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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended December 31, 1997
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ________________ __, ____
to ___________________ __, ____
Commission File Number: 0-22808
OSAGE SYSTEMS GROUP, INC.
(Name of small business issuer in its charter)
Delaware 95-4374983
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (602) 274-1299
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $.01 par value
(Title of Class)
Check whether the Registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. (1) Yes X No (2) Yes X No
--- --- --- ---
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Registrant's revenues for the year ended December 31, 1997: $14,191,203.
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant, as of March 26, 1998, was approximately
$19,848,289 based upon the closing bid price of the Registrant's Common Stock
upon The OTC Bulletin Board of $6.87 per share of Common Stock on such date. See
Footnote (1) below.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the Registrant's sole class
of Common Stock as of March 26, 1998 was 5,570,000 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE:
None.
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(1) The information provided shall in no way be construed as an
admission that any person whose holdings are excluded from the
figure is not an affiliate or that any person whose holdings are
included is an affiliate and any such admission is hereby
disclaimed. The information provided is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT When used in this
Annual Report on Form 10-KSB, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "intend," and similar expressions are intended to
identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
regarding events, conditions and financial trends which may affect the Company's
future plans of operations, business strategy, operating results and financial
position. Such statements are not guarantees of future performance and are
subject to risks and uncertainties and actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. Such factors include, among others: (i) risks related to the Company's
acquisition strategy; (ii) the Company's ability to secure additional financing
to implement its acquisition strategy; (iii) the uncertainty of future trading
prices for the Company's Common Stock and the impact such trading prices may
have upon the Company, in general, and its acquisition strategy; (iv) the
uncertain effect of the additional dilution associated with the future issuance
of outstanding convertible securities, as well as, the dilution associated
with the Company's acquisition strategy; (v) the Company's dependence on certain
large customers and suppliers; (vi) the Company's dependence on certain key
personnel; (vii) the competitive market for technical personnel and; (viii) the
Company's ability to adapt to certain Year 2000 issues. Additional factors are
described in the Company's other public reports and filings with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Osage Systems Group, Inc. (the "Company") was originally
incorporated as "Pacific Rim Entertainment, Inc." under the laws of Delaware in
1992. From 1992 through 1996, the Company had been engaged principally in the
animated film production business. After several years of losses following its
initial public offering in 1993, the Company suspended its business operations
in 1996 and remained inactive while it sought to identify a strategic business
combination with a private operating company. The Company acquired, and
thereafter, assumed the historic business of Osage Computer Group, Inc.
("Osage") in a merger transaction (the "Merger") that became effective on
December 22, 1997. Osage had been a provider of network computing solutions
since 1989.
Through its operating subsidiaries, Osage, Solsource Computers,
Inc. ("Solsource") and H.V. Jones, Inc. ("HV Jones"), 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
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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 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.
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.
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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.
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
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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 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 and HV Jones. 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.
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 Solsource acquisition was completed for a purchase price of
$1.1 million; payable $200,000 in cash and $900,000 in newly issued common
shares priced at $6.00
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per share. Additional earn-out shares may be issued if Solsource achieves
certain performance targets.
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.
On a proforma basis, the Company would have realized net sales of
over $27 million during 1997 had both 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 and
Texas.
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 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
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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; 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
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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 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.
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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.
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.
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
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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.
PERSONNEL
As of March 26, 1998, the Company employed 70 persons, of whom 31
were engaged in sales and marketing, 21 were engaged in providing the Company's
technical services and 18 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. The Company considers relations with its employees
to be good.
ITEM 2. DESCRIPTION OF PROPERTIES.
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, California. The HV Jones operations occupy approximately 5,900 square
feet of leased office facilities in Houston, Texas and Austin, Texas. The
Company believes that it has sufficient space for its current and anticipated
near-term needs.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to an Information Statement dated October 31, 1997,
effective as of November 21, 1997, the Company amended its Certificate of
Incorporation to effect a reverse split of its Common Stock.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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
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<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 (through March 26, 1998) $6.87 $4.00
</TABLE>
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(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.
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The last reported bid price of the Common Stock was $6.87 as
reported on the OTC Bulletin Board on March 26, 1998.
RECORD HOLDERS
As of March 26, 1998, there were approximately 192 holders of
record of the Common Stock. Based upon depository requests in connection with
the distribution of an Information Statement dated February 17, 1998, the
Company believes the number of beneficial owners of its Common Stock exceeds
900.
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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.
RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1997, the Company 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 Company
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 Company 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:
14
<PAGE> 16
<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 Company 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
for The Elanken Family Trust 20,000
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
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
Eckard Kirsch 1.5
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C>
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>
17
<PAGE> 19
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 Section
4(2) of the Act, as a transaction of issuer 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
18
<PAGE> 20
performance targets. The issuance of such securities was exempt from
registration pursuant to Section 4(2) of the Act, as a transaction of issuer not
involving a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
OVERVIEW
Osage became publicly held by virtue of the Merger into a
wholly-owned subsidiary of the Company on December 22, 1997. The Company then
operating under the name "Pacific Rim Entertainment, Inc." 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, the Company assumed the
continuing operations of Osage and on March 10, 1998, changed its name to "Osage
Systems Group, Inc." Since, as a result of the Merger, the former stockholders
of Osage acquired a controlling interest in the Company, 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 the Company.
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 "ITEM 1.
DESCRIPTION OF BUSINESS - ACQUISITION STRATEGY."
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
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
Diluted $ .02 $ .01 $ (.06)
============= ============ ============
$ .02 $ .01 $ (.06)
============= ============ ============
</TABLE>
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.
The Company's net sales are expected to increase during 1998 as
the Company implements its acquisition strategy. Towards this end, the Company
recently completed the acquisition of Solsource and HV Jones and entered into
letters of intent to acquire two (2) additional companies. There can be no
assurances that the acquisitions subject to the letters of intent will be
completed since both letters of intent are preliminary in nature and subject to
due diligence reviews and other conditions to closing. During 1997, Solsource
and HV Jones realized net sales of $7.3 million and $5.6 million, respectively.
On a proforma basis, the Company would have realized net sales of over $27
million during 1997 had both of these acquisitions occurred as of January 1,
1997.
20
<PAGE> 22
The Company's acquisition strategy relies primarily upon
identifying target companies that fit within the Company's acquisition criteria
and having sufficient financing available to complete its planned acquisitions.
Although the Company has sufficient financing available to complete its pending
acquisition targets, 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 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.
21
<PAGE> 23
As part of the Merger consideration, the Company 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, and 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 1997,
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 probable of 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.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited
quarterly financial information for each of the eight (8) quarters through
December 31, 1997. 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 10-KSB.
22
<PAGE> 24
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1996 1996 1996 1996 1997
---- ---- ---- ---- ----
<S> <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
Gross profit 309,738 377,343 636,068 890,455 494,422
Selling, general and
administrative expenses 283,830 299,331 433,371 1,126,442 439,261
Income (loss) from operations 25,908 78,012 202,697 (235,987) 55,161
Interest expense (2,019) (12,192) (7,976) (4,043) (2,303)
Provision (benefit) for income taxes 9,464
Net income (loss) $ 23,889 $ 65,820 $ 194,721 $ (249,494) $ 52,858
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
June 30, Sept. 30, Dec. 31,
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 3,036,574 $ 3,273,151 $ 5,726,298
Gross profit 598,605 678,665 749,445
Selling, general and
administrative expenses 447,510 609,242 1,311,327
Income (loss) from operations 151,095 69,423 (561,882)
Interest expense (359) (382) (6,687)
Provision (benefit) for income taxes (3,000)
Net income (loss) $ 150,736 $ 69,041 $ (565,569)
</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 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 billings and changes in the Company's billing and 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 year ended
December 31, 1996, 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.
23
<PAGE> 25
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.
The working capital of the Company continued to increase during
the first quarter of 1998 as the Company sold 600,000 shares of Common Stock in
a private placement transaction at a purchase price of $3.50 per share, which
resulted in net proceeds to the Company of $1,974,000, after paying commissions
of $126,000.
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.
The Company believes that the Company's 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 (See "ITEM 1. DESCRIPTION OF BUSINESS - 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
obtain 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, its
growth could be limited unless it is able to obtain additional capital through
debt or equity financings.
The Company has recently initiated its acquisition program with
the acquisition of Solsource and HV Jones. See "ITEM 1. DESCRIPTION OF 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.
24
<PAGE> 26
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.
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 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 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. SFAS 131 may require additional
disclosures and will be effective beginning January 1, 1998.
25
<PAGE> 27
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements of the Company for the years ended December
31, 1997 and 1996, and specific supplementary financial information are included
within Item 13(A) and 13(B) of this Report and may be found at pages F-1 through
F-14.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no matters to be reported hereunder.
26
<PAGE> 28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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.
27
<PAGE> 29
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
28
<PAGE> 30
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.
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.
ITEM 10. 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 Executive Officer 1996 $ 49,417 N/A N/A $ 236,335
1995 -- $ 55,000
DAVID S. OLSON 1997 $ 89,967(3) -0- 351,057(2) $ 261,463
Director, Chief Operating Officer and President 1996 $ 64,417 N/A N/A $ 236,335
1995 $ 25,000 $ 55,000
MICHAEL G. GLYNN 1997 -(4)- -0-(5) 100,000(6) -0-
Director and Executive Vice President 1996 N/A N/A N/A N/A
STEVEN B. ROSNER 1997 -0- $ 100(7) -0- $ 100,000(8)
Former President, Secretary and Director 1996 -0- -0- -0- -0-
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."
29
<PAGE> 31
(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 the Company.
(8) Mr. Rosner had been the President and a director of the Company
since January 1997. He resigned his position as an officer of the
Company effective upon the Merger, and resigned as a director on
March 27, 1998. While the directors and executive officers of the
Company 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 the Company's executive
offices, reimbursement of certain expenses on behalf of the
Company and for consulting services by Mr. Rosner in connection
with the financial and administrative reorganization of the
Company. See "ITEM 12. 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. See "SUMMARY
COMPENSATION TABLE."
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.
30
<PAGE> 32
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, the Company 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 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.
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
$3.00 per share. Such options have a term of two years and vest at various rates
during such period in accordance with the terms of the respective option
agreements.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Based solely on its review of copies of forms filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934, and written
representations from certain reporting persons, the Company believes that during
fiscal 1997 all reporting persons timely complied with all filing requirements
applicable to them, except for certain reports, which include: (i) a Form 3, and
Forms 4 and 5 for Mr. Rosner; and (ii) a Form 3 and Forms 4 and 5 for each of
Messrs. Bernard Buchwalter, Ike Suri and Richard Someck. Messrs. Buchwalter,
Suri and Someck resigned as directors prior to or in connection with the Merger.
31
<PAGE> 33
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
----------------------------
Individual Grants
----------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Option/SARs Employees in Base Price Expiration
Name Granted(#)(1) Fiscal Year ($/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 In-
Options/SARs 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.
32
<PAGE> 34
(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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 26, 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 (1) Shares
- ---------------- ----------------- ------
<S> <C> <C>
Jack R. Leadbeater ................................. 683,057(2) 11.8%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
David S. Olson ..................................... 683,057(2) 11.8%
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 .................................... 11,000(5) (*)
2 Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Godwin Finance Ltd. ................................ 350,000 6.3%
Whitehill House
Newby Road Industrial Estate
Newby Road
Hazel Grove, Stockport SK7 5DA, England
Steven B. Rosner ................................... 617,850(6) 11.1%
1220 Mirabeau Lane
Gladwynne, PA 19035
Michael Lauer ...................................... 800,000(7) 14.36%
</TABLE>
33
<PAGE> 35
<TABLE>
<S> <C> <C>
375 Park Avenue, Suite 2006
New York, NY 10152
All Directors and Officers as a group (5 persons) .. 1,377,114 22.86%
</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 5,570,000 shares of Common Stock outstanding as
of March 26, 1998.
(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
"ITEM 11. 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) Includes direct ownership of 40,000 shares and investment control
of 760,000 shares through Mr. Lauer's role as Managing Member of
Lancer Management Group LLC which is the Manager of Lancer
Offshore, Inc. (420,000 shares) and Lancer Voyager Fund (70,000),
and Lancer Management Group, II, which is the Manager of Lancer
Partners, L.P. (270,000 shares). Mr. Lauer acts as Investment
Manager of each of these funds.
(*) 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
34
<PAGE> 36
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.
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 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.
ITEM 12. 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 "ITEM 10. EMPLOYMENT ARRANGEMENTS."
CONSULTING SERVICES
Mr. Rosner received $100,000 during the fiscal year ended
December 31, 1997 in consideration for the provision of the Company's executive
offices prior to the Merger, reimbursement of certain expenses on behalf of the
Company and for consulting services by Mr. Rosner in connection with the
financial and administrative reorganization of the Company.
SALE OF COMMON STOCK
During November 1997, the Company 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
35
<PAGE> 37
sole general partner, purchased in the aggregate 691,692 shares of Common Stock
at a purchase price of $69,169. See "ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
36
<PAGE> 38
PART IV
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements filed as part of this Report: Page
Report of Deloitte & Touche LLP..............................................F-1
Report of Pearce, Gray & Rudd................................................F-2
Consolidated Balance Sheets December 31, 1997 and 1996....................F-3
Consolidated Statements of Operations Years
Ended December 31, 1997 and 1996.........................................F-4
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996...................................F-5
Consolidated Statements of Cash Flows Years
Ended December 31, 1997 and 1996.........................................F-6
Notes to Financial Statements..............................................F-7
(b) 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 Incorporated by reference to
November 5, 1997 by and among Pacific Rim Exhibit 2.1 to Registrant's
Entertainment, Inc., PR Acquisition Corp. Current Report on Form 8-K
and Osage Computer Group, Inc. dated December 22, 1997 (the
"December 22, 1997 Form 8-
K")
2.2 First Amendment to Agreement and Plan of Incorporated by reference to
Merger dated December 19, 1997 Exhibit 2.2 to the December
22, 1997 Form 8-K
2.3 Certificate of Merger of Osage Computer Incorporated by reference to
Group, Inc. into PR Acquisition Corp. (a Exhibit 2.3 to the December
wholly-owned subsidiary of Pacific Rim 22, 1997 Form 8-K
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C> <C>
Entertainment, Inc.)
2.4 Agreement and Plan of Merger dated Incorporated by reference to
February 27, 1998 by and among Pacific Rim Exhibit 2.4 to Registrant's
Entertainment, Inc., Solsource Acquisition Current Report on Form 8-K
Corp. and Solsource Computers, Inc. dated March 27, 1998 (the
"March 27, 1998 Form 8-K").
2.5 Agreement and Plan of Merger dated Incorporated by reference to
February 27, 1998 by and among Pacific Rim Exhibit 2.5 to the March 27,
Entertainment, Inc., Jones Acquisition Corp. 1998 Form 8-K.
and H.V. Jones, Inc.
2.6 Amendment to the Agreement and Plan of Incorporated by reference to
Merger dated March 17, 1998 by and among Exhibit 2.6 to the March 27,
Osage Systems Group, Inc., Jones 1998 Form 8-K.
Acquisition Corp. and H.V. Jones, Inc.
2.7 Certificate of Merger of Solsource Incorporated by reference to
Computers, Inc. into Solsource Acquisition Exhibit 2.7 to the March 27,
Corp. 1998 Form 8-K.
2.8 Certificate of Merger of H.V. Jones, Inc. into Incorporated by reference to
Jones Acquisition Corp. Exhibit 2.8 to the March 27,
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 Exhibit 3.1 to Registrant's
Rights of Class A Non-Voting Convertible Current Report on Form 8-K
Preferred Stock dated March 11, 1998 (the
"March 11, 1998 Form 8-K")
3.3 Certificate of Amendment of Certificate of Incorporated by reference to
Designation, Preferences and Rights of Class Exhibit 3.2 to the March 11,
A Non-Voting Convertible Preferred Stock 1998 Form 8-K
3.4 Certificate of Restoration and Revival of Incorporated by reference to
</TABLE>
38
<PAGE> 40
<TABLE>
<S> <C> <C>
Certificate of Incorporation Exhibit 3.3 to the March 11,
1998 Form 8-K
3.5 Certificate of Amendment to the Certificate Incorporated by reference to
of Incorporation dated November 21, 1997 Exhibit 3.4 to the March 11,
1998 Form 8-K
3.6 Certificate of Designation, Preferences and Incorporated by reference to
Rights of Series A $3.00 Convertible Exhibit 3.3 to the December
Preferred Stock 22, 1997 Form 8-K
3.7 Certificate of Designation, Preferences and Incorporated by reference to
Rights of Series B $3.00 Convertible Exhibit 3.4 to the December
Preferred Stock 22, 1997 Form 8-K
3.8 Certificate of Designation, Preferences and Incorporated by reference to
Rights of Series C Convertible Preferred Exhibit 3.8 to the March 27,
Stock 1998 Form 8-K
3.9 Bylaws Incorporated by reference to
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 Incorporated by reference to
Preferred Stock Exhibit 4.1 to the December
22, 1997 Form 8-K
</TABLE>
39
<PAGE> 41
<TABLE>
<S> <C> <C>
4.6 Specimen of Series B $3.00 Convertible Incorporated by reference to
Preferred Stock Exhibit 4.2 to the December
22, 1997 Form 8-K
4.7 Specimen of Series C Convertible Preferred Incorporated by reference to
Stock Exhibit 4.7 to the March 27,
1997 Form 8-K
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")
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 Incorporated by reference to
Leadbeater Exhibit 10.2 to December 22,
1997 Form 8-K
10.5 Form of Employment Agreement of David Incorporated by reference to
Olson Exhibit 10.3 to December 22,
1997 Form 8-K
10.6 Form of Employment Agreement of Michael Incorporated by reference to
Glynn Exhibit 10.4 to December 22,
1997 Form 8-K
10.7 Option to Purchase 100,000 Shares Granted Incorporated by reference to
to Michael Glynn Exhibit 10.5 to December 22,
1997 Form 8-K
</TABLE>
40
<PAGE> 42
<TABLE>
<S> <C> <C>
10.8 Confidential Private Placement Memorandum Incorporated by reference to
dated November 24, 1997 relating to the offer Exhibit 10.6 to December 22,
and sale of $3,660,000 of Series A Preferred 1997 Form 8-K
Stock
10.9 Supplement No. 1 to Confidential Private Incorporated by reference to
Placement Memorandum dated November 24, Exhibit 10.7 to December 22,
1997 relating to the offer and sale of 1997 Form 8-K
$3,660,000 of Series A Preferred Stock
10.10 Form of Employment Agreement with John Incorporated by reference to
Iorillo 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
10.13 Registration Rights Agreement by and among Incorporated by reference to
Pacific Rim Entertainment, Inc. and the Trust Exhibit 10.13 of the March 27,
of Daniel J. and Mary G. Vahalla, Gary 1998 Form 8-K
Gwin, Maureen Gaare and Daniel Grube
10.14 Registration Rights Agreement by and Incorporated by reference to
between Pacific Rim Entertainment, Inc. and Exhibit 10.14 of the March 27,
Hugh V. Jones 1998 Form 8-K
21 Subsidiaries of the Registrant Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
41
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements of filing on Form 10-KSB, and has duly caused this
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized on the 30th day of March, 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
Pursuant to the requirements of the Securities Exchange Act of
1934, this Form 10-KSB has been signed by the following persons in the capacity
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jack R. Leadbeater Chairman, Chief Executive March 30, 1998
- ----------------------- Officer and
Jack R. Leadbeater Director
/s/ David S. Olson President, Chief Operating March 30, 1998
- ----------------------- Officer and
David S. Olson Director
/s/ Michael G. Glynn Executive Vice President March 30, 1998
- ----------------------- and Director
Michael G. Glynn
/s/ John Iorillo Chief Financial Officer March 30, 1998
- ----------------------- and Director
John Iorillo
/s/ Andrew P. Panzo Director March 30, 1998
- -----------------------
Andrew P. Panzo
</TABLE>
<PAGE> 44
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-1
<PAGE> 45
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> 46
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,576,323 $ 564
Accounts receivable - net of allowance for doubtful accounts of
$15,000 in 1997 1,974,496 1,939,347
Inventories 6,672 2,190
Prepaid expenses and other current assets 25,728 45,534
Deferred income taxes (Note 8) 210,000
----------- -----------
Total current assets 4,793,219 1,987,635
FURNITURE AND EQUIPMENT - Net (Note 3) 86,881 81,586
OTHER ASSETS 27,000
----------- -----------
TOTAL $ 4,880,100 $ 2,096,221
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,948,802 $ 1,639,682
Accrued expenses 507,395 82,067
Deferred income taxes (Note 8) 55,000
Income taxes payable (Note 8) 262,182
----------- -----------
Total current liabilities 2,718,379 1,776,749
----------- -----------
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
(Deficit) retained earnings (675,925) 117,009
----------- -----------
Total stockholders' equity 2,161,721 165,209
----------- -----------
TOTAL $ 4,880,100 $ 2,096,221
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 47
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 14,191,203 $ 9,908,379
COST OF SALES 11,670,066 7,694,775
------------ ------------
Gross profit 2,521,137 2,213,604
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,807,340 2,142,974
------------ ------------
OPERATING (LOSS) INCOME (286,203) 70,630
INTEREST EXPENSE - Net (9,731) (26,230)
------------ ------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (295,934) 44,400
(BENEFIT) PROVISION FOR INCOME TAXES (Note 8) (3,000) 9,464
------------ ------------
NET (LOSS) INCOME $ (292,934) $ 34,936
============ ============
(LOSS) INCOME PER COMMON SHARE -
BASIC AND DILUTED (Note 1) $ (0.06) $ 0.01
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
(Note 1) 4,820,000 4,868,200
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 48
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL RETAINED TOTAL
---------------- --------------- --------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,916,400 $48,200 $ 83,027 $ 131,227
Purchase and retirement of
treasury shares ........... (96,400) (954) (954)
Net income .................. 34,936 34,936
--------- ------- ----- ------- ------ ------ ---------- --------- -----------
BALANCE, DECEMBER 31, 1996 4,820,000 48,200 117,009 165,209
Acquisition of Pacific Rim
Entertainment, Inc.
(Note 1) .................. 50 $5,000 $ (715,554) (500,000) (1,210,554)
Private placement offering
(Note 1) .................. 122 $12,200 3,487,800 3,500,000
Net loss .................... (292,934) (292,934)
--------- ------- ----- ------- ------ ------ ---------- --------- -----------
BALANCE, DECEMBER 31, 1997 4,820,000 $48,200 122 $12,200 50 $5,000 $2,772,246 $(675,925) $ 2,161,721
========= ======= ===== ======= ====== ====== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 49
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED 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) income $ (292,934) $ 34,936
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 31,546 48,527
Stock-based compensation 300,000
Loss on disposal of assets 1,859
Loss on disposal of investments 50,000
Deferred income taxes (265,000) 9,464
Changes in operating assets and liabilities:
Accounts receivable (35,149) (587,678)
Inventories (4,482) 1,976
Prepaid expenses and other assets 21,806 1,316
Accounts payable 309,120 667,663
Accrued expenses 125,328 (33,422)
Income taxes payable 262,182
----------- -----------
Net cash provided by operating activities 504,276 142,782
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (38,700) (32,138)
Investments (25,000) (25,000)
----------- -----------
Net cash used in investing activities (63,700) (57,138)
----------- -----------
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 (212,500) (954)
Acquisition costs (48,054)
----------- -----------
Net cash provided by (used in) financing activities 2,135,183 (110,954)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,575,759 (25,310)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 564 25,874
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 2,576,323 $ 564
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 50
OSAGE SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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, the Company acquired Osage pursuant to the terms of
a Merger Agreement dated November 5, 1997 (the "Merger Agreement") with
Pacific Rim Entertainment, Inc., a publicly-traded company. Upon the
closing of the merger, through a wholly-owned subsidiary, the Company
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-7
<PAGE> 51
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 Entertainment,
Inc. 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:
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
============
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-8
<PAGE> 52
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-9
<PAGE> 53
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:
1997 1996
-------- --------
Computer hardware $ 179,747 $ 150,220
Furniture and fixtures 12,795 11,230
Computer software 12,868 12,273
-------- --------
Total 205,410 173,723
Less accumulated depreciation 118,529 92,137
-------- --------
Furniture and equipment - net $ 86,881 $ 81,586
======== ========
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-10
<PAGE> 54
5. SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of net sales for the years
ended December 31 are as follows:
1997 1996
------ ------
Customer A 64.8 % 43.9 %
Customer B 1.6 % 11.3 %
Customer C 4.8 % 10.4 %
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:
1998 $ 148,000
1999 103,000
2000 12,000
2001 12,000
2002 6,000
---------
Total $ 281,000
=========
Total rent expense was $81,983 and $59,144, net of rent income from a
month-to-month sublease of $23,683 and $0 for the years ended December 31,
1997 and 1996, 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 asset (liability) at December 31, 1997 and 1996 is
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Use of cash basis of accounting for income tax purposes $ 85,000 $ (55,000)
Allowance for doubtful accounts 6,000
Deferred stock-based compensation 119,000
--------- ---------
Net current assets (liabilities) $ 210,000 $ (55,000)
========= =========
</TABLE>
F-11
<PAGE> 55
The income tax (benefit) provision consists of the following for the years
ended December 31:
1997 1996
--------- -------
Current:
Federal $ 207,000
State 55,000
Deferred:
Federal (228,000) $ 9,464
State (37,000)
--------- -------
Income tax (benefit) provision $ (3,000) $ 9,464
========= =======
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>
1997 1996
---- ----
<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 (5.5)% 6.3 %
Overall effect of graduated federal rates 26.6 % (19.0)%
---- ----
Effective income tax rate (1.0)% 21.3 %
==== ====
</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-12
<PAGE> 56
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-13
<PAGE> 57
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-14
<PAGE> 58
EXHIBIT INDEX
Exhibit
Number
(Referenced
to Item 601
of Reg. S-K)
21 Subsidiaries of the Registrant
<PAGE> 1
Exhibit 21
1. Osage Computer Group, Inc.
2. Solsource Computers, Inc.
3. H.V. Jones, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,576,323
<SECURITIES> 0
<RECEIVABLES> 1,989,496
<ALLOWANCES> 15,000
<INVENTORY> 6,672
<CURRENT-ASSETS> 4,793,219
<PP&E> 205,410
<DEPRECIATION> 118,529
<TOTAL-ASSETS> 4,880,100
<CURRENT-LIABILITIES> 2,718,379
<BONDS> 0
0
17,200
<COMMON> 48,200
<OTHER-SE> 2,096,321
<TOTAL-LIABILITY-AND-EQUITY> 4,880,100
<SALES> 14,191,203
<TOTAL-REVENUES> 14,191,203
<CGS> 11,670,066
<TOTAL-COSTS> 11,670,066
<OTHER-EXPENSES> 2,807,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,731
<INCOME-PRETAX> (295,934)
<INCOME-TAX> (3,000)
<INCOME-CONTINUING> (292,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (292,934)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
