OSAGE SYSTEMS GROUP, INC.
1661 East Camelback Road, Suite 245
Phoenix, Arizona 85016
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14(f)-1 THEREUNDER
REPORT OF CHANGE IN MAJORITY OF DIRECTORS
IN CONNECTION WITH PENDING TRANSACTIONS
This statement is being mailed on or about November 10, 1999 to holders of
record on November 5, 1999 (the "Record Date") of shares of Common Stock, par
value $.01 per share (the "Shares"), of Osage Systems Group, Inc., a Delaware
corporation (the "Company"). This statement is being furnished in connection
with proposed change in the majority of the board of directors of the Company as
a result of two pending transactions. The first transaction involves a pending
sale of the personal stock holdings of Jack Leadbeater and David Olson in a
private resale transaction (the "Private Resale Transaction"). Messrs.
Leadbeater and Olson are, respectively, Chairman and Chief Executive Officer,
and Director, President and Secretary of the Company. The second transaction
involves a planned private placement of Debenture Units by the Company (the
"Private Placement Transaction") to Michael Lauer and three investment funds
managed by him, Lancer Offshore, Inc., Lancer Partners, L.P. and Orbiter Fund,
Ltd. (collectively, "Lancer"). The Debenture Units consist of convertible
debentures and Common Stock purchase warrants. According to filings made with
the Securities and Exchange Commission, Lancer is presently the beneficial owner
of approximately 15% of the Company's outstanding securities. The Private Resale
Transaction and the Private Placement Transaction are scheduled to close
concurrently. Upon the closing thereof, Messrs. Leadbeater and Olson will resign
their positions as directors and officers of the Company. Phil Carter, George
Knight and Gerald Harrington have been nominated, and will be appointed as
directors upon the closing. Phil Carter will become the Company's Chief
Executive Officer. Mr. Carter had previously served as an officer and a director
of the Company prior to his resignation on September 2, 1999. Following his
resignation, Mr. Carter was appointed as the Company's interim Chief Executive
Officer on October 8, 1999. Mr. Knight had previously served as a director prior
to his resignation on September 3, 1999. Mr. Harrington has been nominated to
serve as a director as Lancer's designee.
As of the Record Date, there were 10,013,526 shares of the Company's Common
Stock outstanding and approximately 303 stockholders of record. Based upon
depository requests in connection with the distribution of its most recent
proxy, the Company believes the number of beneficial owners of its Common Stock
exceeds 900. Upon conversion of the debentures and exercise of the warrants to
be sold by the Company pursuant to the Private Placement Transaction, the number
of shares of Common Stock outstanding could increase to approximately
40,013,526.
<PAGE>
THIS STATEMENT IS BEING PROVIDED FOR INFORMATIONAL PURPOSES ONLY. NO PROXIES ARE
BEING SOUGHT HEREBY AND STOCKHOLDERS ARE NOT BEING ASKED TO TAKE ANY ACTION IN
CONNECTION HEREWITH.
Description of Private Placement Transaction
On October 8, 1999, the Company agreed to sell and Lancer agreed to
purchase a $3,000,000 principal amount 10% Convertible Subordinated Debenture
(the "Debenture") and certain Common Stock purchase warrants (the "Warrants")
for an aggregate purchase price of $3,000,000. The principal amount of the
Debenture is payable two years from the closing date with interest payable at
the rate of ten percent (10%) per annum on a quarterly basis commencing December
31, 1999. Interest may be paid in cash, or at the option of Lancer, in shares of
Common Stock priced at the "Conversion Price" of the Debenture. At the option of
Lancer, the Debentures are convertible into shares of the Company's Common Stock
at the Conversion Price per share at any time prior to maturity, commencing once
stockholder approval of this sale transaction has been obtained. However, once
stockholder approval of the sale has been obtained and the shares of Common
Stock issuable upon the conversion of the Debenture may be resold under an
effective registration statement filed with the Securities and Exchange
Commission, the Debenture shall automatically convert into shares of the
Company's Common Stock at the Conversion Price. The Conversion Price shall be
$.30 per share of Common Stock (reflective of a twenty (20%) percent discount to
the closing bid price of the Common Stock on October 8, 1999).
The Debentures are being privately offered as a Unit, together with
Warrants that, subject to certain vesting provisions, entitle Lancer to purchase
twenty million (20,000,000) shares of Common Stock of the Company. The Warrants
are exercisable for Common Stock at an exercise price of $.30 per share. The
Warrants consist of 5-year warrants to purchase ten million (10,000,000) shares
of Common Stock of the Company (the "Long-Term Warrants") and 90-day warrants to
purchase ten million (10,000,000) shares of Common Stock of the Company (the
"Short-Term Warrants"). The Long-Term Warrants shall vest only once stockholder
approval of the transaction is obtained. The Short-Term Warrants shall vest upon
issuance, but only to the extent that the shares issuable thereunder represent
less than 20% of the shares of the Company's outstanding Common Stock. The right
to exercise the Short-Term Warrants for 20% or more of the Company's outstanding
Common Stock is expressly conditioned upon stockholder approval. Any aggregate
proceeds received by the Company prior to obtaining such stockholder approval as
payment of the exercise price under the Short-Term Warrants for shares of Common
Stock representing 20% or more of the Company's outstanding Common Stock will be
treated as a demand loan to the Company; provided, however, that upon securing
stockholder approval, the outstanding amount of any such loan will automatically
convert into the right to receive shares of Common Stock under the Short-Term
Warrants at $.30 per share.
The Private Placement Transaction had been subject to certain due diligence
review and other conditions precedent which have recently been either satisfied
or waived. The closing of the Private Placement Transaction is scheduled to
occur concurrently with the closing of the Private Resale Transaction.
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<PAGE>
Upon the closing of the Private Placement Transaction, Lancer will have the
right to exercise Short-Term Warrants for approximately 2,000,000 shares of
Common Stock, resulting in Lancer beneficially owning approximately 29.1% of the
number of shares of Common Stock outstanding. In the event that the stockholders
approve the conversion of the Debentures and the exercise of certain Short-Term
Warrants and all of the Long-Term Warrants, the number of shares of Common Stock
outstanding could increase to approximately 40,013,526, and the percentage of
shares of Common Stock outstanding that are beneficially owned by Lancer would
increase significantly.
Description of the Private Resale Transaction
Jack Leadbeater and David Olson, presently directors and executive officers
of the Company, have agreed to sell their shares of the Company in a private
resale transaction at $.30 per share. Messrs. Leadbeater and Olson presently own
664,000 and 639,000 shares of the Company's Common Stock, respectively.
In conjunction with the Private Resale Transaction, Messrs. Leadbeater and
Olson have entered into severance agreements with the Company ("Severance
Agreements"), whereby they have agreed to: (i) resign as officers and directors
of the Company; (ii) terminate their existing employment agreements with the
Company; (iii) terminate certain Termination Benefits Agreements they have with
the Company; and (iv) forfeit all of their options to purchase Common Stock of
the Company. In return, the Company has agreed to provide each of Messrs.
Leadbeater and Olson with severance benefits commencing on the closing date of
the Private Resale Transaction until December 22, 2000 in the form of salary
continuation at $17,500 per month.
Management of the Company immediately following closing of these
transactions will be undertaken by a Board of Directors consisting of Phil
Carter, George Knight and Gerald Harrington. There can be no assurances,
however, that the composition of the Company's Board of Directors will not
change in the future, particularly following the Company's next annual meeting
of its stockholders. See "OSAGE SYSTEMS GROUP, INC. BOARD OF DIRECTORS AND
NOMINEES - Nominees."
OSAGE SYSTEMS GROUP, INC. BOARD OF DIRECTORS AND NOMINEES
Current Board of Directors and Executive Officers
The following table sets forth certain information with respect to each of
the current executive officers and directors of the Company.
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<PAGE>
Name Age Position
---- --- --------
Jack R. Leadbeater 44 Chairman of the Board and Chief Executive
Officer
David S. Olson 41 Director, President and Secretary
Phil Carter 54 Interim Chief Executive Officer
Jack R. Leadbeater
Mr. Leadbeater became Chairman and Chief Executive Officer of the Company
on December 22, 1997, the effective date of the merger between the Company and
Osage Computer Group, Inc. (the "Merger"). From 1993 to 1997, Mr. Leadbeater
served as President and director of Osage Computer Group, Inc. 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.
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, and became
Secretary of the Company on June 12, 1998. On January 5, 1999, Mr. Olson
resigned as Chief Operating Officer. From 1993 to 1997, Mr. Olson served as a
director and Executive Vice-President/General Manager of Osage Computer Group,
Inc. 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.
Phil Carter
Mr. Carter became a director and Chief Operating Officer on January 5,
1999. He resigned as a director and officer as of September 2, 1999. As of
October 8, 1999, Mr. Carter became interim Chief Executive Officer pending the
closing of the Private Resale Transaction. He had served as Executive Vice
President and General Manager of Operations of the Company since July 1, 1998.
From 1994 until 1998, Mr. Carter owned and operated a privately held real estate
sales and development company. From 1986 to 1993, Mr. Carter was President,
Chief Operating Officer, and a member of the Board of Directors of Acxiom
Corporation, an international database management and direct marketing company.
Prior to 1986, Mr. Carter held numerous senior management and executive
positions with IBM, including Branch
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<PAGE>
Manager, Regional Manager, and Director of IBM's Value Added Reseller Channel.
He is a graduate of the University of Central Arkansas with a Bachelor of
Science degree in Math.
Classified Board Of Directors; Removal Of Directors
On June 12, 1998, the Company held its 1998 Annual Meeting of Stockholders
(the "Meeting"). At the Meeting, the Company's Stockholders approved a number of
amendments to the Company's Restated Certificate of Incorporation (the
"Certificate"). Among other things, the Certificate was amended to provide for
the classification of the Board of Directors of the Company into three separate
classes, each to serve for 3-year terms with one class to be elected at each
annual meeting of stockholders after 1998. As Class I directors, Jack R.
Leadbeater and David Olson would have served until the scheduled expiration of
their terms at the Company's Annual Meeting in 2001. Vacancies exist as to the
Class II and Class III directors, whose terms respectively expire at the
Company's Annual Meetings in 2000 and 2002. Directors may only be removed for
cause and by the affirmative vote of two-thirds of the Company's stockholders
entitled to vote thereon.
The Board of Directors held 2 meetings (in person or telephonically) during
1998. Additionally, the Board of Directors took action by unanimous written
consent on twenty-four (24) occasions.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee is responsible for reviewing the
Company's financial and accounting practices and controls and making
recommendations concerning the engagement of its independent auditors. The
Compensation Committee is responsible for determining the compensation of the
officers and employees of the Company and administering the Company's stock
option plans. As of the closing of the Private Resale Transaction, the Audit
Committee and the Compensation Committee will consist of Messrs. Knight,
Harrington and Carter. The Company has no nominating committee.
Directors' Compensation
Currently, the Company 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.
Resignation of Current Officers and Directors
In connection with the closing of the Private Placement Transaction and
Private Resale Transaction, Messrs. Leadbeater and Olson will resign their
positions with the Company.
Nominees
The following table sets forth the executive officers and directors of the
Company upon the closing of the Private Placement Transaction.
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<PAGE>
Name Age Position
---- --- --------
Phil Carter(1) 54 Chairman of the Board and
Chief Executive Officer
George Knight(2) 58 Director
Gerald Harrington(2) 41 Director
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(1) Member of Compensation Committee.
(2) Member of Audit Committee and Compensation Committee.
The business experience of the new executive officers and new nominees for
director are as follows:
Phil Carter
Mr. Carter currently serves as interim Chief Executive Officer of the
Company, a position he has held since October 8, 1999 pending the closing of the
Private Resale Transaction. From January 5, 1999 to September 2, 1999, Mr.
Carter served as a director and Chief Operating Officer of the Company. He had
served as Executive Vice President and General Manager of Operations of the
Company since July 1, 1998. From 1994 until 1998, Mr. Carter owned and operated
a privately held real estate sales and development company. From 1986 to 1993,
Mr. Carter was President, Chief Operating Officer, and a member of the Board of
Directors of Acxiom Corporation, an international database management and direct
marketing company. Prior to 1986, Mr. Carter held numerous senior management and
executive positions with IBM, including Branch Manager, Regional Manager, and
Director of IBM's Value Added Reseller Channel. He is a graduate of the
University of Central Arkansas with a Bachelor of Science degree in Math.
George Knight
Mr. Knight became a member of the Board of Directors during November 1998.
He resigned his position as director as of September 3, 1999. Mr. Knight retired
from IBM in 1995 after a 29 year career in sales and management. He held several
positions in Northwest Arkansas, St. Louis, and Little Rock. Most recently, Mr.
Knight was the owner of a insurance agency that was sold in 1997. Mr. Knight
also serves as an independent contractor and consultant, having performed work
for companies such as IBM, Acxiom, Inc. and Dillards Department Stores. He is a
graduate of the University of Arkansas with a degree in Civil Engineering.
Gerald T. Harrington
Since February 1999, Mr. Harrington has served as a Managing Director of
Capitol City Group, LLC, a Washington, D.C. and Providence, Rhode Island-based
government relations firm. Mr. Harrington is also an attorney with the firm of
Nadeau & Simmons, P.C. in Providence, Rhode Island, where he has concentrated
his practice in municipal finance since February 1999. From 1992 to February
1999, Mr. Harrington was a partner in the law firm of
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<PAGE>
McGovern Noel & Benik, Incorporated, where his practice focused on governmental
relations and financial transactions. Mr. Harrington received a Bachelors of
Arts degree from Yale University in 1981 and a Juris Doctor degree from the
University of Pennsylvania in 1985.
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, as amended, and written
representations from certain reporting persons, the Company believes that during
fiscal 1998 all reporting persons timely complied with all filing requirements
applicable to them, except for certain reports, which include: (i) Forms 3 and 4
for Mr. Iorillo; (ii) a Form 4 for each of Messrs. Leadbeater, Olson, Iorillo
and Glynn; and (iii) a Form 3 for each of Messrs. Carter and Knight.
COMPENSATION OF, AND OTHER INFORMATION
CONCERNING OFFICERS AND DIRECTORS
The following table sets forth a summary of compensation paid or accrued
for the fiscal years ended December 31, 1998, 1997 and 1996 by the Company to or
for the benefit of the named executive officers.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------
AWARDS PAYOUTS
----------------------------- ------------
ANNUAL COMPENSATION RESTRICTED
NAME AND PRINCIPAL ----------------------------- STOCK OPTIONS/ ALL OTHER
POSITION YEAR SALARY BONUS AWARD(S)($) SARS(#) COMPENSATION
- ------------------ ---- ------ ----- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
JACK R. LEADBEATER 1998 $200,000 $ 70,000 -- 664,000(1) $26,295(2)
Chairman of the Board and 1997 $ 89,967 $261,463 -0- 19,057(3) -0-
Chief Executive Officer 1996 $ 49,417 $236,335 N/A N/A -0-
DAVID S. OLSON 1998 $200,000 $ 70,000 -- 664,000(1) $18,052(4)
Director and President and 1997 $ 89,967 $261,463 -0- 19,057(3) -0-
Former Chief Operating 1996 $ 64,417 $236,335 N/A N/A -0-
Officer
PHIL CARTER 1998 $ 75,000(5) -- -- 510,000(6) --
Interim Chief Executive 1997 N/A N/A N/A N/A N/A
Officer and Former Director 1996 N/A N/A N/A N/A N/A
and Chief Operating Officer
JOHN IORILLO 1998 $ 87,500(7) $ 77,500 -- 150,000(8) $ 2,586(9)
Former Director and Chief 1997 N/A N/A N/A N/A -0-
Financial Officer 1996 N/A N/A N/A N/A -0-
MICHAEL G. GLYNN 1998 $200,000(10) -- -0- -0- $13,200(11)
Former Director and 1997 -- -- 100,000(12) 100,000(13) -0-
Executive Vice President 1996 N/A N/A N/A N/A N/A
</TABLE>
- ----------------------------
(1) Reflects options to purchase 664,000 shares of Common Stock ("New
Options") issued in exchange for the surrender of options to purchase
332,000 shares of Common Stock ("Merger Options") previously granted on
December 22, 1997 as part of the December 22, 1997 merger between the
Company and Osage Computer Group, Inc. (the "Merger "). The New Options
have an exercise price of $4.50 per share, while the Merger Options had
an exercise price of $3.00 per share. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." The New Options will be forfeited upon the
closing of the Private Resale Transaction.
(2) Includes $12,795 in interest income from a loan made to the Company in
1998, and $13,500 in car payments. With respect to the loan, see
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(3) Reflects options to purchase 19,057 shares of Common Stock granted
immediately following the Merger. These options will be forfeited upon
the closing of the Private Placement Transaction.
(4) Includes $4,552 in interest income from a loan made to the Company in
1998, and $13,500 in car payments. With respect to the loan, see
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(5) Reflects Mr. Carter's compensation during the six month period
commencing July 1, 1998, the date on which Mr. Carter was employed by
Osage, based on an annual salary of $150,000.
(6) Reflects options to purchase 510,000 shares of Common Stock granted in
conjunction with the commencement of employment in 1998, of which
options to purchase 360,000 shares of Common Stock were forfeited by
virtue of Mr. Carter's resignation on September 2, 1999. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(7) Reflects Mr. Iorillo's compensation during 1998 commencing February 16,
1998, the date on which Mr. Iorillo was employed by Osage, based on an
annual salary of $100,000.
(8) Includes options to purchase 100,000 shares of Common Stock granted in
conjunction with the commencement of employment. Also includes options
to purchase 50,000 shares of Common Stock granted during June 1998. All
of these options were forfeited on October 15, 1999.
(9) Includes $2,396 in interest income from a loan made to the Company in
1998, and $190 in premium payments for a life insurance policy. With
respect to the loan, see "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(10) Mr. Glynn is a former director and officer of the Company.
(11) Represents $13,200 in car payments.
(12) Includes 100,000 shares of Common Stock granted to Mr. Glynn in
conjunction with his employment.
(13) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock; however,
these options did not vest due to the Company's failure to achieve
certain performance criteria and have since expired.
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<PAGE>
Employment Arrangements; Severance Arrangements
The Company has employment agreements with each of Messrs. Leadbeater and
Olson. Each of Messrs. Leadbeater and Olson has an annual salary of $210,000,
plus annual and interim bonuses which may be awarded at the discretion of the
Board of Directors. Each of Messrs. Leadbeater and Olson is 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. The employment agreements of
Messrs. Leadbeater and Olson contain non-competition and non-solicitation
provisions which survive their actual employment for a term of one year.
The Company had an employment agreement with Mr. Iorillo which terminated
on October 15, 1999 by virtue of his resignation from the Company. The
employment agreement with Mr. Iorillo provided for an annual salary of $105,000,
plus annual and interim bonuses at the discretion of the Board of Directors. Mr.
Iorillo was employed for an initial term of one year commencing February 1998,
with successive year-to-year renewals in the event that the agreement was not
earlier terminated. Mr. Iorillo was granted options to purchase 100,000 shares
of the Common Stock of the Company in connection with his employment with the
Company.
In conjunction with the closing of the Private Resale Transaction and the
Private Placement Transaction, the Company has agreed to enter into severance
arrangements with Messrs. Leadbeater and Olson. In addition, the Company has
entered into a severance arrangement with Mr. Iorillo effective as of October
15, 1999. Each of the severance arrangements with Messrs. Leadbeater, Olson and
Iorillo provides for the termination of their respective employment agreements
and the termination benefits agreements with the Company. Each agreement further
provides for severance benefits commencing on the closing date in the form of
salary continuation at $17,500 per month for Messrs. Leadbeater and Olson
commencing as of the closing date until December 22, 2000, and $8,750 per month
for Mr. Iorillo, commencing October 18, 1999 until March 31, 2000, reimbursement
of reasonable business expenses through their respective resignation dates and
repayment of certain outstanding shareholder loans extended to the Company in
the amount of $83,488.44 to Mr. Leadbeater, $7,748.36 to Mr. Olson and $10,000
(plus accrued interest) to Mr. Iorillo, payable upon the terms set forth in
their respective agreements. Mr. Iorillo will also receive accrued wages in the
amount of $15,000. The Company also agreed to provide directors and officers
insurance coverage for Messrs. Leadbeater, Olson and Iorillo for a period of one
year from the closing date. Messrs. Leadbeater and Olson will surrender and
forfeit all rights to any options held as of the closing date. Mr. Iorillo
surrendered and forfeited all rights to any options held as of October 15, 1999,
the effective date of his resignation. The agreements of Messrs. Leadbeater and
Olson contain covenants not to compete for three months after the closing date
and covenants not to solicit the Company's employees or customers until after
December 22, 2000, for which the Company will pay lump-sum payments on the
closing date to Mr. Leadbeater and Mr. Olson of $159,360 and $153,360,
respectively. The agreements also contain mutual releases of the Company and
each of Messrs. Leadbeater, Olson and Iorillo.
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<PAGE>
The Company had an employment letter of understanding with Mr. Carter,
which terminated upon Mr. Carter's resignation on September 2, 1999. The letter
of understanding provided for an annual salary of $150,000 plus a
performance-based bonus of up to $150,000 per year, as well as an initial
three-year term, commencing July 1, 1998. In conjunction with his previous
employment by the Company, Mr. Carter was granted options to purchase 510,000
shares of Common Stock of the Company. By virtue of Mr. Carter's subsequent
resignation from the Company on September 2, 1999, options to purchase 360,000
shares of Common Stock were forfeited. See "Summary Compensation Table." Mr.
Carter is currently an at-will employee of the Company with an annual salary of
$175,000.
Stock Options
1993 Stock Option Plan
The Company's Amended and Restated 1993 Stock Option Plan, as amended (the
"1993 Option Plan") covers 5,000,000 shares of the Company's Common Stock. Under
its terms, officers, directors, key employees and consultants of the Company are
eligible to receive incentive stock options within the meaning of Section 422 of
the Internal Revenue Code, as well as non-qualified stock options. The 1993
Option Plan is administered by the Board of Directors or a committee designated
by the Board of Directors. Incentive stock options, as well as non-qualified
stock options, granted under the 1993 Option Plan are exercisable for a period
of up to 10 years from the date of grant and at an exercise price that is not
less than the fair market value of the Common Stock on the date of the grant.
The term of an incentive stock option granted under the 1993 Option Plan to a
stockholder owning more than 10% of the outstanding Common Stock may not exceed
five years and the exercise price of an incentive stock option granted to such
stockholder may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. As of October 15, 1999, options to purchase
1,291,521 shares of the Company's Common Stock were outstanding under the 1993
Option Plan.
Additional Stock Options
In addition to the options covered by the 1993 Option Plan, the Company has
also issued options to purchase 1,600,000 shares of the Company's Common Stock
to the former shareholders of Osage Computer Group, Inc. in exchange for the
surrender by such shareholders of options to purchase 800,000 shares of its
Common Stock previously granted on December 22, 1997 in connection with the
Company's acquisition of Osage Computer Group, Inc. These options vested upon
grant, are subject to an exercise price of $4.50 and expire if not exercised by
December 19, 2003. The options they replaced were subject to an exercise price
of $3.00 per share, vested based upon the Company achieving certain operating
results and expired on December 19, 2003.
During 1998, options to purchase an additional 698,114 shares were issued
to certain directors and officers at exercise prices between $3.00 to $4.50.
These include options to purchase 510,000 shares of the Company's Common Stock
granted to Phil Carter upon his employment by the Company effective as of June
10, 1998. These options have an exercise price of $4.50 per share and were
subject to periodic vesting provisions. Of the options granted to Mr. Carter,
options to purchase 150,000 shares of Common Stock vested on December 31,
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<PAGE>
1998 and options to purchase 360,000 shares of Common Stock were forfeited upon
Mr. Carter's resignation from the Company on September 2, 1999. The options
granted during 1998 also include options to purchase 100,000 shares of the
Company's Common Stock granted to John Iorillo during February 1998 at an
exercise price of $5.00 per share. On June 10, 1998, the Company agreed to amend
these options to: (i) eliminate delayed vesting provisions; and (ii) reduce the
exercise price of these options to $4.50 per share, and at the same time,
granted Mr. Iorillo additional options to purchase 50,000 shares of the
Company's Common Stock through December 19, 2003 at an exercise price of $4.50
per share. All options granted to Mr. Iorillo were forfeited upon the effective
date of his resignation from the Company on October 15, 1999.
Surrender of Options
In connection with their severance arrangements, Messrs. Leadbeater, Olson
and Iorillo have agreed to surrender and forfeit all of their respective
options.
1999 Employee Stock Purchase Plan
In June 1999, the stockholders approved the adoption of the Company's 1999
Employee Stock Purchase Plan. The plan covers 1,000,000 shares of the Company's
Common Stock. Under its terms, employees, including officers and directors of
the Company, are eligible to purchase shares of the Company's Common Stock, up
to 10% of the participant's compensation (not to exceed $25,000 in fair market
value) in any given year, through accumulated payroll deductions. Purchases may
be made four times per year at a price equal to the lesser of (i) 85% of the
closing price of the Company's Common Stock reported on the American Stock
Exchange ("AMEX") on the first business day of the offering period and (ii) 85%
of the closing price of the Company's Common Stock reported on AMEX on the last
business day of the offering period. As of October 15, 1999, 69,943 shares of
the Company's Common Stock have been purchased by plan participants.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
------------------------------
Individual Grants
------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Option/SARs Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ---- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Jack R. Leadbeater 664,000(1) 24.2% $4.50 December 19, 2003
David S. Olson 664,000(1) 24.2% $4.50 December 19, 2003
Phil Carter 510,000(2) 18.6% $4.50 June 10, 2003
John Iorillo 150,000(3) 5.5% $4.50 December 19, 2003
</TABLE>
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(1) All of these options will be forfeited upon the closing of the Private
Resale Transaction.
(2) All of these options were forfeited on September 2, 1999, the date of Mr.
Carter's resignation as Chief Operating Officer of the Company.
(3) All of these options were forfeited on October 15, 1999, the effective date
of Mr. Iorillo's resignation.
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<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs In-the-Money
at FY-End (#) Options/SARs at
Shares Shares FY-End ($)
Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized ($) Unexercisable Unexercisable(1)
- ---- ----------- ------------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Jack R. Leadbeater -0- -0- (E) 683,057(2)/(U)0 (E)$797,025/(U)$0
Phil Carter -0- -0- (E)150,000/ (E)$168,750/(U)$405,000
(U)360,000(3)
David S. Olson -0- -0- (E)683,057(2)/(U)0 (E)$797,025/(U)$0
John Iorillo -0- -0- (E)150,000(4)/(U)0 (E)$168,750/(U)$0
Michael G. Glynn -0- -0- (E)0/(U)0 (E)$0/(U)$0
</TABLE>
- ------------------------
(1) Based upon $5.625, the high bid price (per share) of the Company's Common
Stock on the last reported trading date during the year ended December 31,
1998 as reported on the American Stock Exchange.
(2) All of these options shall be forfeited upon the closing of the Private
Resale Transaction.
(3) The options to purchase 360,000 shares of Common Stock were forfeited on
September 2, 1999.
(4) All of these options were forfeited on October 15, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Arrangements; Severance Arrangements
The Company has employment agreements with Messrs. Leadbeater and Olson. In
conjunction with the closing of the Securities Purchase Agreement, the Company
has entered into severance arrangements with Messrs. Leadbeater and Olson. The
Company had an employment agreement with Mr. Iorillo which terminated on October
15, 1999 by virtue of the severance agreement entered into between the Company
and Mr. Iorillo as of October 8, 1999. The Company also had an employment letter
of understanding with Mr. Carter, the terms of which included the grant of
options to purchase 510,000 shares of Common Stock. Of these options granted to
Mr. Carter, 360,000 were forfeited.
Restructure of Consideration Paid in the Merger with Osage Computer Group, Inc.
On June 12, 1998, the Company issued New Options to purchase 1.6 million
shares of its Common Stock to the former shareholders of Osage Computer Group,
Inc. in exchange for the surrender by such shareholders of the 800,000 Merger
Options and the waiver by such shareholders of all rights to upward adjustment
with respect to 900,000 shares of Common Stock
-12-
<PAGE>
originally received on December 22, 1997, in conjunction with the Company's
acquisition of Osage Computer Group, Inc. Mr. Leadbeater and Mr. Olson each
received 664,000 New Options in exchange for the surrender of 332,000 Merger
Options.
The New Options are subject to an exercise price of $4.50 per share and
expire on December 19, 2003. They replace the Merger Options which had an
exercise price of $3.00 per share (or lower based upon the average of the
closing bid and ask prices of the shares for the 15 trading days prior to the
date any segment of the Merger Options vest) and also expired on December 19,
2003. The Merger Options, however, only vested once the Company's earnings
achieved certain agreed upon levels, and were contingent upon the holder's
continued employment with the Company.
The New Options were granted to replace the Merger Options in order, among
other things, to avoid the potential compensation expense associated with
vesting of the Merger Options when and if the Company achieved its earning
targets in the future.
As a result of the Company's issuance of the New Options and the adoption
of a classified board of directors in June 1998, the former shareholders of
Osage Computer Group, Inc. further agreed to convert all of their shares of
Series B $3.00 Convertible Preferred Stock received in conjunction with the
Company's acquisition of Osage Computer Group, Inc. Holders of the Series B
Shares had been entitled to certain voting rights with respect to the election
of directors. All of the Series B Shares have been converted.
In connection with the severance arrangements to be entered into upon the
closing of the Securities Purchase Agreement and the Private Resale Transaction,
Messrs. Leadbeater and Olson have agreed to surrender and forfeit all 1,328,000
New Options received by them.
Options Granted to Management
During December 1997, the Company granted options to purchase 19,057 shares
of its Common Stock to each of Jack Leadbeater and David Olson. The options
permit the purchase of additional shares of Common Stock at $3.00 per share
through December 19, 2000.
During September 1999, the Company granted options to purchase 116,943
shares of its Common Stock to Jack Leadbeater. The options permit the purchase
of additional shares of Common Stock at $1.437 per share.
Effective with his employment by the Company as of June 10, 1998, the
Company granted Phil Carter options to purchase 510,000 shares of the Company's
Common Stock through June 10, 2003 at an exercise price of $4.50 per share. The
options vested periodically provided Mr. Carter remained employed by the Company
through December 31, 2000. On September 2, 1999, Mr. Carter resigned as Chief
Operating Officer of the Company, resulting in the forfeiture of options to
purchase 360,000 shares of Common Stock which had not vested at that time.
In conjunction with his employment by the Company, during February 1998,
the Company granted John Iorillo options to purchase 100,000 shares of the
Company's Common Stock through June 10, 2003 at an exercise price of $5.00. On
June 10, 1998, the Company agreed to amend these options to: (i) eliminate
delayed vesting provisions; and (ii) reduce the exercise price of these options
to $4.50 per share, and at the same time, granted Mr. Iorillo additional options
to purchase 50,000 shares of the Company's Common Stock through December 19,
2003 at an exercise price of $4.50 per share.
-13-
<PAGE>
In connection with their severance arrangements, Messrs. Leadbeater, Olson
and Iorillo have agreed to surrender and forfeit all of their respective
options.
On December 4, 1998, the Company entered into an Investment Banking
Agreement with American Maple Leaf Financial Corp. ("AMLF") for financial
advisory and acquisition services. Andrew Panzo, a director of the Company until
June 1999, was also the Managing Director of AMLF as of December 4, 1998. In
consideration for such services, the Company granted AMLF a warrant to purchase
50,000 shares of Common Stock at an exercise price of $4.75 per share. 25,000 of
the warrants vested on December 4, 1998, and 25,000 warrants vested on March 4,
1999. The warrants expire on December 4, 2000. Pursuant to the terms of the
Investment Banking Agreement, the Company further agreed to pay AMLF a monthly
fee and additional compensation in the form of cash or warrants in the event
that the Company consummates certain financing transactions or acquisitions with
third parties introduced to it by AMLF. The Company's arrangements with AMLF
have expired.
Loan to Company to Complete Acquisition
The systems integration business of IntraNet Solutions, Inc. ("IntraNet")
was acquired by the Company on October 15, 1998 for a purchase price of
$1,535,000. $740,000 of the purchase price was paid in cash at the closing; the
balance was reflected by a promissory note due within ninety (90) days (the
"IntraNet Note"). In order to facilitate the IntraNet acquisition, Jack
Leadbeater: (i) pledged certain of his personal stock holdings in order to
guarantee the IntraNet Note, and (ii) together with David Olson and John
Iorillo, loaned $740,000 to the Company (the "Shareholder Loan") to satisfy the
cash component of the purchase price. Together with a commitment fee of
$183,000, the principal of the Shareholder Loan of $923,000 is payable, together
with interest at the rate of ten (10%) percent per annum, at the earlier of: (i)
a six month period commencing January 15, 1999; or (ii) out of the proceeds of
any earlier financing transaction completed by the Company. Through October 15,
1999, $821,763 of the Shareholder Loan had been repaid by the Company. In
connection with the transactions, the Board of Directors concluded that the
terms of the Shareholder Loan were more favorable to the Company than other
financing proposals received at the time. In connection with the severance
arrangements with Messrs. Leadbeater, Olson and Iorillo, the balance of the
Shareholder Loan will be repaid.
Termination Benefits Agreements
The Company entered into Termination Benefits Agreements with each of
Messrs. Leadbeater and Olson effective June 12, 1998, and with Mr. Iorillo
effective December 1998, pursuant to which they are entitled to certain benefits
if, after the occurrence of a Change in Control of the Company (as such term is
defined therein), the Company terminates their employment other than for cause
or Messrs. Leadbeater, Olson or Iorillo, as the case may be, voluntarily
terminates his employment for "good reason" (including, among other things, a
reduction in salary, material reduction in benefits, or a change in title,
reporting responsibilities or office location requiring relocation).
Corresponding amendments were made to the Employment Agreements of Messrs.
Leadbeater, Olson and Iorillo. In connection with the severance arrangements
with Messrs. Leadbeater, Olson and Iorillo, the Termination Benefits Agreements
of Messrs. Leadbeater and Olson will be terminated upon the closing of the
Private Resale Transaction, and the Termination Benefits Agreement of Mr.
Iorillo terminated on October 15, 1999
-14-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of November 1, 1999, 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 five percent (5%) of the Company's
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>
Ownership Before Closing Ownership After Closing
---------------------------------- ------------------------------------------
Shares Owned Percentage of Shares Owned Percentage of
Beneficially and Outstanding Beneficially and Outstanding
Name and Address of Record (1) Shares of Record (1) Shares
- ---------------- ---------------------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Jack R. Leadbeater 1,464,000(2) 13.5% 100(8) (*)
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
David S. Olson 1,322,137(3) 12.4% 100(8) (*)
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Phil Carter 153,200(4) 1.5% 153,200(9) 1.5%
61 East Camelback Road, Suite 245
Phoenix, AZ 85016
George Knight 3,000 (*) 3,000 (*)
1706 Alton Drive
Fayetteville, AR 72701
Gerald T. Harrington(5) 0 0% 0 0%
80 Hazael Street
Providence, RI 02908
Lancer Offshore, Inc. 820,000(6) 8.2% 2,155,136(10) 19.0%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners, LP 470,000(6) 4.7% 803,783(11) 7.8%
375 Park Avenue, Suite 2006
New York, NY 10152
Michael Lauer 1,500,000(7) 15.0% 3,502,705(12) 29.1%
375 Park Avenue, Suite 2006
New York, NY 10152
All Directors and Officers as a group 2,939,333 25.2% 156,200 1.5%
(3 persons before the closing; 3
persons after the closing)
</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
-15-
<PAGE>
disclaimed as to certain of the securities. This table has been
prepared based on 10,013,526 shares of Common Stock outstanding as of
November 1, 1999.
(2) Includes 664,100 shares of Common Stock and 800,000 shares issuable
upon the exercise of vested stock options.
(3) Includes 639,100 shares of Common Stock and 683,037 shares issuable
upon the exercise of vested stock options.
(4) Includes 3,200 shares of Common Stock and 150,000 shares issuable upon
the exercises of vested stock options.
(5) Mr. Harrington has agreed to join the Board of Directors upon the
closing of the Securities Purchase Agreement.
(6) The beneficial ownership of these shares is also attributed to Michael
Lauer. See Footnote No. 7.
(7) Includes direct ownership of 40,000 shares and investment control of
1,460,000 shares through Mr. Lauer's role as Managing Member of Lancer
Management Group LLC which is the Manager of Lancer Offshore, Inc.
(820,000 shares) and Lancer Voyager Fund (170,000 shares), and Lancer
Management Group, II, which is the Manager of Lancer Partners, L.P.
(470,000 shares). Mr. Lauer acts as Investment Manager of each of these
funds.
(8) Messrs. Leadbeater and Olson have agreed to sell all but 100 shares of
Common Stock owned by them, surrender all of their stock options and
resign upon the closing of the Private Resale Transaction.
(9) Mr. Carter will continue to serve as director and will commence service
as Chief Executive Officer as of the closing of the Private Resale
Transaction.
(10) Includes 820,000 shares of Common Stock. Also includes approximately
1,335,136 shares issuable upon the exercise of Short-Term Warrants that
will vest upon the closing of the Private Placement Transaction. Does
not include Short-Term Warrants to purchase approximately 5,331,531
shares, Long-Term Warrants to purchase 6,666,667 shares, or Debentures
convertible into 6,666,667 shares, none of which will vest until the
Company's stockholders approve the exercise of these Warrants and the
conversion of the Debentures.
(11) Includes 470,000 shares of Common Stock. Also includes
approximately 333,783 shares issuable upon the exercise of Short-Term
Warrants that will vest upon the closing of the Private Placement
Transaction. Does not include Short-Term Warrants to purchase
approximately 1,332,882 shares, Long-Term Warrants to purchase
1,666,666 shares, or Debentures convertible into 1,666,666 shares, none
of which will vest until the Company's stockholders approve the
exercise of these Warrants and the conversion of the Debentures.
(12) Includes direct ownership of 40,000 shares and investment control of
1,460,000 shares through Mr. Lauer's role as Managing Member of Lancer
Management Group LLC, which is the Manager of Lancer Offshore, Inc.
(820,000 shares) and Lancer Voyager Fund (170,000 shares), and Lancer
Management Group, II, which is the Manager of Lancer Partners, L.P.
(470,000 shares). Mr. Lauer acts as Investment Manager of each of these
funds. Also includes approximately 2,002,705 shares issuable upon the
exercise of certain Short-Term Warrants that will vest upon the closing
of the Private Placement Transaction, of which 166,895 will be directly
owned by Mr. Lauer, with the remainder owned by the following funds
managed by Mr. Lauer: Lancer Offshore, Inc. (1,335,136), Lancer
Partners, L.P. (333,783), and Orbiter Fund, Ltd. (166,891). Does not
include the Debentures and exercise of certain Warrants that will not
vest until the Company's stockholders approve the conversion of the
Debentures and the exercise of these Warrants, which instruments will
be owned of record either by Michael Lauer or funds managed by Mr.
Lauer, as follows: Short-Term Warrants to purchase an aggregate of
approximately 7,997,295 shares (of which 5,331,531 will be in the name
of Lancer Offshore, Inc., 1,332,882 will in the name of Lancer
Partners, L.P., 666,441 will be in the name of Michael Lauer and
666,441 will be in the name of Orbiter Fund, Ltd.), Long-Term Warrants
to purchase an aggregate 10,000,000 shares (of which 6,666,667 will be
in the name of Lancer Offshore, Inc., 1,666,666 will be in the name of
Lancer Partners, L.P., 833,334 will be in the name of Michael Lauer and
833,333 will be in the name of Orbiter Fund, Ltd.), or Debentures
convertible into 10,000,000 shares (of which 6,666,667 will be in the
name of Lancer Offshore, Inc., 1,666,666 will be in the name of Lancer
Partners, L.P., 833,334 will be in the name of Michael Lauer and
833,333 will be in the name of Orbiter Fund, Ltd.).
(*) Less than 1%.
-16-
