<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OSAGE SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-22808 95-4374983
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
1661 EAST CAMELBACK ROAD
SUITE 245
PHOENIX, ARIZONA 85016
(Address of principal executive office)
(602) 274-1299
(Registrant's telephone number, including area code)
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
--------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's sole class of common stock,
as of May 8, 1998 was 5,903,334 shares.
Transitional Small Business Disclosure Format:
Yes No X
--------- ---------
<PAGE> 2
OSAGE SYSTEMS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION*
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1998 (unaudited) and 1
December 31, 1997
Unaudited Condensed Consolidated Statements of Operations for the Three 2
Months ended March 31, 1998 and 1997
Unaudited Condensed Consolidated Statements of Cash Flows for the Three 3
Months ended March 31, 1998 and 1997
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSAGE SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998
(UNAUDITED) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,498,336 $ 2,576,323
Accounts receivable - net of allowance for doubtful
accounts of $33,000 in 1998 and $15,000 in 1997 4,484,301 1,974,496
Inventories 517,479 6,672
Prepaid expenses and other current assets 161,605 25,728
Deferred income taxes 425,000 210,000
------------ ------------
Total current assets 8,086,721 4,793,219
------------ ------------
FURNITURE AND EQUIPMENT - net 292,311 86,881
GOODWILL, less accumulated amortization of $11,911 4,276,066
OTHER ASSETS 64,228
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TOTAL $ 12,719,326 $ 4,880,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable under line of credit $ 308,553
Notes payable - other 206,973
Accounts payable 4,168,228 $ 1,948,802
Accrued expenses 875,975 507,395
Deferred revenue 20,458
Income taxes payable 191,175 262,182
------------ ------------
Total current liabilities 5,771,362 2,718,379
------------ ------------
NOTES PAYABLE 296,377
------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized,
issued and outstanding, 122 shares; total liquidation
preference, $3,660,000 12,200 12,200
Series B Preferred, $100 stated value - authorized,
issued and outstanding, 50 shares; total liquidation
preference, $1,500,000 5,000 5,000
Series C Preferred, $50 stated value - authorized,
issued and outstanding, 105.3 shares; total liquidation
preference, $1,579,500 5,265
Common stock, $.01 par value - authorized, 10,000,000
shares; issued and outstanding, 5,570,000 shares in
1998 and 4,820,000 shares in 1997 55,700 48,200
Additional paid-in-capital 7,335,863 2,772,246
Retained earnings (762,441) (675,925)
------------ ------------
Total stockholders' equity 6,651,587 2,161,721
------------ ------------
TOTAL $ 12,719,326 $ 4,880,100
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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OSAGE SYSTEMS GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
NET SALES $ 5,641,932 $ 2,239,778
COST OF SALES 4,580,010 1,745,355
----------- -----------
Gross profit 1,061,922 494,423
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,222,988 439,262
----------- -----------
OPERATING (LOSS) INCOME (161,066) 55,161
INTEREST INCOME - net 35,550 2,303
----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (125,516) 57,464
BENEFIT FOR INCOME TAXES (39,000)
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NET (LOSS) INCOME $ (86,516) $ 57,464
=========== ===========
(LOSS) INCOME PER COMMON SHARE -
BASIC AND DILUTED $ (0.02) $ 0.01
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,342,472 5,342,472
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
Osage Systems Group, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (86,516) $ 57,464
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 29,265 12,600
Stock-based compensation 75,000
Deferred income taxes (23,231) (55,000)
Changes in operating assets and liabilities:
Accounts receivable (1,174,742) 917,109
Inventories (253,039) (2,048)
Prepaid expenses and other assets (79,163) (5,141)
Accounts payable 576,706 (816,097)
Accrued expenses 79,409 (2,619)
Deferred revenue (4,673)
Income taxes payable (71,007)
----------- -----------
Net cash (used in) provided by operating activities (931,991) 106,268
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (74,124) (279)
Acquisition costs, including cash received of $40,492 (734,064)
Investments (25,000)
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Net cash used in investing activities (808,188) (25,279)
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FINANCING ACTIVITIES:
Net repayments on notes payable (311,808)
Net proceeds from sale of common stock 1,974,000
Purchase of treasury stock (81,553)
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Net cash provided by (used in) financing activities 1,662,192 (81,553)
----------- -----------
NET DECREASE IN CASH (77,987) (564)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,576,323 564
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,498,336 $ --
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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OSAGE CONDENSED SYSTEMS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
position of the Company and the results of its operations and changes
in its financial position for the periods reported. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the entire year. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Osage
Systems Group, Inc. (the "Company") and its wholly-owned subsidiaries,
Osage Computer Group, Inc. ("Osage"), Solsource Computers, Inc.
("Solsource"), and H.V. Jones, Inc. ("HV Jones"). All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior
financial statements to conform to the current classifications.
The information presented within the accompanying unaudited
consolidated financial statements should be read in conjunction with
the Company's audited Financial Statements for the fiscal year ended
December 31, 1997 and 1996 and "Management's Discussion and Analysis or
Plan of Operation" from the 1997 Annual Report on Form 10-KSB.
2. Recent Acquisitions During Period.
On March 17, 1998, the Company acquired Solsource pursuant to the terms
of an Agreement and Plan of Merger. Upon closing, through a
wholly-owned subsidiary, the Company acquired 100% of the outstanding
capital stock of Solsource for merger consideration of $1.1 million;
consisting of $200,000 in cash and $900,000 in newly issued common
shares priced at $6.00 per share. In addition, the merger consideration
included earn-out incentive shares to be issued if Solsource achieves
certain performance targets.
On March 17, 1998, the Company also completed the acquisition of HV
Jones pursuant to the terms of an Agreement and Plan of Merger dated
February 27, 1998. Upon closing,
<PAGE> 7
through a wholly-owned subsidiary, the Company acquired 100% of the
outstanding capital stock of HV Jones for merger consideration of
$1,975,000; consisting of $395,000 in cash and $1.58 million (105.3
shares) in Series C Convertible Preferred Stock ("Series C Shares")
which converts into common stock during the next four quarters at a
conversion rate equal to the lower of $6.87 or a 33% premium over the
average closing price of the Company's common stock for the ten trading
days prior to each date of conversion.
The Solsource and HV Jones acquisitions were accounted for using the
purchase method of accounting for business combinations. The excess of
assets acquired over liabilities assumed has been allocated to goodwill
and is being amortized over 15 years. Results of operations of
Solsource and HV Jones have been included in the Company's statement of
operations from their respective acquisition dates.
3. Pro Forma Information.
The following pro forma summary presents the consolidated results of
operations of the Company as if the acquisitions completed during the
period had occurred as of January 1, 1998 and 1997, and do not purport
to be indicative of what would have occurred had the acquisitions been
made as of those dates or of results which may occur in the future. The
pro forma summary data for the three months ended March 31, 1998 and
1997 combines historical financial information of the Company,
Solsource and HV Jones for the three months ended March 31, 1998 and
1997.
PRO FORMA - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Sales $ 7,141,218 $ 5,888,043
Net loss $ (456,020) $ (59,351)
Net loss per share - basic and diluted $ (0.09) $ (0.01)
</TABLE>
4. Earnings Per Share.
In March 1997, the FASB issued SFAS No. 128, Earnings per Share ("SFAS
128"), which is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The Company has
implemented this statement and, as required, has restated earnings per
share ("EPS") for all periods presented. This new standard requires
dual presentation of "basic" and "diluted" EPS on the face of the
statement of operations and requires a reconciliation of the numerator
and denominator of basic and diluted EPS calculations. Basic earnings
per common share is computed on the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per
common share is computed on the weighted average number of shares of
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<PAGE> 8
common stock outstanding plus additional shares that would have been
outstanding if all dilutive potential common shares had been issued.
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the year after giving effect to stock options and the conversion
of preferred shares considered to be dilutive. Because the Company
incurred a loss for the period ended March 31, 1998, the effects of the
potential dilutive securities are not included in the calculations.
5. New Accounting Pronouncements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"), which is
effective for financial statements for periods beginning after December
15, 1997 and establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The
adoption of this Statement on January 1, 1998 had no impact on the
Company's financial statement presentation or related disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"), which is
effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company operates in one business segment and does not
believe that SFAS 131 will require additional disclosures when adopted.
6. Income Taxes.
The Company accounts for income taxes using the asset and liability
approach, which can result in recording tax provisions or benefits in
periods different than the periods in which such taxes are paid or
benefits realized. Deferred income taxes are recorded for the
difference between the book and tax basis of various assets and
liabilities which can provide for current recognition of expected tax
benefits from temporary differences that will result in deductible
amounts in future years.
The deferred income tax asset at March 31, 1998 is comprised of the
following:
<TABLE>
<S> <C>
Use of cash basis of accounting for income tax purposes $ 95,000
Allowance for doubtful accounts 13,000
Net operating loss carryforward 168,000
Deferred stock-based compensation 119,000
Other 30,000
----------
Net current asset $ 425,000
==========
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Report on Form 10-QSB, 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 adequate 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's ability to utilize its Common Stock to facilitate 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.
OVERVIEW
Osage Systems Group, Inc. (the "Company") was originally incorporated
as "Pacific Rim Entertainment, Inc." ("Pacific Rim") under the laws of Delaware
in 1992. From 1992 through 1996, Pacific Rim had been engaged principally in the
animated film production business. After several years of losses following its
initial public offering in 1993, Pacific Rim suspended its business operations
in 1996 and remained inactive while it sought to identify a strategic business
combination with a private operating company. In December 1997, Pacific Rim
acquired Osage Computer Group, Inc. ("Osage"), an Arizona corporation, which had
been in the computer systems integration business since 1989. The acquisition
was completed through a merger of Osage with and into a wholly-owned subsidiary
of Pacific Rim which became effective on December 22, 1997 (the "Merger").
Thereafter, Pacific Rim assumed the historic operations of Osage and on March
10, 1998, changed its name to Osage Systems Group, Inc. Since, as a result
7
<PAGE> 10
of the Merger, the former stockholders of Osage acquired a controlling interest
in Pacific Rim, the Merger has been accounted for as a "reverse acquisition."
Accordingly, for financial statement presentation purposes, Osage is viewed as
the continuing entity and the related business combination is viewed as a
recapitalization of Osage, rather than an acquisition by Pacific Rim.
Through its operating subsidiaries, the Company markets a broad range
of information technology products and services intended to transform discrete
hardware and software components into an integrated system. The Company's
ability to deliver integrated solutions is principally attributable to its
technical expertise and its value-added reseller agreements with
industry-leading vendors of information technology products such as Sun
Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft.
The Company has also established relationships with leading aggregators of
computer hardware and software products. These agreements enable the Company to
provide its clients with competitive product pricing, ready product availability
and services. To date, most of its net sales have been derived from the resale
of products from these vendors, however, the Company anticipates that as it
continues to increase the technical expertise of its service personnel and
broaden the geographic base of its marketing coverage, an increasing percentage
of its net sales in the future will be derived from the services and support
component of its business.
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth, 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 who may benefit from the Company's long-term
growth strategy and status as a public company.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
8
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<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------
1998 1997
--------------------------- --------------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES ..................................... $ 5,641,932 100.0% $ 2,239,778 100.0%
COST OF SALES ................................. 4,580,010 81.2 1,745,355 77.9
----------- ----------- ----------- -----------
Gross profit ............................. 1,061,922 18.8 494,423 22.1
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................... 1,222,988 21.7 439,262 19.6
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS ................. (161,066) (2.9) 55,161 2.5
INTEREST INCOME - NET ......................... 35,550 .7 2,303 .1
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES ......................................... (125,516) (2.2) 57,464 2.6
BENEFIT FOR INCOME TAXES ...................... (39,000) (.7)
----------- ----------- ----------- -----------
NET (LOSS) INCOME ............................. $ (85,516) (1.5%) $ 57,464 2.6%
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic and Diluted $ (.02) $ .01
=========== ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
Revenues. Net sales increased by 152%, or $3.4 million to $5.6 million,
for the three months ended March 31, 1998 as compared to $2.2 million for the
same prior year period. This increase in net sales was principally attributable
to increased product sales to new and existing customers as the Company
experienced favorable market acceptance of new products introduced by the
Company's major vendors. In addition, the Company opened a new regional sales
office that resulted in increased revenues. Consulting revenues remained
relatively flat for the three months ended March 31, 1998 as compared to the
same prior year period.
The Company's net sales are expected to increase during 1998 as the
Company implements its acquisition strategy. Towards this end, the Company
completed the acquisition of Solsource and HV Jones during the first quarter.
These acquisitions were accounted for using the purchase method of accounting
for business combinations. Accordingly, the Company's results of operations
include only the net sales of Solsource and HV Jones from the date of
acquisition (March 17, 1998) through the end of the quarter. During the second
quarter, the Company acquired Open System Technologies, Inc. ("OST"). In
addition, the Company has entered into a letter of intent to acquire an
additional company and is actively involved in discussions with additional
potential acquisition targets. There can be no assurances that the acquisition
subject to the letter of intent will be completed since the underlying
transaction is preliminary in nature and subject to due diligence review and
other conditions to closing. During 1997, Solsource, HV Jones and OST realized
net sales of $7.3 million, $5.6 million and $11.9 million, respectively. On a
pro forma basis, the Company would have realized net sales of approximately $39
million during 1997 had all of these acquisitions occurred as of January 1,
1997.
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<PAGE> 12
The Company's acquisition strategy relies primarily upon identifying
target companies that fit within its acquisition criteria and having sufficient
financing available to complete its planned acquisitions. Although the Company
has sufficient financing available to complete its pending acquisition, there
can be no assurances that sufficient financing will be secured so as to
facilitate the continuation of the Company's acquisition program on a
longer-term basis. Furthermore, due to the early stages of this program, there
can be no assurances as to the long-term impact of the Company's acquisition
strategy on the gross profits or net income of the Company.
Gross Profit. The Company's cost of sales include primarily, in the
case of product sales, the cost to the Company of products acquired for resale,
and in the case of services and support revenue, salaries and related costs. The
Company's gross profit increased by 115% or $.6 million to $1.1 million for the
three months ended March 31, 1998 as compared to $.5 million for the same prior
year period. Gross profit margin decreased to approximately 18.8% during the
three months ended March 31, 1998, as compared to approximately 22.1%
experienced during the same prior year period. During the second half of 1997
and the first quarter of 1998, the Company experienced an overall decrease in
its gross profit margin. This decrease was primarily due to cost reductions
passed on to the Company's customers from its major vendors as a result of an
increase in demand for the Company's products which occurred as certain
customers increased their volume of purchases. Management believes that in the
long term it will be able to sustain or improve its profit margin as a result of
its focus on providing a broad spectrum of products, services and support
packages, and through a greater emphasis on consulting and support services,
which typically have a higher profit margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions, employee
benefits, travel, promotion and related marketing costs. Selling, general and
administrative expenses increased by 178% or $.8 million to $1.2 million for the
three months ended March 31, 1998 as compared to $.4 million for the same prior
year period. This increase in expenses is primarily attributable to the
expansion of the Company's infrastructure as it became publicly-held by virtue
of the Merger during the fourth quarter of 1997, including increased
administrative personnel and increased travel and promotion expenses associated
with the growth of the business. During the three months ended March 31, 1998,
as a percent of net sales, selling, general and administrative expenses
increased to approximately 21.7%, from 19.6% experienced during the same prior
year period.
During the fourth quarter of 1997 and the first quarter of 1998, the
Company increased its fixed payroll with the addition of three executive level
personnel. This had the effect of resulting in an increase in the Company's
selling, general and administrative expense as a percentage of net sales. This
increase is likely to be offset in the near-term as the Company's revenues
increase.
As part of the Merger consideration, Pacific Rim granted options to
purchase 800,000 shares of its Common Stock to the former stockholders of Osage.
These options were granted at an exercise price of $3.00, vest once the future
earnings of the Company attain certain agreed upon levels and are contingent
upon the holder's continued employment by the Company. During the first quarter
of 1998, the Company recorded no compensation expense associated with the
granting of these options since the vesting of the options was not probable at
any time
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<PAGE> 13
during this period. However, management believes that the Company will record
compensation expense in the future if the earnings of the Company achieve agreed
upon levels and other events occur that lead management to believe that vesting
of the options is a probable occurrence. The expense, when recorded, could have
an adverse effect on the Company's income for financial accounting purposes, as
it would approximate the difference between the exercise price of the options
and the fair market value of the Company's Common Stock at that time. This would
have no effect, however, on the Company's cash flow from operations as the
vesting of the options is a non-cash event, and ultimately, the exercise of the
options would provide a capital infusion to the Company.
VARIABLE OPERATING RESULTS
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
revenues and changes in the Company's utilization rates. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future performance. The Company
anticipates that its business will continue to be subject to such seasonal
variations.
BACKLOG
The Company normally ships systems promptly after receiving an order
and therefore does not customarily have a significant backlog.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily from cash
generated by operations and, to a lesser extent, with funds from borrowings
under the Company's revolving line of credit. For the three months ended March
31, 1998, cash flow used in operating activities was $932,000, compared to
$106,300 provided by operating activities for the same prior year period. The
Company's cash flow from operations has been negatively affected primarily by
the increase in accounts receivable and inventories offset by an increase in the
level of accounts payable. For the three months ended March 31, 1998, accounts
receivable increased $1,174,700 and accounts payable increased $576,700.
The Company's working capital was $2,315,400 at March 31, 1998, as
compared to $2,074,800 at December 31, 1997. The increase in the Company's
working capital during the period is principally attributable to the net
proceeds received from a private placement of the Company's common stock
approximately $1.97 million that was completed during the first quarter of 1998
and, to a lesser extent, the growth of the Company's revenues during the period.
The proceeds of the private
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<PAGE> 14
placement were used primarily by the Company to finance the cash payments of
approximately $700,000 utilized in connection with the acquisitions completed
during the first quarter of 1998. An additional $750,000 was applied by the
Company to support the operations and pay-off short-term debt of HV Jones.
A $500,000 revolving credit facility was terminated by the Company in
connection with the Merger. The Company is currently negotiating with several
banks to secure a new credit facility. There can be no assurance, however, that
the Company will obtain such facility on favorable terms, if at all. Management
believes that its ability to finance operations, as well as facilitate working
capital used to finance acquisitions, will be enhanced through obtaining an
adequate credit facility. Failure to obtain an adequate credit facility for more
than the short term may have an adverse effect upon the Company's ability to
finance its operations and acquisitions.
The Company believes that its current working capital and the
anticipated cash flow from operations will be adequate to fund operations for
the near term. However, the Company has commenced an aggressive acquisition
strategy which is likely to require additional financing in the near term. The
Company intends to finance these acquisitions primarily through the use of cash,
funds from lines of credit, if and when available, and shares of its Common
Stock or other securities. In the event that the Company's Common Stock does not
attain or maintain a sufficient market value or potential acquisition candidates
are otherwise unwilling to accept the Company's securities as part of the
purchase price for the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to continue its
acquisition program. If the Company does not have sufficient cash resources,
through either operations or from debt facilities, its growth could be limited
unless it is able to obtain such additional capital.
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 twelve 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.
12
<PAGE> 15
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 adoption of this statement on January
1, 1998 had no impact on the Company's financial statement presentation or
related disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosure about Segments of an Enterprise and Related Information ("SFAS
131") which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company operates in one business segment and does not believe
that SFAS 131 will require additional disclosures when adopted.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES.
1. 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>
2. 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. The Company may have an obligation to issue additional
shares of Common Stock if certain performance criteria are met.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Trust of Daniel J. and Mary Vahalla 146,297
Gary Gwin 3,111
Maureen Gaare 296
Daniel Grube 296
-------
TOTAL 150,000
</TABLE>
The issuance of such securities was exempt from registration pursuant
to Rule 506 and Section 4(2) of the Act, as an issuer transaction not involving
a public offering.
3. 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. 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)
14
<PAGE> 17
trading days prior to each date of conversion. Additional earn-out shares may be
issued if HV Jones achieves certain performance targets.
The issuance of such securities was exempt from registration pursuant
to Rule 506 and Section 4(2) of the Act, as an issuer transaction not involving
a public offering.
4. On April 24, 1998, the Company issued 333,334 shares of Common
Stock to Mr. O. Jack Anderson in connection with the acquisition of 100% of the
outstanding capital stock of Open System Technologies, Inc. In conjunction with
the acquisition, the Company agreed to issue 50,000 shares to an investment
banking advisor to the Company in consideration for services provided in
identifying the target company and advising the Company in connection with the
acquisition. The issuance of such securities was exempt from registration
pursuant to Rule 506 and Section 4(2) of the Act, as an issuer transaction not
involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 10, 1998, the Company effected an amendment to its Certificate
of Incorporation whereby the name of the Company was changed from "Pacific Rim
Entertainment, Inc." to "Osage Systems Group, Inc." The name change was effected
pursuant to a consent solicitation distributed to the Company's stockholders
pursuant to an Information Statement dated February 17, 1998 and approved by
52.6% of the Company's outstanding voting securities (2,536,692 Shares).
ITEM 5. OTHER INFORMATION
On March 31, 1998, the Company filed a registration statement
("Registration Statement") on Form SB-2 with the Securities and Exchange
Commission relating to the resale to the public by certain selling security
holders of 4,351,982 shares, subject to adjustment, of common stock, $.01 par
value per share. The Registration Statement has not yet become effective.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
27 Financial Data Schedule
(Electronic filing only)
(b) Reports on Form 8-K:
15
<PAGE> 18
(i) A Report on Form 8-K was filed with the Securities
and Exchange Commission on January 6, 1998 relating to the merger of the Company
and Osage Computer Group, Inc. on December 22, 1997, and an amendment thereto on
Form 8-K/A was filed with the Securities and Exchange Commission as of March 5,
1998.
(ii) A Report on Form 8-K was filed with the Securities
and Exchange Commission on February 17, 1998 relating to a change in the
Company's certifying accountants as of February 9, 1998.
(iii) A Report on Form 8-K was filed with the Securities
and Exchange Commission on March 11, 1998 relating to the change of the
Company's name to "Osage Systems Group, Inc."
(iv) A Report on Form 8-K was filed with the Securities
and Exchange Commission on March 27, 1998 relating to the acquisition by the
Company of Solsource Computers, Inc. and H.V. Jones, Inc. as of March 17, 1998.
(v) A Report on Form 8-K was filed with the Securities
and Exchange Commission on May 7, 1998 relating to the acquisition of Open
System Technologies, Inc. as of April 24, 1998.
16
<PAGE> 19
OSAGE SYSTEMS GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OSAGE SYSTEMS GROUP, INC.
Dated: May 15, 1998 /s/Jack R. Leadbeater
---------------------------------
JACK R. LEADBEATER
Chairman of the Board
Chief Executive Officer
Dated: May 15, 1998 /s/John Iorillo
---------------------------------
JOHN IORILLO
Chief Financial Officer
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,498,336
<SECURITIES> 0
<RECEIVABLES> 4,517,301
<ALLOWANCES> 33,000
<INVENTORY> 517,479
<CURRENT-ASSETS> 8,086,721
<PP&E> 563,694
<DEPRECIATION> 271,383
<TOTAL-ASSETS> 12,719,326
<CURRENT-LIABILITIES> 5,771,362
<BONDS> 0
0
22,465
<COMMON> 55,700
<OTHER-SE> 6,573,422
<TOTAL-LIABILITY-AND-EQUITY> 6,651,587
<SALES> 5,641,932
<TOTAL-REVENUES> 5,641,932
<CGS> 4,580,010
<TOTAL-COSTS> 4,580,010
<OTHER-EXPENSES> 1,222,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,550)
<INCOME-PRETAX> (125,516)
<INCOME-TAX> (39,000)
<INCOME-CONTINUING> (86,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,516)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
