<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, VIA EDGAR ON MARCH 31,
1998
REGISTRATION NO. 333 -_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------
OSAGE SYSTEMS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4374983
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7373
(PRIMARY STANDARD CLASSIFICATION CODE
NUMBER)
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE AND PRINCIPAL
PLACE OF BUSINESS)
Mr. Jack R. Leadbeater
1661 East Camelback Road
Suite 245
Phoenix, AZ 85016
(602) 274-1299
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
(215) 665-3873
--------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
following effectiveness of this Registration Statement.
--------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: / X /
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement in the same offering: / /
--------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: / /
--------------------
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
--------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: / /
------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------- -------------------- ---------------------- ------------------------ ========================
Title of
Each Class
of Securities Amount Proposed Proposed
to be to be Maximum Offering Maximum Aggregate Amount of
Registered Registered(1) Price Per Share(2) Offering Price Registration Fee(3)
- --------------------- -------------------- ---------------------- ------------------------ ========================
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 4,351,982 $6.87 $29,898,116.34 $9,060.04
===================== ==================== ====================== ======================== ========================
</TABLE>
(1) Represents shares of the Company's Common Stock which may be offered by
certain Selling Security Holders. See "SELLING SECURITY HOLDERS."
(2) Reflects the last closing bid price of the Company's Common Stock on
the OTC Bulletin Board on March 26, 1998.
(3) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee.
------------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 3
OSAGE SYSTEMS GROUP, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS OR PAGE
- ---------------------------------------------- ------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Forepart of the Registration Statement; Outside
of Prospectus..................................................... Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus.......... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risks.................................... Prospectus Summary; Risk Factors; Summary
Consolidated Financial Data
4. Use of Proceeds.................................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.................................. Cover Page of Prospectus; Plan of Distribution
6. Dilution......................................................... Not Applicable
7. Selling Security Holders......................................... Selling Security Holders
8. Plan of Distribution............................................. Cover Page of Prospectus; Plan of Distribution;
Risk Factors
9. Legal Proceedings................................................ Business
10. Directors, Executive Officers, Promoters and Control Persons..... Management
11. Security Ownership of Certain Beneficial Owners and Management... Principal Stockholders and Selling Security
Holders
12. Description of Securities........................................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Description of Securities;
Plan of Distribution
13. Interest of Named Experts and Counsel............................ Not Applicable
14. Disclosure of Commission Position on Indemnification for Limitations on Directors' Liabilities,
Securities Act Liabilities........................................ Indemnification and Directors' and Officers'
Insurance; Part II; Item 24 - Indemnification
of Directors and Officers
15. Organization Within Last Five Years.............................. Not Applicable
16. Description of Business.......................................... Business
17. Management's Discussion and Analysis of Financial Condition and Management's Discussion and Analysis or Plan of
Results of Operations............................................. Operation
18. Description of Property.......................................... Business
19. Certain Relationships and Related Transactions................... Certain Relationships and Related Transactions
20. Market Price For Common Equity and Related Stockholder Matters... Market Price for the Company's Common Equity;
Description of Securities
21. Executive Compensation........................................... Management
22. Financial Statements............................................. Capitalization; Summary Financial Information;
Market Price for the Company's Common Equity;
Financial Statements
23. Changes in and Disagreements with Accountants on Accounting and Experts
Financial Disclosure..............................................
</TABLE>
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, not shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
DATED MARCH 31, 1998
OSAGE SYSTEMS GROUP, INC.
---------------
4,351,982 Shares of Common Stock
offered by certain Selling Security Holders,
subject to adjustment as described herein.
----------------
This Prospectus relates to the sale of 4,351,982 shares, subject to adjustment
as described under "SELLING SECURITY HOLDERS" below, of common stock, $.01 par
value per share (the "Common Stock") of OSAGE SYSTEMS GROUP, INC. (the
"Company"), all of which are being offered by the holders thereof identified as
"Selling Security Holders" in this Prospectus, including 131,000 shares offered
by certain directors and executive officers and 1,350,000 shares offered by
certain principal stockholders. The shares of Common Stock offered hereby
include: (i) 2,901,997 shares of Common Stock; (ii) 1,220,000 shares of Common
Stock, subject to adjustment, which may be issued upon the conversion, if at
all, of the Company's outstanding Series A $3.00 Convertible Preferred Stock
(the "Series A Shares"); and (iii) 229,985 shares of Common Stock, subject to
adjustment, which may be issued upon the conversion of the Company's outstanding
Series C Convertible Preferred Stock (the "Series C Shares"). The shares of
Common Stock, Series A Shares and Series C Shares were previously issued by the
Company in private placement transactions. See "SELLING SECURITY HOLDERS" and
"DESCRIPTION OF SECURITIES." Certain of the shares of Common Stock being offered
by the Selling Security Holders are subject to restrictions upon resale. See
"PLAN OF DISTRIBUTION - RESTRICTIONS UPON RESALE."
The Shares of Common Stock may be offered by the Selling Security Holders
identified in this Prospectus or by donees, pledgees, transferees, or other
successors in interest, for sale from time to time by the holders in regular
brokerage transactions, either directly or through brokers or to dealers, in
private sales or negotiated transactions, or otherwise, at prices related to
then prevailing market prices. The Company will not receive any of the proceeds
of the sale of shares of Common Stock by the Selling Security Holders. All
expenses of the registration of such securities will be borne by the Company.
The Selling Security Holders, and not the Company, will pay or assume all
applicable brokerage commissions or other costs of sale as may be incurred in
the sale of such securities. See "SELLING SECURITY HOLDERS."
<PAGE> 5
The Company will assume no responsibility for the sale of the shares of Common
Stock of the Selling Security Holders, nor can there be any assurances that a
liquid trading market will exist for the sale of the shares of Common Stock to
be offered by the Selling Security Holders. See "RISK FACTORS."
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"OSGE." On March 26, 1998, the last reported bid price of the Common Stock was
$6.87 per share. See "MARKET PRICE FOR THE COMPANY'S COMMON EQUITY."
No person is authorized to give any information or to make any representations,
other than as contained herein, in connection with the offer made in this
Prospectus, and any information or representation not contained herein must not
be relied upon as having been authorized by the Company or the Selling Security
Holders. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any security other than the Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy any shares of Common Stock offered hereby to any person in any
jurisdiction where it is unlawful to make such an offer or solicitation to such
person. Neither the delivery of this Prospectus nor any sale hereunder shall
under any circumstances create any implication that information contained herein
is correct as of any time subsequent to the date hereof.
--------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF
THIS PROSPECTUS.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------- -------------------------- ------------------------------ -----------------------------
Price to Underwriting Discounts Proceeds to the Selling
Class of Security Public and Commissions Security Holders
- ----------------------------- -------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
Shares of $6.87 (1) $_____________(2)
Common Stock
- ----------------------------- -------------------------- ------------------------------ -----------------------------
</TABLE>
(1) Does not give effect to ordinary brokerage commissions or other costs
of sale that will be borne solely by the Selling Security Holders.
(2) Represents the anticipated sale by the Selling Security Holders at
$6.87, the closing bid price of the Company's Common Stock on the OTC
Bulletin Board on March 26, 1998. There can be no assurances, however
that the Selling Security Holders will be able to sell their shares of
Common Stock at this price, or that a liquid market will exist for the
Company's Common Stock. The Company will realize no proceeds upon the
sale of shares of Common Stock by the Selling Security Holders.
-----------------------
The date of this Prospectus is ________, 1998
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the caption "RISK FACTORS." Unless the context
otherwise requires, the "Company" refers to Osage Systems Group, Inc. and its
wholly-owned subsidiaries, Osage Computer Group, Inc. ("Osage"), Solsource
Computers, Inc. ("Solsource") and H. V. Jones, Inc. ("HV").
THE COMPANY
Through its wholly-owned subsidiaries, the Company is a provider of
network computing solutions. The Company markets a broad range of information
technology services and products intended to transform discrete hardware and
software components into an integrated system. The Company offers integration
services which assist customers in dealing with issues during the entire life
cycle of their systems, including system architecture and design, product
acquisition, configuration and implementation, ongoing operational support, and
evolutions in technology. The Company provides solutions to complex information
technology problems including system availability and performance,
UNIX/Microsoft Windows NT integration, client server database implementation,
electronic mail and messaging, system and network security, and
Internet/intranet and world wide web application deployment.
The Company's ability to deliver integrated solutions is principally
attributable to its technical expertise and its value-added reseller
relationships with industry-leading vendors of information technology products
such as Sun Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and
Microsoft. To date, most of its revenues have been derived from the resale of
products. The Company has also established relationships with leading
aggregators of computer hardware and software products. These relationships
enable it to provide its clients with competitive product pricing, ready product
availability and services such as electronic product ordering, product
configuration and testing and product warehousing and delivery.
The Company's customer base varies from relatively small companies to
Fortune 500 and other large and mid-sized companies. The Company's customer base
is generally located in the southwestern United States, primarily in Texas,
Arizona and Southern California; with an emphasis on industries such as
semi-conductor manufacturing, publishing, hospitality, distribution, military,
education, and state and local government.
Management believes that the relationships of value-added resellers
with certain industry-leading technology vendors provide them with access to
resources such as technical training, technical documentation, evaluation units
and leading-edge industry information. These resources represent significant
value to large and mid-sized companies that typically do not maintain such
in-house resources. Management also believes that reduced cost, increased
productivity and broader sales coverage, particularly in the burgeoning middle
market, is motivating technology vendors to sell their products through the
value-added channel. Given
3
<PAGE> 7
these market forces, management believes that value-added resellers such as the
Company will be well positioned to capitalize on anticipated growth in the
industry.
Given the size and highly fragmented composition of the industry, the
Company believes there is an opportunity to implement a market roll-up program
through the selective, strategic acquisition of other companies with
complementary businesses in a revenue range of $5 million to $15 million per
annum. Management believes that companies in this range of revenues may be
receptive to the Company's acquisition program as often they are too small to be
identified as acquisition targets of larger public companies or to attempt
independently their own public offering. In particular, the Company intends to
focus its acquisition strategy on candidates which have strong relationships
with key technology vendors, a proven record of delivering high-quality network
computing solutions and a customer base of large and mid-sized companies.
The Company commenced its acquisition program with the acquisition of
Solsource and HV Jones on March 17, 1998. In addition, the Company has recently
signed letters of intent to acquire two (2) additional companies. The
acquisitions subject to the letters of intent, however, remain in the
preliminary stages and are subject to due diligence review and other conditions
to closing. See "BUSINESS - Recent Acquisitions." The success of the acquisition
program will likely be dependent upon, among other factors, the Company's
ability to secure additional financing through the sale of debt or equity
securities, and the development of an active trading market for the Company's
securities, neither of which can be assured. See "RISK FACTORS."
BACKGROUND
The Company was originally incorporated as "Pacific Rim Entertainment,
Inc." under the laws of Delaware in 1992. From 1992 through 1996, the Company
had been engaged principally in the animated film production business. After
several years of losses following its initial public offering in 1993, the
Company suspended its business operations in 1996 and remained inactive while it
sought to identify a strategic business combination with a private operating
company. In December 1997, the Company acquired Osage Computer Group, Inc.
("Osage"), an Arizona corporation, which had been in the computer systems
integration business since 1989. The acquisition was completed through a merger
of Osage with and into a wholly-owned subsidiary of the Company which became
effective on December 22, 1997 (the "Merger"). Thereafter, the Company assumed
the historic operations of Osage and on March 10, 1998, changed its name to
"Osage Systems Group, Inc." The executive offices of the Company are located at
1661 East Camelback Road, Suite 245, Phoenix, Arizona 85016, and its telephone
number is (602) 274-1299.
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders:.................. 4,351,982 shares
Common Stock to be outstanding after the Offering:................. 7,019,985 shares(1)
Proceeds:.......................................................... The Company will not receive any of the
proceeds from the sale of shares by
Selling Stockholders.
Trading Symbol (OTC Bulletin Board)............................... OSGE
</TABLE>
- ---------------------------
(1) The Company presently has 5,570,000 shares of Common Stock outstanding.
The number of shares outstanding may increase as a result of this
offering as 1,449,985 additional shares, subject to adjustment, may be
issued upon the conversion of the Series A Shares and Series C Shares.
The number of outstanding shares does not include 500,000 shares of
Common Stock reserved for issuance pursuant to the conversion of the
Company's Series B $3.00 Convertible Preferred Stock (the "Series B
Shares") issued in the Merger and 1,300,000 shares of Common Stock
reserved for issuance pursuant to the exercise of outstanding stock
options; nor does it include shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding Redeemable Warrants.
See "DESCRIPTION OF SECURITIES."
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net Sales ........................................... $ 7,392 $ 9,908 $ 14,191
Gross profit ........................................ 1,176 2,214 2,521
Operating income (loss) ............................. 118 71 (286)
Net income (loss) .................................. 77 35 (293)
Net income (loss) per share: Basic .................. $ .02 $ .01 $ (.06)
Diluted ................ $ .02 $ .01 $ (.06)
Weighted average number of
shares outstanding ............................... 4,916,400 4,868,200 4,820,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:.............................................................
Cash and cash equivalents....................................................... $2,576
Working capital............................................................... 2,075
Total assets.................................................................. 4,880
Shareholders' equity.......................................................... 2,162
</TABLE>
- ---------------------
(1) The financial data presented above reflects the relevant Statement of
Income data and Balance Sheet data of Osage. The Company became
publicly held by virtue of the Merger on December 22, 1997 with Pacific
Rim Entertainment, Inc., an inactive public company. Since, as a result
of the Merger, the former stockholders of Osage acquired a controlling
interest in the Company, the Merger has been accounted for as a
"reverse acquisition." Accordingly, for financial statement
presentation purposes, Osage is viewed as the continuing entity and the
related business combination is viewed as a recapitalization of Osage,
rather than an acquisition by the Company.
6
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the shares of Common
Stock offered hereby should carefully review the following risk factors as well
as the other information set forth in this Prospectus.
This Prospectus contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Pro forma information
contained within this Prospectus, to the extent it is predictive of the
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions may also be characterized as forward-looking
statements. Although forward-looking statements are based on assumptions made,
and information believed, by management to be reasonable, no assurance can be
given that such statements will prove to be correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
projected or expected. Such risks and uncertainties are described under the
headings "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," "BUSINESS"
and in the risk factors set forth below.
1. Risks Related to Acquisition Strategy. The Company intends to grow
primarily through the acquisition of additional value-added reseller businesses.
Increased competition for acquisition candidates may develop in which event
there may be fewer acquisition opportunities available to the Company as well as
higher acquisition prices. There can be no assurance that the Company will be
able to identify, acquire or profitably manage additional businesses or
successfully integrate acquired businesses, if any, into the Company without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of risks, including possible adverse effects on
the Company's operating results, diversion of management resources, failure to
retain key personnel, risks associated with unanticipated liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Performance of, or other problems at, a single acquired
company could have an adverse effect on the Company's national sales and
marketing initiative. In addition, there can be no assurance that the Company or
other value-added reseller businesses acquired in the future will achieve
anticipated revenues and earnings.
2. Need for Additional Financing; Risks Related to Acquisition
Financing. Management believes that the Company has sufficient capital to
implement its acquisition strategy in the near term. However, it is anticipated
that in order to pursue the Company's acquisition strategy in the long term, the
Company will continue to require additional financing, which the Company intends
to obtain through a combination of traditional debt financing, the issuance of
its shares and the placement of debt and equity securities. The Company intends
to finance some portion of its future acquisitions by using shares of its Common
Stock for all or a substantial portion of the consideration to be paid. In the
event that the Common Stock does not attain or maintain a sufficient market
value, or potential acquisition candidates are otherwise
7
<PAGE> 11
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to maintain its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings.
3. Additional Dilution Associated with Outstanding Securities. There
are currently 1,449,985 shares of Common Stock, subject to adjustment, issuable
upon the exercise of the Series A Shares and the Series C Shares covered by this
Prospectus. Excluding the 500,000 shares of Common Stock issuable upon the
conversion of the Series B Shares and the 1,300,000 shares of Common Stock
issuable upon the exercise of outstanding stock options, the conversion of the
Series A Shares and Series C Shares would have the effect of increasing the
outstanding shares of the Company's Common Stock from 5,570,000 to 7,019,985.
The Company is unable to predict the effect, if any, that the future sale of
such shares, or the availability of such shares for future sale, will have on
the market price for the Company's Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such influx
of shares into the market could occur, could adversely effect the market price
of the Common Stock and could impair the Company's future ability to obtain
capital through offerings of equity securities or to accomplish its acquisition
strategy. See "ADDITIONAL DILUTION ASSOCIATED WITH ACQUISITION STRATEGY."
4. Additional Dilution Associated with Acquisition Strategy. The
Company is likely to require additional financing to fund its acquisition
strategy which may entail the issuance of additional shares of Common Stock or
common stock equivalents, which would have the effect of further increasing the
number of shares outstanding. See "NEED FOR ADDITIONAL FINANCING; RISKS RELATED
TO ACQUISITION FINANCING." The acquisitions that were recently completed provide
for the issuance of additional earn-out shares based upon the future net income
of Solsource and HV Jones. In addition, at an assumed market price of $6.00 per
share, the acquisitions which are currently pending contemplate the issuance of
approximately 666,000 shares of Common Stock. See "BUSINESS ACQUISITION
STRATEGY." Accordingly, in connection with the pending transactions and future
acquisitions, if any, the Company will likely undertake the issuance of more
shares of Common Stock without notice to the then existing stockholders. This
may be done in order to, among others, facilitate a business combination,
acquire assets or stock of another business, compensate employees or consultants
or for other valid business reasons in the discretion of the Company's Board of
Directors.
5. Variability of Performance. The Company has experienced, and is
expected to continue experiencing, quarterly variations in revenues and
operating income as a result of many factors, including the timing of projects
or purchases from customers, hiring of personnel and additional selling, general
and administrative expenses incurred to support the Company's growth. In
connection with certain projects, the Company could incur costs in periods prior
to recognizing revenues under those contracts. In addition, the Company must
plan its operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecast in any quarter would likely adversely affect the
Company's operating results for the quarter.
8
<PAGE> 12
6. Substantial Reliance on Key Customers. The Company's customer base
has been and continues to be highly concentrated, with its largest customer
accounting for 44% and 65% of net sales in the fiscal years ended December 31,
1996 and 1997, respectively. Based upon historical and recent results and
existing relationships with customers, the Company believes that a substantial
portion of its net sales and gross profits will continue to be derived from
sales to the Company's largest customers. There are no ongoing written
commitments by such customers to purchase products and services from the
Company. The Company has service contracts with many of its large customers to
provide systems integration and other services. In general, such service
contracts are project-based and terminable upon relatively short notice. There
can be no assurance that the Company's service customers will continue to enter
into service contracts with the Company or that existing contracts will not be
terminated. All product sales by the Company are made on a purchase order basis.
A significant reduction in orders from any of the Company's largest customers
could have a material adverse effect on the Company's results of operations.
There can be no assurance that the Company's largest customers will continue to
place orders with the Company or that orders by such customers will continue at
their previous levels.
7. Dependence on Key Personnel. The success of the Company for the
foreseeable future will depend largely on the continued services of its key
executive officers and leading salespersons. The Company is particularly
dependent upon Jack Leadbeater, Chief Executive Officer of the Company and David
Olson, Chief Operating Officer of the Company, because of their industry
knowledge, marketing skills and relationships with major vendors and customers.
The Company has employment agreements with each of Messrs. Leadbeater and Olson,
which contain a non-competition covenant which survive their actual term of
employment for a term of one year. The Company maintains, and is the beneficiary
of, life insurance policies each in the amount of $500,000 on the lives of
Messrs. Leadbeater and Olson. There can be no assurance that the departure of
such key personnel would not have a material adverse effect on the Company's
results of operations. Furthermore, there can be no assurance that the Company
will be successful in attracting and retaining the personnel it requires to
conduct its operations or to meet its future needs to accommodate growth
successfully.
8. Competitive Market for Technical Personnel. The Company's success
depends in part on its ability to attract, hire, train and retain qualified
managerial, technical and sales and marketing personnel, particularly for
systems integration and support services. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining the technical personnel it requires to conduct and
expand its operations successfully. The Company's results of operations could be
materially adversely affected if the Company were unable to attract, hire, train
and retain qualified personnel.
9. Dependence on Suppliers. The Company's business depends upon an
adequate supply of hardware, software products and computer systems at
competitive prices and on reasonable terms for resale by the Company.
Consequently, the Company's results of operations are dependent, in part, upon
the demand for, price of, technical capabilities of and quality of the products
available for resale. The Company's principal suppliers are Sun Microsystems,
Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft.
9
<PAGE> 13
To mitigate against a risk of product shortage, the Company will
procure some hardware and software products from multiple sources for the
products it sells. Some products are available from only a single source, as
manufacturers elect to provide a direct relationship with system integrators.
The Company has supply contracts with its vendors and purchases hardware and
software products, and computer systems on a purchase order basis. As a result,
there can be no assurance that such products will continue to be available as
required by the Company at prices or on terms acceptable to the Company.
Although the Company has not experienced significant problems with its
suppliers in the past, there can be no assurance that such relationships will
continue or that, in the event of a termination of its relationships with its
suppliers, it would be able to obtain alternative sources of supply for most
products without a material disruption in the Company's ability to provide
products to its customers. Any material disruption of the Company's supply of
products would have a material adverse effect on the Company's results of
operations.
10. Dependence on Continued Authorization to Resell and Provide
Manufacturer-Authorized Products and Services. The Company's future success in
both product sales and services and support offerings will depend largely on its
continued status as an approved reseller of products and its continued
authorization as a service provider. With respect to many of the Company's
hardware and software product sales, the Company maintains the highest levels of
sales and service authorizations with many industry-leading manufacturers,
including Sun Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard,
and Microsoft. Without such sales and service authorizations, the Company would
be unable to provide the range of products and services currently offered by the
Company. In general, the agreements between the Company and such manufacturers
include termination provisions ranging from immediate termination to termination
upon 90 days prior written notice. In addition, many of such agreements are
based upon the Company's ability to sell a certain volume of each manufacturer's
products and services. There can be no assurance that such manufacturers will
continue to authorize the Company as an approved reseller or service provider.
11. Year 2000 Issues. The Company is presently attempting to respond to
Year 2000 issues. Year 2000 issues are the result of computer programs being
written using two digits rather than four to define the applicable year
associated with the program or an associated computation. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities. Management expects to have substantially
all of the systems application changes completed within the next 12 months and
believes that its level of preparedness is appropriate.
The total cost to the Company of these Year 2000 compliance
issues is not anticipated to be material to its financial position or results of
operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
10
<PAGE> 14
third party modification plans and other factors. However, there can be no
assurances that these estimates will be achieved and actual results could differ
from those plans.
12. Dividends. No dividends have been paid by the Company since
inception and the payment of dividends is not contemplated in the foreseeable
future. The payment of future dividends will be directly dependent upon the
earnings of the Company, its financial needs and other similarly unpredictable
factors. Earnings, if any, are expected to be retained to finance and develop
the Company's business.
13. No Legal or Tax Advice. Any purchasers of the Company's Common
Stock should consult with their respective counsel, accountant or business
adviser as to legal, tax and related matters concerning investment in the Common
Stock offered hereby. An investment in the Common Stock may involve certain
material federal and state tax consequences.
14. Limited Public Market. Although the Company's Common Stock is
listed for trading on the OTC Bulletin Board, there is currently only limited
trading in the Company's Common Stock. There can be no assurances that a regular
trading market will develop or be maintained for the Company's Common Stock.
15 Substantial Voting Power of Principal Stockholders. The former
stockholders of Osage, including, principally, Jack Leadbeater and David Olson,
have voting control over up to 3.1 million shares of Common Stock. In addition,
pursuant to the terms of the Company's acquisition of Osage, the former
stockholders of Osage, as the holders of the Series B Shares, are entitled to
elect a majority of the Board of Directors subject to certain performance
criteria. See "PRINCIPAL STOCKHOLDERS - MATERIAL VOTING ARRANGEMENTS."
16. Intense Competition. The Company encounters intense competition
from numerous other systems integration companies. Many of the Company's
competitors are larger and have greater financial and other resources and are
better known to consumers than the Company. There can be no assurance that the
Company will be able to continue to compete successfully in its markets.
11
<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
by the Selling Security Holders.
MARKET PRICE FOR THE COMPANY'S COMMON EQUITY
The Company's Common Stock is listed on the OTC Bulletin Board under
the symbol "OSGE." The following table sets forth the range of the high and low
closing bid prices of the Common Stock.
<TABLE>
<CAPTION>
Common Stock(1)(2)
High Low
---- ---
<S> <C> <C>
1996
1st Quarter $0.01 $ 0.01
2nd Quarter $0.03 $ 0.01
3rd Quarter $0.03 $ 0.03
4th Quarter $0.10 $ 0.03
1997
1st Quarter $0.25 $ 0.10
2nd Quarter $0.25 $ 0.25
3rd Quarter $0.37 $ 0.25
4th Quarter (through December 22, 1997) $0.37(3) $ 0.12(3)
4th Quarter (December 23, 1997
through December 31, 1997) $4.00(4) $ 4.00(4)
1998
1st Quarter (through March 26, 1998) $6.87 $ 4.00
</TABLE>
- ---------------------------
(1) All per share data reflect the cumulative effect of a 1 for 10 and a 1
for 20 reverse stock split.
(2) Represents the high and low bid prices of the Company's Common Stock as
reported by the OTC Bulletin Board. Such prices are inter-dealer prices
without retail mark-ups or commissions and may not represent actual
transactions.
(3) Reflects the trading price prior to the effective date of the Merger
with Osage.
(4) Reflects the trading price following the effective date of the Merger
with Osage.
- ---------------------------
The last reported bid price of the Common Stock was $6.87 as reported
on the OTC Bulletin Board on March 26, 1998.
RECORD HOLDERS
As of March 26, 1998, there were approximately 192 holders of record of
the Common Stock. Based upon depository requests in connection with the
distribution of an Information Statement dated February 17, 1998, the Company
believes the number of beneficial owners of its Common Stock exceeds 900.
DIVIDENDS
The Company has not paid any cash dividends, to date, and has no
intention to pay any cash dividends on its Common Stock in the foreseeable
future. The declaration and payment of dividends is subject to the discretion of
the Board of Directors and to certain limitations under
12
<PAGE> 16
the General Corporation Law of the State of Delaware. The timing, amount and
form of dividends, if any, will depend, among other things, on the Company's
results of operations, financial condition, cash requirements and other factors
deemed relevant by the Board of Directors.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. This table should be reviewed in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
(IN THOUSANDS)
--------------------
<S> <C>
Cash $ 2,576
Shareholders' equity:
Series A Preferred stock, $100 stated value; 122 shares authorized 12
and outstanding
Series B Preferred stock, $100 stated value; 50 shares authorized 5
and outstanding
Common stock, $0.01 par value; 10,000,000 shares authorized; 48
4,820,000 shares issued and outstanding
Additional paid-in capital 2,773
Accumulated deficit (676)
-------
Total shareholders' equity 2,162
-------
Total capitalization $ 4,738
=======
</TABLE>
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Osage became publicly held by virtue of the Merger into a wholly-owned
subsidiary of the Company on December 22, 1997. The Company then operating under
the name "Pacific Rim Entertainment, Inc." had been an inactive public company
at the time of the Merger. Osage had been a provider of network computing
solutions since 1989. Following the Merger, the Company assumed the continuing
operations of Osage and on March 10, 1998, changed its name to "Osage Systems
Group, Inc." Since, as a result of the Merger, the former stockholders of Osage
acquired a controlling interest in the Company, the Merger has been accounted
for as a "reverse acquisition." Accordingly, for financial statement
presentation purposes, Osage is viewed as the continuing entity and the related
business combination is viewed as a recapitalization of Osage, rather than an
acquisition by the Company.
Through its operating subsidiaries, the Company markets a broad range
of information technology products and services intended to transform discrete
hardware and software components into an integrated system. The Company's
ability to deliver integrated solutions is principally attributable to its
technical expertise and its value-added reseller agreements with
industry-leading vendors of information technology products such as Sun
Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft.
The Company has also established relationships with leading aggregators of
computer hardware and software products. These agreements enable the Company to
provide its clients with competitive product pricing, ready product availability
and services. To date, most of its net sales have been derived from the resale
of products from these vendors, however, the Company anticipates that as it
continues to increase the technical expertise of its service personnel and
broaden the geographic base of its marketing coverage, an increasing percentage
of its net sales in the future will be derived from the services and support
component of its business.
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth, through acquisition and
accelerated internal growth. The Company is currently pursuing an aggressive
acquisition strategy to enhance its position in its current markets and acquire
operations in new markets. This strategy will focus on acquiring candidates who
have a proven record of delivering high-quality technical services, a customer
base of large and mid-sized companies and which may benefit from the Company's
long-term growth strategy and status as a public company. See "BUSINESS -
ACQUISITION STRATEGY."
15
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
% OF % OF % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
----------- --------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 7,391,969 100.0% $ 9,908,379 100.0% $ 14,191,203 100.0%
COST OF SALES 6,215,830 84.1% 7,694,775 77.7% 11,670,066 82.2%
----------- --------- ----------- --------- ------------ ---------
Gross profit 1,176,139 15.9% 2,213,604 22.3% 2,521,137 17.8%
----------- --------- ----------- --------- ------------ ---------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,058,410 14.3% 2,142,974 21.6% 2,807,340 19.8%
----------- --------- ----------- --------- ------------ ---------
INCOME (LOSS) FROM OPERATIONS 117,729 1.6% 70,630 .7% (286,203) -2.0%
INTEREST EXPENSE (9,256) -.1% (26,230) -.3% (9,731) -.1%
----------- --------- ----------- --------- ------------ ---------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 108,473 1.5% 44,400 .4% (295,934) -2.1%
PROVISION (BENEFIT) FOR INCOME
TAXES 31,042 .5% 9,464 -- (3,000) --
----------- --------- ----------- ---------- ------------ ----------
NET INCOME (LOSS) $ 77,431 1.0% $ 34,936 .4% ($ 292,934) -2.1%
=========== ========= =========== ========== ============ ==========
NET INCOME (LOSS) PER SHARE:
Basic $ .02 $ .01 $ (.06)
=========== =========== ============
Diluted $ .02 $ .01 $ (.06)
=========== =========== ============
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Net sales increased by 43.2%, or $4.3 million to $14.2
million, for the year ended December 31, 1997 as compared to $9.9 million for
the prior year. This increase in net sales was principally attributable to
increased product sales to new and existing customers as the Company experienced
favorable market acceptance of new products introduced by the Company's major
vendors. In addition, the Company opened a new regional sales office which
resulted in increased revenues. Consulting revenues increased 81.3% to $390,600
for the year ended December 31,1997 as compared to $215,500 for the prior year.
This increase was primarily attributable to demand for the Company's consulting
services and technical support resulting from the Company's increased focus on
the service component of its revenue base.
The Company's net sales are expected to increase during 1998 as the
Company implements its acquisition strategy. Towards this end, the Company
recently completed the acquisition of Solsource and HV Jones and entered into
letters of intent to acquire two (2) additional companies. There can be no
assurances that the acquisitions subject to the letters of intent will be
completed since both letters of intent are preliminary in nature and subject to
due diligence reviews and other conditions to closing. During 1997, Solsource
and HV Jones realized net sales of $7.3 million and $5.6 million, respectively.
On a proforma basis, the Company would have realized net sales of over $27
million during 1997 had both of these acquisitions occurred as of January 1,
1997.
16
<PAGE> 20
The Company's acquisition strategy relies primarily upon identifying
target companies that fit within the Company's acquisition criteria and having
sufficient financing available to complete its planned acquisitions. Although
the Company has sufficient financing available to complete its pending
acquisition targets, there can be no assurances that sufficient financing will
be secured so as to facilitate the continuation of the Company's acquisition
program on a longer-term basis. Furthermore, due to the early stages of this
program, there can be no assurances as to the long-term impact of the Company's
acquisition strategy on the gross profits or net income of the Company.
Gross Profit. The Company's cost of sales includes primarily, in the
case of product sales, the cost to the Company of products acquired for resale,
and in the case of services and support revenue, salaries and related costs. The
Company's gross profit increased by 13.9% or $.3 million to $2.5 million for the
year ended December 31, 1997 as compared to $2.2 million for the prior year.
Gross profit margin decreased to approximately 17.8% during the year ended
December 31, 1997, as compared to approximately 22.3% experienced during the
prior year. During 1997, the Company experienced an overall decrease in its
gross profit margin. This decrease was primarily due to cost reductions passed
on to the Company's customers from its major vendors as a result of an increase
in demand for the Company's products which occurred as certain customers
increased their volume of purchases. Management believes that in the long term
it will be able to sustain its profit margin as a result of its focus on
providing a broad spectrum of products, services and support packages, and
through a greater emphasis upon consulting and support services which typically
have a higher profit margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, sales person
compensation, employee benefits, travel, promotion and related marketing costs.
Selling, general and administrative expenses increased by 31.0% or $.7 million
to $2.8 million for the year ended December 31, 1997 as compared to $2.1 million
for the prior year. This increase in expenses is primarily attributable to the
expansion of the Company's infrastructure as it became publicly-held by virtue
of the Merger transaction during the fourth quarter of 1997, including increased
administrative personnel and increased travel and promotion expenses associated
with the growth of the business. This included a non-cash charge of $300,000
attributable to the granting of shares of Common Stock to one of the Company's
executive officers. During 1997, as a percent of net sales, selling, general and
administrative expenses decreased to approximately 19.8%, from 21.6% experienced
during the prior year.
During the fourth quarter of 1997 and the first quarter of 1998, the
Company increased its fixed payroll by the addition of three executive level
personnel. This may have the effect in the short-term of resulting in an
increase in the Company's selling, general and administrative expense as a
percentage of net sales. This increase is likely to be offset in the near-term
as the Company's revenues increase.
17
<PAGE> 21
As part of the Merger consideration, the Company granted options to
purchase 800,000 shares of its Common Stock to the former stockholders of Osage.
These options were granted at an exercise price of $3.00, and vest once the
future earnings of the Company attain certain agreed upon levels, and are
contingent upon the holder's continued employment by the Company. During 1997,
the Company recorded no compensation expense associated with the granting of
these options since the vesting of the Options was not probable at any time
during this period. However, management believes that the Company will record
compensation expense in the future if the earnings of the Company achieve agreed
upon levels and other events occur that lead management to believe that vesting
of the options is probable of occurrence. The expense, when recorded, could have
an adverse effect on the Company's income for financial accounting purposes, as
it would approximate the difference between the exercise price of the options
and the fair market value of the Company's Common Stock at that time. This would
have no effect, however, on the Company's cash flow from operations as the
vesting of the options is a non-cash event, and ultimately, the exercise of the
options would provide a capital infusion to the Company.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the eight (8) quarters through December 31,
1997. This information is derived from unaudited quarterly consolidated
financial statements of the Company that include, in the opinion of the Company,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results of operations for such periods. Such information
should be read in conjunction with the audited Consolidated Financial Statements
of the Company and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 1,201,310 $ 2,055,097 $ 2,602,370 $ 4,049,602 $ 2,155,180 $ 3,036,574 $ 3,273,151 $ 5,726,298
Gross profit 309,738 377,343 636,068 890,455 494,422 598,605 678,665 749,445
Selling, general
and administrative
expenses 283,830 299,331 433,371 1,126,442 439,261 447,510 609,242 1,311,327
Income (loss) from
operations 25,908 78,012 202,697 (235,987) 55,161 151,095 69,423 (561,882)
Interest expense (2,019) (12,192) (7,976) (4,043) (2,303) (359) (382) (6,687)
Provision (benefit)
for income taxes 9,464 (3,000)
Net income (loss) $ 23,889 $ 65,820 $ 194,721 $ (249,494) $ 52,858 $ 150,736 $ 69,041 $ (565,569)
</TABLE>
The Company's historical operating results have varied from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue in any fiscal quarter would result in
lower profitability in that quarter. A variety of factors, many of which are
18
<PAGE> 22
not within the Company's control, influence the Company's quarterly operating
results, including seasonal patterns of hardware and software capital spending
by customers, information technology outsourcing trends, the timing, size and
stage of projects, new service introductions by the Company or its competitors,
levels of market acceptance for the Company's products or services or the hiring
of additional staff. Operating results also may be impacted by the timing of
billings and changes in the Company's billing and utilization rates. The Company
believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future performance.
The Company anticipates that its business will continue to be subject to such
seasonal variations.
BACKLOG
The Company normally ships systems promptly after receiving an order
and therefore does not customarily have a significant backlog.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily from cash
generated by operations and, to a lesser extent, with funds from borrowings
under the Company's revolving line of credit. For the year ended December 31,
1996, cash flow from operations was $142,800, after the payment of bonuses of
$570,300. During the year ended December 31, 1997, cash flow from operations was
$504,300, after the payment of bonuses of $652,000. The Company's cash flow from
operations has been positively affected primarily by the increase in net sales,
together with increases in the collection of accounts receivable and in the
level of accounts payable. For the year ended December 31, 1997, accounts
receivable increased $35,100 with accounts payable increasing $309,100 from
December 31, 1996.
The Company's working capital was $2,074,800 at December 31, 1997, as
compared to a level of $210,900 at December 31, 1996. The increase in the
Company's working capital during such period is principally attributable to the
net proceeds received from a private placement of $3.66 million that was
completed during the fourth quarter of 1997, and, to a lesser extent, to the
growth of the Company's revenues during the period. A portion of the proceeds of
the private placement was used by the Company to: (i) retire approximately
$450,000 of short-term debt; (ii) pay the $500,000 cash component of the Merger
consideration to the former Osage stockholders; and (iii) pay $160,000 of fees
and expenses associated with the transaction.
The working capital of the Company continued to increase during the
first quarter of 1998 as the Company sold 600,000 shares of Common Stock in a
private placement transaction at a purchase price of $3.50 per share, which
resulted in net proceeds to the Company of $1,974,000, after paying commissions
of $126,000.
A $500,000 revolving credit facility was terminated by the Company in
connection with the Merger. The Company is currently negotiating with several
banks to secure a new credit facility. There can be no assurance, however, that
the Company will obtain such facility on favorable terms, if at all.
19
<PAGE> 23
The Company believes that the Company's current working capital and the
anticipated cash flow from operations will be adequate to fund operations for
the near term. However, the Company has commenced an aggressive acquisition
strategy (See "BUSINESS - ACQUISITION STRATEGY") which is likely to require
additional financing in the near term. The Company intends to finance these
acquisitions primarily through the use of cash, funds from lines of credit, if
and when available, and shares of its Common Stock or other securities. In the
event that the Company's Common Stock does not obtain or maintain a sufficient
market value or potential acquisition candidates are otherwise unwilling to
accept the Company's securities as part of the purchase price for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to continue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity
financings. See "RISK FACTORS."
The Company has recently initiated its acquisition program with the
acquisition of Solsource and HV Jones. See "BUSINESS - RECENT ACQUISITIONS." The
Solsource acquisition was completed for the purchase price of $1.1 million;
payable $200,000 in cash and $900,000 in newly issued shares of Common Stock
priced at $6.00 per share. The HV Jones acquisition was completed for the
purchase price of $1,975,000; payable $395,000 in cash and $1.58 million in
preferred stock that converts into Common Stock during the next four quarters at
a conversion rate equal to the lower of $6.87 per share or a 33% premium over
the average closing price of the Company's Common Stock for the 10 trading days
prior to each date of conversion.
YEAR 2000 MATTERS
The Company is presently attempting to respond to Year 2000 issues.
Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year associated with the
program or an associated computation. Any of the Company's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. Management expects to have substantially all of the systems
application changes completed within the next 12 months and believes that its
level of preparedness is appropriate.
The total cost to the Company of these Year 2000 compliance issues is
not anticipated to be material to its financial position or results of
operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurances that these estimates will be achieved and actual results could differ
from those plans.
IMPACT OF INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented.
20
<PAGE> 24
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"), which is effective for financial
statements for periods beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company does not believe the adoption of SFAS 130 will
have a material impact on its financial statement presentation or related
disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS 131")
which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 may require additional disclosures and will be effective
beginning January 1, 1998.
21
<PAGE> 25
BUSINESS
GENERAL
The Company was originally incorporated as "Pacific Rim Entertainment,
Inc." under the laws of Delaware in 1992. From 1992 through 1996, the Company
had been engaged principally in the animated film production business. After
several years of losses following its initial public offering in 1993, the
Company suspended its business operations in 1996 and remained inactive while it
sought to identify a strategic business combination with a private operating
company. The Company acquired, and thereafter, assumed the historic business of
Osage in the Merger that became effective on December 22, 1997. Osage had been a
provider of network computing solutions since 1989.
Through its operating subsidiaries, the Company markets a broad range
of information technology products and services intended to transform discrete
hardware and software components into an integrated system. The Company offers
integration services which assist customers in dealing with issues during the
entire life cycle of their systems; including system architecture and design,
product acquisition, configuration and implementation, ongoing operational
support, and evolutions in technology. The Company provides solutions to complex
information technology problems including system availability and performance,
UNIX/Microsoft Windows NT integration, client server database implementation,
electronic mail and messaging, system and network security, and
Internet/intranet and world wide web application deployment.
The Company's ability to deliver integrated solutions has enabled it to
establish a customer base ranging from relatively small companies to Fortune 500
and other mid-sized companies. The Company's customer base is generally located
in the southwestern United States, primarily in Texas, Arizona and Southern
California; with an emphasis in industries such as semi-conductor,
manufacturing, publishing, hospitality, distribution, military, education and
state and local government.
Management believes that its success is attributed principally to its
technical expertise, marketplace relationships, vendor alliances, direct sales
strategy and customer service orientation. The Company intends to grow primarily
through the acquisition of other value-added reseller businesses with similar
characteristics to the Company, and leveraging the common pool of resources
created by such acquisitions.
22
<PAGE> 26
INDUSTRY BACKGROUND
Dealing with the forces of change such as eroding profit margins,
shrinking business cycles and increased global competition has become a central
issue for businesses. Organizations of all sizes have recognized information
technology as being a competitive advantage in coping with such market forces.
These organizations have also realized that systems built on networked
technology, including client server databases, internet protocol ("IP") based
networks and the Internet/intranet systems can be more effective in enabling
this competitive advantage than are legacy systems built on older technology.
The increasingly complex nature and rapid change in technology has
created increased demand for companies with the expertise to design, integrate,
implement and manage the technology. This requires the services of a systems
integrator that has the proper blend of vendor relationships, resources,
technical expertise, products and services to integrate these technologies. In
recognition of the increasing complexity of computer systems and technologies,
growing numbers of technology users have been utilizing systems integrators to
coordinate information technology services and products. According to the
Computer Industry Report dated July 1997, the systems integration market is
forecast to grow 11% incrementally worldwide between 1996 and 2001 and 12%
incrementally in the United States for the same period. This service segment is
estimated to account for $60 billion of the worldwide Information Technology
market in 2001.
Management further believes that the relationships of value-added
resellers with certain industry-leading technology vendors provide them with
access to resources such as technical training, technical documentation,
evaluation units and leading-edge industry information. These resources
represent significant value to large and mid-sized companies that typically do
not maintain such in-house resources. Management also believes that reduced
cost, increased productivity and broader sales coverage, particularly in the
burgeoning middle market, is motivating technology vendors to sell their
products through the value-added channel. Given these market forces, management
believes that value-added resellers such as the Company will be well positioned
to capitalize on anticipated growth in the industry.
BUSINESS STRATEGY
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth through acquisition and
accelerated internal growth. The Company intends to carryout the following
strategies.
Expanding New and Existing Markets through Acquisitions: The Company is
currently pursuing an aggressive acquisition strategy to enhance its position in
its current markets and acquire operations in new markets. In particular, the
Company will focus its acquisition strategy on candidates that have a proven
record of delivering high-quality technical services, a customer base of large
and mid-sized companies and which may benefit from the synergies offered by the
Company's acquisition strategy. Management believes the Company will have many
acquisition
23
<PAGE> 27
opportunities in a fragmented market and be able to offer the management of
these acquisition candidates an opportunity to continue operating their
respective businesses as well as to participate in a company with a growth
strategy and liquid trading market for its securities. The Company looks forward
to expanding into new and existing markets by acquiring well-established
value-added resellers that are leaders in their regional markets. Given the size
and highly fragmented composition of the industry, the Company believes that
there is an opportunity to implement a market roll-up program within the
value-added reseller industry.
Accelerating Internal Growth: A key component of the Company's strategy is to
accelerate internal growth of the Company's existing business as well as the
existing business of its acquisitions. The Company expects that internal growth
can be accelerated by:
Applying Additional Resources to Current Operations. The value-added
reseller organizations which the Company expects to acquire are
primarily small, privately held companies. The Company intends to
facilitate internal growth of these acquisitions by providing them with
access to capital resources and technical expertise in product
procurement and integration services. Management recognizes that the
Company's capital resources are presently limited and anticipates that
future financing activities will be required to increase its capital
resources. There is a risk that the Company will be unable to secure
such additional resources. See "RISK FACTORS."
Leverage Additional Opportunity Through the Collective Skill Set. While
the collective skills of the acquired companies may have a high degree
of overlap there will also be technical and market areas which are
unique to particular companies. The Company intends to create an
environment in which each of the acquired companies is able to
cross-leverage their unique skills and markets for the benefit of the
entire organization. Management considers that this will result in
increased operating efficiencies without proportionate increases in
administrative costs.
Increase Services Revenues. The Company plans to implement a marketing
initiative designed to increase services revenues through the
development of standardized service packages. The Company intends to
create standardized service packages in several areas, including
systems administration, database administration, security and systems
and network performance tuning. Management believes that such service
packages will make the Company's products and services more
cost-effective and accessible to customers as well as increase the
Company's profit margins.
Development of Identity. The Company intends to produce marketing
materials and develop the market image and reputation of the Company as
a "national organization" of regional companies, with the goal of
providing business opportunities which would not normally be available
to a regional company.
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<PAGE> 28
ACQUISITION STRATEGY
The Company believes there are many attractive acquisition candidates
in its industry because of the highly fragmented composition of the marketplace,
the industry participants' need for capital and their owners' desire for
liquidity. The Company is pursuing an aggressive acquisition program to
consolidate and enhance its position in its current market and to acquire
operations in new markets.
Initially, the Company intends to expand its business through
selective, strategic acquisitions of other companies with complementary
businesses in a revenue range of $5 million to $15 million per annum. Management
believes that companies in this range of revenues may be receptive to the
Company's acquisition program as often they are too small to be identified as
acquisition targets of larger public companies or to attempt independently their
own public offerings. In particular, the Company intends to focus its
acquisition strategy on candidates which have a strong relationship with key
technology vendors, a proven record of delivering high-quality network computing
solutions and a customer base of large and mid-sized companies.
The Company believes it can successfully implement its acquisition
strategy due to: (i) the highly fragmented composition of the market; (ii) its
strategy for creating a national company, which should enhance the acquired
company's ability to compete in its local and regional market through an
expansion of offered services and lower operating costs; (iii) the additional
capital that management anticipates will become available for internal growth;
(iv) the potential for increased profitability as a result of the Company's
centralization of certain administrative functions, greater purchasing power,
and economies of scale; (v) the Company's status as a public corporation; (vi) a
decentralized management strategy, which should, in most cases, enable the
acquired company's management to remain involved in the operation of the
Company; and (vii) the ability to utilize its experienced management in
identifying acquisition opportunities.
A "platform acquisition" is defined by management as one that creates a
significant presence for the Company in a new geographic market. The Company
intends, where possible, to make a platform acquisition in a targeted market by
acquiring an established, high quality local company. The Company will retain
the management as well as the operating, sales and technical personnel of a
platform acquisition to maintain continuity of operations and customer service.
The Company will seek to increase an acquired company's revenues and improve its
profitability by implementing the Company's operating strategies for internal
growth.
A "tuck-in" acquisition on the other hand will more likely occur in an
existing market, will be smaller than a platform acquisition and will enable the
Company to offer additional services or expand into secondary markets within the
region already served. When justified by the size and business line of an
existing market acquisition, the Company expects to retain the management, along
with the operating, sales and technical personnel of the acquired company while
seeking to improve that company's profitability by implementing the Company's
operating strategies. The Company also contemplates effecting tuck-in
acquisitions of small companies or individual systems integration operations in
existing markets. In most instances, operations
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<PAGE> 29
acquired by tuck-in acquisition can be integrated into the Company's existing
operations in that market, resulting in elimination of duplicative overhead and
operating costs.
RECENT ACQUISITIONS
The Company commenced its acquisition program with the acquisition of
Osage and has recently acquired Solsource and HV Jones. Solsource is a systems
integrator headquartered in Carlsbad, California with principal sales offices in
Northern and Southern California. Solsource has two operating divisions within
the company. A presentation division provides portable UNIX laptops and high end
data projection equipment into the mobil computing marketplace. A systems
integration division provides complete hardware, software and service solutions
to address data and network security problems in large and small commercial
organizations. Solsource also provides specialized services for security audits,
firewall penetration testing and anti-virus protection. It distributes hardware
and software products from well known manufacturers such as Sun Microsystems,
Cisco Systems, Microsoft, Netscape, Checkpoint and Trend Micro. In 1996,
Solsource was ranked by Inc. Magazine as the 21st fastest growing private
company in America. Solsource employs approximately 30 people and during its
most recent fiscal year, realized revenues of $7.3 million.
HV Jones is a complex systems integrator headquartered in Houston,
Texas, with a sales and development office in Austin, Texas. HV Jones provides
proprietary services and turnkey technology infrastructure solutions in the
areas of business assessment, enterprise resource planning, interoperability,
database, networking and security. A major focus of its services is the
enterprise wide interoperability between UNIX and NT environments. This
includes: networking, server platforms, databases and systems management
interoperability services. Another major focus of HV Jones is providing the
complete data center infrastructure necessary to support enterprise resource
planning solutions such as SAP. Its market focus is on the middle market
(Fortune 1000 - 5000) in the sectors of manufacturing, distribution, medical,
telecommunications and general business. HV Jones represents hardware and
software products from well known manufacturers such as Hewlett Packard, Sun
Microsystems, Netscape, Silicon Graphics, Oracle, Cisco Systems, Ascend and
Digital Equipment Corp. HV Jones employs approximately 20 people and during its
most recent fiscal year, realized revenues of $5.6 million.
The Solsource acquisition was completed for a purchase price of $1.1
million; payable $200,000 in cash and $900,000 in newly issued common shares
priced at $6.00 per share. Additional earn-out shares may be issued if Solsource
achieves certain performance targets.
The HV Jones acquisition was completed for a purchase price of
$1,975,000; payable $395,000 in cash and $1.58 million in preferred stock that
converts into common stock during the next four quarters at a conversion rate
equal to the lower of $6.87 or a 33% premium over the average closing price of
the Company's common stock for the ten (10) trading days prior to each date of
conversion. Additional earn-out shares may be issued if HV Jones achieves
certain performance targets.
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<PAGE> 30
On a proforma basis, the Company would have realized net sales of over
$27 million during 1997 had both of these acquisitions occurred as of January 1,
1997.
The Company believes that the acquisition of these companies will
enhance its client base through expansion into new markets in California and
Texas.
PRODUCTS AND SERVICES
The Company is a provider of network computing solutions. The Company
markets a broad range of information technology products and services intended
to transform discrete hardware and software components into an integrated
system. The Company offers integration services which assist customers in
dealing with issues during the entire life cycle of their systems, including
system architecture and design, product acquisition, configuration and
implementation, ongoing operational support, and evolutions in technology. The
Company provides solutions to complex information technology problems including
system availability and performance, UNIX/Microsoft Windows NT integration,
client server database implementation, electronic mail and messaging, system and
network security, and internet/intranet and world wide web application
deployment.
The Company's customer base varies in range from relatively small
companies to Fortune 500 and other large and mid-sized companies. They are
geographically located in the southwestern United States, primarily in Texas,
Arizona, and Southern California; and they span various industries including
semi-conductor manufacturing, publishing, hospitality, distribution, military,
education, and state and local government.
The Company's ability to deliver integrated solutions is principally
attributable to its technical expertise and its value-added reseller agreements
with industry-leading vendors of information technology products such as Sun
Microsystems, Oracle, Netscape, Cisco Systems, Hewlett Packard and Microsoft. To
date, most of its revenues have been derived from the resale of products from
these vendors. Additional sales are accrued to small, niche vendors whose
products augment those of the three major vendors in areas such as backup
management, security and network and infrastructure management. The Company has
also established relationships with leading aggregators of computer hardware and
software products. These agreements enable the Company to provide its clients
with competitive product pricing, ready product availability and services such
as electronic product ordering, product configuration and testing and product
warehousing and delivery.
The Company plans to implement a marketing initiative designed to
increase services revenues through the development of standardized service
packages. The Company intends to create standardized service packages in several
areas, including systems administration, database administration, security and
systems and network performance tuning. Management believes that such service
packages will make the Company's products and services more cost-effective and
accessible to customers as well as increase the Company's profit margins.
The Company has a strategy for providing products and services in four
practice areas. They are: Network Interoperability; Security; Electronic
Messaging and Electronic Commerce;
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<PAGE> 31
and Database and Application Integration. The Company's business strategy is to
combine market-leading products with its highly skilled technical personnel to
deliver comprehensive information technology solutions based within these
practice areas to new and existing clients.
Network Interoperability
Management believes there is a tremendous opportunity for system
integrators in view of the split in the business community over the use of
computer operating systems between UNIX or Microsoft Windows NT. UNIX appears to
have captured a larger share of the enterprise computing environment, whereas
Windows NT has a larger percentage of the workgroup server and desktop market.
The traditional enterprise application such as financial applications,
distribution, manufacturing and order entry are typically run in a UNIX or
mainframe environment, whereas the workgroup technologies that have been
commonly deployed on the internet have been typically rendered on the Windows NT
platform. In order for applications such as SAP, BAAN and Peoplesoft to be made
available over the internet, UNIX and Windows NT must be effectively integrated
to a reliable and stable computing infrastructure. This creates tremendous
opportunities for systems integrators such as the Company to provide network
interoperability services to middle market and Fortune 1000 companies.
The Company designs networks, conducts performance audits, integrates
differing technologies and provides consulting services for issues such as data
backup and restore, disaster recovery, and server consolidation. All of these
services are designed to drive product sales in the areas of enterprise and
departmental servers, software licenses, network components, UNIX workstations,
and related equipment.
Security
The growth in internet activity and connections has provided a huge
opportunity for business, however, at the same time it has exposed businesses to
risk through unauthorized access to corporate data which is mission-critical and
confidential. It is more important now than ever to ensure that customer
networks and data are secure. The Company has built a practice around data and
network security which is a rapidly growing market. The service and product
offerings in this area are numerous. From a product standpoint, the Company
offers software for firewalls, virus protection, attack recognition, content
protection, network monitoring, data encryption, and user authentication. From a
services perspective, the Company's offerings include services to build a
security policy, design and implement security solutions, perform penetration
testing, carry out security audits, and provide training and support.
Electronic Messaging and Electronic Commerce
While messaging and electronic commerce are different, they share the
same underlying technologies and quite often go hand-in-hand. The advent of the
internet has brought electronic messaging (e-mail) to virtually every aspect of
business. While growth in this area has paved the way for companies to do
business over the internet (inter-company communication as well as business to
business electronic commerce), it has also created a technology management
nightmare for corporations around the world. Products from a multitude of
hardware and
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<PAGE> 32
software vendors has created a mixture of incompatible technologies. The Company
helps these customers design, and build messaging networks that will become the
infrastructure not only for e-mail, but for Electronic Commerce as well. E-mail
is no longer being looked at as a novelty. It is now being viewed by many medium
and large-sized companies as a necessity. Unfortunately, these systems have not
been designed with the features that are necessary to achieve compatibility
among systems. The Company provides the correct mix of computer hardware,
software and expertise to design and implement messaging networks and systems.
The Company can help evaluate, select, test, design, implement, and support
networks for a variety of end users from small single location users to large
industrial multi-location users.
Database and Application Integration
As data has proliferated within corporations, it has done so using many
formats, technologies, and system platforms. For example, manufacturing and
distribution information may be stored on a mainframe or enterprise UNIX system
while sales and marketing information is likely stored on personal computers in
small departmental networks and product information is being stored on UNIX
based engineering workstations and networks. This data is often fragmented,
stored in many different products and formats, and can be difficult to access
and consolidate. Data needs to be integrated with information that is currently
available on a company's web-site, and made accessible in a secure manner. This
has created a need to develop systems that will standardize and centralize data
storage and delivery techniques. The Company offers products and services that
are designed to accomplish this. These services include database installation,
performance tuning, database design, database management and administration, as
well as data migration.
SALES AND MARKETING
The Company currently focuses its marketing and sales efforts on
referrals from vendors and major corporations through its direct sales and
marketing staff. The Company believes that its direct sales and support,
including having salespersons serve as client-relationship managers, lead to
better account penetration and management, better communications and long-term
relationships with its clients and more opportunities for follow-on sales of
products and services to its existing client base. To date, the Company has
focused its sales and marketing efforts on large and mid-sized customers within
the southwestern United States, principally Arizona, California and Texas.
As part of its business strategy, the Company intends to expand the
size of the Company's sales and marketing staff. Historically, the Company has
conducted limited marketing. Most efforts have been through referrals from
vendors and direct sales calls made by individual sales personnel. Each
salesperson's compensation is commission-based. Sales personnel derive sales
leads from individual business contacts, the marketing department's efforts and
from customer referrals from suppliers and vendors, many of whom receive
requests from clients seeking an authorized reseller to design and install their
new systems.
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<PAGE> 33
The Company benefits from the name recognition of the products that it
sells and has successfully utilized its relationships with vendors and
manufacturers to build strong product and service sales. Management expects to
continue to utilize these relationships. Additional business opportunities with
some of its major clients may develop as a result of the implementation of the
Company's acquisition strategy.
The Company intends to hire additional sales and service personnel as
the business grows. The Company's sales and marketing focus continues to be
technology-driven, with systems engineers participating with direct sales
personnel as part of a team approach to sales and marketing. Sales personnel
also participate in training programs designed to introduce new products and new
versions of existing products and to provide industry information and sales
technique instruction. Management believes that it maintains a competitive
advantage by continually educating its sales force on the latest technologies
and through the increased role of high-level engineers in the sales process.
In addition, management has plans to develop a marketing department
dedicated to facilitating the sales process. External marketing efforts would
continue to include brochures, direct mail programs, formulation of marketing
strategies designed to create new business opportunities, development of sales
presentation materials and follow-up of prospects introduced to the Company by
its existing clients and vendors.
COMPETITION
The information technology value-added channel is comprised of a large
number of participants and is subject to rapid change and intense competition.
The Company will face competition from system integrators, value-added
resellers, local and regional network services firms, telecommunications
providers, network equipment vendors and computer system vendors, many of which
have significantly greater financial, technical and marketing resources and
greater name recognition and generate greater revenue than the Company does. The
Company expects to continue to face, additional competition from new entrants
into its markets. Increased competition may result in price reductions, fewer
client projects, underutilization of Company personnel, reduced operating
margins and loss of market share, any of which could materially adversely effect
its business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors. The failure of the Company to compete successfully would
have a material adverse effect on its business, operating results and financial
condition.
FACILITIES
The Company owns no real property and currently leases all of its
office space. The Company leases the office space that houses its executive
offices in Phoenix, Arizona, totaling approximately 8,900 square feet. The lease
expires in August 1999. The Company uses this facility for its executive,
marketing, administrative, finance and management personnel. The Company also
leases a small office in Tucson, Arizona as a sales facility. The Solsource
operations occupy approximately 5,600 square feet of leased office facilities in
Carlsbad,
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<PAGE> 34
California. The HV Jones operations occupy approximately 5,900 square
feet of leased office facilities in Houston, Texas and Austin, Texas. The
Company believes that it has sufficient space for its current and anticipated
near-term needs.
PERSONNEL
As of March 26, 1998, the Company employed 70 persons, of whom 31 were
engaged in sales and marketing, 21 were engaged in providing the Company's
technical services and 18 were engaged in finance, administration and management
functions.
None of the Company's employees is covered by a collective bargaining
agreement. There is increasing competition for experienced technical
professionals and sales and marketing personnel. The Company's future success
will depend in part on its ability to continue to attract, retain and motivate
highly qualified personnel. See "RISK FACTORS." The Company considers relations
with its employees to be good.
LEGAL PROCEEDINGS
There are currently no legal proceedings pending to which the Company
is a party or to which any of its properties is subject.
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Leadbeater 43 Chairman of the Board and Chief Executive
Officer
David S. Olson 40 Director, Chief Operating Officer and President
Michael G. Glynn 41 Director, Executive Vice President
John Iorillo 31 Director, Chief Financial Officer
Andrew P. Panzo 33 Director
</TABLE>
The following is a brief summary of the business experience of the
foregoing directors and executive officers.
JACK R. LEADBEATER
Mr. Leadbeater became Chairman and Chief Executive Officer of the
Company on the effective date of the Merger on December 22, 1997. Mr. Leadbeater
remains President and a director of Osage, positions he has held since 1993.
From 1987 to 1993, Mr. Leadbeater served as President of a privately held
computer systems integration company. Prior to 1987, Mr. Leadbeater was employed
as a regional sales manager by MAI Canada Ltd., an international manufacturer of
mini-computers. Mr. Leadbeater is a graduate of the University of Manitoba,
Canada with a Business/Commerce degree and a major in Marketing.
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<PAGE> 36
DAVID S. OLSON
Mr. Olson became director, President and Chief Operating Officer of the
Company on the effective date of the Merger on December 22, 1997. Mr. Olson
remains a director and Executive Vice-President/General Manager of Osage,
positions he has held since 1993. From 1989 to 1993, Mr. Olson served as an
Executive Vice-President of a privately held computer systems integration
company. Prior to 1989, he was employed by Sun Microsystems Canada Ltd. where
his responsibilities included sales as well as market development in the
petroleum exploration market. Prior to joining Sun Microsystems, Mr. Olson was
an Account Manager at Digital Equipment, Canada where he sold information
processing technology to major national accounts in the petroleum exploration
market. Mr. Olson is a graduate of the University of Calgary, Canada with a
Bachelor of Science degree and a major in Computer Science.
MICHAEL G. GLYNN
Mr. Glynn became a director of the Company on March 10, 1998. Mr. Glynn
became an Executive Vice-President of the Company on the effective date of the
Merger on December 22, 1997. During 1997, Mr. Glynn served as Director of Sales
for the Southwest region of United States for Compuware, a publicly-traded
software manufacturer. From 1996 to 1997, Mr. Glynn served as Senior Vice
President and Chief Operating Officer of Prologic Management Systems, a
publicly-traded software development company. From 1993 to 1996, he was Director
of Sales and International Business Development at Access Technologies (formerly
Access Graphics, a division of Lockheed Martin), an aggregator of computer
software and hardware. From 1991 to 1993, Mr. Glynn served on the Football staff
at the University of Colorado. Mr. Glynn is a graduate from the University of
Notre Dame with a Bachelor of Arts degree in the Program of Liberal Studies and
Languages and a Master of Divinity degree. He is also continuing his graduate
work at Northwestern University's JL Kellogg Graduate School of Management.
JOHN IORILLO
Mr. Iorillo became Chief Financial Officer of the Company on February
16, 1998 and a director on March 27, 1998. From 1990 to 1998, Mr. Iorillo was
employed as a certified public accountant by Deloitte and Touche LLP where his
responsibilities included the oversight of audit engagements, participation in
various merger and acquisition projects and other related activities. Mr.
Iorillo is a graduate of Cleveland State University with a Bachelor of Business
Administration degree in Accounting with a minor in Economics.
ANDREW P. PANZO
Mr. Panzo became a director of the Company during December 1997. Mr.
Panzo is President of American Maple Leaf Financial Corporation in Philadelphia,
Pennsylvania, an investment banking firm which specializes in emerging growth
companies. He is also a director of The Eastwind Group, Inc., a public company.
Mr. Panzo is a graduate of the University of Connecticut and has a Masters
degree in International Business and Finance from Temple University.
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<PAGE> 37
DIRECTORS' COMPENSATION
The Company currently has no policy with respect to the granting of
fees to directors in connection with their service to the Company. However, the
Company may reimburse directors for their cost of travel and lodging to attend
meetings of the Board of Directors or committees thereof. In connection with
their service as directors of the Company, each of Messrs. Steven B. Rosner,
Bernard Buchwalter, Ike Suri and Richard Someck received 1,000 shares of Common
Stock of the Company during the fiscal year ended December 31, 1997. Prior to or
in connection with the effective date of the Merger, Messrs. Buchwalter, Suri
and Someck resigned as directors of the Company. Mr. Rosner subsequently
resigned as a director on March 27, 1998.
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<PAGE> 38
EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
--------------------------- ---------------
ANNUAL COMPENSATION RESTRICTED
------------------- STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD(S)($) SARS(#) COMPENSATION($)
- --------------------------- ---- ------ ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
JACK R. LEADBEATER 1997 $89,967(1) -0- 351,057(2) $261,463
Chairman of the Board and Chief 1996 $49,417 N/A N/A $236,335
Executive Officer 1995 $ 55,000
DAVID S. OLSON 1997 $89,967(3) -0- 351,057(2) $261,463
Director, Chief Operating Officer 1996 $64,417 N/A N/A $236,335
and President 1995 $25,000 $ 55,000
MICHAEL G. GLYNN 1997 -(4)- -0-(5) 100,000(6) -0-
Director and Executive Vice 1996 N/A N/A N/A N/A
President
STEVEN B. ROSNER 1997 -0- $ 100(7) -0- $100,000(8)
Former President, Secretary and 1996 -0- -0- -0- -0-
Director 1995 -0- -0- -0- -0-
</TABLE>
- ----------------------------
(1) Reflects Mr. Leadbeater's compensation during 1997, 1996 and 1995 as an
officer and director of Osage. As of December 22,1997, Mr. Leadbeater
entered into an employment agreement with the Company pursuant to which
his scheduled base compensation for 1998 is $200,000. See "EMPLOYMENT
ARRANGEMENTS."
(2) Includes options to purchase 332,000 shares of Common Stock granted as
part of the Merger. Also includes options to purchase 19,057 shares of
Common Stock granted immediately following the Merger.
(3) Reflects Mr. Olson's compensation as an officer and director of Osage
during 1997, 1996 and 1995. As of December 22, 1997, Mr. Olson entered
into an employment agreement with the Company pursuant to which his
scheduled base compensation for 1998 is $200,000. See "EMPLOYMENT
ARRANGEMENTS."
(4) Mr. Glynn became an officer of the Company on December 22, 1997. Mr.
Glynn's scheduled compensation for 1998 is $200,000. Mr. Glynn entered
into an employment agreement with the Company as of December 22, 1997.
See "EMPLOYMENT ARRANGEMENTS."
(5) Does not include 200,000 shares of Common Stock being held by the
Company which are subject to release at the rate of 100,000 shares on
each of December 22, 1998 and 1999; provided that Mr. Glynn remains
employed by the Company on those dates.
(6) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock.
(7) Represents the fair market value of 1,000 shares of Common Stock
granted to Mr. Rosner during the year ended December 31, 1997 in
connection with his service as a director of the Company.
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<PAGE> 39
(8) Mr. Rosner had been the President and a director of the Company since
January 1997. He resigned his position as an officer of the Company
effective upon the Merger, and resigned as a director on March 27,
1998. While the directors and executive officers of the Company
received no annual compensation during the fiscal years ended December
31, 1997, 1996 and 1995, Mr. Rosner received $100,000 during the fiscal
year ended December 31, 1997 in consideration for the provision of the
Company's executive offices, reimbursement of certain expenses on
behalf of the Company and for consulting services by Mr. Rosner in
connection with the financial and administrative reorganization of the
Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Messrs. Leadbeater,
Olson, Glynn and Iorillo. Each of Messrs. Leadbeater, Olson and Glynn are
provided with an annual salary of $200,000. The agreement with Mr. Iorillo
provides for an annual salary of $100,000. Each of Messrs. Leadbeater and Olson
are employed for an initial term of three years, commencing December 1997 with
successive year-to-year renewals in the event that neither they, nor the
Company, elect to terminate the agreement after the initial term. Each of
Messrs. Glynn and Iorillo are employed for an initial term of one year
commencing December 1997 and February 1998, respectively, with successive
year-to-year renewals in the event that the agreement is not earlier terminated.
The employment agreements of Messrs. Leadbeater, Olson, Glynn and Iorillo
contain non-competition and non-solicitation provisions which survive their
actual employment for a term of one year. Mr. Glynn has been granted 200,000
shares under his employment arrangement; 100,000 of which vest at the end of his
first year of employment and the remainder of which vest at the end of his
second year of employment. Each of Messrs. Glynn and Iorillo were also granted
options to purchase 100,000 shares of Common Stock of the Company. See "SUMMARY
COMPENSATION TABLE."
STOCK OPTIONS
The Company's 1993 Stock Option Plan provides for the issuance of both
"Incentive Stock Options" as well as "Nonqualified Options" to be issued to
employees, consultants and others. An aggregate of 100,000 shares of Common
Stock were reserved for issuance under this plan. No options have been granted
under this plan since inception.
The Company also adopted the "Outside Directors Stock Option Plan"
pursuant to which options to purchase an aggregate of 2,500 shares of Common
Stock have been authorized on an annual basis to each outside director who has
served during the immediately preceding year. No options have been granted under
this plan since inception.
In connection with the Merger, the Company granted the former
stockholders of Osage options to purchase 800,000 shares of Common Stock. Such
options have a term of six years and an exercise price of $3.00 per share. The
options vest: (i) 50% once the Company's audited
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<PAGE> 40
financial statements reflect annual earnings for the preceding year of no less
than $.20 per share and (ii) 100% once the Company's audited financial
statements reflect annual earnings for the preceding year of no less than $.30
per year.
Under the terms of their respective employment agreements, each of
Messrs. Glynn and Iorillo were granted options to purchase 100,000 shares of
Common Stock. Mr. Glynn's options are subject to the same exercise price and
vesting criteria as the options granted pursuant to the Merger. Mr. Iorillo's
options are subject to an exercise price of $5.00 per share, are scheduled to
expire on January 1, 2002 and vest upon the earlier of: (i) January 1, 2001,
provided Mr. Iorillo remains continuously employed by the Company; (ii) fifty
percent (50%) of the options, however, shall vest earlier than January 1, 2001,
provided that at such earlier date the Company's annual earnings equal or exceed
$.20 per share; and (iii) one hundred percent (100%) of the options, however,
shall vest earlier than January 1, 2001, provided that at such earlier date the
Company's annual earnings equal or exceed $.30 per share.
Immediately following the Merger, the Company issued to various
employees and agents, including Messrs. Leadbeater and Olson, options to
purchase in the aggregate 100,000 shares of Common Stock at an exercise price of
$3.00 per share. Such options have a term of two years and vest at various rates
during such period in accordance with the terms of the respective option
agreements.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Based solely on its review of copies of forms filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, and written representations from
certain reporting persons, the Company believes that during fiscal 1997 all
reporting persons timely complied with all filing requirements applicable to
them, except for certain reports, which include: (i) a Form 3, and Forms 4 and 5
for Mr. Rosner; and (ii) a Form 3 and Forms 4 and 5 for each of Messrs. Bernard
Buchwalter, Ike Suri and Richard Someck. Messrs. Buchwalter, Suri and Someck
resigned as directors prior to or in connection with the Merger.
37
<PAGE> 41
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
-------------------------------------
Individual Grants
-------------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Option/SARs Employees in Base Price Expiration
Name Granted(#)(1) Fiscal Year ($/Sh) Date
- ---- ------------- ----------- ------ ----
<S> <C> <C> <C> <C>
Jack R. Leadbeater 19,057 1.9% $3.00 December 19, 2000
Jack R. Leadbeater 332,000 33.2% $3.00 December 19, 2003
David S. Olson 332,000 33.2% $3.00 December 19, 2003
David S. Olson 19,057 1.9% $3.00 December 19, 2000
Michael G. Glynn 100,000 10% $3.00 December 19, 2003
Steven B. Rosner -0- N/A N/A N/A
- ------------------------
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Options/SARs In-the-Money Options/SARs
at FY-End (#) at
Shares Shares FY-End ($)
Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized ($) Unexercisable Unexercisable (2)
- ---- ----------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C>
Jack R. Leadbeater -0- -0- (E)0/(U)351,057 (E)$0/(U)$351,057
David S. Olson -0- -0- (E)0/(U)351,057 (E)$0/(U)$351,057
Michael G. Glynn -0- -0- (E)0/(U)100,000 (E)$0/(U)$100,000(3)
Steven B. Rosner -0- -0- (E)0/(U)0 (E)$0/(U)$0
- ------------------------
</TABLE>
(1) As part of the purchase price in the Merger, each of Messrs. Leadbeater
and Olson were granted options to purchase 332,000 shares of Common
Stock. Such options have a term of six years commencing in December
1997 and an exercise price of $3.00 per share. Provided Messrs.
Leadbeater and Olson remained employed by the Company, the options
vest: (i) 50% once the Company's audited financial statements reflect
annual earnings for the preceding year of no less than $.20 per share
and (ii) 100% once the Company's audited financial statements reflect
annual earnings for the preceding year of no less than $.30 per year.
Messrs. Leadbeater and Olson were also each granted options to purchase
19,057 shares of the Company's Common Stock immediately following the
Merger. These options vested upon grant.
(2) Based upon the high bid price ($4.00 per share) of the Company's Common
Stock on the last reported trading date during the year ended December
31, 1997 as reported on the OTC Bulletin Board.
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<PAGE> 42
(3) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock. Such
options have a term of six years commencing in December 1997 and an
exercise price of $3.00 per share. Provided that Mr. Glynn remains
employed by the Company, the options vest: (i) 50% once the Company's
audited financial statements reflect annual earnings for the preceding
year of no less than $.20 per share and (ii) 100%, once the Company's
audited financial statements reflect annual earnings for the preceding
year of no less than $.30 per year.
39
<PAGE> 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with Messrs. Leadbeater, Olson,
Glynn and Iorillo. The terms of Mr. Glynn's agreement include the grant of
options to purchase 100,000 shares of Common Stock which have not vested and the
grant of 200,000 shares of Common Stock which have not vested. The terms of Mr.
Iorillo's agreement includes the grant of options to purchase 100,000 shares of
Common Stock which have not vested. See "MANAGEMENT - EMPLOYMENT ARRANGEMENTS."
CONSULTING SERVICES
Mr. Rosner received $100,000 during the fiscal year ended December 31,
1997 in consideration for the provision of the Company's executive offices prior
to the Merger, reimbursement of certain expenses on behalf of the Company and
for consulting services by Mr. Rosner in connection with the financial and
administrative reorganization of the Company.
SALE OF COMMON STOCK
During November 1997, the Company sold shares of Common Stock in a
private placement transaction at a purchase price of $.10 per share which
generated net proceeds in excess of $300,000. In such private placement
transaction, Mr. Rosner purchased 190,000 shares at a purchase price of $19,000.
In addition, two Delaware limited partnerships, of which Mr. Rosner is the sole
general partner, purchased in the aggregate 691,692 shares of Common Stock at a
purchase price of $69,169. See "PRINCIPAL STOCKHOLDERS."
40
c
<PAGE> 44
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 26, 1998, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange Commission, has reason to believe may
be deemed the beneficial owners of more than 5% of the Company outstanding
Common Stock. Also set forth in the table is the beneficial ownership of all
shares of the Company's outstanding stock, as of such date, of all officers and
directors, individually and as a group.
<TABLE>
<CAPTION>
Shares Owned Percentage of
Beneficially Outstanding
Name and Address and of Record Shares
(1)
------------- ----------------
<S> <C> <C>
Jack R. Leadbeater .................................. 683,057(2) 11.8%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
David S. Olson ...................................... 683,057(2) 11.8%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Michael G. Glynn .................................... (3) 0%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
John Iorillo ........................................ (4) 0%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Andrew P. Panzo ..................................... 11,000(5) (*)
2 Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Godwin Finance Ltd. ................................. 350,000 6.3%
Whitehill House
Newby Road Industrial Estate
Newby Road
Hazel Grove, Stockport SK7 5DA, England
Steven B. Rosner .................................... 617,850(6) 11.1%
1220 Mirabeau Lane
Gladwynne, PA 19035
Michael Lauer ....................................... 800,000(7) 14.36%
375 Park Avenue, Suite 2006
New York, NY 10152
All Directors and Officers as a group (5 persons) ... 1,377,114 22.86%
</TABLE>
- --------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934,
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other
relative who has the same home as such individual, as well as other
securities as to which the individual has or shares voting or
investment power or which each person has the right to acquire within
60 days through the exercise of options, or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 5,570,000 shares of Common Stock outstanding
as of March 26, 1998.
41
<PAGE> 45
(2) Includes 456,500 shares of Common Stock, 207,500 shares issuable upon
conversion of the Series B Shares and 19,057 shares issuable upon the
exercise of vested options. Does not include options to purchase
332,000 shares of Common Stock which have not vested. Also, does not
include 1.5 million shares of Common Stock held in a voting trust over
which the holders of the Series B Shares, including Messrs. Leadbeater
and Olson, have voting rights. See "MATERIAL VOTING ARRANGEMENTS."
(3) Does not include 200,000 shares of Common Stock being held by the
Company in escrow, which are subject to release at the rate of 100,000
shares on each of the first and second anniversaries of the
commencement of Mr. Glynn's employment with the Company; provided, that
Mr. Glynn remain an employee of the Company at the time such shares are
released. Does not include options to purchase 100,000 shares of Common
Stock which have not vested.
(4) Does not include options to purchase 100,000 shares of Common Stock
granted to Mr. Iorillo pursuant to his employment agreement, and which
have not vested. Mr. Iorillo is a director and the Chief Financial
Officer of the Company.
(5) Includes the indirect ownership of the shares owned by American Maple
Leaf Financial Corporation. Mr. Panzo is an officer and director of
American Maple Leaf Financial Corporation.
(6) Includes the direct ownership of 192,850 shares and the indirect
ownership of 414,025 shares through Mr. Rosner's role as the sole
general partner of two Delaware limited partnerships, Diversified
Investment Fund, L.P. (50,000 shares) and PRE Investors, L.P. (375,000
shares).
(7) Includes direct ownership of 40,000 shares and investment control of
760,000 shares through Mr. Lauer's role as Managing Member of Lancer
Management Group LLC which is the Manager of Lancer Offshore, Inc.
(420,000 shares) and Lancer Voyager Fund (70,000), and Lancer
Management Group, II, which is the Manager of Lancer Partners, L.P.
(270,000 shares). Mr. Lauer acts as Investment Manager of each of these
funds.
(*) Less than 1%.
- ----------------------
MATERIAL VOTING ARRANGEMENTS
Voting Rights of Series B Shares
For so long as the Company continues to satisfy certain performance
criteria (the "Voting Rights Performance Criteria") and until the third
anniversary of the Merger, the holders of Series B Shares are entitled to vote
in the election of directors by casting as many votes in total as equates to the
total number of shares that may be cast in the election of directors by the
holders of Common Stock, plus one; provided that the holders of the Series B
Shares may only elect a majority of the Board of Directors by voting for their
own nominees. The holders of the Series B Shares will also be entitled to vote
as a class on all matters brought to a vote of stockholders. The Company shall
remain in compliance with the Voting Rights Performance Criteria so long as for
the first three years following the year of the Merger, its annual audited
financial statements reflect earnings per share of $.05, $.10, and $.15,
respectively. Failure to meet the Voting Rights Performance Criteria in any of
the first three years after the closing of the Merger results in the termination
of such rights.
Voting Trust
In conjunction with the Merger, certain historic stockholders of the
Company placed in a voting trust (the "Voting Trust") 1.5 million shares of
Common Stock with voting rights as to
42
<PAGE> 46
such shares vested in the holders of the Series B Shares, including Messrs.
Leadbeater and Olson. The Voting Trust shall remain in effect until the earlier
of: (i) the end of the 18th month following the Merger; or (ii) such earlier
date when all of its shares have either been released to its beneficial owners
or allocated in satisfaction of the purchase price in the Merger. For every
three month period during the term of the Voting Trust in which no shares are
issued in satisfaction of the purchase price, 250,000 shares may be released to
such historic stockholders of the Company from the Voting Trust.
43
<PAGE> 47
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$.01 par value per share, of which 5,570,000 are currently outstanding.
Holders of Common Stock have equal rights to receive dividends when, as
and if declared by the Board of Directors, out of funds legally available
therefor. Holders of Common Stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
Common Stock are not redeemable and have no pre-emptive or similar rights. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Within the limits and restrictions contained in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 1,000 shares of Preferred Stock, $.01 par
value per share (the "Preferred Stock"), in one or more series, and to fix, as
to any such series, the dividend rate, redemption prices, preferences on
liquidation or dissolution, sinking fund terms, if any, conversion rights,
voting rights, and any other preference or special rights and qualifications.
SERIES A $3.00 CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series A $3.00 Convertible Preferred Stock, with such rights
and preferences as are described in the following summary. The Company currently
has 122 Series A Shares outstanding.
- Liquidation Preference
The Series A Shares shall have a liquidation preference of $30,000 per
Series A Share, plus any accrued dividends thereon. The holders of the Series A
Shares and the Series B Shares shall share ratably in all liquidation
preferences. Accordingly, if the Company shall liquidate or dissolve, after
payment to all creditors, no distribution shall be made to holders of the
Company's Common Stock, unless prior thereto holders of the Series A Shares and
the holders of the Series B Shares have received $30,000 per share.
- Dividends
The holders of the Series A Shares shall not be entitled to receive
dividends.
44
<PAGE> 48
- Conversion
The holders of the Series A Shares have the right at any time to
convert the principal amount of the purchase price of the Series A Shares into
shares of Common Stock at a conversion rate (the "Series A Conversion Rate") of
$3.00 per share of Common Stock.
The number of shares of Common Stock into which each Series A Share
shall be convertible shall be subject to adjustment to protect against dilution
in the event the Company shall declare a stock dividend, make a distribution on
the Common Stock, divide or reclassify the outstanding shares of Common Stock.
- Voting Rights
Prior to the conversion of the Series A Shares, the holders thereof
shall have no voting rights.
- Redemption
Commencing six months from the date of the Closing of this Offering,
all, but not less than all, of the Series A Shares may be redeemed at any time
by the Company at its sole discretion at $3.00 per Series A Share upon thirty
(30) days' written notice to the holders (the "Redemption Notice"), provided
that at the time of the Redemption Notice: (i) the average of the closing bid
and ask prices of the Company's Common Stock shall have exceeded $5.00 for the
twenty (20) trading days preceding the date of the Redemption Notice; (ii) the
shares of Common Stock issued or issuable upon conversion of the Series A Shares
are subject to an effective Registration Statement; and (iii) Lexington Capital
Partners & Co. (the "Private Placement Agent") shall have waived any
restrictions upon the resale of such shares. See "RESTRICTIONS UPON RESALE." The
holders of the Series A Shares shall be entitled to exercise their conversion
option during said thirty (30) day notice period.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series A Shares. The actual terms are contained within a definitive
Certificate of Designation on file with the Delaware Secretary of State.
SERIES B $3.00 CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series B $3.00 Convertible Preferred Stock, with such rights
and preferences as are described below in the following summary.
The Company currently has 50 Series B Shares outstanding.
- Liquidation Preference
The Series B Shares shall have a liquidation preference of $30,000 per
Share. The holders of the Series B Shares and the Series A Shares shall share
ratably in all liquidation
45
<PAGE> 49
preferences. Accordingly, if the Company shall liquidate or dissolve, after
payment to all creditors, and payment of the liquidation preference to the
holders of the Series A Shares, no distribution shall be made to holders of the
Common Stock, unless prior thereto holders of the Series B Shares and the
holders of the Series A Shares shall have received $30,000 per share.
- Dividends
Each holder of the Series B Shares shall be entitled to dividends only
when, as and if declared by the Board of Directors. Each holder of the Series B
Shares will share with the holders of the Common Stock, on an "as converted"
basis, any dividends declared on the Common Stock. The Company may, at its sole
election, pay any dividend in either cash or in shares of Common Stock, based on
the Conversion Rate (as hereafter defined) of the Series B Shares.
- Conversion
The holders of the Series B Shares have the right at any time to
convert the $1.5 million principal amount of the shares, plus any and all
accrued dividends thereon, into shares of the Company's Common Stock at the
Series B Conversion Rate of $3.00 per share. The Series B Conversion Rate is
subject to adjustment provided that at the time of conversion the Company
remains in compliance with the Conversion Performance Criteria. The Company
shall remain in compliance with the Conversion Performance Criteria so long as
during each of the fiscal quarters in the first, second and third years after
the Merger, the Company achieves earnings per share of $.0125, $.025 and $.0375,
respectively. As so adjusted, the Series B Conversion Rate shall be the lower
of: (i) $3.00 per share of Common Stock; or (ii) the average of the closing bid
and ask prices of the Common Stock on the principal exchange, automated
quotation system or over-the-counter market for the 15 trading days prior to the
date of conversion. The failure to meet the Conversion Performance Criteria for
any particular quarter will not adversely effect the computation of the Series B
Conversion Rate for any subsequent quarter.
The number of shares of Common Stock into which each Series B Share
shall be convertible shall be subject to adjustment to protect against dilution
in the event the Company shall declare a stock dividend, make a distribution on
the Common Stock, divide or reclassify the outstanding shares of Common Stock.
- Voting Rights
The holders of Series B Shares are entitled to vote in the election of
directors by casting as many votes in total as equates to the total number of
shares that may be cast in the election of directors by the holders of Common
Stock, plus one; provided that the holders of the Series B Shares may only elect
a majority of the Board of Directors by voting for their own nominees. The
holders of the Series B Shares will also be entitled to vote as a class on all
matters brought to a vote of stockholders. The foregoing rights of the holders
of the Series B Shares shall terminate upon the earlier of: (i) the first date
upon which the Company no longer complies with the Voting Rights Performance
Criteria; or (ii) the third anniversary of the closing of the Merger. The
Company shall remain in compliance with the Voting Rights Performance Criteria
so long
46
<PAGE> 50
as for the first three years following the closing of the Merger, its annual
audited financial statements reflect earnings per share of $.05, $.10, and $.15,
respectively. Failure to meet the Voting Rights Performance Criteria in any of
the first three years after the closing of the Merger results in the termination
of such rights of holders of the Series B Shares. Upon termination of such
rights, the holders of the Series B Shares shall have no voting rights and their
consent shall not be required for the taking of any action except as required by
law.
- Redemption
The Series B Shares are not subject to redemption by the Company.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series B Shares. The actual terms are contained within a definitive
Certificate of Designation on file with the Delaware Secretary of State.
SERIES C CONVERTIBLE PREFERRED STOCK
The Board of Directors has authorized the designation of a series of
Preferred Stock as Series C Convertible Preferred Stock, with such rights and
preferences as are described in the following summary. The Company currently has
105.3 Series C Shares outstanding.
- Liquidation Preference
The Series C Shares shall have a liquidation preference of $15,000 per
Series C Share. The holders of the Series A Shares, Series B Shares and Series C
Shares shall share ratably in all liquidation preferences. Accordingly, if the
Company shall liquidate or dissolve, after payment to all creditors, and payment
of the liquidation preference to the holders of the Series A and Series B
Shares, no distribution shall be made to the holders of the Common Stock, unless
prior thereto, holders of the Series C Shares shall have received a liquidation
preference of $15,000 per share.
- Dividends
The holder of the Series C Shares shall be entitled to dividends only
when, as and if declared by the Board of Directors. The holder of the Series C
Shares will share with the holders of the Common Stock, on an "as converted"
basis, any dividends declared on the Common Stock.
- Conversion
The Series C Shares shall automatically convert into shares of the
Company's Common Stock on the last day of each of the three month periods
following the issuance of the Series C Shares (March 18, 1998). $455,000 of the
Series C Shares shall convert on June 18, 1998. Thereafter, on each of the next
three month periods following issuance, $375,000 of Series C
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<PAGE> 51
Shares shall convert into Common Stock. The Series C Shares shall convert into
shares of Common Stock at a conversion rate (the "Series C Conversion Rate")
equal to the lower of: (i) $6.87 per share; or (ii) a 33% premium over the
average of the closing prices of the Company's Common Stock on the principal
exchange, automated quotation system or over-the-counter market upon which the
Company's Common Stock trades, for the ten trading days prior to the date of
each conversion.
- Voting Rights
Prior to the conversion of the Series C Shares, the holder thereof
shall have no voting rights.
- Redemption
The Series C Shares are not subject to redemption by the Company.
- Certificate of Designation
The terms described above are merely summaries of the salient features
of the Series C Shares. The actual terms are described within the definitive
Certificate of Designation on file with the Delaware Secretary of State.
REDEEMABLE WARRANTS
In connection with its initial public offering ("IPO") in November
1993, the Company issued 2,310,000 redeemable warrants (the "Redeemable
Warrants"), of which 11,554 remain outstanding. The Redeemable Warrants can be
redeemed by the Company at a price of $0.05 per warrant commencing November 10,
1994 and ending November 10, 1998, following any period in which, for 20
consecutive trading days, the closing bid price of the Company's Common Stock is
equal to or greater than 200% of the IPO price, as adjusted (initially $10.00
per share). After giving effect to certain 1 for 10 and 1 for 20 reverse stock
splits, the exercise and call prices of the Redeemable Warrants are $1,000 and
$10 per warrant, respectively. The Redeemable Warrants expire as of November 10,
1998.
REGISTRATION RIGHTS
This Prospectus has been prepared, in part, pursuant to the
registration rights granted in connection with the sale of shares of Common
Stock in the Merger, the concurrent sale of the Company's Series A Shares, and
the subsequent sale of shares of Common Stock in certain private placement
transactions (including the recently completed acquisition of HV Jones). The
Company has agreed to register the resale of all of the shares issued in the
Merger, even though Messrs. Leadbeater and Olson have elected to include only
120,000 shares within this Prospectus. The additional shares acquired in the
Merger by Messrs. Leadbeater and Olson will likely be covered by a subsequent
registration statement filed by the Company with the Securities and Exchange
Commission during the third or fourth quarter of 1998.
48
<PAGE> 52
The Company has also granted registration rights in connection with its
recent acquisition of Solsource. Pursuant to such registration rights, the
Company has agreed to use its best efforts to prepare and file, not later than
the 90th day following the first anniversary of the Solsource closing, a
registration statement with the Securities and Exchange Commission for the
purpose of facilitating the public resale of 75,000 of the 150,000 shares
distributed in the Solsource acquisition. In the event, however, that Solsource
fails to achieve certain performance criteria agreed upon by the parties in the
acquisition transaction, no shares shall be registered on the first anniversary
of the closing, rather, the Company would use its best efforts to prepare and
file, no later than the 90th day after the second anniversary of the closing, a
Registration Statement for the purposes of facilitating the public resale of the
shares distributed in the acquisition transaction, as well as any additional
shares of Common Stock that were "earned-out" by Solsource following the
closing.
PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT
Delaware General Corporation Law
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or within
three years, did own) 15% or more of the corporation's voting stock.
The provisions regarding certain business combinations under the GCL
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management. A takeover transaction
frequently affords stockholders the opportunity to sell their shares at a
premium over current market prices.
The provisions described above, together with the voting rights of the
Series B Shares and the ability of the Board of Directors to issue Preferred
Stock as described under "Preferred Stock," may have the effect of delaying or
deterring a change in the control or management of the Company.
Certificate of Incorporation
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or
49
<PAGE> 53
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock or may otherwise adversely affect the market price of the
Common Stock.
LIMITATIONS ON DIRECTORS' LIABILITIES, INDEMNIFICATION AND DIRECTORS' AND
OFFICERS' INSURANCE
The Company's Certificate of Incorporation and Bylaws reflect the
adoption of the provisions of Section 102(b)(7) of the GCL, which eliminate or
limit the personal liability of a director to the Company or its stockholders
for monetary damages for breach of fiduciary duty under certain circumstances.
If the GCL is amended to authorize corporate action further eliminating or
limiting personal liability of directors, the Certificate of Incorporation
provides that the liability of the director of the Company shall be eliminated
or limited to the fullest extent permitted by the GCL. The Company's Certificate
of Incorporation and Bylaws also provide that the Company shall indemnify any
person, who was or is a party to a proceeding by reason of the fact that he is
or was a director, officer, employer or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with such proceeding if he acted in good faith and in a manner
he reasonably believed to be or not opposed to the best interests of the
Company, in accordance with, and to the full extent permitted by, the GCL. In
addition, the Certificate of Incorporation and Bylaws authorize the Company to
maintain insurance to cover such liabilities. As of the date hereof, the Company
has not purchased Directors' and Officers' Liability Insurance.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issuer.
TRANSFER AGENT
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
50
<PAGE> 54
SELLING SECURITY HOLDERS
All of the shares of Common Stock of the Company offered by this
Prospectus are being sold for the account of the selling security holders
identified in the following table (the "Selling Security Holders").
The Selling Security Holders are offering for sale an aggregate of
4,351,982 shares of Common Stock which include: (i) 2,901,997 shares of Common
Stock; (ii) 1,220,000 shares of Common Stock, subject to adjustment, which may
be issued upon the conversion, if at all, of the Series A Shares; and (iii)
229,985 shares of Common Stock, subject to adjustment, which may be issued upon
the conversion of the Company's outstanding Series C Shares. The shares of
Common Stock, Series A Shares and Series C Shares were previously issued by the
Company in private placement transactions. 131,000 of the shares covered by this
Prospectus are being offered by certain directors and executive officers.
1,350,000 of the shares covered by this Prospectus are being offered by the
Company's principal stockholders. Certain of the shares of Common Stock being
offered by the Selling Security Holders are subject to restrictions upon resale.
See "PLAN OF DISTRIBUTION - Restrictions Upon Resale."
The following table sets forth the number of Shares being held of
record or beneficially (to the extent known by the Company) by such Selling
Security Holders and provides (by footnote reference) any material relationship
between the Company and such Selling Security Holder, all of which is based upon
information currently available to the Company.
The shares of Common Stock offered by the Selling Security Holders may
be offered for sale from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting discounts
or commissions except for usual and customary selling commissions paid to
brokers or dealers.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Paul Jeffrey Adelizzi 10,500 (*) 10,500 -0- -0-
Phil Albrecht, Jr 20,000 (*) 20,000 -0- -0-
American Maple Leaf Financial
Corporation(1) 11,000 (*) 11,000 -0- -0-
Myles Bass 93,330 (*) 93,330 -0- -0-
Paul Beenan 20,000 (*) 20,000 -0- -0-
Howard & Shari Borenstein 15,000 (*) 7,000 8,000 -0-
Timothy Paul Buck 10,000 (*) 10,000 -0- -0-
Capital Growth Trust 180,000 3.2% 180,000 -0- -0-
Clifton Capital 170,000(2) 3.1% 100,000 70,000 1.2%
Cecile T. Coady 10,000 (*) 5,000 5,000 (*)
</TABLE>
51
<PAGE> 55
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Bernard Cohen 20,000 (*) 20,000 -0- -0-
Commonwealth Insurance Company
Profit Sharing Plan 10,000 (*) 10,000 -0- -0-
David M. Daniels(11) 200,000 3.6% 20,000 180,000 3.2%
Frank DeLuca 20,000 (*) 20,000 -0- -0-
DeSilva & Partners, Inc.
Self Directed Retirement Fund 10,000 (*) 10,000 -0- -0-
Dewey Investment Partnership Ltd. 100,000 1.8% 100,000 -0- -0-
Diversified Investment Fund, L.P. 50,000 (*) 40,000 10,000 (*)
Chris Donahue 82,230(3) 1.5% 55,000 27,230 (*)
Jere Dumanic 50,000 (*) 10,000 40,000 (*)
Mark Dutton 7,500 (*) 7,500 -0- -0-
Hamid Ebrahimi 20,000 (*) 20,000 -0- -0-
Bermuda Trust Company, Trustee for 230,667 4.1% 230,667 -0- -0-
The Elanken Family Trust
EquiTech, Inc. 10,000 (*) 10,000 -0- -0-
Bruce Ginsburg 15,000 (*) 7,000 8,000 (*)
Godwin Finance Ltd. 350,000(2) 6.3% 250,000 100,000 1.7%
Daniel Gooze 40,000 (*) 40,000 -0- -0-
Rick Gunther 32,896(4) (*) 22,000 10,896 (*)
Bernard Hollander Family Trust 10,000 (*) 10,000 -0- -0-
Michael Dane Ibsen 86,667 1.5% 40,000 46,667 (*)
Interbanc Mortgage 200,000 3.6% 200,000 -0- -0-
Hugh V. Jones(5) 229,985 3.9% 229,985 -0- 0%
Richard Joyce 170,000 3.1% 170,000 -0- -0-
KAB Investments, Inc. 100,000(2) 1.8% 75,000 25,000 (*)
Eckard Kirsch 15,000 (*) 15,000 -0- -0-
Michael Lauer(6) 800,000 14.36% 800,000 -0- -0-
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Jack Leadbeater(7) 683,057(8) 11.8% 60,000 623,057 10.7%
Steven D. Levin 15,000 (*) 5,000 10,000 (*)
Douglas Martin 10,000 (*) 10,000 -0- -0-
Morris Asset Management, Inc. 5,000 (*) 5,000 -0- -0-
Torrey Mosvold 40,000 (*) 40,000 -0- -0-
MSB Research Inc. 80,000 1.4% 80,000 -0- -0-
Millworth Investments, Inc. 175,000 3.2% 125,000 50,000 (*)
Keith E. Myers 30,000 (*) 15,000 15,000 (*)
David S. Olson(7) 683,057(8) 11.8% 60,000 623,057 10.7%
Robert Poulson 15,000 (*) 15,000 -0- -0-
PRE Investors L.P. 375,000 6.7% 200,000 175,000 3.1%
R.R. Donnelley & Sons Company 11,000 (*) 11,000 -0- -0-
Chaim Rajchenbach 5,000 (*) 5,000 -0- -0-
Moshe Rajchenbach 5,000 (*) 5,000 -0- -0-
Naomi Treger Rajchenbach 10,000 (*) 10,000 -0- -0-
Louis Rambler 10,000 (*) 10,000 -0- -0-
Sherwin and Helen Ray 10,000 (*) 10,000 -0- -0-
Gary Rein 10,000 (*) 10,000 -0- -0-
Steve Rigby 82,230(3) 1.5% 55,000 27,230 (*)
James C. and Patricia J. Rives 30,000 (*) 30,000 -0- -0-
Steven B. Rosner(9) 192,850(2)(10) 3.5% 50,000 142,850 2.6%
Ira Saligman 10,000 (*) 10,000 -0- -0-
Pinchas and Nahma Schwartz 10,000 (*) 10,000 -0- -0-
Jonathan Shecter 10,000 (*) 10,000 -0- -0-
Chad Shusman 10,000 (*) 10,000 -0- -0-
Leonard Silvestri 10,000 (*) 10,000 -0- -0-
Jeff Sokolin 10,000 (*) 10,000 -0- -0-
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
-------------------------- -------------------------
SHARES
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ---- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
SPH Equities, Inc. 73,388 1.3% 60,000 13,388 (*)
SPH Investments, Inc. 50,000(2) (*) 20,000 30,000 (*)
SPH Investments, Inc. Profit Sharing
Plan dtd 12/1/92 f/b/o Stephen P
Harrington 50,000 (*) 20,000 30,000 (*)
Harvey Sternberg 15,000 (*) 7,000 8,000 (*)
John N. Straub Ltd., a Professional 10,000 (*) 10,000 -0- -0-
Medical Corporation
Synergy Group 250,000(2) 4.5% 100,000 150,000 2.7%
Al Terrell 3,340 (*) 3,340 -0- -0-
Burton Turk 10,000 (*) 10,000 -0- -0-
Dale Van De Vrede Family Trust 82,230(3) 1.5% 55,000 27,230 (*)
Roderic S. Ware 20,000 (*) 20,000 -0- -0-
West Tropical Investments 175,000(2) 3.4% 125,000 50,000 (*)
Will's Wei Corp. 166,660 3.0% 166,660 -0- -0-
Kevin Wyllie 10,000 (*) 10,000 -0- -0-
101 Investments, Inc. 5,000 (*) 5,000 -0- -0-
--------- --------- ---------
TOTAL 6,857,587 4,351,982 2,505,605
========= ========= =========
</TABLE>
- ---------------------------------------
(*) Less than 1%
(1) Andrew P. Panzo, a director of the Company is an officer and director
of American Maple Leaf Financial Corporation.
(2) Certain of these shares have been deposited into the Voting Trust and
may only be sold upon release therefrom. See "PLAN OF DISTRIBUTION -
Restrictions Upon Resale."
(3) An employee of the Company and a former stockholder of Osage. Includes
55,000 shares of Common Stock, 25,000 shares issuable upon conversion
of the Series B Shares and 2,230 shares issuable upon the exercise of
vested options. Does not include options to purchase 40,000 shares of
Common Stock which have not vested.
(4) An employee of the Company and a former stockholder of Osage. Includes
22,000 shares of Common Stock, 10,000 shares issuable upon conversion
of the Series B Shares and 896 shares issuable upon the exercise of
vested options. Does not include options to purchase 16,000 shares of
Common Stock which have not vested.
(5) A director of HV Jones, Inc., a subsidiary of the Company.
(6) Includes shares owned directly by Mr. Lauer, as well as the resale by
the various funds over which Mr. Lauer may have indirect ownership. Mr.
Lauer is presently a principal stockholder of the Company.
(7) Director and Executive Officer of the Company
54
<PAGE> 58
(8) Includes 456,500 shares of Common Stock, 207,500 shares issuable upon
conversion of the Series B Shares and 19,057 shares issuable upon the
exercise of vested options. Does not include options to purchase
332,000 shares of Common Stock which have not vested.
(9) Principal stockholder and former director.
(10) Does not include shares for which Mr. Rosner has indirect ownership.
See "Diversified Investment Fund, L.P." and "PRE Investors, L.P."
(11) Company employee.
ADJUSTMENT FEATURES OF CERTAIN SECURITIES
The Series C Shares contain certain price protection and adjustment
features which, during the term of the instruments, may result in the issuance
of additional securities upon conversion. 900,000 shares of Common Stock issued
to the former Osage stockholders as part of the Merger are also subject to
adjustment provisions.
- SERIES C SHARES
The holder of the Series C Shares has agreed to convert the $1.58
principal amount of the Series C Shares into shares of the Company's Common
Stock on a quarterly basis commencing June 18, 1998. The Conversion Rate of the
Series C Shares (the "Series C Conversion Rate") shall be the lower of: (i)
$6.87 per share; or (ii) a thirty-three (33%) percent premium over the average
closing price of the Company's Common Stock for the ten (10) trading days prior
to the date of conversion. The number of shares to be offered by the holder of
the Series C Shares has been determined on the assumption that the Series C
Conversion Rate will be $6.87 per share. In the event the Series C Conversion
Rate is lower than $6.87 per share upon any of the quarterly conversion dates,
additional shares of Common Stock may be issued by the Company and offered for
public sale pursuant to this Prospectus.
- CERTAIN SHARES OF COMMON STOCK ISSUED IN THE MERGER
900,000 of the shares of Common Stock issued to the former Osage
stockholders in the Merger are subject to an upward adjustment to the extent
that during any of the six (6) consecutive three (3) month periods following the
date of this Prospectus, the "Quarterly Value" of the Company's Common Stock, as
to 150,000 shares during each such applicable three (3) month period, is below
$2.00. The "Quarterly Value" shall be derived from a combination of: (i) sales
of shares of the Company's Common Stock by the former Osage stockholders in open
market transactions, upon which value shall be measured by the average per share
sales price; or (ii) to the extent that open market sales have not generated
sales proceeds to the former Osage stockholders of at least $300,000 (based upon
the sale of 150,000 shares), then the remaining value (i.e., the difference
between the sum total of such sales and $300,000) shall be measured based upon
the average of the closing bid and ask prices of the Company's Common Stock on
the principal exchange, automated quotation system or over-the-counter market
for the fifteen trading days before the last trading day in each such respective
three month period (such last trading date hereinafter referred to as the
"Valuation Date"); provided, however, that such average price is $2.00 or
higher, and if the average price is lower than $2.00, the value of such unsold
shares shall be measured based upon 85% of the aforesaid average closing bid and
ask prices for the fifteen trading days before the Valuation Date. Quarterly
Value shall then be
55
<PAGE> 59
determined by making separate non-cumulative computations on each of the
respective Valuation Dates to determine how many shares of the Company's Common
Stock have been sold during the three month period, or would need to be sold
(assuming the sale) on such Valuation Dates, in order for the former Osage
stockholders to have yielded gross receipts of at least $300,000 upon the sale
of 150,000 shares.
To the extent that a sale or deemed sale of 150,000 shares yields for
the former Osage stockholders less than $300,000 during any such applicable
three month period, then, and in that event, the Company would be required to
issue to the former Osage stockholders such number of additional shares of
Common Stock as would provide them with a yield of $300,000 on the sale or
deemed sale of Common Stock during the applicable three month period (the
"Additional Shares"). The Additional Shares may either be issued by the Company
as newly issued shares of Common Stock; or may be withdrawn from a voting trust
of 1,500,000 shares established by existing Company stockholders upon the
closing of the Merger. See "MATERIAL VOTING ARRANGEMENTS - VOTING Trust." If, at
the time Additional Shares are required to be issued, the Company remains in
compliance with the Conversion Performance Criteria, the Additional Shares will
be withdrawn from the Voting Trust. If, however, the Company is not in
compliance with the Conversion Performance Criteria, the Additional Shares will
be issued by the Company as newly issued shares of Common Stock.
PLAN OF DISTRIBUTION
The Selling Security Holders are offering shares of Common Stock for
their own account, and not for the account of the Company. The Company will not
receive any proceeds from the sale of the shares of Common Stock by the Selling
Security Holders.
The Common Stock may be sold from time to time by the Selling Security
Holders or by their pledges, donees, transferees or other successors in
interest. Such sales may be made on the exchange or market upon which the shares
trade at the time, the over-the-counter market or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in negotiated transactions. The Common Stock may be sold by one or more of the
following: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage
transactions and transactions in which the broker solicits purchases. In
effecting sales, brokers or dealers engaged by the Selling Security Holders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Security Holders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to Rule
144 may be sold under Rule 144 rather than pursuant to this Prospectus. The
Company will not receive any of the proceeds from the sale of these shares,
although it has paid the expenses of preparing this Prospectus and the related
Registration Statement. The Selling Security Holders have been
56
<PAGE> 60
advised that they are subject to the applicable provisions of the Exchange Act,
including without limitation, Regulation M thereunder.
RESTRICTIONS UPON RESALE
Certain of the shares of Common Stock being offered by the Selling
Security Holders are subject to the following restrictions upon resale.
- Series A Shares
The Series A Shares and the shares of Common Stock issuable upon
conversion of the Series A Shares may not be transferred, sold, encumbered or
otherwise disposed of for a period of eighteen months after the closing of the
Merger without the prior written consent of the broker-dealer that acted as the
placement agent of the offering of the Series A Shares.
- Common Stock issued in the Merger.
The shares of Common Stock issued in the Merger are generally subject
to eighteen (18) month resale restrictions, however, during this eighteen (18)
month period, the holders thereof are permitted to publicly sell an aggregate of
$300,000 of these shares on a quarterly basis commencing on the date of this
Prospectus.
- Voting Trust
Approximately 500,000 shares of Common Stock being offered by the
Selling Security Holders are presently being held in the Voting Trust and may
only be sold upon release therefrom. The Voting Trust permits the release of
250,000 shares per quarter commencing with the quarter following the date of
this Prospectus.
The Company will use its best efforts to file, during any period in
which offers or sales are being made, one or more post-effective amendments to
the Registration Statement of which this Prospectus is a part to describe any
material information with respect to the plan of distribution not previously
disclosed in this Prospectus or any material change to such information in this
Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon
for the Company by Buchanan Ingersoll Professional Corporation, Philadelphia,
Pennsylvania, 19103.
EXPERTS
The financial statements of Osage Computer Group, Inc. as of December
31, 1996 and for the year then ended included in this Prospectus, have been so
included in reliance on the report of Pearce, Gray & Rudd, independent certified
public accountants, given on the authority of said firm as experts in auditing
and accounting. The financial statements of Osage Systems Group, Inc. as of
December 31, 1997 and for the year then ended included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
57
<PAGE> 61
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational and reporting requirements
of the Securities Exchange Act of 1934, as amended, and in accordance therewith
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information concerning the Company may be
inspected without charge, and copies of all or any part thereof may be obtained
from the Commission's principal office in Washington, DC at Room 1024, 450 Fifth
Street N.W., Washington, DC 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained upon written request addressed to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, DC
20549, at prescribed rates. In addition, the Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act with respect to the shares of Common Stock
being offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which have been omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is made to
the Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made.
58
<PAGE> 62
OSAGE SYSTEMS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
FINANCIAL STATEMENTS:
Report of Pearce, Gray & Rudd........................................................F-1
Report of Deloitte & Touche LLP......................................................F-2
Consolidated Balance Sheets December 31, 1996 and 1997..........................F-3
Consolidated Statements of Operations Years
Ended December 31, 1996 and 1997..............................................F-4
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1997........................................F-5
Consolidated Statements of Cash Flows Years
Ended December 31, 1996 and 1997..............................................F-6
Notes to Consolidated Financial Statements Years Ended
December 31, 1996 and 1997 ...................................................F-7
</TABLE>
<PAGE> 63
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Osage Computer Group, Inc.
We have audited the balance sheets of Osage Computer Group, Inc. as of
December 31, 1996 and 1995 and the statements of income, retained earnings
and changes in financial position for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, the statements of income, changes in financial position and
retained earnings for the years ended December 31, 1996 and 1995 are
presented in accordance with generally accepted accounting principles
applied on a consistent basis. Further, in our opinion, the balance sheet
presents fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995 in accordance with generally
accepted accounting principles.
PEARCE, GRAY & RUDD
Mesa, Arizona
March 24, 1997
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
Shareholders
Osage Systems Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Osage Systems
Group, Inc. (formerly Osage Computer Group, Inc.) (the "Company") as of December
31, 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
February 20, 1998, except for certain information in Note 1 to the consolidated
financial statements, as to which the date is March 10, 1998, and certain
information in Note 10 to the consolidated financial statements, as to which
the date is March 17, 1998
F-2
<PAGE> 65
OSAGE SYSTEMS GROUP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- -------------------------------------------------------------------------------------------------
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 564 $ 2,576,323
Accounts receivable - net of allowance for doubtful accounts of
$15,000 in 1997 1,939,347 1,974,496
Inventories 2,190 6,672
Prepaid expenses and other current assets 45,534 25,728
Deferred income taxes (Note 8) 210,000
---------- -----------
Total current assets 1,987,635 4,793,219
FURNITURE AND EQUIPMENT - Net (Note 3) 81,586 86,881
OTHER ASSETS 27,000
---------- -----------
TOTAL $2,096,221 $ 4,880,100
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,639,682 $ 1,948,802
Accrued expenses 82,067 507,395
Deferred income taxes (Note 8) 55,000
Income taxes payable (Note 8) 262,182
---------- -----------
Total current liabilities 1,776,749 2,718,379
---------- -----------
DUE TO FORMER PARENT COMPANY (Note 4) 154,263
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5 and 6)
STOCKHOLDERS' EQUITY (Notes 2, 9 and 10):
Series A Preferred, $100 stated value - authorized, issued
and outstanding, 122 shares; total liquidation preference,
$3,660,000 12,200
Series B Preferred, $100 stated value - authorized, issued and
outstanding, 50 shares; total liquidation preference, $1,500,000 5,000
Common stock, $.01 par value - authorized, 10,000,000 shares;
issued and outstanding, 4,820,000 shares 48,200 48,200
Additional paid-in capital 2,772,246
Retained earnings (deficit) 117,009 (675,925)
---------- -----------
Total stockholders' equity 165,209 2,161,721
---------- -----------
TOTAL $2,096,221 $ 4,880,100
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 66
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
NET SALES $ 9,908,379 $ 14,191,203
COST OF SALES 7,694,775 11,670,066
----------- ------------
Gross profit 2,213,604 2,521,137
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,142,974 2,807,340
----------- ------------
OPERATING INCOME (LOSS) 70,630 (286,203)
INTEREST EXPENSE - Net (26,230) (9,731)
----------- ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 44,400 (295,934)
PROVISION (BENEFIT) FOR INCOME TAXES (Note 8) 9,464 (3,000)
----------- ------------
NET INCOME (LOSS) $ 34,936 $ (292,934)
=========== ============
INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED (Note 1) $ 0.01 $ (0.06)
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING
(Note 1) 4,868,200 4,820,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 67
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,916,400 $ 48,200
Purchase and retirement of treasury shares (96,400)
Net income
---------- --------- ------ -------- ------ ------
BALANCE, DECEMBER 31, 1996 4,820,000 48,200
Acquisition of Pacific Rim Entertainment, Inc. (Note 1) 50 $5,000
Private placement offering (Note 1) 122 $ 12,200
Net loss
---------- --------- ------ -------- ------ ------
BALANCE, DECEMBER 31, 1997 4,820,000 $ 48,200 122 $ 12,200 50 $5,000
========== ========= ====== ======== ====== ======
<CAPTION>
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 83,027 $ 131,227
Purchase and retirement of treasury shares (954) (954)
Net income 34,936 34,936
---------- --------- ----------
BALANCE, DECEMBER 31, 1996 117,009 165,209
Acquisition of Pacific Rim Entertainment, Inc. (Note 1) $ (715,554) (500,000) (1,210,554)
Private placement offering (Note 1) 3,487,800 3,500,000
Net loss (292,934) (292,934)
---------- --------- ----------
BALANCE, DECEMBER 31, 1997 $2,772,246 $(675,925) $2,161,721
========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 68
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 34,936 $ (292,934)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 48,527 31,546
Stock-based compensation 300,000
Loss on disposal of assets 1,859
Loss on disposal of investments 50,000
Deferred income taxes 9,464 (265,000)
Changes in operating assets and liabilities:
Accounts receivable (587,678) (35,149)
Inventories 1,976 (4,482)
Prepaid expenses and other assets 1,316 21,806
Accounts payable 667,663 309,120
Accrued expenses (33,422) 125,328
Income taxes payable 262,182
----------- -----------
Net cash provided by operating activities 142,782 504,276
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,138) (38,700)
Investments (25,000) (25,000)
----------- -----------
Net cash used in investing activities (57,138) (63,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to Osage stockholders (500,000)
Repayment of bridge indebtedness (450,000)
Net proceeds from sale of Series A Preferred shares 3,500,000
Principal payments on bank line of credit (110,000)
Repayment of note payable due to former parent company (154,263)
Purchase of treasury stock (954) (212,500)
Acquisition costs (48,054)
----------- -----------
Net cash (used in) provided by financing activities (110,954) 2,135,183
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (25,310) 2,575,759
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 25,874 564
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 564 $ 2,576,323
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 69
OSAGE SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Osage Systems Group, Inc. (the "Company")
through its wholly-owned subsidiary, Osage Computer Group, Inc. ("Osage"),
provides network computer solutions through a broad range of information
technology services primarily in the state of Arizona. Such services are
intended to transform discrete hardware and software components into
integrated systems and provide solutions to complex information technology
problems.
The Company has entered into a contract with a major supplier of computer
hardware and software to act as its exclusive value-added reseller in
Arizona. Purchases and sales under the value-added reseller contract
account for the majority of the Company's sales and costs of sales. The
term of the contract is one year and expires in May 1998.
On November 11, 1997, the former parent of Osage, Sun Up Enterprises, Inc.
("Sun Up") was merged into Osage. In conjunction with such merger, Sun
Up's separate corporate existence ceased.
On December 22, 1997, the Company acquired Osage pursuant to the terms of
a Merger Agreement dated November 5, 1997 (the "Merger Agreement") with
Pacific Rim Entertainment, Inc., a publicly-traded company. Upon the
closing of the merger, through a wholly-owned subsidiary, the Company
acquired 100 percent of the outstanding capital stock of Osage in exchange
for consideration paid to the former stockholders of Osage (the "Osage
Stockholders") consisting of: (i) $500,000 in cash; (ii) 900,000
newly-issued shares of common stock (subject to upward adjustment in the
event the trading price of the Company's common stock is below $2.00 per
share during an 18-month period following the merger); (iii) 200,000
newly-issued shares of common stock; (iv) 50 shares of Series B $3.00
convertible preferred stock (the "Series B Shares"), which are convertible
into 500,000 shares of common stock (subject to upward adjustment provided
that certain performance criteria are achieved subsequent to the merger);
and (v) options with a term of six years that permit the purchase of
800,000 shares of common stock, at an exercise price equal to $3.00 per
share. The options vest upon certain performance criteria set forth in the
Merger Agreement (Note 9).
Of the shares of common stock issued to the Osage Stockholders in the
merger are 900,000 shares subject to an upward adjustment to the extent
that during any of the six consecutive three-month periods following the
effectiveness of a registration statement, the quarterly value of the
Company's common stock, as to 150,000 shares during each such applicable
three-month period, is below $2.00. The quarterly value shall be derived
from a combination of (1) sales of shares of the Company's common stock by
the Osage Stockholders in open market transactions, upon which value shall
be measured by the average per share sales price, or (2) to the extent
that open market sales have not generated sales proceeds to the Osage
Stockholders of at least $300,000 (based upon the sale of 150,000 shares),
then the remaining value shall be measured based on the average of the
closing bid and ask prices of the Company's common stock on the principal
exchange, automated quotation system of over-the-counter market for the 15
trading days before the last trading day in each such respective
three-month period. To the extent that a sale or deemed sale of 150,000
shares yields for the Osage Stockholders less than $300,000 during any
such applicable three-month period, then, and in that event, the Company
would be required to issue to the Osage Stockholders such number of
additional shares of common stock as would provide them with a yield of
$300,000 on the sale or deemed sale of common stock during the applicable
three-month period.
F-7
<PAGE> 70
Contemporaneous with the merger, the Company completed a private placement
offering to accredited investors (the "Offering") of $3,660,000,
consisting of 122 shares of Series A $3.00 convertible preferred stock
(the "Series A Shares"). Part of the proceeds was used by the Company to:
(i) retire approximately $450,000 of debt; (ii) pay the $500,000 cash
component of the merger consideration to the Osage Stockholders; and (iii)
pay $160,000 of related fees for such offering. The remainder of the
proceeds is expected to be used to finance the Company's strategic
acquisition strategy.
On March 10, 1998, the Company changed its name to Osage Systems Group,
Inc.
For accounting purposes, the merger is considered a reverse acquisition
with Osage being the accounting acquirer and Pacific Rim Entertainment,
Inc. being the legal acquirer. Accordingly, because the Osage Stockholders
retained voting and operating control of the combined entity, the merger
consideration was allocated to the net assets of the Company followed by a
recapitalization of Osage. All historical share and per share amounts have
been restated to retroactively reflect the reverse acquisition. The pro
forma results of operations for the year ended December 31, 1997, assuming
the acquisition was made at the beginning of the year, would have been as
follows:
<TABLE>
<S> <C>
Net sales $ 14,191,203
Cost of sales 11,670,066
----------
Gross margin 2,521,137
Selling, general and administrative expenses 3,965,444
----------
Loss from operations (1,444,307)
Interest expense (9,731)
Benefit for income taxes 3,000
------------
Net loss $ (1,451,038)
============
Net loss per share $ 0.30
============
</TABLE>
SIGNIFICANT ACCOUNTING POLICIES are as follows:
BASIS OF CONSOLIDATION - The accompanying financial statements include the
accounts of the Company and Osage. All significant intercompany accounts
and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
REVENUE RECOGNITION - The Company recognizes sales of products when the
products are shipped and services and support revenue is recognized when
the applicable services are rendered. Preventative maintenance contracts
sold to customers are provided by an unrelated company. Upon sale of a
preventative maintenance contract, the Company recognizes the sale and
related cost in its statement of operations.
INVENTORIES are recorded at the lower of cost (first-in, first-out) or
market.
FURNITURE AND EQUIPMENT are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
The useful lives range from three to seven years.
F-8
<PAGE> 71
INCOME TAXES - The Company accounts for income taxes using the asset and
liability approach, which can result in recording tax provisions or
benefits in periods different than the periods in which such taxes are
paid or benefits realized. Deferred income taxes are recorded for the
difference between the book and tax basis of various assets and
liabilities which can provide for current recognition of expected tax
benefits from temporary differences that will result in deductible amounts
in future years.
NET INCOME (LOSS) PER COMMON SHARE - The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share.
Income (loss) per share data in 1996 has been restated to reflect the
adoption of SFAS No. 128.
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the year after giving effect to stock options and the conversion of
preferred shares considered to be dilutive. Because the Company incurred a
loss for the year ended December 31, 1997, the effects of the potential
dilutive securities discussed in Notes 1, 2 and 10 are not included in the
calculations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of accounts
receivable, accounts payable and accrued expenses approximates the
carrying value due to the short-term nature of these instruments.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive
Income ("SFAS 130"), which is effective for financial statements for
periods beginning after December 15, 1997 and establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company does not believe the adoption of SFAS
130 will have a material impact on its financial statement presentation or
related disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997 and establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company operates in one business segment
and does not believe that SFAS 131 will require additional disclosures
when adopted.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
balances to conform with the classifications used in 1997.
F-9
<PAGE> 72
2. CAPITAL STOCK
The Company's capital stock consists of common stock, Series A Preferred
and Series B Preferred. The Series A Preferred shares have no voting
rights, do not share in dividends, are each convertible at any time into
10,000 shares of voting common stock, and beginning June 22, 1998, six
months from issuance, are redeemable by the Company at its discretion at
$3.00 per share. The Series A Preferred shares are redeemable by the
Company provided (1) the average of the closing bid and ask prices of the
Company's common stock has exceeded $5.00 per share for the 20 trading
days preceding the date notice of redemption is given to the holders of
the Series A Preferred shares, (2) the shares of the common stock issued
or issuable upon conversion of the Series A Preferred shares are subject
to an effective registration statement, and (3) the placement agent of the
offering shall have waived any restrictions upon the resale of such
shares.
The Series B Preferred shares participate in common stock dividends on an
"if converted" basis. The shares are each convertible into 10,000 common
shares, which is subject to adjustment, provided that the Company, during
each of the fiscal quarters in the first, second and third years
subsequent to the merger between the Company and Pacific Rim
Entertainment, achieves earnings per share as reflected within its
quarterly financial statements as filed with the Securities and Exchange
Commission of $.0125, $.025 and $.0375, respectively. If so adjusted, the
conversion rate shall be the lower of (i) $3.00 per share of common stock
(10,000 shares each) or (ii) the average of the closing bid and ask prices
of the common stock for the 15 days prior to the conversion.
The holders of the Series B Preferred shares are entitled to a number of
votes, in total, that equal the total number of common stock votes, plus
one vote, in all elections of directors, such that the majority of the
directors are elected by the Series B stockholders. On all matters brought
to a vote of stockholders, the Series B stockholders are entitled to vote
as a class. These special voting rights terminate upon the earlier of (i)
the first date upon which the Company does not meet certain defined
performance criteria or (ii) the third anniversary of the closing date of
the Merger Agreement.
3. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Computer hardware $150,220 $179,747
Furniture and fixtures 11,230 12,795
Computer software 12,273 12,868
-------- --------
Total 173,723 205,410
Less accumulated depreciation 92,137 118,529
-------- --------
Furniture and equipment - net $ 81,586 $ 86,881
======== ========
</TABLE>
4. DUE TO FORMER PARENT COMPANY
The note payable due to the former parent company of Osage outstanding at
December 31, 1996 was repaid during 1997.
F-10
<PAGE> 73
5. SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of net sales for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Customer A 43.9% 64.8%
Customer B 11.3% 1.6%
Customer C 10.4% 4.8%
</TABLE>
6. COMMITMENTS
The Company leases office space under noncancelable operating leases which
expire through 2002. Future minimum lease payments under noncancelable
operating leases at December 31, 1997 are approximately as follows:
<TABLE>
<S> <C>
1998 $148,000
1999 103,000
2000 12,000
2001 12,000
2002 6,000
--------
Total $281,000
========
</TABLE>
Total rent expense was $59,144 and $81,983, net of rent income from a
month-to-month sublease of $0 and $23,683 for the years ended December 31,
1996 and 1997, respectively.
7. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 21 and completed six months of
service. Each participant may elect to contribute up to 15 percent of his
or her gross compensation up to the maximum amount allowed by the Internal
Revenue Service. The Company can make discretionary matching
contributions. No matching contributions have been made under the plan.
8. INCOME TAXES
The deferred income tax (liability) asset at December 31 is comprised of
the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Use of cash basis of accounting for income tax purposes $(55,000) $ 85,000
Allowance for doubtful accounts 6,000
Deferred stock-based compensation 119,000
-------- --------
Net current (liabilities) assets $(55,000) $210,000
======== ========
</TABLE>
F-11
<PAGE> 74
The income tax provision (benefit) consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Current:
Federal $207,000
State 55,000
Deferred:
Federal $ 9,464 (228,000)
State (37,000)
-------- --------
Income tax provision (benefit) $ 9,464 $ (3,000)
======== ========
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Federal statutory rate 34.0 % (34.0)%
Nondeductible meals, entertainment and insurance 5.2 %
Nondeductible write-off of investment 6.7 %
State income taxes 6.3 % (5.5)%
Overall effect of graduated federal rates (19.0)% 26.6 %
----- -----
Effective income tax rate 21.3 % (1.0)%
===== =====
</TABLE>
9. STOCK OPTIONS AND STOCK COMPENSATION
During 1993, the Company adopted the 1993 Stock Option Plan. The plan
provides for the issuance of both incentive stock options as well as
nonqualified options to be issued to consultants and others. The Company
has reserved 100,000 shares of common stock for issuance under this plan.
No options have been granted under this plan since inception.
Also in 1993, the Company adopted the Outside Directors Stock Option Plan
pursuant to which options to purchase an aggregate of 2,500 shares of
common stock have been authorized on an annual basis to each outside
director who has served during the immediately preceding year. No options
have been granted under this plan since inception.
At December 31, 1997, the Company had 1,000,000 options outstanding to
purchase shares of common stock. Of these options, 800,000 were granted in
connection with the Merger Agreement as discussed in Note 1. The options
are subject to an exercise price equal to the lower of $3.00 per share or
the average of the closing bid and ask prices of shares of the Company's
common stock on the principal exchange, automated quotation system or
over-the-counter market for the 15 trading days prior to the date upon
which any segment of the options vest. The options will vest in the
following manner:
(i) 50 percent of the options will vest once the Company's annual
earnings equal or exceed $.20 per share provided the holder of such
options remains continuously employed by the Company;
(ii) 100 percent of the options will vest once the Company's annual
earnings equal or exceed $.30 per share provided the holder of such
options remains continuously employed by the Company.
F-12
<PAGE> 75
The options granted in conjunction with the Merger Agreement expire
December 19, 2003.
An additional 100,000 options are subject to the same exercise price and
vesting criteria as the options granted within the Merger Agreement. Of
the remaining 100,000 options, which have an exercise price of $3.00 per
share, 57,500 were exercisable at the grant date and 42,500 are
exercisable at the rate of 50 percent on each of the first two
anniversaries of the grant date and expire on the third anniversary of the
grant date.
Subsequent to December 31, 1997, 100,000 options to purchase shares of
common stock at an exercise price of $5.00 per share were granted. The
options shall vest upon the earlier of:
(i) January 1, 2001, provided the holder of such options remains
continuously employed by the Company;
(ii) 50 percent of the options, however, shall vest earlier than January
1, 2001, provided that at such earlier date the Company's annual
earnings equal or exceed $.20 per share provided the holder of such
options remains continuously employed by the Company;
(iii) 100 percent of the options, however, shall vest earlier than January
1, 2001, provided that at such earlier date the Company's annual
earnings equal or exceed $.30 per share provided the holder of such
options remains continuously employed by the Company.
The options granted expire January 1, 2002.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock options. The 800,000
options granted in conjunction with the Merger Agreement and the 100,000
options granted subject to the same exercise period and vesting criteria
as the options granted within the Merger Agreement are considered variable
options, as defined by the provisions of APB No. 25 and related
interpretations. The Company will start recognizing compensation expense
on variable arrangements when the future events become probable of
occurring. The accrual of compensation expense under the variable
arrangement has not commenced, as it is unlikely that the award will be
earned in the near future due to the loss incurred in 1997. No
compensation expense has been recognized in the accompanying consolidated
statement of operations for the year ended December 31, 1997 as the
remaining options granted are considered fixed options and were granted at
market value, as defined by the provisions of APB No. 25 and related
interpretations. The Company has determined that the pro forma effects of
recognizing compensation cost in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, would not be materially different than the
actual net loss and loss per common share included in the consolidated
statements of operations.
The Company has an employment contract with one of its executives that
grants the employee 200,000 shares of the Company's common stock, 100,000
shares of which vest at the end of the employee's first anniversary with
the remaining 100,000 shares vesting at the end of the employee's second
anniversary. In connection with the employment contract, if the employee
is terminated prior to the one-year anniversary, 100,000 shares shall be
released to the employee. Accordingly, the Company has recorded $300,000
(value assigned to 100,000 shares) of compensation expense in the
accompanying 1997 consolidated statement of operations. The remaining
$300,000 of compensation expense will be recorded in 1998.
F-13
<PAGE> 76
10. SUBSEQUENT EVENTS
On February 10, 1998, the Company completed a private placement offering
of 600,000 shares of common stock to accredited investors for $2,100,000.
The net proceeds of $1,974,000 will be used for working capital purposes
and to finance the Company's strategic acquisition strategy. In connection
with the private placement, 200,000 warrants to purchase common stock of
the Company at $3.50 per share were granted to the broker.
On March 17, 1998, the Company closed two separate transactions to acquire
a California corporation and a Texas corporation. Both companies operate
in the same industry as the Company. Under the terms of the merger with
the California company, the Company paid $200,000 and issued $900,000 of
the Company's common stock (value at $6 a share) to the seller. Under the
terms of the merger with the Texas corporation, the Company paid $395,000
and issued $1,580,000 of the Company's convertible preferred stock to the
seller.
* * * * * *
F-14
<PAGE> 77
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Market Price for the Company's Common Equity.........
Capitalization.......................................
Management's Discussion and Analysis or
Plan of Operation.................................
Business.............................................
Management...........................................
Certain Relationships and Related Transactions.......
Principal Stockholders...............................
Description of Securities...........................
Selling Security Holders.............................
Plan of Distribution.................................
Legal Matters........................................
Experts..............................................
Additional Information...............................
Financial Statements.................................
</TABLE>
4,351,982 SHARES
OSAGE SYSTEMS GROUP, INC.
COMMON STOCK
-------------------
PRELIMINARY
P R O S P E C T U S
-------------------
____________, 1998
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws reflect the
adoption of the provisions of Section 102(b)(7) of the Delaware General
Corporation Law (the "GCL"), which eliminate or limit the personal liability of
a director to the Company or its stockholders for monetary damages for breach of
fiduciary duty under certain circumstances. If the GCL is amended to authorize
corporate action further eliminating or limiting personal liability of
directors, the Certificate of Incorporation provides that the liability of the
director of the Company shall be eliminated or limited to the fullest extent
permitted by the GCL. The Company's Certificate of Incorporation and Bylaws also
provide that the Company shall indemnify any person, who was or is a party to a
proceeding by reason of the fact that he is or was a director, officer, employer
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with such proceeding if he
acted in good faith and in a manner he reasonably believed to be or not opposed
to the best interests of the Company, in accordance with, and to the full extent
permitted by, the GCL. The determination of whether indemnification is proper
under the circumstances, unless made by the Court, shall be determined by the
Board of Directors.
Reference is made to Item 28 for the undertakings of the Registrant
with respect to indemnification of liabilities arising under the Securities Act
of 1933, as amended (the "Act").
II-1
<PAGE> 79
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
<TABLE>
<S> <C>
SEC Registration Fee...........................$ 9,060.04
Printing and Engraving......................... 5,000.00
Accountants' Fees and Expenses................. 25,000.00
Blue Sky Filing Fees and Expenses.............. 5,000.00
NASD Filing Fee................................ --
Listing Fees................................... --
Legal Fees and Expenses........................ 50,000.00
Other Offering Expenses........................ 5,939.96
----------
TOTAL...............$100,000.00
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1997, the Company sold $450,000 principal amount of
Senior Secured Notes and warrants to purchase 135,000 shares of Common Stock at
an exercise price of $.10 per share, in a private placement transaction exempt
under Section 4(2). The Warrants were subsequently canceled in December 1997 in
exchange for shares of Common Stock as set forth below:
<TABLE>
<CAPTION>
Amount of Common Stock
8% Senior Exchanged
Name Secured Notes Warrants for Warrants
- ---- ------------- -------- ------------
<S> <C> <C> <C>
Elliot Braun 25,000 7,500 7,200
Robert Brvenik 20,000 6,000 5,800
Bernard Buchwalter 40,000 12,000 11,500
Dune Holdings, Inc. 100,000 30,000 29,250
Bermuda Trust Company, Trustee
for The Elanken Family Trust 65,000 19,500 18,900
Robert Friedman 75,000 22,500 21,500
Anthony Kamin 50,000 15,000 14,650
Jeffrey Markowitz 75,000 22,500 22,100
------- ------- -------
TOTAL 450,000 135,000 130,900
</TABLE>
2. During the period from May 1997 to October 1997, the Company
issued in the aggregate 172,183 shares of Common Stock in consideration for
services rendered, release of debt and various other claims which the parties
may have had against the Company in transactions exempt under Section 4(2) of
the Act, as a transaction by an issuer not involving a public offering, as set
forth below:
II-2
<PAGE> 80
<TABLE>
<CAPTION>
Number of Shares
Name Common Stock Consideration
- ---- ---------------- -------------
<S> <C> <C>
Paul Jeffrey Adelizzi 10,500 $ 50,000
Burt Ahrens 3,293 $ 32,932
Arthur Anderson 2,267 $ 45,349
Robert Brvenik 5,000 $ 5,000
Bernard Buchwalter 6,500 $ 5,000
Catalina Plastics 3,500 $ 40,826
Mark Dutton 7,500 $ 25,000
Bermuda Trust Company, Trustee
for The Elanken Family Trust 31,100 $ 85,000
Stan Freberg 1,000 (1)
Richard Friedman 5,000 $ 5,000
Anthony Kamin 5,000 $ 5,000
Sy Leslie 3,293 $ 32,932
Alan Livingston 21,730 $ 217,298
Christopher Livingston 2,500 (2)
Jeffrey Markowitz 5,000 $ 5,000
Frank Piazza 2,500 (2)
Jason Rabinovitz 1,500 $ 15,000
R.R. Donnelly & Sons Company 11,000 $ 203,168
Rubin Baum Levin Constant & Friedman 7,500 $ 115,000
Richard Someck 6,500 $ 5,000
Ike Suri 15,000 $ 50,000
Robert Poulson 15,000 $ 15,000
------- ---------
TOTAL 172,183 $ 957,505
- ---------
</TABLE>
(1) In consideration for certain rights to copyright.
(2) In consideration for certain music rights.
3. In November 1997, the Company sold 3,185,080 shares of Common
Stock to accredited investors in a private placement transaction exempt from
registration pursuant to Rule 506 of Regulation D. In connection with this
transaction, no brokerage commissions were paid. The following persons purchased
shares at $.10 per share.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
101 Investments, Inc. 5,000
Howard & Shari Borenstein 15,000
Capital Growth Trust 180,000
Clifton Capital 170,000
Cecile T. Coady 10,000
David M. Daniels 200,000
Diversified Investment Fund L.P. 50,000
Jere Dumanic 50,000
Bermuda Trust Company, Trustee
</TABLE>
II-3
<PAGE> 81
<TABLE>
<S> <C>
for the Elanken Family Trust 20,000
El Paso Holdings Ltd. 125,000
Bruce Ginsburg 15,000
Godwin Finance Ltd. 350,000
KAB Investments, Inc. 100,000
Michael Dane Ibsen 20,000
Interbanc Mortgage Services, Inc. 200,000
Steven D. Levin 15,000
Millworth Investments Inc. 175,000
Keith E. Myers 30,000
PRE Investors L.P. 641,692
Steven B. Rosner 190,000
SPH Equities, Inc. 73,388
Chad Shusman 10,000
SPH Investments, Inc. Profit Sharing Plan dtd 12/1/92
f/b/o Stephen P. Harrington 50,000
SPH Investments, Inc. 50,000
Harvey Sternberg 15,000
Synergy Group, Inc. 250,000
West Tropical Investments Corp. 175,000
---------
TOTAL 3,185,080
</TABLE>
- ---------------------
4. In December 1997, the Company sold 122 shares of Series A
$3.00 Convertible Preferred Stock at a purchase price of $30,000 per share to
accredited investors in a private placement transaction exempt from registration
pursuant to Rule 506 of Regulation D. Each Series A Share is convertible into
10,000 shares of Common Stock. In connection with this transaction brokerage
commissions and related fees of $160,000 were paid. The following persons
purchased shares:
<TABLE>
<CAPTION>
Name Shares of Series A Stock
- ---- ------------------------
<S> <C>
Phil Albrecht, Jr. 2
Myles Bass 9.333
Paul Beenan 2
Timothy Paul Buck 1
Bernard Cohen 2
Commonwealth Insurance Company Profit Sharing Plan 1
Frank DeLuca 2
DeSilva & Partners, Inc. Self Directed Retirement Fund 1
Dewey Investment Partnership Ltd. 10
EquiTech, Inc. 1
Hamid Ebrahimi 2
Bermuda Trust Company, Trustee
for The Elanken Family Trust 16.667
Daniel Gooze 4
Bernard Hollander Family Trust 1
Richard Joyce 17
</TABLE>
II-4
<PAGE> 82
<TABLE>
<S> <C>
Eckard Kirsch 1.5
Douglas Martin 1
Morris Asset Management, Inc. .5
Torrey Mosvold 4
MSB Research Inc. 8
Chaim Rajchenbach .5
Moshe Rajchenbach .5
Naomi Treger Rajchenbach 1
Louis Rambler 1
Sherwin and Helen Ray 1
Gary Rein 1
James C. and Patricia J. Rives 3
Ira Saligman 1
Pinchas and Nahma Schwartz 1
Jonathan Shecter 1
Leonard Silvestri 1
Jeff Sokolin 1
John N. Straub Ltd., a Professional Medical Corporation 1
Al Terrell .334
Burton Turk 1
Roderic S. Ware 2
Will's Wei Corp. 16.666
Kevin Wyllie 1
------
TOTAL 122
</TABLE>
5. As of December 22, 1997, the Company issued a total of
1,100,000 shares of Common Stock and 50 shares of Series B $3.00 Convertible
Preferred Stock to the stockholders set forth below in exchange for 100% of the
stock of Osage Computer Group, Inc., an Arizona corporation. The holders of the
Series B Shares have the right at any time to convert the $1.5 million principal
amount of the shares, plus any and all accrued dividends thereon, into shares of
the Company's Common Stock at a conversion rate of $3.00 per share of Common
Stock (the "Conversion Rate"), which is subject to adjustment provided that at
the time of conversion the Company remains in compliance with certain
performance criteria set forth in the Merger Agreement.
<TABLE>
<CAPTION>
Shares of Series B
Name Common Stock Shares Options
- ---- ------------ ------------- -------
<S> <C> <C> <C>
Jack Leadbeater 456,500 20.75 332,000
David Olson 456,500 20.75 332,000
Steven Rigby 55,000 2.5 40,000
Chris Donahue 55,000 2.5 40,000
Dale Van De Vrede Family Trust 55,000 2.5 40,000
Rick Gunther 22,000 1.0 16,000
--------- ----- -------
1,100,000 50 800,000
</TABLE>
II-5
<PAGE> 83
In connection with the Merger, the Company granted 200,000 shares of
Common Stock to Michael Glynn in consideration for his future employment
services. These shares vest 50% after one year of employment and 50% after the
second year of employment. The issuance of such securities was exempt from
registration pursuant to Section 4(2) of the Act, as a transaction by an issuer
not involving a public offering.
6. In January 1998, the Company sold 600,000 shares of Common
Stock at a purchase price of $3.50 per share to accredited investors in a
private placement transaction exempt from registration pursuant to Rule 506 of
Regulation D as set forth below. In connection with this transaction, a
brokerage fee was paid of $126,000 and options to purchase 200,000 shares of
Common Stock at an exercise price of $3.50 per share with a term of three years.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Lancer Partners, L.P. 210,000
Lancer Offshore Inc. 320,000
Lancer Voyager Fund 50,000
Michael Lauer 20,000
-------
TOTAL 600,000
</TABLE>
7. In March 1998, the Company issued 150,000 shares of Common
Stock in consideration of the acquisition of 100% of the outstanding capital
stock of Solsource Computer, Inc. The Company may have an obligation to issue
additional shares of Common Stock pursuant to the Agreement and Plan of Merger
among the Company, Solsource Acquisition Corp. and Solsource Computers, Inc., if
certain performance criteria are met.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Trust of Daniel J. and Mary Vahalla 146,297
Gary Gwin 3,111
Maureen Gaare 296
Daniel Grube 296
-------
TOTAL 150,000
</TABLE>
The issuance of such securities was exempt from registration pursuant to Section
4(2) of the Act, as a transaction of issuer not involving a public offering.
8. In March 1998, the Company issued 105.3 shares of Series C
Convertible Preferred Stock to Hugh V. Jones in consideration of the acquisition
of 100% of the outstanding capital stock of HV Jones, Inc. ("Jones"). The 105.3
shares of Series C Convertible Preferred Stock convert into Common Stock during
the next four quarters at a conversion rate equal to the lower of $6.87 or a 33%
premium over the average closing price of the Company's Common Stock for the
(10) trading days prior to each date of conversion. Additional earn-out shares
may be issued if Jones achieves certain performance targets.
II-6
<PAGE> 84
The issuance of such securities was exempt from registration pursuant to Section
4(2) of the Act, as a transaction of issuer not involving a public offering.
ITEM 27. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated November 5, 1997 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., PR 2.1 to Registrant's Current Report on
Acquisition Corp. and Osage Computer Group, Inc. Form 8-K dated December 22, 1997 (the
"December 22, 1997 Form 8-K")
2.2 First Amendment to Agreement and Plan of Merger dated Incorporated by reference to Exhibit
December 19, 1997 2.2 to the December 22, 1997 Form 8-K
2.3 Certificate of Merger of Osage Computer Group, Inc. Incorporated by reference to Exhibit
into PR Acquisition Corp. (a wholly-owned subsidiary 2.3 to the December 22, 1997 Form 8-K
of Pacific Rim Entertainment, Inc.)
2.4 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., 2.4 to Registrant's Current Report on
Solsource Acquisition Corp. and Solsource Computers, Form 8-K dated March 27, 1998 (the
Inc. "March 27, 1998 Form 8-K").
2.5 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to Exhibit
by and among Pacific Rim Entertainment, Inc., Jones 2.5 to the March 27, 1998
Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.6 Amendment to the Agreement and Plan of Merger dated Incorporated by reference to Exhibit
by and among Osage Systems Group, 2.6 to the March March 17, 1998 Form 8-K.
27, 1998 Inc., Jones Acquisition Corp. and H.V.
Jones, Inc.
2.7 Certificate of Merger of Solsource Computers, Inc. Incorporated by reference to Exhibit
into Solsource Acquisition 2.7 to the March 27,
</TABLE>
II-7
<PAGE> 85
<TABLE>
<S> <C> <C>
Corp. 1998 Form 8-K.
2.8 Certificate of Merger of H.V. Jones, Inc. into Jones Incorporated by reference to Exhibit
Acquisition Corp. 2.8 to the March 27, 1998 Form 8-K.
3.1 Certificate of Incorporation Incorporated by reference to Exhibit
3.1 to Amendment No. 1 to the
Registrant's Registration Statement
on Form S-1 (Reg. No. 33-69380) filed
November 2, 1993 ("Amendment No. 1 to
Form S-1")
3.2 Certificate of Designation, Preferences and Rights of Exhibit 3.1 to Registrant's Current
Class A Non-Voting Convertible Preferred Stock Report on Form 8-K dated March 11,
1998 (the "March 11, 1998 Form 8-K")
3.3 Certificate of Amendment of Certificate of Incorporated by reference to Exhibit
Designation, Preferences and Rights of Class A 3.2 to the March 11, 1998 Form 8-K
Non-Voting Convertible Preferred Stock
3.4 Certificate of Restoration and Revival of Certificate Incorporated by reference to Exhibit
of Incorporation 3.3 to the March 11, 1998 Form 8-K
3.5 Certificate of Amendment to the Certificate of Incorporated by reference to Exhibit
Incorporation dated November 21, 1997 3.4 to the March 11, 1998 Form 8-K
3.6 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series A $3.00 Convertible Preferred Stock 3.3 to the December 22, 1997 Form 8-K
3.7 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series B $3.00 Convertible Preferred Stock 3.4 to the December 22, 1997 Form 8-K
3.8 Certificate of Designation, Preferences and Rights of Incorporated by reference to Exhibit
Series C Convertible Preferred Stock 3.8 to the March 27, 1998 Form 8-K
3.9 Bylaws Incorporated by reference to
</TABLE>
II-8
<PAGE> 86
<TABLE>
<S> <C> <C>
Exhibit 3.2 to Amendment No. 1 to
Form S-1
4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit
4.1 to Amendment No. 1 to Form S-1
4.2 Form of Warrant Incorporated by reference to Exhibit
1.2 to Amendment No. 1 to Form S-1
4.3 Form of Warrant Certificate Incorporated by reference to Exhibit
4.2 to Amendment No. 1 to Form S-1
4.4 Form of 8% Senior Secured Note Incorporated by reference to Exhibit
4 to the Registrant's Quarterly
Report on Form 10-QSB for the period
ended June 30, 1997
4.5 Specimen of Series A $3.00 Convertible Preferred Stock Incorporated by reference to Exhibit
4.1 to the December 22, 1997 Form 8-K
4.6 Specimen of Series B $3.00 Convertible Preferred Stock Incorporated by reference to Exhibit
4.2 to the December 22, 1997 Form 8-K
4.7 Specimen of Series C Convertible Preferred Stock Incorporated by reference to Exhibit
4.7 to the March 27, 1997 Form 8-K
5.1 Opinion of Buchanan Ingersoll Professional Corporation To be provided by amendment
9.1 Form of Voting Trust Agreement Incorporated by reference to Exhibit
9.1 to the December 22, 1997 Form 8-K
10.1 1993 Stock Option Plan Incorporated by reference to Exhibit
10.4 to the Registration Statement on
Form S-1 (Reg. No. 33-69380) filed
September 24, 1993 ("Form S-1")
</TABLE>
II-9
<PAGE> 87
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 1993 Outside Director Stock Option Plan Incorporated by reference to Exhibit
10.5 to Form S-1
10.3 Form of Stock Option Incorporated by reference to Exhibit
10.1 to December 22, 1997 Form 8-K
10.4 Form of Employment Agreement of Jack Leadbeater Incorporated by reference to Exhibit
10.2 to December 22, 1997 Form 8-K
10.5 Form of Employment Agreement of David Olson Incorporated by reference to Exhibit
10.3 to December 22, 1997 Form 8-K
10.6 Form of Employment Agreement of Michael Glynn Incorporated by reference to Exhibit
10.4 to December 22, 1997 Form 8-K
10.7 Option to Purchase 100,000 Shares Granted to Michael Incorporated by reference to Exhibit
Glynn 10.5 to December 22, 1997 Form 8-K
10.8 Confidential Private Placement Memorandum dated Incorporated by reference to Exhibit
November 24, 1997 relating to the offer and sale of 10.6 to December 22, 1997 Form 8-K
$3,660,000 of Series A Preferred Stock
10.9 Supplement No. 1 to Confidential Private Placement Incorporated by reference to Exhibit
Memorandum dated November 24, 1997 relating to the 10.7 to December 22, 1997 Form 8-K
offer and sale of $3,660,000 of Series A Preferred
Stock
10.10 Form of Employment Agreement with John Iorillo Incorporated by reference to Exhibit
10.10 of the March 27, 1998 Form 8-K
10.11 Employment Agreement of Daniel J. Vahalla Incorporated by reference to Exhibit
10.11 of the March 27, 1998 Form 8-K
10.12 Employment Agreement Hugh V. Jones Incorporated by reference to Exhibit
10.12 of the March 27, 1998 Form 8-K
</TABLE>
II-10
<PAGE> 88
<TABLE>
<S> <C> <C>
10.13 Registration Rights Agreement by and among Pacific Incorporated by reference to Exhibit
Rim Entertainment, Inc. and the Trust of Daniel J. 10.13 of the March 27, 1998 Form 8-K
and Mary G. Vahalla, Gary Gwin, Maureen Gaare and
Daniel Grube
10.14 Registration Rights Agreement by and between Pacific Incorporated by reference to Exhibit
Rim Entertainment, Inc. and Hugh V. Jones 10.14 of the March 27, 1998 Form 8-K
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under Exhibit 5.1
23.2 Consent of Deloitte & Touche LLP Filed herewith
23.3 Consent of Pearce, Gray & Rudd Filed herewith
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to: (i) include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement; and (iii) include any additional
or changed material information on the plan of distribution.
2. For the purpose of determining liability under the Securities
Act of 1933, as amended, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To file a post-effective amendment to remove from registration
any of the securities being registered which remain unsold at the termination of
the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action,
II-11
<PAGE> 89
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
5. For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
6. For purposes determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
as the initial bona fide offering thereof.
II-12
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, hereunto duly authorized in the City of Phoenix,
Arizona on March 30, 1998.
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack R. Leadbeater
------------------------------------------------
Jack R. Leadbeater
Chairman of the Board and Chief Executive
Officer
By /s/ John Iorillo
------------------------------------------------
John Iorillo
Chief Financial Officer/Principal Accounting
Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints JACK R. LEADBEATER his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement and any related Registration Statements filed
pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack. R. Leadbeater
----------------------- Chairman, Chief Executive March 30, 1998
Jack R. Leadbeater Officer and Director
</TABLE>
<PAGE> 91
<TABLE>
<S> <C> <C>
/s/ David S. Olson
--------------------- President, Chief Operating March 30, 1998
David S. Olson Officer and Director
/s/ Michael G. Glynn
--------------------- Executive Vice President and March 30, 1998
Michael G. Glynn Director
/s/ John Iorillo
--------------------- Chief Financial Officer and March 30, 1998
John Iorillo Director
/s/ Andrew P. Panzo
--------------------- Director March 30, 1998
Andrew P. Panzo
</TABLE>
<PAGE> 1
Exhibit 21
1. Osage Computer Group, Inc.
2. Solsource Computers, Inc.
3. H.V. Jones, Inc.
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Osage Systems Group,
Inc. on Form SB-2 of our report dated February 20, 1998, except for certain
information in Note 1 to the consolidated financial statements, as to which the
date is March 10, 1998, and certain information in Note 10 to the consolidated
financial statements, as to which the date is March 17, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 31, 1998
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Osage Systems Group,
Inc. on Form SB-2 of our report dated March 24, 1997. We understand that
certain presentations have been restated for purposes of this Registration
Statement to be consistent with successor auditors' presentation.
We also consent to the reference to us under the heading "Experts" appearing in
such prospectus.
PEARCE, GRAY & RUDD
Mesa, Arizona
March 28, 1998
