<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): March 17, 1998
OSAGE SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22808 95-4374983
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1661 East Camelback Road
Suite 245
Phoenix, AZ 85016
(Address of principal executive office)
Registrant's telephone number, including area code: (602) 274-1299
(Former name or former address, if changed since last report)
<PAGE> 2
GENERAL EXPLANATION
The purpose of this Report is to amend the registrant's Current Report on
Form 8-K dated March 17, 1998 relative to the acquisition of Solsource
Computers, Inc. and HV Jones, Inc. This Report amends the information provided
under Item 7(a) and 7(b).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Acquired Businesses
SOLSOURCE COMPUTERS, INC.
Independent Auditors' Report
Balance Sheets as of January 31, 1998 and 1997
Statements of Operations for the years ended January 31, 1998
and 1997
Statements of Stockholders' Equity (Net Capital Deficiency)
for the years ended January 31, 1998 and 1997
Statements of Cash Flows for the years ended January 31, 1998
and 1997
<PAGE> 3
Notes to Financial Statements
H.V. JONES, INC.
Independent Auditors' Report
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31,
1997 and 1996
Statements of Net Stockholder's Capital Deficiency for the
years ended December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997
and 1996
Notes to Financial Statements
(b) Pro Forma Financial Information
<PAGE> 4
FINANCIAL STATEMENTS PROVIDED UNDER ITEM 7(a)
<PAGE> 5
SOLSOURCE COMPUTERS, INC
Financial Statements
Years Ended January 31, 1998 and 1997, and
Independent Auditors' Report
<PAGE> 6
INDEPENDENT AUDITORS' REPORT
Stockholders
Solsource Computers, Inc.
Carlsbad, California
We have audited the accompanying balance sheets of Solsource Computers, Inc.
(the "Company") as of January 31, 1998 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
April 24, 1998
<PAGE> 7
SOLSOURCE COMPUTERS, INC.
BALANCE SHEETS
JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS (NOTES 3 AND 4) 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash $ 10,506
Accounts receivable - net of allowance for doubtful accounts of
$7,900 in 1998 and $6,100 in 1997 700,378 $ 1,634,886
Federal and state income tax refunds receivable 44,799 24,036
Inventories - net of reserve for obsolescence of $18,400 in 1998
and $44,000 in 1997 349,032 836,646
Prepaid expenses 5,827 21,289
Deferred income taxes (Note 5) 38,925 1,421
- ------ -----
Total current assets 1,149,467 2,518,278
FURNITURE, EQUIPMENT AND SOFTWARE - Net (Notes 2 and 6) 44,627 88,508
OTHER ASSETS - Net of accumulated amortization of
$7,900 in 1998 and $6,100 in 1997 52,550 55,788
Deferred income taxes (Note 5) 128,844
------- --------
TOTAL $ 1,375,488 $ 2,662,574
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Bank overdraft $ 21,706
Accounts payable $ 784,641 1,775,949
Accrued expenses 68,374 97,139
Line of credit (Note 4) 304,150
Deferred service revenues 30,318 31,952
Deferred income taxes (Note 5) 8,745
Current portion of long-term debt (Note 3) 61,234 58,577
Current portion of capital lease obligation (Note 6) 18,527 15,738
------ ------
Total current liabilities 1,267,244 2,009,806
--------- ---------
LONG-TERM DEBT - Less current portion (Note 3) 275,188 345,955
------- -------
CAPITAL LEASE OBLIGATION - Less current portion (Note 6) 6,879 25,406
----- ------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6 and 8)
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(Notes 3 and 7):
Common stock - no par value; authorized, 10,000,000 shares;
issued and outstanding, 2,028,000 shares 135,125 135,125
(Deficit) retained earnings (274,011) 181,219
Treasury stock - 90,440 shares at cost (34,937) (34,937)
------- -------
Total stockholders' equity (net capital deficiency) (173,823) 281,407
-------- -------
TOTAL $ 1,375,488 $ 2,662,574
=========== ===========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE> 8
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
NET SALES $ 7,231,978 $ 13,687,280
COST OF SALES 5,364,206 10,673,922
--------- ----------
Gross profit 1,867,772 3,013,358
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,474,431 2,852,507
--------- ---------
OPERATING (LOSS) INCOME (606,659) 160,851
INTEREST EXPENSE - Net (59,833) (43,928)
------- -------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (666,492) 116,923
(BENEFIT) PROVISION FOR INCOME TAXES (Note 5) (211,262) 31,944
-------- ------
NET (LOSS) INCOME $ (455,230) $ 84,979
========== ========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE> 9
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Treasury
Shares Amount (Deficit) Stock Total
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1996 2,022,400 $ 126,600 $ 96,240 $ (1,200) $ 221,640
Issuance of common stock (Note 7) 66,440 8,525 8,525
Purchase of treasury shares (Note 7) (60,840) (33,737) (33,737)
Net income 84,979 84,979
--------- ------- ------ ------- ---------
BALANCE, JANUARY 31, 1997 2,028,000 135,125 181,219 (34,937) 281,407
Net loss (455,230) (455,230)
--------- --------- ---------- --------- ----------
BALANCE, JANUARY 31, 1998 2,028,000 $ 135,125 $(274,011) $(34,937) $(173,823)
========= ========= ========= ======== =========
</TABLE>
See notes to financial statements.
- 4 -
<PAGE> 10
SOLSOURCE COMPUTERS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (455,230) $ 84,979
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 32,501 42,134
Loss on disposal of assets 9,240
Provision for inventory obsolescence 73,648 8,372
Deferred income taxes (175,093) (4,216)
Changes in operating assets and liabilities:
Accounts receivable 934,508 (105,253)
Inventories 413,965 (286,219)
Other current assets (16,967) (39,553)
Accounts payable (991,308) 90,997
Accrued expenses (28,765) (184,866)
Deferred service revenue (1,634) 31,952
------ ------
Net cash used in operating activities (205,135) (361,673)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 29,683
Capital expenditures (12,638) (27,040)
Proceeds from sale of investments 250,000
Purchase of treasury stock (1,737)
Proceeds from sale of common stock 8,525
------ -----
Net cash provided by investing activities 17,045 229,748
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 304,150
Principal payments on debt (68,110) (63,463)
Principal payments on capital lease (15,738)
Bank overdraft (21,706) 21,706
------- ------
Net cash provided by (used in) financing activities 198,596 (41,757)
------- -------
NET INCREASE (DECREASE) IN CASH 10,506 (173,682)
CASH, BEGINNING OF YEAR 173,682
-------- --------
CASH, END OF YEAR $ 10,506 $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF TOTAL INTEREST PAID $ 64,875 $ 54,553
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Purchase of treasury stock in exchange for a
note payable (Note 7) $ 32,000
========
Purchase of software and equipment in exchange
for capital lease $ 41,144
========
See notes to financial statements.
</TABLE>
- 5 -
<PAGE> 11
SOLSOURCE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Solsource Computers, Inc. (the "Company") is a
systems integrator specializing in data and network security solutions and
services. The Company is focused on providing complete end-to-end data and
network security solutions.
The Company has entered into contracts with major suppliers of computer
hardware and software to act as their value-added reseller. Purchases and
sales under the value-added reseller contracts account for the majority of
the Company's sales and costs of sales.
The Company is currently licensed to do business in Illinois, Connecticut,
New Jersey, Texas and California.
SIGNIFICANT ACCOUNTING POLICIES are as follows:
REVENUE RECOGNITION - The Company recognizes sales of products when the
products are shipped, and services and support revenue is recognized
when the applicable services are rendered. The Company sells
preventative maintenance services on an as needed basis or under
one-year contracts. Revenues from services performed on an as needed
basis are recognized as services are performed, and revenues from
one-year contracts are recognized over the term of the contract as
contract hours are utilized which may result in the contract completion
prior to the one-year period. Unearned contract revenue is recorded as
deferred service revenues in the accompanying balance sheets.
INVENTORIES are recorded at the lower of cost (first-in, first-out) or
market.
FURNITURE, EQUIPMENT AND SOFTWARE are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the assets. The useful lives range from three to seven years.
OTHER ASSETS consist principally of the cash surrender value of
officer's life insurance, deposits to vendors and loan fees which are
stated at cost less amortization computed on a straight-line method over
the life of the loan.
INCOME TAXES are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of accounts
receivable, accounts payable and accrued expenses approximates the
carrying value due to the short-term nature of these instruments. The
fair value of long-term obligations approximates carrying value based on
borrowing rates currently available to the Company for loans with
similar terms and average maturities.
-6-
<PAGE> 12
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. FURNITURE, EQUIPMENT AND SOFTWARE
Furniture, equipment and software at January 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computer equipment $ 8,875 $ 4,734
Furniture and fixtures 134,431 173,032
Software 7,603 39,387
-------- --------
Total 150,909 217,153
Less accumulated depreciation 106,282 128,645
-------- --------
Furniture and equipment - net $ 44,627 $ 88,508
======== ========
</TABLE>
3. LONG-TERM DEBT
Long-term debt at January 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime plus 2.75% (8.5% at January 31, 1998), due
in monthly installments through 2003 $ 124,226 $ 142,240
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime plus 2.75% (8.5% at January 31, 1998), due
in monthly installments through 2002 168,095 197,449
Note payable to a related party with interest at 10%, collateralized
by various Company assets, due in monthly installments
through 2002 44,101 51,295
Note payable to a related party with interest at 10%, due in
monthly installments through 1998 13,548
--------- ---------
Total 336,422 404,532
Less current maturities 61,234 58,577
--------- ---------
Long-term debt - net $ 275,188 $ 345,955
========= =========
</TABLE>
Among other things, the notes payable guaranteed by the U.S. Small
Business Administration require lender's approval prior to declaration or
payment of any dividend, purchase or retirement of capital stock,
consolidation or merger. Such notes payable are collateralized by
substantially all of the assets of the Company.
Future principal payments on long-term debt at January 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 61,234
2000 68,249
2001 76,050
2002 84,745
2003 46,144
--------
Total $336,422
========
</TABLE>
-7-
<PAGE> 13
4. LINE OF CREDIT
The Company has a line of credit. The line of credit bears interest at
prime (8.5% at January 31, 1998) plus 3.15 percent and is collateralized
by all business assets.
Among other things, the line of credit requires that the Company maintain
a minimum amount of tangible net worth. As of January 31, 1998, the
Company was not in compliance with such covenant. As of March 10, 1998,
the Company renewed its line of credit through June 30, 1998. The new line
of credit was amended, the covenant was waived and the line was reduced
from $400,000 to $300,000.
5. INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting for certain transactions,
primarily net operating loss carryover and depreciation.
Net deferred income taxes at January 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets $ 167,769 $ 1,421
Deferred income tax liabilities (8,745)
Net deferred income tax asset (liability) 167,769 (7,324)
Less net current deferred income taxes 38,925 7,324
--------- -------
Net noncurrent deferred income taxes $ 128,844 $
========= =======
</TABLE>
The (benefit) provision for income taxes for the years ended January 31
consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ (36,169) $ 36,160
Deferred (175,093) (4,216)
-------- ------
Total (benefit) provision $ (211,262) $ 31,944
========== ========
</TABLE>
The (benefit) provision for income taxes differs from the amount that
would have been calculated using statutory federal rates primarily due to
federal bracket differences between years.
6. LEASE COMMITMENTS
Operating Leases - The Company leases office space and equipment under
noncancelable operating leases. The Company has an option to renew the
office lease for an additional three-year term at fair market value.
Future minimum lease payments under noncancelable operating leases at
January 31, 1998 and related subleases are as follows:
<TABLE>
<CAPTION>
LEASES SUBLEASES NET
<S> <C> <C> <C>
1999 $ 127,501 $ 37,098 $ 90,403
2000 100,793 38,582 62,211
2001 55,765 16,663 39,102
--------- -------- --------
Total $ 284,059 $ 92,343 $191,716
========= ======== ========
</TABLE>
Total rent expense was $93,398 and $63,156 for the years ended January 31,
1998 and 1997, respectively.
-8-
<PAGE> 14
Capital Leases - The Company leases computer equipment under leases
classified as capital leases. Capital lease assets and accumulated
amortization included in furniture, equipment and software in the
accompanying financial statements as of January 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computer equipment $ 53,837 $ 53,837
Less accumulated amortization 21,050 12,227
------ ------
Net $ 32,787 $ 41,610
======== ========
</TABLE>
At January 31, capital lease obligations are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Capital lease obligations excluding interest at approximately 18% $ 25,406 $ 41,144
Less current portion of capital lease obligations 18,527 15,738
------ ------
Capital lease obligations less current portion $ 6,879 $ 25,406
======= ========
</TABLE>
7. CAPITAL STOCK
In 1997, the Company issued 66,400 shares of common stock to two employees
in exchange for $8,525. The Company also repurchased 60,840 shares in
exchange for notes payable in the amount of $32,000 and cash of $1,737.
Effective September 11, 1997, the Company authorized a four-for-one split
of the Company's common stock. The stock split has been retroactively
reflected in the accompanying financial statements.
The Company's majority stockholder has granted options to acquire shares
of his common stock in the Company to key employees, including officers. A
summary of stock option activity is as follows:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at January 31, 1996 397,406 $0.07 - $0.41
Granted 410,316 $0.07 - $0.56
Exercised (46,840) $0.10 - $0.56
Terminated (32,833) $0.10 - $0.25
-------
Outstanding at January 31, 1997 728,049 $0.07 - $0.25
Granted 24,300 $0.25 - $0.50
Terminated (49,297) $0.25
-------
Outstanding at January 31, 1998 703,052 $0.07 - $0.50
=======
</TABLE>
In management's opinion, all of these options were issued at or above the
estimated fair value at the grant date.
The Company applies Accounting Principles Board ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for the above stock options. Accordingly no compensation expense has been
recognized for the above stock options. Had compensation cost for the
above stock options been determined based upon the fair value at the grant
date consistent with the
-9-
<PAGE> 15
methodology prescribed in Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company's
net income for the years ended January 31, 1998 and 1997 would have been
reduced by approximately $14.000. The fair value of the options granted
during the years ended January 31, 1998 and 1997 are estimated at $3,000
and $69,000 on the date of grant using an option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
<S> <C>
Dividend yield 0 %
Volatility 0 %
Average risk-free interest rate 6 %
Average expected life 5 years
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 21 and completed six months of
service. Each participant may elect to contribute up to 15 percent of his
or her gross compensation up to the maximum amount allowed by the Internal
Revenue Service. The Company can make discretionary matching
contributions. No matching contributions have been made under the plan.
9. SUBSEQUENT EVENTS
On March 17, 1998, the Company was acquired by Osage Systems Group, Inc.
("Osage"), which operates in the same industry as the Company. Under the
terms of the agreement with Osage, the selling price of the Company was
$200,000 cash and $900,000 of Osage's common stock valued at $6 per share.
* * * * * *
-10-
<PAGE> 16
H.V. JONES, INC.
Financial Statements for the Years Ended December 31, 1997 and 1996 and
Independent Auditors' Report
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
H.V. Jones, Inc.
Houston, Texas
We have audited the accompanying balance sheets of H.V. Jones, Inc. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, net stockholder's capital deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
April 10, 1998
Houston, Texas
<PAGE> 18
H.V. JONES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,265 $ 71,214
Trade accounts receivable (Note 4) 732,442 288,824
Advances to stockholder (Note 6) 70,513 64,926
------ ------
Total current assets 948,220 424,964
FURNITURE AND EQUIPMENT - Net (Note 2) 68,687 31,550
OTHER ASSETS 7,999 4,353
----- -----
TOTAL $1,024,906 $460,867
========== ========
LIABILITIES AND NET STOCKHOLDER'S CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Note 4) $ 422,695 $ 280,297
Current portion of obligations under capital leases (Note 3) 30,688 14,312
Accounts payable 796,574 463,720
Accrued expenses 193,154 73,815
------- ------
Total current liabilities 1,443,111 832,144
--------- -------
OBLIGATIONS UNDER CAPITAL LEASES - Less current
portion (Note 3) 26,402 9,031
------ -----
COMMITMENTS (Note 5)
NET STOCKHOLDER'S CAPITAL DEFICIENCY:
Common stock - 1,000 shares authorized, issued and outstanding 1,000 1,000
Deficit (445,607) (381,308)
-------- --------
Total net stockholder's capital deficiency (444,607) (380,308)
-------- --------
TOTAL $1,024,906 $460,867
========== ========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE> 19
H.V. JONES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET SALES $ 5,606,898 $ 2,544,597
COST OF SALES 4,194,608 1,736,405
--------- ---------
Gross profit 1,412,290 808,192
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Note 6) 1,425,419 991,409
--------- -------
LOSS FROM OPERATIONS (13,129) (183,217)
INTEREST EXPENSE - Net (51,170) (29,847)
------- -------
NET LOSS $ (64,299) $ (213,064)
========= ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 20
H.V. JONES, INC.
STATEMENTS OF NET STOCKHOLDER'S CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
NET
STOCKHOLDER'S
COMMON STOCK CAPITAL
SHARES AMOUNT DEFICIT DEFICIENCY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,000 $ 1,000 $ (168,244) $ (167,244)
Net loss (213,064) (213,064)
----- ------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,000 1,000 (381,308) (380,308)
Net loss (64,299) (64,299)
----- ------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,000 $ 1,000 $ (445,607) $ (444,607)
===== ======= ========== ==========
</TABLE>
-4-
<PAGE> 21
H.V. JONES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (64,299) $ (213,064)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 24,326 7,593
Changes in operating assets and liabilities:
Trade accounts receivable (443,618) (22,511)
Advances to stockholder (5,587) (210)
Other assets (3,646) (2,742)
Accounts payable 332,854 221,799
Accrued expenses 119,339 63,952
------- ------
Net cash (used in) provided by operating activities (40,631) 54,817
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of furniture and equipment (6,783) (913)
------ ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under line of credit agreement 136,700 (51,000)
Proceeds from notes payable 41,497 108,801
Payments on notes payable (35,799) (67,995)
Payments on obligations under capital leases (20,933) (5,555)
------- ------
Net cash provided by (used in) financing activities 121,465 (15,749)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 74,051 38,155
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 71,214 33,059
------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 145,265 $ 71,214
========= ========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 53,438 $ 29,847
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS - Equipment acquired under capital leases $ 54,680 $ 28,898
======== ========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 22
H.V. JONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In March 1998 H.V. Jones, Inc. (the "Company") was acquired by Osage
Systems Group, Inc. ("Osage"), which operates in the same industry as the
Company. In connection with the acquisition, Osage forgave $60,000 of the
advances to stockholder and loaned the Company $750,000, the proceeds of
which were used to pay certain notes and accounts payable.
DESCRIPTION OF BUSINESS - The Company is a complex systems integrator with
offices in Houston and Austin, Texas, specializing in providing
proprietary services and turnkey technology infrastructure solutions.
The Company has entered into contracts with major suppliers of computer
hardware and software to act as their value-added reseller. Purchases and
sales under the value-added reseller contracts account for the majority of
the Company's sales and costs of sales.
SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition - The Company recognizes revenue from product
sales when the products are shipped and service and support revenue
when the applicable services are rendered.
Furniture and Equipment - Furniture and equipment are stated at
cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The useful lives range
from five to seven years.
Fair Value of Financial Instruments - The fair value of accounts
receivable, advances to stockholder, accounts payable, accrued
expenses and notes payable approximates the carrying value due to
the short-term nature of these instruments. The fair value of
long-term obligations approximate carrying value based on borrowing
rates currently available to the Company for loans with similar
terms and average maturities.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expense during
the reporting period. Actual results could differ from these
estimates.
Income Taxes - The Company accounts for income taxes using the asset
and liability approach, which can result in recording tax provisions
or benefits in periods different than the periods in which taxes are
paid or benefits realized. Deferred income taxes are recorded for
the difference between the book and tax bases of various assets and
liabilities which can provide for current recognition of expected
tax benefits from temporary differences that will result in
deductible amounts in future years.
-6-
<PAGE> 23
New Accounting Pronouncement - In June 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which is
effective for financial statement periods beginning after December
15, 1997 and establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
The Company does not believe the adoption of SFAS No. 130 will have
a material impact on its financial statement presentation or related
disclosures.
Cash and Cash Equivalents - The Company considers all highly liquid
debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
2. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment $ 26,602 $ 24,700
Furniture and fixtures 15,890 11,009
Equipment under capital leases 83,578 28,898
------ ------
Total 126,070 64,607
Less accumulated depreciation 57,383 33,057
------ ------
Furniture and equipment - net $ 68,687 $ 31,550
======== ========
</TABLE>
3. CAPITAL LEASES
The Company is the lessee of telephone and computer equipment under
capital leases expiring in various years through 2001. The assets and
liabilities under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair value of the asset. The
assets are depreciated over the shorter of their related lease terms or
their estimated productive lives. Depreciation of assets under capital
leases is included in depreciation expense for 1997 and 1996.
Following is a summary of property held under capital leases:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment $ 64,367 $ 28,898
Telephone equipment 19,211
------ -------
83,578 28,898
Less accumulated depreciation 27,696 6,020
------ -----
Total $ 55,882 $ 22,878
======== ========
</TABLE>
-7-
<PAGE> 24
Minimum future lease payments under capital leases as of December 31, 1997
and in the aggregate are as follows for the years ending December 31:
<TABLE>
<S> <C>
1998 $34,823
1999 17,928
2000 5,847
2001 5,360
-------
Total minimum lease payments 63,958
Less amount representing interest 6,868
-------
Present value of net minimum lease payments $57,090
=======
</TABLE>
Interest rates on capitalized leases are estimated at 10% and are imputed
based on the Company's incremental borrowing rate at the inception of each
lease.
4. NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Line of credit agreement with bank, principal due March 1998,
interest at prime plus 1.25% (10.75% at December 31, 1997)
payable monthly, collateralized by accounts receivable (1) $250,000 $113,300
9.5% unsecured note payable to related party with principal
and accrued interest payable on demand (Note 6) 70,873 76,957
Various unsecured notes payable to financial institutions with
principal and accrued interest payable (interest rates range
from 14.5% to 18.9%) on demand 101,822 90,040
-------- --------
$422,695 $280,297
======== ========
</TABLE>
(1) As discussed in Note 1, this line was paid subsequent to December 31, 1997.
5. OPERATING LEASES
The Company leases office space under an operating lease expiring in 2000.
Minimum future rental payments under this noncancelable operating lease as
of December 31, 1997 and in the aggregate are as follows for the years
ending December 31:
<TABLE>
<S> <C>
1998 $39,624
1999 39,624
2000 9,906
-------
Total minimum future rental payments $89,154
=======
</TABLE>
Total rental expense for 1997 and 1996 amounted to $80,979 and $92,110,
respectively.
-8-
<PAGE> 25
6. RELATED-PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company has advanced amounts to the sole
stockholder of the Company of $70,513 and $64,926 and has a note payable to
a family member of the sole stockholder of $70,873 and $76,957.
Included in selling, general and administrative expenses for 1997 and 1996
are approximately $71,000 and $59,000 in operations consulting fees paid to
an entity owned by the sole stockholder of the Company.
Included in selling, general and administrative expenses in 1997 are $8,600
in accounting fees paid to the spouse of the sole stockholder of the
Company.
7. INCOME TAXES
Deferred taxes for the Company result primarily from net operating losses.
At December 31, 1997 and 1996, the Company's net deferred tax assets
comprised the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets $ 166,000 $ 144,000
Valuation allowance (166,000) (144,000)
--------- ---------
Net $ -- $ --
========= =========
</TABLE>
A valuation allowance of $166,000 and $144,000 was established in 1997 and
1996 as management of the Company believes that, due to continuing losses,
it is more likely than not that the deferred tax assets will not ultimately
be realized.
The Company's net operating loss carryforwards amounted to approximately
$488,000 at December 31, 1997 and expire in various years through 2012.
******
-9-
<PAGE> 26
PRO FORMA FINANCIAL INFORMATION PROVIDED UNDER ITEM 7(b)
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet combines historical
information as if the acquisitions of Solsource Computers, Inc. ("Solsource")
and H.V. Jones, Inc. ("HVJ") had occurred on December 31, 1997. The unaudited
pro forma consolidated statement of operations for the year ended December 31,
1997 combines historical statements of operations for Osage Systems Group,
Inc. (the "Company") and the acquired companies, Solsource and HVJ, as if the
acquisitions had occurred on January 1, 1997.
The unaudited pro forma consolidated balance sheet at December 31, 1997 combines
historical financial information of the Company and HVJ at December 31, 1997
and Solsource at January 31, 1998. The unaudited pro forma consolidated
statement of operations for the year ended December 31, 1997 combines historical
financial information of the Company and HVJ for the year ended December 31,
1997 and Solsource for the year ended January 31, 1998. As the most recent
fiscal year end of Solsource differs from the Company's fiscal year end by less
than 93 days, no adjustment was made to Solsource's statement of operations for
the purpose of the pro forma presentation.
The detailed assumptions used to prepare the unaudited pro forma consolidated
financial information are contained herein. The unaudited pro forma consolidated
financial information reflects the use of the purchase method of accounting for
the acquisitions. The purchase price allocation used in the preparation of the
pro forma financial information is preliminary and subject to change based upon
final evaluations being performed.
The unaudited pro forma combined financial information assumes the acquisitions
were funded from currently available cash, assorted private placement
transactions and through the issuance of common stock and the Series C
Convertible Preferred Stock.
The unaudited pro forma data are not necessarily indicative of the financial
position or results of operations which would have actually been reported had
the transactions been consummated at the date mentioned above or which may be
reported in the future.
The unaudited pro forma data should be read in conjunction with the notes to the
unaudited pro forma consolidated historical financial information and the
historical financial statements, and notes thereto, of the Company which are
incorporated by reference to the Company's Form 10-KSB and the historical
financial statements of Solsource and HVJ which are included herein.
<PAGE> 28
OSAGE SYSTEMS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
H.V.
OSAGE SOLSOURCE JONES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,576 $ 11 $ 145
Accounts receivable 1,974 700 732
Inventories 7 349
Prepaid expenses and other current assets 26 51 0
Advances to affiliates
Advances to stockholder 71
Deferred income taxes 210 39
-------- -------- --------
Total current assets 4,793 1,150 948
PROPERTY AND EQUIPMENT 87 45 69
-------- -------- --------
OTHER ASSETS:
Goodwill
Deferred income taxes 129
Other 52 8
-------- -------- --------
Total other assets 0 181 8
-------- -------- --------
Total assets $ 4,880 $ 1,376 $ 1,025
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 304 $ 423
Current portion of long term debt 80 31
Accounts payable $ 1,949 785 797
Accrued expenses 508 69 193
Deferred revenue 30
Income taxes payable 262
Deferred income taxes
-------- -------- --------
Total current liabilities 2,719 1,268 1,444
-------- -------- --------
LONG TERM DEBT 282 26
-------- -------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 12
Series B preferred stock 5
Series C preferred stock
Common stock 48 100 1
Additional paid-in-capital 2,772
Retained earnings (deficit) (676) (274) (446)
-------- -------- --------
Total shareholders' equity (deficit) 2,161 (174) (445)
-------- -------- --------
Total liabilities and shareholders' equity (deficit) $ 4,880 $ 1,376 $ 1,025
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA CONSOLIDATED
ADJ. BALANCE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ (658){a} $ 2,074
Accounts receivable 3,406
Inventories 356
Prepaid expenses and other current assets 77
Advances to affiliates 0
Advances to stockholder (60){f} 11
Deferred income taxes 24 {d} 273
-------- --------
Total current assets (694) 6,197
PROPERTY AND EQUIPMENT 201
-------- --------
OTHER ASSETS:
Goodwill 3,923 {d} 3,923
Deferred income taxes 129
Other 60
-------- --------
Total other assets 3,923 4,112
-------- --------
Total assets $ 3,229 $ 10,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 727
Current portion of long term debt 111
Accounts payable 3,531
Accrued expenses 770
Deferred revenue 30
Income taxes payable 262
-------- --------
Total current liabilities 5,431
-------- --------
LONG TERM DEBT 308
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 12
Series B preferred stock 5
Series C preferred stock 5 {c} 5
Common stock 2 {b} 50
(101){e}
Additional paid-in-capital 1,029 {b} 5,375
1,574 {c}
Retained earnings (deficit) 720 {e} (676)
-------- --------
Total shareholders' equity (deficit) 3,229 4,771
-------- --------
Total liabilities and shareholders' equity (deficit) $ 3,229 $ 10,510
======== ========
</TABLE>
<PAGE> 29
PRO FORMA ADJUSTMENT LEGEND
{a} Amount represents the following adjustments to cash:
<TABLE>
<S> <C>
Solsource acquisition cash $ (200)
H.V. Jones acquisition cash (395)
Repayment of note resulting from H.V. Jones acquisition (63){g}
--------
Net adjustment to cash $ (658)
========
</TABLE>
{b} Amount represents net adjustment to common stock and additional
paid in capital:
<TABLE>
<CAPTION>
----------------------------------------------------
IN THOUSANDS, EXCEPT SHARE INFORMATION
----------------------------------------------------
COMMON
SHARES STOCK APIC TOTAL
------ ----- ---- -----
<S> <C> <C> <C> <C>
Solsource shares 150,000 $ 2 $1,029 $1,031
======= ====== ====== ======
</TABLE>
{c} Amount represents net adjustment to preferred stock and additional
paid in capital:
<TABLE>
<CAPTION>
---------------------------------------------
IN THOUSANDS, EXCEPT SHARE INFORMATION
---------------------------------------------
PREFERRED
SHARES STOCK APIC TOTAL
------ ----- ---- -----
<S> <C> <C> <C> <C>
H.V. Jones shares 105.3 $ 5 $1,573 $1,579
===== ====== ====== ======
</TABLE>
{d} The following summarizes the pro forma adjustment for goodwill:
<TABLE>
<S> <C>
Total stock consideration $2,610
Cash 658
Forgiveness of advances from H.V. Jones shareholder 60{f}
Pro forma adjustment for deferred income taxes (24)
-------
Total consideration 3,304
-------
FMV of net assets acquired (619)
-------
Goodwill $ 3,923
=======
</TABLE>
{e} Amount represents elimination of shareholders' equity.
{f} Amount represents a pro forma adjustment forgiving $60 of the
advances to the shareholder of H.V. Jones in conjunction with the
acquisition.
{g} Amount represents a pro forma adjustment repaying a $63 note
resulting from the H.V. Jones acquisition.
<PAGE> 30
OSAGE SYSTEMS GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
H.V. PRO FORMA CONSOLIDATED
OSAGE SOLSOURCE JONES ADJ. BALANCE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $14,191 $7,232 $5,607 $27,030
COST OF SALES 11,670 5,364 4,195 21,229
------- ------ ------ ----- -------
Gross profit 2,521 1,868 1,412 5,801
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,807 2,474 1,425 $ 262 {a} 6,968
------- ------ ------ ----- -------
OPERATING INCOME (LOSS) (286) (606) (13) (262) (1,167)
INTEREST EXPENSE - Net (10) (60) (51) (121)
------- ------ ------ ----- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (296) (666) (64) (262) (1,288)
PROVISION (BENEFIT) FOR INCOME TAXES (3) (211) (214)
------- ------ ------ ----- -------
NET INCOME (LOSS) $ (293) $ (455) $ (64) $(262) $(1,074)
======= ====== ====== ===== =======
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.06) $ (0.22)
======= =======
SHARES USED IN PER SHARE CALCULATION 4,820 4,970 {d}
======= =======
</TABLE>
<PAGE> 31
PRO FORMA ADJUSTMENT LEGEND
{a} Amount represents the amortization of goodwill. While the Company
has yet to complete the final purchase accounting entries, based on
its preliminary estimate, the Company believes that any additional
adjustments required will be allocated to goodwill, which is
estimated to be amortized over 15 years.
{b} Amount represents the number of shares outstanding resulting from
the acquisitions of Solsource and H.V. Jones as if the shares were
outstanding as of January 1, 1997:
<TABLE>
<S> <C>
Shares outstanding as of December 31, 1997 4,820
Solsource shares 150
-----
Total 4,970
=====
</TABLE>
<PAGE> 32
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.
Dated: May 22, 1998 OSAGE SYSTEMS GROUP, INC.
BY:/s/ Jack R. Leadbeater
----------------------
Jack R. Leadbeater
Chief Executive Officer
