Lauer ....................................... 1,500,000(8) 21.4%
375 Park Avenue, Suite 2006
New York, NY 10152
Lancer Offshore Inc. ................................ 820,000(9) 11.7%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners LP .................................. 470,000(9) 6.7%
375 Park Avenue, Ste. 2006
New York, NY 10152
All Directors and Officers as a group (5 persons) ... 1,387,114 18.6%
</TABLE>
- --------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934,
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other
relative who has the same home as such individual, as well as other
securities as to which the individual has or shares voting or
investment power or which each person has the right to acquire within
60 days through the exercise of options, or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 7,013,628 shares of Common Stock outstanding
as of June 5, 1998.
43
<PAGE> 47
(2) Includes 456,500 shares of Common Stock, 207,500 shares issuable upon
conversion of the Series B Shares and 19,057 shares issuable upon the
exercise of vested options. Does not include options to purchase
332,000 shares of Common Stock which have not vested. Also, does not
include 1.5 million shares of Common Stock held in a voting trust over
which the holders of the Series B Shares, including Messrs. Leadbeater
and Olson, have voting rights. See "MATERIAL VOTING ARRANGEMENTS."
(3) Does not include 200,000 shares of Common Stock being held by the
Company in escrow, which are subject to release at the rate of 100,000
shares on each of the first and second anniversaries of the
commencement of Mr. Glynn's employment with the Company; provided, that
Mr. Glynn remain an employee of the Company at the time such shares are
released. Does not include options to purchase 100,000 shares of Common
Stock which have not vested.
(4) Does not include options to purchase 100,000 shares of Common Stock
granted to Mr. Iorillo pursuant to his employment agreement, and which
have not vested. Mr. Iorillo is a director and the Chief Financial
Officer of the Company.
(5) Includes the indirect ownership of the shares owned by American Maple
Leaf Financial Corporation. Mr. Panzo is an officer and director of
American Maple Leaf Financial Corporation.
(6) Includes the direct ownership of 192,850 shares and the indirect
ownership of 414,025 shares through Mr. Rosner's role as the sole
general partner of two Delaware limited partnerships, Diversified
Investment Fund, L.P. (50,000 shares) and PRE Investors, L.P. (375,000
shares).
(7) A Delaware Limited Partnership controlled by Steven B. Rosner as its
sole general partner. The beneficial ownership of these shares is also
attributed to Steven B. Rosner.
(8) Includes direct ownership of 40,000 shares and investment control of
1,460,000 shares through Mr. Lauer's role as Managing Member of Lancer
Management Group LLC which is the Manager of Lancer Offshore, Inc.
(820,000 shares) and Lancer Voyager Fund (170,000 shares), and Lancer
Management Group, II, which is the Manager of Lancer Partners, L.P.
(470,000 shares). Mr. Lauer acts as Investment Manager of each of these
funds.
(9) The beneficial ownership of these shares is also attributed to Michael
Lauer. See Footnote No. 8.
(*) Less than 1%.
- ----------------------
MATERIAL VOTING ARRANGEMENTS
Voting Rights of Series B Shares
For so long as the Company continues to satisfy certain performance
criteria (the "Voting Rights Performance Criteria") and until the third
anniversary of the Merger, the holders of Series B Shares are entitled to vote
in the election of directors by casting as many votes in total as equates to the
total number of shares that may be cast in the election of directors by the
holders of Common Stock, plus one; provided that the holders of the Series B
Shares may only elect a majority of the Board of Directors by voting for their
own nominees. The holders of the Series B Shares will also be entitled to vote
as a class on all matters brought to a vote of stockholders. The Company shall
remain in compliance with the Voting Rights Performance Criteria so long as for
the first three years following the year of the Merger, its annual audited
financial statements reflect earnings per share of $.05, $.10, and $.15,
respectively. Failure to meet the Voting Rights Performance Criteria in any of
the first three years after the closing of the Merger results in the termination
of such rights.
Pending the adoption of a classified Board of Directors scheduled to
be voted upon at the next scheduled meeting of the Company's stockholders, the
holders of the Series B Shares have agreed to relinquish voting rights for the
election of directors.
Voting Trust
In conjunction with the Merger, certain historic stockholders of the
Company placed in a voting trust (the "Voting Trust") 1.5 million shares of
Common Stock with voting rights as to
44
<PAGE> 48
such shares vested in the holders of the Series B Shares, including Messrs.
Leadbeater and Olson. The Voting Trust shall remain in effect until the earlier
of: (i) the end of the 18th month following the Merger; or (ii) such earlier
date when all of its shares have either been released to its beneficial owners
or allocated in satisfaction of the purchase price in the Merger. For every
three month period during the term of the Voting Trust in which no shares are
issued in satisfaction of the purchase price, 250,000 shares may be released to
such historic stockholders of the Company from the Voting Trust.
The holders of the Series B Shares and certain of the holders of the
shares within the Voting Trust have engaged in discussions relative to the
reduction of the shares held within the Voting Trust. Although these
discussions are not final, if agreed upon, the shares held in the Voting Trust
would be reduced from 1.5 million to 500,000, and the 500,000 shares would
remain in the Voting Trust until the end of the 18th month following the Merger.
45
<PAGE> 49
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$.01 par value per share, of which 7,013,628 are currently outstanding as of
June 5, 1998.
Holders of Common Stock have equal rights to receive dividends when, as
and if declared by the Board of Directors, out of funds legally available
therefor. Holders of Common Stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
Common Stock are not redeemable and have no pre-emptive or similar rights. All
outstanding shares of Common Stock are fully paid and non-assessable.
900,000 of the shares of Common Stock issued to the former Osage
stockholders in the Merger are subject to an upward adjustment to the extent
that during any of the six (6) consecutive three (3) month periods following the
date of this Prospectus, the "Quarterly Value" of the Company's Common Stock, as
to 150,000 shares during each such applicable three (3) month period, is below
$2.00. The "Quarterly Value" shall be derived from a combination of: (i) sales
of shares of the Company's Common Stock by the former Osage stockholders in open
market transactions, upon which value shall be measured by the average per share
sales price; or (ii) to the extent that open market sales have not generated
sales proceeds to the former Osage stockholders of at least $300,000 (based upon
the sale of 150,000 shares), then the remaining value (i.e., the difference
between the sum total of such sales and $300,000) shall be measured based upon
the average of the closing bid and ask prices of the Company's Common Stock on
the principal exchange, automated quotation system or over-the-counter market
for the fifteen trading days before the last trading day in each such respective
three month period (such last trading date hereinafter referred to as the
"Valuation Date"); provided, however, that such average price is $2.00 or
higher, and if the average price is lower than $2.00, the value of such unsold
shares shall be measured based upon 85% of the aforesaid average closing bid and
ask prices for the fifteen trading days before the Valuation Date. Quarterly
Value shall then be determined by making separate non-cumulative computations on
each of the respective Valuation Dates to determine how many shares of the
Company's Common Stock have been sold during the three month period, or would
need to be sold (assuming the sale) on such Valuation Dates, in order for the
former Osage stockholders to have yielded gross receipts of at least $300,000
upon the sale of 150,000 shares.
To the extent that a sale or deemed sale of 150,000 shares yields for
the former Osage stockholders less than $300,000 during any such applicable
three month period, then, and in that event, the Company would be required to
issue to the former Osage stockholders such number of additional shares of
Common Stock as would provide them with a yield of $300,000 on the sale or
deemed sale of Common Stock during the applicable three month period (the
"Additional Shares"). The Additional Shares may either be issued by the Company
as newly issued shares of Common Stock; or may be withdrawn from a voting trust
of 1,500,000 shares established by existing Company stockholders upon the
closing of the Merger. See "MATERIAL VOTING ARRANGEMENTS - VOTING Trust." If, at
the time Additional Shares are required to be issued, the Company remains in
compliance with the Conversion Performance Criteria, the Additional Shares will
be withdrawn from the Voting Trust. If, however, the Company is not in
compliance with the Conversion Performance Criteria, the Additional Shares will
be issued by the Company as newly issued shares of Common Stock.
PREFERRED STOCK
Within the limits and restrictions contained in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 1,000 shares of Preferred Stock, $.01 par
value per share (the "Preferred Stock"), in one or more series, and to fix, as
to any such series, the dividend rate, redemption prices, preferences on
liquidation or dissolution, sinking fund terms, if any, conversion rights,
voting rights, and any other preference or special rights and qualifications.
46
<PAGE> 50
SERIES A $3.00 CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series A $3.00 Convertible Preferred Stock, with such rights
and preferences as are described in the following summary. The Company currently
has 122 Series A Shares outstanding.
- Liquidation Preference
The Series A Shares shall have a liquidation preference of $30,000 per
Series A Share, plus any accrued dividends thereon. The holders of the Series A
Shares and the Series B Shares shall share ratably in all liquidation
preferences. Accordingly, if the Company shall liquidate or dissolve, after
payment to all creditors, no distribution shall be made to holders of the
Company's Common Stock, unless prior thereto holders of the Series A Shares and
the holders of the Series B Shares have received $30,000 per share.
- Dividends
The holders of the Series A Shares shall not be entitled to receive
dividends.
- Conversion
The holders of the Series A Shares have the right at any time to
convert the principal amount of the purchase price of the Series A Shares into
shares of Common Stock at a conversion rate (the "Series A Conversion Rate") of
$3.00 per share of Common Stock.
The number of shares of Common Stock into which each Series A Share
shall be convertible shall be subject to adjustment to protect against dilution
in the event the Company shall declare a stock dividend, make a distribution on
the Common Stock, divide or reclassify the outstanding shares of Common Stock.
- Voting Rights
Prior to the conversion of the Series A Shares, the holders thereof
shall have no voting rights.
- Redemption
Commencing six months from the date of the Closing of this Offering,
all, but not less than all, of the Series A Shares may be redeemed at any time
by the Company at its sole discretion at $3.00 per Series A Share upon thirty
(30) days' written notice to the holders (the "Redemption Notice"), provided
that at the time of the Redemption Notice: (i) the average of the closing bid
and ask prices of the Company's Common Stock shall have exceeded $5.00 for the
twenty (20) trading days preceding the date of the Redemption Notice; (ii) the
shares of Common Stock issued or issuable upon conversion of the Series A Shares
are subject to an effective Registration Statement; and (iii) Lexington Capital
Partners & Co. (the "Private Placement Agent") shall have waived any
restrictions upon the resale of such shares. See "RESTRICTIONS UPON RESALE." The
holders of the Series A Shares shall be entitled to exercise their conversion
option during said thirty (30) day notice period.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series A Shares. The actual terms are contained within a definitive
Certificate of Designation on file with the Delaware Secretary of State.
SERIES B $3.00 CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series B $3.00 Convertible Preferred Stock, with such rights
and preferences as are described below in the following summary.
The Company currently has 50 Series B Shares outstanding.
- Liquidation Preference
The Series B Shares shall have a liquidation preference of $30,000 per
Share. The holders of the Series B Shares and the Series A Shares shall share
ratably in all liquidation
47
<PAGE> 51
preferences. Accordingly, if the Company shall liquidate or dissolve, after
payment to all creditors, and payment of the liquidation preference to the
holders of the Series A Shares, no distribution shall be made to holders of the
Common Stock, unless prior thereto holders of the Series B Shares and the
holders of the Series A Shares shall have received $30,000 per share.
- Dividends
Each holder of the Series B Shares shall be entitled to dividends only
when, as and if declared by the Board of Directors. Each holder of the Series B
Shares will share with the holders of the Common Stock, on an "as converted"
basis, any dividends declared on the Common Stock. The Company may, at its sole
election, pay any dividend in either cash or in shares of Common Stock, based on
the Conversion Rate (as hereafter defined) of the Series B Shares.
- Conversion
The holders of the Series B Shares have the right at any time to
convert the $1.5 million principal amount of the shares, plus any and all
accrued dividends thereon, into shares of the Company's Common Stock at the
Series B Conversion Rate of $3.00 per share. The Series B Conversion Rate is
subject to adjustment provided that at the time of conversion the Company
remains in compliance with the Conversion Performance Criteria. The Company
shall remain in compliance with the Conversion Performance Criteria so long as
during each of the fiscal quarters in the first, second and third years after
the Merger, the Company achieves earnings per share of $.0125, $.025 and $.0375,
respectively. As so adjusted, the Series B Conversion Rate shall be the lower
of: (i) $3.00 per share of Common Stock; or (ii) the average of the closing bid
and ask prices of the Common Stock on the principal exchange, automated
quotation system or over-the-counter market for the 15 trading days prior to the
date of conversion. The failure to meet the Conversion Performance Criteria for
any particular quarter will not adversely effect the computation of the Series B
Conversion Rate for any subsequent quarter.
The number of shares of Common Stock into which each Series B Share
shall be convertible shall be subject to adjustment to protect against dilution
in the event the Company shall declare a stock dividend, make a distribution on
the Common Stock, divide or reclassify the outstanding shares of Common Stock.
- Voting Rights
The holders of Series B Shares are entitled to vote in the election of
directors by casting as many votes in total as equates to the total number of
shares that may be cast in the election of directors by the holders of Common
Stock, plus one; provided that the holders of the Series B Shares may only elect
a majority of the Board of Directors by voting for their own nominees. The
holders of the Series B Shares will also be entitled to vote as a class on all
matters brought to a vote of stockholders. The foregoing rights of the holders
of the Series B Shares shall terminate upon the earlier of: (i) the first date
upon which the Company no longer complies with the Voting Rights Performance
Criteria; or (ii) the third anniversary of the closing of the Merger. The
Company shall remain in compliance with the Voting Rights Performance Criteria
so long
48
<PAGE> 52
as for the first three years following the closing of the Merger, its annual
audited financial statements reflect earnings per share of $.05, $.10, and $.15,
respectively. Failure to meet the Voting Rights Performance Criteria in any of
the first three years after the closing of the Merger results in the termination
of such rights of holders of the Series B Shares. Upon termination of such
rights, the holders of the Series B Shares shall have no voting rights and their
consent shall not be required for the taking of any action except as required by
law.
- Redemption
The Series B Shares are not subject to redemption by the Company.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series B Shares. The actual terms are contained within a definitive
Certificate of Designation on file with the Delaware Secretary of State.
SERIES C CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series C Convertible Preferred Stock, with such rights and
preferences as are described in the following summary. The Company currently has
105.3 Series C Shares outstanding.
- Liquidation Preference
The Series C Shares shall have a liquidation preference of $15,000 per
Series C Share. The holders of the Series A Shares, Series B Shares and Series C
Shares shall share ratably in all liquidation preferences. Accordingly, if the
Company shall liquidate or dissolve, after payment to all creditors, and payment
of the liquidation preference to the holders of the Series A and Series B
Shares, no distribution shall be made to the holders of the Common Stock, unless
prior thereto, holders of the Series C Shares shall have received a liquidation
preference of $15,000 per share.
- Dividends
The holder of the Series C Shares shall be entitled to dividends only
when, as and if declared by the Board of Directors. The holder of the Series C
Shares will share with the holders of the Common Stock, on an "as converted"
basis, any dividends declared on the Common Stock.
- Conversion
The Series C Shares shall automatically convert into shares of the
Company's Common Stock on the last day of each of the three month periods
following the issuance of the Series C Shares (March 18, 1998). $455,000 of the
Series C Shares shall convert on June 18, 1998. Thereafter, on each of the next
three month periods following issuance, $375,000 of Series C
49
<PAGE> 53
Shares shall convert into Common Stock. The Series C Shares shall convert into
shares of Common Stock at a conversion rate (the "Series C Conversion Rate")
equal to the lower of: (i) $6.87 per share; or (ii) a 33% premium over the
average of the closing prices of the Company's Common Stock on the principal
exchange, automated quotation system or over-the-counter market upon which the
Company's Common Stock trades, for the ten trading days prior to the date of
each conversion.
- Voting Rights
Prior to the conversion of the Series C Shares, the holder thereof
shall have no voting rights.
- Redemption
The Series C Shares are not subject to redemption by the Company.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series C Shares. The actual terms are described within the definitive
Certificate of Designation on file with the Delaware Secretary of State.
PROPOSAL TO INCREASE AUTHORIZED SHARES
The Company intends to submit for stockholders at its next annual
meeting of stockholders scheduled for June 12, 1998 proposals to, among others:
(i) approve an Amendment to the Certificate to increase the number of shares of
common stock the Company is authorized to issue from 10,000,000 to 50,000,000;
and (ii) to approve an Amendment to the Certificate to increase the number of
shares of preferred stock the Company is authorized to issue from 1,000 to
10,000,000.
REDEEMABLE WARRANTS
In connection with its initial public offering ("IPO") in November
1993, the Company issued 2,310,000 redeemable warrants (the "Redeemable
Warrants"), of which 11,554 remain outstanding. The Redeemable Warrants can be
redeemed by the Company at a price of $0.05 per warrant commencing November 10,
1994 and ending November 10, 1998, following any period in which, for 20
consecutive trading days, the closing bid price of the Company's Common Stock is
equal to or greater than 200% of the IPO price, as adjusted (initially $10.00
per share). After giving effect to certain 1 for 10 and 1 for 20 reverse stock
splits, the exercise and call prices of the Redeemable Warrants are $1,000 and
$10 per warrant, respectively. The Redeemable Warrants expire as of November 10,
1998.
PRIVATELY ISSUED OPTIONS AND WARRANTS
The Company has issued in private transactions options to purchase
1,300,000 shares of Common Stock (the "Options"). 800,000 of the Options were
issued to the former Osage shareholders in the Merger with Pacific Rim (see
"MANAGEMENT - STOCK OPTIONS") and the remaining Options were issued during the
fourth quarter of 1997 and the first quarter of 1998 to management, employees
and other consultants at exercise prices ranging from $3.00 to $5.00, subject to
varying vesting periods.
The Company has also agreed to issue warrants to purchase 375,000
shares of Common Stock (the "Warrants"). The Warrants are to be issued to
investors and certain placement agents and investment bankers in connection with
approximately $6.3 million in private placement financing completed by the
Company during 1998. The Warrants are to be issued at exercise prices ranging
from $3.50 to $4.25.
REGISTRATION RIGHTS
This Prospectus has been prepared, in part, pursuant to the
registration rights granted in connection with the sale of shares of Common
Stock in the Merger, the concurrent sale of the Company's Series A Shares, and
the subsequent sale of shares of Common Stock in certain private placement
transactions (including the recently completed acquisition of HV Jones). The
Company has agreed to register the resale of all of the shares issued in the
Merger, even though Messrs. Leadbeater and Olson have elected to include only
120,000 shares within this Prospectus. The additional shares acquired in the
Merger by Messrs. Leadbeater and Olson will likely be covered by a subsequent
registration statement filed by the Company with the Securities and Exchange
Commission during the third or fourth quarter of 1998.
50
<PAGE> 54
The Company has also granted registration rights in connection with its
recent acquisitions of Solsource and OST. In connection with the Solsource
acquisition, the Company has agreed to use its best efforts to prepare and
file, not later than the 90th day following the first anniversary of the
Solsource closing, a registration statement with the Securities and Exchange
Commission for the purpose of facilitating the public resale of 75,000 of the
150,000 shares distributed in the Solsource acquisition. In the event, however,
that Solsource fails to achieve certain performance criteria agreed upon by the
parties in the acquisition transaction, no shares shall be registered on the
first anniversary of the closing, rather, the Company would use its best efforts
to prepare and file, no later than the 90th day after the second anniversary of
the closing, a Registration Statement for the purposes of facilitating the
public resale of the shares distributed in the acquisition transaction, as well
as any additional shares of Common Stock that were "earned-out" by Solsource
following the closing.
In connection with the OST acquisition, the Company has agreed to use
its best efforts to prepare and file not later than May 25, 1999, a
registration statement with the Securities and Exchange Commission for the
purpose of facilitating the public resale of the 333,334 shares issued in that
transaction.
PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT
Delaware General Corporation Law
The Company is governed by the provisions of Section 203 of the GCL,
an anti-takeover law. In general, the law prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with its
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
The provisions regarding certain business combinations under the GCL
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management. A takeover transaction
frequently affords stockholders the opportunity to sell their shares at a
premium over current market prices.
The provisions described above, together with the voting rights of the
Series B Shares and the ability of the Board of Directors to issue Preferred
Stock as described under "Preferred Stock," may have the effect of delaying or
deterring a change in the control or management of the Company.
Certificate of Incorporation
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or
51
<PAGE> 55
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock or may otherwise adversely affect the market price of the
Common Stock.
The Company has proposed to amend its Certificate to provide for the
classification of the Board of Directors and to provide that directors shall
only be removed for cause and by a supermajority vote of stockholder, as well
as, to require the consent of the Board of Directors to amend the Certificate.
These proposals, if approved by the stockholders, could delay or frustrate the
removal of incumbent directors and could make more difficult a change in
control transaction. There can be no assurance that such proposals will be
approved by the requisite vote of stockholders. See "RISK FACTORS."
LIMITATIONS ON DIRECTORS' LIABILITIES, INDEMNIFICATION AND DIRECTORS' AND
OFFICERS' INSURANCE
The Company's Certificate of Incorporation and Bylaws reflect the
adoption of the provisions of Section 102(b)(7) of the GCL, which eliminate or
limit the personal liability of a director to the Company or its stockholders
for monetary damages for breach of fiduciary duty under certain circumstances.
If the GCL is amended to authorize corporate action further eliminating or
limiting personal liability of directors, the Certificate of Incorporation
provides that the liability of the director of the Company shall be eliminated
or limited to the fullest extent permitted by the GCL. The Company's Certificate
of Incorporation and Bylaws also provide that the Company shall indemnify any
person, who was or is a party to a proceeding by reason of the fact that he is
or was a director, officer, employer or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with such proceeding if he acted in good faith and in a manner
he reasonably believed to be or not opposed to the best interests of the
Company, in accordance with, and to the full extent permitted by, the GCL. In
addition, the Certificate of Incorporation and Bylaws authorize the Company to
maintain insurance to cover such liabilities. As of the date hereof, the Company
has not purchased Directors' and Officers' Liability Insurance.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issuer.
TRANSFER AGENT
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
52
<PAGE> 56
SELLING SECURITY HOLDERS
All of the shares of Common Stock of the Company offered by this
Prospectus are being sold for the account of the selling security holders
identified in the following table (the "Selling Security Holders").
The Selling Security Holders are offering for sale an aggregate of
4,351,982 shares of Common Stock which include: (i) 2,901,997 shares of Common
Stock; (ii) 1,220,000 shares of Common Stock, subject to adjustment, which may
be issued upon the conversion, if at all, of the Series A Shares; and (iii)
229,985 shares of Common Stock, subject to adjustment, which may be issued upon
the conversion of the Company's outstanding Series C Shares. The shares of
Common Stock, Series A Shares and Series C Shares were previously issued by the
Company in private placement transactions. 131,000 of the shares covered by this
Prospectus are being offered by certain directors and executive officers.
1,350,000 of the shares covered by this Prospectus are being offered by the
Company's principal stockholders. Certain of the shares of Common Stock being
offered by the Selling Security Holders are subject to restrictions upon resale.
See "PLAN OF DISTRIBUTION - Restrictions Upon Resale."
The following table sets forth the number of Shares being held of
record or beneficially (to the extent known by the Company) by such Selling
Security Holders and provides (by footnote reference) any material relationship
between the Company and such Selling Security Holder, all of which is based upon
information currently available to the Company.
The shares of Common Stock offered by the Selling Security Holders may
be offered for sale from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting discounts
or commissions except for usual and customary selling commissions paid to
brokers or dealers.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Paul Jeffrey Adelizzi 10,500 (*) 10,500 -0- -0-
Phil Albrecht, Jr 20,000 (*) 20,000 -0- -0-
American Maple Leaf Financial
Corporation(1) 21,000 (*) 21,000 -0- -0-
Myles Bass 93,330 1.3% 93,330 -0- -0-
Paul Beenen 20,000 (*) 20,000 -0- -0-
Howard & Shari Borenstein 15,000 (*) 7,000 8,000 -0-
Timothy Paul Buck 10,000 (*) 10,000 -0- -0-
Capital Growth Trust 180,000 2.6% 180,000 -0- -0-
Clifton Capital Ltd. 170,000(2) 2.4% 100,000 70,000 (*)
Cecile T. Coady 10,000 (*) 5,000 5,000 (*)
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Bernard Cohen 20,000 (*) 20,000 -0- -0-
Commonwealth Insurance Company 10,000 (*) 10,000 -0- -0-
Profit Sharing Plan
David M. Daniels(12) 200,000 2.8% 20,000 180,000 2.6%
Frank DeLuca 20,000 (*) 20,000 -0- -0-
DeSilva & Partners, Inc.
Self Directed Retirement Fund 10,000 (*) 10,000 -0- -0-
Dewey Investment Partnership Ltd. 100,000 1.4% 100,000 -0- -0-
Diversified Investment Fund, L.P. 50,000 (*) 40,000 10,000 (*)
Chris Donahue 82,230(3) 1.1% 55,000 27,230 (*)
Jere Dumanic 50,000 (*) 25,000 25,000 (*)
Mark Dutton 7,500 (*) 7,500 -0- -0-
Hamid Ebrahimi 20,000 (*) 20,000 -0- -0-
Bermuda Trust Company, Trustee for 230,667 3.2% 230,667 -0- -0-
The Elanken Family Trust
El Paso Holdings, Ltd. 60,000 (*) 10,000 50,000 (*)
EquiTex, Inc. 10,000 (*) 10,000 -0- -0-
Bruce Ginsburg 15,000 (*) 7,000 8,000 (*)
Godwin Finance Ltd. 350,000(2) 4.9% 250,000 100,000 1.4%
Daniel Gooze 40,000 (*) 40,000 -0- -0-
Rick Gunther 32,896(4) (*) 22,000 10,896 (*)
Bernard Hollander Family Trust 10,000 (*) 10,000 -0- -0-
Michael Dane Ibsen 86,667 1.2% 40,000 46,667 (*)
Interbanc Mortgage Services, Inc. 200,000 2.8% 170,000 30,000 (*)
Hugh V. Jones(5) 229,985 3.2% 229,985 -0- 0%
Richard Joyce 170,000 2.4% 170,000 -0- -0-
KAB Investments, Inc. 100,000(2) 1.4% 75,000 25,000 (*)
Eckard Kirsch 15,000 (*) 15,000 -0- -0-
Lancer Offshore Inc.(6) 820,000 11.7% 420,000 400,000 5.7%
</TABLE>
54
<PAGE> 58
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Lancer Partners LP(6) 470,000 6.7% 270,000 200,000 2.8%
Lancer Voyager Fund(6) 170,000 2.4% 70,000 100,000 1.4%
Michael Lauer(7) 40,000 (*) 40,000 -0- -0-
Jack Leadbeater(8) 683,057(9) 9.4% 60,000 623,057 8.7%
Steven D. Levin 15,000 (*) 5,000 10,000 (*)
Douglas Martin 10,000 (*) 10,000 -0- -0-
Morris Asset Management, Inc. 5,000 (*) 5,000 -0- -0-
Torrey Mosvold 40,000 (*) 40,000 -0- -0-
MSB Research Inc. 80,000 1.1% 80,000 -0- -0-
Millworth Investments, Inc. 175,000 2.5% 125,000 50,000 (*)
Keith E. Myers 30,000 (*) 15,000 15,000 (*)
David S. Olson(8) 683,057(9) 9.4% 60,000 623,057 8.7%
Robert Poulson 15,000 (*) 15,000 -0- -0-
PRE Investors L.P. 375,000 5.3% 200,000 175,000 2.5%
R.R. Donnelley & Sons Company 11,000 (*) 11,000 -0- -0-
Chaim Rajchenbach 5,000 (*) 5,000 -0- -0-
Moshe Rajchenbach 5,000 (*) 5,000 -0- -0-
Naomi Treger Rajchenbach 10,000 (*) 10,000 -0- -0-
Louis Rambler 10,000 (*) 10,000 -0- -0-
Sherwin and Helen Ray 10,000 (*) 10,000 -0- -0-
Gary Rein 10,000 (*) 10,000 -0- -0-
Steve Rigby 82,230(3) 1.1% 55,000 27,230 (*)
James C. and Patricia J. Rives 30,000 (*) 30,000 -0- -0-
Steven B. Rosner(10) 192,850(2)(11) 2.7% 50,000 142,850 2.0%
Ira Saligman 10,000 (*) 10,000 -0- -0-
Pinchas and Nahma Schwartz 10,000 (*) 10,000 -0- -0-
Jonathan Shecter 10,000 (*) 10,000 -0- -0-
Chad Shusman 10,000 (*) 10,000 -0- -0-
Leonard Silvestri 10,000 (*) 10,000 -0- -0-
Jeff Sokolin 10,000 (*) 10,000 -0- -0-
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
SPH Equities, Inc. 73,388 1.1% 60,000 13,388 (*)
SPH Investments, Inc. 50,000(2) (*) 20,000 30,000 (*)
SPH Investments, Inc. Profit Sharing
Plan dtd 12/1/92 f/b/o Stephen P
Harrington 50,000 (*) 20,000 30,000 (*)
Harvey Sternberg 15,000 (*) 7,000 8,000 (*)
John N. Straub Ltd., a Professional 10,000 (*) 10,000 -0- -0-
Medical Corporation
Synergy Group 250,000(2) 3.5% 100,000 150,000 2.1%
Al Terrell 3,340 (*) 3,340 -0- -0-
Burton Turk 10,000 (*) 10,000 -0- -0-
Dale Van De Vrede Family Trust 82,230(3) 1.1% 55,000 27,230 (*)
Roderic S. Ware 20,000 (*) 20,000 -0- -0-
West Tropical Investments Corp. 175,000(2) 2.5% 110,000 65,000 (*)
Weston Investors 10,000 (*) 10,000 -0- -0-
Will's Wei Corp. 341,660 4.8% 166,660 175,000 2.5%
Kevin Wyllie 10,000 (*) 10,000 -0- -0-
101 Investments, Inc. 5,000 (*) 5,000 -0- -0-
--------- --------- ---------
TOTAL 7,812,587 4,351,982 3,460,605
========= ========= =========
</TABLE>
- ---------------------------------------
(*) Less than 1%
(1) Andrew P. Panzo, a director of the Company is an officer and director
of American Maple Leaf Financial Corporation.
(2) Certain of these shares have been deposited into the Voting Trust and
may only be sold upon release therefrom. See "PLAN OF DISTRIBUTION -
Restrictions Upon Resale."
(3) An employee of the Company and a former stockholder of Osage. Includes
55,000 shares of Common Stock, 25,000 shares issuable upon conversion
of the Series B Shares and 2,230 shares issuable upon the exercise of
vested options. Does not include options to purchase 40,000 shares of
Common Stock which have not vested.
(4) An employee of the Company and a former stockholder of Osage. Includes
22,000 shares of Common Stock, 10,000 shares issuable upon conversion
of the Series B Shares and 896 shares issuable upon the exercise of
vested options. Does not include options to purchase 16,000 shares of
Common Stock which have not vested.
(5) A director of HV Jones, Inc., a subsidiary of the Company.
(6) Investment funds controlled, directly or indirectly, by Michael Lauer.
(7) Includes shares owned directly by Mr. Lauer, as well as the resale by
the various funds over which Mr. Lauer may have indirect ownership. Mr.
Lauer is presently a principal stockholder of the Company.
(8) Director and Executive Officer of the Company.
56
<PAGE> 60
(9) Includes 456,500 shares of Common Stock, 207,500 shares issuable upon
conversion of the Series B Shares and 19,057 shares issuable upon the
exercise of vested options. Does not include options to purchase
332,000 shares of Common Stock which have not vested.
(10) Principal stockholder and former director.
(11) Does not include shares for which Mr. Rosner has indirect ownership.
See "Diversified Investment Fund, L.P." and "PRE Investors, L.P."
(12) Company employee.
ADJUSTMENT FEATURES OF CERTAIN SECURITIES
The Series C Shares contain certain price protection and adjustment
features which, during the term of the instruments, may result in the issuance
of additional securities upon conversion. 900,000 shares of Common Stock issued
to the former Osage stockholders as part of the Merger are also subject to
adjustment provisions. See "DESCRIPTION OF SECURITIES--COMMON STOCK."
- SERIES C SHARES
The holder of the Series C Shares has agreed to convert the $1.58
principal amount of the Series C Shares into shares of the Company's Common
Stock on a quarterly basis commencing June 18, 1998. The Conversion Rate of the
Series C Shares (the "Series C Conversion Rate") shall be the lower of: (i)
$6.87 per share; or (ii) a thirty-three (33%) percent premium over the average
closing price of the Company's Common Stock for the ten (10) trading days prior
to the date of conversion. The number of shares to be offered by the holder of
the Series C Shares has been determined on the assumption that the Series C
Conversion Rate will be $6.87 per share. In the event the Series C Conversion
Rate is lower than $6.87 per share upon any of the quarterly conversion dates,
additional shares of Common Stock may be issued by the Company and offered for
public sale pursuant to this Prospectus.
57
<PAGE> 61
PLAN OF DISTRIBUTION
The Selling Security Holders are offering shares of Common Stock for
their own account, and not for the account of the Company. The Company will not
receive any proceeds from the sale of the shares of Common Stock by the Selling
Security Holders.
The Common Stock may be sold from time to time by the Selling Security
Holders or by their pledges, donees, transferees or other successors in
interest. Such sales may be made on the exchange or market upon which the shares
trade at the time, the over-the-counter market or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in negotiated transactions. The Common Stock may be sold by one or more of the
following: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Security Holders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Security Holders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to Rule
144 may be sold under Rule 144 rather than pursuant to this Prospectus. The
Company will not receive any of the proceeds from the sale of these shares,
although it has paid the expenses of preparing this Prospectus and the related
Registration Statement. The Selling Security Holders have been
58
<PAGE> 62
advised that they are subject to the applicable provisions of the Exchange Act,
including without limitation, Regulation M thereunder.
RESTRICTIONS UPON RESALE
Certain of the shares of Common Stock being offered by the Selling
Security Holders are subject to the following restrictions upon resale.
- Series A Shares
The Series A Shares and the shares of Common Stock issuable upon
conversion of the Series A Shares may not be transferred, sold, encumbered or
otherwise disposed of for a period of eighteen months after the closing of the
Merger without the prior written consent of the broker-dealer that acted as the
placement agent of the offering of the Series A Shares.
- Common Stock issued prior to the Merger.
In November 1997, the Pacific Rim sold 3,185,080 shares of Common Stock
to a number of accredited investors in a private placement transaction. This
transaction was intended to generate working capital that was needed by the
Company to settle indebtedness with certain trade creditors and to provide
sufficient capital to allow the Company to close on the Merger with Osage, or if
that transaction did not close, to pursue other acquisition candidates. The
3,185,080 shares issued in this placement are subject to restrictions upon
resale in the discretion of the broker-dealer that acted as the placement agent
of the offering of the Series A Shares.
- Common Stock issued in the Merger.
The shares of Common Stock issued in the Merger are generally subject
to eighteen (18) month resale restrictions, however, during this eighteen (18)
month period, the holders thereof are permitted to publicly sell an aggregate of
$300,000 of these shares on a quarterly basis commencing on the date of this
Prospectus.
- Voting Trust
Approximately 500,000 shares of Common Stock being offered by the
Selling Security Holders are presently being held in the Voting Trust and may
only be sold upon release therefrom. The Voting Trust permits the release of
250,000 shares per quarter commencing with the quarter following the date of
this Prospectus. The Voting Trust may be amended, however, from time to time,
to the extent agreed upon by the holders of the Series B Shares. The holders of
the Series B Shares are in discussion with the holders of the shares within the
Voting Trust relative to a reduction of the Voting Trust to 500,000 shares.
Although these discussions have not yet become final, to the extent the holders
of the Series B Shares elect to reduce the number of shares held in the Voting
Trust, the number of shares of the Company's Common Stock that may be released
for public sale may be increased.
The Company will use its best efforts to file, during any period in
which offers or sales are being made, one or more post-effective amendments to
the Registration Statement of which this Prospectus is a part to describe any
material information with respect to the plan of distribution not previously
disclosed in this Prospectus or any material change to such information in this
Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon
for the Company by Buchanan Ingersoll Professional Corporation, Philadelphia,
Pennsylvania, 19103.
EXPERTS
The financial statements of Osage Computer Group, Inc. as of December
31, 1996 and for the year then ended included in this Prospectus, have been so
included in reliance on the report of Pearce, Gray & Rudd, independent certified
public accountants, given on the authority of said firm as experts in auditing
and accounting. The financial statements of Osage Systems Group, Inc. as of
December 31, 1997 and for the year then ended included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
59
<PAGE> 63
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of H.V. Jones, Inc. as of December 31, 1997
and December 31, 1996 and for each of the two years then ended included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and are included in reliance upon the
report of such firm, given upon their authority as experts in auditing and
accounting.
The financial statements of Solsource Computers, Inc. as of January 31,
1998 and January 31, 1997 and for each of the two years then ended included in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm, given upon their authority as experts in
auditing and accounting.
The financial statements of Open System Technologies, Inc. as of
December 31, 1997 and for the year then ended included in this Prospectus, have
been so included in reliance on the report of Clark, Shaffer & Hackett,
independent certified public accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Open System Technologies, Inc. as of
December 31, 1996 and for the year then ended included in this Prospectus, have
been so included in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational and reporting requirements
of the Securities Exchange Act of 1934, as amended, and in accordance therewith
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information concerning the Company may be
inspected without charge, and copies of all or any part thereof may be obtained
from the Commission's principal office in Washington, DC at Room 1024, 450 Fifth
Street N.W., Washington, DC 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained upon written request addressed to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, DC
20549, at prescribed rates. In addition, the Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act with respect to the shares of Common Stock
being offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which have been omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is made to
the Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made.
60
<PAGE> 64
OSAGE SYSTEMS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY:
Report of Pearce, Gray & Rudd........................................................ F-2
Report of Deloitte & Touche LLP...................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997.................... F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1997 ........................................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996 and 1997...................................... F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1997 ........................................... F-7
Notes to Consolidated Financial Statements...................................... F-8
Interim Financial Statements....................................................
Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997....................................................... F-16
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 .............................................. F-17
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997............................................... F-18
Notes to Unaudited Condensed Consolidated Financial Statements.................. F-19
FINANCIAL STATEMENTS OF ACQUIRED COMPANIES:
OPEN SYSTEM TECHNOLOGIES, INC. (FORMERLY COMPUTER HEALTH AND SAFETY, INC.)
Report of Clark, Schaffer & Hackett.................................................. F-22
Balance Sheet as of December 31, 1997........................................... F-23
Statement of Income and Retained Earnings for the Year
ended December 31, 1997..................................................... F-24
Statement of Cash Flows for the Year
ended December 31, 1997..................................................... F-25
Notes to Financial Statements................................................... F-26
Report of KPMG Peat Marwick LLP...................................................... F-29
Balance Sheet as of December 31, 1996........................................... F-30
Statement of Income and Retained Earnings for the Year
ended December 31, 1996..................................................... F-31
Statement of Cash Flows for the Year ended December 31, 1996.................... F-32
Notes to Financial Statements................................................... F-33
Unaudited Interim Financial Statements...............................................
Balance Sheets as of March 31, 1998 and 1997.................................... F-36
Statements of Operations for the three months ended March 31, 1998 and
1997........................................................................ F-37
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997..................................................... F-38
Notes to Unaudited Interim Financial Statements ................................ F-39
SOLSOURCE COMPUTERS, INC.
Report of Deloitte & Touche LLP...................................................... F-40
Balance Sheets as of January 31, 1998 and 1997.................................. F-41
Statements of Operations for the Years ended
January 31, 1998 and 1997................................................... F-42
Statements of Stockholders' Equity (Net Capital Deficiency)
for the Years ended January 31, 1998 and 1997............................... F-43
Statements of Cash Flows for the Years ended
January 31, 1998 and 1997................................................... F-44
Notes to Financial Statements................................................... F-45
H. V. JONES, INC.
Report of Deloitte & Touche LLP...................................................... F-50
Balance Sheets as of December 31, 1997 and 1996................................. F-51
Statements of Operations for the Years ended
December 31, 1997 and 1996.................................................. F-52
Statements of Net Stockholder's Capital Deficiency
for the Years ended December 31, 1997 and 1996.............................. F-53
Statements of Cash Flows for the Years ended
December 31, 1997 and 1996.................................................. F-54
Notes to Financial Statements................................................... F-55
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Basis of Presentation.......................................................... F-59
Pro Forma Consolidated Balance Sheet
as of March 31, 1998 ....................................................... F-60
Pro Forma Consolidated Statements of Operations for the
Three months Ended March 31, 1998 and the Year Ended December 31, 1997...... F-62
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Osage Computer Group, Inc.
We have audited the balance sheets of Osage Computer Group, Inc. as of
December 31, 1996 and 1995 and the statements of income, retained earnings
and changes in financial position 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
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.
In our opinion, the statements of income, changes in financial position and
retained earnings for the years ended December 31, 1996 and 1995 are
presented in accordance with generally accepted accounting principles
applied on a consistent basis. Further, in our opinion, the balance sheet
presents fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995 in accordance with generally
accepted accounting principles.
PEARCE, GRAY & RUDD
Mesa, Arizona
March 24, 1997
F-2
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
Shareholders
Osage Systems Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Osage Systems
Group, Inc. (formerly Osage Computer Group, Inc.) (the "Company") as of December
31, 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
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 statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
February 20, 1998, except for certain information in Note 1 to the consolidated
financial statements, as to which the date is March 10, 1998, and certain
information in Note 10 to the consolidated financial statements, as to which
the date is March 17, 1998
F-3
<PAGE> 67
OSAGE SYSTEMS GROUP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- -------------------------------------------------------------------------------------------------
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 564 $ 2,576,323
Accounts receivable - net of allowance for doubtful accounts of
$15,000 in 1997 1,939,347 1,974,496
Inventories 2,190 6,672
Prepaid expenses and other current assets 45,534 25,728
Deferred income taxes (Note 8) 210,000
---------- -----------
Total current assets 1,987,635 4,793,219
FURNITURE AND EQUIPMENT - Net (Note 3) 81,586 86,881
OTHER ASSETS 27,000
---------- -----------
TOTAL $2,096,221 $ 4,880,100
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,639,682 $ 1,948,802
Accrued expenses 82,067 507,395
Deferred income taxes (Note 8) 55,000
Income taxes payable (Note 8) 262,182
---------- -----------
Total current liabilities 1,776,749 2,718,379
---------- -----------
DUE TO FORMER PARENT COMPANY (Note 4) 154,263
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5 and 6)
STOCKHOLDERS' EQUITY (Notes 2, 9 and 10):
Series A Preferred, $100 stated value - authorized, issued
and outstanding, 122 shares; total liquidation preference,
$3,660,000 12,200
Series B Preferred, $100 stated value - authorized, issued and
outstanding, 50 shares; total liquidation preference, $1,500,000 5,000
Common stock, $.01 par value - authorized, 10,000,000 shares;
issued and outstanding, 4,820,000 shares 48,200 48,200
Additional paid-in capital 2,772,246
Retained earnings (deficit) 117,009 (675,925)
---------- -----------
Total stockholders' equity 165,209 2,161,721
---------- -----------
TOTAL $2,096,221 $ 4,880,100
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 68
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
NET SALES $ 9,908,379 $ 14,191,203
COST OF SALES 7,694,775 11,670,066
----------- ------------
Gross profit 2,213,604 2,521,137
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,142,974 2,807,340
----------- ------------
OPERATING INCOME (LOSS) 70,630 (286,203)
INTEREST EXPENSE - Net (26,230) (9,731)
----------- ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 44,400 (295,934)
PROVISION (BENEFIT) FOR INCOME TAXES (Note 8) 9,464 (3,000)
----------- ------------
NET INCOME (LOSS) $ 34,936 $ (292,934)
=========== ============
INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED (Note 1) $ 0.01 $ (0.06)
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING
(Note 1) 4,868,200 4,820,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 69
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,916,400 $ 48,200
Purchase and retirement of treasury shares (96,400)
Net income
---------- --------- ------ -------- ------ ------
BALANCE, DECEMBER 31, 1996 4,820,000 48,200
Acquisition of Pacific Rim Entertainment, Inc. (Note 1) 50 $5,000
Private placement offering (Note 1) 122 $ 12,200
Net loss
---------- --------- ------ -------- ------ ------
BALANCE, DECEMBER 31, 1997 4,820,000 $ 48,200 122 $ 12,200 50 $5,000
========== ========= ====== ======== ====== ======
<CAPTION>
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 83,027 $ 131,227
Purchase and retirement of treasury shares (954) (954)
Net income 34,936 34,936
---------- --------- ----------
BALANCE, DECEMBER 31, 1996 117,009 165,209
Acquisition of Pacific Rim Entertainment, Inc. (Note 1) $ (715,554) (500,000) (1,210,554)
Private placement offering (Note 1) 3,487,800 3,500,000
Net loss (292,934) (292,934)
---------- --------- ----------
BALANCE, DECEMBER 31, 1997 $2,772,246 $(675,925) $2,161,721
========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 70
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 34,936 $ (292,934)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 48,527 31,546
Stock-based compensation 300,000
Loss on disposal of assets 1,859
Loss on disposal of investments 50,000
Deferred income taxes 9,464 (265,000)
Changes in operating assets and liabilities:
Accounts receivable (587,678) (35,149)
Inventories 1,976 (4,482)
Prepaid expenses and other assets 1,316 21,806
Accounts payable 667,663 309,120
Accrued expenses (33,422) 125,328
Income taxes payable 262,182
----------- -----------
Net cash provided by operating activities 142,782 504,276
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,138) (38,700)
Investments (25,000) (25,000)
----------- -----------
Net cash used in investing activities (57,138) (63,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to Osage stockholders (500,000)
Repayment of bridge indebtedness (450,000)
Net proceeds from sale of Series A Preferred shares 3,500,000
Principal payments on bank line of credit (110,000)
Repayment of note payable due to former parent company (154,263)
Purchase of treasury stock (954) (212,500)
Acquisition costs (48,054)
----------- -----------
Net cash (used in) provided by financing activities (110,954) 2,135,183
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (25,310) 2,575,759
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 25,874 564
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 564 $ 2,576,323
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 71
OSAGE SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Osage Systems Group, Inc. (the "Company")
through its wholly-owned subsidiary, Osage Computer Group, Inc. ("Osage"),
provides network computer solutions through a broad range of information
technology services primarily in the state of Arizona. Such services are
intended to transform discrete hardware and software components into
integrated systems and provide solutions to complex information technology
problems.
The Company has entered into a contract with a major supplier of computer
hardware and software to act as its exclusive value-added reseller in
Arizona. Purchases and sales under the value-added reseller contract
account for the majority of the Company's sales and costs of sales. The
term of the contract is one year and expires in May 1998.
On November 11, 1997, the former parent of Osage, Sun Up Enterprises, Inc.
("Sun Up") was merged into Osage. In conjunction with such merger, Sun
Up's separate corporate existence ceased.
On December 22, 1997, Pacific Rim Entertainment, Inc. ("Pacific Rim"), a
publicly-traded company, acquired Osage pursuant to the terms of a Merger
Agreement dated November 5, 1997 (the "Merger Agreement"). Upon the
closing of the merger, through a wholly-owned subsidiary, Pacific Rim
acquired 100 percent of the outstanding capital stock of Osage in exchange
for consideration paid to the former stockholders of Osage (the "Osage
Stockholders") consisting of: (i) $500,000 in cash; (ii) 900,000
newly-issued shares of common stock (subject to upward adjustment in the
event the trading price of the Company's common stock is below $2.00 per
share during an 18-month period following the merger); (iii) 200,000
newly-issued shares of common stock; (iv) 50 shares of Series B $3.00
convertible preferred stock (the "Series B Shares"), which are convertible
into 500,000 shares of common stock (subject to upward adjustment provided
that certain performance criteria are achieved subsequent to the merger);
and (v) options with a term of six years that permit the purchase of
800,000 shares of common stock, at an exercise price equal to $3.00 per
share. The options vest upon certain performance criteria set forth in the
Merger Agreement (Note 9).
Of the shares of common stock issued to the Osage Stockholders in the
merger are 900,000 shares subject to an upward adjustment to the extent
that during any of the six consecutive three-month periods following the
effectiveness of a registration statement, the quarterly value of the
Company's common stock, as to 150,000 shares during each such applicable
three-month period, is below $2.00. The quarterly value shall be derived
from a combination of (1) sales of shares of the Company's common stock by
the Osage Stockholders in open market transactions, upon which value shall
be measured by the average per share sales price, or (2) to the extent
that open market sales have not generated sales proceeds to the Osage
Stockholders of at least $300,000 (based upon the sale of 150,000 shares),
then the remaining value shall be measured based on the average of the
closing bid and ask prices of the Company's common stock on the principal
exchange, automated quotation system of over-the-counter market for the 15
trading days before the last trading day in each such respective
three-month period. To the extent that a sale or deemed sale of 150,000
shares yields for the Osage Stockholders less than $300,000 during any
such applicable three-month period, then, and in that event, the Company
would be required to issue to the Osage Stockholders such number of
additional shares of common stock as would provide them with a yield of
$300,000 on the sale or deemed sale of common stock during the applicable
three-month period.
F-8
<PAGE> 72
Contemporaneous with the merger, the Company completed a private placement
offering to accredited investors (the "Offering") of $3,660,000,
consisting of 122 shares of Series A $3.00 convertible preferred stock
(the "Series A Shares"). Part of the proceeds was used by the Company to:
(i) retire approximately $450,000 of debt; (ii) pay the $500,000 cash
component of the merger consideration to the Osage Stockholders; and (iii)
pay $160,000 of related fees for such offering. The remainder of the
proceeds is expected to be used to finance the Company's strategic
acquisition strategy.
On March 10, 1998, the Company changed its name to Osage Systems Group,
Inc.
For accounting purposes, the merger is considered a reverse acquisition
with Osage being the accounting acquirer and Pacific Rim being the legal
acquirer. Accordingly, because the Osage Stockholders retained voting and
operating control of the combined entity, the merger consideration was
allocated to the net assets of the Company followed by a recapitalization
of Osage. All historical share and per share amounts have been restated to
retroactively reflect the reverse acquisition. The pro forma results of
operations for the year ended December 31, 1997, assuming the acquisition
was made at the beginning of the year, would have been as follows:
<TABLE>
<S> <C>
Net sales $ 14,191,203
Cost of sales 11,670,066
----------
Gross margin 2,521,137
Selling, general and administrative expenses 3,965,444
----------
Loss from operations (1,444,307)
Interest expense (9,731)
Benefit for income taxes 3,000
------------
Net loss $ (1,451,038)
============
Net loss per share $ 0.30
============
</TABLE>
SIGNIFICANT ACCOUNTING POLICIES are as follows:
BASIS OF CONSOLIDATION - The accompanying financial statements include the
accounts of the Company and Osage. All significant intercompany accounts
and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
REVENUE RECOGNITION - The Company recognizes sales of products when the
products are shipped and services and support revenue is recognized when
the applicable services are rendered. Preventative maintenance contracts
sold to customers are provided by an unrelated company. Upon sale of a
preventative maintenance contract, the Company recognizes the sale and
related cost in its statement of operations.
INVENTORIES are recorded at the lower of cost (first-in, first-out) or
market.
FURNITURE AND EQUIPMENT are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
The useful lives range from three to seven years.
F-9
<PAGE> 73
INCOME TAXES - The Company accounts for income taxes using the asset and
liability approach, which can result in recording tax provisions or
benefits in periods different than the periods in which such taxes are
paid or benefits realized. Deferred income taxes are recorded for the
difference between the book and tax basis of various assets and
liabilities which can provide for current recognition of expected tax
benefits from temporary differences that will result in deductible amounts
in future years.
NET INCOME (LOSS) PER COMMON SHARE - The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share.
Income (loss) per share data in 1996 has been restated to reflect the
adoption of SFAS No. 128.
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the year after giving effect to stock options and the conversion of
preferred shares considered to be dilutive. Because the Company incurred a
loss for the year ended December 31, 1997, the effects of the potential
dilutive securities discussed in Notes 1, 2 and 10 are not included in the
calculations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of accounts
receivable, accounts payable and accrued expenses approximates the
carrying value due to the short-term nature of these instruments.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive
Income ("SFAS 130"), which is effective for financial statements for
periods beginning after December 15, 1997 and establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company does not believe the adoption of SFAS
130 will have a material impact on its financial statement presentation or
related disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997 and establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company operates in one business segment
and does not believe that SFAS 131 will require additional disclosures
when adopted.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
balances to conform with the classifications used in 1997.
F-10
<PAGE> 74
2. CAPITAL STOCK
The Company's capital stock consists of common stock, Series A Preferred
and Series B Preferred. The Series A Preferred shares have no voting
rights, do not share in dividends, are each convertible at any time into
10,000 shares of voting common stock, and beginning June 22, 1998, six
months from issuance, are redeemable by the Company at its discretion at
$3.00 per share. The Series A Preferred shares are redeemable by the
Company provided (1) the average of the closing bid and ask prices of the
Company's common stock has exceeded $5.00 per share for the 20 trading
days preceding the date notice of redemption is given to the holders of
the Series A Preferred shares, (2) the shares of the common stock issued
or issuable upon conversion of the Series A Preferred shares are subject
to an effective registration statement, and (3) the placement agent of the
offering shall have waived any restrictions upon the resale of such
shares.
The Series B Preferred shares participate in common stock dividends on an
"if converted" basis. The shares are each convertible into 10,000 common
shares, which is subject to adjustment, provided that the Company, during
each of the fiscal quarters in the first, second and third years
subsequent to the merger between the Company and Pacific Rim
Entertainment, achieves earnings per share as reflected within its
quarterly financial statements as filed with the Securities and Exchange
Commission of $.0125, $.025 and $.0375, respectively. If so adjusted, the
conversion rate shall be the lower of (i) $3.00 per share of common stock
(10,000 shares each) or (ii) the average of the closing bid and ask prices
of the common stock for the 15 days prior to the conversion.
The holders of the Series B Preferred shares are entitled to a number of
votes, in total, that equal the total number of common stock votes, plus
one vote, in all elections of directors, such that the majority of the
directors are elected by the Series B stockholders. On all matters brought
to a vote of stockholders, the Series B stockholders are entitled to vote
as a class. These special voting rights terminate upon the earlier of (i)
the first date upon which the Company does not meet certain defined
performance criteria or (ii) the third anniversary of the closing date of
the Merger Agreement.
3. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Computer hardware $150,220 $179,747
Furniture and fixtures 11,230 12,795
Computer software 12,273 12,868
-------- --------
Total 173,723 205,410
Less accumulated depreciation 92,137 118,529
-------- --------
Furniture and equipment - net $ 81,586 $ 86,881
======== ========
</TABLE>
4. DUE TO FORMER PARENT COMPANY
The note payable due to the former parent company of Osage outstanding at
December 31, 1996 was repaid during 1997.
F-11
<PAGE> 75
5. SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of net sales for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Customer A 43.9% 64.8%
Customer B 11.3% 1.6%
Customer C 10.4% 4.8%
</TABLE>
6. COMMITMENTS
The Company leases office space under noncancelable operating leases which
expire through 2002. Future minimum lease payments under noncancelable
operating leases at December 31, 1997 are approximately as follows:
<TABLE>
<S> <C>
1998 $148,000
1999 103,000
2000 12,000
2001 12,000
2002 6,000
--------
Total $281,000
========
</TABLE>
Total rent expense was $59,144 and $81,983, net of rent income from a
month-to-month sublease of $0 and $23,683 for the years ended December 31,
1996 and 1997, respectively.
7. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 21 and completed six months of
service. Each participant may elect to contribute up to 15 percent of his
or her gross compensation up to the maximum amount allowed by the Internal
Revenue Service. The Company can make discretionary matching
contributions. No matching contributions have been made under the plan.
8. INCOME TAXES
The deferred income tax (liability) asset at December 31 is comprised of
the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Use of cash basis of accounting for income tax purposes $(55,000) $ 85,000
Allowance for doubtful accounts 6,000
Deferred stock-based compensation 119,000
-------- --------
Net current (liabilities) assets $(55,000) $210,000
======== ========
</TABLE>
F-12
<PAGE> 76
The income tax provision (benefit) consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Current:
Federal $207,000
State 55,000
Deferred:
Federal $ 9,464 (228,000)
State (37,000)
-------- --------
Income tax provision (benefit) $ 9,464 $ (3,000)
======== ========
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Federal statutory rate 34.0 % (34.0)%
Nondeductible meals, entertainment and insurance 5.2 %
Nondeductible write-off of investment 6.7 %
State income taxes 6.3 % (5.5)%
Overall effect of graduated federal rates (19.0)% 26.6 %
----- -----
Effective income tax rate 21.3 % (1.0)%
===== =====
</TABLE>
9. STOCK OPTIONS AND STOCK COMPENSATION
During 1993, the Company adopted the 1993 Stock Option Plan. The plan
provides for the issuance of both incentive stock options as well as
nonqualified options to be issued to consultants and others. The Company
has reserved 100,000 shares of common stock for issuance under this plan.
No options have been granted under this plan since inception.
Also in 1993, the Company adopted the Outside Directors Stock Option Plan
pursuant to which options to purchase an aggregate of 2,500 shares of
common stock have been authorized on an annual basis to each outside
director who has served during the immediately preceding year. No options
have been granted under this plan since inception.
At December 31, 1997, the Company had 1,000,000 options outstanding to
purchase shares of common stock. Of these options, 800,000 were granted in
connection with the Merger Agreement as discussed in Note 1. The options
are subject to an exercise price equal to the lower of $3.00 per share or
the average of the closing bid and ask prices of shares of the Company's
common stock on the principal exchange, automated quotation system or
over-the-counter market for the 15 trading days prior to the date upon
which any segment of the options vest. The options will vest in the
following manner:
(i) 50 percent of the options will vest once the Company's annual
earnings equal or exceed $.20 per share provided the holder of such
options remains continuously employed by the Company;
(ii) 100 percent of the options will vest once the Company's annual
earnings equal or exceed $.30 per share provided the holder of such
options remains continuously employed by the Company.
F-13
<PAGE> 77
The options granted in conjunction with the Merger Agreement expire
December 19, 2003.
An additional 100,000 options are subject to the same exercise price and
vesting criteria as the options granted within the Merger Agreement. Of
the remaining 100,000 options, which have an exercise price of $3.00 per
share, 57,500 were exercisable at the grant date and 42,500 are
exercisable at the rate of 50 percent on each of the first two
anniversaries of the grant date and expire on the third anniversary of the
grant date.
Subsequent to December 31, 1997, 100,000 options to purchase shares of
common stock at an exercise price of $5.00 per share were granted. The
options shall vest upon the earlier of:
(i) January 1, 2001, provided the holder of such options remains
continuously employed by the Company;
(ii) 50 percent of the options, however, shall vest earlier than January
1, 2001, provided that at such earlier date the Company's annual
earnings equal or exceed $.20 per share provided the holder of such
options remains continuously employed by the Company;
(iii) 100 percent of the options, however, shall vest earlier than January
1, 2001, provided that at such earlier date the Company's annual
earnings equal or exceed $.30 per share provided the holder of such
options remains continuously employed by the Company.
The options granted expire January 1, 2002.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock options. The 800,000
options granted in conjunction with the Merger Agreement and the 100,000
options granted subject to the same exercise period and vesting criteria
as the options granted within the Merger Agreement are considered variable
options, as defined by the provisions of APB No. 25 and related
interpretations. The Company will start recognizing compensation expense
on variable arrangements when the future events become probable of
occurring. The accrual of compensation expense under the variable
arrangement has not commenced, as it is unlikely that the award will be
earned in the near future due to the loss incurred in 1997. No
compensation expense has been recognized in the accompanying consolidated
statement of operations for the year ended December 31, 1997 as the
remaining options granted are considered fixed options and were granted at
market value, as defined by the provisions of APB No. 25 and related
interpretations. The Company has determined that the pro forma effects of
recognizing compensation cost in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, would not be materially different than the
actual net loss and loss per common share included in the consolidated
statements of operations.
The Company has an employment contract with one of its executives that
grants the employee 200,000 shares of the Company's common stock, 100,000
shares of which vest at the end of the employee's first anniversary with
the remaining 100,000 shares vesting at the end of the employee's second
anniversary. In connection with the employment contract, if the employee
is terminated prior to the one-year anniversary, 100,000 shares shall be
released to the employee. Accordingly, the Company has recorded $300,000
(value assigned to 100,000 shares) of compensation expense in the
accompanying 1997 consolidated statement of operations. The remaining
$300,000 of compensation expense will be recorded in 1998.
F-14
<PAGE> 78
10. SUBSEQUENT EVENTS
On February 10, 1998, the Company completed a private placement offering
of 600,000 shares of common stock to accredited investors for $2,100,000.
The net proceeds of $1,974,000 will be used for working capital purposes
and to finance the Company's strategic acquisition strategy. In connection
with the private placement, 200,000 warrants to purchase common stock of
the Company at $3.50 per share were granted to the broker.
On March 17, 1998, the Company closed two separate transactions to acquire
a California corporation and a Texas corporation. Both companies operate
in the same industry as the Company. Under the terms of the merger with
the California company, the Company paid $200,000 and issued $900,000 of
the Company's common stock (value at $6 a share) to the seller. Under the
terms of the merger with the Texas corporation, the Company paid $395,000
and issued $1,580,000 of the Company's convertible preferred stock to the
seller.
* * * * * *
F-15
<PAGE> 79
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
OSAGE SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998
(UNAUDITED) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,498,336 $ 2,576,323
Accounts receivable - net of allowance for doubtful
accounts of $33,000 in 1998 and $15,000 in 1997 4,484,301 1,974,496
Inventories 517,479 6,672
Prepaid expenses and other current assets 161,605 25,728
Deferred income taxes 425,000 210,000
------------ ------------
Total current assets 8,086,721 4,793,219
------------ ------------
FURNITURE AND EQUIPMENT - net 292,311 86,881
GOODWILL, less accumulated amortization of $11,911 4,276,066
OTHER ASSETS 64,228
------------ ------------
TOTAL $ 12,719,326 $ 4,880,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable under line of credit $ 308,553
Notes payable - other 206,973
Accounts payable 4,168,228 $ 1,948,802
Accrued expenses 875,975 507,395
Deferred revenue 20,458
Income taxes payable 191,175 262,182
------------ ------------
Total current liabilities 5,771,362 2,718,379
------------ ------------
NOTES PAYABLE 296,377
------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized,
issued and outstanding, 122 shares; total liquidation
preference, $3,660,000 12,200 12,200
Series B Preferred, $100 stated value - authorized,
issued and outstanding, 50 shares; total liquidation
preference, $1,500,000 5,000 5,000
Series C Preferred, $50 stated value - authorized,
issued and outstanding, 105.3 shares; total liquidation
preference, $1,579,500 5,265
Common stock, $.01 par value - authorized, 10,000,000
shares; issued and outstanding, 5,570,000 shares in
1998 and 4,820,000 shares in 1997 55,700 48,200
Additional paid-in-capital 7,335,863 2,772,246
Retained earnings (762,441) (675,925)
------------ ------------
Total stockholders' equity 6,651,587 2,161,721
------------ ------------
TOTAL $ 12,719,326 $ 4,880,100
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-16
<PAGE> 80
OSAGE SYSTEMS GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
NET SALES $ 5,641,932 $ 2,239,778
COST OF SALES 4,580,010 1,745,355
----------- -----------
Gross profit 1,061,922 494,423
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,222,988 439,262
----------- -----------
OPERATING (LOSS) INCOME (161,066) 55,161
INTEREST INCOME - net 35,550 2,303
----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (125,516) 57,464
BENEFIT FOR INCOME TAXES (39,000)
----------- -----------
NET (LOSS) INCOME $ (86,516) $ 57,464
=========== ===========
(LOSS) INCOME PER COMMON SHARE -
BASIC AND DILUTED $ (0.02) $ 0.01
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,342,472 5,342,472
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-17
<PAGE> 81
Osage Systems Group, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (86,516) $ 57,464
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 29,265 12,600
Stock-based compensation 75,000
Deferred income taxes (23,231) (55,000)
Changes in operating assets and liabilities:
Accounts receivable (1,174,742) 917,109
Inventories (253,039) (2,048)
Prepaid expenses and other assets (79,163) (5,141)
Accounts payable 576,706 (816,097)
Accrued expenses 79,409 (2,619)
Deferred revenue (4,673)
Income taxes payable (71,007)
----------- -----------
Net cash (used in) provided by operating activities (931,991) 106,268
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (74,124) (279)
Acquisition costs, including cash received of $40,492 (734,064)
Investments (25,000)
----------- -----------
Net cash used in investing activities (808,188) (25,279)
----------- -----------
FINANCING ACTIVITIES:
Net repayments on notes payable (311,808)
Net proceeds from sale of common stock 1,974,000
Purchase of treasury stock (81,553)
----------- -----------
Net cash provided by (used in) financing activities 1,662,192 (81,553)
----------- -----------
NET DECREASE IN CASH (77,987) (564)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,576,323 564
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,498,336 $ --
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-18
<PAGE> 82
OSAGE CONDENSED SYSTEMS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
position of the Company and the results of its operations and changes
in its financial position for the periods reported. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the entire year. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Osage
Systems Group, Inc. (the "Company") and its wholly-owned subsidiaries,
Osage Computer Group, Inc. ("Osage"), Solsource Computers, Inc.
("Solsource"), and H.V. Jones, Inc. ("HV Jones"). All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior
financial statements to conform to the current classifications.
The information presented within the accompanying unaudited
consolidated financial statements should be read in conjunction with
the Company's audited Financial Statements for the fiscal year ended
December 31, 1997 and 1996 and "Management's Discussion and Analysis or
Plan of Operation" from the 1997 Annual Report on Form 10-KSB.
2. Recent Acquisitions During Period.
On March 17, 1998, the Company acquired Solsource pursuant to the terms
of an Agreement and Plan of Merger. Upon closing, through a
wholly-owned subsidiary, the Company acquired 100% of the outstanding
capital stock of Solsource for merger consideration of $1.1 million;
consisting of $200,000 in cash and $900,000 in newly issued common
shares priced at $6.00 per share. In addition, the merger consideration
included earn-out incentive shares to be issued if Solsource achieves
certain performance targets.
On March 17, 1998, the Company also completed the acquisition of HV
Jones pursuant to the terms of an Agreement and Plan of Merger dated
February 27, 1998. Upon closing,
F-19
<PAGE> 83
through a wholly-owned subsidiary, the Company acquired 100% of the
outstanding capital stock of HV Jones for merger consideration of
$1,975,000; consisting of $395,000 in cash and $1.58 million (105.3
shares) in Series C Convertible Preferred Stock ("Series C Shares")
which converts into common stock during the next four quarters at a
conversion rate equal to the lower of $6.87 or a 33% premium over the
average closing price of the Company's common stock for the ten trading
days prior to each date of conversion.
The Solsource and HV Jones acquisitions were accounted for using the
purchase method of accounting for business combinations. The excess of
assets acquired over liabilities assumed has been allocated to goodwill
and is being amortized over 15 years. Results of operations of
Solsource and HV Jones have been included in the Company's statement of
operations from their respective acquisition dates.
3. Pro Forma Information.
The following pro forma summary presents the consolidated results of
operations of the Company as if the acquisitions completed during the
period had occurred as of January 1, 1998 and 1997, and do not purport
to be indicative of what would have occurred had the acquisitions been
made as of those dates or of results which may occur in the future. The
pro forma summary data for the three months ended March 31, 1998 and
1997 combines historical financial information of the Company,
Solsource and HV Jones for the three months ended March 31, 1998 and
1997.
PRO FORMA - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Sales $ 7,141,218 $ 5,888,043
Net loss $ (456,020) $ (59,351)
Net loss per share - basic and diluted $ (0.09) $ (0.01)
</TABLE>
4. Earnings Per Share.
In March 1997, the FASB issued SFAS No. 128, Earnings per Share ("SFAS
128"), which is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The Company has
implemented this statement and, as required, has restated earnings per
share ("EPS") for all periods presented. This new standard requires
dual presentation of "basic" and "diluted" EPS on the face of the
statement of operations and requires a reconciliation of the numerator
and denominator of basic and diluted EPS calculations. Basic earnings
per common share is computed on the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per
common share is computed on the weighted average number of shares of
F-20
<PAGE> 84
common stock outstanding plus additional shares that would have been
outstanding if all dilutive potential common shares had been issued.
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the year after giving effect to stock options and the conversion
of preferred shares considered to be dilutive. Because the Company
incurred a loss for the period ended March 31, 1998, the effects of the
potential dilutive securities are not included in the calculations.
5. New Accounting Pronouncements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"), which is
effective for financial statements for periods beginning after December
15, 1997 and establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
adoption of this Statement on January 1, 1998 had no impact on the
Company's financial statement presentation or related disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"), which is
effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company operates in one business segment and does not
believe that SFAS 131 will require additional disclosures when adopted.
6. Income Taxes.
The Company accounts for income taxes using the asset and liability
approach, which can result in recording tax provisions or benefits in
periods different than the periods in which such taxes are paid or
benefits realized. Deferred income taxes are recorded for the
difference between the book and tax basis of various assets and
liabilities which can provide for current recognition of expected tax
benefits from temporary differences that will result in deductible
amounts in future years.
The deferred income tax asset at March 31, 1998 is comprised of the
following:
<TABLE>
<S> <C>
Use of cash basis of accounting for income tax purposes $ 95,000
Allowance for doubtful accounts 13,000
Net operating loss carryforward 168,000
Deferred stock-based compensation 119,000
Other 30,000
----------
Net current asset $ 425,000
==========
</TABLE>
F-21
<PAGE> 85
Independent Auditors' Report
The Board of Directors
Open System Technologies, Inc.:
We have audited the accompanying balance sheet of Open System Technologies, Inc.
(an S Corporation) as of December 31, 1997, 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 audit.
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 statement 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 Open System Technologies, Inc.
at December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Clark, Schaefer, Hackett & Co.
Middletown, Ohio
January 16, 1998
F-22
<PAGE> 86
OPEN SYSTEM TECHNOLOGIES, INC.
Balance Sheet
December 31, 1997
Assets
<TABLE>
<S> <C>
Current assets:
Cash $ 6,157
Accounts receivable 2,179,734
Inventories 98,474
Other current assets 80,876
----------
2,365,241
----------
Property and equipment, net 165,787
----------
Other assets 35,000
----------
$2,566,028
==========
Liabilities and Stockholders' Equity
Current liabilities:
Cash management account $ 265,277
Accounts payable 910,629
Note payable 76,000
Accrued liabilities 77,043
----------
1,328,949
----------
Stockholders' equity:
Common stock, $1 par value; authorized 750 shares;
issued and outstanding 10 shares 10
Paid-in capital 490
Retained earnings 1,236,579
----------
1,237,079
----------
$2,566,028
==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 87
OPEN SYSTEM TECHNOLOGIES, INC.
Statement of Income and Retained Earnings
Year Ended December 31, 1997
<TABLE>
<S> <C>
Net Sales $11,938,449
Cost of Sales 9,675,150
-----------
Gross profit 2,263,299
General and administrative expenses 1,692,492
-----------
Income from operations 570,807
-----------
Other income (expenses):
Other income 25,094
Interest expense (26,635)
-----------
Total other expense (1,541)
-----------
Net income 569,266
Retained earnings - beginning of year 780,171
Dividends paid (112,858)
-----------
Retained earnings - end of year $ 1,236,579
===========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 88
OPEN SYSTEM TECHNOLOGIES, INC.
Statement of Cash Flows
Year Ended December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 569,266
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 76,176
Loss on disposal 5,530
Changes in current assets and liabilities:
Accounts receivable - trade (454,418)
Inventories 242,462
Other assets (90,214)
Cash management account 265,277
Accounts payable 688,803
Accrued expenses (115,687)
-----------
Net cash provided by operating activities 1,187,195
-----------
Cash flows from investing activities:
Purchase of property and equipment (112,427)
-----------
Cash flows from financing activities:
Decrease in note payable (794,808)
Payment on note payable, stockholder (200,000)
Payment of dividends (112,858)
-----------
Net cash used in financing activities (1,107,666)
-----------
Net decrease in cash (32,898)
Cash - beginning of year 39,055
-----------
Cash - end of year $ 6,157
===========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest $ 25,255
===========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 89
OPEN SYSTEM TECHNOLOGIES, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies:
The following accounting principles and practices of the Company are set
forth to facilitate the understanding of data presented in the financial
statements:
Nature of operations
Open System Technologies, Inc. (the Company), a Delaware corporation,
specializes in the sale and integration of computer systems, particularly
in open-system, client servers environments. The Company maintains several
Value Added Reseller (VAR) agreements with computer equipment manufacturers
whereby the Company purchases products from the manufacturer on a
non-exclusive basis for resale to end-users. The Company was previously
named Computer Health & Safety, Inc., but operated under the name, Open
Systems Technologies. During 1997, the Company amended its Certificate of
Incorporation to change its name to Open Systems Technologies, Inc.
Revenue recognition
Revenue is recognized from equipment sales when the product is shipped to
the customer and from support services over the contractual period or as
the services are performed.
Accounts receivable
Accounts receivable have been adjusted for all known uncollectible
accounts. No allowance for bad debts is considered necessary at year end.
Inventories
Inventories include completed equipment and parts, and are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
Property and equipment - net
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
F-26
<PAGE> 90
INCOME TAXES
The Company is an S Corporation for federal income tax purposes. As such,
the income tax effects of the results of operations of the Company accrue
directly to the stockholder. Accordingly, the accompanying financial
statements do not include a provision for income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash on deposit and trade accounts
receivable. Periodically during the year, the Company may have cash deposits
in excess of federally-insured limits. The Company places its cash with high
credit quality financial institutions and believes its exposure to loss is
limited. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited.
2. INVENTORIES:
The Company's inventories consist of high-technology computer equipment,
which are subject to rapid technological obsolescence or reduction in value
as a result of new products developed by competitors or normal competitive
pressures. The Company periodically estimates a reduction in value based on
current market conditions. At December 31, 1997, no reserve for obsolescence
was considered necessary. Changes in the marketplace for high technology
computer equipment may significantly affect management's estimates.
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment, net at December 31, 1997, consists of the following:
<TABLE>
<S> <C>
Leasehold improvement $ 9,965
Office equipment 89,179
Computer equipment 258,361
Office sign 3,129
--------
360,634
Less accumulated depreciation 194,847
--------
$165,787
========
</TABLE>
F-27
<PAGE> 91
4. NOTE PAYABLE:
The Company has a line of credit expiring on May 31, 1998 which provides for
borrowings of up to $1,750,000 bearing interest at prime (8.5% at December
31, 1997) plus 0.5%. $500,000 of the line is secured by the personal
guarantee of a stockholder. The remainder of the line is unsecured. The line
of credit contains certain restrictive covenants. At December 31, 1997, the
Company was either in compliance with these covenants or obtained a waiver of
compliance from the creditor. At December 31, 1997, $76,000 was outstanding
under this line of credit.
5. RELATED PARTY TRANSACTIONS:
A note payable to the stockholder of $200,000 was repaid during 1997. The
interest rate of the note was 9%. Interest expense related to this note was
$13,859 during 1997.
6. BUSINESS AND CREDIT CONCENTRATIONS:
Two vendors accounted for 81% of the Company's purchases. All of the
Company's customers are located in South Florida. Consequently, changes in
the South Florida economy could affect the Company's operations. At December
31, 1997, two customers accounted for approximately 75% of accounts
receivable. Four customers accounted for approximately 67% of the Company's
sales for the year ended 1997.
7. COMMITMENTS:
The Company is obligated under a noncancellable operating lease for office
space which expires in May 31, 2000. Minimum future rental payments under
this noncancellable operating lease as of December 31, 1997 are as follows:
1998 $ 98,800
1999 103,600
2000 44,000
--------
$246,400
========
F-28
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Computer Health & Safety, Inc.
We have audited the accompanying balance sheet of Computer Health & Safety, Inc.
at December 31, 1996, 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 audit.
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 statement 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 Computer Health & Safety, Inc.
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Miami, Florida
January 24, 1997
F-29
<PAGE> 93
COMPUTER HEALTH & SAFETY, INC.
BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
Assets
------
Current assets:
Cash $ 39,055
Accounts receivable, (net of allowance
for doubtful accounts of $10,229) 1,725,316
Inventories 340,936
Other current assets 24,929
----------
Total current assets 2,130,236
----------
Property and equipment, net 135,066
Other assets 733
----------
Total assets $2,266,035
==========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Accounts payable $ 221,826
Note payable 870,808
Note payable, stockholder 200,000
Accrued liabilities 192,730
----------
Total current liabilities 1,485,364
----------
Stockholder's equity:
Common stock, $1 par value. Authorized
750 shares; issued and outstanding
10 shares 10
Paid-in capital 490
Retained earnings 780,171
----------
Total stockholder's equity 780,671
Commitments
----------
Total liabilities and
stockholder's equity $2,266,035
==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 94
COMPUTER HEALTH & SAFETY, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Net sales $11,476,169
Cost of sales 9,311,239
-----------
Gross profit 2,164,930
General and administrative expenses 1,821,553
-----------
Income from operations 343,377
Other income (expense):
Other income 7,649
Interest expense (123,341)
-----------
Total other expense (115,692)
-----------
Net income 227,685
Retained earnings, beginning of year 721,908
Prior period adjustment (note 7) (62,401)
Dividends paid (107,021)
-----------
Retained earnings, end of year $ 780,171
===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 95
COMPUTER HEALTH & SAFETY, INC.
STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 227,685
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 52,432
Bad debt expense 10,229
Changes in current assets and liabilities:
Accounts receivable, trade (535,477)
Inventories 44,825
Other current assets (22,074)
Accounts payable (100,188)
Accrued expenses 142,836
---------
Net cash used in operating activities (179,732)
---------
Cash flows from investing activities:
Purchase of property and equipment (109,276)
---------
Cash flows from financing activities:
Increase in note payable 257,276
Payment on note payable, stockholder (22,748)
Payment of dividends (107,021)
---------
Net cash provided by financing activities 127,507
---------
Net decrease in cash (161,501)
Cash, beginning of year 200,556
---------
Cash, end of year $ 39,055
=========
Supplementary disclosure of cash flow information:
Cash paid during the year for interest $ 123,341
=========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 96
COMPUTER HEALTH & SAFETY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(1) DESCRIPTION OF BUSINESS
Computer Health and Safety, Inc. (the "Company"), a Delaware corporation,
specializes in the sale and integration of computer systems, particularly
in open-system, client server environments. The Company maintains several
Value Added Reseller ("VAR") agreements with computer equipment
manufacturers whereby the Company purchases products from the manufacturer
on a non-exclusive basis for resale to end-users. The Company conducts its
operations under the name of its division, Open System Technologies.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(b) PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost. Depreciation of property
and equipment is calculated on a straight-line basis over the
estimated useful lives of the assets.
Maintenance and repairs are charged to operations when incurred.
Substantial expenditures for improvements that increase the capacity
or extend the useful life of the asset are capitalized.
(c) INVENTORIES
Inventories include completed equipment and parts, and are stated at
the lower of cost or market. Cost is determined using the first-in,
first-out ("FIFO") method for all inventories.
(d) REVENUE RECOGNITION
Revenue is recognized from equipment sales when the product is shipped
to the customer and from support services over the contractual period
or as the services are performed.
(e) INCOME TAXES
The Company is an S corporation for federal income tax purposes. As
such, the income tax effects of the results of operations of the
Company accrue directly to the stockholder. Accordingly, the
accompanying financial statements do not include a provision for
income taxes.
(Continued)
F-33
<PAGE> 97
COMPUTER HEALTH & SAFETY, INC.
NOTES TO FINANCIAL STATEMENTS
(f) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of this statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
(3) INVENTORIES
Inventories at December 31, 1996 consist of:
Completed equipment ....... $242,829
Parts ..................... 111,761
--------
Total ............... 354,590
Less reserve .............. 13,654
--------
$340,936
========
The Company's inventories consist of high-technology computer equipment,
which are subject to rapid technological obsolescence or reduction in
value as a result of new products developed by competitors or normal
competitive pressures. The Company periodically estimates a reserve for
obsolete inventory and reduction in value based on current market
conditions. Changes in the marketplace for high technology computer
equipment may significantly effect management's estimates.
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 1996 consists of the following:
Office equipment ..................... $ 24,239
Computer equipment ................... 248,881
--------
Total ............................ 273,120
Less accumulated depreciation ........ 138,054
--------
Property and equipment, net ...... $135,066
========
(Continued)
F-34
<PAGE> 98
COMPUTER HEALTH & SAFETY, INC.
NOTES TO FINANCIAL STATEMENTS
(5) NOTE PAYABLE
The Company has an unsecured line of credit expiring on August 31, 1997,
which provides for borrowings of up to $2,500,000 bearing interest at
prime (8.25% at December 31, 1996) plus 0.5 percent. At December 31, 1996,
$870,808 was outstanding under this line of credit. The line of credit
contains a number of restrictive covenants. At December 31, 1996, the
Company was not in compliance with the debt service coverage ratio. The
Company has obtained a waiver of compliance with this covenant from the
creditor.
(6) NOTE PAYABLE, STOCKHOLDER
As of December 31, 1996, the Company had a note payable to the stockholder
of $200,000. Monthly interest only installments are due until September 1,
1997 at which time the entire principal balance is due. The note bears an
annual interest rate of 9 percent. Related interest expense incurred
during 1996 amounted to $19,659.
(7) PRIOR PERIOD ADJUSTMENT
During 1996, the Company identified a $62,401 overstatement of the
Company's December 31, 1995 inventory and a corresponding understatement
of cost of sales for the year ended December 31, 1995. The Company has
reflected this error as a prior year adjustment in their financial
statements for the year ended December 31, 1996.
(8) BUSINESS AND CREDIT CONCENTRATIONS
One vendor accounted for 65 percent of the Company's purchases. All of the
Company's customers are located in South Florida. Consequently, changes in
the South Florida economy could affect the Company's operations. At
December 31, 1996, three customers accounted for approximately 88 percent
of accounts receivable. Three customers accounted for approximately 54
percent of the Company's sales for the year ended 1996.
(9) COMMITMENTS
(a) LEASES
The Company is obligated under a noncancelable operating lease for
office space which expires in 1997. Minimum future rental payments
under this noncancelable operating lease as of December 31, 1996 are
$12,740 in 1997.
Rent expense on this lease approximated $47,612 for the year ended
December 31, 1996.
F-35
<PAGE> 99
OPEN SYSTEM TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
(UNAUDITED) (UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 223,960 $ 259,867
Accounts receivable - net of $3,000 allowance for
doubtful accounts in 1998 and $17,000 in 1997 1,540,023 1,770,280
Inventories - net of $3,000 reserve in 1998 and
$21,000 in 1997 112,125 197,836
Prepaid expenses and other current assets 89,364 45,708
---------- ----------
Total current assets 1,965,472 2,273,690
---------- ----------
FURNITURE AND EQUIPMENT - net 173,960 116,655
OTHER ASSETS 28,638 15,687
---------- ----------
TOTAL $2,168,070 $2,406,032
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable under line of credit $ 323,000
Accounts payable 535,891 $1,102,311
Accrued expenses 67,043 87,189
---------- ----------
Total current liabilities 925,934 1,189,500
---------- ----------
NOTES PAYABLE 200,000
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 10 10
Additional paid-in-capital 490 490
Retained earnings 1,241,636 1,016,032
---------- ----------
Total stockholders' equity 1,242,136 1,016,532
---------- ----------
TOTAL $2,168,070 $2,406,032
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-36
<PAGE> 100
OPEN SYSTEM TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
(UNAUDITED) (UNAUDITED)
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
NET SALES $2,328,969 $3,044,053
COST OF SALES 1,839,249 2,380,436
---------- ----------
Gross profit 489,720 663,616
---------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 463,688 403,445
---------- ----------
OPERATING INCOME 26,032 260,171
INTEREST INCOME - net 1,354 690
---------- ----------
NET OPERATING INCOME $ 27,386 $ 260,861
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-37
<PAGE> 101
OPEN SYSTEM TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 27,386 $ 260,861
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,633 24,000
Changes in operating assets and liabilities:
Accounts receivable 639,711 (44,964)
Inventories (13,651) 143,100
Prepaid expenses and other assets (2,126) (35,733)
Accounts payable (640,015) 880,485
Accrued expenses (10,000) (105,541)
----------- -----------
Net cash provided by operating activities 19,938 1,122,208
----------- -----------
INVESTING ACTIVITIES - Capital expenditures (26,806) (5,589)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings(repayments) on notes payable 247,000 (870,808)
Shareholder distributions (22,328) (25,000)
----------- -----------
Net cash provided by (used in) financing activities 224,672 (895,808)
----------- -----------
NET INCREASE IN CASH 217,803 220,811
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,157 39,056
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 223,960 $ 259,867
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-38
<PAGE> 102
OPEN SYSTEM TECHNOLOGIES, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of the Company, the accompanying unaudited interim financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company and the
results of its operations and changes in its financial position for the
periods presented.
F-39
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
Stockholders
Solsource Computers, Inc.
Carlsbad, California
We have audited the accompanying balance sheets of Solsource Computers, Inc.
(the "Company") as of January 31, 1998 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
the years 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 audits 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 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
April 24, 1998
F-40
<PAGE> 104
SOLSOURCE COMPUTERS, INC.
BALANCE SHEETS
JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS (NOTES 3 AND 4) 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash $ 10,506
Accounts receivable - net of allowance for doubtful accounts of
$7,900 in 1998 and $6,100 in 1997 700,378 $ 1,634,886
Federal and state income tax refunds receivable 44,799 24,036
Inventories - net of reserve for obsolescence of $18,400 in 1998
and $44,000 in 1997 349,032 836,646
Prepaid expenses 5,827 21,289
Deferred income taxes (Note 5) 38,925 1,421
- ------ -----
Total current assets 1,149,467 2,518,278
FURNITURE, EQUIPMENT AND SOFTWARE - Net (Notes 2 and 6) 44,627 88,508
OTHER ASSETS - Net of accumulated amortization of
$7,900 in 1998 and $6,100 in 1997 52,550 55,788
Deferred income taxes (Note 5) 128,844
------- --------
TOTAL $ 1,375,488 $ 2,662,574
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Bank overdraft $ 21,706
Accounts payable $ 784,641 1,775,949
Accrued expenses 68,374 97,139
Line of credit (Note 4) 304,150
Deferred service revenues 30,318 31,952
Deferred income taxes (Note 5) 8,745
Current portion of long-term debt (Note 3) 61,234 58,577
Current portion of capital lease obligation (Note 6) 18,527 15,738
------ ------
Total current liabilities 1,267,244 2,009,806
--------- ---------
LONG-TERM DEBT - Less current portion (Note 3) 275,188 345,955
------- -------
CAPITAL LEASE OBLIGATION - Less current portion (Note 6) 6,879 25,406
----- ------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6 and 8)
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(Notes 3 and 7):
Common stock - no par value; authorized, 10,000,000 shares;
issued and outstanding, 2,028,000 shares 135,125 135,125
(Deficit) retained earnings (274,011) 181,219
Treasury stock - 90,440 shares at cost (34,937) (34,937)
------- -------
Total stockholders' equity (net capital deficiency) (173,823) 281,407
-------- -------
TOTAL $ 1,375,488 $ 2,662,574
=========== ===========
</TABLE>
See notes to financial statements.
F-41
<PAGE> 105
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET SALES $ 7,231,978 $ 13,687,280
COST OF SALES 5,364,206 10,673,922
--------- ----------
Gross profit 1,867,772 3,013,358
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,474,431 2,852,507
--------- ---------
OPERATING (LOSS) INCOME (606,659) 160,851
INTEREST EXPENSE - Net (59,833) (43,928)
------- -------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (666,492) 116,923
(BENEFIT) PROVISION FOR INCOME TAXES (Note 5) (211,262) 31,944
-------- ------
NET (LOSS) INCOME $ (455,230) $ 84,979
========== ========
</TABLE>
See notes to financial statements.
F-42
<PAGE> 106
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Treasury
Shares Amount (Deficit) Stock Total
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1996 2,022,400 $ 126,600 $ 96,240 $ (1,200) $ 221,640
Issuance of common stock (Note 7) 66,440 8,525 8,525
Purchase of treasury shares (Note 7) (60,840) (33,737) (33,737)
Net income 84,979 84,979
--------- ------- ------ ------- ---------
BALANCE, JANUARY 31, 1997 2,028,000 135,125 181,219 (34,937) 281,407
Net loss (455,230) (455,230)
--------- --------- ---------- --------- ----------
BALANCE, JANUARY 31, 1998 2,028,000 $ 135,125 $(274,011) $(34,937) $(173,823)
========= ========= ========= ======== =========
</TABLE>
See notes to financial statements.
F-43
<PAGE> 107
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (455,230) $ 84,979
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 32,501 42,134
Loss on disposal of assets 9,240
Provision for inventory obsolescence 73,648 8,372
Deferred income taxes (175,093) (4,216)
Changes in operating assets and liabilities:
Accounts receivable 934,508 (105,253)
Inventories 413,965 (286,219)
Other current assets (16,967) (39,553)
Accounts payable (991,308) 90,997
Accrued expenses (28,765) (184,866)
Deferred service revenue (1,634) 31,952
------ ------
Net cash used in operating activities (205,135) (361,673)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 29,683
Capital expenditures (12,638) (27,040)
Proceeds from sale of investments 250,000
Purchase of treasury stock (1,737)
Proceeds from sale of common stock 8,525
------ -----
Net cash provided by investing activities 17,045 229,748
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 304,150
Principal payments on debt (68,110) (63,463)
Principal payments on capital lease (15,738)
Bank overdraft (21,706) 21,706
------- ------
Net cash provided by (used in) financing activities 198,596 (41,757)
------- -------
NET INCREASE (DECREASE) IN CASH 10,506 (173,682)
CASH, BEGINNING OF YEAR 173,682
-------- --------
CASH, END OF YEAR $ 10,506 $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF TOTAL INTEREST PAID $ 64,875 $ 54,553
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Purchase of treasury stock in exchange for a
note payable (Note 7) $ 32,000
========
Purchase of software and equipment in exchange
for capital lease $ 41,144
========
See notes to financial statements.
</TABLE>
F-44
<PAGE> 108
SOLSOURCE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Solsource Computers, Inc. (the "Company") is a
systems integrator specializing in data and network security solutions and
services. The Company is focused on providing complete end-to-end data and
network security solutions.
The Company has entered into contracts with major suppliers of computer
hardware and software to act as their value-added reseller. Purchases and
sales under the value-added reseller contracts account for the majority of
the Company's sales and costs of sales.
The Company is currently licensed to do business in Illinois, Connecticut,
New Jersey, Texas and California.
SIGNIFICANT ACCOUNTING POLICIES are as follows:
REVENUE RECOGNITION - The Company recognizes sales of products when the
products are shipped, and services and support revenue is recognized
when the applicable services are rendered. The Company sells
preventative maintenance services on an as needed basis or under
one-year contracts. Revenues from services performed on an as needed
basis are recognized as services are performed, and revenues from
one-year contracts are recognized over the term of the contract as
contract hours are utilized which may result in the contract completion
prior to the one-year period. Unearned contract revenue is recorded as
deferred service revenues in the accompanying balance sheets.
INVENTORIES are recorded at the lower of cost (first-in, first-out) or
market.
FURNITURE, EQUIPMENT AND SOFTWARE are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the assets. The useful lives range from three to seven years.
OTHER ASSETS consist principally of the cash surrender value of
officer's life insurance, deposits to vendors and loan fees which are
stated at cost less amortization computed on a straight-line method over
the life of the loan.
INCOME TAXES are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of accounts
receivable, accounts payable and accrued expenses approximates the
carrying value due to the short-term nature of these instruments. The
fair value of long-term obligations approximates carrying value based on
borrowing rates currently available to the Company for loans with
similar terms and average maturities.
F-45
<PAGE> 109
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 amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. FURNITURE, EQUIPMENT AND SOFTWARE
Furniture, equipment and software at January 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computer equipment $ 8,875 $ 4,734
Furniture and fixtures 134,431 173,032
Software 7,603 39,387
-------- --------
Total 150,909 217,153
Less accumulated depreciation 106,282 128,645
-------- --------
Furniture and equipment - net $ 44,627 $ 88,508
======== ========
</TABLE>
3. LONG-TERM DEBT
Long-term debt at January 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime plus 2.75% (8.5% at January 31, 1998), due
in monthly installments through 2003 $ 124,226 $ 142,240
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime plus 2.75% (8.5% at January 31, 1998), due
in monthly installments through 2002 168,095 197,449
Note payable to a related party with interest at 10%, collateralized
by various Company assets, due in monthly installments
through 2002 44,101 51,295
Note payable to a related party with interest at 10%, due in
monthly installments through 1998 13,548
--------- ---------
Total 336,422 404,532
Less current maturities 61,234 58,577
--------- ---------
Long-term debt - net $ 275,188 $ 345,955
========= =========
</TABLE>
Among other things, the notes payable guaranteed by the U.S. Small
Business Administration require lender's approval prior to declaration or
payment of any dividend, purchase or retirement of capital stock,
consolidation or merger. Such notes payable are collateralized by
substantially all of the assets of the Company.
Future principal payments on long-term debt at January 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 61,234
2000 68,249
2001 76,050
2002 84,745
2003 46,144
--------
Total $336,422
========
</TABLE>
F-46
<PAGE> 110
4. LINE OF CREDIT
The Company has a line of credit. The line of credit bears interest at
prime (8.5% at January 31, 1998) plus 3.15 percent and is collateralized
by all business assets.
Among other things, the line of credit requires that the Company maintain
a minimum amount of tangible net worth. As of January 31, 1998, the
Company was not in compliance with such covenant. As of March 10, 1998,
the Company renewed its line of credit through June 30, 1998. The new line
of credit was amended, the covenant was waived and the line was reduced
from $400,000 to $300,000.
5. INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting for certain transactions,
primarily net operating loss carryover and depreciation.
Net deferred income taxes at January 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets $ 167,769 $ 1,421
Deferred income tax liabilities (8,745)
--------- -------
Net deferred income tax asset (liability) 167,769 (7,324)
Less net current deferred income taxes 38,925 7,324
--------- -------
Net noncurrent deferred income taxes $ 128,844 $
========= =======
</TABLE>
The (benefit) provision for income taxes for the years ended January 31
consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ (36,169) $ 36,160
Deferred (175,093) (4,216)
-------- ------
Total (benefit) provision $ (211,262) $ 31,944
========== ========
</TABLE>
The (benefit) provision for income taxes differs from the amount that
would have been calculated using statutory federal rates primarily due to
federal bracket differences between years.
6. LEASE COMMITMENTS
Operating Leases - The Company leases office space and equipment under
noncancelable operating leases. The Company has an option to renew the
office lease for an additional three-year term at fair market value.
Future minimum lease payments under noncancelable operating leases at
January 31, 1998 and related subleases are as follows:
<TABLE>
<CAPTION>
LEASES SUBLEASES NET
<S> <C> <C> <C>
1999 $ 127,501 $ 37,098 $ 90,403
2000 100,793 38,582 62,211
2001 55,765 16,663 39,102
--------- -------- --------
Total $ 284,059 $ 92,343 $191,716
========= ======== ========
</TABLE>
Total rent expense was $93,398 and $63,156 for the years ended January 31,
1998 and 1997, respectively.
F-47
<PAGE> 111
Capital Leases - The Company leases computer equipment under leases
classified as capital leases. Capital lease assets and accumulated
amortization included in furniture, equipment and software in the
accompanying financial statements as of January 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computer equipment $ 53,837 $ 53,837
Less accumulated amortization 21,050 12,227
------ ------
Net $ 32,787 $ 41,610
======== ========
</TABLE>
At January 31, capital lease obligations are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Capital lease obligations excluding interest at approximately 18% $ 25,406 $ 41,144
Less current portion of capital lease obligations 18,527 15,738
------ ------
Capital lease obligations less current portion $ 6,879 $ 25,406
======= ========
</TABLE>
7. CAPITAL STOCK
In 1997, the Company issued 66,400 shares of common stock to two employees
in exchange for $8,525. The Company also repurchased 60,840 shares in
exchange for notes payable in the amount of $32,000 and cash of $1,737.
Effective September 11, 1997, the Company authorized a four-for-one split
of the Company's common stock. The stock split has been retroactively
reflected in the accompanying financial statements.
The Company's majority stockholder has granted options to acquire shares
of his common stock in the Company to key employees, including officers. A
summary of stock option activity is as follows:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at January 31, 1996 397,406 $0.07 - $0.41
Granted 410,316 $0.07 - $0.56
Exercised (46,840) $0.10 - $0.56
Terminated (32,833) $0.10 - $0.25
-------
Outstanding at January 31, 1997 728,049 $0.07 - $0.25
Granted 24,300 $0.25 - $0.50
Terminated (49,297) $0.25
-------
Outstanding at January 31, 1998 703,052 $0.07 - $0.50
=======
</TABLE>
In management's opinion, all of these options were issued at or above the
estimated fair value at the grant date.
The Company applies Accounting Principles Board ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for the above stock options. Accordingly no compensation expense has been
recognized for the above stock options. Had compensation cost for the
above stock options been determined based upon the fair value at the grant
date consistent with the
F-48
<PAGE> 112
methodology prescribed in Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company's
net income for the years ended January 31, 1998 and 1997 would have been
reduced by approximately $14.000. The fair value of the options granted
during the years ended January 31, 1998 and 1997 are estimated at $3,000
and $69,000 on the date of grant using an option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
<S> <C>
Dividend yield 0 %
Volatility 0 %
Average risk-free interest rate 6 %
Average expected life 5 years
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 21 and completed six months of
service. Each participant may elect to contribute up to 15 percent of his
or her gross compensation up to the maximum amount allowed by the Internal
Revenue Service. The Company can make discretionary matching
contributions. No matching contributions have been made under the plan.
9. SUBSEQUENT EVENTS
On March 17, 1998, the Company was acquired by Osage Systems Group, Inc.
("Osage"), which operates in the same industry as the Company. Under the
terms of the agreement with Osage, the selling price of the Company was
$200,000 cash and $900,000 of Osage's common stock valued at $6 per share.
* * * * * *
F-49
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
H.V. Jones, Inc.
Houston, Texas
We have audited the accompanying balance sheets of H.V. Jones, Inc. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, net stockholder's capital deficiency and cash flows for the years
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 audits 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 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Houston, Texas
April 10, 1998
F-50
<PAGE> 114
H.V. JONES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,265 $ 71,214
Trade accounts receivable (Note 4) 732,442 288,824
Advances to stockholder (Note 6) 70,513 64,926
------ ------
Total current assets 948,220 424,964
FURNITURE AND EQUIPMENT - Net (Note 2) 68,687 31,550
OTHER ASSETS 7,999 4,353
----- -----
TOTAL $1,024,906 $460,867
========== ========
LIABILITIES AND NET STOCKHOLDER'S CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Note 4) $ 422,695 $ 280,297
Current portion of obligations under capital leases (Note 3) 30,688 14,312
Accounts payable 796,574 463,720
Accrued expenses 193,154 73,815
------- ------
Total current liabilities 1,443,111 832,144
--------- -------
OBLIGATIONS UNDER CAPITAL LEASES - Less current
portion (Note 3) 26,402 9,031
------ -----
COMMITMENTS (Note 5)
NET STOCKHOLDER'S CAPITAL DEFICIENCY:
Common stock - 1,000 shares authorized, issued and outstanding 1,000 1,000
Deficit (445,607) (381,308)
-------- --------
Total net stockholder's capital deficiency (444,607) (380,308)
-------- --------
TOTAL $1,024,906 $460,867
========== ========
</TABLE>
See notes to financial statements.
F-51
<PAGE> 115
H.V. JONES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET SALES $ 5,606,898 $ 2,544,597
COST OF SALES 4,194,608 1,736,405
--------- ---------
Gross profit 1,412,290 808,192
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Note 6) 1,425,419 991,409
--------- -------
LOSS FROM OPERATIONS (13,129) (183,217)
INTEREST EXPENSE - Net (51,170) (29,847)
------- -------
NET LOSS $ (64,299) $ (213,064)
========= ==========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 116
H.V. JONES, INC.
STATEMENTS OF NET STOCKHOLDER'S CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
NET
STOCKHOLDER'S
COMMON STOCK CAPITAL
SHARES AMOUNT DEFICIT DEFICIENCY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,000 $ 1,000 $ (168,244) $ (167,244)
Net loss (213,064) (213,064)
----- ------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,000 1,000 (381,308) (380,308)
Net loss (64,299) (64,299)
----- ------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,000 $ 1,000 $ (445,607) $ (444,607)
===== ======= ========== ==========
</TABLE>
F-53
<PAGE> 117
H.V. JONES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (64,299) $ (213,064)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 24,326 7,593
Changes in operating assets and liabilities:
Trade accounts receivable (443,618) (22,511)
Advances to stockholder (5,587) (210)
Other assets (3,646) (2,742)
Accounts payable 332,854 221,799
Accrued expenses 119,339 63,952
------- ------
Net cash (used in) provided by operating activities (40,631) 54,817
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of furniture and equipment (6,783) (913)
------ ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line of credit agreement 136,700 (51,000)
Proceeds from notes payable 41,497 108,801
Payments on notes payable (35,799) (67,995)
Payments on obligations under capital leases (20,933) (5,555)
------- ------
Net cash provided by (used in) financing activities 121,465 (15,749)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 74,051 38,155
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 71,214 33,059
------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 145,265 $ 71,214
========= ========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 53,438 $ 29,847
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS - Equipment acquired under capital leases $ 54,680 $ 28,898
======== ========
</TABLE>
See notes to financial statements.
F-54
<PAGE> 118
H.V. JONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In March 1998 H.V. Jones, Inc. (the "Company") was acquired by Osage
Systems Group, Inc. ("Osage"), which operates in the same industry as the
Company. In connection with the acquisition, Osage forgave $60,000 of the
advances to stockholder and loaned the Company $750,000, the proceeds of
which were used to pay certain notes and accounts payable.
DESCRIPTION OF BUSINESS - The Company is a complex systems integrator with
offices in Houston and Austin, Texas, specializing in providing
proprietary services and turnkey technology infrastructure solutions.
The Company has entered into contracts with major suppliers of computer
hardware and software to act as their value-added reseller. Purchases and
sales under the value-added reseller contracts account for the majority of
the Company's sales and costs of sales.
SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition - The Company recognizes revenue from product
sales when the products are shipped and service and support revenue
when the applicable services are rendered.
Furniture and Equipment - Furniture and equipment are stated at
cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The useful lives range
from five to seven years.
Fair Value of Financial Instruments - The fair value of accounts
receivable, advances to stockholder, accounts payable, accrued
expenses and notes payable approximates the carrying value due to
the short-term nature of these instruments. The fair value of
long-term obligations approximate carrying value based on borrowing
rates currently available to the Company for loans with similar
terms and average maturities.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expense during
the reporting period. Actual results could differ from these
estimates.
Income Taxes - The Company accounts for income taxes using the asset
and liability approach, which can result in recording tax provisions
or benefits in periods different than the periods in which taxes are
paid or benefits realized. Deferred income taxes are recorded for
the difference between the book and tax bases of various assets and
liabilities which can provide for current recognition of expected
tax benefits from temporary differences that will result in
deductible amounts in future years.
F-55
<PAGE> 119
New Accounting Pronouncement - In June 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which is
effective for financial statement periods beginning after December
15, 1997 and establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
The Company does not believe the adoption of SFAS No. 130 will have
a material impact on its financial statement presentation or related
disclosures.
Cash and Cash Equivalents - The Company considers all highly liquid
debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
2. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment $ 26,602 $ 24,700
Furniture and fixtures 15,890 11,009
Equipment under capital leases 83,578 28,898
------ ------
Total 126,070 64,607
Less accumulated depreciation 57,383 33,057
------ ------
Furniture and equipment - net $ 68,687 $ 31,550
======== ========
</TABLE>
3. CAPITAL LEASES
The Company is the lessee of telephone and computer equipment under
capital leases expiring in various years through 2001. The assets and
liabilities under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair value of the asset. The
assets are depreciated over the shorter of their related lease terms or
their estimated productive lives. Depreciation of assets under capital
leases is included in depreciation expense for 1997 and 1996.
Following is a summary of property held under capital leases:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment $ 64,367 $ 28,898
Telephone equipment 19,211
------ -------
83,578 28,898
Less accumulated depreciation 27,696 6,020
------ -----
Total $ 55,882 $ 22,878
======== ========
</TABLE>
F-56
<PAGE> 120
Minimum future lease payments under capital leases as of December 31, 1997
and in the aggregate are as follows for the years ending December 31:
<TABLE>
<S> <C>
1998 $34,823
1999 17,928
2000 5,847
2001 5,360
-------
Total minimum lease payments 63,958
Less amount representing interest 6,868
-------
Present value of net minimum lease payments $57,090
=======
</TABLE>
Interest rates on capitalized leases are estimated at 10% and are imputed
based on the Company's incremental borrowing rate at the inception of each
lease.
4. NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Line of credit agreement with bank, principal due March 1998,
interest at prime plus 1.25% (10.75% at December 31, 1997)
payable monthly, collateralized by accounts receivable (1) $250,000 $113,300
9.5% unsecured note payable to related party with principal
and accrued interest payable on demand (Note 6) 70,873 76,957
Various unsecured notes payable to financial institutions with
principal and accrued interest payable (interest rates range
from 14.5% to 18.9%) on demand 101,822 90,040
-------- --------
$422,695 $280,297
======== ========
</TABLE>
(1) As discussed in Note 1, this line was paid subsequent to December 31, 1997.
5. OPERATING LEASES
The Company leases office space under an operating lease expiring in 2000.
Minimum future rental payments under this noncancelable operating lease as
of December 31, 1997 and in the aggregate are as follows for the years
ending December 31:
<TABLE>
<S> <C>
1998 $39,624
1999 39,624
2000 9,906
-------
Total minimum future rental payments $89,154
=======
</TABLE>
Total rental expense for 1997 and 1996 amounted to $80,979 and $92,110,
respectively.
F-57
<PAGE> 121
6. RELATED-PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company has advanced amounts to the sole
stockholder of the Company of $70,513 and $64,926 and has a note payable to
a family member of the sole stockholder of $70,873 and $76,957.
Included in selling, general and administrative expenses for 1997 and 1996
are approximately $71,000 and $59,000 in operations consulting fees paid to
an entity owned by the sole stockholder of the Company.
Included in selling, general and administrative expenses in 1997 are $8,600
in accounting fees paid to the spouse of the sole stockholder of the
Company.
7. INCOME TAXES
Deferred taxes for the Company result primarily from net operating losses.
At December 31, 1997 and 1996, the Company's net deferred tax assets
comprised the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets $ 166,000 $ 144,000
Valuation allowance (166,000) (144,000)
--------- ---------
Net $ -- $ --
========= =========
</TABLE>
A valuation allowance of $166,000 and $144,000 was established in 1997 and
1996 as management of the Company believes that, due to continuing losses,
it is more likely than not that the deferred tax assets will not ultimately
be realized.
The Company's net operating loss carryforwards amounted to approximately
$488,000 at December 31, 1997 and expire in various years through 2012.
******
F-58
<PAGE> 122
BASIS OF PRESENTATION
The following unaudited pro forma consolidated balance sheet at March 31, 1998
combines historical financial information as if the acquisition of Open System
Technologies, Inc. ("OST") had occurred on March 31, 1998. The unaudited pro
forma consolidated statement of operations for the year ended December 31, 1997
and the three months ended March 31, 1998 combines historical statements of
operations for Osage Systems Group, Inc. (the "Company") and the acquired
companies, OST, Solsource and HV as if the acquisitions had occurred on January
1, 1997.
The detailed assumptions used to prepare the unaudited pro forma consolidated
financial information are contained herein. The unaudited pro forma consolidated
financial information reflects the use of the purchase method of accounting for
the acquisitions. The purchase price allocation used in the preparation of the
pro forma financial information is preliminary and subject to change based upon
final evaluations being performed.
The unaudited pro forma data are not necessarily indicative of the financial
position or results of operations which would have actually been reported had
the transactions been consummated at the date mentioned above or which may be
reported in the future.
F-59
<PAGE> 123
OSAGE SYSTEMS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED
OSAGE OST ADJ. BALANCE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,498 $ 224 $ (2,500){a} $ 222
Accounts receivable 4,484 1,540 6,024
Inventories 518 112 630
Prepaid expenses and other current assets 162 89 251
Deferred income taxes 425 200 {d} 625
-------- ------ ------------- --------
Total current assets 8,087 1,965 (2,300) 7,752
-------- ------ ------------- --------
FURNITURE AND EQUIPMENT - net 292 174 466
-------- ------ ------------- --------
OTHER ASSETS:
Goodwill - net 4,276 4,287 {d} 8,563
Other 64 29 93
-------- ------ ------------- --------
Total other assets 4,340 29 4,287 8,656
-------- ------ ------------- --------
Total assets $ 12,719 $2,168 $ 1,987 $ 16,874
======== ====== ============= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable under line of credit $ 309 $ 323 $ 632
Notes payable - other 207 207
Accounts payable 4,168 535 4,703
Accrued expenses 876 67 $ 238 {c} 1,181
Deferred revenue 20 20
Income taxes payable 191 191
-------- ------ ------------- --------
Total current liabilities 5,771 925 238 6,934
-------- ------ ------------- --------
NOTES PAYABLE - OTHER 296 420 {c} 716
-------- ------ ------------- --------
SHAREHOLDERS' EQUITY:
Series A preferred stock 12 12
Series B preferred stock 5 5
Series C preferred stock 5 5
Common stock 56 1 4 {b} 60
(1){e}
Additional paid-in-capital 7,336 2,568 {b} 9,904
Retained earnings (deficit) (762) 1,242 (1,242){e} (762)
-------- ------ ------------- --------
Total shareholders' equity 6,652 1,243 1,329 9,224
-------- ------ ------------- --------
Total liabilities and shareholders' equity $ 12,719 $2,168 $ 1,987 $ 16,874
======== ====== ============= ========
</TABLE>
F-60
<PAGE> 124
PRO FORMA ADJUSTMENT LEGEND
{a} Amount represents the following adjustments to cash:
<TABLE>
<S> <C>
OST acquisition cash $ (2,500)
========
</TABLE>
{b} Amount represents net adjustment to common stock and additional paid in
capital:
<TABLE>
<CAPTION>
IN THOUSANDS
----------------------------------------------------
COMMON
SHARES STOCK APIC TOTAL
----------------------------------------------------
<S> <C> <C> <C> <C>
OST shares 333,334 3 2,233 2,237
Fees paid 50,000 1 335 336
----------------------------------------------------
Total 383,334 $ 4 $ 2,568 $ 2,572
====================================================
</TABLE>
{c} Reflects an adjustment to record liabilities resulting from the OST
acquisition. Balance consists of $238 which will be paid within one
year following the closing with the balance payable two years following
the closing of the acquisition.
{d} The following summarizes the pro forma adjustment for goodwill:
<TABLE>
<S> <C>
Total stock consideration 2,572
Cash 2,500
Present value of additional liabilities resulting from OST
acquisition 658 {c}
Pro forma adjustment for deferred income taxes (200)
-------
Total consideration 5,530
-------
FMV of net assets acquired 1,243
-------
Goodwill $ 4,287
=======
</TABLE>
{e} Amount represents elimination of shareholders' equity.
F-61
<PAGE> 125
OSAGE SYSTEMS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical
-------------------------------------------------- PRO FORMA
H.V. PRO FORMA CONSOLIDATED
OSAGE SOLSOURCE JONES OST ADJ. BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 5,218 $ 1,060 $ 863 $2,329 $ 9,470
COST OF SALES 4,251 834 696 1,839 7,620
------- ------- ----- ------ ------- -------
Gross profit 967 226 167 490 1,850
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,076 458 384 464 137 {a} 2,519
------- ------- ----- ------ ------- -------
OPERATING INCOME (LOSS) (109) (232) (217) 26 (137) (669)
INTEREST EXPENSE - Net 43 (76) 50 1 (16){c} 2
------- ------- ----- ------ ------- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (66) (308) (167) 27 (153) (667)
PROVISION (BENEFIT) FOR INCOME TAXES (39) (45) (17){b} (101)
------- ------- ----- ------ ------- -------
NET INCOME (LOSS) $ (27) $ (263) $(167) $ 27 $ (136) $(566)
======= ======= ===== ====== ======= =======
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ (0.11)
======= =======
SHARES USED IN PER SHARE CALCULATION 4,820 5,353 {d}
======= =======
</TABLE>
F-62
<PAGE> 126
PRO FORMA ADJUSTMENT LEGEND
{a} Amount represents the amortization of goodwill. While the Company has
yet to complete the final purchase accounting entries, based on its
preliminary estimate, the Company believes that any additional
adjustments required will be allocated to goodwill, which is estimated
to be amortized over 15 years.
{b} Amount represents adjustment for income taxes as follows:
<TABLE>
<S> <C>
Current tax provision for OST assuming a 40%
tax rate as OST was taxed as an S Corp. prior to
the acquisition $ 11
Tax benefit of deductible goodwill resulting from the OST
acquisition (28)
-----
Total $ (17)
=====
</TABLE>
{c} Amount represents amortization of discount on liabilities resulting
from the OST acquisition.
{d} Amount represents the number of shares outstanding resulting from the
acquisitions of Solsource, H.V. Jones and OST as if the shares were
outstanding as of January 1, 1998:
<TABLE>
<S> <C>
Shares outstanding as of December 31, 1997 4,820
Solsource shares 150
OST shares 333
Fees paid 50
-----
Total 5,353
=====
</TABLE>
F-63
<PAGE> 127
OSAGE SYSTEMS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------- PRO FORMA
H.V. PRO FORMA CONSOLIDATED
OSAGE SOLSOURCE JONES OST ADJ. BALANCE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 14,191 $ 7,232 $ 5,607 $ 11,938 $ 38,968
COST OF SALES 11,670 5,364 4,195 9,675 30,904
-------- ------- ------- -------- ------- --------
Gross profit 2,521 1,868 1,412 2,263 8,064
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,807 2,474 1,425 1,692 $ 548 {a} 8,946
-------- ------- ------- -------- ------- --------
OPERATING INCOME (LOSS) (286) (606) (13) 571 (548) (882)
INTEREST EXPENSE - Net (10) (60) (51) (2) (62){c} (185)
-------- ------- ------- -------- ------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (296) (666) (64) 569 (610) (1,067)
PROVISION (BENEFIT) FOR INCOME TAXES (3) (211) 119 {b} (95)
-------- ------- ------- -------- ------- --------
NET INCOME (LOSS) $ (293) $ (455) $ (64) $ 569 $ (728) $ (971)
======== ======= ======= ======== ======= ========
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.06) $ (0.18)
======== ========
SHARES USED IN PER SHARE CALCULATION 4,820 5,353 {d}
======== ========
</TABLE>
F-64
<PAGE> 128
PRO FORMA ADJUSTMENT LEGEND
{a} Amount represents the amortization of goodwill. While the Company has
yet to complete the final purchase accounting entries, based on its
preliminary estimate, the Company believes that any additional
adjustments required will be allocated to goodwill, which is estimated
to be amortized over 15 years.
{b} Amount represents adjustment for income taxes as follows:
<TABLE>
<S> <C>
Current tax provision for OST assuming a 40%
tax rate as OST was taxed as an S Corp. prior to
the acquisition $ 228
Tax benefit of deductible goodwill resulting from the OST
acquisition (109)
-----
Total $ 119
=====
</TABLE>
{c} Amount represents amortization of discount on liabilities resulting
from the OST acquisition.
{d} Amount represents the number of shares outstanding resulting from the
acquisitions of Solsource, H.V. Jones and OST as if the shares were
outstanding as of January 1, 1997:
<TABLE>
<S> <C>
Shares outstanding as of December 31, 1997 4,820
Solsource shares 150
OST shares 333
Fees paid 50
-----
Total 5,353
=====
</TABLE>
F-65
<PAGE> 129
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Market Price for the Company's Common Equity.........
Capitalization.......................................
Management's Discussion and Analysis or
Plan of Operation.................................
Business.............................................
Management...........................................
Certain Relationships and Related Transactions.......
Principal Stockholders...............................
Description of Securities...........................
Selling Security Holders.............................
Plan of Distribution.................................
Legal Matters........................................
Experts..............................................
Additional Information...............................
Financial Statements.................................
</TABLE>
4,351,982 SHARES
OSAGE SYSTEMS GROUP, INC.
COMMON STOCK
-------------------
PRELIMINARY
P R O S P E C T U S
-------------------
____________, 1998
<PAGE> 130
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws reflect the
adoption of the provisions of Section 102(b)(7) of the Delaware General
Corporation Law (the "GCL"), which eliminate or limit the personal liability of
a director to the Company or its stockholders for monetary damages for breach of
fiduciary duty under certain circumstances. If the GCL is amended to authorize
corporate action further eliminating or limiting personal liability of
directors, the Certificate of Incorporation provides that the liability of the
director of the Company shall be eliminated or limited to the fullest extent
permitted by the GCL. The Company's Certificate of Incorporation and Bylaws also
provide that the Company shall indemnify any person, who was or is a party to a
proceeding by reason of the fact that he is or was a director, officer, employer
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with such proceeding if he
acted in good faith and in a manner he reasonably believed to be or not opposed
to the best interests of the Company, in accordance with, and to the full extent
permitted by, the GCL. The determination of whether indemnification is proper
under the circumstances, unless made by the Court, shall be determined by the
Board of Directors.
Reference is made to Item 28 for the undertakings of the Registrant
with respect to indemnification of liabilities arising under the Securities Act
of 1933, as amended (the "Act").
II-1
<PAGE> 131
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
<TABLE>
<S> <C>
SEC Registration Fee...........................$ 9,060.04
Printing and Engraving......................... 5,000.00
Accountants' Fees and Expenses................. 25,000.00
Blue Sky Filing Fees and Expenses.............. 5,000.00
NASD Filing Fee................................ --
Listing Fees................................... --
Legal Fees and Expenses........................ 50,000.00
Other Offering Expenses........................ 5,939.96
----------
TOTAL...............$100,000.00
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1997, the Pacific Rim sold $450,000 principal amount of
Senior Secured Notes and warrants to purchase 135,000 shares of Common Stock at
an exercise price of $.10 per share, in a private placement transaction exempt
under Section 4(2). The Warrants were subsequently canceled in December 1997 in
exchange for shares of Common Stock as set forth below:
<TABLE>
<CAPTION>
Amount of Common Stock
8% Senior Exchanged
Name Secured Notes Warrants for Warrants
- ---- ------------- -------- ------------
<S> <C> <C> <C>
Elliot Braun 25,000 7,500 7,200
Robert Brvenik 20,000 6,000 5,800
Bernard Buchwalter 40,000 12,000 11,500
Dune Holdings, Inc. 100,000 30,000 29,250
Bermuda Trust Company, Trustee
for The Elanken Family Trust 65,000 19,500 18,900
Robert Friedman 75,000 22,500 21,500
Anthony Kamin 50,000 15,000 14,650
Jeffrey Markowitz 75,000 22,500 22,100
------- ------- -------
TOTAL 450,000 135,000 130,900
</TABLE>
2. During the period from May 1997 to October 1997, the Pacific
Rim issued in the aggregate 172,183 shares of Common Stock in consideration for
services rendered, release of debt and various other claims which the parties
may have had against the Pacific Rim in transactions exempt under Section 4(2)
of the Act, as a transaction by an issuer not involving a public offering, as
set forth below:
II-2
<PAGE> 132
<TABLE>
<CAPTION>
Number of Shares
Name Common Stock Consideration
- ---- ---------------- -------------
<S> <C> <C>
Paul Jeffrey Adelizzi 10,500 $ 50,000
Burt Ahrens 3,293 $ 32,932
Arthur Anderson 2,267 $ 45,349
Robert Brvenik 5,000 $ 5,000
Bernard Buchwalter 6,500 $ 5,000
Catalina Plastics 3,500 $ 40,826
Mark Dutton 7,500 $ 25,000
Bermuda Trust Company, Trustee
for The Elanken Family Trust 31,100 $ 85,000
Stan Freberg 1,000 (1)
Richard Friedman 5,000 $ 5,000
Anthony Kamin 5,000 $ 5,000
Sy Leslie 3,293 $ 32,932
Alan Livingston 21,730 $ 217,298
Christopher Livingston 2,500 (2)
Jeffrey Markowitz 5,000 $ 5,000
Frank Piazza 2,500 (2)
Jason Rabinovitz 1,500 $ 15,000
R.R. Donnelly & Sons Company 11,000 $ 203,168
Rubin Baum Levin Constant & Friedman 7,500 $ 115,000
Richard Someck 6,500 $ 5,000
Ike Suri 15,000 $ 50,000
Robert Poulson 15,000 $ 15,000
------- ---------
TOTAL 172,183 $ 957,505
- ---------
</TABLE>
(1) In consideration for certain rights to copyright.
(2) In consideration for certain music rights.
3. In November 1997, the Pacific Rim sold 3,185,080 shares of
Common Stock to accredited investors in a private placement transaction exempt
from registration pursuant to Rule 506 of Regulation D. In connection with this
transaction, no brokerage commissions were paid. The following persons purchased
shares at $.10 per share.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
101 Investments, Inc. 5,000
Howard & Shari Borenstein 15,000
Capital Growth Trust 180,000
Clifton Capital 170,000
Cecile T. Coady 10,000
David M. Daniels 200,000
Diversified Investment Fund L.P. 50,000
Jere Dumanic 50,000
Bermuda Trust Company, Trustee
</TABLE>
II-3
<PAGE> 133
<TABLE>
<S> <C>
for the Elanken Family Trust 20,000
El Paso Holdings Ltd. 125,000
Bruce Ginsburg 15,000
Godwin Finance Ltd. 350,000
KAB Investments, Inc. 100,000
Michael Dane Ibsen 20,000
Interbanc Mortgage Services, Inc. 200,000
Steven D. Levin 15,000
Millworth Investments Inc. 175,000
Keith E. Myers 30,000
PRE Investors L.P. 641,692
Steven B. Rosner 190,000
SPH Equities, Inc. 73,388
Chad Shusman 10,000
SPH Investments, Inc. Profit Sharing Plan dtd 12/1/92
f/b/o Stephen P. Harrington 50,000
SPH Investments, Inc. 50,000
Harvey Sternberg 15,000
Synergy Group, Inc. 250,000
West Tropical Investments Corp. 175,000
---------
TOTAL 3,185,080
</TABLE>
- ---------------------
4. In December 1997, the Company sold 122 shares of Series A
$3.00 Convertible Preferred Stock at a purchase price of $30,000 per share to
accredited investors in a private placement transaction exempt from registration
pursuant to Rule 506 of Regulation D. Each Series A Share is convertible into
10,000 shares of Common Stock. In connection with this transaction brokerage
commissions and related fees of $160,000 were paid. The following persons
purchased shares:
<TABLE>
<CAPTION>
Name Shares of Series A Stock
- ---- ------------------------
<S> <C>
Phil Albrecht, Jr. 2
Myles Bass 9.333
Paul Beenan 2
Timothy Paul Buck 1
Bernard Cohen 2
Commonwealth Insurance Company Profit Sharing Plan 1
Frank DeLuca 2
DeSilva & Partners, Inc. Self Directed Retirement Fund 1
Dewey Investment Partnership Ltd. 10
EquiTech, Inc. 1
Hamid Ebrahimi 2
Bermuda Trust Company, Trustee
for The Elanken Family Trust 16.667
Daniel Gooze 4
Bernard Hollander Family Trust 1
Richard Joyce 17
</TABLE>
II-4
<PAGE> 134
<TABLE>
<S> <C>
Eckard Kirsch 1.5
Douglas Martin 1
Morris Asset Management, Inc. .5
Torrey Mosvold 4
MSB Research Inc. 8
Chaim Rajchenbach .5
Moshe Rajchenbach .5
Naomi Treger Rajchenbach 1
Louis Rambler 1
Sherwin and Helen Ray 1
Gary Rein 1
James C. and Patricia J. Rives 3
Ira Saligman 1
Pinchas and Nahma Schwartz 1
Jonathan Shecter 1
Leonard Silvestri 1
Jeff Sokolin 1
John N. Straub Ltd., a Professional Medical Corporation 1
Al Terrell .334
Burton Turk 1
Roderic S. Ware 2
Will's Wei Corp. 16.666
Kevin Wyllie 1
------
TOTAL 122
</TABLE>
5. As of December 22, 1997, the Company issued a total of
1,100,000 shares of Common Stock and 50 shares of Series B $3.00 Convertible
Preferred Stock to the stockholders set forth below in exchange for 100% of the
stock of Osage Computer Group, Inc., an Arizona corporation. The holders of the
Series B Shares have the right at any time to convert the $1.5 million principal
amount of the shares, plus any and all accrued dividends thereon, into shares of
the Company's Common Stock at a conversion rate of $3.00 per share of Common
Stock (the "Conversion Rate"), which is subject to adjustment provided that at
the time of conversion the Company remains in compliance with certain
performance criteria set forth in the Merger Agreement.
<TABLE>
<CAPTION>
Shares of Series B
Name Common Stock Shares Options
- ---- ------------ ------------- -------
<S> <C> <C> <C>
Jack Leadbeater 456,500 20.75 332,000
David Olson 456,500 20.75 332,000
Steven Rigby 55,000 2.5 40,000
Chris Donahue 55,000 2.5 40,000
Dale Van De Vrede Family Trust 55,000 2.5 40,000
Rick Gunther 22,000 1.0 16,000
--------- ----- -------
1,100,000 50 800,000
</TABLE>
II-5
<PAGE> 135
In connection with the Merger, the Company granted 200,000 shares of
Common Stock to Michael Glynn in consideration for his future employment
services. These shares vest 50% after one year of employment and 50% after the
second year of employment. The issuance of such securities was exempt from
registration pursuant to Section 4(2) of the Act, as a transaction by an issuer
not involving a public offering.
6. In January 1998, the Company sold 600,000 shares of Common
Stock at a purchase price of $3.50 per share to accredited investors in a
private placement transaction exempt from registration pursuant to Rule 506 of
Regulation D as set forth below. In connection with this transaction, a
brokerage fee was paid of $126,000 and options to purchase 200,000 shares of
Common Stock at an exercise price of $3.50 per share with a term of three years.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Lancer Partners, L.P. 210,000
Lancer Offshore Inc. 320,000
Lancer Voyager Fund 50,000
Michael Lauer 20,000
-------
TOTAL 600,000
</TABLE>
7. In March 1998, the Company issued 150,000 shares of Common
Stock in consideration of the acquisition of 100% of the outstanding capital
stock of Solsource Computers, Inc. The Company may have an obligation to issue
additional shares of Common Stock pursuant to the Agreement and Plan of Merger
among the Company, Solsource Acquisition Corp. and Solsource Computers, Inc., if
certain performance criteria are met.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Trust of Daniel J. and Mary Vahalla 146,297
Gary Gwin 3,111
Maureen Gaare 296
Daniel Grube 296
-------
TOTAL 150,000
</TABLE>
The issuance of such securities was exempt from registration pursuant
to Rule 506 and Section 4(2) of the Act, as an issuer transaction not involving
a public offering.
8. In March 1998, the Company issued 105.3 shares of Series C
Convertible Preferred Stock to Hugh V. Jones in consideration of the acquisition
of 100% of the outstanding capital stock of HV Jones, Inc. ("Jones"). The 105.3
shares of Series C Convertible Preferred Stock convert into Common Stock during
the next four quarters at a conversion rate equal to the lower of $6.87 or a 33%
premium over the average closing price of the Company's Common Stock for the
(10) trading days prior to each date of conversion. Additional earn-out shares
may be issued if Jones achieves certain performance targets.
II-6
<PAGE> 136
The issuance of such securities was exempt from registration pursuant to Rule
506 and Section 4(2) of the Act, as an issuer transaction not involving a public
offering.
9. On April 24, 1998, the Company issued 333,334 shares of Common Stock
to Mr. O. Jack Anderson in connection with the acquisition of 100% of the
outstanding capital stock of Open System Technologies, Inc. In conjunction with
the acquisition, the Company agreed to issue 50,000 shares to an investment
banking advisor to the Company in consideration for services provided in
identifying the target company and advising the Company in connection with the
acquisition. The issuance of such securities was exempt from registration
pursuant to Rule 506 and Section 4(2) of the Act, as an issuer transaction not
involving a public offering.
10. In May 1998, the Company sold 700,000 shares of Common Stock at a
purchase price of $3.50 per share to accredited investors in a private placement
transaction exempt from registration pursuant to Section 4(2) of the Act and
Rule 506 of Regulation D as set forth below. In connection with this
transaction, a brokerage fee consisting of a cash commission of $147,000 was
paid.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Lancer Partners L.P. 200,000
Lancer Voyager Fund 100,000
Lancer Offshore Inc. 400,000
-------
TOTAL 700,000
</TABLE>
11. In May 1998, the Company sold 175,000 shares of Common Stock at a
purchase price of $4.25 per share to Will's Wei Corp., an accredited investor in
a private placement transaction exempt from registration pursuant to Section
4(2) of the Act and Rule 506 of Regulation D. In connection with this
transaction, a brokerage fee was paid consisting of a cash commission of $44,625
and warrants to purchase 25,000 shares of the Company's Common Stock at an
exercise price of $4.25 per share.
12. In May 1998, the Company sold 235,294 shares of Common Stock and
warrants to purchase 100,000 shares of Common Stock, for an aggregate purchase
price of $1 million to Founders Partners IV LLC, an accredited investor, in a
private placement transaction exempt from registration pursuant to Section 4(2)
of the Act and Rule 506 of Regulation D. In connection with this transaction, a
brokerage fee was paid consisting of a cash commission of $20,000 and warrants
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$4.25 per share.
ITEM 27. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated November 5, 1997 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., PR 2.1 to Registrant's Current Report on
Acquisition Corp. and Osage Computer Group, Inc. Form 8-K dated December 22, 1997 (the
"December 22, 1997 Form 8-K")
2.2 First Amendment to Agreement and Plan of Merger dated Incorporated by reference to Exhibit
December 19, 1997 2.2 to the December 22, 1997 Form 8-K
2.3 Certificate of Merger of Osage Computer Group, Inc. Incorporated by reference to Exhibit
into PR Acquisition Corp. (a wholly-owned subsidiary 2.3 to the December 22, 1997 Form 8-K
of Pacific Rim Entertainment, Inc.)
2.4 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., 2.4 to Registrant's Current Report on
Solsource Acquisition Corp. and Solsource Computers, Form 8-K dated March 27, 1998 (the
Inc. "March 27, 1998 Form 8-K").
2.5 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., Jones 2.5 to the March 27, 1998
Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.6 Amendment to the Agreement and Plan of Merger dated Incorporated by reference to Exhibit
by and among Osage Systems Group, 2.6 to the March March 17, 1998 Form 8-K.
27, 1998 Inc., Jones Acquisition Corp. and H.V.
Jones, Inc.
2.7 Certificate of Merger of Solsource Computers, Inc. Incorporated by reference to Exhibit
into Solsource Acquisition 2.7 to the March 27,
</TABLE>
II-7
<PAGE> 137
<TABLE>
<S> <C> <C>
Corp. 1998 Form 8-K.
2.8 Certificate of Merger of H.V. Jones, Inc. into Jones Incorporated by reference to Exhibit
Acquisition Corp. 2.8 to the March 27, 1998 Form 8-K.
2.9 Stock Purchase Agreement by and between Incorporated by reference to Exhibit 2.9
Osage Systems Group, Inc. and O. Jack Anderson to Registrant's Current Report on Form 8-K
dated May 8, 1998 (the "May 8, 1998 Form 8-K").
3.1 Certificate of Incorporation Incorporated by reference to Exhibit
3.1 to Amendment No. 1 to the
Registrant's Registration Statement
on Form S-1 (Reg. No. 33-69380) filed
November 2, 1993 ("Amendment No. 1 to
Form S-1")
3.2 Certificate of Designation, Preferences and Rights of Exhibit 3.1 to Registrant's Current
Class A Non-Voting Convertible Preferred Stock Report on Form 8-K dated March 11,
1998 (the "March 11, 1998 Form 8-K")
3.3 Certificate of Amendment of Certificate of Incorporated by reference to Exhibit
Designation, Preferences and Rights of Class A 3.2 to the March 11, 1998 Form 8-K
Non-Voting Convertible Preferred Stock
3.4 Certificate of Restoration and Revival of Certificate Incorporated by reference to Exhibit
of Incorporation 3.3 to the March 11, 1998 Form 8-K
3.5 Certificate of Amendment to the Certificate of Incorporated by reference to Exhibit
Incorporation dated November 21, 1997 3.4 to the March 11, 1998 Form 8-K
3.6 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series A $3.00 Convertible Preferred Stock 3.3 to the December 22, 1997 Form 8-K
3.7 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series B $3.00 Convertible Preferred Stock 3.4 to the December 22, 1997 Form 8-K
3.8 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series C Convertible Preferred Stock 3.8 to the March 27, 1998 Form 8-K
3.9 Bylaws Incorporated by reference to
</TABLE>
II-8
<PAGE> 138
<TABLE>
<S> <C> <C>
Exhibit 3.2 to Amendment No. 1 to
Form S-1
4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit
4.1 to Amendment No. 1 to Form S-1
4.2 Form of Warrant Incorporated by reference to Exhibit
1.2 to Amendment No. 1 to Form S-1
4.3 Form of Warrant Certificate Incorporated by reference to Exhibit
4.2 to Amendment No. 1 to Form S-1
4.4 Form of 8% Senior Secured Note Incorporated by reference to Exhibit
4 to the Registrant's Quarterly
Report on Form 10-QSB for the period
ended June 30, 1997
4.5 Specimen of Series A $3.00 Convertible Preferred Stock Incorporated by reference to Exhibit
4.1 to the December 22, 1997 Form 8-K
4.6 Specimen of Series B $3.00 Convertible Preferred Stock Incorporated by reference to Exhibit
4.2 to the December 22, 1997 Form 8-K
4.7 Specimen of Series C Convertible Preferred Stock Incorporated by reference to Exhibit
4.7 to the March 27, 1997 Form 8-K
5.1 Opinion of Buchanan Ingersoll Professional Corporation Previously filed.
9.1 Form of Voting Trust Agreement Incorporated by reference to Exhibit
9.1 to the December 22, 1997 Form 8-K
10.1 1993 Stock Option Plan Incorporated by reference to Exhibit
10.4 to the Registration Statement on
Form S-1 (Reg. No. 33-69380) filed
September 24, 1993 ("Form S-1")
</TABLE>
II-9
<PAGE> 139
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 1993 Outside Director Stock Option Plan Incorporated by reference to Exhibit
10.5 to Form S-1
10.3 Form of Stock Option Incorporated by reference to Exhibit
10.1 to December 22, 1997 Form 8-K
10.4 Form of Employment Agreement of Jack Leadbeater Incorporated by reference to Exhibit
10.2 to December 22, 1997 Form 8-K
10.5 Form of Employment Agreement of David Olson Incorporated by reference to Exhibit
10.3 to December 22, 1997 Form 8-K
10.6 Form of Employment Agreement of Michael Glynn Incorporated by reference to Exhibit
10.4 to December 22, 1997 Form 8-K
10.7 Option to Purchase 100,000 Shares Granted to Michael Incorporated by reference to Exhibit
Glynn 10.5 to December 22, 1997 Form 8-K
10.8 Confidential Private Placement Memorandum dated Incorporated by reference to Exhibit
November 24, 1997 relating to the offer and sale of 10.6 to December 22, 1997 Form 8-K
$3,660,000 of Series A Preferred Stock
10.9 Supplement No. 1 to Confidential Private Placement Incorporated by reference to Exhibit
Memorandum dated November 24, 1997 relating to the 10.7 to December 22, 1997 Form 8-K
offer and sale of $3,660,000 of Series A Preferred
Stock
10.10 Form of Employment Agreement with John Iorillo Incorporated by reference to Exhibit
10.10 of the March 27, 1998 Form 8-K
10.11 Employment Agreement of Daniel J. Vahalla Incorporated by reference to Exhibit
10.11 of the March 27, 1998 Form 8-K
10.12 Employment Agreement Hugh V. Jones Incorporated by reference to Exhibit
10.12 of the March 27, 1998 Form 8-K
</TABLE>
II-10
<PAGE> 140
<TABLE>
<S> <C> <C>
10.13 Registration Rights Agreement by and among Pacific Incorporated by reference to Exhibit
Rim Entertainment, Inc. and the Trust of Daniel J. 10.13 of the March 27, 1998 Form 8-K
and Mary G. Vahalla, Gary Gwin, Maureen Gaare and
Daniel Grube
10.14 Registration Rights Agreement by and between Pacific Incorporated by reference to Exhibit
Rim Entertainment, Inc. and Hugh V. Jones 10.14 of the March 27, 1998 Form 8-K
10.15 Consulting Agreement by and between Osage Systems Incorporated by reference to Exhibit 10.15
Group, Inc. and O. Jack Anderson of the May 8, 1998 Form 8-K
10.16 Noncompetition Agreement by and between Osage Incorporated by reference to Exhibit 10.16
Systems Group, Inc. and O. Jack Anderson of the May 8, 1998 Form 8-K
10.17 Registration Rights Agreement by and between Osage Incorporated by reference to Exhibit 10.17
Systems Group, Inc. and O. Jack Anderson of the May 8, 1998 Form 8-K
21 Subsidiaries of the Registrant Previously filed
23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under Exhibit 5.1
23.2 Consent of Deloitte & Touche LLP Filed herewith
23.3 Consent of Pearce, Gray & Rudd Filed herewith
23.4 Consent of KPMG Peat Marwick LLP Filed herewith
23.5 Consent of Clark, Shaffer & Hackett Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to: (i) include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement; and (iii) include any additional
or changed material information on the plan of distribution.
2. For the purpose of determining liability under the Securities
Act of 1933, as amended, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration
any of the securities being registered which remain unsold at the termination of
the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action,
II-11
<PAGE> 141
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
5. For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
6. For purposes determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
as the initial bona fide offering thereof.
II-12
<PAGE> 142
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized Amendment No. 2 to
this Registration Statement to be signed on its behalf by the undersigned, in
the City of Phoenix, State of Arizona on June 8, 1998.
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack R. Leadbeater
------------------------------------------------
Jack R. Leadbeater
Chairman of the Board and Chief Executive
Officer
By /s/ John Iorillo
------------------------------------------------
John Iorillo
Chief Financial Officer/Principal Accounting
Officer and Director
In accordance with the requirements of the Securities Act of 1933,
Amendment No. 2 to this Registration Statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack. R. Leadbeater
----------------------- Chairman, Chief Executive June 8, 1998
Jack R. Leadbeater Officer and Director
</TABLE>
<PAGE> 143
<TABLE>
<S> <C> <C>
/s/ David S. Olson(*)
--------------------- President, Chief Operating June 8, 1998
David S. Olson Officer and Director
/s/ Michael G. Glynn(*)
--------------------- Executive Vice President and June 8, 1998
Michael G. Glynn Director
/s/ John Iorillo(*)
--------------------- Chief Financial Officer and June 8, 1998
John Iorillo Director
/s/ Andrew P. Panzo(*)
--------------------- Director June 8, 1998
Andrew P. Panzo
</TABLE>
(*) Executed by Jack R. Leadbeater pursuant to Power of Attorney.
<PAGE> 144
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit No. Description
- ----------- -----------
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Pearce, Gray & Rudd
23.4 Consent of Clark, Shaffer & Hackett
23.5 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-49029 of Osage Systems Group, Inc. on Form SB-2 of our report dated February
20, 1998, except for certain information in Note 1 to the consolidated financial
statements, as to which the date is March 10, 1998, and certain information in
Note 10 to the consolidated financial statements, as to which the date is March
17, 1998 on our audit of the consolidated financial statements of Osage Systems
Group, Inc. as of December 31, 1997 and for the year then ended; our report
dated April 24, 1998 on the audits of the financial statements of Solsource
Computers, Inc. as of January 31, 1998 and 1997 and for the years then ended;
and our report dated April 10, 1998 on the audits of the financial statements of
H.V. Jones, Inc. as of December 31, 1997 and 1996 and for the years then ended,
all appearing in the Prospectus, which is a part of such Registration Statement,
and to the reference to us under the headings "Summary Consolidated Financial
Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 8, 1998
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-49029 of Osage Systems Group, Inc. on Form SB-2 of our report dated
March 24, 1997. We understand that certain presentations have been restated for
purposes of this Registration Statement to be consistent with successor
auditors' presentation.
We also consent to the reference to us under the heading "Experts" appearing in
such prospectus.
PEARCE, GRAY & RUDD
Mesa, Arizona
June 8, 1998
<PAGE> 1
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-49029 of Osage Systems Group, Inc. on Form SB-2, of our report dated
January 16, 1998 on the financial statements of Open System Technologies, Inc.,
appearing in the Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Clark, Schaefer, Hackett & Co.
- ----------------------------------------
CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
June 8, 1998
<PAGE> 1
Exhibit 23.5
[KPMG PEAT MARWICK LLP LETTERHEAD]
The Board of Directors
Osage Systems Group, Inc.
We consent to the use of our report included herein.
/s/ KPMG Peat Marwick LLP
Miami, Florida
June 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,498,336
<SECURITIES> 0
<RECEIVABLES> 4,517,301
<ALLOWANCES> 33,000
<INVENTORY> 517,479
<CURRENT-ASSETS> 8,086,721
<PP&E> 563,694
<DEPRECIATION> 271,383
<TOTAL-ASSETS> 12,719,326
<CURRENT-LIABILITIES> 5,771,362
<BONDS> 0
0
22,465
<COMMON> 55,700
<OTHER-SE> 6,573,422
<TOTAL-LIABILITY-AND-EQUITY> 6,651,587
<SALES> 5,641,932
<TOTAL-REVENUES> 5,641,932
<CGS> 4,580,010
<TOTAL-COSTS> 4,580,010
<OTHER-EXPENSES> 1,222,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,550)
<INCOME-PRETAX> (125,516)
<INCOME-TAX> (39,000)
<INCOME-CONTINUING> (86,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,516)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
