<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OSAGE SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-22808 95-4374983
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
1661 EAST CAMELBACK ROAD
SUITE 245
PHOENIX, ARIZONA 85016
(Address of principal executive office)
(602) 274-1299
(Registrant's telephone number, including area code)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes X No
(2) Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's sole class of common stock,
as of November 5, 1999 was 10,645,277 shares.
Transitional Small Business Disclosure Format:
Yes No X
<PAGE> 2
OSAGE SYSTEMS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION*
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
Months ended September 30, 1999 and 1998 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1999 and 1998 3
Notes to Unaudited Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis or Plan of Operation 9 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3 Defaults Under Senior Securities 23 - 24
Item 5. Other Information 24 - 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSAGE SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,345,489 $ 3,151,572
Accounts receivable - net of allowance for doubtful
accounts of $361,217 in 1999 and $132,000 in 1998 18,880,521 14,077,862
Inventories 1,505,047 322,272
Prepaid expenses and other current assets 387,140 556,972
Deferred income taxes 508,000 508,000
------------ -----------
Total current assets 22,626,197 18,626,678
------------ -----------
FURNITURE AND EQUIPMENT - net 1,800,735 1,475,284
GOODWILL, less accumulated amortization of $938,944 in 1999 and $475,471
in 1998 14,962,592 15,462,427
DEFERRED INCOME TAXES 1,657,354 1,392,000
OTHER ASSETS 282,445 204,876
------------ -----------
TOTAL $ 41,329,323 $37,161,265
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 333,293 $ 750,000
Current portion of long-term debt 1,324,266 1,914,078
Accounts payable 23,031,202 15,857,172
Accrued expenses 1,581,290 2,141,795
Accrued restructuring costs 2,227,837
Deferred revenue 205,958 1,185,382
Income taxes payable 70,485
------------ -----------
Total current liabilities 28,693,846 21,918,912
------------ -----------
LONG-TERM DEBT 633,927 645,104
SERIES D CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 1,000
SHARES IN 1999 AND 1998; TOTAL LIQUIDATION PREFERENCE, $1,000,000 765,586 765,586
SERIES D CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 2,000
SHARES IN 1999; TOTAL LIQUIDATION PREFERENCE, $2,000,000 1,709,174
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized, issued and
outstanding, 10 shares in 1999 and 1998; total liquidation
preference, $300,000 1,000 1,000
Series C Preferred, $50 stated value - authorized, issued and
outstanding, 25 shares in 1998; total liquidation
preference, $375,000 1,250
Common stock, $.01 par value - authorized, 50,000,000 shares;
issued and outstanding, 10,593,836 shares in 1999 and
9,511,058 in 1998 105,938 95,111
Additional paid-in capital 20,657,052 17,434,279
Retained earnings (deficit) (11,237,200) (3,699,977)
------------ -----------
Total stockholders' equity 9,526,790 13,831,663
------------ -----------
TOTAL $ 41,329,323 $37,161,265
============ ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE> 4
OSAGE SYSTEMS GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- --------------------------------
SEPT. 30, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 30,004,611 $ 19,682,686 $ 83,716,450 $ 38,090,289
COST OF SALES 24,814,538 15,381,384 66,741,757 30,528,129
------------ ------------ ------------ ------------
Gross profit 5,190,073 4,301,302 16,974,693 7,562,160
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 5,847,565 4,068,931 17,513,334 8,091,389
Depreciation and amortization 377,324 248,761 1,106,853 436,362
Restructuring and impairment charges 5,122,366 5,122,366
------------ ------------ ------------ ------------
Total operating expenses 11,347,255 4,317,692 23,742,553 8,527,751
------------ ------------ ------------ ------------
OPERATING LOSS (6,157,182) (16,390) (6,767,860) (965,591)
INTEREST - net (463,838) (79,994) (845,903) (53,890)
------------ ------------ ------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (6,621,020) (96,384) (7,613,763) (1,019,481)
PROVISION (BENEFIT) FOR INCOME TAXES 81,791 (40,000) (183,209) (364,000)
------------ ------------ ------------ ------------
NET LOSS $ (6,702,811) $ (56,384) $ (7,430,554) $ (655,481)
============ ============ ============ ============
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.68) $ (0.01) $ (0.77) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 9,830,091 8,908,379 9,611,191 7,017,037
============ ============ ============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE> 5
OSAGE SYSTEMS GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
SEPT. 30, 1999 SEPT. 30, 1998
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(7,430,554) $ (655,481)
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,106,853 436,362
Deferred income taxes (265,354) (176,231)
Noncash interest 32,880
Restructuring and impairment charges 5,122,366
Loss on disposal of assets 620
Changes in operating assets and liabilities:
Accounts receivable (4,802,659) (4,425,113)
Inventories (1,172,775) 59,458
Prepaid expenses and other assets (2,107) (269,335)
Accounts payable 7,164,029 3,057,505
Accrued expenses (367,173) 1,442,881
Deferred revenue (979,424) (1,011)
Income taxes payable (70,485) (232,682)
----------- -----------
Net cash provided by (used in) operating activities (1,663,783) (763,647)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (689,918) (590,242)
Acquisition costs, net of cash received of $185,227 in 1998 (335,847) (5,233,896)
----------- -----------
Net cash used in investing activities (1,025,765) (5,824,138)
----------- -----------
FINANCING ACTIVITIES:
Net payments under line of credit agreement (416,707)
Payments on executive officers notes payable (821,940)
Net proceeds/(payments) on notes payable 188,071 (319,787)
Net proceeds from sale of common stock and preferred shares 1,931,524 6,086,598
Net increase in note receivable 2,517 59,163
----------- -----------
Net cash (used in) provided by financing activities 883,465 5,825,974
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,806,083) (761,811)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,151,572 2,576,323
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,345,489 $ 1,814,512
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE> 6
OSAGE SYSTEMS GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
position of the Company and the results of its operations and its cash
flows for the periods reported. The results of operations for interim
periods are not necessarily indicative of the results to be expected
for the entire year. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Osage
Systems Group, Inc. ("Osage") and its wholly-owned subsidiaries, Osage
Computer Group, Inc. ("Osage Computer"), Solsource Computers, Inc.
("Solsource"), H.V. Jones, Inc. ("HV Jones"), Open System Technologies,
Inc. ("OST"), Open Business Systems, Inc. ("OBS"), Osage Systems Group
Minnesota, Inc. and Osage Support Center, Inc. (collectively, the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain reclassifications have been
made to the prior financial statements to conform to the current
classifications.
The information presented within the accompanying unaudited condensed
consolidated financial statements should be read in conjunction with
the Company's audited Financial Statements for the fiscal years ended
December 31, 1998 and 1997 and "Management's Discussion and Analysis or
Plan of Operation" from the 1998 Annual Report on Form 10-KSB.
2. Acquisitions.
On March 17, 1998, Osage acquired Solsource pursuant to the terms of an
Agreement and Plan of Merger. Upon closing, through a wholly-owned
subsidiary, Osage acquired 100% of the outstanding capital stock of
Solsource for merger consideration of $1.1 million; consisting of
$200,000 in cash and $900,000 in newly issued common shares priced at
$6.00 per share.
4
<PAGE> 7
On March 17, 1998, Osage also completed the acquisition of HV Jones
pursuant to the terms of an Agreement and Plan of Merger dated February
27, 1998. Upon closing, through a wholly-owned subsidiary, Osage
acquired 100% of the outstanding capital stock of HV Jones for merger
consideration of $1,975,000; consisting of $395,000 in cash and $1.58
million (105.3 shares) in Series C Convertible Preferred Stock ("Series
C Shares") which converted into 229,985 shares of common stock during
the four quarters following the closing (commencing June 17, 1998) at a
conversion rate of $6.87. In addition, the merger consideration
included earn-out incentive shares to be issued if HV Jones achieves
certain performance targets, of which 144,535 shares valued at
$1,000,000 were issued in July 1999.
On April 24, 1998, Osage completed the acquisition of 100% of the
outstanding capital stock of OST for merger consideration of $5.26
million; consisting of $2.76 million in cash, $2.0 million in newly
issued common shares priced at $6.00 per share and $500,000 in a key
employee retention program.
On June 22, 1998, Osage completed the acquisition of 100% of the
outstanding capital stock of OBS for merger consideration of
$4,000,000; consisting of $2,000,000 in cash and $2,000,000 in newly
issued common shares priced at $5.52 per share. In addition, the merger
consideration included earn-out incentive shares to be issued if OBS
achieves certain performance targets, of which 579,710 shares valued at
$500,000 were issued in September 1999.
On October 8, 1998, Osage acquired Electronic Commerce Network
Solutions Corporation ("E-Comm") pursuant to the terms of an Agreement
and Plan of Merger. Upon closing, through a wholly-owned subsidiary,
Osage acquired 100% of the outstanding stock of E-Comm for merger
consideration of $1,250,000; consisting of $232,500 in cash, $930,000
in newly issued common shares priced at $6.21 per share and $87,500 in
a key employee retention program. In addition, the merger consideration
included earn-out incentive shares to be issued if E-Comm achieves
certain performance targets.
On October 15, 1998, Osage completed the acquisition of the systems
integration business of IntraNet Solutions, Inc. ("IntraNet") for
merger consideration of $1,600,000; consisting of $715,000 in cash,
$785,000 in the form of a promissory note and $100,000 in a key
employee retention program. As of September 30, 1999, the $785,000
promissory note has been paid. In addition, the merger consideration
included earn-out incentive shares to be issued based upon
predetermined financial criteria.
On August 11, 1999, Osage completed the acquisition of the business
intelligence and data warehousing practice of Leveraged Solutions, Inc.
("LSI") for merger consideration of $1.2 million, consisting of
$240,000 in cash and $960,000 in newly issued common shares priced at
$2.63 per share.
5
<PAGE> 8
The Solsource, HV Jones, OST, OBS, E-Comm and the systems integration
business of IntraNet were accounted for using the purchase method of
accounting for business combinations. The excess of assets acquired
over liabilities assumed has been allocated to goodwill and is being
amortized over 20 years. Results of operations of Solsource, HV Jones,
OST, OBS, E-Comm and the systems integration business of IntraNet have
been included in the Company's statements of operations from their
respective acquisition dates.
3. Restructuring and Impairment Charges
During the Company's third quarter ending September 30, 1999, the
Company announced and began to implement a restructuring program aimed
at eliminating unprofitable operations, reducing overhead and focusing
on long-term profitability. For the three-month period ended September
30, 1999, the Company recorded a total of $5.1 million of restructuring
and other one-time charges. The restructuring plan is broad-based and
includes virtually all aspects of the Company's operations and
processes. The restructuring activity resulted in the planned
elimination of approximately forty-five positions, including several
senior executive personnel, vacating certain leased facilities and
canceling certain contracts. These actions resulted in aggregate
charges of $2.2 million, of which approximately $2.15 million have used
or will use cash and $50,000 of which were non-cash charges.
The operating asset write-down includes a $2.89 million charge taken
during the current fiscal quarter to write down fixed assets and
purchased goodwill associated with the acquisitions of Solsource in
March 1998 and E-Comm in October 1998. The impairment write down is
primarily based on the facts that each of the operations have operated
at a loss since acquisition and the forecast demonstrates that the
entity will not produce positive cash flow on a stand-alone basis or
the Company has decided to withdraw business presence in that
particular marketplace. As the sum of estimated undiscounted cash flows
are less than the carrying amount of the asset, the Company has
recognized an impairment loss during its current fiscal quarter.
The components of the restructuring and impairment charge for the
nine-month period ended September 30, 1999 are as follows:
6
<PAGE> 9
<TABLE>
<CAPTION>
CHARGES - EXPENDITURES
DESCRIPTION THIRD QUARTER 1999 CASH NON-CASH
<S> <C> <C> <C>
Severance and related charges $1,501,938 $1,501,938
Facilities 332,697 332,697
Canceled contracts 393,202 393,202
Impairment of goodwill / fixed assets 2,894,528 $2,894,528
----------------------------------------------------
Total $5,122,365 $2,227,837 $2,894,528
====================================================
</TABLE>
4. Pro Forma Information.
The following pro forma summary presents the consolidated results of
operations of the Company as if the acquisitions completed during 1998
had occurred as of January 1, 1998, and does not purport to represent
the results of operations that would have actually resulted had the
purchases occurred on the indicated dates, nor should it be taken as
indicative of future results of operations. The pro forma summary data
for the nine months ended September 30, 1999 and September 30, 1998
combines historical financial information of Osage, Osage Computer,
Solsource, HV Jones, OST, OBS, E-Comm and the systems integration
business of IntraNet for the nine months ended September 30, 1999 and
1998, and does not include restructuring and impairment charges.
INFORMATION FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
(PRO FORMA) (PRO FORMA)
<S> <C> <C>
Net Sales $83,716,450 $59,204,734
Net loss $(2,308,189) $(635,512)
Net (loss) per share:
basic and diluted $(0.24) $(0.07)
</TABLE>
5. Earnings Per Share.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share.
7
<PAGE> 10
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 three and nine months ended September 30, 1999
and 1998, the effects of the potential dilutive securities are not
included in the calculations.
6. New Accounting Pronouncements.
During June 1999, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement 133. The
Statement defers the effective date of SFAS 133 to fiscal 2001.
Management is evaluating SFAS 133 and does not believe that adoption of
the Statement will have a material impact on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Report on Form 10-QSB, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends which may affect the
Company's future plans of operations, business strategy, operating results and
financial position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties and actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors include, among others: (i) risks related to the
restructuring program being undertaken by the Company; (ii) risks related to the
Company's acquisition strategy; (iii) the Company's ability to secure adequate
financing to implement its business strategies; (iv) uncertainty as to whether
the Company can achieve integration of acquired companies in a manner intended
to take advantage of overall corporate synergies and result in an accretion to
consolidated earnings; (v) the uncertainty of future trading prices for the
Company's Common Stock and the impact such trading prices may have upon the
Company's ability to utilize its Common Stock to facilitate its acquisition
strategy; (vi) the uncertain effect of the additional dilution associated with
the future issuance of outstanding convertible securities, as well as the
dilution associated with the Company's acquisition strategy; (vii) the Company's
dependence on certain large customers and suppliers; (viii) the Company's
dependence on certain key personnel; (ix) the competitive market for technical
personnel; and (x)
8
<PAGE> 11
the Company's ability to adapt to certain Year 2000 issues. Additional factors
are described in the Company's other public reports and filings with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
made. The Company undertakes no obligation to publicly release the result of any
revision of these forward-looking statements to reflect events or circumstances
after the date they are made or to reflect the occurrence of unanticipated
events.
OVERVIEW
Osage Systems Group, Inc. (the "Company") is a multi-regional provider of
network computing solutions through its eleven (11) offices located in nine (9)
states. The Company provides these solutions by deploying a life-cycle
methodology, which addresses all phases of a customer's information technology
needs. This includes business needs analysis, systems architecture design,
systems implementation and ongoing systems management support. Solutions are
developed and delivered by the Company's technical consultants, who are skilled
in specialized practice areas such as enterprise infrastructure, enterprise
resource planning, electronic commerce, java application development, web
solutions, electronic publishing and network support services. The Company's
solutions integrate products that feature state of the art technology from
industry-leading vendors of information technology products, such as Sun
Microsystems, Inc., Cisco Systems, Inc., Oracle Corporation, Netscape
Communications Corporation, Hewlett Packard Company, Microsoft, Fore Systems,
Inc., Lawson Software, Check Point Software Technologies, Ltd., Inktomi
Corporation, Veritas Software Corporation, and IBM Corporation.
The Company's former business strategy was to focus on growth in both internal
operations and through acquisitions, with the objective of achieving economies
of scale. The Company's inability to realize the desired results of its
acquisition strategy has caused it to undertake the elimination of unprofitable
operations and take a restructuring charge.
The Company's objective is to be recognized as one of the leading solution
providers of networking and internet computing needs. It intends to fulfill this
objective by, among other things, shifting the focus of its product and service
offerings to the development of specialized practice areas.
The Company was originally incorporated as "Pacific Rim Entertainment, Inc."
under the laws of Delaware in 1992. From 1992 through 1996, the Company had been
engaged principally in the animated film production business. After several
years of losses following its initial public offering in 1993, the Company
suspended its business operations in 1996 and remained inactive while it sought
to identify a strategic business combination with a private operating company.
The Company acquired, and thereafter, assumed the historic business of Osage
Computer in a merger transaction (the "Merger") that became effective on
December 22, 1997. Osage Computer had been a provider of network computing
solutions since 1989.
9
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 30,004,611 100.0% $ 19,682,686 100.0%
COST OF SALES 24,814,538 82.7% 15,381,384 78.1%
------------ ------------ ------------ ------------
Gross profit 5,190,073 17.3% 4,301,302 21.9%
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 5,847,565 19.6% 4,068,931 20.7%
Depreciation and amortization 377,324 1.1% 248,761 1.3%
Restructuring and impairment charges 5,122,366 17.1%
------------ ------------ ------------ ------------
Total operating expenses 11,347,255 37.8% 4,317,692 22.0%
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (6,157,182) -20.5% (16,390) 0.01%
INTEREST - NET (463,838) -1.5% (79,994) -0.4%
------------ ------------ ------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (6,621,020) -22.0% (96,384) -0.5%
PROVISION (BENEFIT) FOR INCOME TAXES 81,791 0.3% (40,000) -0.2%
------------ ------------ ------------ ------------
NET LOSS $ (6,702,811) -22.3% $ (56,384) -0.3%
============ ============ ============ ============
NET LOSS PER SHARE:
Basic and Diluted $ (0.68) $ (0.01)
============ ============
</TABLE>
10
<PAGE> 13
Revenues. Net sales increased by 52%, or $10.3 million, to $30.0 million for the
three months ended September 30, 1999 as compared to $19.7 million for the same
prior year period. This increase in net sales was principally attributable to
increased product, service and consulting revenues delivered to new customers,
leveraging existing customer alliances by undertaking additional projects for
existing customers, as well as cross-selling the Company's skill set across the
United States. This was due, in large part, to the Company's aggressive
acquisition and growth strategy implemented during 1998 coupled with the strong
demand for information technology products and services in the marketplace.
During 1998, the Company completed the acquisitions of Solsource, HV Jones, OST,
OBS, E-Comm and the systems integration business of IntraNet and opened branch
offices in San Antonio, Texas, Washington D.C. and New York, New York. In light
of the Company's restructuring, management expects growth in revenue to be flat
or slow substantially from historic levels as the Company focuses on profitable
operations.
Consulting revenues increased 125% to $4.5 million for the three months ended
September 30, 1999, as compared to $2.0 million for the prior year period. This
increase was primarily attributable to demand for the Company's consulting
services and technical support resulting from the Company's increased focus on
the service component of its revenue base and through its aggressive growth
strategy.
Gross Profit. The Company's cost of sales consists primarily of the cost to the
Company of products acquired for resale. The Company's gross profit increased by
21.0% or $888,800 to $5.2 million for the three months ended September 30, 1999
as compared to $4.3 million for the prior year period. Gross profit margin
decreased to approximately 17.3% during the three months ended September 30,
1999, as compared to approximately 21.9% experienced during the prior year
period. The Company experienced a decrease in gross profit margin during the
quarter as the gross margins from the sale of computer products and software
decreased due to competitive pressures. While the increase in demand for the
Company's products led to an overall growth in revenues, there was not a
corresponding growth in gross profit. Management believes that over the short
term the Company will continue to experience a reduction in gross profit margin
reflecting the continued importance of its computer sales.
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 44%, or $1.7 million,
to $5.8 million for the three months ended September 30, 1999 as compared to
$4.1 million for the prior year. This increase in expense is primarily
attributable to two factors. First, the Company added substantially to its
corporate overhead in anticipation of further acquisitions and revenue growth.
Second, the Company has incurred significant costs to automate its internal
processes including computer hardware and software to support the Company's
expanding operations and for an internal financial application system, sales
force automation and quoting
11
<PAGE> 14
tool for the purpose of improving operating efficiencies and integrating the
companies acquired during 1998.
In addition, competition for personnel with information technology skills is
intense and the Company expects compensation to continue to increase. During
1998 and 1999, the Company encountered significant recruiting costs to support
the Company's continued growth and geographic expansion. Corresponding increases
in legal and accounting fees were also incurred by the Company in connection
with its financing and acquisition activities. As a percent of net sales,
selling, general and administrative expenses during the three months ended
September 30, 1999 and decreased from 20.7% experienced during the same prior
year period to 19.6%.
During the Company's third quarter ending September 30, 1999, the Company
announced and began to implement a restructuring program aimed at eliminating
unprofitable operations, reducing overhead and focusing on long-term
profitability. For the three-month period ended September 30, 1999, the Company
recorded a total of $5.1 million of restructuring and other one-time charges.
The restructuring plan is broad-based and includes virtually all aspects of our
operations and processes. The restructuring activity resulted in the planned
elimination of approximately forty-five positions, including several senior
executive personnel, vacating certain leased facilities and canceling certain
contracts. These actions resulted in aggregate charges of $2.2 million, of which
approximately $2.15 million have used or will use cash and $50,000 of which were
non-cash charges.
The operating asset write-down includes a $2.89 million charge taken during the
current fiscal quarter to write down fixed assets and purchased goodwill
associated with the acquisitions of Solsource in March 1998 and E-Comm in
October 1998. The impairment write down is primarily based on the facts that
each of the operations have operated at a loss since acquisition and the
forecast demonstrates that the entity cannot produce positive cash flow on a
stand-alone basis or the Company has decided to withdraw business presence in
that particular marketplace. As the sum of undiscounted cash flows are less that
the carrying amount of the asset, the Company has recognized an impairment loss
during its current fiscal quarter.
As a result of the processes described above, the Company also found it
necessary to write-off certain software related costs associated with internal
infrastructure enhancement that have been canceled or postponed indefinitely.
Due to the fact that most of the costs incurred are related to software and
software licenses that are not transferable, the entire net book value of
$202,200 has been written-off during the current fiscal quarter.
Depreciation and Amortization. Depreciation and amortization of $377,324 for the
three months ended September 30, 1999 reflected an increase of 43%, or $128,600,
as compared to the same prior year period. This increase was primarily due to
the amortization of goodwill and depreciation of assets acquired in connection
with the acquisitions that occurred during 1998. At present levels, amortization
expense of approximately $799,000 is expected for each of the next 20 years.
12
<PAGE> 15
Net Income (Loss). During the three months ended September 30, 1999, the Company
incurred a net loss of $6.7 million as compared to a net loss of $56,400 for the
same prior year period. The net loss for the current period, however, includes
$377,324 of non-cash charges relating to depreciation and amortization resulting
from the Company's acquisition program and $2.9 million in non-cash charges
relating to write-off of goodwill and fixed assets. Additional factors
contributing to the Company's net loss consisted of significant increases in the
Company's overhead expenses as corporate infrastructure was established in
anticipation of future growth through the Company's acquisition program and the
expansion of the Company's business through the opening of branch offices in New
York, New York and Tucson, Arizona. Management anticipates that as the effects
of the restructuring initiatives are realized, the Company's operating losses
will be reduced. Management expects that future profitability is likely to
depend upon a combination of several factors. First, the Company will focus on
its higher margin service business. Second, with the reduction in corporate
overhead, the Company will realize higher operating income on any growth in
revenues.
13
<PAGE> 16
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
NINE MONTHS ENDED
----------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 83,716,450 100.0% $ 38,090,289 100.0%
COST OF SALES 66,741,757 79.7% 30,528,129 80.1%
------------ ------------ ------------ ------------
Gross profit 16,974,693 20.3% 7,562,160 19.9%
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 17,513,334 20.9% 8,091,389 21.2%
Depreciation and amortization 1,106,853 1.4% 436,362 1.2%
Restructuring and impairment charges 5,122,366 6.1%
------------ ------------ ------------ ------------
Total operating expenses 23,742,553 28.4% 8,527,751 22.4%
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (6,767,860) -8.1% (965,591) -2.5%
INTEREST - NET (845,903) -1.0% (53,890) -0.2%
------------ ------------ ------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (7,613,763) -9.1% (1,019,481) -2.7%
BENEFIT FOR INCOME TAXES (183,209) -0.2% (364,000) -1.0%
------------ ------------ ------------ ------------
NET LOSS $ (7,430,554) -8.9% $ (655,481) -1.7%
============ ============ ============ ============
NET LOSS PER SHARE:
Basic and Diluted $ (0.77) $ (0.09)
============ ============
</TABLE>
Revenues. Net sales increased by 120%, or $45.6 million, to $83.7 million for
the nine months ended September 30, 1999 as compared to $38.1 million for the
same prior year period. This increase in net sales was principally attributable
to increased product, service and consulting revenues delivered to new customers
and leveraging existing customer alliances by undertaking additional projects
for existing customers. This was due, in large part, to the Company's aggressive
acquisition and growth strategy implemented during 1998 coupled with the strong
demand for information technology products and services in the marketplace.
During 1998, the Company completed the acquisitions of Solsource, HV Jones, OST,
OBS, E-Comm and the systems integration business of IntraNet and opened branch
offices in San Antonio, Texas, Washington D.C. and New York, New York.
14
<PAGE> 17
Consulting revenues increased 318% to $11.7 million for the nine months ended
September 30, 1999, as compared to $2.8 million for the prior year period. This
increase was primarily attributable to demand for the Company's consulting
services and technical support resulting from the Company's increased focus on
the service component of its revenue base and through its aggressive growth
strategy
Growth in the Company's net sales are expected to slow during the remainder of
1999 and into 2000 as the Company emphasizes improving current operations.
Gross Profit. The Company's cost of sales consists primarily of the cost to the
Company of products acquired for resale. The Company's gross profit increased by
125% or $9.4 million to $17.0 million for the nine months ended September 30,
1999 as compared to $7.6 million for the prior year period. Gross profit margin
increased to approximately 20.3% during the nine months ended September 30,
1999, as compared to approximately 19.9% experienced during the prior year
period. The Company has experienced increased gross profit margins as a result
of increased margins from certain acquisitions made during 1998, the delivery of
productized services which generally generate higher margins and the ability of
the Company to deliver complete information technology solutions to a wider
range of customers.
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 116%, or $9.4 million,
to $17.5 million for the nine months ended September 30, 1999 as compared to
$8.1 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. The Company has
incurred significant costs to automate its internal processes including computer
hardware and software to support the Company's expanding operations and for an
internal financial application system, sales force automation and quoting tool
for the purpose of improving operating efficiencies and integrating the
companies acquired during 1998. In addition, competition for personnel with
information technology skills is intense and the Company expects compensation to
continue to increase. As a percent of net sales, selling, general and
administrative expenses during the nine months ended September 30, 1999
decreased from 21.2% experienced during the same prior year period to 20.9%.
Depreciation and Amortization. Depreciation and amortization of $1.1 million for
the nine months ended September 30, 1999 reflected an increase of 149%, or
$670,500 as compared to the same prior year period. This increase was primarily
due to the amortization of goodwill and depreciation of assets acquired in
connection with the acquisitions that occurred during 1998. At present levels,
amortization expense of approximately $799,000 is expected for each of the next
20 years.
15
<PAGE> 18
Net Income (Loss). During the nine months ended September 30, 1999, the Company
incurred a net loss of $7.4 million as compared to a net loss of $655,500 for
the same prior year period. The net loss for the current period, however,
includes $1.1 million of non-cash charges relating to depreciation and
amortization resulting from the Company's acquisition program and $2.9 million
for goodwill and fixed assets impairment. Additional factors contributing to the
Company's net loss consisted of significant increases in the Company's overhead
expenses as corporate infrastructure was established in anticipation of future
growth through the Company's acquisition program and the expansion of the
Company's business through the opening of branch offices in New York, New York
and Tucson, Arizona. In the third quarter the Company made several moves to
reduce operating losses by eliminating unprofitable operations and reducing
corporate overhead. Management expects that future profitability is likely to
depend upon a combination of several factors. First, the Company has focused its
operations on profitable business. Second, the continued expansion of the
Company's higher margin service business is expected to contribute to a greater
gross profit margin.
ACQUISITION STRATEGY
Initially, the Company intended to expand its business through selective,
strategic acquisitions of other companies with complementary businesses. In
particular, the Company intended 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. Since the beginning of 1998, the Company has executed
its acquisition strategy through the acquisition of Solsource (March 17, 1998),
HV Jones (March 17, 1998), OST (April 24, 1998), OBS (June 22, 1998), E-Comm
(October 8, 1998), the systems integration business of IntraNet (October 15,
1998) and the business intelligence and data warehousing practice of LSI (August
11, 1999). These acquisitions were accounted for under the purchase method of
accounting for business combinations. Accordingly, the Company's results of
operations include only the operations of each of these companies from the date
of acquisition through the end of the period reported.
During the quarter ended September 30, 1999, the Company shifted the focus of
its business strategy from growth through acquisitions to profitability. The
Company is currently implementing a restructuring program to eliminate
unprofitable operations.
Through its internal and acquisition growth, the Company expanded its operations
from Phoenix, Arizona to Houston, Texas, Austin, Texas, San Antonio, Texas, Ft.
Lauderdale, Florida, Chicago, Illinois, Minneapolis, Minnesota, Madison,
Wisconsin, Washington, D.C. and New York, New York.
VARIABLE OPERATING RESULTS
The Company's historical operating results have varied from quarter to quarter,
and the Company expects that they will continue to do so. Due to the relatively
fixed nature of certain of the Company's costs, including personnel and
facilities costs, a decline in revenue in any fiscal
16
<PAGE> 19
quarter would result in lower profitability or increase the loss in that
quarter. A variety of factors, many of which are not within the Company's
control, influence the Company's quarterly revenues, including seasonal patterns
of hardware and software capital spending by customers, information technology
outsourcing trends, the timing, size and stage of projects, new service
introductions by the Company or its competitors, levels of market acceptance for
the Company's products or services or the hiring of additional staff. Operating
results also may be impacted by the timing of revenues and changes in the
Company's utilization rates. The Company believes, therefore, that past
operating results and period-to-period comparisons should not be relied upon as
an indication of future performance. The Company anticipates that its business
will continue to be subject to such seasonal variations.
BACKLOG
The Company normally ships systems promptly after receiving an order and
therefore does not customarily have a significant backlog.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily from cash
generated by operations and, to a lesser extent, with funds from borrowings
under the Company's credit facility and private placement financings. For the
nine months ended September 30, 1999, cash used in operations was $1.7 million
as compared to cash used in operating activities of $763,600 during the same
prior year period. The Company's cash flow from operations has been positively
affected by the extended terms granted by the Company's major distributor offset
by increases in accounts receivable, inventories and deferred revenue.
The Company's working capital deficit was $5.4 million at September 30, 1999, as
compared to a deficit of $3.3 million at December 31, 1998. The unfavorable
impact on the Company's working capital deficit is principally attributable to
the accrual of restructuring costs during the third quarter coupled with an
operating loss for the nine months ending September 30, 1999. Capital
expenditures, which totaled $689,900 during the nine month period ended
September 30, 1999, were principally for computer hardware and software to
support the Company's expanding operations and for an internal financial
application system for the purpose of improving operating efficiencies and
integrating the companies acquired during 1998.
Cash flow from financing activities during the nine-month period ended September
30, 1999 was favorably impacted by the $1.9 million of net proceeds received
from the sale of Series E preferred shares offset by $1.0 million of net debt
repayments. The Company's Series D and Series E preferred shares sold during
1999 and 1998 may be redeemed during the first quarter of 2000 in the event that
the Company's Common Stock is not trading at certain threshold prices during
specified periods during the fourth quarter of 1999 and the first quarter of
2000. The potential redemption liability for the preferred shares is $3.6
million.
The Company has a $20 million credit facility with Coast Business Credit
("CBC"). The CBC credit facility provides funding through four sources; a
traditional working capital facility, an
17
<PAGE> 20
inventory financing facility, a term loan facility and an acquisition facility.
Borrowings under the working capital and acquisition facility bear interest at
prime (8.25% at September 30, 1999) plus one and one-half percent. Amounts
outstanding under the term loan facility bear interest at prime (8.25% at
September 30, 1999) plus three percent. Amounts outstanding under the inventory
line which are paid within sixty days of invoice date do not bear interest.
Outstanding borrowings under the revolving line of credit at September 30, 1999
were $333,293. Amounts outstanding under the inventory line were $8,934,150 at
September 30, 1999. Amounts outstanding under the term loan facility were
$1,000,000 at September 30, 1999. As of September 30, 1999 the Company was in
default of a provision in its loan agreement requiring $2,000,000 of cash to be
in a segregated account as of that date. The Company has been in discussion with
CBC seeking to obtain a waiver of that default and believes a waiver will be
granted by CBC. In the interim CBC has continued to fund the Company's working
capital needs under the credit facility.
As its operations continue to expand, additional financing will be required to
support the continued growth of the Company. The inability to secure such
financing may have an adverse effect on the operations of the Company.
Principally all of the Company's currently available cash from operations and
financing is being utilized to help support the Company's operations. The
Company expects to issue a convertible subordinated debenture in the principal
amount of $3 million during the fourth week of November 1999 in a private
placement transaction. The proceeds of the private placement will be used
primarily to finance the Company's restructuring, as well as for working
capital. The debenture, together with warrants to be concurrently granted to the
investor, will likely be highly dilutive to the Company's earnings per share.
YEAR 2000 READINESS
The Company has developed a Year 2000 readiness plan to help it identify and
resolve Year 2000 issues associated with the Company's internal systems and the
products and services provided by the Company. The plan includes development of
corporate awareness, assessment, implementation (including remediation and
upgrading of certain systems), validation testing and contingency planning.
The Company has completed the assessment phase of its plan, reviewing internal
non-IT systems (such as building security, voice mail, telephone and other
systems containing embedded microprocessors). As it relates to these systems,
the Company is currently in the process of installing upgrades and patches
recommended by the third party vendors to make such systems and equipment Year
2000 ready.
The Company's material internal IT systems consist principally of financial,
accounting, project management and human resources application software created
by third parties. The Company has also completed the assessment phase of its
plan with respect to these systems. The Company believes that, based on oral
statements made by manufacturers and/or statements published on manufacturers'
web sites, that most of these systems are Year 2000 ready. With respect to the
systems that are not currently Year 2000 ready, at the manufacturers'
recommendations, the Company is installing patches and upgrades. For example,
the Company recently installed
18
<PAGE> 21
patches in its versions of the Windows 95 and Windows NT operating systems in
order for those operating systems to become Year 2000 ready. The manufacturers
of the Company's computer hardware platforms, principally servers, have
indicated that the versions currently used by the Company are Year 2000 ready.
The Company believes that it is substantially complete in installing patches and
upgrades to its third party software and hardware.
The Company believes that a majority of the costs associated with becoming Year
2000 compliant are not incremental to the Company, but rather represent a
reallocation of existing resources and regularly scheduled system upgrades and
maintenance. In addition, regardless of the Year 2000 problem, the Company is
currently undergoing an internal financial application system upgrade and
implementation for the purpose of improving operating efficiencies and
integrating companies acquired during 1998. The Company estimates that the costs
of its Year 2000 efforts will be approximately $1.5 million. This estimate does
not include potential expenditures related to customers or other claims. The
Company currently anticipates the aforementioned evaluation and remediation of
its systems to be completed by November 1999. However, if compliance efforts are
not completed on time, or additional compliance efforts are required of which
the Company is not currently aware, or the cost of any required updating or
modification of our IT systems exceeds the Company's estimates, the Year 2000
issue could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company is developing a comprehensive contingency plan to address the
situations that may result if it is unable to achieve Year 2000 readiness of the
Company's major IT and non-IT systems. The Company expects to complete this
contingency plan by November 30, 1999. There can be no assurance that any
contingency plans developed by the Company will prevent any such service
interruption or a material adverse effect on the Company.
In addition to the Company's internal systems, the Company relies on third party
relationships in the conduct of its business. For example, the Company relies on
the services of the landlords of its facilities, telecommunication companies,
banks, utilities, and commercial airlines. The Company is currently attempting
to receive assurances from its landlords and material vendors regarding their
Year 2000 readiness, and to the extent such assurances are not given, the
Company intends to devise contingency plans designed to alleviate the negative
effects on the Company in the event the Year 2000 issue results in the
unavailability of these services or systems. There can be no assurance that any
contingency plans developed by the Company will prevent any such service
interruption on the part of one or more of the Company's third party vendors or
suppliers from having a material adverse effect on the Company's business,
results of operations or financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to the Year 2000
issue could result in a delay in the payment of invoices issued by the Company
for services and expenses. A failure of the accounting systems of a significant
number of the Company's clients would have a material adverse effect on the
Company's business, results of operations and financial condition.
19
<PAGE> 22
The Company's business involves designing, developing and implementing mission
critical hardware and software applications for its clients. In addition, the
Company has recommended, implemented and customized various third-party hardware
and software packages for its clients, certain of which may not be Year 2000
ready. Former, present and future clients may assert that certain services
performed or products sold or recommended by the Company are not Year 2000
ready. Because the Company has designed, developed and implemented hardware,
software and systems for a large number of clients since 1991, there can be no
way of assuring that all such software programs and systems will be Year 2000
ready. This uncertainty is magnified by the fact that in many cases the
Company's clients retain the right to maintain, alter and modify the systems
developed and implemented by the Company after the completion of an engagement.
Due to the potential significant impact of the Year 2000 issue on the operations
of the Company's clients, the Company may be faced with claims regardless of
whether the failure relates to services provided by the Company. If asserted,
such claims (and the associated defense costs) could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company's policy has been to attempt to include provisions in its client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties, limit the Company's total dollar liability to an
amount specified in the contract, disclaim consequential or other such damages
and disclaim any liability arising from third-party software that is
implemented, customized or installed by the Company. There can be no assurance
that the Company will be able to obtain these contractual protections in
agreements concerning future projects, or that any contractual provisions
governing current and completed projects will prevent clients from asserting
claims against the Company with respect to the Year 2000 issue. There also can
be no assurance that the contractual protections, if any, obtained by the
Company will effectively operate to protect the Company from, or limit the
amount of, any liability arising from claims asserted against the Company.
The foregoing discussion of the Company's Year 2000 readiness contains forward
looking statements, including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will prove accurate and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of the Company to identify and correct all Year 2000 problems
and the success of third parties with whom the Company does business in
addressing their Year 2000 issues.
IMPACT OF INFLATION
The effects of inflation on the Company's operations were not significant during
the periods presented.
20
<PAGE> 23
RECENTLY ISSUED ACCOUNTING STANDARDS
During June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 and does not
believe that adoption of the Statement will have a material impact on its
financial statements.
21
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
John E. Udelhofen and E. Michael Durbin v. Osage Systems Group, Inc.
No. 99 C 6310. This action is pending in the United States District Court for
the Northern District of Illinois. The case is in its initial stages. The
Complaint was served on October 29, 1999. By agreement, the response to the
Complaint is due on December 17, 1999. The Plaintiffs are two former
shareholders' of Open Business Systems, Inc. ("OBS"). On June 22, 1998, Osage
purchased all of the outstanding shares of OBS and the Plaintiffs entered into
employment contracts with Osage. On August 17, 1999, Osage terminated the
Plaintiffs' employment contracts. In the lawsuit the Plaintiffs claim their
employment contracts were wrongfully terminated and seeks damages in excess of
$75,000, as well as declaratory relief. The Plaintiffs also claim that Osage
breached the Registration Rights Agreement entered into by the parties in
connection with the sale of the stock of OBS. The Plaintiffs claim Osage failed
to timely file the necessary registration statement with the SEC with respect
to the registration for resale of the Osage stock distributed to Plaintiffs in
connection with the transaction. Plaintiffs claim that as a result of the
delay, they were unable to sell their stock, the price of which dropped,
thereby causing damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES.
1. On July 6, 1999, the Company issued 144,535 shares of Common Stock
valued at $1,000,000 to Hugh V. Jones, the former shareholder of HV Jones, based
upon certain performance targets set forth in the Agreement and Plan of Merger
among the Company, Hugh V. Jones and HV Jones. The shares of Common Stock issued
were based upon certain performance targets achieved for the one-year period
following the acquisition of HV Jones. The issuance of the shares was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), as an issuer transaction not involving a public offering.
2. On September 29, 1999, the Company issued an aggregate 579,710
shares of Common Stock valued at $500,000 to John Udelhofen, E. Michael Durbin,
David Durbin and Brian Wolfe, the former shareholders of OBS (the "OBS
Shareholders"), based upon certain performance targets set forth in the Stock
Purchase Agreement among the Company, OBS and the OBS Shareholders. The shares
of Common Stock issued were based upon certain performance targets achieved for
the one-year period following the acquisition of OBS. The issuance of the shares
was exempt from registration pursuant to Section 4(2) of the Act as an issuer
transaction not involving a public offering.
ITEM 3 DEFAULTS UNDER SENIOR SECURITIES.
As of the period-end, the Company had a $20 million credit facility
(the "Facility") from Coast Business Credit (the "Lender"), of which $9.3
million was outstanding as of September 30, 1999. The Facility provides working
capital funding for the Company's operations. The amount available to the
Company under the Facility is based upon a percentage of the value of certain
eligible accounts receivable of the Company. The Company has limited
availability under the Facility.
The Facility matures in 2002 and bears interest at a floating rate
based upon the Lender's prime rate. The Facility agreements provide for an
acceleration of the maturity date in the event of an "Event of Default" (as such
term is defined in the Facility agreements). An Event of Default includes
failure to pay when due any installment of interest on or principal of the
Facility
22
<PAGE> 25
and any failure to observe the covenants provided in the Facility agreements,
including certain financial covenants.
The Facility contains various financial and other covenants including
maintaining a minimum cash balance if a specified debt coverage ratio is not
satisfied as of the end of each fiscal quarter. This covenant was not met as of
September 30, 1999 and constituted a technical default under the Facility. The
Company is currently negotiating a waiver of or a revision to this covenant.
There can be no assurance that such negotiations will result in a waiver or
revision of such covenant. The Company's failure to successfully negotiate such
waiver or revisions would adversely affect the Company's ability to obtain
necessary working capital and would have a material adverse effect on the
continuing operations of the Company.
ITEM 5. OTHER INFORMATION.
On November 10, 1999, the Company filed an information statement pursuant to
Section 14(f) of the Securities Exchange Act of 1934 and Rule 14(f)-1 thereunder
relating to a change in the majority of the board members in connection with a
pending securities purchase agreement ("Securities Purchase Agreement"). The
information statement was furnished in connection with proposed changes to a
majority of the members of the board of directors pursuant to the Securities
Purchase Agreement. Upon closing of the Securities Purchase Agreement, Messrs.
Jack Leadbeater and David Olson will resign their positions as officers and
directors of the Company. Pursuant to his severance arrangements with the
Company, Mr. John Iorillo has resigned his position as an officer and director
of the Company as of October 15, 1999. Mark Weiss resigned from the board of
directors in October 1999. It is anticipated that Messrs. Phil Carter, George
Knight and Gerald Harrington will be nominated as directors, thus resulting in a
change in the majority of directors of the Company. It is anticipated that the
Securities Purchase Agreement will close on November 22, 1999.
On June 30, 1999, the Company filed an amendment to a registration statement
("Registration Statement") on Form S-3 with the Securities and Exchange
Commission ("SEC") relating to the resale to the public by certain selling
security holders of 4,606,306 shares of common stock, subject to adjustment. The
Registration Statement has not yet become effective.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT NUMBER
(REFERENCED TO ITEM
601 OF REG. S-B)
DESCRIPTION METHOD OF FILING
23
<PAGE> 26
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K:
(i) A Report on Form 8-K was filed with the Securities and
Exchange Commission on September 16, 1999 relating to the resignation of Phil
Carter as a Director of Registrant's Board of Directors and the resignation of
George Knight as a Director and Member of Registrant's Audit Committee.
(ii) A Report on Form 8-K was filed with the Securities and
Exchange Commission on November 10, 1999 relating to the resignation of Mark
Weiss as a Director and Member of Registrant's Audit Committee and the
resignation of John Iorillo as Director and Chief Financial Officer.
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Form 10-QSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
OSAGE SYSTEMS GROUP, INC.
By:/s/ Phil Carter Dated: November 22, 1999
---------------
Phil Carter
Chairman of the Board and
Chief Executive Officer
By:/s/ Mitchell Gens Dated: November 22, 1999
-----------------
Mitchell Gens
Controller (Principal
Financial and Accounting Officer)
25
<PAGE> 28
EXHIBIT INDEX
EXHIBIT NUMBER
(REFERENCED TO ITEM
601 OF REG. S-B)
DESCRIPTION
27 Financial Data Schedule
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,345,489
<SECURITIES> 0
<RECEIVABLES> 18,519,304
<ALLOWANCES> 361,217
<INVENTORY> 1,505,047
<CURRENT-ASSETS> 22,626,197
<PP&E> 3,088,251
<DEPRECIATION> 1,287,516
<TOTAL-ASSETS> 40,699,324
<CURRENT-LIABILITIES> 28,063,847
<BONDS> 0
2,474,760
1,000
<COMMON> 105,938
<OTHER-SE> 9,419,852
<TOTAL-LIABILITY-AND-EQUITY> 40,699,324
<SALES> 83,716,450
<TOTAL-REVENUES> 83,716,450
<CGS> 66,741,757
<TOTAL-COSTS> 66,741,757
<OTHER-EXPENSES> 23,742,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (845,903)
<INCOME-PRETAX> (7,613,763)
<INCOME-TAX> (183,209)
<INCOME-CONTINUING> (7,430,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,430,554)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
