<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 SEPTEMBER 30, 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 November 9, 1998 was 9,456,473 shares.
Transitional Small Business Disclosure Format:
Yes No X
<PAGE> 2
OSAGE SYSTEMS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION*
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 1
Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 1998 and 1997 2
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1998 and 1997 3
Notes to Unaudited Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis or Plan of Operation 8 - 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19 - 20
</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>
September 30, 1998
(Unaudited) December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,814,512 $ 2,576,323
Accounts receivable - net of allowance for doubtful
accounts of $52,000 in 1998 and $15,000 in 1997 10,633,783 1,974,496
Inventories 477,557 6,672
Prepaid expenses and other current assets 445,577 25,728
Deferred income taxes 778,000 210,000
------------ ------------
Total current assets 14,149,429 4,793,219
------------ ------------
FURNITURE AND EQUIPMENT - net 1,020,024 86,881
GOODWILL, less accumulated amortization of $282,869 12,743,355
OTHER ASSETS 48,481
------------ ------------
TOTAL $ 27,961,289 $ 4,880,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 949,252
Accounts payable 8,574,756 $ 1,948,802
Accrued expenses 2,575,096 507,395
Deferred revenue 24,120
Income taxes payable 29,500 262,182
------------ ------------
Total current liabilities 12,152,724 2,718,379
------------ ------------
NOTES PAYABLE 227,173
OTHER 419,995
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized,
issued and outstanding, 10 shares in 1998 and 122
shares in 1997; total liquidation preference, $300,000
in 1998 and $3,660,000 in 1997 1,000 12,200
Series B Preferred, $100 stated value - authorized,
issued and outstanding, 50 shares in 1997; total liquidation
preference, $1,500,000 5,000
Series C Preferred, $50 stated value - authorized,
issued and outstanding, 50 shares; total liquidation
preference, $750,000 2,500
Common stock, $.01 par value - authorized, 50,000,000
shares; issued and outstanding, 9,306,773 shares in 93,067
1998 and 4,820,000 shares in 1997 48,200
Additional paid-in-capital 16,396,236 2,772,246
Retained earnings (deficit) (1,331,406) (675,925)
------------ ------------
Total stockholders' equity 15,161,397 2,161,721
------------ ------------
TOTAL $ 27,961,289 $ 4,880,100
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
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Osage Systems Group, Inc.
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 19,682,686 $ 3,659,682 $ 38,090,289 $ 8,588,163
COST OF SALES 15,381,384 2,953,209 30,528,129 6,816,471
------------ ------------ ------------ ------------
Gross profit 4,301,302 706,473 7,562,160 1,771,692
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 4,068,931 596,643 8,091,389 1,458,214
Depreciation and amortization 248,761 12,600 436,362 37,800
------------ ------------ ------------ ------------
Total operating expenses 4,317,692 609,243 8,527,751 1,496,014
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (16,390) 97,230 (965,591) 275,678
INTEREST - net (79,994) 382 (53,890) 3,044
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE BENEFIT FOR INCOME TAXES (96,384) 97,612 (1,019,481) 278,722
BENEFIT FOR INCOME TAXES (40,000) (364,000)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (56,384) $ 97,612 $ (655,481) $ 278,722
============ ============ ============ ============
(LOSS) INCOME PER COMMON SHARE -
BASIC AND DILUTED $ (0.01) $ 0.01 $ (0.09) $ 0.04
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 8,908,379 8,908,379 7,017,037 7,017,037
============ ============ ============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE> 5
Osage Systems Group, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (655,481) $ 278,722
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 436,362 37,800
Deferred income taxes (176,231) (55,000)
Changes in operating assets and liabilities:
Accounts receivable (4,425,113) (304,432)
Inventories 59,458 (3,595)
Prepaid expenses and other assets (269,335) 35,317
Accounts payable 3,057,505 349,859
Accrued expenses 1,442,881 160,054
Deferred revenue (1,011)
Income taxes payable (232,682)
----------- -----------
Net cash (used in) provided by operating activities (763,647) 498,725
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (590,242) (16,612)
Acquisition costs, net of cash received of $185,227 (5,233,896)
Investments (100,000)
----------- -----------
Net cash used in investing activities (5,824,138) (116,612)
----------- -----------
FINANCING ACTIVITIES:
Net repayments on notes payable (319,787) (25,451)
Net proceeds from sale of common stock 6,086,598
Net increase in note receivable 59,163
Purchase of treasury stock (105,830)
----------- -----------
Net cash provided by (used in) financing activities 5,825,974 (131,281)
----------- -----------
NET (DECREASE) INCREASE IN CASH (761,811) 250,832
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,576,323 564
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,814,512 $ 251,396
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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OSAGE SYSTEMS GROUP, INC.
NOTES TO UNAUDITED CONDENSED 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 its cash
flows 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. ("Osage") and its wholly-owned subsidiaries, Osage
Computer Group, Inc. ("Osage"), Solsource Computers, Inc. ("Solsource"),
H.V. Jones, Inc. ("HV Jones"), Open System Technologies, Inc. ("OST"),
Open Business Systems, Inc. ("OBS") and Osage Systems Group Minnesota,
Inc., (collectively, the "Company"). 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 years 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.
On March 17, 1998, Osage acquired Solsource pursuant to the terms of an
Agreement and Plan of Merger. Upon closing, through a wholly-owned
subsidiary, Osage 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.
4
<PAGE> 7
On March 17, 1998, Osage also completed the acquisition of HV Jones
pursuant to the terms of an Agreement and Plan of Merger dated February
27, 1998. Upon closing, through a wholly-owned subsidiary, Osage 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
convert into common stock during the four quarters following the closing
(commencing June 17, 1998) 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. In
addition, the merger consideration included earn-out incentive shares to
be issued if HV Jones achieves certain performance targets.
On April 24, 1998, Osage completed the acquisition of 100% of the
outstanding capital stock of OST for merger consideration of $5,000,000;
consisting of $2,500,000 in cash, $2,000,000 in newly issued common shares
priced at $6.00 per share and $500,000 in a key employee retention
program.
On June 22, 1998, Osage completed the acquisition of 100% of the
outstanding capital stock of OBS for merger consideration of $4,000,000;
consisting of $2,000,000 in cash and $2,000,000 in newly issued common
shares priced at $5.52 per share. In addition, the merger consideration
included earn-out incentive shares to be issued if OBS achieves certain
performance targets.
The Solsource, HV Jones, OST and OBS 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 20 years. Results of operations of Solsource,
HV Jones, OST and OBS have been included in the Company's statement of
operations from their respective acquisition dates.
Subsequent to September 30, 1998, the Company completed the acquisitions
of Electronic Commerce Network Solutions Corporation ("E-Comm") and the
systems integration business of IntraNet Solutions, Inc. (NASDAQ: INRS).
On October 8, 1998, Osage acquired E-Comm pursuant to the terms of an
Agreement and Plan of Merger. Upon closing, through a wholly-owned
subsidiary, Osage acquired 100% of the outstanding stock of E-Comm for
merger consideration of $1,250,000; consisting of $232,500 in cash,
$930,000 in newly issued common shares priced at $6.21 per share and
$87,500 in a key employee retention program. In addition, the merger
consideration included earn-out incentive shares to be issued if E-Comm
achieves certain performance targets.
5
<PAGE> 8
On October 15, 1998, Osage completed the acquisition of the systems
integration business of IntraNet Solutions, Inc. for merger consideration
of $1,600,000; consisting of $715,000 in cash, $785,000 in the form of a
Note, in which $250,000 shall be due and payable within 30 days after the
Closing and the remaining principal amount of $535,000 shall be due and
payable within 90 days after the Closing, and $100,000 in a key employee
retention program. In addition, the merger consideration included earn-out
incentive shares to be issued based upon predetermined financial criteria.
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, 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 nine months ended September 30, 1998 and 1997
combines historical financial information of Osage, Solsource, HV Jones,
OST and OBS for the nine months ended September 30, 1998 and 1997.
PRO FORMA INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Sales $49,031,166 $33,284,722
Net (loss) income $(1,765,205) $ 163,168
Net (loss) income per share:
basic and diluted $ (0.25) $ 0.02
</TABLE>
4. Earnings Per Share.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. 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 common stock outstanding plus additional shares that
would have been outstanding if all dilutive potential common shares had
been issued.
6
<PAGE> 9
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period after giving effect to stock options and the conversion of
preferred shares considered to be dilutive. Because the Company incurred a
loss for the three and nine month periods ended September 30, 1998, the
effects of the potential dilutive securities are not included in the
calculations.
5. New Accounting Pronouncements.
In June 1997, the 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which is effective for
the Company in 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The standard also provides
specific guidance for accounting for derivatives designated as hedging
instruments. The Company is currently evaluating what impact, if any,
this standard will have on its financial statements.
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
7
<PAGE> 10
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 September 30, 1998 is comprised of the
following:
<TABLE>
<S> <C>
Net operating loss carryforward $ 464,000
Use of cash basis of accounting for income tax (43,000)
purposes
Allowance for doubtful accounts 21,000
Deferred compensation 320,000
Other 16,000
---------
Net current asset $ 778,000
=========
</TABLE>
7. Stock Options.
As part of the Company's original acquisition of Osage on December 22,
1997, options were granted to the former Osage stockholders at an exercise
price of $3.00, however, vesting was contingent upon the future earnings
of the Company and the Holders' continued employment by the Company.
Because these options were "performance-based", the Company previously
reported that it would have to record compensation expense in the future
if the earnings of the Company achieved agreed upon levels and other
events occurred that would lead management to believe that vesting of the
options was a probable occurrence. The expense, when recorded, could have
had an adverse effect on the Company's income for financial accounting
purposes, as it would have approximated the difference between the
exercise price of the options and the fair market value of the Company's
Common Stock at that time. In recognition of the potential charge upon the
Company's earnings, and for other consideration, during June 1998, the
Company restructured the options so as to increase the number of options
granted, increase the exercise price to $4.50 (fair market value when
granted) and eliminate any vesting conditions. As restructured, management
does not believe that the Company will record compensation expense in the
future based upon the grant of these options.
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
8
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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 Company's
ability to acquire profitable target companies; (iv) uncertainty as to whether
the Company can achieve integration of target companies in a manner intended to
take advantage of overall corporate synergies and result in an accretion to
consolidated earnings; (v) 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; (vi) 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; (vii) the Company's
dependence on certain large customers and suppliers; (viii) the Company's
dependence on certain key personnel; (ix) the competitive market for technical
personnel and; (x) 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
operated a 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 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
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<PAGE> 12
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 external growth through acquisitions
as well as internal growth through expansion of operations. The Company is
currently pursuing an aggressive acquisition strategy to enhance its position in
its current markets and acquire operations in new markets. The focus of this
strategy is on acquiring candidates who management believes are likely to
benefit from the Company's long-term growth strategy and status as a public
company. Through its acquisition parameters, the Company is continuing to seek
and identify target companies who have a proven record of delivering
high-quality technical services, a customer base of large and mid-sized
companies and operations that offer synergies with existing or anticipated
segments of the Company's business.
10
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997
---------------------------------------------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
------ --------- ------ ---------
<S> <C> <C> <C> <C>
NET SALES $ 19,682,686 100.0% $ 3,659,682 100.0%
COST OF SALES 15,381,384 78.1 2,953,209 80.7
------------ ----- ------------ -----
Gross profit 4,301,302 21.9 706,473 19.3
------------ ----- ------------ -----
OPERATING EXPENSES:
Selling, general and 4,068,931 20.7 596,643 16.3
administrative expenses
Depreciation and amortization 248,761 1.3 12,600 .3
------------ ----- ------------ -----
Total operating expenses 4,317,692 22.0 609,243 16.6
------------ ----- ------------ -----
(LOSS) INCOME FROM OPERATIONS (16,390) (.1) 97,230 2.7
INTEREST - NET (79,994) (.4) 382 --
------------ ----- ------------ -----
(LOSS) INCOME BEFORE BENEFIT FOR
INCOME TAXES (96,384) (.5) 97.612 2.7
BENEFIT FOR INCOME TAXES (40,000) (.2)
------------ ----- ------------ -----
NET (LOSS) INCOME $ (56,384) (.3%) $ 97,612 2.7%
============ ===== ============ =====
NET INCOME (LOSS) PER SHARE:
Basic and Diluted $ (.01) $ .01
============ ============
</TABLE>
Revenues. Net sales increased by 438%, or $16.0 million to $19.7 million,
for the three months ended September 30, 1998 as compared to $3.7 million for
the same prior year period. This increase in net sales was principally
attributable to the acquisitions of Solsource, HV Jones, OST and OBS during the
current period and 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 combined with increased market penetration in the
Company's expanding territories. Net sales resulting from the acquisitions of
Solsource, HV Jones, OST and OBS amounted to $15.6 million for the three months
ended September 30, 1998. Consulting revenues increased by 1,608%, or
$1,863,600, to $1,979,500, for the three months ended September 30, 1998 as
compared to $115,900 for the same prior year period. 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 especially as it relates to the Company's Java Development and
Enterprise Resource Planning ("ERP") practices coupled with the acquisitions
made during the year. Management expects that net sales will continue to
increase as the Company further implements its acquisition strategy and more
fully recognizes the revenue contribution from its recently acquired companies
(See "Acquisition Strategy").
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<PAGE> 14
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 509% or $3.6 million to $4.3 million for the
three months ended September 30, 1998 as compared to $.7 million for the same
prior year period. Gross profit margin increased to 21.9% during the three
months ended September 30, 1998, as compared to 19.3% experienced during the
same prior year period. During the three month period ended September 30, 1998,
the Company experienced an overall increase in its gross profit margin. This was
primarily due to an increase in the services portion of the Company's business
which has higher margins as compared to product sales. 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 582% or $3.5 million to $4.1 million for
the three months ended September 30, 1998 as compared to $.6 million for the
same prior year period. Also, during the three months ended September 30, 1998,
as a percent of net sales, selling, general and administrative expenses
increased to 20.7%, from 16.3% experienced during 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 during the fourth quarter of
1997 and implemented an aggressive growth strategy during 1998. This resulted in
a significant increase in the Company's administrative personnel and travel and
promotion expenses. Corresponding increases in legal and accounting fees were
also incurred by the Company in connection with its financing and acquisition
activities and for historical audits performed on assorted acquisition targets.
Management believes that its selling, general and administrative expenses will
continue to be more fully absorbed as the Company further implements its
acquisition strategy (See "Acquisition Strategy").
Depreciation and Amortization. Depreciation and amortization increased
1,874%, or $236,200, for the three months ended September 30, 1998 as compared
to the same prior year period. This increase was primarily due to the
amortization of goodwill and depreciation of assets acquired in connection with
the acquisitions that occurred during the year.
Net Income (Loss). During the three months ended September 30, 1998, the
Company incurred a net loss of $56,400 as compared to net income of $97,600 for
the same prior year period. The net loss for the current period, however,
includes $248,800 of non-cash charges relating to depreciation and amortization
resulting from the Company's acquisition program. Additional factors
contributing to the Company's net loss consisted of significant increases in the
Company's overhead expenses as corporate infrastructure was established in
anticipation of future growth through the Company's acquisition program.
Management believes that as net sales continue to increase, overhead costs
associated with corporate infrastructure will be more fully absorbed.
12
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997
--------------------------------------------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
------ --------- ------ ---------
<S> <C> <C> <C> <C>
NET SALES $ 38,090,289 100.0% $ 8,588,163 100.0%
COST OF SALES 30,528,129 80.1 6,816,471 79.4
------------ ----- ------------ -----
Gross profit 7,562,160 19.9 1,771,692 20.6
------------ ----- ------------ -----
OPERATING EXPENSES:
Selling, general and
administrative expenses 8,091,389 21.3 1,458,214 17.0
Depreciation and amortization 436,362 1.1 37,800 .4
------------ ----- ------------ -----
Total operating expenses 8,527,751 22.4 1,496,014 17.4
------------ ----- ------------ -----
(LOSS) INCOME FROM OPERATIONS (965,591) (2.5) 275,678 3.2
INTEREST INCOME - NET (53,890) (.2) 3,044 --
------------ ----- ------------ -----
(LOSS) INCOME BEFORE BENEFIT FOR
INCOME TAXES (1,019,481) (2.7) 278,722 3.2
BENEFIT FOR INCOME TAXES (364,000) (1.0)
------------ ----- ------------ -----
NET (LOSS) INCOME $ (655,481) (1.7%) $ 278,722 3.2%
============ ===== ============ =====
NET (LOSS) INCOME PER SHARE:
Basic and Diluted $ (.09) $ 04
============ ============
</TABLE>
Revenues. Net sales increased by 344%, or $29.5 million to $38.1 million,
for the nine months ended September 30, 1998 as compared to $8.6 million for the
same prior year period. This increase in net sales was principally attributable
to the acquisitions of Solsource, HV Jones, OST and OBS during the period and
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 combined with increased market penetration in the Company's expanding
territories. Net sales resulting from the acquisitions of Solsource, HV Jones,
OST and OBS amounted to $24.6 million for the nine months ended September 30,
1998. Consulting revenues increased by 803%, or $2,469,200, to $2,776,600, for
the nine months ended September 30, 1998 as compared to $307,400 for the same
prior year period. 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 especially as it
relates to the Company's Java Development and ERP practices coupled with the
acquisitions made during the year. Management expects that net sales will
continue to increase as the Company further implements its acquisition strategy
and more fully recognizes the revenue contribution from its recently acquired
companies (See "Acquisition Strategy").
13
<PAGE> 16
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 327% or $5.8 million to $7.6 million for the
nine months ended September 30, 1998 as compared to $1.8 million for the same
prior year period. Gross profit margin, however, decreased to 19.9% during the
nine months ended September 30, 1998, as compared to 20.6% experienced during
the same prior year period. During the second half of 1997 and the first half 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 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 455% or $6.6 million to $8.1 million for
the nine months ended September 30, 1998 as compared to $1.5 million for the
same prior year period. Also, during the nine months ended September 30, 1998,
as a percent of net sales, selling, general and administrative expenses
increased to 21.3%, from 17.0% experienced during 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 during the fourth quarter of
1997 and implemented an aggressive growth strategy during 1998. This resulted in
a significant increase in the Company's administrative personnel and travel and
promotion expenses. Corresponding increases in legal and accounting fees were
also incurred by the Company in connection with its financing and acquisition
activities and for historical audits performed on assorted acquisition targets.
Management believes that its selling, general and administrative expenses will
continue to be more fully absorbed as the Company further implements its
acquisition strategy (See "Acquisition Strategy").
Depreciation and Amortization. Depreciation and amortization increased
1,054%, or $398,600, for the nine months ended September 30, 1998 as compared to
the same prior year period. This increase was primarily due to the amortization
of goodwill and depreciation of assets acquired in connection with the
acquisitions that occurred during the year.
Net Income (Loss). During the nine months ended September 30, 1998, the
Company incurred a net loss of $655,500 as compared to net income of $278,700
for the same prior year period. The net loss for the current period, however,
includes $436,400 of non-cash charges relating to depreciation and amortization
resulting from the Company's acquisition program and growth of its corporate
infrastructure. Additional factors contributing to the Company's net loss
consisted of significant increases in the Company's overhead expenses as
corporate infrastructure was established in anticipation of future growth
through the Company's acquisition program.
14
<PAGE> 17
Management believes that as net sales continue to increase, overhead costs
associated with corporate infrastructure will be more fully absorbed.
ACQUISITION STRATEGY
The Company's objective is to be one of the leading providers of systems
integration and related services throughout the United States. The Company has
developed an interrelated growth and operating strategy to achieve this
objective. A key element of the Company's growth strategy is an acquisition
program which is intended to take advantage of the highly fragmented composition
of the marketplace.
Since the beginning of 1998, the Company has executed upon its acquisition
strategy through the acquisition of Solsource (March 17, 1998), HV Jones (March
17, 1998), OST (April 24, 1998), OBS (June 22, 1998), E-Comm (October 8, 1998)
and the systems integration business of IntraNet Solutions, Inc. (October 15,
1998). These acquisitions were accounted for under the purchase method of
accounting for business combinations. Accordingly, the Company's results of
operations include only the operations of each of these companies from the date
of acquisition through the end of the period reported. During the year ended
December 31, 1997, Solsource, HV Jones, OST, OBS, E-Comm and the systems
integration business of IntraNet Solutions, Inc. realized net sales of $7.3
million, $5.6 million, $11.9 million, $9.2 million, $.8 million and $13.8
million, respectively. On a proforma basis, the Company would have realized net
sales of approximately $62.8 million during the year ended December 31, 1997 had
all of these acquisitions occurred as of January 1, 1997.
The Company's net sales are expected to continue to increase during 1998
and 1999 as the Company continues to execute upon its acquisition strategy. The
Company's acquisition strategy, however, relies primarily upon identifying
target companies that fit within its acquisition criteria and having sufficient
financing available to complete its acquisitions. There can be no assurances
that sufficient financing will be available to facilitate the continuation of
the Company's acquisition program on a longer-term basis.
Due to the early stages of the Company's acquisition 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. Through the third quarter of
1998, the acquisition strategy may have contributed towards the net loss of the
Company in several respects. First, certain of the acquired companies have
continued to incur losses from operations, or have required significant cash
advances from the Company, which, in turn, has adversely affected the Company's
results of operations. Second, the acquisition strategy has caused the Company
to significantly increase its selling, general and administrative expenses which
have also contributed negatively toward the Company's results of operations. As
net sales continue to increase, however, the Company's overhead will be spread
over a larger revenue base which is expected to have a positive impact on the
Company's results of operations.
15
<PAGE> 18
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 or increase the loss in that quarter. A variety of factors,
many of which are not within the Company's control, influence the Company's
quarterly revenues, 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 nine months ended
September 30, 1998, cash used in operating activities was ($763,600), compared
to $498,700 of cash 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 significant costs invested
in building the Company's corporate infrastructure, offset by an increase in the
level of accounts payable and accrued expenses.
The Company's working capital was $1,996,700 at September 30, 1998, as
compared to $2,074,800 at December 31, 1997. The decrease in the Company's
working capital during the period is principally attributable to the Company
using the net proceeds received from assorted private placement transactions to
close the acquisitions undertaken during the year. An additional $1,700,000 was
applied by the Company to support the operations and pay-off short-term debt of
Solsource, HV Jones and OST.
The Company's line of credit with Bank of America contained customary
financial covenants requiring the maintenance of certain financial ratios. As of
September 30, 1998, the Company was not in compliance with certain of its
financial covenants. Outstanding borrowings at September 30, 1998 of $750,000
were subsequently repaid by the Company with funds provided by Finova Capital
Corporation ("Finova") pursuant to an existing working capital
16
<PAGE> 19
relationship. In connection with the repayment, the credit agreement with Bank
of America was terminated.
The Company believes that its current working capital, available financing
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 debt facilities, 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.
READINESS FOR THE YEAR 2000
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 Company believes that a majority of the costs associated with becoming
Year 2000 compliant are not incremental to the Company, rather represent a
reallocation of existing resources and regularly scheduled system upgrades and
maintenance. In addition, the Company is currently undergoing an internal system
implementation for the purpose of improving operating efficiencies, integrating
companies acquired during 1998 and obtaining Year 2000 compliance once fully
implemented. The Company believes that the costs of the aforementioned Year 2000
efforts are not material and estimates that such costs will be approximately
$1.5 million. This estimate does not include potential expenditures related to
customers or other claims. The Company currently anticipates the aforementioned
evaluation of its products, services, systems and any necessary remediation to
be completed by the end of the second fiscal quarter of 1999. 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
17
<PAGE> 20
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which is effective for the Company in 2000. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The standard also provides specific
guidance for accounting for derivatives designated as hedging instruments. The
Company is currently evaluating what impact, if any, this standard will have
on its financial statements.
18
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
CONVERSION OF SERIES B SHARES.
The Certificate of Designation of the Company's Series B Convertible
Preferred Stock (the "Series B Shares") provided that the holders of the Series
B Shares (the historic stockholders of Osage Computer Group, Inc.) were entitled
to vote in the election of directors by casting votes equal to the total number
of shares of Common Stock entitled to vote plus one. Accordingly, holders of the
Series B Shares were permitted to elect a majority of the Board of Directors.
The holders of the Series B Shares agreed to relinquish this right upon adoption
of the amendment to the Company's Certificate to provide for the classification
of the Board of Directors. In order to effectuate this agreement, the holders of
the Series B Shares agreed to convert all such shares into shares of Common
Stock which was completed on August 25, 1998.
RECENT SALES OF UNREGISTERED SECURITIES.
1. In August 1998, the Company issued 70,000 shares of Common Stock at a
purchase price of $4.75 per share to IT Services Corp., an accredited investor
in a private placement transaction exempt from registration pursuant to Section
4(2) of the Act and Rule 506 of Regulation D as an issuer transaction not
involving a public offering. In connection with this transaction, the Company
realized gross proceeds of $332,500 and paid a brokerage fee consisting of a
cash commission of $33,250 and warrants to purchase 35,000 shares of the
Company's Common Stock at an exercise price of $5.25 per share for a term of
four years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REG. S-B) DESCRIPTION METHOD OF FILING
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K:
(i) An Amendment to Form 8-K (Form 8-K/A) was filed with the
Securities and Exchange Commission on September 4, 1998 amending a previously
filed 8-K
19
<PAGE> 22
dated as of June 22, 1998 relative to the Company's acquisition of Open Business
Systems, Inc. The Amendment contained the historical "Financial Statements of
Acquired Businesses" and "Pro Forma Financial Information" required under Items
7(a) and 7(b) of Form 8-K.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-QSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack R. Leadbeater Dated: November 13, 1998
----------------------
Jack R. Leadbeater
Chairman of the Board and
Chief Executive Officer
By: /s/ John Iorillo Dated: November 13, 1998
----------------
John Iorillo
Chief Financial Officer (Principal
Financial and Accounting Officer)
21
<PAGE> 24
EXHIBIT INDEX
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REG. S-B) DESCRIPTION
27 Financial Data Schedule
22
<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> SEP-30-1998
<CASH> 1,814,512
<SECURITIES> 0
<RECEIVABLES> 10,685,783
<ALLOWANCES> 52,000
<INVENTORY> 477,557
<CURRENT-ASSETS> 14,149,429
<PP&E> 1,816,920
<DEPRECIATION> 796,896
<TOTAL-ASSETS> 27,961,289
<CURRENT-LIABILITIES> 12,152,724
<BONDS> 0
0
3,500
<COMMON> 93,067
<OTHER-SE> 15,064,830
<TOTAL-LIABILITY-AND-EQUITY> 27,961,289
<SALES> 38,090,289
<TOTAL-REVENUES> 38,090,289
<CGS> 30,528,129
<TOTAL-COSTS> 30,528,129
<OTHER-EXPENSES> 8,527,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,890)
<INCOME-PRETAX> (1,019,481)
<INCOME-TAX> (364,000)
<INCOME-CONTINUING> (655,481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (655,481)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
