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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ,
to ,
Commission File Number: 0-22808
OSAGE SYSTEMS GROUP, INC.
(Name of small business issuer in its charter)
Delaware 95-4374983
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (602) 274-1299
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered
Common Stock, American Stock Exchange
$.01 par value
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
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
--- --- --- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Registrant's revenues for the year ended December 31, 1998: $60,975,674.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of March 16, 1999, was approximately $45,213,836 based
upon the closing sale price of the Registrant's Common Stock on the American
Stock Exchange of $6.87 per share of Common Stock on such date. See Footnote (1)
below.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the Registrant's sole class of
Common Stock as of March 16, 1999 was 9,411,058 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is not an affiliate
or that any person whose holdings are included is an affiliate and any such
admission is hereby disclaimed. The information provided is included solely
for recordkeeping purposes of the Securities and Exchange Commission.
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-KSB AND IN OTHER PUBLIC
STATEMENTS BY THE COMPANY AND COMPANY OFFICERS, THE WORDS "EXPECT", "ESTIMATE",
"PROJECT", "INTEND", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS REGARDING EVENTS AND FINANCIAL TRENDS WHICH MAY
AFFECT THE COMPANY'S FUTURE OPERATING RESULTS AND FINANCIAL CONDITION. SUCH
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S
ACTUAL RESULTS AND FINANCIAL CONDITION TO DIFFER MATERIALLY. SUCH FACTORS
INCLUDE, AMONG OTHERS, THE RISK FACTORS DESCRIBED UNDER ITEM 1 IN THIS ANNUAL
REPORT. ADDITIONAL FACTORS ARE DESCRIBED IN THE COMPANY'S OTHER PUBLIC REPORTS
FILED 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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
DESCRIPTION OF THE BUSINESS
Osage Systems Group, Inc. (the "Company") is a multi-regional provider
of network computing solutions through its twelve (12) 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 and Veritas Software Corporation.
During 1998, the Company implemented an aggressive growth strategy
based on management's belief in two fundamental concepts. First, the expanding
market demand for companies with the expertise to design, integrate and
implement a customer's information technology needs. Second, the competitive
advantages offered by the Company's blend of specialized professional services
and products. A key element of this strategy is to identify acquisition
candidates that have a proven record of delivering high-quality technical
services and a customer base of large and mid-sized companies which may benefit
from the synergies offered by the Company's growth strategy. An additional
factor is to identify acquisition candidates with expertise in higher margin
professional consulting services that can be cross-sold through other Company
offices. One of the principal objectives of this strategy is to develop a
greater focus upon the delivery of professional consulting services, thereby
offering the potential for higher profit margins and greater growth
opportunities than generally available to traditional product resellers. Through
implementation of this strategy, the Company intends to expand its market
presence in selected regions throughout the Country. This will enable the
Company to further establish the "Osage" brand name, provide a greater
opportunity for cross selling and maximize operating efficiencies through the
integration of certain centralized functions.
Since the adoption of its growth strategy in the beginning of 1998, the
Company has acquired six (6) companies who have significantly contributed to its
revenue base. During 1998, the Company's revenues increased to $61 million, as
compared to $14.2 million during 1997. On a pro forma basis, had each of the
acquisitions been completed as of January 1, 1998, the Company's revenues during
1998 would have increased to $83 million.
The Company's objective is to be recognized as one of the leading
solutions providers of a customer's networking and internet computing needs. It
intends to fulfill this objective by, among
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other things, continuing its growth strategy and 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 Group, Inc. ("Osage") in a merger transaction (the "Merger") that
became effective on December 22, 1997. Osage had been a provider of network
computing solutions since 1989.
The executive offices of the Company are located at 1661 East Camelback
Road, Suite 245, Phoenix, Arizona, and its telephone number is (602) 274-1299.
INDUSTRY BACKGROUND
Dealing with the forces of change such as eroding profit margins,
shrinking business cycles and increased global competition has become a central
issue for businesses. Organizations of all sizes have recognized information
technology as being a competitive advantage in coping with such market forces.
These organizations have also realized that systems built on networked
technology, including client server databases, internet protocol ("IP") based
networks and internet/intranet systems can be more effective in enabling this
competitive advantage than are legacy systems built on older technology.
The increasingly complex nature and rapid change in technology has
created increased demand for companies with the expertise to design, integrate,
implement and manage the technology. This requires the services of a systems
integrator that has the proper blend of vendor relationships, resources,
technical expertise, products and services to integrate these technologies. In
recognition of the increasing complexity of computer systems and technologies,
growing numbers of technology users have been utilizing systems integrators to
coordinate information technology services and products. According to the
Computer Industry Report dated July 1997, the systems integration market is
forecast to grow 11% incrementally worldwide between 1996 and 2001 and 12%
incrementally in the United States for the same period. This service segment is
estimated to account for $60 billion of the worldwide Information Technology
market in 2001.
Management further believes that the relationships of value-added
resellers with certain industry-leading technology vendors provide them with
access to resources such as technical training, technical documentation,
evaluation units and leading-edge industry information. These resources
represent significant value to large and mid-sized companies that typically do
not maintain such in-house resources. Management also believes that reduced
cost, increased productivity and broader sales coverage, particularly in the
burgeoning middle market, is motivating technology vendors to sell their
products through the value-added channel. Given these market forces, management
believes that value-added resellers such as the Company will be well positioned
to capitalize on anticipated growth in the industry.
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BUSINESS STRATEGY
The Company's objective is to be one of the leading solutions providers
for a customer's networking and internet requirements. The Company intends to
fulfill this objective through a business strategy, which includes the
following:
- Continue to Expand through Strategic Acquisitions
The Company is currently pursuing a strategic acquisition plan to add
to its base of operations in certain practice areas, as well as to establish
operations in new geographic markets and to add to its consulting and technical
resource pool. In particular, the Company will focus its acquisition strategy on
candidates that have a proven record of delivering innovative network solutions
and are leaders in their regional markets. Management believes the Company will
have many acquisition opportunities in a fragmented market, and that the Company
can offer acquisition candidates an opportunity to continue operating their
respective businesses, as well as to participate in a company with a growth
strategy and liquid trading market for its securities. Given the size and highly
fragmented composition of the industry, the Company believes that there is an
opportunity to implement a market roll-up program within the value-added
reseller industry.
- Focus on Professional Service Component
The Company intends to shift the blend of its product and service
offerings to establish a greater focus on the development of professional
service offerings within specialized practice areas. This is primarily in
recognition of two factors: first, the increasing demand for experienced
information technology consultants, primarily in recognition of the rapid
evolution of increasingly complex computing systems; and second, to secure the
increased profit margins for professional consulting services.
- Establish the Osage Brand
The Company believes that it can gain significant advantages from
developing a highly identifiable national brand focused around its ability to be
a complete solutions provider. Toward this end, the Company has commenced a
rapid transition of the acquired companies from their original operating names
and logos to the "Osage" name and logo. In addition, the Company has developed
marketing materials, customer seminar programs, and joint-marketing programs
with strategic partners intended to promote its full service capabilities.
- Leveraging Strategic Relationships
The Company intends to utilize its strong relationships with industry
leading technology vendors. These relationships provide the Company with
opportunities to develop joint marketing programs, technical education, access
to advanced releases of new technology, and joint sales opportunities. The
Company currently has partner relationships with 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 and Veritas Software
Corporation.
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Enhancing Annuity Service Base
The Company has established a national customer service center and help
desk in support of its customer base. Services are provided on an annual or
multi-year contract basis. In addition to being an important customer
satisfaction and retention tool, the Company views the annuity revenue stream as
an important component to its business into the future. The Company intends to
focus heavily on expanding this revenue base through marketing initiatives as
well as through expanded service offerings, such as remote system and network
monitoring, application specific support, and web server hosting, which can all
be delivered through the service center infrastructure.
- Leveraging Operational Efficiencies
The Company is able to provide certain operational efficiencies to its
acquired companies in the form of centrally managed accounting and financial
reporting, human resources programs, common operating procedures, marketing and
business development and vendor contract management. By automating those
functions, which are appropriate, the Company believes that its regional offices
will have greater ability to focus on the continued development of their
customer base.
ACQUISITION STRATEGY
The Company believes there are many attractive acquisition candidates
in its industry because of the highly fragmented composition of the marketplace,
the industry participants' need for capital and their owners' desire for
liquidity. The Company is pursuing an aggressive acquisition program to
consolidate and enhance its position in its current market and to acquire
operations in new markets.
Initially, the Company intends to expand its business through
selective, strategic acquisitions of other companies with complementary
businesses in a revenue range of $5 million to $15 million per annum. Management
believes that companies in this range of revenues may be receptive to the
Company's acquisition program as often they are too small to be identified as
acquisition targets of larger public companies or to attempt independently their
own public offerings. In particular, the Company intends to focus its
acquisition strategy on candidates which have a strong relationship with key
technology vendors, a proven record of delivering high-quality network computing
solutions and a customer base of large and mid-sized companies.
The Company believes it can successfully implement its acquisition
strategy due to: (i) the highly fragmented composition of the market; (ii) its
strategy for creating a national company, which should enhance the acquired
company's ability to compete in its local and regional market through an
expansion of offered services and lower operating costs; (iii) the additional
capital that management anticipates will become available for internal growth;
(iv) the potential for increased profitability as a result of the Company's
centralization of certain administrative functions, greater purchasing power,
and economies of scale; (v) the Company's status as a public corporation; (vi) a
decentralized management strategy, which should, in most cases, enable the
acquired company's management to remain involved in the operation of the
Company; and (vii) the ability to utilize its experienced management in
identifying acquisition opportunities.
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Management defines a "platform acquisition" as one that creates a
significant presence for the Company in a new geographic market. The Company
intends, where possible, to make a platform acquisition in a targeted market by
acquiring an established, high quality local company. The Company will retain
the management as well as the operating, sales and technical personnel of a
platform acquisition to maintain continuity of operations and customer service.
The Company will seek to increase an acquired company's revenues and improve its
profitability by implementing the Company's operating strategies for internal
growth.
A "tuck-in" acquisition on the other hand will more likely occur in an
existing market, will be smaller than a platform acquisition and will enable the
Company to offer additional services or expand into secondary markets within the
region already served. When justified by the size and business line of an
existing market acquisition, the Company expects to retain the management, along
with the operating, sales and technical personnel of the acquired company while
seeking to improve that company's profitability by implementing the Company's
operating strategies. The Company also contemplates effecting tuck-in
acquisitions of small companies or individual systems integration operations in
existing markets. In most instances, operations acquired by tuck-in acquisition
can be integrated into the Company's existing operations in that market,
resulting in elimination of duplicate overhead and operating costs.
ACQUISITION PROGRAM
During 1998, the Company completed the acquisition of six companies
with combined revenues of approximately $48.4 million in their respective fiscal
years prior to the acquisition. These acquisitions are intended to shift the
Company's business toward the higher margin consultative and service oriented
information technology solutions. These acquisitions also increased the
Company's geographic presence in the Southeast, Southwest, Midwest and Southern
regions of the United States, thereby allowing the Company to more effectively
provide services to large regional and national accounts while at the same time
utilizing skill sets from other parts of the country that may not have otherwise
been available.
The following information provides a summary of the acquisitions
completed by the Company during 1998:
SOLSOURCE COMPUTERS, INC. ("Solsource"): On March 17, 1998, the Company
acquired Solsource pursuant to the terms of an Agreement and Plan of Merger.
Upon closing, through a wholly-owned subsidiary, the Company 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 and certain earnout provisions. Solsource
generated proforma revenues of approximately $6.5 million during the year ended
December 31, 1998. Solsource provides specialized services for security audits,
firewall penetration testing and anti-virus protection.
H.V. JONES, INC. ("HV Jones"): On March 17, 1998, the Company 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, the Company acquired 100% of the outstanding capital stock of HV
Jones for merger consideration of $1,975,000; consisting of
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$395,000 in cash, $1.58 million (105.3 shares) in Series C Convertible Preferred
Stock and a two-year earnout based upon the gross profit and net income of HV
Jones payable in additional shares of Common Stock. HV Jones generated proforma
revenues of approximately $14.9 million during the year ended December 31, 1998.
HV Jones provides proprietary services and turnkey technology infrastructure
solutions in the areas of business assessment, enterprise resource planning,
interoperability, database, networking and security.
OPEN SYSTEM TECHNOLOGIES, INC. ("OST"): On April 24, 1998, the Company
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. OST generated proforma revenues of
approximately $10.5 million during the year ended December 31, 1998. OST
installs open-system computer products that provide businesses with
comprehensive solutions for network integration, internet access, system
security, network and systems management, including enterprise-wide backup. OST
offers Lawson Software, a comprehensive package that streamlines business
operations through integrated financial, human resources, procurement, and
supply chain management software.
OPEN BUSINESS SYSTEMS, INC. ("OBS"): On June 22, 1998, the Company
completed the acquisition of 100% of the outstanding capital stock of OBS for
merger consideration of $4.0 million; consisting of $2.0 million in cash, $2.0
million in newly issued common shares priced at $5.52 per share and a three-year
earnout based on the sales revenues and net income of OBS payable in additional
shares of Common Stock. OBS generated proforma revenues of approximately $17.9
million during the year ended December 31, 1998. OBS is known nationwide for its
expertise in Java technology, a universal language that operates on any
platform. OBS was the first reseller in North America to be named an Authorized
Java Center by Sun Microsystems. In addition, OBS furnishes comprehensive
enterprise wide networking and security solutions, with a specialty in the
fields of web design and electronic commerce.
ELECTRONIC COMMERCE NETWORK SOLUTIONS CORPORATION ("E-Comm"): On
October 8, 1998, Osage acquired E-Comm pursuant to the terms of an Agreement and
Plan of Merger. Upon closing, through a wholly-owned subsidiary, Osage acquired
100% of the outstanding stock of E-Comm for merger consideration of $1.25
million; consisting of $232,500 in cash, $930,000 in newly issued common shares
priced at $6.21 per share, $87,500 in a key employee retention program and a
two-year earnout based upon the consulting revenues of E-Comm payable in cash
and additional shares of Common Stock. E-Comm generated proforma revenues of
approximately $1.9 million during the year ended December 31, 1998. E-Comm is a
full service system and infrastructure integration-consulting firm with services
ranging from strategic planning to implementation and support. E-Comm also
designs and implements mission-critical solutions including systems management,
remote and mobile computing, process and workflow consulting, and distributed
computing.
INTRANET SOLUTIONS, INC. ("IntraNet"): On October 15, 1998, the Company
completed the acquisition of the systems integration business of IntraNet for
merger consideration of $1.6 million; consisting of $1.535 million in cash,
$100,000 in a key employee retention program and a two-year earnout based upon
the net revenues and gross profit generated by the former IntraNet employees
retained by the Company payable in additional shares of Common Stock. The
Minnesota region
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generated proforma revenues of approximately $13.9 million during the year ended
December 31, 1998.
Through its internal and acquisition growth, the Company expanded its
operations from Phoenix, Arizona to San Diego California, Houston, Texas,
Austin, Texas, San Antonio, Texas, Ft. Lauderdale, Florida, Chicago, Illinois,
Minneapolis, Minnesota, Madison, Wisconsin, Washington D.C. and New York, New
York.
PRODUCTS AND SERVICES
The Company is a provider of network computing solutions. The Company's
system life-cycle methodology consists of 4 major components which address all
phases of a customer's information technology project including: business needs
analysis, system architecture design, system implementation, and ongoing systems
management and support.
The Company has developed solutions in a number of focused practice
areas. Each of these practice areas uses the system life-cycle approach to
develop and deploy solutions.
Enterprise Infrastructure
The enterprise infrastructure practice provides solutions to a
customer's requirements relative to its overall computer systems and network
infrastructure. In general, the overall focus of this practice is to provide a
computing infrastructure that meets the customer's business requirements with
respect to reliability, availability, and serviceability. Specific solutions
address custom needs such as: network security, electronic messaging, systems
and network design and integration, and database and application integration.
The enterprise infrastructure practice partners with several industry-leading
vendors of information technology products, such as Sun Microsystems, Inc.,
Cisco Systems, Inc., Oracle Corporation, Veritas Software Corporation, Check
Point Software Technologies, Ltd., Inktomi Corporation, and Netscape
Communications Corporation to deliver solutions.
Network Security
The growth in internet activity and connections has provided a huge
opportunity for business, however, at the same time it has exposed businesses to
risk through unauthorized access to corporate data which is mission-critical and
confidential. It is more important now than ever to ensure that customer
networks and data are secure. The Company has built a practice around data and
network security, which is a rapidly growing market. The service and product
offerings in this area are numerous. From a product standpoint, the Company
offers software for firewalls, virus protection, attack recognition, content
protection, network monitoring, data encryption, and user authentication. From a
services perspective, the Company's offerings include services to build a
security policy, design and implement security solutions, perform penetration
testing, carry out security audits, and provide training and support.
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Network Design and Integration
As the business community's use of and dependence upon computer
networks increases, it is becoming increasingly important to implement networks
which are designed to be scaleable and reliable. The Company has gained
significant experience in designing and implementing both local area and wide
area network architectures for its customers.
Additionally, management believes there is a tremendous opportunity for
system integrators in view of the split in the business community over the use
of computer operating systems between UNIX and Microsoft Windows NT. UNIX
appears to have captured a larger share of the enterprise-computing environment,
whereas Windows NT has a larger percentage of the workgroup server and desktop
market. The traditional enterprise application such as financial applications,
distribution, manufacturing and order entry are typically run in a UNIX or
mainframe environment, whereas the workgroup technologies that have been
commonly deployed on the internet have been typically rendered on the Windows NT
platform. In order for applications such as SAP, BAAN and Peoplesoft to be made
available over the Internet, UNIX and Windows NT must be effectively integrated
to a reliable and stable computing infrastructure. This creates tremendous
opportunities for systems integrators such as the Company to provide network
interoperability services to middle market and Fortune 1000 companies.
Electronic Messaging
The advent of the Internet has brought electronic messaging (e-mail) to
virtually every aspect of business. While growth in this area has paved the way
for companies to do business over the Internet (inter-company communication as
well as business to business electronic commerce), it has also created a
technology management nightmare for corporations around the world. Products from
a multitude of hardware and software vendors have created a mixture of
incompatible technologies. The Company helps these customers design and build
messaging networks that will become the infrastructure for their e-mail systems.
E-mail is no longer being looked at as a novelty. It is now being viewed by many
medium and large-sized companies as a necessity. Unfortunately, these systems
have not been designed with the features that are necessary to achieve
compatibility among systems. The Company provides the correct mix of computer
hardware, software and expertise to design and implement messaging networks and
systems. The Company can help evaluate, select, test, design, implement, and
support networks for a variety of end users from small single location users to
large industrial multi-location users.
Database and Application Integration
As data has proliferated within corporations, it has done so using many
formats, technologies, and system platforms. For example, manufacturing and
distribution information may be stored on a mainframe or enterprise UNIX system
while sales and marketing information is likely stored on personal computers in
small departmental networks and product information is being stored on UNIX
based engineering workstations and networks. This data is often fragmented,
stored in many different products and formats, and can be difficult to access
and consolidate. Data needs to be integrated with information that is currently
available on a company's web-site, and made accessible in a secure manner. This
has created a need to develop systems that will standardize and centralize data
storage and delivery techniques. The Company offers products and services that
are designed to
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accomplish this. These services include database installation, performance
tuning, database design, database management and administration, as well as data
migration.
Enterprise Resource Planning ("ERP")
Enterprise resource planning (ERP) systems are being viewed by many
organizations as integral components of their business operations. ERP systems
allow an organization to organize, manage, and distribute mission critical data
throughout their organization. In response to this market need the Company has
organized an ERP practice which is capable of delivering a complete ERP solution
to its customers. The ERP practice aligned with Lawson, a leading supplier of
ERP software to the middle market, provides solutions in business functional
areas such as integrated financial accounting, human resources and supply chain
management.
Java Development
Sun Microsystems' Java programming language is rapidly gaining market
share and momentum as the software development platform of choice for Internet
applications. The Company believes that there is a tremendous emerging
opportunity in the Java development market. The Company's Java development
practice provides customers with custom developed application solutions. Through
its authorized Java center facility, the Java development practice has delivered
customized applications solutions for a number of customer business needs
including: electronic bill presentment and payment, customer information
management, and freight forwarding.
Electronic Commerce
As businesses are becoming more comfortable with the stability,
reliability, and security of the Internet there is a sharp increase in both the
number and size of business transactions being conducted across this medium. The
Company's electronic commerce practice addresses customers' requirements to
utilize the World Wide Web as a vehicle for transacting business both internally
and externally. The electronic commerce practice leverages its partnership with
leading suppliers of electronic commerce software, such as Netscape, I-Cat, and
Interworld to deliver a complete electronic commerce solution.
Web Solutions
An organization's presence on the World Wide Web is no longer viewed as
a quaint artifact but rather as an important marketing and brand development
tool. The Company's web solutions practice has the skills necessary to assists
customers in developing their World Wide Web strategy as well as the content
required for an impactful web site. The web solutions practice also offers
services in web site hosting and maintenance, which allows a customer to
completely outsource their web site operations.
Electronic Publishing
As the number of electronic documents within an organization grows, it
becomes an issue as to how these documents can be managed as corporate assets.
The Company's electronic publishing
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practice assists its customers in developing a strategy for the management and
distribution of its documents. The electronic publishing practice partners with
product companies such as Adobe and Intranet Solutions to deliver complete
electronic publishing solutions.
Osage Support Center
As the solutions which the Company offers to its customer base
proliferates, the importance of providing high quality customer support
increases. In response to this need, the Company has implemented a 24-hour by 7
day per week customer help desk and support center. The support center provides
contracted levels of support to its customer base on an annual and multi-year
basis.
SALES AND MARKETING
The Company's customer base has historically been concentrated with
several large customers who in 1996 and 1997 accounted for approximately 65.6%
and 71.2% of net sales, respectively. This included one Fortune 500 corporation
that alone accounted for 43.9% and 64.8% of net sales for 1996 and 1997,
respectively. As the Company's revenues have increased and the geographic scope
of its business has expanded significantly, the Company's dependence on its
largest customers has substantially diminished. During 1998, the Company's three
largest customers accounted for approximately 32.8% of net sales, with its two
largest customers accounting for 16.7% and 10.1%, respectively, of net sales.
The remainder of the Company's customers, none of whom accounted for more than
10% of net sales, were comprised of a diversified base of small to medium size
companies in industries such as semi-conductor, manufacturing, publishing,
hospitality, distribution, military, education and state and local government.
The Company currently focuses its marketing and sales efforts on
referrals from vendors and major corporations through its direct sales and
marketing staff. The Company believes that its direct sales and support,
including having salespersons serve as client-relationship managers, lead to
better account penetration and management, better communications and long-term
relationships with its clients and more opportunities for follow-on sales of
products and services to its existing client base.
The Company benefits from the name recognition of the products that it
sells and has successfully utilized its relationships with vendors and
manufacturers to build strong product and service sales. The Company currently
maintains value added reseller relationships with its major suppliers: Sun
Microsystems, Inc., Oracle Corporation, Cisco Systems, Inc., Veritas Software
Corporation, Netscape Communications Corporation, Check Point Software
Technologies, Ltd., Inktomi Corporation, Fore Systems, Inc., Lawson Software,
Adobe Systems, Inc., Silicon Graphics, Inc., Merisel and Access Graphics.
Management expects to continue to utilize these relationships.
The Company believes it can gain significant advantage from developing
a highly identifiable national brand focused around its ability to be a complete
solutions provider. Toward this end, the Company has commenced a rapid
transition of its acquisitions from their original operating names and logos to
the Osage name and logo. The company also intends to develop marketing
collateral, customer seminar programs and joint marketing programs with its
strategic partners and suppliers.
12
<PAGE> 13
COMPETITION
The information technology value-added channel is comprised of a large
number of participants and is subject to rapid change and intense competition.
The Company will face competition from system integrators, value-added
resellers, local and regional network services firms, telecommunications
providers, network equipment vendors and computer system vendors, many of which
have significantly greater financial, technical and marketing resources and
greater name recognition and generate greater revenue than the Company does. The
Company expects to continue to face additional competition from new entrants
into its markets. Increased competition may result in price reductions, fewer
client projects, underutilization of Company personnel, reduced operating
margins and loss of market share, any of which could materially adversely effect
its business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors. The failure of the Company to compete successfully would
have a material adverse effect on its business, operating results and financial
condition.
PERSONNEL
As of March 16, 1999, the Company employed 173 persons, of whom 46 were
engaged in sales and marketing, 79 were engaged in providing the Company's
technical and consulting services and 48 were engaged in finance, administration
and management functions.
None of the Company's employees are covered by a collective bargaining
agreement. There is increasing competition for experienced technical
professionals and sales and marketing personnel. The Company's future success
will depend in part on its ability to continue to attract, retain and motivate
highly qualified personnel. The Company considers relations with its employees
to be good.
RISK FACTORS
1. RECENT NET LOSSES
The Company incurred a net loss of $3,024,052 for the year ended
December 31, 1998, of which $2,368,571 of the loss was incurred during the
fourth quarter. Although management is confident that, as greater operating
efficiencies are achieved and other nonrecurring factors are addressed, the
Company's losses will subside, there can be no assurances to this effect.
Notwithstanding management's expectations, should material losses continue, the
Company's operations would be adversely effected and the continued
implementation of its acquisition program would be significantly delayed.
2. RISKS ASSOCIATED WITH ACQUISITION STRATEGY
One of the central elements of the Company's business strategy is to
achieve growth through acquisitions and to focus future growth on the higher
margin services segment of its operations. Due to the early stages of the
Company's acquisition program, there can be no assurances as to the long-term
impact of the Company's acquisition strategy on the gross profits or net income
of the Company. During 1998, the acquisition strategy may have contributed
towards the net loss of the
13
<PAGE> 14
Company in several respects. First, certain of the acquired companies have
continued to incur losses from operations, or have required significant cash
advances from the Company, which, in turn, has adversely effected the Company's
results of operations. Second, the acquisition strategy has caused the Company
to significantly increase its selling, general and administrative expenses which
have also contributed negatively toward the Company's results of operations. As
net sales continue to increase, however, the Company's overhead will be spread
over a larger revenue base which is expected to have a positive impact on the
Company's results of operations.
Management anticipates that future profitability is likely to depend
upon a combination of many factors. First, the continued growth of its business
through acquisitions. Second, the management of the growth through the
integration of the businesses acquired. Third, the continued expansion of the
Company's higher margin service business. Continuation of the Company's growth
strategy, however, is dependent upon a number of factors. First, the Company
must continue to have adequate capital resources to continue to finance the
acquisitions. In view of the Company's recent losses and limited available
financing, its ability to finance cash acquisitions is presently limited.
Second, the continued availability of an adequate supply of acquisition targets
at reasonable purchase prices. Increased competition for acquisition candidates
could reduce the pool of available targets and could increase acquisition
prices.
3. NEED FOR ADDITIONAL FINANCING; RISKS RELATED TO ACQUISITION
FINANCING
In order to pursue its acquisition strategy in the long term, the
Company will require additional financing, which it will attempt to secure
through a combination of traditional debt financing, the issuance of its shares
and the placement of debt and equity securities. To the extent acquisitions can
be financed through Company securities, the need for cash resources is somewhat
mitigated. In the event that the Company's Common Stock does not attain or
maintain a sufficient market value, or potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for the
sale of their businesses, the Company will be required to utilize more of its
cash resources, if available, in order to maintain its acquisition program. If
the Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
4. ADDITIONAL DILUTION ASSOCIATED WITH EXISTING CONVERTIBLE
SECURITIES AND POSSIBLE FUTURE ACQUISITIONS.
The Company is presently authorized to issue 50,000,000 shares of
Common Stock, of which 9,411,058 are outstanding as of the date of this Report.
The Company may in the future be caused to issue up to approximately 660,352
shares of its Common Stock (subject to potential upward adjustment) upon the
conversion of its outstanding Series A, Series C, Series D and Series E
Convertible Preferred Stock. The Company may also in the future be caused to
issue up to approximately 4,212,268 shares of its Common Stock upon the exercise
of outstanding stock options and warrants. Together with conversion of
outstanding shares of preferred stock, an exercise of outstanding options and
warrants could conceivably result in an increase in the Company's outstanding
shares of Common Stock from 9,411,058 to 14,283,678 or more. Issuance of this
many shares is likely to have an extremely dilutive effect upon the existing
stockholders.
14
<PAGE> 15
The Company may also be caused to issue additional shares of Common
Stock in the future in connection with earn-out provisions of certain prior
acquisitions, the adjustments feature of the shares issued in the Merger,
pending or future acquisitions, or for other valid business purposes within the
discretion of the Board of Directors.
5. INFLUX OF SHARES ELIGIBLE FOR SALE
Sales of substantial amounts of the Company's Common Stock in the
public market could have an adverse effect on the market price of the Company's
Common Stock and make it more difficult for the Company to sell its equity
securities in the future at prices it deems appropriate. As of the date of this
Report, the Company had 9,411,058 shares of Common Stock outstanding, of which
approximately 4.4 million were eligible for public resale. By virtue of
registration rights granted in connection with private placement transactions
and acquisitions, and as a result of the lapse of the holding period for
restricted securities under Rule 144 of the Securities Act of 1933,
approximately 2.2 million shares will become eligible for public resale during
the summer of 1999, and up to an additional approximately 2.9 million shares
will become eligible for public resale periodically during the remainder of
1999. Sale of these shares in the public market, or the perception that such
future sales could occur, may adversely effect the market price of the Company's
Common Stock and could impair the Company's ability to obtain capital through
offerings of equity securities.
6. CLASSIFIED BOARD; DELAWARE ANTI-TAKEOVER LAW
The Company has classified the Board of Directors into three classes,
with the members of one class (or approximately one-third of the Board) elected
each year to serve a three-year term. A director may be removed only for cause
by a vote of the holders of two-thirds of the Company's outstanding securities.
The classified Board of Directors makes it more difficult to change majority
control of the Board, which may discourage attempts by third parties to make a
tender offer or otherwise obtain control of the Company, even if such attempt
would be beneficial to the Company and its stockholders.
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or, within
three years, did own) 15% or more of the corporation's voting stock. The
supermajority voting provisions in the Company's bylaws and the provisions
regarding certain business combinations under the GCL could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices.
15
<PAGE> 16
7. SUBSTANTIAL RELIANCE ON KEY CUSTOMERS
The Company's dependence on its largest customers has diminished as
revenues have increased and the geographic scope of its business has expanded.
The largest customer which in 1996 and 1997 accounted for 43.9% and 64.8% of net
sales, respectively, accounted for only 16.7% of net sales in 1998. Two other
customers accounted for 6.0% and 10.1% of the Company's net sales for the year
ended December 31, 1998. Based upon historical and recent results and existing
relationships with customers, although the Company's dependence on its largest
customers has been reduced, management believes that a substantial portion of
its net sales and gross profits will continue to be derived from sales to the
Company's largest customers.
8. SUBSTANTIAL VARIABILITY OF QUARTERLY OPERATING RESULTS
In the past, the Company's operating results have varied substantially
from quarter to quarter, and management expects that they will continue to do
so. The Company's quarterly operating results are influenced by; among others:
- the timing, size and stage of projects;
- new service introductions by the Company or its
competitors;
- information technology outsourcing trends;
- the hiring of additional staff and increased selling
and administrative expenses associated with the
Company's growth;
- changes in the Company's billing and employee
utilization rates; and
- incurring costs for projects in periods prior to
recognizing revenues for such contracts.
The Company plans its operating expenditures based on revenue
forecasts, and a revenue shortfall below such forecast in any quarter would
likely adversely effect the Company's operating results for the quarter.
Management believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future performance.
9. HIGHLY COMPETITIVE INFORMATION TECHNOLOGY SERVICES INDUSTRY
The Company's business is highly competitive. Many of the Company's
competitors have longer operating histories, possess greater industry and name
recognition and have significantly greater financial, technical and marketing
resources. Additionally, the Company expects to continue to face additional
competition from new entrants into its markets.
16
<PAGE> 17
10. COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
The Company's success on a longer-term basis, will depend upon its
ability to attract, retain, train and motivate highly skilled employees,
particularly project managers and other senior technical personnel. Such
qualified personnel are in great demand, there is significant competition for
such employees and it is likely that access to such personnel will remain
limited for the foreseeable future. There can be no assurance that the Company
will be successful in attracting a sufficient number of such personnel in the
future, or that it will be successful in retaining, training and motivating the
employees it is able to attract.
11. RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The Company's success depends in part on its ability to develop
solutions that keep pace with continuing changes in information technology,
evolving industry standards, and changing customer objectives and preferences.
There can be no assurance that the Company will be successful in adequately
addressing these developments on a timely basis. Even if these developments are
addressed, the Company may not be successful in the marketplace. In addition,
competitor's products or technologies may make the Company's services
non-competitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on its business.
12. DEPENDENCE ON SUPPLIERS
The Company's business depends upon an adequate supply of hardware,
software products and computer systems at competitive prices and on reasonable
terms. Consequently, the Company's results of operations are dependent, in part,
upon the demand for, price of, technical capabilities of and quality of the
products available for resale. The Company's principal supplier is Sun
Microsystems, Inc. It is also supplied by Oracle Corporation, Netscape
Communications Corporation, Cisco Systems, Inc. and Hewlett Packard Company.
To mitigate the risk of product shortage, the Company attempts, when
possible, to procure some hardware and software products from multiple sources.
Some products are available from only a single source, as manufacturers elect to
provide a direct relationship with system integrators. The Company has supply
contracts with its vendors and purchases hardware and software products, and
computer systems on a purchase order basis. As a result, there can be no
assurance that such products will continue to be available as required at
acceptable prices or on acceptable terms.
Prior to the fourth quarter of 1998, the Company had not experienced
any material problems with its suppliers. During the fourth quarter of 1998,
shortages of products from the Company's principal vendor significantly
disrupted the orderly flow of products and had a material adverse effect on the
Company's results of operations. See ITEM 6. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS."
13. EFFECTS OF YEAR 2000 ISSUE
The purchasing patterns of clients or potential clients may be affected
by year 2000 issues as companies expend significant resources to ensure that
their current systems are year 2000 compliant. These expenditures may result in
reduced funds being available to purchase services offered by the
17
<PAGE> 18
Company which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, although the Company
does not believe that year 2000 issues will have a significant impact on its
internal operations or on solutions developed for clients where the Company has
provided an express warranty regarding the year 2000 issue, there can be no
assurance that the Company will not experience interruptions of operations
because of year 2000 problems or become involved in disputes with clients
regarding year 2000 problems involving solutions that the Company developed or
implemented or the interaction of such solutions with other applications. Year
2000 problems could require the Company to incur unanticipated expenses, and
such expenses could have a material adverse effect on the Company's business,
financial condition and results of operations.
14. DIVIDENDS
No dividends have been paid by the Company since inception and the
payment of dividends on the Company's Common Stock is not contemplated in the
foreseeable future. The payment of future dividends on the Company's Common
Stock will be directly dependent upon our earnings, our financial needs and
other similarly unpredictable factors. Earnings, if any, are expected to be
retained to finance and develop the Company's business.
15. POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has been and in the
future may be highly volatile. Some factors that may affect the market price
include:
- actual or anticipated fluctuations in operating
results;
- announcements of technological innovations or new
commercial products or services by the Company or its
competitors;
- market conditions in the computer software and
hardware industries generally;
- changes in recommendations or earnings estimates by
securities analysts; and
- actual or anticipated quarterly fluctuations in
financial results.
Furthermore, the stock market historically has experienced volatility
which has particularly affected the market prices of securities of many
technology companies and which sometimes has been unrelated to the operating
performances of such companies.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company owns no real property and currently leases all of its
office facilities. The Company's executive and administrative offices consist of
approximately 8,800 square feet of leased office space at 1661 East Camelback
Road, Phoenix, Arizona. These offices are leased for an annual rental of
$135,000, subject to a lease that expires in August 1999.
18
<PAGE> 19
In addition to its executive and administrative offices, the Company
leases office locations for each of its operating subsidiaries on the terms
summarized below:
<TABLE>
<CAPTION>
Lease
Location Square Feet Annual Rental Expiration
-------- ----------- ------------- ----------
<S> <C> <C> <C>
Texas Locations (officers in Approximately $74,000 Various dates from
Houston, Austin and San 7,000 10/31/99-3/15/2002
Antonio)
Carlsbad, CA Approximately $93,000 6/30/2000
6,000
Pompano Beach, FL Approximately $102,000 5/31/2000
9,600
Wooddale, IL Approximately $249,000 8/31/2004
19,000
St. Paul, MN Approximately $103,000 10/31/2004
10,000
Vienna, VA Approximately $70,000 9/20/2003
3,000
Madison, WI Approximately $13,000 10/01/2001
1,000
</TABLE>
The Company believes that it has sufficient space for its current and
anticipated near-term needs. Even when and if certain of the Company's leases
expire, the Company believes there is an adequate supply of suitable leased
office facilities at reasonable rates in the markets in which it currently
operates or in which it contemplates expansion.
ITEM 3. LEGAL PROCEEDINGS.
There are currently no legal proceedings pending to which the Company
is a party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter ended December 31,
1998, to a vote of the Company's security holders.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since November 20, 1998, the Company's Common Stock has been listed on
the American Stock Exchange under the symbol "OSE". For all other prior periods
covered by this Item, the Company's Common Stock was listed on the OTC Bulletin
Board under the symbol "OSGE."
The following table sets forth the range of high and low prices of the
Company's Common Stock by fiscal quarters for the periods indicated. As to
periods prior to November 20, 1998, prices are based on high and low closing bid
prices as reported by National Quotations Bureau, LLC. Commencing November 20,
1998 and thereafter, prices are based on high and low closing sales prices as
reported by the American Stock Exchange.
<TABLE>
<CAPTION>
Common Stock(1)
----------------------
High Low
---- ---
<S> <C> <C>
1997
1st Quarter $0.25 $0.10
2nd Quarter $0.25 $0.25
3rd Quarter $0.37 $0.25
4th Quarter $4.00 $0.12
1998
1st Quarter $6.875 $4.00
2nd Quarter $7.50 $4.50
3rd Quarter $7.43 $6.00
4th Quarter $6.75 $4.50
1999
1st Quarter (2) $7.87 $4.50
</TABLE>
- ----------
(1) Prices reflected prior to November 20, 1998 are inter-dealer prices
without retail mark-ups or commissions and may not represent actual
transactions.
(2) Through and including March 16, 1999.
The last reported sales price of the Common Stock was $6.87 as reported
on the American Stock Exchange on March 16, 1999.
RECORD HOLDERS
As of March 16, 1999, there were approximately 303 holders of record of
the Common Stock. Based upon depository requests in connection with the
distribution of its most recent Proxy
20
<PAGE> 21
Statement, the Company believes the number of beneficial owners of its Common
Stock exceeds 900.
DIVIDENDS
The Company has not paid any cash dividends, to date, and has no
intention to pay any cash dividends on its Common Stock in the foreseeable
future. The declaration and payment of dividends is subject to the discretion of
the Board of Directors and to certain limitations under the General Corporation
Law of the State of Delaware. The timing, amount and form of dividends, if any,
will depend, among other things, on the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1997, the Company sold $450,000 principal amount of Senior
Secured Notes and warrants to purchase 135,000 shares of Common Stock at an
exercise price of $.10 per share, in a private placement transaction exempt
under Section 4(2). The Warrants were subsequently canceled in December 1997 in
exchange for shares of Common Stock as set forth below:
<TABLE>
<CAPTION>
Amount of Common Stock
8% Senior Exchanged
Name Secured Notes Warrants for Warrants
- ---- ------------- -------- ------------
<S> <C> <C> <C>
Elliot Braun 25,000 7,500 7,200
Robert Brvenik 20,000 6,000 5,800
Bernard Buchwalter 40,000 12,000 11,500
Dune Holdings, Inc. 100,000 30,000 29,250
Bermuda Trust Company, Trustee
for The Elanken Family Trust 65,000 19,500 18,900
Robert Friedman 75,000 22,500 21,500
Anthony Kamin 50,000 15,000 14,650
Jeffrey Markowitz 75,000 22,500 22,100
------- ------- -------
TOTAL 450,000 135,000 130,900
</TABLE>
2. During the period from May 1997 to October 1997, the Company issued
in the aggregate 172,183 shares of Common Stock in consideration for services
rendered, release of debt and various other claims which the parties may have
had against the Company in transactions exempt under Section 4(2) of the Act, as
a transaction by an issuer not involving a public offering, as set forth below:
<TABLE>
<CAPTION>
Number of Shares
Name Common Stock Consideration
- ---- ---------------- -------------
<S> <C> <C>
Paul Jeffrey Adelizzi 10,500 $ 50,000
Burt Ahrens 3,293 $ 32,932
Arthur Anderson 2,267 $ 45,349
Robert Brvenik 5,000 $ 5,000
Bernard Buchwalter 6,500 $ 5,000
Catalina Plastics 3,500 $ 40,826
Mark Dutton 7,500 $ 25,000
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
Bermuda Trust Company, Trustee
for The Elanken Family Trust 31,100 $ 85,000
Stan Freberg 1,000 (1)
Richard Friedman 5,000 $ 5,000
Anthony Kamin 5,000 $ 5,000
Sy Leslie 3,293 $ 32,932
Alan Livingston 21,730 $ 217,298
Christopher Livingston 2,500 (2)
Jeffrey Markowitz 5,000 $ 5,000
Frank Piazza 2,500 (2)
Jason Rabinovitz 1,500 $ 15,000
R.R. Donnelly & Sons Company 11,000 $ 203,168
Rubin Baum Levin Constant & Friedman 7,500 $ 115,000
Richard Someck 6,500 $ 5,000
Ike Suri 15,000 $ 50,000
Robert Poulson 15,000 $ 15,000
--------- ---------
TOTAL 172,183 $ 957,505
</TABLE>
- ----------
(1) In consideration for certain rights to copyright.
(2) In consideration for certain music rights.
3. In November 1997, the Company sold 3,185,080 shares of Common Stock
to accredited investors in a private placement transaction exempt from
registration pursuant to Rule 506 of Regulation D. In connection with this
transaction, no brokerage commissions were paid. The following persons purchased
shares at $.10 per share.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
101 Investments, Inc. 5,000
Howard & Shari Borenstein 15,000
Capital Growth Trust 180,000
Clifton Capital 170,000
Cecile T. Coady 10,000
David M. Daniels 200,000
Diversified Investment Fund L.P. 50,000
Jere Dumanic 50,000
Bermuda Trust Company for The Elanken Family Trust Trustee
20,000
El Paso Holdings Ltd. 125,000
Bruce Ginsburg 15,000
Godwin Finance Ltd. 350,000
KAB Investments, Inc. 100,000
Michael Dane Ibsen 20,000
Interbanc Mortgage Services, Inc. 200,000
Steven D. Levin 15,000
Millworth Investments Inc. 175,000
Keith E. Myers 30,000
PRE Investors L.P. 641,692
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
Steven B. Rosner 190,000
SPH Equities, Inc. 73,388
Chad Shusman 10,000
SPH Investments, Inc. Profit Sharing Plan dtd 12/1/92 f/b/o Stephen
P. Harrington 50,000
SPH Investments, Inc. 50,000
Harvey Sternberg 15,000
Synergy Group, Inc. 250,000
West Tropical Investments Corp. 175,000
---------
TOTAL 3,185,080
</TABLE>
- ----------
4. In December 1997, the Company sold 122 shares of Series A $3.00
Convertible Preferred Stock at a purchase price of $30,000 per share to
accredited investors in a private placement transaction exempt from registration
pursuant to Rule 506 of Regulation D. Each Series A Share is convertible into
10,000 shares of Common Stock. In connection with this transaction brokerage
commissions and related fees of $160,000 were paid.
The following persons purchased shares:
<TABLE>
<CAPTION>
Name Shares of Series A Stock
- ---- ------------------------
<S> <C>
Phil Albrecht, Jr. 2
Myles Bass 9.333
Paul Beenan 2
Timothy Paul Buck 1
Bernard Cohen 2
Commonwealth Insurance Company Profit Sharing Plan 1
Frank DeLuca 2
DeSilva & Partners, Inc. Self Directed Retirement Fund 1
Dewey Investment Partnership Ltd. 10
EquiTech, Inc. 1
Hamid Ebrahimi 2
Bermuda Trust Company, Trustee
for The Elanken Family Trust 16.667
Daniel Gooze 4
Bernard Hollander Family Trust 1
Richard Joyce 17
Eckard Kirsch 1.5
Douglas Martin 1
Morris Asset Management, Inc. .5
Torrey Mosvold 4
MSB Research Inc. 8
Chaim Rajchenbach .5
Moshe Rajchenbach .5
Naomi Treger Rajchenbach 1
Louis Rambler 1
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
Sherwin and Helen Ray 1
Gary Rein 1
James C. and Patricia J. Rives 3
Ira Saligman 1
Pinchas and Nahma Schwartz 1
Jonathan Shecter 1
Leonard Silvestri 1
Jeff Sokolin 1
John N. Straub Ltd., a Professional Medical Corporation 1
Al Terrell .334
Burton Turk 1
Roderic S. Ware 2
Will's Wei Corp. 16.666
Kevin Wyllie 1
------
TOTAL 122
</TABLE>
5. As of December 22, 1997, the Company issued a total of 1,100,000
shares of Common Stock (the "Merger Shares"), 50 shares of Series B $3.00
Convertible Preferred Stock and 800,000 options (the "Merger Options") to the
stockholders set forth below in exchange for 100% of the stock of Osage Computer
Group, Inc., an Arizona corporation.
The Merger Options were granted at an exercise price equal to the lower
of $3.00 or 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. The
Merger Options vest once the future earnings of the Company attain certain agree
upon levels, and are contingent upon the holder's continued employment by the
Company.
<TABLE>
<CAPTION>
Shares of Series B
Name Common Stock Shares Options
- ---- ------------ -------- -------
<S> <C> <C> <C>
Jack Leadbeater 456,500 20.75 332,000
David Olson 456,500 20.75 332,000
Steven Rigby 55,000 2.5 40,000
Chris Donahue 55,000 2.5 40,000
Dale Van De Vrede Family Trust 55,000 2.5 40,000
Rick Gunther 22,000 1.0 16,000
--------- ----- -------
TOTAL 1,100,000 50.0 800,000
</TABLE>
In connection with the Merger, the Company also granted 200,000 shares
of Common Stock to Michael Glynn in consideration for his future employment
services. These shares vest 50% after one year of employment and 50% after the
second year of employment. The issuance of such securities was exempt from
registration pursuant to Section 4(2) of the Act, as a transaction by an issuer
not involving a public offering.
On June 12, 1998, the Company issued new options to purchase 1,600,000
shares of its common stock (the "New Options") to the former shareholders of
Osage Computer Group, Inc. in
24
<PAGE> 25
exchange for the surrender by such shareholders of the Merger Options. The New
Options are subject to an exercise price of $4.50 per share and expire if not
exercised by December 19, 2003. The New Options were granted to the following
individuals:
<TABLE>
<CAPTION>
Name Number of Options
---- -----------------
<S> <C>
Jack R. Leadbeater 664,000
David S. Olson 664,000
Steve Rigby 80,000
Chris Donahue 80,000
Dale Van deVrede Family Trust 80,000
Rick Gunther 32,000
---------
TOTAL 1,600,000
</TABLE>
The New Options were granted in a private transaction exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving a public offering.
6. In January 1998, the Company sold 600,000 shares of Common Stock at
a purchase price of $3.50 per share to accredited investors in a private
placement transaction exempt from registration pursuant to Rule 506 of
Regulation D as set forth below. In connection with this transaction, a
brokerage fee was paid of $126,000 and options to purchase 200,000 shares of
Common Stock at an exercise price of $3.50 per share with a term of three years.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Lancer Partners, L.P. 210,000
Lancer Offshore Inc. 320,000
Lancer Voyager Fund 50,000
Michael Lauer 20,000
-------
TOTAL 600,000
</TABLE>
7. In March 1998, the Company issued 150,000 shares of Common Stock in
consideration of the acquisition of 100% of the outstanding capital stock of
Solsource Computers, Inc. The Company may have an obligation to issue additional
shares of Common Stock pursuant to the Agreement and Plan of Merger among the
Company, Solsource Acquisition Corp. and Solsource Computers, Inc., if certain
performance criteria are met.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Trust of Daniel J. and Mary Vahalla 146,297
Gary Gwin 3,111
Maureen Gaare 296
Daniel Grube 296
-------
TOTAL 150,000
</TABLE>
25
<PAGE> 26
The issuance of such securities was exempt from registration pursuant
to Section 4(2) of the Act, as a transaction of issuer not involving a public
offering.
8. In March 1998, the Company issued 105.3 shares of Series C
Convertible Preferred Stock to Hugh V. Jones in consideration of the acquisition
of 100% of the outstanding capital stock of HV Jones, Inc. ("Jones"). The 105.3
shares of Series C Convertible Preferred Stock convert into Common Stock during
the next four quarters at a conversion rate equal to the lower of $6.87 or a 33%
premium over the average closing price of the Company's Common Stock for the
(10) trading days prior to each date of conversion. Additional earn-out shares
may be issued if Jones achieves certain performance targets. The issuance of
such securities was exempt from registration pursuant to Section 4(2) of the
Act, as a transaction of issuer not involving a public offering.
9. On April 24, 1998, the Company issued 333,334 shares of Common
Stock to Mr. O. Jack Anderson in connection with the acquisition of 100% of the
outstanding capital stock of Open System Technologies, Inc ("OST"). In
conjunction with the acquisition, the Company agreed to issue 50,000 shares of
Common Stock to an investment banking advisor to the Company in consideration
for services provided in identifying OST as a target company and advising the
Company in connection with the acquisition. The issuance of these securities was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Act") and Rule 506 of Regulation D as an issuer transaction not
involving a public offering.
10. In May 1998, the Company issued 700,000 shares of Common Stock at a
purchase price of $3.50 per share to the accredited investors identified below
in a private placement transaction exempt from registration pursuant to Section
4(2) of the Act and Rule 506 of Regulation D as an issuer transaction not
involving a public offering. In connection with this transaction, the Company
realized gross proceeds of $ 2,450,000 and paid a brokerage fee consisting of a
cash commission of $147,000.
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
Lancer Partners L.P 200,000
Lancer Voyager Fund 100,000
Lancer Offshore Inc. 400,000
-------
TOTAL 700,000
</TABLE>
11. In May 1998, the Company issued 175,000 shares of Common Stock at a
purchase price of $4.25 per share to Will's Wei Corp., an accredited investor in
a private placement transaction exempt from registration pursuant to Section
4(2) of the Act and Rule 506 of Regulation D as an issuer transaction not
involving a public offering. In connection with this transaction, the Company
realized gross proceeds of $743,750 and paid a brokerage fee consisting of a
cash commission of $44,625 and warrants to purchase 25,000 shares of the
Company's Common Stock at an exercise price of $4.25 per share for a term of
three years.
26
<PAGE> 27
12. In May 1998, the Company issued 235,294 shares of Common Stock and
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$4.25 per share for a term of three years, for an aggregate purchase price of
$1,000,000 to Founders Partners IV LLC, an accredited investor, in a private
placement transaction exempt from registration pursuant to Section 4(2) of the
Act and Rule 506 of Regulation D as an issuer transaction not involving a public
offering. In connection with this transaction, a brokerage fee was paid
consisting of a cash commission of $20,000 and warrants to purchase 150,000
shares of the Company's Common Stock at an exercise price of $4.25 per share for
a term of three years.
13. On June 22, 1998, the Company issued 362,330 shares of Common Stock
in connection with the acquisition of 100% of the outstanding capital stock of
Open Business Systems, Inc. ("OBS"). The Company may have an obligation to issue
additional shares of Common Stock if certain performance criteria are met. In
connection with the acquisition, the Company agreed to issue 70,000 shares to an
investment banking advisor to the Company in consideration for services provided
in identifying OBS as a target company and advising the Company in connection
with the acquisition. The issuance of these securities was exempt from
registration pursuant to Section 4(2) of the Act and Rule 506 of Regulation D as
an issuer transaction not involving a public offering. The shares of the
Company's Common Stock were issued at the closing to the following shareholders
of OBS (the "OBS Shareholders"):
<TABLE>
<CAPTION>
Name Shares of Common Stock
- ---- ----------------------
<S> <C>
John Udelhofen 45,291
E. Michael Durbin 45,291
David R. Durbin 45,291
Brian Wolfe 45,291
In escrow for the benefit of
the OBS Shareholders 181,166
-------
TOTAL 362,330
</TABLE>
14. In August 1998, the Company issued 70,000 shares of Common Stock at
a purchase price of $4.75 per share to IP Services Corp., an accredited investor
in a private placement transaction exempt from registration pursuant to Section
4(2) of the Act and Rule 506 of Regulation D as an issuer transaction not
involving a public offering. In connection with this transaction, the Company
realized gross proceeds of $332,500 and paid a brokerage fee consisting of a
cash commission of $33,250 and warrants to purchase 35,000 shares of the
Company's Common Stock at an exercise price of $5.25 per share for a term of
four years.
15. On December 31, 1998, the Company sold 1,000 shares of Series D
Preferred Stock at a purchase price of $1,000 per share for aggregate sales
consideration of $1,000,000. The Series D Preferred Stock is convertible into
common stock at a conversion price of $4.975 per share, subject to adjustment.
As part of the transaction, the Company issued warrants to purchase 100,000
shares of common stock at an exercise price of $5.97. The warrants expire on
December 31, 2001. The shares of Series D Preferred Stock and warrants were sold
to The Cuttyhunk Fund Limited, an institutional investor in a private placement
transaction exempt from registration pursuant to Rule 506 of Regulation D.
27
<PAGE> 28
16. On February 10, 1999, the Company sold 2,000 shares of Series E
Preferred Stock at a purchase price of $1,000 per share for aggregate sales
consideration of $2,000,000. The Series E Preferred Stock is convertible into
common stock at a conversion price of $6.56 per share, subject to adjustment. As
part of the transaction, the Company issued warrants to purchase 150,000 shares
of common stock at an exercise price of $7.875. The warrants expire on February
9, 2002. The shares of Series E Preferred Stock and warrants were sold to
Halifax Fund L.P., an institutional investor in a private placement transaction
exempt from registration pursuant to Rule 506 of Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
OVERVIEW
Through its operating subsidiaries, the Company markets a broad range
of integrated information technology products and professional consulting
services, intended to address all phases of a customer's information technology
needs. The Company's ability to deliver integrated solutions is principally
attributable to its technical expertise and its value-added reseller agreements
with industry-leading vendors of information technology products such as Sun
Microsystems, 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 and Veritas Software Corporation. The Company has also established
relationships with leading aggregators of computer hardware and software
products. These agreements enable the Company to provide its clients with
competitive product pricing, ready product availability and services.
The Company's objective is to provide clients with comprehensive
information technology products, services and support. Management plans to
achieve this goal through a combination of growth through acquisition and
accelerated internal growth. The Company is currently pursuing an aggressive
acquisition strategy to enhance its position in its current markets and acquire
operations in new markets. This strategy will focus on acquiring candidates who
have a proven record of delivering high-quality technical and professional
consulting services, a customer base of large and mid-sized companies and which
may benefit from the Company's long-term growth strategy and status as a public
company. See ITEM 1. "DESCRIPTION OF BUSINESS - ACQUISITION STRATEGY."
Since the adoption of its growth strategy in the beginning of 1998, the
Company has acquired six (6) companies which have significantly contributed to
its revenue base. During 1998, the Company's revenues increased to $61 million,
as compared to $14.2 million during 1997. These acquisitions were accounted for
under the purchase method of accounting for business combinations. Accordingly,
the Company's results of operations include the operations of each of the
acquired companies from the respective dates of acquisition through the end of
the period reported. On a proforma basis, had each of the acquisitions been
completed or reported as of January 1, 1998, the Company's revenues during 1998
would have increased to $83 million.
The Company realizes revenues from the sale of products and services.
Professional services are provided to customers on a time and material basis at
hourly rates or on fixed contract basis that
28
<PAGE> 29
are established based upon the skill level, experience and type of service being
performed. Support contract revenue is recognized over the term of the contract.
Historically, most of the Company's revenues have been derived from the resale
of computer and network hardware and software products. However, in recognition
that market demand is evolving toward higher margin complete information
technology solutions, the Company has adopted as one of its business strategies,
the expansion of its service offerings to the marketplace. During 1998, the
Company's consulting and service revenue increased to 9.6% of overall revenue,
from 2.75% in 1997. Management expects its consulting and service revenue to
increase as a percentage of net sales as it seeks acquisition candidates that
provide services as a major component of their business and expand its internal
service offerings to new and existing customers.
Osage became publicly held by virtue of the Merger into a wholly-owned
subsidiary of the Company on December 22, 1997. The Company then operating under
the name "Pacific Rim Entertainment, Inc." had been an inactive public company
at the time of the Merger. Osage had been a provider of network computing
solutions since 1989. Following the Merger, the Company assumed the continuing
operations of Osage and on March 10, 1998, changed its name to "Osage Systems
Group, Inc." Since, as a result of the Merger, the former stockholders of Osage
acquired a controlling interest in the Company, the Merger has been accounted
for as a "reverse acquisition." Accordingly, for financial statement
presentation purposes, Osage is viewed as the continuing entity and the related
business combination is viewed as a recapitalization of Osage, rather than an
acquisition by the Company.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
29
<PAGE> 30
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
% OF % OF % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
---------- --------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $60,975,674 100.0% $14,191,203 100.0% $9,908,379 100.0%
COST OF SALES 49,430,087 81.1% 11,670,066 82.2% 7,694,775 77.7%
--------------------------------------------------------------------------------
Gross profit 11,545,587 18.9% 2,521,137 17.8% 2,213,604 22.3%
--------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative expenses 15,132,780 24.8% 2,775,794 19.6% 2,094,447 21.1%
Depreciation and amortization 747,815 1.2% 31,546 0.2% 48,527 0.5%
--------------------------------------------------------------------------------
Total operating expenses 15,880,595 26.0% 2,807,340 19.8% 2,142,974 21.6%
--------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,335,008) -7.1% (286,203) -2.0% 70,630 0.7%
INTEREST - NET (218,044) -0.4% (9,731) -0.1% (26,230) -0.3%
--------------------------------------------------------------------------------
INCOME (LOSS) BEFORE BENEFIT FOR
INCOME TAXES (4,553,052) -7.5% (295,934) -2.1% 44,400 0.4%
PROVISION (BENEFIT) FOR INCOME TAXES (1,529,000) -2.5% (3,000) 0.0% 9,464 0.1%
--------------------------------------------------------------------------------
NET INCOME (LOSS) $(3,024,052) -5.0% $ (292,934) -2.1% $ 34,936 0.4%
================================================================================
NET INCOME (LOSS) PER SHARE:
Basic $ (0.40) $ (0.06) $ 0.01
============ ========== ==========
Diluted $ (0.40) $ (0.06) $ 0.01
============ ========== ==========
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Net sales increased by 329.7%, or $46.8 million to $61.0
million, for the year ended December 31, 1998 as compared to $14.2 million for
the prior year. 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 Solutions, Inc. and
opened branch offices in San Antonio, Texas, Washington D.C. and New York, New
York. The acquired companies had combined net sales of approximately $48.4
million in their respective fiscal years prior to acquisition. On a pro forma
basis, the Company would have realized net sales of over $83 million during 1998
had all the acquisitions occurred as of January 1, 1998.
Consulting revenues increased 1,400% to $5.9 million for the year ended
December 31,1998, as compared to $390,600 for the prior year. This increase was
primarily attributable to demand for the Company's consulting services and
technical support resulting from the Company's increased focus on the service
component of its revenue base and through its aggressive growth strategy.
30
<PAGE> 31
The Company's net sales are expected to increase during 1999 as the
Company further implements its acquisition and growth strategy.
The Company's acquisition strategy relies primarily upon identifying
target companies that fit within the Company's acquisition criteria and having
sufficient financing available to complete its planned acquisitions. Although
the Company believes sufficient financing will become available to complete
proposed acquisitions, there can be no assurances to this effect. Presently, the
Company's available financing is being utilized primarily in operations.
Financing sufficient to maintain an aggressive acquisition program will likely
not be available until new or increased sources of financing are made available.
Furthermore, there can be no assurances as to the long-term impact of the
Company's acquisition strategy on the gross profits or net income of the
Company.
Gross Profit. The Company's cost of sales consists primarily of the
cost to the Company of products acquired for resale. The Company's gross profit
increased by 358% or $9.0 million to $11.5 million for the year ended December
31, 1998 as compared to $2.5 million for the prior year. Gross profit margin
increased to approximately 18.9% during the year ended December 31, 1998, as
compared to approximately 17.8% experienced during the prior year. During 1997,
the Company experienced an overall decrease in its gross profit margin. This
decrease was primarily due to cost reductions passed on to the Company's
customers from its major vendors as a result of an increase in demand for the
Company's products which occurred as certain customers increased their volume of
purchases. During the first portion of 1998, the Company experienced downward
pressure on gross profit margins based upon increased sales to certain
customers. During the latter half of 1998, the Company experienced increased
gross profit margins as result of increased margins from certain acquisitions
made during the year, 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. Management
believes that in the long term it will be able to sustain its profit margin as a
result of its focus on providing a broad spectrum of products, services and
support packages, and through a greater emphasis upon professional consulting
and support services which typically have a higher profit margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, sales person
compensation, employee benefits, travel, promotion and related marketing costs.
Selling, general and administrative expenses increased by 445.2% or $12.4
million to $15.1 million for the year ended December 31, 1998 as compared to
$2.8 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. In addition,
competition for personnel with information technology skills is intense and the
Company expects compensation to continue to increase. During 1998, 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. This increase is likely to be offset in the near-term as
the Company's revenues increase and the Company continues its acquisition and
growth strategy. In addition, the Company instituted a cost containment program
in December 1998 whereby synergies of a larger organization were initiated
through the removal of
31
<PAGE> 32
duplication of efforts, consolidation of systems and administrative functions
and the adoption of business processes.
As part of the Company's original acquisition of Osage Computer Group,
Inc. on December 22, 1997, Merger Options were granted to the former Osage
Computer Group, Inc. stockholders at an exercise price of $3.00; however,
vesting was contingent upon the future earnings of the Company and such former
stockholders' continued employment by the Company. Because the Merger Options
were "performance-based", the Company previously reported that it would have to
record compensation expense in the future if the earnings of the Company
achieved agreed upon levels and other events occurred that would lead management
to believe that vesting of the Merger Options was a probable occurrence. The
expense, when recorded, could have had an adverse effect on the Company's income
for financial accounting purposes, as it would have approximated the difference
between the exercise price of the Merger Options and the fair market value of
the Company's Common Stock at that time. In recognition of the potential charge
upon the Company's earnings, and for other consideration, during June 1998, the
Company arranged for the surrender of the Merger Options in exchange for the
issuance of the New Options, which have an exercise price of $4.50 and which
vest immediately. As the Merger consideration was restructured, management does
not believe that the Company will record compensation expense in the future
based upon the grant of the New Options.
Depreciation and Amortization. Depreciation and amortization of
$747,800 for 1998 reflected an increase of 2,271%, or $716,300, for the year
ended December 31, 1998 as compared to the same prior year period. This increase
was primarily due to the amortization of goodwill and depreciation of assets
acquired in connection with the acquisitions that occurred during the year. At
present levels, amortization expense of approximately $800,000 is expected for
the next 20 years.
Income Taxes. The Company's effective tax rate benefit for the year
ended December 31, 1998 was 33.6% which is primarily attributable to the net
operating loss carryforward generated during the year.
Net Loss. During the year ended December 31, 1998, the Company incurred
a net loss of $3.0 million as compared to a net loss of $292,900 for the prior
year. The net loss for the current period, however, includes $747,800 of
non-cash charges relating to depreciation and amortization resulting from the
Company's acquisition program. Additional factors contributing to the Company's
net loss consisted of significant increases in the Company's overhead expenses
as corporate infrastructure was established in anticipation of future growth
through the Company's acquisition program. An additional contributing factor
occurred during the fourth quarter when product availability was limited due to
a major implementation of a new order entry, manufacturing and distribution
systems by the Company's major product manufacturer. Accordingly, during this
period, the Company was unable to secure sufficient product to satisfy customer
demand, thereby resulting in a material loss of sales. Product availability
during the early part of 1999 resumed to normal levels and management believes
that the Company will have sufficient access to product to fulfill customer
demand. Management anticipates that as greater operating efficiencies are
achieved and these other non-recurring factors are addressed, 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 continued
growth of its business through acquisitions. Second, the management of
32
<PAGE> 33
this growth through the integration of the businesses acquired. Third, the
continued expansion of the Company's higher margin service business.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Net sales increased by 43.2%, or $4.3 million to $14.2
million, for the year ended December 31, 1997 as compared to $9.9 million for
the prior year. This increase in net sales was principally attributable to
increased product sales to new and existing customers as the Company experienced
favorable market acceptance of new products introduced by the Company's major
vendors. In addition, the Company opened a new regional sales office which
resulted in increased revenues. Consulting revenues increased 81.3% to $390,600
for the year ended December 31,1997 as compared to $215,500 for the prior year.
This increase was primarily attributable to demand for the Company's consulting
services and technical support resulting from the Company's increased focus on
the service component of its revenue base.
The Company's net sales are expected to increase during 1998 as the
Company implements its acquisition strategy. Towards this end, the Company
recently completed the acquisition of Solsource and HV Jones and entered into
letters of intent to acquire two (2) additional companies. There can be no
assurances that the acquisitions subject to the letters of intent will be
completed since both letters of intent are preliminary in nature and subject to
due diligence reviews and other conditions to closing. During 1997, Solsource
and HV Jones realized net sales of $7.3 million and $5.6 million, respectively.
On a pro forma basis, the Company would have realized net sales of over $27
million during 1997 had both of these acquisitions occurred as of January 1,
1997.
The Company's acquisition strategy relies primarily upon identifying
target companies that fit within the Company's acquisition criteria and having
sufficient financing available to complete its planned acquisitions. Although
the Company has sufficient financing available to complete its pending
acquisition targets, there can be no assurances that sufficient financing will
be secured so as to facilitate the continuation of the Company's acquisition
program on a longer-term basis. Furthermore, due to the early stages of this
program, there can be no assurances as to the long-term impact of the Company's
acquisition strategy on the gross profits or net income of the Company.
Gross Profit. The Company's cost of sales consists primarily of the
cost to the Company of products acquired for resale. The Company's gross profit
increased by 13.9% or $.3 million to $2.5 million for the year ended December
31, 1997 as compared to $2.2 million for the prior year. Gross profit margin
decreased to approximately 17.8% during the year ended December 31, 1997, as
compared to approximately 22.3% experienced during the prior year. During 1997,
the Company experienced an overall decrease in its gross profit margin. This
decrease was primarily due to cost reductions passed on to the Company's
customers from its major vendors as a result of an increase in demand for the
Company's products which occurred as certain customers increased their volume of
purchases. Management believes that in the long term it will be able to sustain
its profit margin as a result of its focus on providing a broad spectrum of
products, services and support packages, and through a greater emphasis upon
consulting and support services which typically have a higher profit margin.
33
<PAGE> 34
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 32.5% or $.7 million
to $2.8 million for the year ended December 31, 1997 as compared to $2.1 million
for the prior year. This increase in expenses is primarily attributable to the
expansion of the Company's infrastructure as it became publicly-held by virtue
of the Merger transaction during the fourth quarter of 1997, including increased
administrative personnel and increased travel and promotion expenses associated
with the growth of the business. This included a non-cash charge of $300,000
attributable to the granting of shares of Common Stock to one of the Company's
executive officers.
During 1997, as a percent of net sales, selling, general and
administrative expenses decreased to approximately 19.6%, from 21.1% experienced
during the prior year. During the fourth quarter of 1997 and the first quarter
of 1998, the Company increased its fixed payroll by the addition of three
executive level personnel. This may have the effect in the short-term of
resulting in an increase in the Company's selling, general and administrative
expense as a percentage of net sales. This increase is likely to be offset in
the near-term as the Company's revenues increase.
Depreciation and Amortization. Depreciation and amortization of $31,500
for 1997 reflected a decrease of 35%, or $17,000, for the year ended December
31, 1997 as compared to the same prior year period. This decrease was primarily
due to reduced depreciation expense on furniture and computer equipment that
became fully depreciated during 1997.
Income Taxes. The Company's effective tax rate benefit for the year
ended December 31, 1997 was 1.0% which is primarily attributable to the net
operating loss carryforward generated during the year and the overall effect of
graduated federal tax rates.
Net Loss. During the year ended December 31, 1997, the Company incurred
a net loss of $292,900 as compared to net income of $34,900 for the prior year.
The net loss for the current period, however, includes $300,000 of non-cash
charges relating to the granting of shares of Common Stock to one of the
Company's executive officers as mentioned above.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the twelve (12) quarters through December 31,
1998. This information is derived from unaudited quarterly consolidated
financial statements of the Company that include, in the opinion of the Company,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results of operations for such periods. Such information
should be read in conjunction with the audited Consolidated Financial Statements
of the Company and notes thereto appearing elsewhere in this 10-KSB.
The Company's historical operating results have varied from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue in any fiscal quarter would result in
lower profitability in that quarter. A variety of factors, many of which are not
within the Company's control, influence the Company's quarterly operating
results, including availability of
34
<PAGE> 35
product, the closings of acquisitions, seasonal patterns of capital spending by
customers, information technology outsourcing trends, the timing, size and stage
of projects, new service introductions by the Company or its competitors, levels
of market acceptance for the Company's products or services or the hiring of
additional staff. Operating results also may be impacted by the timing of
billings and changes in the Company's billing and utilization rates. The Company
believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future performance.
The Company anticipates that its business will continue to be subject to such
seasonal variations.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1996:
Net sales $ 1,201,310 $ 2,055,097 $ 2,602,370 $ 4,049,602 $ 9,908,379
Gross profit 309,738 377,343 636,068 890,455 2,213,604
Operating expenses 283,830 299,331 433,371 1,126,442 2,142,974
Income (loss) from operations 25,908 78,012 202,697 (235,987) 70,630
Interest - net (2,019) (12,192) (7,976) (4,043) (26,230)
Provision (benefit) for income taxes 9,464 9,464
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 23,889 $ 65,820 $ 194,721 $ (249,494) $ 34,936
============ ============ ============ ============ ============
1997:
Net sales $ 2,239,778 $ 2,688,703 $ 3,659,682 $ 5,603,040 $ 14,191,203
Gross profit 494,423 570,796 706,473 749,445 2,521,137
Operating expenses 439,262 447,509 609,243 1,311,326 2,807,340
Income (loss) from operations 55,161 123,287 97,230 (561,881) (286,203)
Interest - net 2,303 359 382 (12,775) (9,731)
Provision (benefit) for income taxes (3,000) (3,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 57,464 $ 123,646 $ 97,612 $ (571,656) $ (292,934)
============ ============ ============ ============ ============
1998:
Net sales $ 5,641,932 $ 12,765,671 $ 19,682,686 $ 22,885,385 $ 60,975,674
Gross profit 1,061,922 2,198,936 4,301,302 3,983,427 11,545,587
Operating expenses 1,222,988 2,987,071 4,317,692 7,352,844 15,880,595
Loss from operations (161,066) (788,135) (16,390) (3,369,417) (4,335,008)
Interest - net 35,550 (9,446) (79,994) (164,154) (218,044)
Benefit for income taxes (39,000) (285,000) (40,000) (1,165,000) (1,529,000)
------------ ------------ ------------ ------------ ------------
Net loss $ (86,516) $ (512,581) $ (56,384) $ (2,368,571) $ (3,024,052)
============ ============ ============ ============ ============
</TABLE>
BACKLOG
The Company normally ships systems promptly after receiving an order
and therefore does not customarily have a significant backlog.
35
<PAGE> 36
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. For the year ended December 31, 1998, cash
flow from operations was $1.2 million as compared to $504,300 during the prior
year. 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 and deferred taxes.
The Company's working capital deficit was $3.3 million at December 31,
1998, as compared to positive working capital of $2.1 million at December 31,
1997. The decrease in the Company's working capital during such period is
principally attributable to the net loss incurred during the fourth quarter of
1998.
Capital expenditures, which totaled $1.1 million in 1998, 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. Acquisitions costs of $6.7 million were used to consummate
the six acquisitions made during the year. These acquisitions collectively
resulted in goodwill of approximately $15.9 million, which is being amortized at
approximately $800,000 per year.
Cash flow from financing activities was favorably impacted by the $7.0
million of net proceeds received from the sale of common stock and preferred
shares offset by $1.2 million of debt repayments resulting primarily from the
acquisitions made during 1998.
The Company has a $13 million credit facility with Finova Capital
Corporation that consists of both a revolving line of credit and an inventory
line. Borrowings under the revolving line of credit cannot exceed $10.5 million
at any one time and bear interest at prime (7.75% at December 31, 1998) plus
three percent. Amounts outstanding under the inventory line which are paid
within sixty days of invoice date do not bear interest. Interest is payable
monthly on amounts outstanding over sixty days at prime (7.75% at December 31,
1998) plus six percent. Outstanding borrowings under the revolving line of
credit were $750,000 at December 31, 1998. Amounts outstanding under the
inventory line were $9,597,463 at December 31, 1998.
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 will need to secure additional financing in the near term in order to
continue the acquisition and growth strategy implemented during 1998. Since its
future profitability is likely dependent upon the continuation of the Company's
acquisition and growth strategy, failure to secure new or increased sources of
financing would not only delay the Company's growth program, but could also have
an adverse effect on the Company's ability to achieve profitable operations.
36
<PAGE> 37
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 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 a majority of the costs associated with
becoming Year 2000 compliant are not incremental to the Company, rather
represent a reallocation of existing resources and regularly scheduled system
upgrades and maintenance. In addition, 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 mid 1999. The Company anticipates that it will
complete the stage of installing patches and upgrades to its third party
software and hardware and anticipates that it will be completed with this stage
of its Year 2000 program by mid 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 has not yet developed 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 intends to
devise contingency plans by mid 1999 designed to
37
<PAGE> 38
mitigate the effects on the conduct of the Company's business in the event the
Year 2000 issue results in the unavailability of any material IT or non-IT
systems. 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 ameliorate 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.
The Company's business involves designing, developing and implementing
mission critical 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, the operations of the Company's clients
operations, the Company may be faced with claims regardless of whether the
failure is related to the 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.
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<PAGE> 39
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 be achieved 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"), which is effective
for financial statements for periods beginning after December 15, 1997 and
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The adoption of SFAS 130 as of January 1,
1998 had no impact on its financial statement presentation or related
disclosures as the Company has no items of other comprehensive income for any of
the periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997 and establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
operates in one business segment. Accordingly, the adoption of SFAS 131 did not
have a material impact on its financial statement presentation or related
disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for transactions entered into in
fiscal quarters of fiscal years that begin after June 15, 1999. This statement
establishes standards for the accounting and reporting for derivative
instruments and for hedging activities. The future effect on the Company's
financial position and the results of operations has not been determined.
39
<PAGE> 40
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements of the Company for the years ended December 31,
1997 and 1996, and specific supplementary financial information are included
within Item 13(A) and 13(B) of this Report and may be found at pages 40 through
54.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no matters to be reported hereunder.
40
<PAGE> 41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Leadbeater (2) 44 Chairman of the Board and Chief Executive
Officer
David S. Olson (2) 41 Director and President
Phil Carter 54 Director and Chief Operating Officer
John Iorillo (2) 32 Director and Chief Financial Officer
George Knight (1) 58 Director
Andrew P. Panzo (1) 34 Director
</TABLE>
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
The following is a brief summary of the business experience of the
foregoing directors and executive officers.
JACK R. LEADBEATER
Mr. Leadbeater became Chairman and Chief Executive Officer of the
Company on the effective date of the Merger on December 22, 1997. Mr. Leadbeater
remains President and a director of Osage, positions he has held since 1993.
From 1987 to 1993, Mr. Leadbeater served as President of a privately held
computer systems integration company. Prior to 1987, Mr. Leadbeater was employed
as a regional sales manager by MAI Canada Ltd., an international manufacturer of
mini-computers. Mr. Leadbeater is a graduate of the University of Manitoba,
Canada with a Business/Commerce degree and a major in Marketing.
41
<PAGE> 42
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. With the
promotion of Phil Carter to Chief Operating Officer on January 5, 1999, Mr.
Olson continues to serve as President of the Company focusing on key
developmental areas within the organization. Mr. Olson remains a director and
Executive Vice-President/General Manager of Osage, positions he has held since
1993. From 1989 to 1993, Mr. Olson served as an Executive Vice-President of a
privately held computer systems integration company. Prior to 1989, he was
employed by Sun Microsystems Canada Ltd., where his responsibilities included
sales as well as market development in the petroleum exploration market. Prior
to joining Sun Microsystems, Mr. Olson was an Account Manager at Digital
Equipment, Canada where he sold information processing technology to major
national accounts in the petroleum exploration market. Mr. Olson is a graduate
of the University of Calgary, Canada with a Bachelor of Science degree and a
major in Computer Science.
PHIL CARTER
Mr. Carter became a director and Chief Operating Officer on January 5,
1999. 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.
JOHN IORILLO
Mr. Iorillo became Chief Financial Officer of the Company on February
16, 1998 and a director on March 27, 1998. From 1990 to 1998, Mr. Iorillo was
employed as a certified public accountant by Deloitte and Touche LLP where his
responsibilities included the oversight of audit engagements, participation in
various merger and acquisition projects and other related activities. Mr.
Iorillo is a graduate of Cleveland State University with a Bachelor of Business
Administration degree in Accounting with a minor in Economics.
GEORGE KNIGHT
Mr. Knight became a member of the Board of Directors during November
1998. Mr. Knight retired from IBM in 1995 after a career in sales and
management. He held several management positions in Northwest Arkansas, St.
Louis, and Little Rock. Mr. Knight sold Wal-Mart their first computer and served
as manager for the account. Most recently, Mr. Knight was the owner of a
property and casualty 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, Dillards,
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<PAGE> 43
and Osage Systems Group. He is a graduate of the University of Arkansas with a
degree in Civil Engineering.
ANDREW P. PANZO
Mr. Panzo became a director of the Company during December 1997. Mr.
Panzo is Managing Director of American Maple Leaf Financial Corporation in
Philadelphia, Pennsylvania, an investment banking firm which specializes in
emerging growth companies. He is also a director of NetValue Holdings, Inc. From
1995 to 1998, Mr. Panzo was a director of the Eastwind Group, Inc. Mr. Panzo is
a graduate of the University of Connecticut and has a Masters degree in
International Business and Finance from Temple University.
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 serve until their terms expire
at the Company's Annual Meeting in 2001. As Class II Directors, John Iorillo and
Phil Carter serve until their terms expire at the Company's Annual Meeting in
2000. As Class III directors, Andrew Panzo and George Knight serve until their
terms expire at the Company's Annual Meeting in 1999. 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 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.
DIRECTORS' COMPENSATION
The Company currently has no policy with respect to the granting of
fees to directors in connection with their service to the Company. However, the
Company may reimburse directors for their cost of travel and lodging to attend
meetings of the Board of Directors or committees thereof.
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<PAGE> 44
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
AWARDS PAYOUTS
---------------------------- ---------------
ANNUAL COMPENSATION RESTRICTED
------------------- STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY AWARD(S)($) SARS(#) COMPENSATION($)
- --------------------------- ---- ------ ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
JACK R. LEADBEATER 1998 $200,000 -- 664,000(1) $ 96,295
Chairman of the Board and Chief 1997 $ 89,967 -0- 19,057(2) $261,463
Executive Officer 1996 $ 49,417 N/A N/A $236,335
DAVID S. OLSON 1998 $200,000 -- 664,000(1) $ 88,052
Director and President and 1997 $ 89,967 -0- 19,057(2) $261,463
Former Chief Operating Officer 1996 $ 64,417 N/A N/A $236,335
PHIL CARTER 1998 $ 75,000(3) -- 510,000(4) --
Director and Chief Operating 1997 N/A N/A N/A N/A
Officer 1996 N/A N/A N/A N/A
JOHN IORILLO 1998 $ 87,500(5) -- 150,000(6) $ 80,086
Director and Chief Financial 1997 N/A N/A N/A -0-
Officer 1996 N/A N/A N/A -0-
MICHAEL G. GLYNN 1998 $200,000(7) -0- -0- $ 13,200
Former Director and Executive 1997 -- 100,000(8) 100,000(9) -0-
Vice President 1996 N/A N/A N/A N/A
</TABLE>
- ----------
(1) Reflects options to purchase 664,000 shares of Common Stock (the "New
Options") issued in exchange for the surrender of options to purchase
332,000 shares of Common Stock previously granted on December 22, 1997
as part of the Merger (the "Merger Options"). 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 ITEM 12. "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
(2) Reflects options to purchase 19,057 shares of Common Stock granted
immediately following the Merger.
(3) 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.
(4) Reflects options to purchase 510,000 shares of Common Stock granted in
conjunction with the commencement of employment. See ITEM 12. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(5) 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 $100,000.
(6) Includes options to purchase 100,000 shares of Common Stock granted in
conjunction with the commencement of employment. Also includes options
to purchase 50,000 shares of Common Stock.
(7) Mr. Glynn is a former director and officer of the Company.
(8) Includes 100,000 shares of Common Stock granted to Mr. Glynn in
conjunction with his employment.
(9) Pursuant to the terms of his employment agreement, Mr. Glynn was
granted options to purchase 100,000 shares of Common Stock; however,
these options did not vest due to the Company's failure to achieve
certain performance criteria and have since expired.
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<PAGE> 45
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
-------------------------------
Individual Grants
-------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Option/SARs Employees in Base Price Expiration
Name Granted(#)(1) Fiscal Year ($/Sh) Date
- ---- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Jack R. Leadbeater 664,000 24.2% $4.50 December 19, 2003
David S. Olson 664,000 24.2% $4.50 December 19, 2003
Phil Carter 510,000 18.6% $4.50 June 10, 2003
John Iorillo 150,000 5.5% $4.50 December 19, 2003
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options/SARs In-the-Money Options/SARs
at FY-End (#) at
Shares Shares FY-End ($)
Acquired on Exercisable/ Exercisable/
Name Exercise(#) Value Realized ($) Unexercisable Unexercisable(1)
- ---- ----------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
Jack R. Leadbeater -0- -0- (E)0/(U)683,057 (E)$0/(U)$797,025
Phil Carter -0- -0- (E)0/(U)150,000(2) (E)$0/(U)$168,750
David S. Olson -0- -0- (E)0/(U)683,057 (E)$0/(U)$797,025
John Iorillo -0- -0- (E)0/(U)150,000 (E)$0/(U)$168,750
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) Includes 150,000 options that vested as of December 31, 1998.
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Messrs. Leadbeater,
Olson and Iorillo. Each of Messrs. Leadbeater and Olson have an annual salary of
$200,000. The agreement with Mr. Iorillo provides for an annual salary of
$100,000. Each of Messrs. Leadbeater and Olson are employed for an initial term
of three years, commencing December 1997 with successive year-to-year renewals
in the event that neither they, nor the Company, elect to terminate the
agreement after the initial term. Mr. Iorillo is employed for an initial term of
one year commencing February 1998, with successive year-to-year renewals in the
event that the agreement is not earlier terminated. Mr. Iorillo was granted
options to purchase 100,000 shares of the Common Stock of the Company in
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<PAGE> 46
conjunction with his employment with the Company. The employment agreements of
Messrs. Leadbeater, Olson and Iorillo contain non-competition and
non-solicitation provisions which survive their actual employment for a term of
one year.
The Company has an employment letter of understanding with Mr. Carter,
which provides for an annual salary of $150,000 and, provided the Company
obtains operating income equal to or in excess of 7% of net sales in a given
year, a bonus equal to 5% of the Company's pre-tax income, which bonus may not
exceed $150,000 per year. In addition, in the event that Mr. Carter remains
employed by the Company for a period of twelve months and in the event that the
Company is sold, Mr. Carter is entitled to receive a bonus equal to 1% of the
acquisition price, provided however, that such bonus shall not exceed $5,000,000
for a sale in 1999, $7,000,000 for a sale in 2000 and $10,000,000 for a sale in
2001. Mr. Carter is employed for an initial term of three years, commencing July
1, 1998. In conjunction with his employment by the Company, Mr. Carter was
granted options to purchase 510,000 shares of Common Stock of the Company.
CHANGE IN CONTROL ARRANGEMENTS
Effective July, 1998, the Company entered into a Termination Benefits
Agreement with each of Messrs. Leadbeater and Olson, and effective December,
1998, with Mr. Iorillo (collectively, the "Benefits Agreements"). Pursuant to
the Benefits Agreements, following a "Change in Control" (as fully defined
therein), the remaining term of employment for each of Messrs. Leadbeater, Olson
and Iorillo is extended for three (3) years (the "Extended Term"). If during the
Extended Term the employment of Messrs. Leadbeater, Olson or Iorillo is
terminated thereafter by the Company other than for cause, or by Messrs.
Leadbeater, Olson or Iorillo for "good reason" (including, among other things, a
reduction in salary, material reduction in benefits, change in title, reporting
responsibilities or office location requiring a material relocation), the
Company is obligated to pay the terminated individual a lump sum equal to his
respective salary and bonus for the remainder of the Extended Term. In addition,
any unvested options held by the terminated employee shall fully vest; the
Company shall continue to pay or make available to the terminated employee for a
period of two years thereafter all benefits provided by or through the Company,
and the Company shall be obligated to pay the amount of any excise tax
associated with the benefits provided under the Benefits Agreement. If such a
termination had taken place as of December 31, 1998, Messrs. Leadbeater, Olson
and Iorillo would have been entitled to cash payments (exclusive of benefits) of
approximately $1,150,000, $1,150,000 and $334,000, respectively (representing
salary and excise tax payments).
STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN
The Company's Amended and Restated 1993 Stock Option Plan (the "1993
Plan") covers 2,000,000 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 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
46
<PAGE> 47
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 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 March 12, 1999,
options to purchase 993,368 shares of the Company's Common Stock were
outstanding under the 1993 Plan.
STOCK OPTIONS
In addition to the options covered by the 1993 Plan, the Company has
also issued in private transactions, options to purchase 2,358,900 shares of its
Common Stock. These options were issued prior to the adoption of certain
amendments to the 1993 Plan on June 12, 1998, which increased the number of
shares eligible for grant thereunder from 100,000 shares to 2,000,000 shares.
Options to purchase 1,600,000 shares of the Company's Common Stock were issued
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 previous 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 replace were subject to an exercise price of
$3.00 per share and vested based upon the Company achieving certain operating
results. Options to purchase an additional 698,114 shares were issued to certain
directors and officers at exercise prices between $3.00 to $4.50
WARRANTS
The Company has issued in private transactions warrants to purchase
860,000 shares of its Common Stock. These warrants were issued to investors,
placement agents and investment bankers in connection with certain of the
Company's acquisitions and approximately $8.9 million in net proceeds resulting
from private placement financing transactions completed by the Company during
1998 and the first quarter of 1999. The warrants were issued at exercise prices
ranging from $3.50 to $7.875
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based solely on its review of copies of forms filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, and written representations from
certain reporting persons, the Company believes that during fiscal 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 16, 1999, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and
47
<PAGE> 48
Exchange Commission, has reason to believe may be deemed the beneficial owners
of more than 5% of the Company outstanding Common Stock. Also set forth in the
table is the beneficial ownership of all shares of the Company's outstanding
stock, as of such date, of all officers and directors, individually and as a
group.
<TABLE>
<CAPTION>
Shares Owned Percentage of
Beneficially and Outstanding
Name and Address of Record (1) Shares
- ---------------- ---------------- -------------
<S> <C> <C>
Jack R. Leadbeater ................................ 1,347,157(2) 13.3%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
David S. Olson .................................... 1,347,157(2) 13.3%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
Phil Carter ....................................... 153,200(3) 1.6%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
John Iorillo ...................................... 150,100(4) 1.6%
1661 East Camelback Road, Suite 245
Phoenix, AZ 85016
George Knight ..................................... 3,000 (*)
1706 Alton Drive
Fayetteville, AR 72701
Andrew P. Panzo ................................... 50,000(5) (*)
2 Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Lancer Offshore, Inc. ............................. 820,000(6) 8.7%
Kaya Flamboyan 9
Curacao, Netherland Antilles
Lancer Partners, LP ............................... 470,000(6) 4.9%
375 Park Avenue, Ste. 2006
New York, NY 10152
Michael Lauer ..................................... 1,500,000(7) 15.9%
375 Park Avenue, Suite 2006
New York, NY
All Directors and Officers as a group (6 persons) 3,050,614 27.5%
</TABLE>
- ----------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934,
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other
relative who has the same home as such individual, as well as other
securities as to which the individual has or shares voting or
investment power or which each person has the right to acquire within
60 days through the exercise of options, or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 9,411,058 shares of Common Stock outstanding
as of March 16, 1999.
(2) Includes 664,100 shares of Common Stock and 683,057 shares issuable
upon the exercise of vested stock options.
48
<PAGE> 49
(3) Includes 3,200 shares of Common Stock and 150,000 shares issuable upon
the exercises of vested stock options. Does not include options to
purchase 360,000 shares of Common Stock which have not yet vested.
(4) Includes 100 shares of Common Stock and 150,000 shares issuable upon
the exercise of vested stock options.
(5) Reflects the indirect ownership of options to purchase 50,000 shares of
the Company's Common Stock owned by American Maple Leaf Financial
Corporation. Mr. Panzo is an officer and director of American Maple
Leaf Financial Corporation.
(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.
(*) Less than 1%.
49
<PAGE> 50
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 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. See ITEM 6. "MANAGEMENT'S DISCUSSION OR ANALYSIS OR PLAN
OF OPERATIONS."
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.
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.
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 vest periodically provided Mr. Carter remains employed by the Company
through December 31, 2000.
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
50
<PAGE> 51
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.
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, is
also the Managing Director of AMLF. 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.
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 and David Olson: (i) pledged certain of their personal stock
holdings in order to guarantee the IntraNet Note, and (ii) together with 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 the date of
this Report, $533,000 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.
CHANGE IN CONTROL
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.
51
<PAGE> 52
PART IV
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
1. Financial Statements filed as part of this Report: Page
----
<S> <C>
Report of Deloitte & Touche LLP..............................................................F-1
Report of Pearce, Gray & Rudd................................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............................F-3
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996........................................F-4
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996........................................F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996........................................F-6
Notes to Consolidated Financial Statements..............................................F-9
</TABLE>
The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated November 5, 1997 by Incorporated by reference to
and among Pacific Rim Entertainment, Inc., PR Exhibit 2.1 on Form 8-K dated
Acquisition Corp. and Osage Computer Group, Inc. December 22, 1997 (the "December 22,
1997 Form 8-K").
2.2 First Amendment to Agreement and Plan of Merger dated Incorporated by reference to
December 19, 1997 Exhibit 2.2 to the December 22, 1997
Form 8-K.
2.3 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to
by and among Pacific Rim Entertainment, Inc., Exhibit 2.4 to Registrant's Current
Solsource Acquisition Corp. and Solsource Computers, Report on Form 8-K dated March 27,
Inc. 1998 (the "March 27, 1998 Form 8-K").
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C> <C>
2.4 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to
by and among Pacific Rim Entertainment, Inc., Jones Exhibit 2.5 to the March 27, 1998
Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.5 Amendment to the Agreement and Plan of Merger dated Incorporated by reference to
March 17, 1998 by and among Osage Systems Group, Inc., Exhibit 2.6 to the March 27, 1998
Jones Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.6 Certificate of Merger of Osage Computer Group, Inc. Incorporated by reference to
into PR Acquisition Corp. (a wholly-owned subsidiary Exhibit 2.3 to the December 22, 1997
of Pacific Rim Entertainment, Inc.) Form 8-K.
2.7 Certificate of Merger of Solsource Computers, Inc. Incorporated by reference to
into Solsource Acquisition Corp. Exhibit 2.7 to the March 27, 1998
Form 8-K.
2.8 Certificate of Merger of H.V. Jones, Inc. into Jones Incorporated by reference to
Acquisition Corp. Exhibit 2.8 to the March 27, 1998
Form 8-K.
2.9 Stock Purchase Agreement dated April 24, 1998 by and Incorporated by reference to
between Osage Systems Group, Inc. and O. Jack Anderson Exhibit 2.9 to Registrant's Current
Report on Form 8-K dated May 8, 1998
(the "May 8, 1998 Form 8-K").
2.10 Stock Purchase Agreement dated June 22, 1998 by and Incorporated by reference to
among Osage Systems Group, Inc. and John Udelhofen, Exhibit 2.10 to Registrant's Current
Michael Durbin, David Durbin and Brian Wolfe, the Report on Form 8-K dated July 7,
shareholders of Open Business Systems, Inc. 1998 (the "July 7, 1998 Form 8-K").
3.1 Certificate of Incorporation Incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to
the Registrant's Registration
Statement on Form S-1 (Reg. No.
33-69380) filed November 2, 1993
("Amendment No. 1 to Form S-1")
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C>
3.2 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation effective March 10, 1998 Exhibit 3.5 of the March 11, 1998
Form 8-K
3.3 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation dated June 12, 1998 Exhibit 3.9 of the Registrant's
Quarterly Report on Form 10-QSB for
the period ended June 30, 1998 (the
"June 30, 1998 Form 10-QSB")
3.4 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Class A Non-Voting Convertible Preferred Stock Exhibit 3.1 of the Registrant's
Current Report on Form 8-K dated
March 11, 1998 (the "March 11, 1998
Form 8-K")
3.5 Certificate of Amendment of Certificate of Incorporated by reference to
Designation, Preferences and Rights of Class A Exhibit 3.2 to the March 11, 1998
Non-Voting Convertible Preferred Stock Form 8-K
3.6 Certificate of Restoration and Revival of Certificate Incorporated by reference to
of Incorporation Exhibit 3.3 to the March 11, 1998
Form 8-K
3.7 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation dated November 21, 1997 Exhibit 3.4 to the March 11, 1998
Form 8-K
3.8 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series A $3.00 Convertible Preferred Stock Exhibit 3.3 to the December 22, 1997
Form 8-K
3.9 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series B $3.00 Convertible Preferred Stock Exhibit 3.4 to the December 22, 1997
Form 8-K
3.10 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series C Convertible Preferred Stock Exhibit 3.8 to the March 27, 1998
Form 8-K
3.11 Certificate of Designation, Preferences and Rights of Filed herewith
Series D Convertible Preferred Stock
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C> <C>
3.12 Certificate of Correction to Certificate of Filed herewith
Designation, Preferences and Rights of Series D
Convertible Preferred Stock
3.13 Certificate of Designation of Series E Convertible Filed herewith
Preferred Stock
3.14 Amended and Restated Bylaws dated June 12, 1998 Incorporated by reference to
Exhibit 3.10 of the June 30, 1998
Form 10-QSB
4.1 Form of Common Stock Certificate Incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to
Form S-1
4.2 Form of Warrant Incorporated by reference to
Exhibit 1.2 to Amendment No. 1 to
Form S-1
4.3 Form of Warrant Certificate Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to
Form S-1
4.4 Form of 8% Senior Secured Note Incorporated by reference to
Exhibit 4 to the Registrant's
Quarterly Report on Form 10-QSB for
the period ended June 30, 1997
4.5 Specimen of Series A $3.00 Convertible Preferred Stock Incorporated by reference to
Exhibit 4.1 to the December 22, 1997
Form 8-K
4.6 Specimen of Series B $3.00 Convertible Preferred Stock Incorporated by reference to
Exhibit 4.2 to the December 22, 1997
Form 8-K
4.7 Specimen of Series C Convertible Preferred Stock Incorporated by reference to
Exhibit 4.7 to the March 27, 1997
Form 8-K
4.8 Specimen of Series D Convertible Preferred Stock Filed herewith
4.9 Specimen of Series E Convertible Preferred Stock Filed herewith
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C>
9.1 Form of Voting Trust Agreement Incorporated by reference to
Exhibit 9.1 to the December 22, 1997
Form 8-K
9.2 Amendment to Voting Trust Agreement Incorporated by reference to
Exhibit 9.2 of the June 30, 1998
Form 10-QSB
10.1 Amended and Restated 1993 Stock Option Plan Incorporated by reference to
Exhibit 10.1 of the June 30, 1998
Form 10-QSB.
10.2 1993 Outside Director Stock Option Plan Incorporated by reference to
Exhibit 10.5 to the Registration
Statement on Form S-1 (Registration
No. 33-69380) filed September 24,
1993 ("Form S-1").
10.3 Form of Stock Option Incorporated by reference to
Exhibit 10.1 to the December 22,
1997 Form 8-K
10.4 Form of Employment Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.2 to the December 22,
1997 Form 8-K
10.5 Amendment to Employment Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.23 of the June 30, 1998
Form 10-QSB
10.6 Option to Purchase 664,000 Shares granted to Jack Incorporated by reference to
Leadbeater Exhibit 10.27 of the June 30, 1998
Form 10-QSB
10.7 Form of Employment Agreement of David Olson Incorporated by reference to
Exhibit 10.3 to the December 22,
1997 Form 8-K
10.8 Amendment to Employment Agreement of David Olson Incorporated by reference to
Exhibit 10.24 of the June 30, 1998
Form 10-QSB
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C> <C>
10.9 Option to Purchase 664,000 Shares granted to David Incorporated by reference to
Olson Exhibit 10.28 of the June 30, 1998
Form 10-QSB
10.10 Form of Employment Agreement with John Iorillo Incorporated by reference to
Exhibit 10.10 of the March 27, 1998
Form 8-K.
10.11 Amendment to Employment Agreement of John Iorillo Filed herewith.
10.12 Option to Purchase 50,000 Shares granted to John Incorporated by reference to
Iorillo Exhibit 10.29 of the June 30, 1998
Form 10-QSB
10.13 Option to Purchase 100,000 Shares granted to John Incorporated by reference to
Iorillo Exhibit 10.30 of the June 30, 1998
Form 10-QSB
10.14 Amendment to Option to Purchase 100,000 Shares granted Incorporated by reference to
to John Iorillo Exhibit 10.31 of the June 30, 1998
Form 10-QSB
10.15 Form of Employment Agreement of Michael Glynn Incorporated by reference to
Exhibit 10.4 to the December 22,
1997 Form 8-K
10.16 Option to Purchase 100,000 Shares Granted to Michael Incorporated by reference to
Glynn Exhibit 10.5 to the December 22,
1997 Form 8-K
10.17 Employment Letter of Understanding with Phil Carter Filed herewith.
10.18 Option to Purchase 510,000 Shares granted to Phil Filed herewith.
Carter
10.19 Employment Agreement of Daniel J. Vahalla Incorporated by reference to
Exhibit 10.11 of the March 27, 1998
Form 8-K
10.20 Employment Agreement of Hugh V. Jones Incorporated by reference to
Exhibit 10.12 of the March 27, 1998
Form 8-K
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C> <C>
10.21 Termination Benefits Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.25 of the June 30, 1998
Form 10-QSB
10.22 Termination Benefits Agreement of David Olson Incorporated by reference to
Exhibit 10.26 of the June 30, 1998
Form 10-QSB
10.23 Termination Benefits Agreement of John Iorillo Filed herewith.
10.24 Confidential Private Placement Memorandum dated Incorporated by reference to
November 24, 1997 relating to the offer and sale of Exhibit 10.6 to the December 22,
$3,660,000 of Series A Preferred Stock 1997 Form 8-K
10.25 Supplement No. 1 to Confidential Private Placement Incorporated by reference to
Memorandum dated November 24, 1997 relating to the
Exhibit 10.7 to the December 22, offer and sale of
$3,660,000 of Series A Preferred 1997 Form 8-K Stock
10.26 Registration Rights Agreement by and among Pacific Rim Incorporated by reference to
Entertainment, Inc. and the Trust of Daniel J. and Exhibit 10.13 of the March 27, 1998
Mary G. Vahalla, Gary Gwin, Maureen Gaare and Daniel Form 8-K
Grube
10.27 Registration Rights Agreement by and between Pacific Incorporated by reference to
Rim Entertainment, Inc. and Hugh V. Jones Exhibit 10.14 of the March 27, 1998
Form 8-K
10.28 Consulting Agreement by and between Osage Systems Incorporated by reference to
Group, Inc. and O. Jack Anderson Exhibit 10.15 of the May 8, 1998
Form 8-K
10.29 Noncompetition Agreement by and between Osage Systems Incorporated by reference to
Group, Inc. and O. Jack Anderson Exhibit 10.16 of the May 8, 1998
Form 8-K
10.30 Registration Rights Agreement by and between Osage Incorporated by reference to
Systems Group, Inc. and O. Jack Anderson Exhibit 10.17 of the May 8, 1998
Form 8-K
10.31 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and John Udelhofen Exhibit 10.18 of July 7, 1998 Form
8-K
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C> <C>
10.32 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and Michael Durbin Exhibit 10.19 of the July 7, 1998
Form 8-K
10.33 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and David Durbin Exhibit 10.20 of the July 7, 1998
Form 8-K
10.34 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and Brian Wolfe Exhibit 10.21 of the July 7, 1998
Form 8-K
10.35 Registration Rights Agreement dated June 22, 1998 by Incorporated by reference to
and among Osage Systems Group, Inc. and John Exhibit 10.22 of the July 7, 1998
Udelhofen, Michael Durbin, David Durbin and Brian Form 8-K
Wolfe, the Shareholders of Open Business Systems, Inc.
10.36 Investment Banking Agreement dated December 4, 1998, Filed herewith.
by and between Osage Systems Group, Inc. and American
Maple Leaf Financial Corp.
10.37 Warrant to Purchase 50,000 shares granted to American Filed herewith.
Maple Leaf Financial Corp.
21.1 Subsidiaries of the Registrant Filed herewith.
27.1 Financial Data Schedule Filed herewith.
</TABLE>
(b) The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1998.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form 10-KSB, and has duly caused this Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized
on the 29th day of March, 1999.
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack R. Leadbeater
----------------------------------------------------
Jack R. Leadbeater
Chairman of the Board and Chief Executive Officer
By: /s/ John Iorillo
----------------------------------------------------
John Iorillo
Chief Financial Officer/Principal Accounting Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacity and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jack R. Leadbeater Chairman and Chief Executive March 29, 1999
- ---------------------- Officer
Jack R. Leadbeater
/s/ David S. Olson President and Director March 29, 1999
- ----------------------
David S. Olson
/s/ Phil Carter Chief Operating Officer and March 29, 1999
- ---------------------- Director
Phil Carter
/s/ John Iorillo Chief Financial Officer and March 29, 1999
- ---------------------- Director
John Iorillo
/s/ Andrew P. Panzo Director March 29, 1999
- ----------------------
Andrew P. Panzo
/s/ George Knight Director March 29, 1999
- ----------------------
George Knight
</TABLE>
60
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Osage Systems Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Osage Systems
Group, Inc. (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, convertible preferred stock and
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Phoenix, Arizona
March 10, 1999
F-1
<PAGE> 62
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Osage Computer Group, Inc.
We have audited the balance sheet of Osage Computer Group, Inc. as of December
31, 1996 and the statements of income, retained earnings and changes in
financial position for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, the statements of income, changes in financial position and
retained earnings for the year ended December 31, 1996 are presented in
accordance with generally accepted accounting principles applied on a consistent
basis. Further, in our opinion, the balance sheet presents fairly, in all
material respects, the financial position of the Company as of December 31, 1996
in accordance with generally accepted accounting principles.
PEARCE, GRAY & RUDD
Mesa, Arizona
March 24, 1997
F-2
<PAGE> 63
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,151,572 $ 2,576,323
Accounts receivable - net of allowance for doubtful accounts of
$132,000 in 1998 and $15,000 in 1997 (Note 4) 14,077,862 1,974,496
Inventories (Note 4) 332,272 6,672
Prepaid expenses and other current assets (Note 8) 556,972 25,728
Deferred income taxes (Note 9) 508,000 210,000
------------ ------------
Total current assets 18,626,678 4,793,219
FURNITURE AND EQUIPMENT - Net (Notes 3 and 4) 1,475,284 86,881
GOODWILL - Net 15,462,427
DEFERRED INCOME TAXES (Note 9) 1,392,000
OTHER ASSETS 204,876
------------ ------------
TOTAL $ 37,161,265 $ 4,880,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4) $ 750,000
Current portion of long-term debt (Notes 4 and 8) 1,914,078
Accounts payable (Note 4) 15,857,172 $ 1,948,802
Accrued expenses 2,141,795 507,395
Deferred revenue 1,185,382
Income taxes payable (Note 9) 70,485 262,182
------------ ------------
Total current liabilities 21,918,912 2,718,379
------------ ------------
LONG-TERM DEBT (Notes 4 and 6) 645,104
SERIES D CONVERTIBLE PREFERRED STOCK, ISSUED AND
OUTSTANDING, 1,000 SHARES IN 1998; TOTAL LIQUIDATION
PREFERENCE, $1,000,000 (NOTE 2) 765,586
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 6, 7 and 8)
STOCKHOLDERS' EQUITY (Notes 2, 7, 10 and 11):
Series A Convertible Preferred, $100 stated value - authorized, issued and
outstanding, 10 shares in 1998 and 122 shares in 1997; total liquidation
preference, $300,000 in 1998 and $3,660,000 in 1997 1,000 12,200
Series B Convertible Preferred, $100 stated value - authorized, issued and
outstanding, 50 shares in 1997; total liquidation preference, $1,500,000 5,000
Series C Convertible 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, 9,511,058 shares in 1998 and 4,820,000
shares in 1997 95,111 48,200
Additional paid-in capital 17,434,279 2,772,246
Accumulated deficit (3,699,977) (675,925)
------------ ------------
Total stockholders' equity 13,831,663 2,161,721
------------ ------------
TOTAL $ 37,161,265 $ 4,880,100
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 64
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 60,975,674 $ 14,191,203 $ 9,908,379
COST OF SALES 49,430,087 11,670,066 7,694,775
------------ ------------ ------------
Gross profit 11,545,587 2,521,137 2,213,604
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 15,132,780 2,775,794 2,094,447
Depreciation and amortization 747,815 31,546 48,527
------------ ------------ ------------
Total operating expenses 15,880,595 2,807,340 2,142,974
------------ ------------ ------------
OPERATING (LOSS) INCOME (4,335,008) (286,203) 70,630
INTEREST EXPENSE - Net (218,044) (9,731) (26,230)
------------ ------------ ------------
(LOSS) INCOME BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (4,553,052) (295,934) 44,400
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 9) (1,529,000) (3,000) 9,464
------------ ------------ ------------
NET (LOSS) INCOME $ (3,024,052) $ (292,934) $ 34,936
============ ============ ============
(LOSS) INCOME PER COMMON SHARE -
BASIC AND DILUTED (Note 1) $ (0.40) $ (0.06) $ 0.01
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,632,407 4,820,000 4,868,200
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 65
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
SERIES D CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
Purchase and retirement of treasury shares
Net income
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996
Acquisition of Pacific Rim Entertainment,
Inc. (Note 1)
Private placement offering (Note 1) 122 $ 12,200
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 122 12,200
Acquisition of Solsource (Note 1)
Acquisition of HV Jones (Note 1)
Acquisition of OST (Note 1)
Acquisition of OBS (Note 1)
Acquisition of E-Comm (Note 1)
Issuance of Series D preferred stock
and common stock warrants (Note 2) 1,000 $ 765,586
Issuance of common stock (Note 2)
Conversion of preferred stock into
common stock (Note 2) (112) (11,200)
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 1,000 $ 765,586 10 $ 1,000
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------
SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- --------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,916,400 $ 48,200
Purchase and retirement of treasury shares (96,400)
Net income
----------- ----------- ----------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1996 4,820,000 48,200
Acquisition of Pacific Rim Entertainment,
Inc. (Note 1) 50 $ 5,000
Private placement offering (Note 1)
Net loss
----------- ----------- ----------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1997 50 5,000 4,820,000 48,200
Acquisition of Solsource (Note 1) 150,000 1,500
Acquisition of HV Jones (Note 1) 105 $ 5,265
Acquisition of OST (Note 1) 383,334 3,833
Acquisition of OBS (Note 1) 432,330 4,323
Acquisition of E-Comm (Note 1) 149,700 1,497
Issuance of Series D preferred stock
and common stock warrants (Note 2)
Issuance of common stock (Note 2) 1,780,294 17,804
Conversion of preferred stock into
common stock (Note 2) (50) $ (5,000) (80) (4,015) 1,795,400 17,954
Net loss
----------- ----------- ----------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1998 $ 25 $ 1,250 9,511,058 $ 95,111
=========== =========== =========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 83,027 $ 131,227
Purchase and retirement of treasury shares (954) (954)
Net income 34,936 34,936
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 117,009 165,209
Acquisition of Pacific Rim Entertainment,
Inc. (Note 1) $ (715,554) (500,000) (1,210,554)
Private placement offering (Note 1) 3,487,800 3,500,000
Net loss (292,934) (292,934)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 2,772,246 (675,925) 2,161,721
Acquisition of Solsource (Note 1) 1,029,000 1,030,500
Acquisition of HV Jones (Note 1) 1,574,235 1,579,500
Acquisition of OST (Note 1) 2,568,338 2,572,171
Acquisition of OBS (Note 1) 2,382,065 2,386,388
Acquisition of E-Comm (Note 1) 928,503 930,000
Issuance of Series D preferred stock
and common stock warrants (Note 2) 154,000 154,000
Issuance of common stock (Note 2) 6,023,631 6,041,435
Conversion of preferred stock into
common stock (Note 2) 2,261
Net loss (3,024,052) (3,024,052)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 $ 17,434,279 $ (3,699,977) $ 13,831,663
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 66
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,024,052) $ (292,934) $ 34,936
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 747,815 31,546 48,527
Stock-based compensation 300,000
Loss on disposal of assets 1,859
Loss on disposal of investments 50,000
Deferred income taxes (1,351,893) (265,000) 9,464
Interest on employee retention programs 43,014
Changes in operating assets and liabilities:
Accounts receivable (7,637,152) (35,149) (587,678)
Inventories 204,743 (4,482) 1,976
Prepaid expenses and other assets (294,609) 21,806 1,316
Accounts payable 10,253,182 309,120 667,663
Accrued expenses and deferred revenue 2,416,394 125,328 (33,422)
Income taxes payable (191,697) 262,182
------------ ------------ ----------
Net cash provided by operating activities 1,165,745 504,276 142,782
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,148,205) (38,700) (32,138)
Acquisition costs, net of cash received of $195,328 (6,673,254)
Investments (25,000) (25,000)
------------ ------------ ----------
Net cash used in investing activities (7,821,459) (63,700) (57,138)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement 750,000
Borrowings on executive officers notes payable 740,000
Principal payments on capital leases (39,061)
Distribution to Osage stockholders (500,000)
Repayment of bridge indebtedness (450,000)
Net proceeds from sale of common stock and
preferred shares 6,961,021 3,500,000
Principal payments on note payable (1,180,997) (110,000)
Repayment of note payable due to former
parent company (154,263)
Purchase of treasury stock (212,500) (954)
Acquisition costs (48,054)
------------ ------------ ----------
Net cash provided by (used in) financing
activities 7,230,963 2,135,183 (110,954)
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 575,249 2,575,759 (25,310)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,576,323 564 25,874
------------ ------------ ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,151,572 $ 2,576,323 $ 564
============ ============ ==========
</TABLE>
(Continued)
F-6
<PAGE> 67
OSAGE SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 256,908 $ 9,731 $ 26,230
========== ======= ========
Income taxes paid $ 17,452
==========
Income taxes refunded $ 46,639
==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Non-cash aspects of Solsource acquisition:
Stock issued $1,030,500
==========
Fair value of assets acquired other than cash $1,339,676
==========
Deferred tax asset acquired $ 14,426
==========
Liabilities assumed $1,758,063
==========
Goodwill recorded in connection with acquisition of Solsource $1,688,943
==========
Non-cash aspects of HV Jones acquisition:
Stock issued $1,579,500
==========
Fair value of assets acquired other than cash $ 602,489
==========
Deferred tax asset acquired $ 140,753
==========
Liabilities assumed $1,225,573
==========
Note forgiveness $ 60,000
==========
Goodwill recorded in connection with acquisition of HV Jones $2,600,701
==========
Non-cash aspect of OST acquisition:
Stock issued $2,572,171
==========
Fair value of assets acquired other than cash $1,663,594
==========
Deferred tax asset acquired $ 167,998
==========
Liabilities assumed $ 783,522
==========
Employee retention program $ 419,995
==========
Note payable $ 238,293
==========
Goodwill recorded in connection with acquisition of OST $4,800,792
==========
Non-cash aspects of OBS acquisition:
Stock issued $2,386,388
==========
Fair value of assets acquired other than cash $2,008,572
==========
Liabilities assumed $1,698,987
==========
Deferred tax liability assumed $ 42,565
==========
Goodwill recorded in connection with acquisition of OBS $4,046,946
==========
</TABLE>
(Continued)
F-7
<PAGE> 68
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Non-cash aspects of E-Comm acquisition:
Stock issued $ 930,000
==========
Fair value of assets acquired other than cash $ 257,351
==========
Deferred tax asset acquired $ 32,220
==========
Liabilities assumed $ 88,460
==========
Employee retention program $ 64,156
==========
Goodwill recorded in connection with acquisition of E-Comm $1,098,429
==========
Non-cash aspects of the systems integration business
of IntraNet Solutions, Inc. acquisition:
Deferred tax asset acquired $ 25,629
==========
Note payable $ 785,000
==========
Employee retention program $ 59,573
==========
Goodwill recorded in connection with acquisition of
the systems integration business of IntraNet $1,702,087
==========
Commitment fee on notes payable (Note 8) $ 183,000
==========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-8
<PAGE> 69
OSAGE SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Osage Systems Group, Inc. (the "Company"),
through its wholly-owned subsidiaries, provides network computer solutions
through a broad range of information technology services primarily in the
states of Arizona, Texas, California, Florida, Illinois, Wisconsin,
Minnesota, Virginia and New York. Such services are intended to transform
discrete hardware and software components into integrated systems and
provide solutions to complex information technology problems.
On November 11, 1997, the former parent of Osage Computer Group, Inc.
("Osage"), Sun Up Enterprises, Inc. ("Sun Up") was merged into Osage. In
conjunction with such merger, Sun Up's separate corporate existence
ceased.
On December 22, 1997, the Company acquired Osage pursuant to the terms of
a Merger Agreement dated November 5, 1997 (the "Merger Agreement") with
Pacific Rim Entertainment, Inc., a publicly-traded company. Upon the
closing of the merger, through a wholly-owned subsidiary, the Company
acquired 100 percent of the outstanding capital stock of Osage in exchange
for consideration paid to the former stockholders of Osage (the "Osage
Stockholders") consisting of: (i) $500,000 in cash; (ii) 900,000
newly-issued shares of common stock (subject to upward adjustment in the
event the trading price of the Company's common stock is below $2.00 per
share during an 18-month period following the merger); (iii) 200,000
newly-issued shares of common stock; (iv) 50 shares of Series B $3.00
convertible preferred stock (the "Series B Shares"), which are convertible
into 500,000 shares of common stock (Note 2); and (v) options with a term
of six years that permit the purchase of 800,000 shares of common stock
(Note 10).
Of the shares of common stock issued to the Osage Stockholders in the
merger are 900,000 shares subject to an upward adjustment to the extent
that during any of the six consecutive three-month periods following the
effectiveness of a registration statement, the quarterly value of the
Company's common stock, as to 150,000 shares during each such applicable
three-month period, is below $2.00. The quarterly value shall be derived
from a combination of (1) sales of shares of the Company's common stock by
the Osage Stockholders in open market transactions, upon which value shall
be measured by the average per share sales price, or (2) to the extent
that open market sales have not generated sales proceeds to the Osage
Stockholders of at least $300,000 (based upon the sale of 150,000 shares),
then the remaining value shall be measured based on the average of the
closing bid and ask prices of the Company's common stock on the principal
exchange, automated quotation system or over-the-counter market for the 15
trading days before the last trading day in each such respective
three-month period. To the extent that a sale or deemed sale of 150,000
shares yields for the Osage Stockholders less than $300,000 during any
such applicable three-month period, then, and in that event, the Company
would be required to issue to the Osage Stockholders such number of
additional shares of common stock as would provide them with a yield of
$300,000 on the sale or deemed sale of common stock during the applicable
three-month period.
F-9
<PAGE> 70
Contemporaneous with the merger, the Company completed a private placement
offering to accredited investors (the "Offering") of $3,660,000,
consisting of 122 shares of Series A $3.00 convertible preferred stock
(the "Series A Shares"). Part of the proceeds was used by the Company to:
(i) retire approximately $450,000 of debt; (ii) pay the $500,000 cash
component of the merger consideration to the Osage Stockholders; and (iii)
pay $160,000 of related fees for such offering. The remainder of the
proceeds was used to finance the Company's strategic acquisition strategy
and working capital requirements.
On March 10, 1998, the Company changed its name from Pacific Rim
Entertainment, Inc. to Osage Systems Group, Inc.
For accounting purposes, the merger is considered a reverse acquisition
with Osage being the accounting acquirer and Pacific Rim Entertainment,
Inc. being the legal acquirer. Accordingly, because the Osage Stockholders
retained voting and operating control of the combined entity, the merger
consideration was allocated to the net assets of the Company followed by a
recapitalization of Osage. All historical share and per share amounts have
been restated to retroactively reflect the reverse acquisition.
During 1998, the Company commenced an aggressive acquisition strategy to
enhance its position in its current markets and acquire operations in new
markets. To effectuate this growth, the Company made six acquisitions
during 1998.
On March 17, 1998, the Company acquired Solsource Computers, Inc.
("Solsource") pursuant to the terms of an Agreement and Plan of Merger.
Upon closing, through a wholly-owned subsidiary, the Company acquired 100
percent of the outstanding capital stock of Solsource for merger
consideration of $1.1 million; consisting of $200,000 in cash and $900,000
in newly issued common shares priced at $6.00 per share. In addition, the
agreement requires earn-out incentive shares of $1.0 million to be issued
if Solsource achieves certain performance targets based upon performance
criteria established for the one-year anniversary following the date of
acquisition.
On March 17, 1998, the Company also completed the acquisition of H.V.
Jones, Inc. ("HV Jones") pursuant to the terms of an Agreement and Plan of
Merger dated February 27, 1998. Upon closing, through a wholly-owned
subsidiary, the Company acquired 100 percent 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 converts into common stock
during the next four quarters (Note 2). In addition, the agreement
requires earn-out incentive shares of $2.7 million to be issued over a
two-year period if HV Jones achieves certain performance targets based
upon performance criteria established for the one and two year
anniversaries following the date of acquisition.
On April 24, 1998, the Company completed the acquisition of 100 percent of
the outstanding capital stock of Open Systems Technologies, Inc. ("OST")
for merger consideration of $5.26 million; consisting of $2.76 million in
cash ($260,000 is payable no later than March 31, 1999), $2.0 million in
newly issued common shares priced at $6.00 per share and $500,000 in a key
employee retention program. The key employee retention program is payable
to key employees or the selling shareholders within 30 days following the
end of the 24th month of the closing of the acquisition and is payable in
equal portions of cash and common stock.
On June 22, 1998, the Company completed the acquisition of 100 percent of
the outstanding capital stock of Open Business Systems, Inc. ("OBS") for
merger consideration of $4.0 million; consisting of $2.0 million in cash
and $2.0 million in newly issued common shares priced at $5.52 per share.
In addition, the agreement requires earn-out incentive shares of $3.0
million to be issued over a three-year period if OBS achieves certain
performance targets based upon performance criteria established for the
one, two and three year anniversaries following the date of acquisition.
F-10
<PAGE> 71
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 percent of the outstanding stock of E-Comm for merger consideration of
$1.25 million; 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. $17,500 of the key employee retention program was paid
at closing, with the remaining $70,000 payable to key employees or the
selling shareholders within 60 days following the end of the first
anniversary of the closing of the acquisition and is payable in shares of
the Company's common stock. In addition, the agreement requires earn-out
incentive of $500,000 (20% cash and 80% common stock) to be issued over a
two year period if E-Comm achieves certain performance targets based upon
performance criteria established for the one and two year anniversaries
following the date of acquisition.
On October 15, 1998, the Company completed the acquisition of the systems
integration business of IntraNet Solutions, Inc. ("IntraNet") for merger
consideration of $1.6 million; consisting of $715,000 in cash, $785,000 in
the form of a note payable, of which $250,000 was due and payable within
30 days after the closing and the remaining principal amount of $535,000
is due and payable within 90 days after the closing, and $100,000 in a key
employee retention program. Of the key employee retention program,
$35,000, was paid at closing, with the remaining $65,000 payable to key
employees or the selling shareholders within 30 days following the end of
the first anniversary of the closing of the acquisition in shares of the
Company's common stock. In addition, the agreement requires earn-out
incentive shares valued at $1.0 million to be issued over a two-year
period if IntraNet achieves certain performance targets based upon
performance criteria established for the one and two year anniversaries
following the date of acquisition.
The Solsource, HV Jones, OST, OBS, E-Comm and the systems integration
business of IntraNet acquisitions were accounted for using the purchase
method of accounting for business combinations. The excess of assets
acquired over liabilities assumed has been allocated to goodwill and is
being amortized over 20 years. Results of operations of Solsource, HV
Jones, OST, OBS, E-Comm and the systems integration business of IntraNet
have been included in the Company's consolidated statements of operations
from their respective acquisition dates.
The unaudited proforma combined condensed financial information below 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
proforma information assumes the acquisitions were made at the beginning
of each year presented.
<TABLE>
<CAPTION>
FISCAL YEAR
1998 1997
<S> <C> <C>
Net sales $ 83,046,200 $ 62,598,600
============ ============
Operating loss $ (4,571,400) $ (1,159,900)
============ ============
Net loss $ (3,179,700) $ (1,705,900)
============ ============
Net loss per share $ (0.33) $ (0.18)
============ ============
</TABLE>
F-11
<PAGE> 72
SIGNIFICANT ACCOUNTING POLICIES are as follows:
BASIS OF CONSOLIDATION - The accompanying financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Osage
Computer Group, Inc., H.V. Jones, Inc., Solsource Computers, Inc., Open
Systems Technologies, Inc., Open Business Systems, Inc., Osage Systems
Group Minnesota, Inc. and Osage Support Center, Inc. (the "Support
Center"), (collectively, the "Company"). All significant intercompany
balances and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
GOODWILL of $15,462,427, relating to the acquisitions made during 1998,
is being amortized on a straight-line basis over 20 years. For the year
ended December 31, 1998, amortization expense and accumulated
amortization were $475,471.
REVENUE RECOGNITION - The Company recognizes sales of products when the
products are shipped and services and support revenue are recognized
when the applicable services are rendered. Prior to November 1, 1998,
preventative maintenance contracts sold to customers were provided by an
unrelated company. Upon sale of a preventative maintenance contract, the
Company recognized the sale and related cost in its statement of
operations. Effective, November 1, 1998, the Support Center commenced
operations whereby the service relating to preventative maintenance
contracts sold to customers is initially handled by the Support Center.
Accordingly, the sale and related costs of such contracts are recognized
over the term of the contract.
INVENTORIES which consist of finished goods, are recorded at the lower
of cost (first-in, first-out) or market.
FURNITURE AND EQUIPMENT are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets. The useful lives range from three to seven years.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability approach, which can result in recording tax provisions or
benefits in periods different than the periods in which such taxes are
paid or benefits realized. Deferred income taxes are recorded for the
difference between the book and tax basis of various assets and
liabilities which can provide for current recognition of expected tax
benefits from temporary differences that will result in deductible
amounts in future years.
NET INCOME (LOSS) PER COMMON SHARE - The Company has adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share.
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 years ended December 31, 1998 and 1997, the
effects of the potential dilutive securities discussed in Notes 1, 2 and
10 are not included in the calculations.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial
instruments which potentially subject the Company to a concentration of
credit risk consist of accounts receivable. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral on accounts receivable. The Company maintains allowances for
probable credit losses and such losses have been within management's
expectations. Write-offs of accounts receivable have not been material
for any of the periods presented.
F-12
<PAGE> 73
The fair value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the carrying value
due to the short-term nature of these instruments. Management has
estimated that the fair values of the notes payable approximate the
current balances outstanding, based on currently available rates for
debt with similar terms.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
IMPAIRMENT - The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful
life of long-lived assets and identifiable intangible assets may warrant
revision or that the remaining balance of these assets may not be
recoverable. When factors indicate that these assets should be evaluated
for possible impairment, the Company's management uses several factors
including, among other the Company's projection of future operating
revenues relating to these assets and their related impact on cash
flows.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive
Income ("SFAS 130"), which is effective for financial statements for
periods beginning after December 15, 1997 and establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The adoption of SFAS 130 as of January 1, 1998 had
no impact on its financial statement presentation or related disclosures
as the Company had no items of comprehensive income for any of the
periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information ("SFAS 131"), which is effective
for fiscal years beginning after December 15, 1997 and establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company operates in
one business segment. Accordingly, the adoption of SFAS 131 did not have
a material impact on its financial statement presentation or related
disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for transactions entered
into in fiscal quarters of fiscal years that begin after June 15, 1999.
This statement establishes standards for the accounting and reporting
for derivative instruments and for hedging activities. The future effect
on the Company's financial position and the results of operations has
not been determined.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
and 1996 balances to conform with the classifications used in 1998.
2. CONVERTIBLE PREFERRED STOCK AND CAPITAL STOCK
In June 1998, the stockholders approved an amendment to the Company's
Articles of Incorporation to increase the number of shares of common
stock the Company is authorized to issue from 10,000,000 to 50,000,000
and to increase the number of shares of preferred stock the Company is
authorized to issue from 1,000 to 10,000,000.
F-13
<PAGE> 74
The Company's capital stock consists of common stock, Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred. The Series
A Preferred shares have no voting rights, do not share in dividends, are
each convertible at any time into 10,000 shares of voting common stock,
and beginning June 22, 1998, six months from issuance, are redeemable by
the Company at its discretion at $3.00 per share. As of December 31, 1998,
10 Series A Shares with a principal amount of $300,000 remain outstanding.
The Series A Preferred shares are redeemable by the Company provided (1)
the average of the closing bid and ask prices of the Company's common
stock has exceeded $5.00 per share for the 20 trading days preceding the
date notice of redemption is given to the holders of the Series A
Preferred shares, (2) the shares of the common stock issued or issuable
upon conversion of the Series A Preferred shares are subject to an
effective registration statement, and (3) the placement agent of the
offering shall have waived any restrictions upon the resale of such
shares.
The Series B Preferred shares that were outstanding as of December 31,
1997 were converted into 500,000 shares of common stock during 1998.
The Series C Preferred shares participate in common stock dividends on an
"if converted" basis. The Series C Shares have no voting rights and are
each convertible into common stock during the four quarters that commenced
on March 31, 1998, at a conversion rate equal to the lower of $6.87 or a
33 percent premium over the average closing price of the Company's common
stock for the 10 trading days prior to each date of conversion. During
1998, 80.3 Series C Shares were converted into 175,400 shares of common
stock.
During 1998, the Company completed a private placement offering for 1,000
shares of Series D Preferred shares. In connection with the private
placement, 100,000 warrants to purchase common stock of the Company at
$5.97 per share were granted to the investor.
The Series D Preferred shares have no voting rights prior to conversion
(discussed below). Subject to and after making provision for the rights
and preferences of the Series A Shares and the Series C Shares, the
holders of the Series D Shares shall be entitled to a liquidation
preference equal to $1,000 plus 8 percent per annum thereon from the
issuance date. Accordingly, if the Company liquidates or dissolves, after
payment to all creditors and payment of the liquidation preference to
holders of Series A and Series C Shares, no distribution shall be made to
the holders of Common Stock, unless prior thereto, holders of the Series D
Shares shall have received a liquidation preference of $1,000 plus eight
percent per annum per share.
The holder of the Series D Shares shall be entitled to cumulative
dividends of 8 percent per annum accruing from the date of issuance. The
holder may elect to receive the dividends in the form of shares of common
stock.
The holder of the Series D Shares have the right at any time to convert
the $1,000,000 principal amount of the shares, plus any and all accrued
dividends therein, into shares of Common Stock at the Series D conversion
rate of $4.975 per share. The Series D conversion rate is subject to
adjustment if the Company fails to comply with certain redemption
provisions described below. As so adjusted, the conversion rate shall be
equal to the lesser of (i) $4.975 or (ii) 80 percent of the three lowest
closing bid prices of the common stock during the five trading days
immediately preceding the conversion date.
Commencing on the effective date of a registration statement covering the
shares of common stock issuable upon conversion of the Series D Shares,
and provided the registration statement then remains effective, the
Company shall have the right to force conversion by the holders of the
Series D Shares, provided that the closing bid price as calculated on the
date set forth in the forced conversion notice is equal to or greater than
150 percent of the conversion price. The Company may not initiate a forced
conversion more than once every 30 calendar days and no single forced
conversion shall exceed 50 percent of the total number of shares of Series
D Shares issued.
F-14
<PAGE> 75
The Series D Shares may be redeemed at the option of a holder upon 10
business days written notice after the first anniversary of the issuance
date if the closing bid price calculated as of the first anniversary of
the issuance date is less than the conversion price as of the issuance
date. The redemption price shall be 120 percent of the stated value
($1,000 per share) plus accrued and unpaid dividends. Failure to comply
with these redemption provisions would result in an adjustment to the
conversion price.
The carrying amount of the redeemable preferred stock has been decreased
by $154,000 the fair value of the common stock warrants with a credit to
additional paid-in capital. This amount will be amortized as a deduction
from net income in the consolidated statement of operations to arrive at
the amount of net (loss) income available to common shareholders.
Additionally, because the redeemable preferred stock has conditions for
redemption that are not solely within the control of the Company, it has
been classified outside of permanent equity in the accompanying
consolidated balance sheet and will be accreted to its redemption value.
During 1998, the Company completed the following private placement
offerings:
<TABLE>
<CAPTION>
PRICE NET PROCEEDS PRICE
DESCRIPTION SHARES PER SHARE AFTER COSTS WARRANTS PER SHARE
----------- ------ --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sale of common shares 600,000 $3.50 $1,972,670 200,000 $3.50
Sale of common shares 700,000 $3.50 $2,290,828
Sale of common shares 175,000 $4.25 $ 691,427 25,000 $4.25
Sale of common shares 235,294 $4.25 $ 980,000 150,000 $4.25
Sale of common shares 70,000 $4.75 $ 286,373 35,000 $5.25
</TABLE>
3. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Computer hardware $1,610,061 $ 179,747
Furniture and fixtures 276,789 12,795
Computer software 525,917 12,868
---------- ----------
Total 2,412,767 205,410
Less accumulated depreciation 937,483 118,529
---------- ----------
Furniture and equipment - net $1,475,284 $ 86,881
========== ==========
</TABLE>
4. DEBT AGREEMENTS
The Company has a $13 million credit facility with FINOVA Capital
Corporation ("FINOVA") that consists of both a revolving line of credit
and an inventory line. Borrowings under the revolving line of credit
cannot exceed $10.5 million at any one time and bear interest at prime
(7.75% at December 31, 1998) plus 3 percent. Amounts outstanding under the
inventory line which are paid within 60 days of invoice date do not bear
interest. Interest is payable monthly on amounts outstanding over 60 days
at prime (7.75% at December 31, 1998) plus 6 percent. Outstanding
borrowings under the revolving line of credit were $750,000 at December
31, 1998. Amounts outstanding under the inventory line of $9,597,463 at
December 31, 1998 are classified in the accompanying consolidated balance
sheets with accounts payable.
F-15
<PAGE> 76
The FINOVA credit facility is collateralized by accounts receivable,
inventory, equipment and intangibles and requires, among other things,
minimum quick ratio requirements and the maintenance of a minimum tangible
net worth commencing with the quarter ending September 30, 1999.
Long term debt at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Notes payable to executive officers (Note 8) $ 923,000
Note payable to IntraNet (Notes 1 and 8) 535,000
Notes payable relating to various employee retention programs (Note 1) 572,275
Note payable relating to the acquisition of OST (Note 1) 252,761
Capital lease obligations (Note 6) 31,869
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime (7.75% at December 31, 1998) plus 2.75%, due
in monthly installments through 2003 105,967
Note payable, guaranteed by the U.S. Small Business Administration,
interest at prime (7.75% at December 31, 1998) plus 2.75%, due
in monthly installments through 2002 138,310
----------
Total 2,559,182
Less current maturities 1,914,078
----------
Long-term debt - net $ 645,104
==========
</TABLE>
The notes payable relating to the acquisition of OST and the employee
retention programs arising from the acquisitions of OST, E-Comm and the
systems integration business of IntraNet have been discounted at 8.75
percent per year over the period such notes remain outstanding (Note 1).
Interest expense on the notes amounted to $43,000 for the year ended
December 31, 1998.
Subsequent to December 31, 1998, the note payable to IntraNet was repaid.
5. SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS
The Company engages in business activities in one operating segment which
provides network computers solutions through information technology
services. The chief operating decision-makers are provided information
about the revenues generated in key client industries. The resources
needed to deliver the Company's services are not separately reported by
industry. The Company's services are delivered to clients primarily in the
U.S., and the Company's long-lived assets are all located in the U.S.
Sales to significant customers as a percentage of net sales for the years
ended December 31 are as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Customer A 16.7% 64.8% 43.9%
Customer B 1.6% 11.3%
Customer C 6.0% 4.8% 10.4%
Customer D 10.1%
</TABLE>
F-16
<PAGE> 77
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable operating leases
which expire through 2002. Future minimum lease payments under
noncancellable operating leases at December 31, 1998 are approximately as
follows:
<TABLE>
<S> <C>
1999 $ 948,000
2000 647,000
2001 472,000
2002 428,000
2003 402,000
Thereafter 252,000
----------
Total $3,149,000
==========
</TABLE>
Total rent expense was $536,400, $81,983 and $59,144, net of rent income
from a month-to-month sublease of $22,000, $23,700 and $0 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company leases computer equipment under agreements classified as
capital leases. The cost and accumulated depreciation of equipment of
$133,578 and $101,661, respectively, are included in furniture and
equipment in the accompanying consolidated financial statements as of
December 31, 1998.
Future minimum lease payments on capital lease obligations are due as
follows:
<TABLE>
<S> <C>
1999 $24,593
2000 5,847
2001 5,360
-------
Total future minimum lease payments 35,800
Less amount representing interest 3,931
-------
Present value of future minimum lease payments 31,869
Less current portion 21,709
-------
Non-current portion $10,160
=======
</TABLE>
The Company is involved in litigation and various other legal matters that
have arisen in the ordinary course of business. The Company does not
believe that the ultimate resolution of existing matters will have a
material adverse effect on its financial condition, results of operations,
or cash flows.
7. EMPLOYEE BENEFIT PLANS
On January 1, 1999, the Board of Directors adopted the Osage Systems
Group, Inc. 401(k) and Profit Sharing Plan (the "Plan") covering
substantially all employees of the Company or its wholly-owned
subsidiaries who have attained the age of 21 and completed three months of
service. The Plan is designed to be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended. Each participant may elect to
contribute up to 15 percent of his or her gross compensation up to the
maximum allowed by the Internal Revenue Service. The Company can make
annual discretionary matching contributions.
F-17
<PAGE> 78
Previously, the Company sponsored a qualified contributory 401(k) plan
(the "Osage Plan") that covered all employees who had attained the age of
21 and completed six months of service. The Company could make
discretionary matching contributions. No matching contributions have been
made under the Osage Plan. On December 31, 1998, contributions to the
Osage Plan were ceased. Furthermore, the Osage Plan was merged into the
Plan as of January 1, 1999. The Company expects to complete the transfer
of assets from the Osage Plan to the Plan in the first half of 1999.
Previously, Solsource, OST and OBS each sponsored a qualified contributory
401(k) plan that covered all employees who had attained the age of 21 and
completed required continuous months of service. The plans of Solsource,
OST and OBS (the "Former Plans") could make discretionary matching
contributions. Matching contributions under the OST and OBS plans amounted
to $21,216 and $16,153, respectively, for the year ended December 31,
1998. On December 31, 1998, all contributions to the Former Plans were
ceased. Furthermore, the Former Plans were merged into the Plan as of
January 1, 1999. The Company expects to complete the transfer of assets
from the Former Plans to the Plan in the first half of 1999.
On January 1, 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Stock Purchase Plan"), which is subject to stockholder
approval during the annual meeting of stockholders in June 1999. The
Company has authorized 250,000 shares of the Company's common stock for
purchases under the Stock Purchase Plan. The Stock Purchase Plan permits
eligible employees to purchase shares of common stock, subject to
limitations provided by Section 423(b) of the Internal Revenue Code,
through accumulated payroll deductions. Each participating employee may
purchase an amount up to 10 percent of the participant's compensation and
purchases by any one employee may not exceed $25,000 in fair market value
in any one year. The purchases are made four times per year at a price
equal to the lesser of (i) 85 percent of the fair market value of the
Company's common stock on the first business day of the payment period or
(ii) 85 percent of the fair market value of the Company's common stock on
the last day of the payment period.
8. RELATED PARTY TRANSACTIONS
In connection with the acquisition of the systems integration business of
IntraNet on October 15, 1998, certain officers loaned funds to the Company
and pledged personal stock of the Company to guarantee the remaining
purchase price with a combined value of $1,525,000 to fund the purchase
price. In conjunction with the loan and stock pledge, a commitment fee of
$183,000 was recorded. The commitment fee and loan, $923,000 as of
December 31, 1998, are payable over a six-month period in equal monthly
installments commencing on January 15, 1999 and accrue interest at the
rate of 10 percent per annum; provided, however, that such sum shall be
payable in full when the Company obtains sufficient working capital and
acquisition financing. Interest paid to officers on notes payable amounted
to $19,742 for the year ended December 31, 1998.
On December 4, 1998, the Company entered into an Investment Banking
Agreement with an investment company for financial advisory and
acquisition services. A director of the Company, is also the Managing
Director of this company. In consideration for such services, the Company
granted this company 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 this
company 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 this
company.
Included in prepaid expenses and other current assets in the accompanying
consolidated balance sheets as of December 31, 1998 is $13,000 due from
employees of the Company.
F-18
<PAGE> 79
9. INCOME TAXES
The deferred income tax asset (liability) at December 31 is comprised of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Use of cash basis of accounting for income
tax purposes $ 51,000 $ 85,000
Allowance for doubtful accounts 51,000 6,000
Compensation 350,000 119,000
Other 56,000
-------- --------
Net current assets (liabilities) $508,000 $210,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net operating loss carryforwards $ 1,806,000
Goodwill (41,000)
Property (10,000)
Valuation allowance on net loss carryforwards (363,000)
-----------
Net noncurrent assets $ 1,392,000
===========
</TABLE>
The income tax (benefit) provision consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 207,000
State $ 38,000 55,000
Deferred:
Federal (1,417,000) (228,000) $ 9,464
State (150,000) (37,000)
----------- ----------- -----------
Income tax (benefit) provision $(1,529,000) $ (3,000) $ 9,464
=========== =========== ===========
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% 34.0%
Nondeductible meals, entertainment and insurance 1.8% 5.2%
Nondeductible goodwill 1.7%
Nondeductible write-off of investment 6.7%
State income taxes (3.1)% (5.5)% 6.3%
Overall effect of graduated federal rates 26.6% (19.0)%
----- ---- ----
Effective income tax rate (33.6)% (1.0)% 21.3%
===== ==== ====
</TABLE>
F-19
<PAGE> 80
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $4,700,000 expiring in various years through 2018. A
significant portion of the Company's net operating loss carryforwards are
subject to an annual limitation under Internal Revenue Code Section 382,
in future years, as a result of changes in ownership of the Company's
stock. The annual limitation is generally equal to the value of the
corporation's equity immediately prior to the change in ownership, times
the federal long-term tax exempt rate published by the federal government.
Management believes that such limitations will not materially impact the
ability to use the net operating loss carryforwards in subsequent years.
As a result of the acquisitions made du ring 1998, the Company has
acquired various net operating loss carryforwards which are subject to
additional limitations on use. Accordingly, a valuation allowance of
$363,000 has been recorded against the net deferred asset since it is more
likely than not that such amounts will not be utilized in subsequent
years.
10. STOCK OPTIONS AND WARRANTS AND STOCK COMPENSATION
During 1993, the Company adopted the 1993 Stock Option Plan (the "Option
Plan"). The Option Plan provides for the issuance of both incentive stock
options as well as nonqualified options to be issued to consultants and
others. In June 1998, the stockholders approved an amendment to the Option
Plan to increase the number of shares available for issuance pursuant to
grants thereunder from 100,000 to 2,000,000. Options granted under the
Option Plan generally vest at the date of grant or ratably over a
three-year period and expire four to five years from the date of grant.
Also in 1993, the Company adopted the Outside Directors Stock Option Plan
pursuant to which options to purchase an aggregate of 2,500 shares of
common stock have been authorized on an annual basis to each outside
director who has served during the immediately preceding year. No options
have been granted under this plan since inception.
At December 31, 1997, the Company had 1,000,000 options outstanding to
purchase shares of common stock. Of these options, 800,000 were granted in
connection with the Merger Agreement as discussed in Note 1. These options
were subject to an exercise price equal to the lower of $3.00 per share or
the average of the closing bid and ask prices of shares of the Company's
common stock on the principal exchange, automated quotation system or
over-the-counter market for the 15 trading days prior to the date upon
which any segment of the options vest. Options granted to the former Osage
stockholders had an exercise price of $3.00, however, vesting was
contingent upon the future earnings of the Company and the employees'
continued employment by the Company. Because these options were
performance-based, the Company would have to record compensation expense
in the future if the earnings of the Company achieved agreed-upon levels
and other events occurred that would lead management to believe that
vesting of the options was a probable occurrence. The expense, when
recorded, could have had an adverse effect on the Company's income for
financial accounting purposes. In recognition of the potential charge upon
the Company's earnings, and for other consideration, during June 1998, the
Company restructured the options so as to increase the number of options
granted from 800,000 to 1,600,000, increase the exercise price to $4.50
(fair market value when regranted) and eliminate any vesting conditions.
In addition, 100,000 options were granted to an officer of the Company in
January 1998 with terms similar to those described above. These options
were also restructured in June 1998 and the exercise price was increased
to $4.50.
F-20
<PAGE> 81
Stock option activity under the Company's stock option plans is summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION EXERCISE PRICE
SHARES PER SHARE
<S> <C> <C>
Outstanding at December 31, 1996
Granted 1,000,000 $3.00
--------- -----
Outstanding at December 31, 1997 1,000,000 $3.00
Granted 2,743,572 4.61
Canceled 900,000 3.17
--------- -----
Outstanding at December 31, 1998 2,843,572 $4.56
========= =====
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
------------------------------------------- -----------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE NUMBER
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE PRICE EXERCISABLE AT
EXERCISE PRICE DECEMBER 31, 1998 LIFE PER SHARE DECEMBER 31, 1998
<S> <C> <C> <C> <C>
$3.00 98,900 1.97 $3.00 79,300
$4.50 2,327,187 4.42 $4.50 1,903,000
$4.75-$7.00 417,485 3.84 $5.25 70,000
----------- --------- ---- ----- ---------
$3.00-$7.00 2,843,572 4.25 $4.56 2,052,300
=========== ========= ==== ===== =========
</TABLE>
Of the total options outstanding as of December 31, 1998, 484,672 options
have been granted in conjunction with the Option Plan while the remaining
2,358,900 options have been granted outside the Option Plan.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock options. Accordingly,
no compensation expense has been recognized in the accompanying
consolidated statements of operations as the options granted are
considered fixed options and were granted at fair market value, as defined
by the provisions of APB No. 25 and related interpretations. Had
compensation expense for the Company's stock option plan been determined
based on the fair value at the grant date for awards under the plan
consistent with the methodology prescribed under SFAS No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), the Company's net loss and net
loss per share would have been increased to the proforma amounts indicated
as follows for the year ended December 31, 1998:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
As reported net loss $ (3,024,052)
Proforma net loss for SFAS 123 $ (5,748,051)
Net loss per share:
As reported net loss per common share - basic and diluted $ (0.40)
Proforma net loss per common share for SFAS 123 - basis and diluted $ (0.75)
</TABLE>
F-21
<PAGE> 82
The Company has determined that the proforma effects of recognizing
compensation expense in accordance with SFAS 123 for the year ended
December 31, 1997 would not be materially different than the actual net
loss and net loss per common share included in the consolidated statements
of operations.
The following assumptions were used by the Company to determine the fair
value of stock options granted using the Black-Scholes option-pricing
model:
<TABLE>
<S> <C>
Expected volatility 73.0%
Average expected option life 2.8 years
Risk-free interest rate 4.7%
Dividend yield 0.0%
</TABLE>
During 1998, the Company issued 760,000 warrants to various investors and
other third parties in connection with services provided and purchases of
the Company's stock. These warrants, which expire at various dates through
November 2003, range in price from $3.50 per share to $5.97 per share.
The Company had an employment contract with one of its executives that
granted the employee 200,000 shares of the Company's common stock, 100,000
shares of which vest at the end of the employee's first anniversary with
the remaining 100,000 shares vesting at the end of the employee's second
anniversary. In connection with the employment contract, if the employee
is terminated prior to the one-year anniversary, 100,000 shares shall be
released to the employee. Accordingly, the Company recorded $300,000
(value assigned to the first 100,000 shares) of compensation expense in
the accompanying 1997 consolidated statement of operations. During 1998,
the employee was terminated and forfeited the remaining 100,000 shares of
common stock. Subsequent to December 31, 1998, the 100,000 shares of
common stock were released to the employee with the associated liability
reclassified to stockholders' equity.
F-22
<PAGE> 83
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary:
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
<S> <C> <C> <C> <C>
1997:
Revenues $ 2,239,778 $ 2,688,703 $ 3,659,682 $ 5,603,040
Gross profit 494,423 570,796 706,473 749,445
Net income (loss) 57,464 123,646 97,612 (571,656)
Net income (loss) per share -
basic and diluted 0.01 0.02 0.01 (0.10)
1998:
Revenues $ 5,641,932 $ 12,765,671 $ 19,682,686 $ 22,885,385
Gross profit 1,061,922 2,198,936 4,301,302 3,983,427
Net loss (86,516) (512,581) (56,384) (2,368,571)
Net loss per share -
basic and diluted (0.02) (0.07) (0.01) (0.30)
</TABLE>
12. SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Company completed a private placement
offering for 2,000 shares of Series E Preferred shares. The net proceeds
of $1,900,000 will be used for working capital purposes and to finance the
Company's strategic acquisition strategy. In connection with the private
placement, 150,000 warrants to purchase common stock of the Company at
$7.875 per share were granted to the investor and broker.
The Series E Preferred shares have a liquidation preference of $1,000 per
share plus 8 percent per annum from the issuance date per Series E Share,
have no voting rights prior to conversion and have similar rights and
features as the Series D Preferred Shares (Note 2).
* * * * * *
F-23
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated November 5, 1997 by Incorporated by reference to
and among Pacific Rim Entertainment, Inc., PR Exhibit 2.1 on Form 8-K dated
Acquisition Corp. and Osage Computer Group, Inc. December 22, 1997 (the "December 22,
1997 Form 8-K").
2.2 First Amendment to Agreement and Plan of Merger dated Incorporated by reference to
December 19, 1997 Exhibit 2.2 to the December 22, 1997
Form 8-K.
2.3 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to
by and among Pacific Rim Entertainment, Inc., Exhibit 2.4 to Registrant's Current
Solsource Acquisition Corp. and Solsource Computers, Report on Form 8-K dated March 27,
Inc. 1998 (the "March 27, 1998 Form 8-K").
</TABLE>
<PAGE> 85
<TABLE>
<S> <C> <C>
2.4 Agreement and Plan of Merger dated February 27, 1998 Incorporated by reference to
by and among Pacific Rim Entertainment, Inc., Jones Exhibit 2.5 to the March 27, 1998
Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.5 Amendment to the Agreement and Plan of Merger dated Incorporated by reference to
March 17, 1998 by and among Osage Systems Group, Inc., Exhibit 2.6 to the March 27, 1998
Jones Acquisition Corp. and H.V. Jones, Inc. Form 8-K.
2.6 Certificate of Merger of Osage Computer Group, Inc. Incorporated by reference to
into PR Acquisition Corp. (a wholly-owned subsidiary Exhibit 2.3 to the December 22, 1997
of Pacific Rim Entertainment, Inc.) Form 8-K.
2.7 Certificate of Merger of Solsource Computers, Inc. Incorporated by reference to
into Solsource Acquisition Corp. Exhibit 2.7 to the March 27, 1998
Form 8-K.
2.8 Certificate of Merger of H.V. Jones, Inc. into Jones Incorporated by reference to
Acquisition Corp. Exhibit 2.8 to the March 27, 1998
Form 8-K.
2.9 Stock Purchase Agreement dated April 24, 1998 by and Incorporated by reference to
between Osage Systems Group, Inc. and O. Jack Anderson Exhibit 2.9 to Registrant's Current
Report on Form 8-K dated May 8, 1998
(the "May 8, 1998 Form 8-K").
2.10 Stock Purchase Agreement dated June 22, 1998 by and Incorporated by reference to
among Osage Systems Group, Inc. and John Udelhofen, Exhibit 2.10 to Registrant's Current
Michael Durbin, David Durbin and Brian Wolfe, the Report on Form 8-K dated July 7,
shareholders of Open Business Systems, Inc. 1998 (the "July 7, 1998 Form 8-K").
3.1 Certificate of Incorporation Incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to
the Registrant's Registration
Statement on Form S-1 (Reg. No.
33-69380) filed November 2, 1993
("Amendment No. 1 to Form S-1")
</TABLE>
<PAGE> 86
<TABLE>
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3.2 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation effective March 10, 1998 Exhibit 3.5 of the March 11, 1998
Form 8-K
3.3 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation dated June 12, 1998 Exhibit 3.9 of the Registrant's
Quarterly Report on Form 10-QSB for
the period ended June 30, 1998 (the
"June 30, 1998 Form 10-QSB")
3.4 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Class A Non-Voting Convertible Preferred Stock Exhibit 3.1 of the Registrant's
Current Report on Form 8-K dated
March 11, 1998 (the "March 11, 1998
Form 8-K")
3.5 Certificate of Amendment of Certificate of Incorporated by reference to
Designation, Preferences and Rights of Class A Exhibit 3.2 to the March 11, 1998
Non-Voting Convertible Preferred Stock Form 8-K
3.6 Certificate of Restoration and Revival of Certificate Incorporated by reference to
of Incorporation Exhibit 3.3 to the March 11, 1998
Form 8-K
3.7 Certificate of Amendment to the Certificate of Incorporated by reference to
Incorporation dated November 21, 1997 Exhibit 3.4 to the March 11, 1998
Form 8-K
3.8 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series A $3.00 Convertible Preferred Stock Exhibit 3.3 to the December 22, 1997
Form 8-K
3.9 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series B $3.00 Convertible Preferred Stock Exhibit 3.4 to the December 22, 1997
Form 8-K
3.10 Certificate of Designation, Preferences and Rights of Incorporated by reference to
Series C Convertible Preferred Stock Exhibit 3.8 to the March 27, 1998
Form 8-K
3.11 Certificate of Designation, Preferences and Rights of Filed herewith
Series D Convertible Preferred Stock
</TABLE>
<PAGE> 87
<TABLE>
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3.12 Certificate of Correction to Certificate of Filed herewith
Designation, Preferences and Rights of Series D
Convertible Preferred Stock
3.13 Certificate of Designation of Series E Convertible Filed herewith
Preferred Stock
3.14 Amended and Restated Bylaws dated June 12, 1998 Incorporated by reference to
Exhibit 3.10 of the June 30, 1998
Form 10-QSB
4.1 Form of Common Stock Certificate Incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to
Form S-1
4.2 Form of Warrant Incorporated by reference to
Exhibit 1.2 to Amendment No. 1 to
Form S-1
4.3 Form of Warrant Certificate Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to
Form S-1
4.4 Form of 8% Senior Secured Note Incorporated by reference to
Exhibit 4 to the Registrant's
Quarterly Report on Form 10-QSB for
the period ended June 30, 1997
4.5 Specimen of Series A $3.00 Convertible Preferred Stock Incorporated by reference to
Exhibit 4.1 to the December 22, 1997
Form 8-K
4.6 Specimen of Series B $3.00 Convertible Preferred Stock Incorporated by reference to
Exhibit 4.2 to the December 22, 1997
Form 8-K
4.7 Specimen of Series C Convertible Preferred Stock Incorporated by reference to
Exhibit 4.7 to the March 27, 1997
Form 8-K
4.8 Specimen of Series D Convertible Preferred Stock Filed herewith
4.9 Specimen of Series E Convertible Preferred Stock Filed herewith
</TABLE>
<PAGE> 88
<TABLE>
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9.1 Form of Voting Trust Agreement Incorporated by reference to
Exhibit 9.1 to the December 22, 1997
Form 8-K
9.2 Amendment to Voting Trust Agreement Incorporated by reference to
Exhibit 9.2 of the June 30, 1998
Form 10-QSB
10.1 Amended and Restated 1993 Stock Option Plan Incorporated by reference to
Exhibit 10.1 of the June 30, 1998
Form 10-QSB.
10.2 1993 Outside Director Stock Option Plan Incorporated by reference to
Exhibit 10.5 to the Registration
Statement on Form S-1 (Registration
No. 33-69380) filed September 24,
1993 ("Form S-1").
10.3 Form of Stock Option Incorporated by reference to
Exhibit 10.1 to the December 22,
1997 Form 8-K
10.4 Form of Employment Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.2 to the December 22,
1997 Form 8-K
10.5 Amendment to Employment Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.23 of the June 30, 1998
Form 10-QSB
10.6 Option to Purchase 664,000 Shares granted to Jack Incorporated by reference to
Leadbeater Exhibit 10.27 of the June 30, 1998
Form 10-QSB
10.7 Form of Employment Agreement of David Olson Incorporated by reference to
Exhibit 10.3 to the December 22,
1997 Form 8-K
10.8 Amendment to Employment Agreement of David Olson Incorporated by reference to
Exhibit 10.24 of the June 30, 1998
Form 10-QSB
</TABLE>
<PAGE> 89
<TABLE>
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10.9 Option to Purchase 664,000 Shares granted to David Incorporated by reference to
Olson Exhibit 10.28 of the June 30, 1998
Form 10-QSB
10.10 Form of Employment Agreement with John Iorillo Incorporated by reference to
Exhibit 10.10 of the March 27, 1998
Form 8-K.
10.11 Amendment to Employment Agreement of John Iorillo Filed herewith.
10.12 Option to Purchase 50,000 Shares granted to John Incorporated by reference to
Iorillo Exhibit 10.29 of the June 30, 1998
Form 10-QSB
10.13 Option to Purchase 100,000 Shares granted to John Incorporated by reference to
Iorillo Exhibit 10.30 of the June 30, 1998
Form 10-QSB
10.14 Amendment to Option to Purchase 100,000 Shares granted Incorporated by reference to
to John Iorillo Exhibit 10.31 of the June 30, 1998
Form 10-QSB
10.15 Form of Employment Agreement of Michael Glynn Incorporated by reference to
Exhibit 10.4 to the December 22,
1997 Form 8-K
10.16 Option to Purchase 100,000 Shares Granted to Michael Incorporated by reference to
Glynn Exhibit 10.5 to the December 22,
1997 Form 8-K
10.17 Employment Letter of Understanding with Phil Carter Filed herewith.
10.18 Option to Purchase 510,000 Shares granted to Phil Filed herewith.
Carter
10.19 Employment Agreement of Daniel J. Vahalla Incorporated by reference to
Exhibit 10.11 of the March 27, 1998
Form 8-K
10.20 Employment Agreement of Hugh V. Jones Incorporated by reference to
Exhibit 10.12 of the March 27, 1998
Form 8-K
</TABLE>
<PAGE> 90
<TABLE>
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10.21 Termination Benefits Agreement of Jack Leadbeater Incorporated by reference to
Exhibit 10.25 of the June 30, 1998
Form 10-QSB
10.22 Termination Benefits Agreement of David Olson Incorporated by reference to
Exhibit 10.26 of the June 30, 1998
Form 10-QSB
10.23 Termination Benefits Agreement of John Iorillo Filed herewith.
10.24 Confidential Private Placement Memorandum dated Incorporated by reference to
November 24, 1997 relating to the offer and sale of Exhibit 10.6 to the December 22,
$3,660,000 of Series A Preferred Stock 1997 Form 8-K
10.25 Supplement No. 1 to Confidential Private Placement Incorporated by reference to
Memorandum dated November 24, 1997 relating to the
Exhibit 10.7 to the December 22, offer and sale of
$3,660,000 of Series A Preferred 1997 Form 8-K Stock
10.26 Registration Rights Agreement by and among Pacific Rim Incorporated by reference to
Entertainment, Inc. and the Trust of Daniel J. and Exhibit 10.13 of the March 27, 1998
Mary G. Vahalla, Gary Gwin, Maureen Gaare and Daniel Form 8-K
Grube
10.27 Registration Rights Agreement by and between Pacific Incorporated by reference to
Rim Entertainment, Inc. and Hugh V. Jones Exhibit 10.14 of the March 27, 1998
Form 8-K
10.28 Consulting Agreement by and between Osage Systems Incorporated by reference to
Group, Inc. and O. Jack Anderson Exhibit 10.15 of the May 8, 1998
Form 8-K
10.29 Noncompetition Agreement by and between Osage Systems Incorporated by reference to
Group, Inc. and O. Jack Anderson Exhibit 10.16 of the May 8, 1998
Form 8-K
10.30 Registration Rights Agreement by and between Osage Incorporated by reference to
Systems Group, Inc. and O. Jack Anderson Exhibit 10.17 of the May 8, 1998
Form 8-K
10.31 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and John Udelhofen Exhibit 10.18 of July 7, 1998 Form
8-K
</TABLE>
<PAGE> 91
<TABLE>
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10.32 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and Michael Durbin Exhibit 10.19 of the July 7, 1998
Form 8-K
10.33 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and David Durbin Exhibit 10.20 of the July 7, 1998
Form 8-K
10.34 Employment Agreement dated June 22, 1998 by and Incorporated by reference to
between Open Business Systems, Inc. and Brian Wolfe Exhibit 10.21 of the July 7, 1998
Form 8-K
10.35 Registration Rights Agreement dated June 22, 1998 by Incorporated by reference to
and among Osage Systems Group, Inc. and John Exhibit 10.22 of the July 7, 1998
Udelhofen, Michael Durbin, David Durbin and Brian Form 8-K
Wolfe, the Shareholders of Open Business Systems, Inc.
10.36 Investment Banking Agreement dated December 4, 1998, Filed herewith.
by and between Osage Systems Group, Inc. and American
Maple Leaf Financial Corp.
10.37 Warrant to Purchase 50,000 shares granted to American Filed herewith.
Maple Leaf Financial Corp.
21.1 Subsidiaries of the Registrant Filed herewith.
27.1 Financial Data Schedule Filed herewith.
</TABLE>
<PAGE> 1
Exhibit 3.11
CERTIFICATE OF DESIGNATION
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
OSAGE SYSTEMS GROUP, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
OSAGE SYSTEMS GROUP, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"COMPANY"), hereby certifies that on December 30, 1998, the Board of Directors
of the Company (the "BOARD"), in accordance with Section 151 of the General
Corporation Law of the State of Delaware and the Company's Certificate of
Incorporation (the "CERTIFICATE OF INCORPORATION"), adopted resolutions creating
out of the 10,000,000 shares of Preferred Stock, par value $0.01 per share,
authorized in Article Fourth of the Certificate of Incorporation (the "PREFERRED
STOCK"), a series of the Preferred Stock of the Company, par value $0.01 per
share, and hereby states the designation and number of shares, and fixes the
relative rights, preferences, and limitations thereof as follows:
I. Designation and Amount. The shares of such series of Preferred Stock shall be
designated as "Series D Convertible Preferred Stock" (the "SERIES D PREFERRED
STOCK") and the number of shares constituting the Series D Preferred Stock shall
be 1,000. The Series D Preferred Stock shall have a stated value (the "STATED
VALUE") of $1,000 per share.
II. Dividends.
A. The holders of shares of Series D Preferred Stock shall be entitled
to receive dividends, out of any assets legally available therefore, prior to,
and in preference to, any declaration or payment of any dividend (payable other
than in Common Stock of the Company) on the Common Stock of the Company, at a
per share rate equal to eight percent per annum of the amount of the Stated
Value of the Series D Preferred Stock, which is payable upon conversion
(including Forced Conversion and Automatic Conversion) as set forth below.
Dividends shall begin to accrue as of the Issuance Date and are based upon a 365
calendar day year. Any dividends payable pursuant to the provisions of this
paragraph shall, at the Company's option, be payable in cash, or shares of
Common Stock of the Company subject to an effective registration statement
within five Business Days of when due. The number of shares of Common Stock to
be issued by the Company in lieu of a cash payment for dividends due as set
forth herein shall be equal to the number of shares of Common Stock resulting
from dividing the dollar amount of dividends owed by the Conversion Price (as
defined below) on such date as the dividends are payable (if such date is not a
Trading Day, then the next Trading Day immediately thereafter).
<PAGE> 2
B. Such dividends shall accrue on each share of Series D Preferred
Stock from the Issuance Date, and shall accrue from day to day whether or not
earned or declared. Such dividends shall be cumulative so that if such dividends
in respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series D Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series D
Preferred Stock or Common Stock. Dividends on the Series D Preferred Stock shall
be non-participating and the holders of the Series D Preferred Stock shall not
be entitled to participate in any other dividends beyond the cumulative
dividends specified herein.
III. Liquidation, Dissolution or Winding Up.
A. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, before any distribution may be made
with respect to the Company's Common Stock or any other class or series of
capital stock (subject to and after making provision for the rights and
preferences of the existing shares of Series A $3.00 Convertible Preferred Stock
and Series C Convertible Preferred Stock), holders of each share of Series D
Preferred Stock shall be entitled to receive out of the assets available for
distribution to shareholders $1,000 plus eight percent per annum thereon from
the Issuance Date (as defined below) to the Trading Day (as defined below)
immediately prior to such liquidation, dissolution or winding up of the Company
(the "LIQUIDATION AMOUNT").
B. If the assets of the Company available for distribution to
shareholders shall be insufficient to pay the holders of shares of Series D
Preferred Stock the full Liquidation Amount to which they shall be entitled,
then any such distribution of assets of the Company shall, after distribution to
the holders of the Series A $3.00 Convertible Preferred Stock and Series C
Convertible Preferred Stock, be distributed ratably to the holders of shares of
Series D Preferred Stock.
C. After the payment of the Liquidation Amount shall have been made in
full to the holders of the Series D Preferred Stock or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series D Preferred Stock so as to be available for such payments,
the holders of the Series D Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Company, and the
remaining assets of the Company legally available for distribution to
shareholders shall be distributed among the holders of Common Stock and any
other classes or series of Preferred Stock of the Company in accordance with
their respective terms.
IV. Voting. Holders of Series D Preferred Stock shall have no voting
rights except as expressly required by law or as expressly provided herein.
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<PAGE> 3
V. Conversion of Series D Preferred Stock. The holders of Series D
Preferred Stock shall have the right, at such holder's option, to convert the
Series D Preferred Stock into shares of Common Stock, on the following terms and
conditions:
A. Subject to the provisions of the Forced Conversion and Redemption
hereof, at any time or times, upon the earlier to occur of (i) the 90th calendar
day after the Issuance Date, or (ii) the Effective Date, any holder of the
Series D Preferred Stock shall be entitled to convert any whole number of shares
of Series D Preferred Stock into that number of fully paid and nonassessable
shares of Common Stock, which is determined (per share of Series D Preferred
Stock) by dividing (x) $1,000, by (y) the Conversion Price (as defined below).
B. For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A "BUSINESS DAY" shall be any day other than a Saturday,
Sunday, national holiday or a day on which the American Stock Exchange is
closed.
The "CLOSING BID PRICE" shall mean, for any security as of any
date, the average of the closing bid prices for such security for the
immediately preceding five Trading Days on the American Stock Exchange as
reported by Bloomberg L.P. ("BLOOMBERG"), or, if the American Stock Exchange is
not the principal trading market for such security, the average of the closing
bid prices of such security for the immediately preceding five Trading Days on
the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
average of the closing bid prices of such security for the immediately preceding
five Trading Days in the over-the-counter market on the OTC Electronic Bulletin
board for such security as reported by Bloomberg, or, if no closing bid or trade
prices are reported for such security by Bloomberg, the Closing Bid Price shall
be determined by reference to the average of the closing bid prices for the
immediately preceding five Trading Days as reported on the Principal Market, and
if not so reported shall be determined from the average of the bid prices of any
market makers for such security as reported in the "pink sheets" published by
the National Quotation Bureau, Inc. for the immediately preceding five Trading
Days. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually agreed by the Company and
the holders of two thirds of the outstanding shares of Series D Preferred Stock.
The "CONVERSION PRICE" shall mean, as to each share of Series
D Preferred Stock, $1,000 divided by the Closing Bid Price determined as of the
Issuance Date, notwithstanding when the event of conversion occurs. However,
only in the event the Company fails to comply with the redemption provisions
provided in Section XII.A. below in any manner whatsoever, the Conversion Price
in connection with that number of shares of Preferred Stock which are subject to
such a redemption shall be equal to the lesser of (A) the Conversion Price
calculated in accordance with the preceding sentence, or (B) 80% of the three
lowest closing bid prices of the Common Stock (as reported by Bloomberg, LP or
if not so reported as set forth in the definition
3
<PAGE> 4
of Closing Bid Price above) during the Closing Bid Price of the Common Stock
calculated as of the Conversion Date.
"EFFECTIVE DATE" shall mean the date on which the Securities
and Exchange Commission (the "SEC") first declares effective a registration
statement registering the resale of the number of shares of Common Stock
issuable (irrespective of any shareholder approval requirement) upon conversion
of all of the Series D Preferred Stock outstanding on the Trading Day
immediately preceding the day such Registration Statement is filed (the
"REGISTRATION STATEMENT").
The "ISSUANCE DATE" shall mean, with respect to each share of
Series D Preferred Stock, the date of issuance of the applicable share of Series
D Preferred Stock.
A "TRADING DAY" shall mean a day on which the American Stock
Exchange is open.
The "PRINCIPAL MARKET" shall mean the Nasdaq National Market,
the Nasdaq Small Cap Stock Market, the American Stock Exchange, the OTC
Electronic Bulletin Board operated by the National Association of Securities
Dealers, Inc., or the New York Stock Exchange, whichever is at the time the
principal trading exchange or market for the Common Stock.
C. Holders of Series D Preferred Stock may exercise their right to
convert the Series D Preferred Stock by telecopying an executed and completed
notice of conversion (the "NOTICE OF CONVERSION") to the Company and delivering
to the Company the original Notice of Conversion and the certificate
representing the Series D Preferred Stock being converted by reputable overnight
courier. Each Business Day (between the hours of 7:00 a.m. and 5:00 p.m.
Mountain Time) on which a Notice of Conversion is telecopied to and received by
the Company shall be deemed a "CONVERSION DATE". The Company will deliver, or
instruct its transfer agent to deliver, the certificates representing shares of
Common Stock issuable upon conversion of any share of Series D Preferred Stock
(the "CONVERSION SHARES") (together with the certificates representing the share
or shares of Series D Preferred Stock not so converted) to the holder thereof
via reputable overnight courier, by electronic transfer or otherwise within five
Business Days after the Conversion Date, provided the Company has received the
original Notice of Conversion and Series D Preferred Stock certificate being so
converted on or before the close of business of the fourth Business Day after
the Conversion Date. In addition to any other remedies which may be available to
the holders of shares of Series D Preferred Stock, in the event that the Company
fails to deliver such shares of Common Stock within such five Business Day
period, the holder will be entitled to revoke the relevant Notice of Conversion
by delivering a notice to such effect to the Company whereupon the Company and
such holder shall each be restored to their respective positions immediately
prior to delivery of such Notice of Conversion. The Notice of Conversion and
Series D Preferred Stock certificates representing the portion of the Series D
Preferred Stock converted shall be delivered as follows:
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<PAGE> 5
To the Company:
Osage Systems Group, Inc.
1661 East Camelback Road, Suite 245
Phoenix, Arizona 85016
Attention: Jack R. Leadbeater, Chief Executive Officer
Telephone: (602) 274-1299
Facsimile: (602) 274-1295
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center
1835 Market Street, 14th Floor
Philadelphia, PA 19103
Telephone: (215) 665-3873
Facsimile: (215) 665-8760
In the event that shares representing the Common Stock issuable upon
conversion of the Series D Preferred Stock (the "CONVERSION SHARES") are not
delivered by the Company within five Business Days after the Conversion Date, in
addition to all other available remedies which such holder may be entitled, the
Company shall pay to the holders thereof, in immediately available funds, upon
demand, as liquidated damages for such failure and not as a penalty, on each
date after such fifth Business Day that conversion is not timely effected, an
amount equal to 2% of the Stated Value of the Series D Preferred Stock subject
to such conversion. In the event the Company fails to pay the liquidated damages
as set forth above within five Business Days of the date incurred, then such
payment shall bear interest at the rate of two percent per month (pro rated for
partial months) until such payments are made. Any and all payments required
pursuant to this paragraph shall be payable only in cash, and shall not be
deemed a waiver of the Company's obligation to issue the Conversion Shares.
D. If the nature and/or character of the Common Stock issuable upon the
conversion of the Series D Preferred Stock shall be changed into the same or
different number of shares of any class or classes of stock, whether by capital
reorganization, reclassification or otherwise, then and in each such event, the
holders of Series D Preferred Stock shall have the right thereafter to convert
such shares into the kind and amount of shares of stock and other securities and
property receivable upon such capital reorganization, reclassification or other
change which such holders would have received had their shares of Series D
Preferred Stock been converted immediately prior to such capital reorganization,
reclassification or other change.
5
<PAGE> 6
E. If at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section)
or a merger or consolidation of the Company with or into another corporation
pursuant to which the Company is not the acquiring entity and pursuant to which
the stockholders of the Company are requested to exchange or convert their
securities for securities of an acquiring entity, or the sale of all or
substantially all of the Company's properties and assets to any other person
(any of which events is herein referred to as a "REORGANIZATION"), then as a
part of such Reorganization, provision shall be made so that the holders of the
Series D Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series D Preferred Stock, the number of shares of Common Stock or other
securities or property of the Company, or of the successor corporation resulting
from such Reorganization, to which such holder would have been entitled if such
holder had converted its shares of Series D Preferred Stock immediately prior to
such Reorganization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section with respect to the rights of
the holders of the Series D Preferred Stock after the Reorganization, to the end
that the provisions of this Section (including adjustment of the number of
shares issuable upon conversion of the Series D Preferred Stock) shall be
applicable after that event in as nearly equivalent a manner as may be
practicable.
F. Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series D Preferred Stock, the Company, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of such Series D Preferred Stock a
certificate executed by the president and chief financial officer (or in the
absence of a person designated as the chief financial officer, by the treasurer)
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment are based. The Company shall, upon
written request at any time of any holder of Series D Preferred Stock, furnish
or cause to be furnished to such holder a certificate setting forth (A) the
Conversion Price at the time in effect, and (B) the number or shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series D Preferred Stock.
G. Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of any Series D Preferred Stock certificate(s), and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company, and upon the cancellation of the Series D Preferred
Stock certificate(s), if mutilated, the Company shall execute and deliver new
certificates for Series D Preferred Stock of like tenure and date. However, the
Company shall not be obligated to reissue such lost or stolen certificates for
shares of Series D Preferred Stock if the holder contemporaneously requests the
Company to convert such shares of Series D Preferred Stock into Common Stock.
H. The Company shall not issue any fraction of a share of Common Stock
upon any conversion. The Company shall round such fraction of a share of Common
Stock up to the nearest whole share.
I. In the event some but not all of the shares of Series D Preferred
Stock represented by a certificate or certificates surrendered by a holder are
converted, the Company shall execute and
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<PAGE> 7
deliver to or on the order of the holder, at the expense of the Company, a new
certificate representing the number of shares of Series D Preferred Stock which
were not converted.
J. Each share of Series D Preferred Stock outstanding two years from
the Issuance Date shall automatically be converted into Common Stock on such
date, pursuant to the conversion terms set forth herein, with such date being
deemed a Conversion Date (referred to as "AUTOMATIC CONVERSION").
K. The Company shall pay any and all original issue and/or transfer
taxes which may be imposed upon it with respect to the issuance and delivery of
Common Stock upon conversion of the Series D Preferred Stock.
VI. No Reissuance of Series D Preferred Stock. No share or shares of Series D
Preferred Stock acquired by the Company by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series D Preferred
Stock accordingly.
VII. Reservation of Shares. The Company shall, so long as any of the Series D
Preferred Stock are outstanding reserve and keep available out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of
the Series D Preferred Stock, such number of shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all of the Series D
Preferred Stock then outstanding; provided that the number of shares of Common
Stock so reserved shall at no time be less than the number of shares of Common
Stock for which the Series D Preferred Stock are at any time convertible and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to maintain such number of shares of Common Stock, the Company
shall take such corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
VIII. Restrictions and Limitations.
A. Except as expressly provided herein or as required by law, so long
as any shares of Series D Preferred Stock remain outstanding, the Company shall
not, without the approval by vote or written consent by the holders of at least
two thirds of the then outstanding shares of Series D Preferred Stock, voting as
a separate class take any action that would have be inconsistent or conflict
with the rights, preferences or privileges of the holders of Series D Preferred
Stock in the manner set forth in Section VIII.B below.
B. The Company shall not so long as any shares of Series D Preferred
Stock remain outstanding amend its Certificate of Incorporation without the
approval by the holders of all of the then outstanding shares of Series D
Preferred Stock if such amendment would:
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<PAGE> 8
1. create any other class or series of capital stock entitled
to seniority as to the payment of dividends in relation to the
holders of Series D Preferred Stock;
2. reduce the amount payable to the holders of Series D
Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company, or change the
relative seniority of the liquidation preferences of the
holders of Series D Preferred Stock to the rights upon
liquidation of the holders of other capital stock of the
Company,
3. cancel or modify the conversion rights of the holders of
Series D Preferred Stock provided for in Section V herein;
4. cancel or modify the rights of the holders of the Series D
Preferred Stock provided for in this Section.
IX. No Dilution or Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Certificate of Designation set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series D Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not establish a par value of any shares of stock
receivable on the conversion of the Series D Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock on the conversion of all Series D
Preferred Stock from time to time outstanding, and (c) shall not consolidate
with or merge into any other person or entity, or permit any such person or
entity to consolidate with or merge into the Company (if the Company is not the
surviving person), unless such other person or entity shall expressly assume in
writing and will be bound by all of the terms of the Series D Preferred Stock
set forth herein.
X. Notices of Record Date. In the event of:
1. any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
2. any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger of the Company where the Company is not the surviving entity, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, or any other entity or person, the result of any of such merger is
8
<PAGE> 9
that the Holder is requested to convert or exchange its certificates
representing Series D Preferred Stock, or
3. any voluntary or involuntary dissolution, liquidation
or winding up of the Company, then and in each such event the Company shall mail
or cause to be mailed to each holder of Series D Preferred Stock a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up is expected to become effective and (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least ten
Business Days prior to the date specified in such notice on which such action is
to be taken.
XI. Forced Conversion.
A. Subject to the other provisions of this Section, from and after the
Effective Date, and provided the Registration Statement then remains effective,
the Company shall have the right to force conversion by the holders of the
Series D Preferred Stock by telecopying written notice of its election to force
conversion (the "FORCED CONVERSION NOTICE") containing the information set forth
below to the holders under the following circumstance:
In the event the Closing Bid Price of the Common Stock as calculated on
the date set forth in the Forced Conversion Notice is equal to or greater than
150% of the Conversion Price (the "150% PERIOD"), the Company may force
conversion by the holders of shares of Series D Preferred Stock at the
Conversion Price; provided that the Company may not initiate another forced
conversion pursuant to the provisions of this Subsection more than once every 30
calendar days and no single forced conversion shall exceed 50% of the total
number of shares of Series D Preferred Stock issued by the Company. A Forced
Conversion Notice shall not be deemed to affect or otherwise reduce the holders'
conversion rights as set forth herein as to the shares of Series D Preferred
Stock not subject to a Forced Conversion Notice.
B. The Company shall effect such forced conversions pro rata amongst
the holders according to the number of shares of Series D Preferred Stock held
by each holder of Series D Preferred Stock. The Forced Conversion Notice must be
delivered via facsimile by the Company prior to 12:00 p.m. Pacific Time on the
second Trading Day immediately following the expiration of the 150% Period
referred to in Section XI. A. above. A Forced Conversion Notice shall be deemed
delivered on (i) the Trading Day the Company faxes the notice and receives
confirmation of transmission thereof prior to 12:00 p.m. Pacific Time on such
day, or (ii) the immediately succeeding Trading Day if the Company receives
confirmation of transmission of the notice after 12:00 p.m. Pacific Time on a
Trading Day or at any time on a day which is not a Trading Day. No Forced
Conversion Notice may be deemed delivered, on a day that is not a
9
<PAGE> 10
Trading Day. Once the Company has exercised its right to force conversion of the
Preferred Stock by giving a Forced Conversion Notice to the holder as set forth
above it shall be deemed irrevocable. The Company will deliver, or instruct its
transfer agent to deliver, the certificates representing shares of Common Stock
issuable upon the forced conversion of any share of Series D Preferred Stock
(together with the certificates representing the share or shares of Series D
Preferred Stock not so converted) to the holder thereof via reputable overnight
courier, by electronic transfer or otherwise within five Business Days after the
date of delivery of the Forced Conversion Notice. In the event the Company fails
to timely deliver the shares of Common Stock due upon a forced conversion on one
occasion, such failure will negate the effect of the Forced Conversion Notice
and thereafter, as a result, the Company shall have waived its right to serve a
Forced Conversion Notice upon that particular holder at any time in the future.
C. The Forced Conversion Notice shall set forth a calculation
referencing the conversion formula contained herein showing the number of shares
of Common Stock being issued pursuant to the applicable forced conversion, and
the Closing Bid Price of the Common Stock relied upon for the forced conversion.
D. Upon the Company's full compliance with the forced conversion
provisions set forth in Section XI.B above, the shares of Series D Preferred
Stock that are the subject of a forced conversion shall be automatically
canceled and converted into a right to receive shares of Common Stock, and all
rights of the Series D Preferred Stock which are the subject of the forced
conversion, including the right to conversion, shall cease without further
action. If the holder does not concur with the Company's conversion calculations
in the Forced Conversion Notice, the holder shall notify the Company in writing
within three Business Days after the Forced Conversion Date of such fact.
Notwithstanding the foregoing, the Company remains obligated to send those
shares of Common Stock which are undisputed.
E. The number of shares of Common Stock issuable upon the forced
conversion of the Series D Preferred Stock shall be adjusted in the manner and
under the circumstances as set forth herein.
F. The Company may not serve a Forced Conversion Notice upon any holder
if such notice would result in such holder owning, at such time, more than 4.99%
of the number of shares of Common Stock then outstanding.
XII. Redemption.
A. If the Closing Bid Price calculated as of the first anniversary of
the Issuance Date is less than the Conversion Price as of the Issuance Date, at
the written option of either the Company or a holder (the "REDEEMING PARTY")
delivered within ten Business Days after the first anniversary of the Issuance
Date (the "REDEMPTION NOTICE"), and provided that the Company has not received a
notice of conversion for such shares prior to the date of the Redemption Notice,
the Company shall repay, in whole or in part, the Series D Preferred Stock
shares at the Redemption Price (as defined below). The Series D Preferred Stock
is redeemable as a series, in
10
<PAGE> 11
whole or in part, by the Redeeming Party providing a timely Redemption Notice to
the other party via facsimile at his or its address as the same shall appear on
the books and records of the Company and in accordance with Section XII.C below
(the Business Day between the hours of 9:00 a.m. and 5:00 Mountain Time in which
the Redemption Notice is received by the other party via facsimile is defined to
be the "REDEMPTION NOTICE DATE"). Within ten Business Days after the Redemption
Notice Date the Company shall pay the Redemption Price (as defined below) in
immediately available funds to the holder for the shares of Series D Preferred
Stock which are the subject of the Redemption Notice (such date of payment
referred to as the "REDEMPTION DATE"), provided that the Company receives the
shares of Series D Preferred Stock which are the subject of the Redemption
Notice by the seventh Business Day after the Redemption Notice Date. Partial
redemptions shall be in an aggregate principal amount of at least $100,000. If
fewer than all of the outstanding shares of Series D Preferred Stock are to be
redeemed, and if the Company is the Redeeming Party, the Company will select
those to be redeemed pro-rata amongst the then holders of the Series D Preferred
Stock. In the event the Company fails to comply with the redemption provisions
contained herein in any manner whatsoever and the Redeeming Party is the holder,
(i) the subject Redemption Notice shall be deemed null and void, and (ii) the
holder thereafter has the right to convert that portion of the Preferred Stock
which were the subject of such Redemption Notice. Notwithstanding the foregoing,
the Company may only serve a Redemption Notice if it has specifically allocated
readily available funds for the Redemption Price.
B. The "REDEMPTION PRICE" per share of Series D Preferred Stock being
redeemed shall be equal to 120% of the Stated Value, plus all accrued and unpaid
dividends.
C. The Redemption Notice shall set forth (i) the number of shares of
Series D Preferred Stock subject to redemption, (ii) the Redemption Price, and
(iii) a statement that dividends on the shares of Series D Preferred Stock to be
redeemed will cease to accrue on the Redemption Date, (iv) a statement of or
reference to the conversion right set forth herein, and (v) complete wire
transfer instructions for the Redemption Price. If practicable, the Redemption
Notice shall specify the numbers of the certificates representing such shares.
For the first five Trading Days after the Redemption Notice Date, the holder of
the Series D Preferred Stock will retain his or its right to convert the Series
D Preferred Stock as set forth herein.
D. Subject to the occurrence of the wire transfer of the Redemption
Price as described in Section XII.C above, each share of Series D Preferred
Stock to be redeemed shall be automatically canceled and converted into a right
to receive the Redemption Price, and all rights of the Series D Preferred Stock,
including the right to conversion, shall cease without further action.
E. The Redemption Price shall be adjusted proportionally upon any
adjustment of the Conversion Price as provided herein and in the event of any
stock dividend, stock split, combination of shares or similar event.
11
<PAGE> 12
XIII. 4.99% Limitation. The number of shares of Common Stock which may be
acquired by any holder upon conversion pursuant to the terms herein shall not
exceed the number of such shares which, when aggregated with all other shares of
Common Stock then owned by holder, inclusive of all other shares of Common Stock
or securities convertible into Common Stock, would result in any holder owning
more than 4.99% of the then issued and outstanding Common Stock. The preceding
shall not interfere with any holder's right to convert the Series D Preferred
Stock over time which in the aggregate totals more than 4.99% of the then
outstanding shares of Common Stock so long as such Investor does not own more
than 4.99% of the then outstanding Common Stock at any given time. The foregoing
limitation shall not apply to the Automatic Conversion provision contained
herein.
RESOLVED, FURTHER, that the appropriate officers of the Company hereby are
authorized to execute and acknowledge a certificate setting forth these
resolutions and to cause such certificate to be filed and recorded, all in
accordance with the requirements of Section 151 of the General Corporation Law
of the State of Delaware.
12
<PAGE> 13
IN WITNESS WHEREOF, Osage Systems Group, Inc., has caused this
Certificate to be signed by its Chief Executive Officer, and attested to by its
Assistant Secretary, this 31st day of December, 1998.
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack R. Leadbeater
-------------------------------
Attest: Jack R. Leadbeater,
Chief Executive Officer
By: /s/ John Iorillo
-----------------
John Iorillo,
Assistant Secretary
13
<PAGE> 1
Exhibit 3.12
CERTIFICATE OF CORRECTION TO
CERTIFICATE OF INCORPORATION
OF
OSAGE SYSTEMS GROUP, INC.
FILED UNDER SECTION 103(f) OF THE
DELAWARE GENERAL CORPORATION LAW
It is hereby certified that:
1. The present name of the Corporation is OSAGE SYSTEMS GROUP, INC.
(the "Corporation"). The Corporation was originally incorporated under the name
of "Pacific Rim Entertainment, Inc." by the filing of a Certificate of
Incorporation with the Secretary of State of the State of Delaware on May 22,
1992. A Certificate of Designation of Series D Convertible Preferred Stock was
filed on December 31, 1998 (the "Series D Certificate of Designation") which
requires correction as permitted by subsection (f) of Section 103 of the GCL.
2. The Series D Certificate of Designation filed December 31, 1998
included certain inaccuracies and shall be corrected as set forth below.
a. The phrase "any accrued but unpaid dividends at the rate
of" shall be added to Section III.A of the Series D Certificate of Designation
so that such section reads as follows:
"In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, before any distribution may be made
with respect to the Company's Common Stock or any other class or series of
capital stock (subject to and after making provision for the rights and
preferences of the existing shares of Series A $3.00 Convertible Preferred
Stock, Series C Convertible Preferred Stock), holders of each share of Series D
Preferred Stock shall be entitled to receive out of the assets available for
distribution to shareholders $1,000 plus any accrued but unpaid dividends at the
rate of eight percent per annum thereon from the Issuance Date (as defined
below) to the Trading Day (as defined below) immediately prior to such
liquidation, dissolution or winding up of the Company (the "LIQUIDATION
AMOUNT")."
b. The phrases "average of the" and "five Trading Days
immediately preceding" shall be added to, and the phrase "Closing Bid Price of
the Common Stock calculated as of" shall be deleted from, the end of the
definition of "Conversion Price" in Section V.B of the Series D Certificate of
Designation so that such definition reads as follows:
"The "CONVERSION PRICE" shall mean, as to each share of Series D
Preferred Stock, $1,000 divided by the Closing Bid Price determined as of the
Issuance Date, notwithstanding when the event of conversion occurs. However,
only in the event the Company fails to comply with the redemption provisions
provided in Section XII.A. below in any manner whatsoever, the Conversion Price
in connection with that number of shares of Preferred Stock which are subject to
such a redemption shall be equal to the lesser of (A) the Conversion Price
calculated in accordance with the preceding sentence, or (B) 80% of the average
of the three lowest closing
<PAGE> 2
bid prices of the Common Stock (as reported by Bloomberg, LP or if not so
reported as set forth in the definition of Closing Bid Price above) during the
five Trading Days immediately preceding the Conversion Date."
c. A new Section V.D shall be added to the Series D
Certificate of Designation as follows, which has the consequence of renumbering
Sections V.D, V.E., V.F., V.G., V.H., V.I., V.J. and V.K as Sections V.E., V.F.,
V.G., V.H., V.I., V.J., V.K and V.L, respectively:
"D. If the Company, at any time while any shares of Series D Preferred
Stock are outstanding, (A) shall pay a stock dividend or otherwise make a
distribution or distributions on any equity securities (including investments or
securities convertible into or exchangeable for such equity securities) in
shares of Common Stock, (B) subdivide outstanding shares of Common Stock into a
larger number of shares, (C) combine outstanding Common Stock into a smaller
number of shares, then the Conversion Price shall be adjusted by multiplying the
Conversion Price then in effect by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding before such event and the
denominator of which shall be the number of shares of Common Stock outstanding
after such event. Any adjustment to the Conversion Price made pursuant to this
Section V(D) shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination."
d. The phrase "(except as provided pursuant to Section V(F)
below)" shall be added to Section V.E (which was formerly Section V.D prior to
the renumbering described in paragraph c above of this Certificate of
Correction) of the Series D Certificate of Designation so that such section
reads as follows:
"E. If the nature and/or character of the Common Stock issuable upon
the conversion of the Series D Preferred Stock shall be changed into the same or
different number of shares of any class or classes of stock, whether by capital
reorganization, reclassification or otherwise (except as provided pursuant to
Section V(F) below), then and in each such event, the holders of Series D
Preferred Stock shall have the right thereafter to convert such shares into the
kind and amount of shares of stock and other securities and property receivable
upon such capital reorganization, reclassification or other change which such
holders would have received had their shares of Series D Preferred Stock been
converted immediately prior to such capital reorganization, reclassification or
other change."
e. The phrases "for the period ending" and "(the "Computation
Date")" shall be added to, and the phrase "(the "150% Period")" shall be deleted
from, the second paragraph of Section XI.A of the Series D Certificate of
Designation so that such paragraph reads as follows:
2
<PAGE> 3
"In the event the Closing Bid Price of the Common Stock as calculated
for the period ending on the date set forth in the Forced Conversion Notice (the
"Computation Date") is equal to or greater than 150% of the Conversion Price,
the Company may force conversion by the holders of shares of Series D Preferred
Stock at the Conversion Price; provided that the Company may not initiate
another forced conversion pursuant to the provisions of this Subsection more
than once every 30 calendar days and no single forced conversion shall exceed
50% of the total number of shares of Series D Preferred Stock issued by the
Company. A Forced Conversion Notice shall not be deemed to affect or otherwise
reduce the holders' conversion rights as set forth herein as to the shares of
Series D Preferred Stock not subject to a Forced Conversion Notice."
f. The phrase "Computation Date" shall be added to, and the
phrase "expiration of the 150% Period" shall be deleted from, the Section XI.B
of the Series D Certificate of Designation so that such section reads as
follows:
"B. The Company shall effect such forced conversions pro rata amongst
the holders according to the number of shares of Series D Preferred Stock held
by each holder of Series D Preferred Stock. The Forced Conversion Notice must be
delivered via facsimile by the Company prior to 12:00 p.m. Pacific Time on the
second Trading Day immediately following the Computation Date referred to in
Section XI. A. above. A Forced Conversion Notice shall be deemed delivered on
(i) the Trading Day the Company faxes the notice and receives confirmation of
transmission thereof prior to 12:00 p.m. Pacific Time on such day, or (ii) the
immediately succeeding Trading Day if the Company receives confirmation of
transmission of the notice after 12:00 p.m. Pacific Time on a Trading Day or at
any time on a day which is not a Trading Day. No Forced Conversion Notice may be
deemed delivered, on a day that is not a Trading Day. Once the Company has
exercised its right to force conversion of the Preferred Stock by giving a
Forced Conversion Notice to the holder as set forth above it shall be deemed
irrevocable. The Company will deliver, or instruct its transfer agent to
deliver, the certificates representing shares of Common Stock issuable upon the
forced conversion of any share of Series D Preferred Stock (together with the
certificates representing the share or shares of Series D Preferred Stock not so
converted) to the holder thereof via reputable overnight courier, by electronic
transfer or otherwise within five Business Days after the date of delivery of
the Forced Conversion Notice. In the event the Company fails to timely deliver
the shares of Common Stock due upon a forced conversion on one occasion, such
failure will negate the effect of the Forced Conversion Notice and thereafter,
as a result, the Company shall have waived its right to serve a Forced
Conversion Notice upon that particular holder at any time in the future."
g. Section XI.F of the Series D Certificate of Designation
shall be deleted and replaced in its entirety with the following:
"F. In the event that a Forced Conversion Notice served on a holder
would result in the holder becoming the "beneficial owner" (as defined under
applicable SEC regulations) of more than 4.99% of the number of shares of Common
Stock then outstanding, then, unless the
3
<PAGE> 4
holder agrees otherwise in writing, such Forced Conversion Notice shall be
effective only with respect to that number of shares of Common Stock into which
the Series D Preferred Stock is convertible by virtue of such Forced Conversion
Notice which, together with all shares already "beneficially owned" by such
holder, constitute 4.99% or less of the number of shares of Common Stock then
outstanding."
h. Section XIII of the Series D Certificate of Designation
shall be amended and restated in its entirety to read as follows:
"XIII. 4.99% Limitation. The number of shares of Common Stock which may
be acquired by any holder upon conversion pursuant to the terms herein shall not
exceed the number of such shares which, when aggregated with all other shares of
Common Stock then owned by holder, inclusive of all other shares of Common Stock
then held by such holder but exclusive of all other securities convertible into
or exercisable for shares of Common Stock that are held by but have not been
converted or exercised by such holder, would result in any holder owning more
than 4.99% of the then issued and outstanding Common Stock. The preceding shall
not interfere with any holder's right to convert the Series D Preferred Stock
over time which in the aggregate totals more than 4.99% of the then outstanding
shares of Common Stock so long as such Investor does not own more than 4.99% of
the then outstanding Common Stock at any given time. The foregoing limitation
shall not apply to the Automatic Conversion provision contained herein."
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Correction on this 9th day of February, 1999.
ATTEST: OSAGE SYSTEMS GROUP, INC.
/s/ John Iorillo /s/ Jack R. Leadbeater
- ---------------- ----------------------
John Iorillo, Jack R. Leadbeater,
Assistant Secretary Chief Executive Officer
4
<PAGE> 1
Exhibit 3.13
CERTIFICATE OF DESIGNATION
OF
SERIES E CONVERTIBLE PREFERRED STOCK
OF
OSAGE SYSTEMS GROUP, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
OSAGE SYSTEMS GROUP, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"COMPANY"), hereby certifies that on February 8, 1999, the Board of Directors of
the Company (the "BOARD"), in accordance with Section 151 of the General
Corporation Law of the State of Delaware and the Company's Certificate of
Incorporation (the "CERTIFICATE OF INCORPORATION"), adopted resolutions creating
out of the 10,000,000 shares of Preferred Stock, par value $0.01 per share,
authorized in Article Fourth of the Certificate of Incorporation (the "PREFERRED
STOCK"), a series of the Preferred Stock of the Company, par value $0.01 per
share, and hereby states the designation and number of shares, and fixes the
relative rights, preferences, and limitations thereof as follows:
I. Designation and Amount. The shares of such series of Preferred Stock shall be
designated as "Series E Convertible Preferred Stock" (the "SERIES E PREFERRED
STOCK") and the number of shares constituting the Series E Preferred Stock shall
be 2,000. The Series E Preferred Stock shall have a stated value (the "STATED
VALUE") of $1,000 per share.
II. Dividends.
A. The holders of shares of Series E Preferred Stock shall be entitled
to receive dividends, out of any assets legally available therefore, prior to,
and in preference to, any declaration or payment of any dividend (payable other
than in Common Stock of the Company) on the Common Stock of the Company
(provided, however, that such dividends shall not be in preference to any
declaration or payment of dividends on the Series D Convertible Preferred Stock
of the Company), at a per share rate equal to eight percent per annum of the
amount of the Stated Value of the Series E Preferred Stock, which is payable
upon conversion (including voluntary conversion by the holder of Series E
Preferred Stock, Forced Conversion and Automatic Conversion) as set forth below.
Dividends shall begin to accrue as of the Issuance Date and are based upon a 365
calendar day year. Any dividends payable pursuant to the provisions of this
paragraph shall, at the Company's option, be payable in cash, or shares of
Common Stock of the Company subject to an effective registration statement
within ten Business Days (as such term is defined below) of when due. The number
of shares of Common Stock to be issued by the Company in lieu of a cash payment
for dividends due as set forth herein shall be equal to the number of shares of
Common Stock resulting from dividing the dollar amount of dividends owed by the
Conversion Price (as defined below) on such date as the dividends are
<PAGE> 2
payable (if such date is not a Trading Day (as defined below), then the next
Trading Day immediately thereafter).
B. Such dividends shall accrue on each share of Series E Preferred
Stock from the Issuance Date, and shall accrue from day to day whether or not
earned or declared. Such dividends shall be cumulative so that if such dividends
in respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series E Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series E
Preferred Stock or Common Stock. Dividends on the Series E Preferred Stock shall
be non-participating and the holders of the Series E Preferred Stock shall not
be entitled to participate in any other dividends beyond the cumulative
dividends specified herein.
III. Liquidation, Dissolution or Winding Up.
A. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, before any distribution may be made
with respect to the Company's Common Stock or any other class or series of
capital stock (subject to and after making provision for the rights and
preferences of the existing shares of Series A $3.00 Convertible Preferred
Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock), holders of each share of Series E Preferred Stock shall be entitled to
receive out of the assets available for distribution to shareholders $1,000 plus
all accrued but unpaid dividends thereon (the "LIQUIDATION AMOUNT").
B. If the assets of the Company available for distribution to
shareholders shall be insufficient to pay the holders of shares of Series E
Preferred Stock the full Liquidation Amount to which they shall be entitled,
then any such distribution of assets of the Company shall, after distribution to
the holders of the Series A $3.00 Convertible Preferred Stock, Series C
Convertible Preferred Stock and Series D Convertible Preferred Stock, be
distributed ratably to the holders of shares of Series E Preferred Stock.
C. After the payment of the Liquidation Amount shall have been made in
full to the holders of the Series E Preferred Stock or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series E Preferred Stock so as to be available for such payments,
the holders of the Series E Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Company, and the
remaining assets of the Company legally available for distribution to
shareholders shall be distributed among the holders of Common Stock and any
other classes or series of Preferred Stock of the Company in accordance with
their respective terms.
IV. Voting. Holders of Series E Preferred Stock shall have no voting rights
except as expressly required by law or as expressly provided herein.
2
<PAGE> 3
V. Conversion of Series E Preferred Stock. The holders of Series E Preferred
Stock shall have the right, at such holder's option, to convert the Series E
Preferred Stock into shares of Common Stock, on the following terms and
conditions:
A. Subject to the provisions of the Forced Conversion and Redemption
hereof, at any time or times, upon the earlier to occur of (i) the 90th calendar
day after the Issuance Date, or (ii) the Effective Date, any holder of the
Series E Preferred Stock shall be entitled to convert any whole number of shares
of Series E Preferred Stock into that number of fully paid and nonassessable
shares of Common Stock, which is determined (per share of Series E Preferred
Stock) by dividing (x) the Stated Value times the number of shares of Preferred
Stock being converted, by (y) the Conversion Price (as defined below). Dividends
on the shares of Series E Preferred Stock being converted shall be paid in
accordance with the terms of Article II.A hereof.
B. For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A "BUSINESS DAY" shall be any day other than a Saturday,
Sunday, national holiday or a day on which the Principal Market is closed.
The "CLOSING BID PRICE" shall mean, for any security as of any
date, the average of the closing bid prices for such security for the
immediately preceding five Trading Days on the American Stock Exchange as
reported by Bloomberg L.P. ("BLOOMBERG"), or, if the American Stock Exchange is
not the principal trading market for such security, the average of the closing
bid prices of such security for the immediately preceding five Trading Days on
the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
average of the closing bid prices of such security for the immediately preceding
five Trading Days in the over-the-counter market on the OTC Electronic Bulletin
board for such security as reported by Bloomberg, or, if no closing bid or trade
prices are reported for such security by Bloomberg, the Closing Bid Price shall
be determined by reference to the average of the closing bid prices for the
immediately preceding five Trading Days as reported on the Principal Market, and
if not so reported shall be determined from the average of the bid prices of any
market makers for such security as reported in the "pink sheets" published by
the National Quotation Bureau, Inc. for the immediately preceding five Trading
Days. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually agreed by the Company and
the holders of two thirds of the outstanding shares of Series E Preferred Stock.
The "CONVERSION PRICE" shall mean, as to each share of Series
E Preferred Stock, the Closing Bid Price determined as of the Issuance Date,
notwithstanding when the event of conversion occurs. However, in the event the
Company fails to comply with the redemption provisions provided in Section
XII.A. below in any manner whatsoever (any such event shall be referred to
herein as a "Conversion Price Reset Event"), the Conversion Price in connection
with that number of shares of Preferred Stock which are subject to such a
redemption shall be equal to the lesser of (A) the Conversion Price calculated
in accordance with the preceding sentence, or (B) 80% of the average of the
three lowest closing bid prices of the Common Stock (as reported
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by Bloomberg or if not so reported as set forth in the definition of Closing Bid
Price above) during the five Trading Days immediately preceding the Conversion
Date (as such term is defined below).
"CONVERSION PRICE RESET EVENT" shall have the meaning set
forth in the definition of Conversion Price above.
"EFFECTIVE DATE" shall mean the date on which the Securities
and Exchange Commission (the "SEC") first declares effective a registration
statement registering the resale of the number of shares of Common Stock
issuable (irrespective of any shareholder approval requirement) upon conversion
of all of the Series E Preferred Stock outstanding on the Trading Day
immediately preceding the day such Registration Statement is filed (the
"REGISTRATION STATEMENT").
"EFFECTIVE REGISTRATION" shall have the meaning for such term
set forth in the Purchase Agreement.
"FIXED REFERENCE PRICE" shall mean the Closing Bid Price of
the Series E Preferred Stock determined as of the Issuance Date.
"FLOATING REFERENCE PERIOD" refers to the five (5) Trading Day
period referred to in clause (B) of the second sentence of the definition of
Conversion Price in this Article V.
"FLOATING REFERENCE PRICE" refers to any of the trading prices
described in clause (B) of the second sentence of the definition of Conversion
Price in this Article V.
The "ISSUANCE DATE" shall mean, with respect to each share of
Series E Preferred Stock, the date of issuance of the applicable share of Series
E Preferred Stock.
"PURCHASE AGREEMENT" shall mean the Series E Preferred Stock
Purchase Agreement between the Company and the Holder, relating to the issuance
of the Series E Preferred Stock.
The "PRINCIPAL MARKET" shall mean the Nasdaq National Market,
the Nasdaq Small Cap Stock Market, the American Stock Exchange or the New York
Stock Exchange, whichever is at the time the principal trading exchange or
market for the Common Stock.
A "TRADING DAY" shall mean a day on which the Principal Market
is open.
C. Holders of Series E Preferred Stock may exercise their right to
convert the Series E Preferred Stock by telecopying an executed and completed
notice of conversion (the "NOTICE OF CONVERSION") to the Company and delivering
to the Company's transfer agent the original Notice of Conversion and the
certificate representing the Series E Preferred Stock being converted by
reputable overnight courier. Each Business Day (between the hours of 7:00 a.m.
and 5:00 p.m. Mountain Time) on which a Notice of Conversion is telecopied to
and received by the Company
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shall be deemed a "CONVERSION DATE". The Company will deliver, or instruct its
transfer agent to deliver, the certificates representing shares of Common Stock
issuable upon conversion of any share of Series E Preferred Stock (the
"CONVERSION SHARES") (together with the certificates representing the share or
shares of Series E Preferred Stock not so converted) to the holder thereof via
reputable overnight courier, by electronic transfer or otherwise at the request
of the holder within five (5) Trading Days after the Conversion Date, provided
the Company's transfer agent has received the original Series E Preferred Stock
certificate being so converted on or before the close of business of the third
Trading Day after the Conversion Date. In addition to any other remedies which
may be available to the holders of shares of Series E Preferred Stock, in the
event that the Company fails to deliver such shares of Common Stock within such
five (5) Trading Day period in accordance with the preceding sentence, the
holder will be entitled to revoke the relevant Notice of Conversion by
delivering a notice to such effect to the Company whereupon the Company and such
holder shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion. The Notice of Conversion and Series E
Preferred Stock certificates representing the portion of the Series E Preferred
Stock converted shall be delivered as follows:
To the Company:
Osage Systems Group, Inc.
1661 East Camelback Road, Suite 245
Phoenix, Arizona 85016
Attention: Jack R. Leadbeater, Chief Executive Officer
Telephone: (602) 274-1299
Facsimile: (602) 274-1295
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center
1835 Market Street, 14th Floor
Philadelphia, PA 19103
Telephone: (215) 665-3873
Facsimile: (215) 665-8760
In the event that shares representing the Common Stock issuable upon
conversion of the Series E Preferred Stock (the "CONVERSION SHARES") are not
delivered by the Company within five (5) Trading Days after the Conversion Date,
in addition to all other available remedies which such holder may be entitled,
the Company shall pay to the holders thereof, in immediately available funds,
upon demand, as liquidated damages for such failure and not as a penalty, on
each date after such fifth Trading Day that conversion is not timely effected,
an amount equal to 2% of the Stated Value of the Series E Preferred Stock
subject to such conversion. In the event the Company fails to pay the liquidated
damages as set forth above within ten Business Days of
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the date incurred, then such payment shall bear interest at the rate of two
percent per month (pro rated for partial months) until such payments are made.
Any and all payments required pursuant to this paragraph shall be payable only
in cash, and shall not be deemed a waiver of the Company's obligation to issue
the Conversion Shares.
D. Stock Splits; Dividends; Adjustments.
(i) If the Company, at any time while any shares of Series E
Preferred Stock are outstanding, (A) shall pay a stock dividend or otherwise
make a distribution or distributions on any equity securities (including
investments or securities convertible into or exchangeable for such equity
securities) in shares of Common Stock, (B) subdivide outstanding shares of
Common Stock into a larger number of shares, (C) combine outstanding shares of
Common Stock into a smaller number of shares, then each of the Affected
Conversion Prices (as defined below) shall be adjusted by multiplying each such
price then in effect by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before such event and the denominator of
which shall be the number of shares of Common Stock outstanding after such
event. Any adjustment to an Affected Conversion Price made pursuant to this
Section V(D)(i) shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination. As used herein, the Affected Conversion Prices (each
an "Affected Conversion Price") shall refer to: (i) the Fixed Reference Price;
and (ii) after the occurrence of a Conversion Price Reset Event, each Floating
Reference Price occurring on any Trading Day included in the Floating Reference
Period, which Trading Day occurred before the record date, in the case of events
referred to in clause (A) of this subparagraph V(D)(i), and the effective date,
in the case of the events referred to in clauses (B) and (C) of this
subparagraph V(D)(i).
(ii) If the Company, at any time while the Series E Preferred
Stock is outstanding, shall distribute to all holders of Common Stock evidences
of its indebtedness or assets or cash or rights or warrants to subscribe for or
purchase any security then in each such case the Fixed Reference Price at which
shares of the Series E Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Fixed Reference Price in effect immediately prior
to the record date fixed for determination of shareholders entitled to receive
such distribution by a fraction, the denominator of which shall be the Fixed
Reference Price or the closing market price for shares of Common Stock on the
Principal Market on the Trading Day (the "Fair Market Price") determined as of
the record date mentioned above, and of which the numerator shall be such Fair
Market Price for shares of Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or evidences of
indebtedness so distributed applicable to one share of outstanding Common Stock
as determined by the Board of Directors in good faith; provided, however that in
the event of a distribution exceeding 20% of the stockholders' equity in the
Company as set forth on the Company's financial statements most recently filed
with the SEC at such time, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent chartered accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"APPRAISER") selected in good faith by
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the Board of Directors and holders of seventy-five percent (75%) in interest of
the Series E Preferred Stock. In either case the adjustments shall be described
in a statement provided to all holders of Series E Preferred Stock of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(iii) Whenever the Conversion Price is adjusted pursuant to
Section V(D)(i) or (ii) , the Company shall promptly mail to each holder of
shares of the Series E Preferred Stock a notice setting forth the Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
E. If the nature and/or character of the Common Stock issuable upon the
conversion of the Series E Preferred Stock shall be changed into the same or
different number of shares of any class or classes of stock, whether by capital
reorganization, reclassification or otherwise (except as provided pursuant to
paragraph F below), then and in each such event, the holders of Series E
Preferred Stock shall have the right thereafter to convert such shares into the
kind and amount of shares of stock and other securities and property receivable
upon such capital reorganization, reclassification or other change which such
holders would have received had their shares of Series E Preferred Stock been
converted immediately prior to such capital reorganization, reclassification or
other change.
F. If at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section)
or a merger or consolidation of the Company with or into another corporation
pursuant to which the Company is not the acquiring entity and pursuant to which
the stockholders of the Company are requested to exchange or convert their
securities for securities of an acquiring entity, or the sale of all or
substantially all of the Company's properties and assets to any other person
(any of which events is herein referred to as a "REORGANIZATION"), then as a
part of such Reorganization, provision shall be made so that the holders of the
Series E Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series E Preferred Stock, the number of shares of Common Stock or other
securities or property of the Company, or of the successor corporation resulting
from such Reorganization, to which such holder would have been entitled if such
holder had converted its shares of Series E Preferred Stock immediately prior to
such Reorganization; provided that if the holders do not agree with the method
the Company proposes to utilize in connection with such Reorganization, such
matters shall be referred to an Appraiser for a binding recommendation.
G. Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series E Preferred Stock, the Company, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of such Series E Preferred Stock a
certificate executed by the president and chief financial officer (or in the
absence of a person designated as the chief financial officer, by the treasurer)
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment are based. The Company shall, upon
written request at any time of any holder of Series E Preferred Stock, furnish
or cause to be furnished to such holder a
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certificate setting forth (A) the Conversion Price at the time in effect, and
(B) the number or shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of a share of
Series E Preferred Stock.
H. Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of any Series E Preferred Stock certificate(s), and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company, and upon the cancellation of the Series E Preferred
Stock certificate(s), if mutilated, the Company shall execute and deliver new
certificates for Series E Preferred Stock of like tenure and date. However, the
Company shall not be obligated to reissue such lost or stolen certificates for
shares of Series E Preferred Stock if the holder contemporaneously requests the
Company to convert such shares of Series E Preferred Stock into Common Stock.
I. The Company shall not issue any fraction of a share of Common Stock
upon any conversion. The Company shall round such fraction of a share of Common
Stock up to the nearest whole share.
J. In the event some but not all of the shares of Series E Preferred
Stock represented by a certificate or certificates surrendered by a holder are
converted, the Company shall execute and deliver to or on the order of the
holder, at the expense of the Company, a new certificate representing the number
of shares of Series E Preferred Stock which were not converted.
K. Automatic Conversion.
(1) Subject to subsection (2) below, shares of Series E
Preferred Stock held on the date which is the second (2nd) anniversary of the
Issuance Date of such shares of Series E Preferred Stock an "AUTOMATIC
CONVERSION DATE") shall automatically be converted into Common Stock on the
Automatic Conversion Date; provided that such Automatic Conversion Date shall be
deferred, at the sole option of the holders of Series E Preferred Stock, for
such number of days as is equal to 1.5 times the number of days (A) there is not
Effective Registration (as defined in the Purchase Agreement), but not including
the first 90 days after the Issuance Date; (B) there is not a sufficient amount
of shares of Common Stock available for conversion of all outstanding shares of
Series E Preferred Stock, (C) for any other reason the Company refuses or
announces its refusal to honor conversion of shares of Series E Preferred Stock;
or (D) there is a suspension, restriction or limitation (other than the
permitted "blackout periods" specified in Section 3 of the Registration Rights
Agreement) in the ability of holders of Series E Preferred Stock to sell shares
of Common Stock received upon conversion of Series E Preferred Stock or under
the Registration Statement (as defined in the Registration Rights Agreement) and
the related prospectus for any reason.
(2) Notwithstanding the preceding subsection (1), no holder of
shares of Series E Preferred Stock shall be obligated to convert any such share
on the Automatic Conversion Date unless and until each of the following
conditions has been satisfied or exists, each of which shall be a condition
precedent to any such forced conversion:
(A) no material default or breach exists, and no
event shall have
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occurred which constitutes (or would constitute with notice or the
passage of time or both) a material default or breach of the Purchase
Agreement, the Registration Rights Agreement, the Warrant (as defined
in the Purchase Agreement) or this Certificate of Designation;
(B) Effective Registration (as defined in the
Purchase Agreement) has occurred and is continuing and has continuously
existed for the prior 60 consecutive Trading Days;
(C) the Company and its subsidiaries on a
consolidated basis have tangible and intangible assets exceeding its
liabilities, and the Company is able to pay all its debts as they
become due in the ordinary course of business, and the Company is not
subject to any liquidation, dissolution or winding up of its affairs;
and
(D) each holder of shares of Series E Preferred Stock
shall have received a certificate from an appropriate executive officer
of the Company certifying that each of the foregoing conditions
precedent exist or have been satisfied.
Such forced conversion shall be subject to and governed by all the provisions
relating to voluntary conversion of the shares of Series E Preferred Stock
contained herein.
L. The Company shall pay any and all original issue and/or transfer
taxes which may be imposed upon it with respect to the issuance and delivery of
Common Stock upon conversion of the Series E Preferred Stock.
M. The Company's obligation to issue shares of Common Stock upon
conversion of shares of Series E Preferred Stock shall be absolute, and is
independent of any covenant of any holder of shares of Series E Preferred Stock
other than each holder's obligation to deliver to the Company or its transfer
agent the original Series E Preferred Stock certificates to be converted and, in
the case of a voluntary conversion, a completed, executed Notice of Conversion.
VI. No Reissuance of Series E Preferred Stock. No share or shares of Series E
Preferred Stock acquired by the Company by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series E Preferred
Stock accordingly. Except as otherwise provided herein, the Company shall not
issue any additional shares of Series E Preferred Stock without the consent of
the holders of 75% of the outstanding shares of the Series E Preferred Stock.
VII. Reservation of Shares. The Company shall, so long as any of the Series E
Preferred Stock are outstanding reserve and keep available out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of
the Series E Preferred Stock, 150% of such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all of the
Series E Preferred Stock then outstanding; provided that the number of shares of
Common Stock so reserved shall at no time be less than 150% of the number of
shares
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of Common Stock for which the Series E Preferred Stock are at any time
convertible and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to maintain such number of shares of Common
Stock, the Company shall take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
VIII. Voting Rights. In addition to all other requirements imposed by Delaware
law, the affirmative vote of seventy-five percent (75%) in interest of the
outstanding Series E Preferred Stock shall be necessary for: (i) any amendment,
modification or repeal of this Certificate of Designation (whether by merger,
consolidation or otherwise); or (ii) any amendment to the Certificate of
Incorporation of the Company, or by-laws of the Company, that may amend or
change or adversely affect any of the rights, preferences, or privileges of the
Series E Preferred Stock; provided, however, that holders of shares of Series E
Preferred Stock (other than the Investor and its affiliates) who are affiliates
of the Company (and the Company itself) shall not participate in such vote and
the shares of Series E Preferred Stock of such holders shall be disregarded and
deemed not to be outstanding for purposes of such vote.
IX. No Dilution or Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Certificate of Designation set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series E Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not establish a par value of any shares of stock
receivable on the conversion of the Series E Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock on the conversion of all Series E
Preferred Stock from time to time outstanding, and (c) shall not consolidate
with or merge into any other person or entity, or permit any such person or
entity to consolidate with or merge into the Company (if the Company is not the
surviving person), unless such other person or entity shall expressly assume in
writing and will be bound by all of the terms of the Series E Preferred Stock
set forth herein.
X. Notices of Record Date. In the event of:
1. any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
2. any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger of the Company where the Company is not the surviving entity, or any
transfer of all or substantially all of the assets of the Company to any other
corporation, or any other entity or person, the result of any of such merger or
such other transaction is that the Holder is requested to convert or exchange
its certificates
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representing Series E Preferred Stock, or
3. any voluntary or involuntary dissolution, liquidation
or winding up of the Company, then and in each such event the Company shall mail
or cause to be mailed to each holder of Series E Preferred Stock a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up is expected to become effective and (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least ten
Business Days prior to the date specified in such notice on which such action is
to be taken.
XI. Forced Conversion.
A. Subject to the other provisions of this Section, from and after the
Effective Registration, and provided the Registration Statement then remains
effective, the Company shall have the right to force conversion by the holders
of the Series E Preferred Stock by telecopying written notice of its election to
force conversion (the "FORCED CONVERSION NOTICE") containing the information set
forth below to the holders under the following circumstance:
The Company has the option to force conversion of all or any
part of the shares of Series E Preferred Stock (other than shares of Series E
Preferred Stock already subject to a Notice of Conversion) if, on each of the
five (5) consecutive Trading Days specified in the Forced Conversion Notice
(such five consecutive Trading Day period, the "150% PERIOD"), the closing bid
price of a share of Common Stock on the Principal Market is not less than 150%
of the Conversion Price; provided that the Company may not initiate another
forced conversion pursuant to the provisions of this Subsection more than once
every 30 calendar days and no single forced conversion shall exceed 50% of the
total number of shares of Series E Preferred Stock issued by the Company. A
Forced Conversion Notice shall not be deemed to affect or otherwise reduce the
holders' conversion rights as set forth herein as to the shares of Series E
Preferred Stock not subject to a Forced Conversion Notice.
B. The Company shall effect such forced conversions pro rata amongst
the holders according to the number of shares of Series E Preferred Stock then
held by each holder of Series E Preferred Stock. The Forced Conversion Notice
must be delivered via facsimile by the Company prior to 3:00 p.m. Eastern
Standard Time on the second Trading Day immediately following the expiration of
the 150% Period referred to in Section XI. A. above. A Forced Conversion Notice
shall be deemed delivered on (i) the Trading Day the Company faxes the notice
and receives confirmation of transmission thereof prior to 3:00 p.m. Eastern
Standard Time on such day, or (ii) the immediately succeeding Trading Day if the
Company receives confirmation of transmission of the notice after 3:00 p.m.
Eastern Standard Time on a Trading Day or at any time on a day which is not a
Trading Day. Once the Company has exercised its right to force conversion of the
Preferred Stock by giving a Forced Conversion Notice to the
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holder as set forth above it shall be deemed irrevocable. The Company will
deliver, or instruct its transfer agent to deliver, the certificates
representing shares of Common Stock issuable upon the forced conversion of any
share of Series E Preferred Stock (together with the certificates representing
the share or shares of Series E Preferred Stock not so converted) to the holder
thereof via reputable overnight courier, by electronic transfer or otherwise
within three Trading Days after the date of delivery of the Forced Conversion
Notice. In the event the Company fails to timely deliver the shares of Common
Stock due upon a forced conversion on one occasion, such failure will negate the
effect of the Forced Conversion Notice and thereafter, as a result, the Company
shall have waived its right to serve a Forced Conversion Notice upon that
particular holder at any time in the future.
C. The Forced Conversion Notice shall set forth a calculation
referencing the conversion formula contained herein showing the number of shares
of Common Stock being issued pursuant to the applicable forced conversion, and
the Closing Bid Price of the Common Stock relied upon for the forced conversion.
D. Upon the Company's full compliance with the forced conversion
provisions set forth in Section XI.B above, the shares of Series E Preferred
Stock that are the subject of a forced conversion shall be automatically
canceled and converted into a right to receive shares of Common Stock, and all
rights of the Series E Preferred Stock which are the subject of the forced
conversion, including the right to conversion, shall cease without further
action. If the holder does not concur with the Company's conversion calculations
in the Forced Conversion Notice, the holder shall notify the Company in writing
within three Business Days after the Forced Conversion Date of such fact.
Notwithstanding the foregoing, the Company remains obligated to send those
shares of Common Stock which are undisputed.
E. The number of shares of Common Stock issuable upon the forced
conversion of the Series E Preferred Stock shall be adjusted in the manner and
under the circumstances as set forth herein.
F. The Company may not serve a Forced Conversion Notice upon any holder
if such notice would result in such holder owning, at such time, more than 4.99%
of the number of shares of Common Stock then outstanding.
XII. Redemption.
A. If the Closing Bid Price calculated as of the first anniversary of
the Issuance Date is less than the Conversion Price as of the Issuance Date, at
the written option of a holder (the "REDEEMING PARTY") delivered within ten
Business Days after the first anniversary of the Issuance Date (the "REDEMPTION
NOTICE"), and provided that the Company has not received a notice of conversion
for such shares prior to the date of the Redemption Notice, the Company shall
repay, in whole or in part, the Series E Preferred Stock shares at the
Redemption Price (as defined below). The Series E Preferred Stock is redeemable
as a series, in whole or in part, by the Redeeming Party providing a timely
Redemption Notice to the other party via facsimile at his or its address as the
same shall appear on the books and records of the Company and in accordance with
Section XII.C below (the Business Day between the hours of 9:00 a.m. and 5:00
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Mountain Time in which the Redemption Notice is received by the other party via
facsimile is defined to be the "REDEMPTION NOTICE DATE"). Within forty (40) days
after such first anniversary, the Company shall pay the Redemption Price (as
defined below) in immediately available funds to the holder for the shares of
Series E Preferred Stock which are the subject of the Redemption Notice (such
date of payment referred to as the "REDEMPTION DATE"), provided that the Company
receives the shares of Series E Preferred Stock which are the subject of the
Redemption Notice at the time of any such payment. Partial redemptions shall be
in an aggregate principal amount of at least $100,000. In the event the Company
fails to comply with the redemption provisions contained herein in any manner
whatsoever, the subject Redemption Notice shall be deemed null and void.
B. The "REDEMPTION PRICE" per share of Series E Preferred Stock being
redeemed shall be equal to 120% of the Stated Value.
C. The Redemption Notice shall set forth (i) the number of shares of
Series E Preferred Stock subject to redemption, (ii) the Redemption Price, and
(iii) a statement that dividends on the shares of Series E Preferred Stock to be
redeemed will cease to accrue on the Redemption Date, (iv) a statement of or
reference to the conversion right set forth herein, and (v) complete wire
transfer instructions for the Redemption Price. If practicable, the Redemption
Notice shall specify the numbers of the certificates representing such shares.
The holder of the Series E Preferred Stock will retain his or its right to
convert the Series E Preferred Stock as set forth herein until the third Trading
Day prior to the date on which the Company's payment of the Redemption Price is
due.
D. Subject to the occurrence of the wire transfer of the Redemption
Price as described in Section XII.C above, each share of Series E Preferred
Stock to be redeemed shall be automatically canceled and converted into a right
to receive the Redemption Price, and all rights of the Series E Preferred Stock,
including the right to conversion, shall cease without further action.
E. The Redemption Price shall be adjusted proportionally upon any
adjustment of the Conversion Price as provided herein and in the event of any
stock dividend, stock split, combination of shares or similar event.
XIII. Mandatory Repurchase. Each holder shall have the unilateral option and
right to compel the Company to repurchase any or all of such holder's Preferred
Stock within 3 days of a written notice requiring such repurchase (in the case
of (i), (iii) or (iv) below only) or simultaneously with the consummation or of
the events described in (ii) below, at the Redemption Price if any of the
following events involving the Company shall have been announced as pending or
planned (in the case of (i) (iii) or (iv) below only), or shall have occurred
(the "Mandatory Repurchase Triggering Date"); provided, however, that each
holder may exercise its right to compel the Company to repurchase Preferred
Stock granted under this Article XIII only by providing the Company with written
notice of such exercise within ninety (90) days of the Mandatory Repurchase
Triggering Date:
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(i) A Change in Control Transaction. A "Change in Control
Transaction" will be deemed to exist if (x) there occurs any consolidation,
merger or tender offer of the Company with or into any other Company or other
entity or person (whether or not the Company is the surviving Company), or any
other corporate reorganization or transaction or series of related transactions
in which in excess of 50% of the Company's voting power is transferred through a
merger, consolidation, tender offer or similar transaction, (y) any person (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), together with its affiliates and associates (as such terms are
defined in Rule 405 under the Securities Act of 1933, as amended (the "ACT")),
beneficially owns or is deemed to beneficially own (as described in Rule 13d-3
under the Exchange Act without regard to the 60-day exercise period) in excess
of 50% of the Company's voting power or (z) there is a replacement of more than
one-half of the members of the Company's Board of Directors which is not
approved by those individuals who are members of the Company's Board of
Directors on the date thereof, in one or a series of related transactions;
(ii) A "going private" transaction under Rule 13e-3
promulgated pursuant to the Exchange Act;
(iii) The Company shall (A) be or become insolvent; (B) admit
in writing its inability to pay its debts generally as they mature; (C) make an
assignment for the benefit of creditors or commence proceedings for its
dissolution; or (D) apply for or consent to the appointment of a trustee,
liquidator or receiver for it or for a substantial part of its property or
business; or
(iv) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings, or relief under any bankruptcy law or any law
for the relief of debt shall be instituted by or against the Company (except for
such proceedings that the Company in good faith believes are without basis,
actively contests and is successful in having dismissed with prejudice within 30
days), or the Company shall by any action or answer approve of, consent to, or
acquiesce in any such proceedings or admit to any material allegations of, or
default in answering a petition filed in any such proceedings.
XIV. Limitations on Conversion Right. Notwithstanding anything to the contrary
contained herein, no Series E Preferred Stock may be converted, other than
pursuant to Article V(K) or Article XI, to the extent that, after giving effect
to Common Shares to be issued pursuant to a Notice of Conversion, the total
number of shares of Common Stock deemed beneficially owned by such holder (other
than by virtue of the ownership of Series E Preferred Stock or ownership of
other securities that have limitations on a holder's rights to convert or
exercise similar to those limitations set forth herein), together with all
shares of Common Stock deemed beneficially owned by the holder's "affiliates"
(as defined in Rule 144 of the Act) that would be aggregated for purposes of
determining whether a group under Section 13(d) of the Exchange Act exists,
would exceed the Restricted Ownership Percentage for such holder specified on
Schedule A to the Purchase Agreement (the "Restricted Ownership Percentage") of
the total issued and outstanding shares of the Company's Common Stock; provided
that (w) each holder shall have the right at any time and from time to time to
reduce its Restricted Ownership Percentage immediately upon notice to the
Company, (x) each holder shall have the right at any time and
14
<PAGE> 15
from time to time, to increase its Restricted Ownership Percentage and otherwise
waive in whole or in part the restrictions of this Section 4(k) upon 61 days
prior notice to the Company or immediately in the event of a Change in Control
Transaction, (y) each holder can make subsequent adjustments pursuant to (w) or
(x) any number of times from time to time (which adjustment shall be effective
immediately if it results in a decrease in the percentage or shall be effective
upon 61 days' prior written notice or immediately in the event of a Change in
Control Transaction if it results in an increase in the percentage) and (z) each
holder may eliminate or reinstate this limitation at any time and from time to
time (which elimination will be effective upon 61 days' prior notice and which
reinstatement will be effective immediately). Without limiting the foregoing, in
the event of a Change in Control Transaction, any holder may reinstate
immediately (in whole or in part) the requirement that any increase in its
Restricted Ownership Percentage be subject to 61 days' prior written notice,
notwithstanding such Change in Control Transaction, without imposing such
requirement on, or otherwise changing such holder's rights with respect to, any
other Change in Control Transaction. For this purpose, any material modification
of the terms of a Change in Control Transaction will be deemed to result in a
new Change in Control Transaction. The delivery of a Conversion Notice by any
holder shall be deemed a representation by such holder that it is in compliance
with this paragraph. The term "deemed beneficially owned" as used in this
Certificate of Designations shall exclude shares that might otherwise be deemed
beneficially owned by reason of the convertibility of the Series E Preferred
Stock. The Company shall provide all holders of Preferred Shares with the
earlier of (i) 20 days' prior written notice of any such Change in Control
Transaction, to the extent the Company has prior knowledge of a Change in
Control Transaction; or (ii) notice on the day immediately following the
Company's learning of any such transaction, but only after, in the case of (i)
and (ii), such Change in Control Transaction has been publicly disclosed.
RESOLVED, FURTHER, that the appropriate officers of the Company hereby are
authorized to execute and acknowledge a certificate setting forth these
resolutions and to cause such certificate to be filed and recorded, all in
accordance with the requirements of Section 151 of the General Corporation Law
of the State of Delaware.
15
<PAGE> 16
IN WITNESS WHEREOF, Osage Systems Group, Inc., has caused this
Certificate to be signed by its Chief Executive Officer, and attested to by its
Assistant Secretary, this 9th day of February, 1999.
Attest: OSAGE SYSTEMS GROUP, INC.
By: /s/ John Iorillo By: /s/ Jack R. Leadbeater
----------------- ----------------------
John Iorillo, Jack R. Leadbeater,
Assistant Secretary Chief Executive Officer
16
<PAGE> 17
EXHIBIT A
(To be Executed by Holder
in order to Convert Shares of Series E Convertible Preferred Stock)
CONVERSION NOTICE
FOR
SERIES E CONVERTIBLE PREFERRED STOCK
The undersigned, as a holder ("Holder") of shares of Series E Convertible
Preferred Stock ("Preferred Shares") of Osage Systems Group, Inc. (the
"Company"), hereby irrevocably elects to convert _____________ Preferred Shares
for shares ("Common Shares") of common stock, par value $.01 per share (the
"Common Stock"), of the Company according to the terms and conditions of the
Certificate of Designation for the Preferred Shares as of the date written
below. The undersigned hereby requests that share certificates for the Common
Stock to be issued to the undersigned pursuant to this Conversion Notice be
issued in the name of, and delivered to, the undersigned or its designee as
indicated below. No fee will be charged to the Holder of Preferred Shares for
any conversion. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed thereto in the Certificate of Designation.
Conversion Date:
-----------------------
Conversion Information: NAME OF HOLDER:
-------------------------------------
By:
-------------------------------------------------
Print Name:
-----------------------------------------
Print Title:
----------------------------------------
Print Address :
-------------------------------------
-------------------------------------
-------------------------------------
Issue Common Stock to:
------------------------------
at:
------------------------------
------------------------------
If Common Stock is to be issued to a person other than Holder, Holder's
signature must be guaranteed below:
SIGNATURE GUARANTEED BY:
--------------------------------------------------
THE COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK TO BE RECEIVED IS SET FORTH
ON PAGE 2 OF THE CONVERSION NOTICE.
PAGE 1 OF CONVERSION NOTICE
17
<PAGE> 18
PAGE 2 TO CONVERSION NOTICE DATED FOR:
------------- ------------------------
(CONVERSION DATE) (NAME OF HOLDER)
COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK TO BE RECEIVED
Number of shares of Preferred Stock converted: shares
---------------
<TABLE>
<CAPTION>
<S> <C>
Number of shares of Preferred Stock converted x Liquidation Preference $
------------
TOTAL DOLLAR AMOUNT CONVERTED $
------------
CONVERSION PRICE
- -- Floating Conversion Price
- -- Fixed Conversion Price
$
------------
</TABLE>
Number of Common Shares =
Total Liquidation Preference of shares of Preferred Stock converted
___________________________________________________________________ =
---------
Conversion Price
NUMBER OF SHARES OF COMMON STOCK =
--------------------
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the Holder is receiving certificate(s) for shares of Preferred Stock upon the
conversion, please issue and deliver _____ certificate(s) for shares of
Preferred Stock in the following amounts:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
18
<PAGE> 1
Exhibit 4.8
[SPECIMEN]
SEE LEGEND ON REVERSE SIDE
NUMBER SHARES
D
OSAGE SYSTEMS GROUP, INC.
Incorporated under the Laws of the State Of Delaware
<TABLE>
<S> <C>
10,000,000 SHARES COMMON STOCK SERIES A $3.00 CONVERTIBLE PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE
SERIES B $3.00 CONVERTIBLE PREFERRED STOCK SERIES C $3.00 CONVERTIBLE PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE
</TABLE>
SERIES D CONVERTIBLE PREFERRED
STOCK
PAR VALUE $.01 PER SHARE
THIS CERTIFIES THAT___________________________________________ is the owner
of _____________________________________ shares of the SERIES D CONVERTIBLE
PREFERRED STOCK OF OSAGE SYSTEMS GROUP, INC., fully paid and
non-assessable, transferable only on the books of the Corporation in person
or by Attorney upon surrender of this Certificate properly endorsed.
The corporation will furnish without charge to each stockholder who so
requests, a statement of the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______ day of _____________________ A.D. 1999.
_________________________________ ________________________________
SECRETARY/ASSISTANT SECRETARY PRESIDENT
<PAGE> 2
[REVERSE SIDE]
FOR VALUE RECEIVED, ______ HEREBY SELL, ASSIGN AND TRANSFER UNTO
Please Insert Social Security or other
Identifying Number of Assignee
_______________________________________
_______________________________________
__________________________________________________________________________
______________________________SHARES REPRESENTED BY THE WITHIN CERTIFICATE,
AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT __________________________
ATTORNEY, TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED: _______________, 19______
IN PRESENCE OF
_______________________________________
_______________________________________
<PAGE> 1
Exhibit 4.9
[SPECIMEN]
SEE LEGEND ON REVERSE SIDE
NUMBER SHARES
E
OSAGE SYSTEMS GROUP, INC.
Incorporated under the Laws of the State Of Delaware
<TABLE>
<S> <C>
10,000,000 SHARES COMMON STOCK SERIES A $3.00 CONVERTIBLE PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE
SERIES B $3.00 CONVERTIBLE PREFERRED STOCK SERIES C $3.00 CONVERTIBLE PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE
SERIES D CONVERTIBLE PREFERRED STOCK SERIES E CONVERTIBLE PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE
</TABLE>
THIS CERTIFIES THAT___________________________________________ is the owner
of _______________________________________ shares of the SERIES E PREFERRED
STOCK OF OSAGE SYSTEMS GROUP, INC., fully paid and non-assessable,
transferable only on the books of the Corporation in person or by Attorney
upon surrender of this Certificate properly endorsed.
The corporation will furnish without charge to each stockholder who so
requests, a statement of the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______ day of _____________________ A.D. 1999.
_________________________________ ________________________________
SECRETARY/ASSISTANT SECRETARY PRESIDENT
<PAGE> 2
[REVERSE SIDE]
FOR VALUE RECEIVED, ______ HEREBY SELL, ASSIGN AND TRANSFER UNTO
Please Insert Social Security or other
Identifying Number of Assignee
_______________________________________
_______________________________________
___________________________________________________________________________
_____________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE,
AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT __________________________
ATTORNEY, TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED: _______________, 19______
IN PRESENCE OF
_______________________________________
_______________________________________
<PAGE> 1
Exhibit 10.11
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement is made and entered into at
Phoenix, Arizona, effective as of December __, 1998 by and between Osage
Systems Group, Inc., a Delaware corporation (hereinafter referred to as
"Employer") and John C. Iorillo, a resident of Maricopa County, Arizona
(hereinafter referred to as "Employee").
WHEREAS, Employer and Employee have entered into a certain Employment
Agreement effective as of January __, 1998 (the "Employment Agreement")
covering various terms and conditions of Employer's employment of Employee; and
WHEREAS, the parties now wish to amend the Employment Agreement as set
forth below.
NOW, THEREFORE, in consideration of the mutual promises of the parties,
and other valuable consideration, the parties agree as follows:
1. Paragraph 10 of the Employment Agreement shall be deleted in its
entirety and shall be of no further force and effect.
Other than as set forth above, all other provisions of the Employment
Agreement shall remain in effect.
IN WITNESS WHEREOF the parties hereto have duly executed this Amendment
No. 1 to Employment Agreement the day and year first above written.
EMPLOYER
OSAGE SYSTEMS GROUP, INC.
By: /s/ Jack Leadbeater
-----------------------------
Jack Leadbeater
Chief Executive Officer
EMPLOYEE:
/s/ John C. Iorillo
---------------------------------
John C. Iorillo
<PAGE> 1
Exhibit 10.17
June 18, 1998
Jack Leadbeater
Chairman and Chief Executive Officer
Osage System Group, Inc.
1661 East Camelback Road
Phoenix, AZ 85016
Dear Jack:
The following represents my understanding of our agreement per our phone
conversation today. Your signature of concurrence below and initial of item 4(a)
or (b) will allow me to begin my discussions with my business partners in
Vail. I am still hopeful of meeting our target Osage start date of July 1, 1998.
CONTRACT FOR OSAGE AND PHIL CARTER
1) Title and responsibilities: Executive Vice President and General Manager of
Operations. No later than December 31, 1998, I will be named a Member of the
Osage Board of Directors. I will be responsible for corporate marketing and the
operations of all Osage companies.
2) Term: 3 years beginning July 1, 1998 until June 30, 2001.
3) Salary: $150,000 per year annual salary beginning July 1, 1998 with a minimum
5% increase per year for the duration of the contract period.
<TABLE>
<CAPTION>
4) Options to be granted: 7/1/98 7/1/99 7/1/00 Total # Value of Options
of options @ $5.60
<S> <C> <C> <C> <C> <C>
(a) $4.00/share 100,000 125,000 125,000 350,000 $560,000
- -----
x (b) $4.50/share(1) 150,000 175,000 185,000 510,000 $561,000
- -----
</TABLE>
5) Bonus: 5% of pre-tax income to a maximum of $150,000 per year if Osage
obtains a minimum of 7% operating income to revenues.
6) 12 months of employment qualifies for a bonus of 1% of the acquisition price
if Osage is sold up to a maximum of $5 million in 1999, $7 million in 2000 and
$10 million in 2001.
7) This is intended to be a "No Cut" contract with SEC "dismissal" language that
is acceptable to both parties:
- --------
(1) All options will be granted immediately and vested as follows:
150,000: December 31, 1998
175,000: December 31, 1999
185,000: December 31, 2000
<PAGE> 2
8) Travel expenses: It is my understanding that my base of business travel shall
be Vail, CO. As my stay in Phoenix increases Osage apartment/condo and car
leases will be considered.
9) Benefit Packages: Similar to other executives at Osage.
Please give me a call if you have any questions.
/s/ John Iorillo, CFO
- ---------------------
CONCURRENCE
John Iorillo
Chief Financial Officer & Director
Osage Systems Group, Inc.
<PAGE> 1
Exhibit 10.18
Certificate No. 1998-10
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION,
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION LETTER OF
COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION."
OPTION TO PURCHASE COMMON STOCK
OF
OSAGE SYSTEMS GROUP, INC.
Void after June 10, 2003
This certifies that, for value received, Phil Carter ("Holder"), is
entitled, subject to the terms set forth below, to purchase from Osage Systems
Group, Inc. (the "Company"), a Delaware corporation, shares of the Common Stock
of the Company (the "Shares"), as constituted on the date hereof (the "Option
Issue Date"), with the Notice of Exercise attached hereto duly executed, and
simultaneous payment therefor in lawful money of the United States, at the
Exercise Price as set forth in Section 2 below. The number, character and
Exercise Price of the shares are subject to adjustment as provided below.
1. TERM OF OPTION. Subject to compliance with the vesting provisions
identified at Paragraph 2.3 hereafter, this Option shall be exercisable, in
whole or in part, during the term commencing on the Option Issue Date and ending
at 5:00 p.m. on June 10, 2003, and shall be void thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 EXERCISE PRICE. The Exercise Price at which this Option,
or portion thereof, may be exercised shall be $4.50 per share, as adjusted
pursuant to Section 11 hereof.
2.2 NUMBER OF SHARES. Provided Holder vests in the Options in
the manner identified at paragraph 2.3 below, the number of shares of the
Company's Common Stock, $.01 par value per share ("Common Stock") which may be
purchased pursuant to this Option shall be 510,000 shares, as adjusted pursuant
to Section 11 hereof.
2.3 VESTING. The Options granted hereunder shall vest in
accordance with the following schedule:
(i) 150,000 Options shall vest on December 31, 1998
provided Holder remains continuously employed by the Company through such date;
(ii) 175,000 Options shall vest on December 31, 1999
provided Holder remains continuously employed by the Company through such date,
<PAGE> 2
(iii) 185,000 Options shall vest on December 31, 2000
provided Holder remains continuously employed by the Company through such date.
Holder relinquishes any right to any Options which have not
been subject to vesting and following any failure to vest this Option shall no
longer be of any force or effect with respect to Options that have not vested.
2.4. DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die while in the employ of
the Company or his employment is terminated due to incapacity (as such term is
defined in Paragraph 2.4(e) below), all of the Options shall vest upon the date
of his death or termination due to incapacity, and he or his estate, personal
representatives, or beneficiary, as applicable, shall have the right to exercise
the Options at any time after the date of his death or termination due to
incapacity.
(b) In the event Holder's employment by the Company
is terminated for "cause" (as such term is defined in Paragraph 2.4(d) below) or
Holder voluntarily terminates his employment with the Company, Holder's right in
and to any Option that has not vested as of such termination date shall lapse
and terminate.
(c) In the event Holder's employment by the Company
is terminated without "cause" (as such term is defined in Paragraph 2.4(d)
below), Holder shall have the right to continue to vest and exercise the Options
as if no termination of employment had occurred.
(d) As used in this Paragraph 2.4, a termination for
"cause" shall mean the occurrence of any of the following events, provided,
however, that the Holder has first been given written notice of the facts or
circumstances constituting the determination of "cause" and a reasonable
opportunity (in no event less than fifteen (15) days) to cure, rectify or
reverse such facts or circumstances and the Holder shall have failed to do so:
(i) the commission by the Holder of a felony
for which he is convicted by a court of competent jurisdiction; or
(ii) the finding by a court of competent
jurisdiction that the Holder perpetrated a dishonest act or common law fraud
against the Company or any affiliate thereof.
(e) As used in this Paragraph 2.4, a termination for
"incapacity" shall occur if the Holder becomes ill or is injured or otherwise
becomes incapacitated such that, in the opinion of the Board of Directors, he
cannot fully carry out and perform his employment duties, and such incapacity
shall continue for a period of 180 consecutive days, and the Board of Directors
at any time thereafter gives the Holder or his representative twenty (20) days'
prior written notice to fully and finally terminate his employment with the
Company.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or by bank or
certified check; or by cashless exercise by delivering to the Company a notice
of exercise together with an
2
<PAGE> 3
irrevocable direction to a broker-dealer registered under the Securities
Exchange Act of 1934, to sell a sufficient portion of the Shares and deliver the
sales proceeds directly to the Company to pay the Exercise Price. If shares of
common stock of the Company are tendered as payment of the Exercise Price, the
value of such shares shall be their "market value" as of the trading date
immediately preceding the date of exercise. The "market value" shall be:
(i) If the Company's common stock is traded in the
over-the-counter market and not on any national securities exchange nor in the
NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
or if not so reported, the average of the closing bid and asked prices for a
share as furnished to the Company by any member of the National Association of
Securities Dealers, Inc., selected by the Company for that purpose.
(ii) If the Company's common stock is traded on a
national securities exchange or in the NASDAQ Reporting System, the market value
shall be either (1) the simple average of the high and low prices at which a
share of the Company's common stock traded, as quoted on the NASDAQ-NMS or its
other principal exchange, or (2) the price of the last sale of a share of common
stock as similarly quoted, whichever is higher, and rounding out such figure to
the next higher multiple of 12.5 cents (unless the figure is already a multiple
of 12.5 cents).
If such tender would result in an issuance of a whole number of shares and a
fractional share of Common Stock, the value of such fractional share shall be
paid to the Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date. As
promptly as practicable on or after such date and in any event within ten (10)
days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates for
the number of shares issuable upon such exercise. In the event that this Option
is exercised in part, the Company at its expense will execute and deliver a new
Option of like tenor exercisable for the number of shares for which this Option
may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this Option.
In lieu of any fractional share
3
<PAGE> 4
to which the Holder would otherwise be entitled, the Company shall make a cash
payment equal to the Exercise Price multiplied by such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Option and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Option, the
Company at its expense shall execute and deliver, in lieu of this Option, a new
Option of like tenor and amount.
6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated herein, the
Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Option shall have been exercised as
provided herein.
7. TRANSFER OF OPTION.
7.1. NON-TRANSFERABILITY. Prior to vesting in accordance with
paragraph 2 herein, the Option shall not be assigned, transferred, pledged or
hypothecated in any way, nor subject to execution, attachment or similar
process, otherwise than by will or by the laws of descent and distribution. To
the extent the Options have vested, transfers thereof which comply with the
remaining provisions of this paragraph 7 may be undertaken upon the prior
written consent of the Company, which consent shall not be unreasonably
withheld. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Option contrary to the provisions hereof, and the levy of an
execution, attachment, or similar process upon the Option, shall be null and
void and without effect.
7.2. EXCHANGE OF OPTION UPON A TRANSFER. On surrender of this
Option for exchange, properly endorsed, the Company at its expense shall issue
to or on the order of the Holder a new Option or Options of like tenor, in the
name of the Holder or as the Holder (on payment by the Holder of any applicable
transfer taxes) may direct, of the number of shares issuable upon exercise
hereof.
7.3. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON
TRANSFERS.
(a) The Holder of this Option, by acceptance hereof,
acknowledges that this Option and the Shares to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment (unless such shares are subject to resale
pursuant to an effective prospectus), and that the Holder will not offer, sell
or otherwise dispose of this Option or any Shares to be issued upon exercise
hereof
4
<PAGE> 5
except under circumstances that will not result in a violation of applicable
federal and state securities laws. Upon exercise of this Option, the Holder
shall, if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the shares of Common Stock so purchased are being acquired
solely for the Holder's own account and not as a nominee for any other party,
for investment (unless such shares are subject to resale pursuant to an
effective prospectus), and not with a view toward distribution or resale.
(b) Neither this Option nor any share of Common Stock
issued upon exercise of this Option may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel satisfactory to the Company that the proposed
sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
(c) All Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN
OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION."
(d) Holder recognizes that investing in the Option and the
Common Stock involves a high degree of risk, and Holder is in a financial
position to hold the Option and the Common Stock indefinitely and is able to
bear the economic risk and withstand a complete loss of its investment in the
Option and the Common Stock. The Holder is a sophisticated investor and is
capable of evaluating the merits and risks of investing in the Company. The
Holder has had an opportunity to discuss the Company's business, management and
financial affairs with the Company's management, has been given full and
complete access to information concerning the Company, and has utilized such
access to its satisfaction for the purpose of obtaining information or verifying
information and has had the opportunity to inspect the Company's operation.
Holder has had the opportunity to ask questions of, and receive answers from the
management of the Company (and any person acting on its behalf) concerning the
Option and the Common Stock and the agreements and transactions contemplated
hereby, and to obtain any additional information as Holder may have requested in
making its investment decision.
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(e) Holder acknowledges and represents: (i) that he has been
afforded the opportunity to review and is familiar with the quarterly, annual
and periodic reports of the Company and has based his decision to invest solely
on the information contained therein and has not been furnished with any other
literature, prospectus or other information except as included in such reports;
(ii) he is at least 21 years of age; (iii) he has adequate means of providing
for his current needs and personal contingencies; (iv) he has no need for
liquidity for his investment in the Option or Common Stock; (v) he maintains his
domicile and is not a transient or temporary resident at the address on the
books and records of the Company; (vi) all of his investments and commitments to
non-liquid assets and similar investments are, after his acquisition of the
Option and Common Stock, will be reasonable in relation to his net worth and
current needs; (vii) he understands that no federal or state agency has approved
or disapproved the Option or Common Stock or made any finding or determination
as to the fairness of the Option and Common Stock for investment; and (viii) he
recognizes that the Common Stock is presently eligible for trading on the
over-the-counter market, and that the Company has made no representations,
warranties, or assurances as to the future trading value of the Common Stock,
whether a public market will continue to exist for the resale of the Common
Stock, or whether the Common Stock can be sold at a price reflective of past
trading history at any time in the future.
8. RESERVATION AND ISSUANCE OF STOCK; PAYMENT OF TAXES.
(a) The Company covenants that during the term that this
Option is exercisable, the Company will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
shares upon the exercise of this Option, and from time to time will take all
steps necessary to amend its Certificate of Incorporation to provide sufficient
reserves of shares of Common Stock issuable upon the exercise of the Option.
(b) The Company further covenants that all shares of Common
Stock issuable upon the due exercise of this Option will be free and clear from
all taxes or liens, charges and security interests created by the Company with
respect to the issuance thereof, however, the Company shall not be obligated or
liable for the payment of any taxes, liens or charges of Holder, or any other
party contemplated by paragraph 7, incurred in connection with the issuance of
this Option or the Common Stock upon the due exercise of this Option. The
Company agrees that its issuance of this Option shall constitute full authority
to its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the shares of Common Stock upon
the exercise of this Option. The Common Stock issuable upon the due exercise of
this Option, will, upon issuance in accordance with the terms hereof, be duly
authorized, validly issued, fully paid and non-assessable.
(c) Upon exercise of the Option, the Company shall have the
right to require the Optionee to remit to the Company an amount sufficient to
satisfy federal, state and local tax withholding requirements prior to the
delivery of any certificate for shares of Company Common Stock purchased
pursuant to the Option, if in the opinion of counsel to the Company such
withholding is required under applicable tax laws.
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(d) An Optionee who is obligated to pay the Company an amount
required to be withheld under applicable tax withholding requirements may pay
such amount (i) in cash; (ii) in the discretion of the Administrator, through
the delivery to the Company of previously-owned shares of Common Stock having an
aggregate Fair Market Value equal to the tax obligation provided that the
previously owned shares delivered in satisfaction of the withholding obligations
must have been held by the Optionee for at least six (6) months; (iii) in the
discretion of the Administrator, through the withholding of shares of Common
Stock otherwise issuable to the Optionee in connection with the Option exercise;
or (iv) in the discretion of the Administrator, through a combination of the
procedures set forth in subsections (i), (ii) and (iii) of this Paragraph 8(d).
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect to
such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this Option
shall be deemed to have been given, (i) in the case of personal delivery, on the
date of such delivery and (ii) in the case of mailing, on the third business day
following the date of such mailing, addressed as follows:
If to the Company:
Osage Systems Group, Inc.
1661 East Camelback Road
Suite 345
Phoenix, AR 85016
and to the Holder:
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
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(a) Any term of this Option may be amended with the written
consent of the Company and the Holder. Any amendment effected in accordance with
this Section 10 shall be binding upon the Holder, each future holder and the
Company.
(b) No waivers of, or exceptions to, any term, condition or
provision of this Option, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such term, condition or
provision.
11. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time upon
the occurrence of certain events, as follows:
11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
while this Option, or any portion thereof, is outstanding and unexpired there
shall be (i) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for herein), (ii) a merger
or consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a merger in which the Company is the
surviving entity but the shares of the Company's capital stock outstanding
immediately prior to the merger are converted by virtue of the merger into other
property, whether in the form of securities, cash or otherwise, or (iii) a sale
or transfer of substantially all of the Company's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the holder of this Option shall upon such reorganization,
merger, consolidation or sale or transfer, have the right by exercising such
Option, to purchase the kind and number of shares of Common Stock or other
securities or property (including cash) otherwise receivable upon such
reorganization, merger, consolidation or sale or transfer by a holder of the
number of shares of Common Stock that might have been purchased upon exercise of
such Option immediately prior to such reorganization, merger, consolidation or
sale or transfer. The foregoing provisions of this Section 11.1 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Option. If the per-share
consideration payable to the Holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application of
the provisions of this Option with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Option
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Option.
11.2. RECLASSIFICATION. If the Company, at any time while this
Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a different
number of securities of any other class or classes, this Option shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Option immediately prior to such
reclassification or other change and the Exercise
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<PAGE> 9
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Option, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as to
which purchase rights under this Option exist, into a different number of
securities of the same class, the Exercise Price and the number of shares
issuable upon exercise of this Option shall be proportionately adjusted.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES
OR PROPERTY. If while this Option, or any portion hereof, remains outstanding
and unexpired the holders of the securities as to which purchase rights under
this Option exist at the time shall have received, or, on or after the record
date fixed for the determination of eligible Stockholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then and in each case, this Option shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Option, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Option on the date hereof and had thereafter,
during the period from the date hereof to and including the date of such
exercise, retained such shares and/or all other additional stock, other
securities or property available by this Option as aforesaid during such period.
11.5 The Company will not, by any voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 11 and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Holders of this Option against impairment.
12. SEVERABILITY. Whenever possible, each provision of this Option
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Option is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
13. GOVERNING LAW. The corporate law of the State of Delaware shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction, validity,
interpretation and enforceability of this Option and the exhibits and schedules
hereto shall be governed by, and construed in accordance with, the laws of the
State of Delaware, without giving effect to any choice of law or conflict of law
rules or provisions (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
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14. JURISDICTION. The Holder and the Company agree to submit to
personal jurisdiction and to waive any objection as to venue in the federal or
state courts in the City in which the headquarters of the Company is located,
which as of the date hereof is San Diego, California. Service of process on the
Company or the Holder in any action arising out of or relating to this Option
shall be effective if mailed to such party at the address listed in Section 9
hereof.
15. ARBITRATION. If a dispute arises as to interpretation of this
Option, it shall be decided finally by three arbitrators in an arbitration
proceeding conforming to the Rules of the American Arbitration Association
applicable to commercial arbitration. The arbitrators shall be appointed as
follows: one by the Company, one by the Holder and the third by the said two
arbitrators, or, if they cannot agree, then the third arbitrator shall be
appointed by the American Arbitration Association. The third arbitrator shall be
chairman of the panel and shall be impartial. The arbitration shall take place
in the City in which the headquarters of the Company is located, which as of the
date hereof is Phoenix, Arizona. The decision of a majority of the Arbitrators
shall be conclusively binding upon the parties and final, and such decision
shall be enforceable as a judgment in any court of competent jurisdiction. Each
party shall pay the fees and expenses of the arbitrator appointed by it, its
counsel and its witnesses. The parties shall share equally the fees and expenses
of the impartial arbitrator.
16. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's certificate of incorporation or by-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and state
securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
17. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit of
and be binding on the respective successors, assigns and legal representatives
of the Holder and the Company.
IN WITNESS WHEREOF, the Company has caused this Option to be executed
by its officers thereunto duly authorized.
Dated: June 10, 1998
OSAGE SYSTEMS GROUP, INC.
BY: /s/ Jack Leadbeater
-------------------
Jack Leadbeater, Chief Executive Officer
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Accepted and Acknowledged:
/s/ Phil Carter
- ---------------
Phil Carter
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NOTICE OF EXERCISE
TO: [_____________________________]
(1) The undersigned hereby elects to purchase _______ shares of Common
Stock of Osage Systems Group, Inc. pursuant to the terms of the attached Option,
and tenders herewith payment of the purchase price for such shares in full in
the following manner (please check one of the following choices):
/ / In Cash
/ / Cashless exercise through a broker; or
/ / Delivery of previously owned Shares.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment (unless such shares are
subject to resale pursuant to an effective prospectus), and that the undersigned
will not offer, sell or otherwise dispose of any such shares of Common Stock
except under circumstances that will not result in a violation of the Securities
Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-----------------------------------
(Name)
-----------------------------------
(Name)
- -------------------------- -----------------------------------
(Date) (Signature)
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Exhibit 10.23
TERMINATION BENEFITS AGREEMENT
TERMINATION BENEFITS AGREEMENT made this ____ day of December, 1998, by
and between OSAGE SYSTEMS GROUP, INC., a Delaware corporation (the "Company")
and JOHN C. IORILLO (the "Executive").
RECITALS
A. The Executive has served the Company, formerly known as Pacific Rim
Entertainment, Inc., as a key executive officer and has helped guide the Company
in its acquisition of Osage Computer Group through a merger with a wholly-owned
subsidiary of the Company, and its successful completion of other acquisitions.
B. The Executive is expected to continue to make a major contribution
to the profitability, growth and financial strength of the Company.
C. The Company considers the continued services of the Executive to be
in the best interest of the Company and its shareholders and desires to assure
the continued service of the Executive on behalf of the Company on an objective
and impartial basis and without distraction or conflict of interest in the event
of an attempt to obtain control of the Company.
D. The Executive is willing to remain in the employ of the Company upon
the understanding that the Company will provide income security upon the terms
and subject to the conditions contained herein if the Executive's employment is
terminated voluntarily for good reason following a Change in Control of the
Company or involuntarily by the Company without cause as provided in Section 5
of the Employment Agreement dated as of January ___, 1998 between the Executive
and the Company (as such agreement currently exists or may be amended, extended
or replaced subsequent to the date hereof, the "Employment Agreement," a copy of
which is attached hereto as Exhibit A).
NOW, THEREFORE, in consideration of the mutual promises herein
contained and intending to be legally bound hereby, the parties agree as
follows:
1. Simultaneously with a "Change in Control of the Company", as that
term is defined herein (a "Change in Control"), the term of the Employment
Agreement then in force between the Company and the Executive, without any
further action on the part of either party, shall be deemed to have been
extended for a term of three (3) years, commencing with the date of the Change
In Control, on the same terms and conditions as existed immediately prior to the
Change in Control (the "Extended Term").
2. During the Extended Term, the Executive may terminate his employment
at any time for "good reason". As used herein, the term "good reason" shall
mean:
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<PAGE> 2
(i) A failure by the Company to comply with any material
provision of the Employment Agreement, which failure has not been cured within
ten (10) days after notice of noncompliance has been given by Executive to the
Company;
(ii) Without Executive's written consent, the assignment to
Executive of any duties inconsistent with Executive's duties, responsibilities
and status with the Company immediately prior to the Change in Control;
(iii) Any change in (a) Executive's reporting
responsibilities, title or office in effect immediately prior to the Change in
Control of the Company, or (b) a change in geographic location of where
Executive's position is based that would reasonably require a relocation of his
personal residence;
(iv) Any removal from or any failure to reelect Executive to
the highest ranking financial executive position in the Company except in
connection with a termination of employment pursuant to Section 5 of Executive's
Employment Agreement or voluntary resignation or refusal to stand for
re-election by Executive;
(v) Any reduction by the Company in Executive's annual salary
in effect immediately prior to a Change in Control or as the same may be
increased from time to time; or
(vi) Any material reduction in the benefits provided to
Executive under any bonus, benefit or compensation plan, life insurance plan,
health and accident plan or disability plan in which Executive is participating
at the time of a Change in Control of the Company.
3. For purposes of this Agreement, a "Change in Control" shall be
determined in the manner established at Paragraph 7 hereafter. A Change in
Control shall mean a Change in Control of a nature that would be required to be
reported in response to item 6(e) of Schedule 14A of Regulation 14A, as in
effect on the date hereof, promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"); provided that, without limitation, such a
Change in Control shall be deemed to have occurred if:
(a) Any "Person" or "group of Persons" (as such terms are
defined hereafter), except for Executive, any affiliate of Executive, or any
group of Persons of which Executive is a participant, any employee benefit plan
of the Company or any subsidiary of the Company, or any entity holding voting
securities of the Company for or pursuant to the terms of any such plan (a
"Benefit Plan" or the "Benefit Plans"), is or becomes the "beneficial owner" (as
such term is defined hereafter), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the Company's
then outstanding securities;
(b) There occurs a contested proxy solicitation of the
Company's shareholders with respect to the election of directors that results in
the contesting party electing a majority of members of the Company's Board of
Directors;
(c) There occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of the Company to another entity,
except to an entity controlled directly or indirectly by the Company, or a
merger, consolidation or other reorganization of the Company in
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<PAGE> 3
which the Company is not the surviving entity, or a plan of liquidation or
dissolution of the Company other than pursuant to bankruptcy or insolvency laws
is adopted; or
(d) During any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof unless
the election, or the nomination for election by the Company's shareholders, of
each new director was approved by a vote of at least two-thirds of the directors
(inclusive of Executive) then still in office who were directors at the
beginning of the period.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to have occurred for purposes of this Agreement: (i) if a "Person" acquires or
becomes the beneficial owner of securities representing 20% or more of the
combined voting power of the Company's then outstanding securities pursuant to a
private placement transaction or underwritten public offering of the Company's
Common Stock where such issuance of securities by the Company is approved by a
vote of at least two-thirds of the directors inclusive of the Executive; (ii) if
a transaction identified in subparagraph 3(c) above occurs and is approved by a
vote of at least two-thirds of the directors inclusive of the Executive; (iii)
in the event of a sale, exchange, transfer or other disposition of substantially
all of the assets of the Company to, or a merger, consolidation or other
reorganization involving the Company and, the Executive, alone or with other
officers of the Company, or any entity in which the Executive (alone or with
other officers) has, directly or indirectly, at least a 25% equity or ownership
interest; or (iv) in a transaction which includes the Executive as a principal
and control person and is otherwise commonly referred to as a "management
leveraged buy-out". For the purposes of subparagraph 3(a), a "Person" shall not
be deemed the beneficial owner of securities representing 20% or more of the
combined voting power of the Company's then outstanding securities if that
"Person" is an underwriter who has acquired shares for resale in connection with
an underwritten public offering of such shares.
Subparagraph 3(a) above to the contrary notwithstanding, a Change in
Control shall not be deemed to have occurred if a Person (i) is, on the date
hereof, the beneficial owner 20% or more of the combined voting power of the
Company's then outstanding securities, or (ii) becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding securities solely as
the result of an acquisition by the Company or any subsidiary of the Company of
voting securities of the Company which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially owned by
such person to 20% or more of the combined voting power of the Company's then
outstanding securities, provided, however, that if a Person currently is or
becomes the beneficial owner of 20% or more of the combined voting power of the
Company's then outstanding securities by reason of shares (y) beneficially owned
on the date hereof, or (z) purchased by the Company or any subsidiary of the
Company and shall thereafter become the beneficial owner, directly or
indirectly, of any additional voting securities of the Company, then a Change in
Control shall be deemed to have occurred with respect to such Person under
subparagraph 3(a) above. Notwithstanding the foregoing, in no event shall a
Change of Control be deemed to occur under subparagraph 3(a) above with respect
to the Benefit Plans.
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<PAGE> 4
For the purposes of this paragraph 3, the terms "Person,"
"group of Persons", "beneficial owner" and "beneficial ownership" shall have the
meanings ascribed thereto under Sections 13(d) and 14(d) and Rule 13d
promulgated under the Securities Exchange Act.
4. Any termination of Executive's employment by the Executive shall be
communicated by written notice of termination to the Company. For purposes of
this Agreement, a "notice of termination" shall mean a dated notice which shall
(i) set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment; and (ii) specify a
date of termination, which shall be not less than thirty nor more than ninety
(90) days after such notice of termination.
5. If during the Extended Term following a Change in Control, Executive
terminates his Employment for good reason as described in subparagraphs (i) to
(vi) of paragraph 2 hereof, or if Executive is terminated by the Company other
than pursuant to Section 5 of Executive's Employment Agreement, then, in lieu of
any further salary payments to Executive for periods subsequent to the date of
termination:
(a) The Company shall pay as a liquidated amount to Executive
within thirty (30) days of such termination, a lump sum cash payment which is
equal to the remainder of any further salary and ascertainable bonus payments
that would have become due to Executive during the remainder of the Extended
Term; calculating the amount of such salary based upon the Executive's current
gross salary (for federal income tax purposes) and ascertainable bonus based
upon the bonus that was received by Executive during the Company's most recently
completed fiscal year;
(b) All options held by Executive, to the extent not vested
pursuant to the terms of any plan or agreement governing such option, shall
become fully vested and exerciseable;
(c) The Company shall continue to pay or make available to
Executive for a period of two (2) years after the date of termination, all
Company benefits including all health, disability and life insurance plans
provided by or through the Company, including those provided in the Employment
Agreement;
(d) If Executive is terminated by the Company other than as
provided in Section 5 of Executive's Employment Agreement, the "Negative
Covenant" provision of Section 11 of the Employment Agreement (including
remedies provided in such Section 11) shall be null and void and unenforceable
and inapplicable as to the Executive; and
(e) The Company, within sixty (60) days of Executive's date of
termination, shall (i) pay to Executive an additional amount sufficient to
satisfy all of Executive's current or prospective liability to any taxing
authority for excise taxes, penalties or any other taxes assessed in excess of
normal income taxes imposed on salaries, incurred by reason of all benefits
provided to Executive under this Agreement and (ii) cause the Company's
independent auditors to determine, within sixty (60) days, the amount to be paid
to Executive pursuant to subparagraph
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<PAGE> 5
5(a) above and this subparagraph 5(e), providing a copy to Executive of the
auditors' detailed determination.
6. The Executive shall not be required to mitigate the amount of any
payment provided for under this Agreement by asking for other employment and
none of these payments may be reduced by any future salary that Executive may
earn.
7. A Change in Control shall be determined within the reasonable
discretion of the Executive who shall within 90 days of such determination
provide written notice (the "Notice") to the Company identifying the Change in
Control, and, if possible, providing reference to the Item or Items constituting
the Change in Control identified in subparagraphs 3(a)-3(c) above. The Company
shall have 15 days in which to respond in writing. This response shall indicate
whether or not the Company adopts or disputes the conclusions set forth within
the Notice, and if the Company disputes the Notice, the Company's response shall
indicate with specificity the basis and grounds for such objection. In the
absence of a timely response, the Company shall be deemed to have adopted the
conclusions set forth within the Notice. The conclusions of the Executive set
forth within the Notice shall be deemed conclusive evidence of a Change in
Control. The Company shall bear the burden of proof of establishing that a
Change in Control has not occurred.
8. The Executive is aware that upon Notice of the occurrence of a
Change in Control, the Board of Directors or a shareholder of the Company may
then cause or attempt to cause the Company to refuse to comply with its
obligations under this Agreement, or may cause or attempt to cause the Company
to institute, or may institute litigation seeking to have this Agreement
declared unenforceable, or may take or attempt to take other action to deny
Executive the benefits intended under this Agreement. In these circumstances,
the purpose of this Agreement could be frustrated. It is the intent of the
Company that Executive not be required to incur the expenses associated with the
enforcement of any rights under this Agreement by litigation or other legal
action, nor be bound to negotiate any settlement of any rights hereunder,
because the cost and expense of such legal action or settlement would
substantially detract from the benefits intended to be extended to Executive
hereunder. Accordingly, if following a Notice relative to a Change in Control it
should appear to Executive that the Company has failed to comply with any of its
obligations under this Agreement or in the event that the Company or any other
person takes any action to declare this Agreement void or unenforceable, or
institutes any litigation or other legal action designed to deny, diminish or to
recover from Executive the benefits intended to be provided to Executive, then
the Company irrevocably authorizes Executive to retain counsel of Executive's
choice, at the expense of the Company as provided in this paragraph 8, to
represent Executive in connection with the initiation or defense of any
litigation or other legal action, whether such action is by or against the
Company or any director, officer, shareholder, or other person affiliated with
the Company, in any jurisdiction. Notwithstanding any existing or prior
attorney-client relationship between the Company and such counsel, the Company
irrevocably consents to Executive entering into an attorney-client relationship
with such counsel, and in that connection the Company and Executive agree that a
confidential relationship shall exist between Executive and such counsel. The
reasonable fees and expenses of counsel selected from time to time by Executive
as hereinabove provided shall be paid in advance or reimbursed to Executive, at
the election of the Executive, by the Company
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<PAGE> 6
on a regular, periodic basis upon presentation by Executive of a statement or
statements or customary retainer letter prepared by such counsel in accordance
with its customary practices, up to a maximum aggregate amount of $200,000. Any
legal expenses incurred by the Company by reason of any dispute between the
parties as to enforceability of or the terms contained in this Agreement,
notwithstanding the outcome of any such dispute, shall be the sole
responsibility of the Company, and the Company shall not take any action to seek
reimbursement from Executive for such expense.
9. This Agreement is the entire agreement between the parties
concerning the subject matter hereof and supersedes all prior or contemporaneous
negotiations or understandings relating hereto. This Agreement may be altered or
amended only by a writing signed by the parties hereto.
10. This Agreement shall be construed in accordance with the laws of
Arizona and shall be binding upon and inure to the benefit of the parties
hereto, their heirs, administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this amendment the
day and year first above written.
OSAGE SYSTEMS GROUP, INC.
BY: /s/ Jack Leadbeater
-------------------
Jack Leadbeater
Chief Executive Officer
/s/ John C. Iorillo
-------------------
John C. Iorillo
6
<PAGE> 7
EXHIBIT A
EMPLOYMENT AGREEMENT
7
<PAGE> 1
Exhibit 10.36
INVESTMENT BANKING AGREEMENT
This Investment Banking Agreement ("this Agreement") is entered into as
of December 4, 1998, by and between Osage Systems Group, Inc. with offices at
1661 East Camelback Road, Suite 245, Phoenix, Arizona 85016 (hereinafter
referred to as "Osage") and American Maple Leaf Financial Corp. with offices at
Two Penn Center Plaza, Suite 605, Philadelphia, Pennsylvania 19102 (hereinafter
referred to as "AMLF").
WHEREAS, AMLF provides its clients with financial advisory services,
mergers and acquisitions advice, financial public relations, and consulting and
advisory services designed to inform interested parties as to the business,
products, management, marketing and financial potential of its clients;
WHEREAS, Osage, its successors, subsidiaries and affiliates
(collectively, the "Company") desire to raise capital, attract interest from
members of the financial community, and pursue strategic merger or acquisition
opportunities;
WHEREAS, the Company desires to publicize itself with the intention of
making its name and business better known ultimately to its shareholders, money
management firms, investors and brokerage firms; and
WHEREAS, AMLF desires to engage the Company as a client and is duly
qualified to enter into this Agreement.
NOW, THEREFORE, in consideration of the terms, covenants and conditions
herein and other valuable consideration, the receipt, adequacy and sufficiency
of which the parties hereby acknowledge, the parties hereto agree as follows:
1. Appointment. On a non-exclusive basis, the Company hereby appoints
AMLF as a financial advisor and hereby retains AMLF on the terms and conditions
of this Agreement. AMLF accepts such appointment and agrees to perform the
services identified below at any time upon the terms and conditions of this
Agreement.
2. Term. The term of this Agreement shall begin on the date hereof and
shall continue on a month-to-month basis until terminated by either party at any
time upon written notice to the other party. AMLF shall commence providing its
services to the Company immediately.
3. Corporate Finance Services.
(a) AMLF shall provide, on a non-exclusive basis, corporate
and financial advisory services to the Company. AMLF shall introduce the Company
to sources of capital and advise the Company with respect to offerings and/or
placements of its securities.
<PAGE> 2
(b) AMLF shall assist in establishing and advising the Company
with respect to interviews of Company officers by analysts, market makers,
broker-dealers and other members of the financial community.
(c) AMLF shall serve as a financial public relations advisor
to the Company. AMLF shall seek to make the Company, its management, its
products and services, and its financial situation and prospects, known to the
financial press and publications, broker-dealers, mutual funds, institutional
investors, market makers, analysts, investment advisors and other members of the
financial community as well as the financial media and the public generally.
AMLF shall advise the Company with respect to existing and potential market
makers, broker-dealers, underwriters and investors as well as act as the liaison
between the Company and such persons.
(d) In consideration for the advisory services provided by
AMLF, the Company shall (i) pay AMLF a monthly fee of $3,000 during the term of
this Agreement, payable on the fifteenth day of each month (in arrears for the
prior month); (ii) within 30 days from the date of this Agreement, issue AMLF
warrants to purchase 25,000 shares of Company common stock exercisable at $4.75
per share, which warrants shall expire two years from the date of issuance
thereof; (iii) 90 days from the date of this Agreement, provided this Agreement
remains in effect at that time, issue warrants to purchase 25,000 shares of
Company common stock exercisable at $4.75 per share, which warrants shall expire
two years from the date of issuance; and thereafter, (iv) for every $1 million
(or portion thereof above $1 million) of equity or subordinated debt raised by
the Company in a financing transaction through an underwriter or other financing
source introduced to the Company by AMLF during the term of this Agreement,
which financing transaction is completed within one year of the date of such
introduction to the Company, issue AMLF warrants to purchase an additional 5,000
shares of Company stock exercisable at a purchase price equal to the average
closing price of the Company's common stock on the principal exchange upon which
its shares trade for the ten (10) trading days prior to the closing of any such
financing transaction, which warrants shall expire two years from the date of
issuance thereof. For the purposes hereof, an "introduction to the Company"
shall be deemed to occur upon the Company's written acknowledgment of such
introduction by AMLF.
(e) Any warrants to be issued to AMLF pursuant to subparagraph
3(d) above shall contain those terms and be in form and substance substantially
similar to the warrant attached hereto as Exhibit "A".
4. Merger and Acquisition Services.
(a) AMLF shall, on a non-exclusive basis, identify and advise
the Company on potential Acquisition Transactions. For purposes of this
Agreement, the term "Acquisition Transaction" means (i) any merger,
consolidation, reorganization or other business combination pursuant to which
any business of a third party is combined with that of the Company or (ii) the
acquisition, directly or indirectly, by the Company of all or substantial
portion of the assets or equity of a third party by way of negotiated purchase.
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<PAGE> 3
(b) In connection with a proposed Acquisition Transaction,
AMLF's advisory services will include the following: (i) assistance in the
evaluation of a third party from a financial point of view, (ii) assistance and
advice with respect to the form and structure of the Acquisition Transaction and
the financing thereof, (iii) conducting discussions and negotiations regarding
an Acquisition Transaction and (iv) providing related advice and assistance as
the Company may reasonably request in connection with a Acquisition Transaction.
(c) If, during the term of this Agreement or within one year
thereafter, an Acquisition Transaction is consummated with a third party
introduced to the Company by AMLF during the term of this Agreement, the Company
will pay AMLF a transaction fee upon the closing of such Acquisition Transaction
equal to (i) 5% of the first $1,000,000 of the Consideration paid or payable in
connection with such Acquisition Transaction; (ii) 4% of the next $1,000,000 of
the Consideration paid or payable in connection with such Acquisition
Transaction; (iii) 3% of the next $1,000,000 of the Consideration paid or
payable in connection with such Acquisition Transaction; (iv) 2% of the next
$1,000,000 of the Consideration paid or payable in connection with such
Acquisition Transaction; and (v) 1% of the remaining Consideration paid or
payable in connection with such Acquisition Transaction. For the purposes
hereof, an "introduction to the Company" shall only be deemed to occur upon the
Company's written acknowledgment of such introduction by AMLF.
(d) For the purposes of subparagraph 4(c) of this Agreement,
the term "Consideration" means the aggregate value of cash, securities, notes or
other property, paid or payable by the Company to the third party target,
acquiree or seller in connection with an Acquisition Transaction. The value of
such Consideration shall be determined as follows:
(i) the value of securities or other property shall
be the fair market value as the parties hereto mutually agree upon
at the date of the closing of the Acquisition Transaction; and
(ii) notes shall be valued at face value.
(e) If the Consideration payable in an Acquisition Transaction
includes contingent or escrow payments to be calculated by reference to
uncertain future occurrences, such as future financial or business performance,
then the transaction fee relating to such contingent or escrow Consideration
shall be payable at the earlier of the (i) payment of such Consideration or (ii)
time that the amount of such Consideration can be determined; however, the
amount of such additional transaction fees shall be computed as if such
additional Consideration was originally included within the total Consideration
paid at the closing of the Acquisition Transaction.
5. Reimbursement of Expenses. The Company shall, upon reasonable
request and submission of written invoices, reimburse AMLF for its reasonable
out-of-pocket expenses incurred in connection with AMLF's provision of services
under this Agreement, to the extent of expenses of $250 per item or aggregate
expenses of $2,500, and thereafter all such expenses shall only be reimbursed if
pre-approved by the Company in writing.
6. Additional Duties of the Company.
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<PAGE> 4
(a) As reasonably requested by AMLF, the Company shall supply
AMLF, on a regular and timely basis, with relevant approved data and information
about the Company, its management, its products and its operations.
(b) The Company shall, upon request supply AMLF with full and
complete copies of all of its filings with the SEC, as well as all data and
information supplied to any analysts, broker-dealers, market makers or other
members of the financial community; and all products/services brochures, sales
materials and similar materials.
(c) The Company shall promptly notify AMLF of the filing of
any registration statement or private placement memorandum for the sale of the
Company's securities and of any other event which imposes any restrictions on
publicity.
(d) The Company shall contemporaneously notify AMLF if any
information or data being supplied to AMLF has not been generally released or
promulgated.
7. Indemnification by the Company.
If, in connection with any services or matters that are the
subject of this Agreement, AMLF becomes involved in any capacity in any action
or legal proceeding, the Company agrees to reimburse AMLF for the reasonable
legal fees and disbursements of counsel and other expenses (including the cost
of investigation and preparation) incurred by AMLF. The Company also agrees to
indemnify and hold AMLF harmless against any losses, claims, damages or
liabilities, joint or several, to which AMLF may become subject in connection
with the services which are the subject of this Agreement; provided, however,
that the Company shall not be liable under the foregoing indemnity agreement in
respect of any loss, claim, damage or liability to the extent that a court
having jurisdiction shall have determined by a final judgment that such loss,
claim, damage or liability primarily resulted from the willful misfeasance or
gross negligence of AMLF. The provisions of this paragraph shall survive the
expiration of the term of this Agreement. The Company's agreements in this
paragraph shall, upon the same terms an conditions, extend to and inure to the
benefit of each person, if any, who may be deemed to control AMLF.
8. Representation and Indemnification by AMLF.
(a) AMLF represents that it has full legal authority to
perform the services as required by this Agreement.
(b) AMLF agrees to indemnify and hold the Company harmless
from and against any and all losses, claims, costs, expenses, damages or
obligations it may incur as a result of, arising from, or in connection with any
violations by AMLF or any of its affiliates of any federal or state securities
laws resulting from AMLF's activities under the term of this Agreement.
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<PAGE> 5
9. Relationship of Parties. AMLF is an independent contractor
responsible for compensation of its agents, employees and representatives, as
well as all applicable withholding therefrom and taxes thereon (including
unemployment compensation) and all workers' compensation insurance. This
Agreement does not establish any partnership, joint venture, or other business
entity or association between the parties, and neither party is intended to have
any interest in the business or property of the other.
10. Non-Disclosure of Confidential Information.
(a) AMLF acknowledges that it is the policy of the Company to maintain
as secret and confidential all valuable information heretofore or hereafter
acquired, developed or used by the Company in relation to its business,
operations, employees and customers which may give the Company a competitive
advantage in its industry (all such information is hereinafter referred to as
"Confidential Information"). The parties recognize that, by reason of its
duties, AMLF may acquire Confidential Information. AMLF recognizes that all such
Confidential Information is the property of the Company. In consideration of the
Company entering into this Agreement, AMLF agrees that:
(i) it shall never, directly or indirectly, publicly
disseminate or otherwise disclose any Confidential Information obtained during
the term of this Agreement without the prior written consent of the Company,
unless and until such information is otherwise known to the public generally or
is not otherwise secret and confidential, it being understood that the
obligation created by this subparagraph shall survive the termination of this
Agreement; and
(ii) during the term of this Agreement, AMLF shall exercise
all diligent precautions to protect the integrity of any of the Company's
documents embodying Confidential Information and upon termination of its
engagement, it shall return all such documents (and copies thereof) in its
possession or control.
(b) AMLF further agrees that any non-public information concerning the
Company that it acquires or receives, directly or indirectly, shall remain in
strict confidence, and all press releases and other disclosures to the public or
to any of the third parties relating to the transactions contemplated by this
Agreement will be subject to the prior approval of the Company, other than such
disclosure AMLF or the Company is obligated to provide by law, court order,
regulatory requirement or under applicable SEC regulations.
11. Disclaimer by AMLF. AMLF makes no representation that (a) the price
of the Company's publicly-traded securities will increase, (b) any person will
purchase securities in the Company as a result of this Agreement, or (c) any
investor will lend money to or invest in or with the Company.
12. Non-Assignability. The rights, obligations and benefits established
by this Agreement shall not be assignable by either party hereto except with the
consent of the other. This Agreement shall, however, be binding upon and shall
inure to the benefit of the parties and their successors.
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<PAGE> 6
13. Compliance and Governing Law. AMLF, together with its agents and
associates, shall take all necessary, appropriate and reasonable steps to
provide the services in accordance with both the securities laws of the United
States and the several states, pursuant to the rules and regulations promulgated
thereunder. The terms and provisions of this Agreement shall be governed by and
construed under the laws of the Commonwealth of Pennsylvania.
14. Forum Designation. Any action or proceeding brought by either party
against the other party relating in any way to this Agreement or the subject
matter hereof shall be brought exclusively in the competent state and federal
courts located in Philadelphia, Pennsylvania, and the parties hereto consent to
the exclusive jurisdiction of such courts in respect of such action or
proceeding.
15. Notice. Notice hereunder shall be in writing and shall be deemed to
have been given (a) at the time when deposited for mailing in a receptacle under
the control of the United States Postal Service by registered or certified mail;
or (b) at the time deposited with a reputable overnight courier for overnight
delivery; each addressed to the respective party at the address of such party
first above written or at such other address as such party may fix by notice
given pursuant to this paragraph.
16. No Other Agreements. This Agreement supersedes all prior
understandings, written or oral, and constitutes the entire Agreement between
the parties hereto with respect to the subject matter hereof. No waiver,
modification or termination of this Agreement shall be valid unless in writing
signed by each of the parties hereto.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same Agreement. This Agreement may be
executed and delivered via electronic facsimile transmission with the same force
and effect as if it were executed and delivered by the parties simultaneously in
the presence of one another.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above written.
Osage Systems Group, Inc.
By: /s/ Jack R. Leadbeater
-------------------------------------------
Jack R. Leadbeater, Chief Executive Officer
American Maple Leaf Financial Corp.
By: /s/Andrew Panzo
-------------------------------------------
Andrew Panzo, Managing Director
6
<PAGE> 1
Exhibit 10.37
Warrant No. 1998-W8
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE HOLDER
PURSUANT TO AN INVESTMENT BANKING AGREEMENT DATED DECEMBER 4, 1998, BETWEEN THE
HOLDER AND THE COMPANY, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE
ACT, BASED ON AN OPINION LETTER OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
WARRANT TO PURCHASE COMMON STOCK
OF
OSAGE SYSTEMS GROUP, INC.
Void after 5:00 p.m. Mountain Time on December 4, 2000
This certifies that, for value received, American Maple Leaf Financial
Corp. and/or its designees ("Holder"), is entitled, subject to the terms set
forth below, to purchase from Osage Systems Group, Inc. (the "Company"), a
Delaware corporation, shares of the Common Stock of the Company, par value .01
per share (the "Shares"), as constituted on the date hereof (the "Warrant Issue
Date"), with the Notice of Exercise attached hereto duly executed, and payment
made therefor in accordance with the terms hereof, at the Exercise Price as set
forth in Subparagraph 2.1(a) below. The number, character and Exercise Price of
the shares are subject to adjustment as provided below.
1. TERM OF WARRANT. Subject to the provisions of Subsection 12.1, this
Warrant shall be exercisable, in whole or in part, during the term commencing at
9:00 a.m. Mountain Time on the Warrant Issue Date and ending at 5:00 p.m.
Mountain Time on December 4, 2000, and shall be void thereafter.
2. EXERCISE PRICE AND NUMBER OF SHARES.
2.1 EXERCISE PRICE.
(a) The price at which this Warrant may be exercised
(the "Exercise Price") shall be $4.75 per share of Common Stock, as adjusted
pursuant to Section 12 hereof.
(b) The Exercise Price shall either be payable in cash or by bank or
certified check, or by cashless exercise through the delivery by the Holder to
the Company of a Notice of Exercise together with an irrevocable direction to a
broker-dealer registered under the Securities Exchange Act of 1934, as amended,
to sell a sufficient portion of the Shares and deliver the sales proceeds
directly to the Company to pay the Exercise Price.
2.2 NUMBER OF SHARES. The number of shares of the Company's
Common Stock which may be purchased pursuant to this Warrant shall be 50,000
Shares, as adjusted pursuant to Section 12 hereof.
<PAGE> 2
2.3 VESTING. The Warrants granted hereunder shall vest in
accordance with the following schedule:
(a) 25,000 Warrants shall vest on the Warrant Issue
Date; and
(b) an additional 25,000 Warrants shall vest on the
date that is 90 days following the Warrant Issue Date, provided that the
Investment Banking Agreement, dated December 4, 1998, by and between the Company
and American Maple Leaf Financial Corporation, remains in effect through such
date.
3. EXERCISE OF WARRANT.
3.1 The purchase rights represented by this Warrant are
exercisable by the Holder in whole or in part, at any time, or from time to time
during the term hereof and in accordance with the vesting periods set forth in
Section 2.3, upon surrender of this Warrant on any business day to the Company
at its principal office, presently located at the address of the Company set
forth in Section 10 hereof (or such other office or agency of the Company as it
may designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company), together with: (i) a completed and
executed Notice of Exercise in the form attached hereto and made a part hereof;
(ii) payment of the full Exercise Price for the amount of Shares set forth in
the Notice of Exercise; and (iii) delivery to the Company by the Holder of such
certifications or documentation (to be furnished by and at the expense of the
Company) reasonably necessary to establish, to the satisfaction of the Company,
that any such exercise has been undertaken in compliance with all applicable
federal and state securities laws.
3.2 This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the Shares
issuable upon such exercise shall be treated for all purposes as the holder of
record of such shares as of the close of business on such date. As promptly as
practicable on or after such date and in any event within ten (10) days
thereafter, the Company at its expense shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of Shares issuable upon such exercise. In the event that this Warrant is
exercised in part, the Company at its expense will execute and deliver a new
Warrant of like tenor exercisable for the number of Shares for which this
Warrant may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. The Company shall not be required to
issue fractional shares of capital stock upon the exercise of this Warrant or to
deliver Warrant Certificates which evidence fractional shares of capital stock.
In the event that any fraction of a Share would, except for the provisions of
this Section 4, be issuable upon the exercise of this Warrant, the Company shall
pay to the Holder exercising the Warrant an amount in cash equal to such
fraction multiplied by the current market value of a Share. For purposes of this
Section 4, the current market value shall be determined as follows:
(i) if the Shares are listed or traded on a national
securities exchange or in the NASDAQ National Market System, the closing price
on the principal national securities exchange on which they are so listed or
traded or in the NASDAQ National Market System, as the case may be, on the last
business day prior to the date of the exercise of this Warrant. The
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<PAGE> 3
closing price referred to in this clause (i) shall be the last reported sales
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case on the national
securities exchange on which the Shares are then listed or in the NASDAQ
Reporting System; or
(ii) if the Shares are traded in the over-the-counter market
and not on any national securities exchange and not in the NASDAQ Reporting
System, the average of the mean between the last bid and asked prices per share,
as reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, for the last business day prior to the date on which
this Warrant is exercised, or if not so reported, the average of the closing bid
and asked prices for a Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company for
that purpose; or
(iii) if no such closing price or closing bid and asked prices
are available, as determined in any reasonable manner as may be prescribed by
the Board of Directors of the Company.
5. PAYMENT OF TAXES.
5.1 The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Shares in a name other
than that of the Holder of a Warrant Certificate surrendered upon the exercise
of a Warrant, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
5.2 Upon exercise of a Warrant, the Company shall have the
right to require the Holder to remit to the Company an amount sufficient to
satisfy federal, state and local tax withholding requirements prior to the
delivery of any certificate for Shares issuable pursuant to the exercise of such
Warrant.
5.3 A Holder who is obligated to pay the Company an amount
required to be withheld under applicable tax withholding requirements may pay
such amount (i) in cash; (ii) in the discretion of the Company's Chief Executive
Officer, through the delivery to the Company of previously-owned shares of
common stock of the Company having an aggregate current market value equal to
the tax obligation, provided that the previously owned shares delivered in
satisfaction of the withholding obligations must have been held by the Holder
for at least six (6) months; (iii) in the discretion of the Company's Chief
Executive Officer, through the withholding of shares of common stock of the
Company otherwise issuable to the Holder in connection with the exercise of a
Warrant; or (iv) in the discretion of the Company's Chief Executive Officer,
through a combination of the procedures set forth in clauses (i), (ii) and (iii)
of this Subsection 5.3.
6. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and
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<PAGE> 4
substance to the Company or, in the case of mutilation, on surrender and
cancellation of this Warrant, the Company at its expense shall execute and
deliver, in lieu of this Warrant, a new warrant of like tenor and amount.
7. RIGHTS OF STOCKHOLDERS. Subject to Section 12 of this Warrant and
the provisions of any other written agreement between the Company and the
Holder, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Shares or any other securities of the Company that may at
any time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been exercised as
provided herein.
8. TRANSFER OF WARRANT.
8.1. EXCHANGE OF WARRANT UPON A TRANSFER. On surrender of this
Warrant for exchange, properly endorsed, the Company at its expense shall issue
to or on the order of the Holder a new warrant or warrants of like tenor, in the
name of the Holder or as the Holder (on payment by the Holder of any applicable
transfer taxes) may direct, for the number of shares issuable upon exercise
hereof.
8.2. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON
TRANSFERS.
(a) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the Shares to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment, and that the Holder will not offer, sell or
otherwise dispose of this Warrant or any Shares to be issued upon exercise
hereof except under circumstances that will not result in a violation of
applicable federal and state securities laws. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment, and not with a view toward distribution or resale.
(b) Neither this Warrant nor any Share of Common
Stock issued upon exercise of this Warrant may be offered for sale or sold, or
otherwise transferred or sold in any transaction which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended (the "1933
Act"), unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified under applicable state securities laws relating to
the offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification requirements
of all such state securities laws are available and the Company shall have
received an opinion of counsel reasonably satisfactory to the Company that the
proposed sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws
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<PAGE> 5
relating to the registration or qualification of securities for sale, such
counsel and such opinion to be satisfactory to the Company.
(c) All Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY
THE HOLDER PURSUANT TO AN INVESTMENT BANKING AGREEMENT, DATED DECEMBER
4, 1998, BETWEEN THE HOLDER AND THE COMPANY, AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR
THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE ACT, BASED
ON AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A
NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION."
(d) Holder recognizes that investing in the Warrant
and the Shares of Common Stock involves a high degree of risk, and Holder is in
a financial position to hold the Warrant and the Shares indefinitely and is able
to bear the economic risk and withstand a complete loss of its investment in the
Warrant and the Shares. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has had
an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has had
the opportunity to ask questions of, and receive answers from, the management of
the Company (and any person acting on its behalf) concerning the Warrant and the
Shares and the agreements and transactions contemplated hereby, and to obtain
any additional information as Holder may have requested in making its investment
decision. The initial Holder of this Warrant is an "accredited investor", as
defined by Regulation D promulgated under the 1933 Act.
8.3 INDEMNIFICATION. The Holder agrees to indemnify and hold
harmless the Company against any loss, damage, claim or liability arising from
the disposition of this Warrant or any Share held by such holder or any interest
therein in violation of the provisions of Subsection 8.2 hereof.
9. RESERVATION OF STOCK. The Company covenants that during the term
that this Warrant is exercisable, the Company will reserve from its authorized
and unissued Common Stock a sufficient number of shares to provide for the
issuance of the shares upon the exercise of this Warrant, and from time to time,
will take all steps necessary to amend its Certificate of Incorporation to
provide sufficient reserves of shares of Common Stock issuable upon the exercise
of the Warrant. The Company further covenants that all Shares that may be issued
upon the exercise of rights represented by this Warrant and payment of the
Exercise Price, all as set
5
<PAGE> 6
forth herein, will be free from all taxes, liens and charges in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously or otherwise specified herein). The Company agrees that its
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for the Shares of Common Stock upon the exercise of this
Warrant.
10. NOTICES. All notices, advices and communications under this Warrant
shall be deemed to have been given, (i) in the case of personal delivery, on the
date of such delivery and (ii) in the case of mailing, on the fifth business day
following the date of such mailing, addressed as follows:
If to the Company:
Osage Systems Group, Inc.
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
Attention: Jack R. Leadbeater, Chief Executive Officer
With a Copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, Pennsylvania 19103
and to the Holder:
American Maple Leaf Financial Corp.
Two Penn Center Plaza
Suite 605
Philadelphia, Pennsylvania 19102
Attention: Andrew Panzo, Managing Director
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Section 10.
11. AMENDMENTS.
11.1 Any term of this Warrant may be amended with the written
consent of the Company and the Holder at that time. Any amendment effected in
accordance with this Section 11 shall be binding upon the Holder, each future
holder and the Company.
6
<PAGE> 7
11.2 No waivers of, or exceptions to, any term, condition or
provision of this Warrant, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such term, condition or
provision.
12. ADJUSTMENTS. The number of Shares of Common Stock purchasable
hereunder and the Exercise Price is subject to adjustment from time to time upon
the occurrence of certain events, as follows:
12.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
while this Warrant, or any portion thereof, is outstanding and unexpired there
shall be (i) a capital reorganization pursuant to which the shares of the
Company's capital stock outstanding immediately prior to such reorganization are
converted by virtue of such reorganization into other property, whether in the
form of new securities, cash or otherwise (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving entity, or a reverse
triangular merger in which the Company is the surviving entity but the shares of
the Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iii) a sale or transfer of all or
substantially all of the Company's properties and assets as, or substantially
as, an entirety to any other person, then, as a part of such capital
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon payment of the Exercise Price then in effect, the number of shares
of stock or other securities or property of the successor corporation resulting
from such capital reorganization, merger, consolidation, sale or transfer that a
holder of the shares deliverable upon exercise of this Warrant would have been
entitled to receive in such capital reorganization, consolidation, merger, sale
or transfer if this Warrant had been exercised immediately before such capital
reorganization, merger, consolidation, sale or transfer, all subject to further
adjustment as provided in Section 12. The foregoing provisions of this
Subsection 12.1 shall similarly apply to successive capital reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Warrant. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder after the transaction, to the end that
the provisions of this Warrant shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable after
that event upon exercise of this Warrant.
12.2. RECLASSIFICATION. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
7
<PAGE> 8
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in Section 12.
12.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Warrant, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the Exercise Price and number of such securities
issuable thereunder shall be proportionately adjusted. For example, if the
Company declares a 2 for 1 stock split and the Exercise Price immediately prior
to such split was $5.00 per share for 100 shares, the Exercise Price as adjusted
would be $2.50 per share and the number of shares issuable thereunder would be
200 shares.
12.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES
OR PROPERTY. If while this Warrant, or any portion hereof, remains outstanding
and unexpired, the holders of the securities as to which purchase rights under
this Warrant exist at the time shall have received, or, on or after the record
date fixed for the determination of eligible stockholders, shall have become
entitled to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way of
dividend, then and in each case, this Warrant shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Warrant, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of this Warrant on the date hereof and had thereafter,
during the period from the date hereof to and including the date of such
exercise, retained such shares and/or all other additional stock, other
securities or property available by this Warrant as aforesaid during such
period.
12.5 MINIMUM PRICE ADJUSTMENTS. No adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least ten cents ($0.10) in such price; provided, however, that
any adjustments which by reason of this Subsection 12.5 are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations under Section 12
hereof shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. Anything in Section 12 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the Exercise Price, in addition to those required by
Section 12, as it, in its sole discretion, shall determine to be advisable in
order that any dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of Common Stock, issuance of Warrants to
Purchase Common Stock or distribution of evidences of indebtedness or other
assets (excluding cash dividends) referred to in Section 12 hereafter made by
the Company to the holders of its Common Stock shall not result in any tax to
the holders of its Common Stock or securities convertible into Common Stock.
12.6 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or
number of Shares purchasable hereunder shall be adjusted pursuant to Section 12
hereof, the Company shall:
(a) issue a certificate signed by its Chief Financial
Officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Exercise Price and number of shares
8
<PAGE> 9
purchasable hereunder after giving effect to such adjustment, and shall cause a
copy of such certificate to be mailed (by first-class mail, postage prepaid) to
the Holder of this Warrant, and to the Company's transfer agent, if any. The
Company may retain a firm of independent certified public accountants selected
by the Board of Directors (who may be the regular accountants employed by the
Company) to make any computation required by Section 12, and a certificate
signed by such firm shall be conclusive evidence of the correctness of such
adjustment; and
(b) forthwith file in the custody of its Secretary or
an Assistant Secretary at its principal office and with its stock transfer
agent, if any, an officer's certificate showing the adjusted Exercise Price
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment, including a statement of the number of additional
shares of Common Stock, if any, and such other facts as shall be necessary to
show the reason for and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the holder and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Holder.
12.7 SECURITIES OTHER THAN COMMON STOCK. In the event that at
any time, as a result of an adjustment made pursuant to Subsections 12.1, 12.2,
12.3 or 12.4 above, the Holder of this Warrant thereafter shall become entitled
to receive any Shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of this Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Subsections 12.1, 12.2, 12.3, 12.4 and 12.5, inclusive.
12.8 TERMS OF SUBSEQUENT WARRANTS. Irrespective of any
adjustments in the Exercise Price or the number or kind of Shares purchasable
upon exercise of this Warrant, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in the similar Warrants initially issuable pursuant to this Warrant.
12.9 FURTHER ASSURANCES. The Company will not, by any
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 12 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
impairment.
13. REDEMPTION OF WARRANTS.
13.1 Upon not less than fifteen (15) days' notice, all but not
less than all of the Warrants, may be redeemed, at the option of the Company, at
a redemption price of $.001 per Warrant (the "Redemption Price") upon the
following conditions: (i) if a Registration Statement covering the resale of the
Shares under the 1933 Act is effective as of that date; (ii) the Holder is then
under no contractual or other legal obligation to refrain from selling the
Shares of Common Stock issuable upon exercise of the Warrants; and (iii) if the
average of the closing bid prices of the Company's Common Stock as reported on
NASDAQ (or the last sales prices if the Common Stock is listed on a national
securities exchange) exceeds 200% of the amount of the Exercise Price for any
thirty (30) consecutive trading days within the two month period before the
Company gives the notice of redemption.
9
<PAGE> 10
13.2 In the event the Company shall desire to exercise its
right to so redeem the Warrants, it may mail a notice or redemption to the
Holder of the Warrants to be redeemed, first class, postage prepaid, not later
than the thirtieth (30th) day before the date fixed for redemption, at the last
address as shall appear on the records of the Warrants. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Holder receives such notice.
13.3 The notice of redemption shall specify (i) the redemption
price; (ii) the date fixed for redemption; (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid; and (iv) that the
right to exercise the Warrant shall terminate at 5:00 P.M. (Mountain Time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrants shall be the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
holder (a) to whom notice was not mailed or (b) whose notice was defective. An
affidavit of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
13.4 Any right to exercise a Warrant shall terminate at 5:00
P.M. (Mountain Time) on the business day immediately preceding the Redemption
Date. On or after the Redemption Date, Holder shall have no further rights
except to receive, upon surrender of the Warrant, the Redemption Price.
13.5 From and after the date specified for redemption, the
Company shall, at the place specified in the notice of redemption, upon
presentation and surrender to the Company by or on behalf of the Holder thereof
of one or more Warrants to be redeemed, deliver or cause to be delivered to or
upon the written order of such Holder a sum in cash equal to the redemption
price of each such Warrant. From and after the date fixed for redemption and
upon the deposit or setting aside by the Company of a sum sufficient to redeem
all the Warrants called for redemption, such Warrants shall expire and become
void and all rights hereunder and under the Warrant certificates, except the
right to receive payment of the Redemption Price, shall cease.
14. SEVERABILITY. Whenever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Warrant
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Warrant shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
15. GOVERNING LAW. The corporate law of the State of Delaware shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction, validity,
interpretation and enforceability of this Warrant and the exhibits and schedules
hereto shall be governed by, and construed in accordance with, the laws of the
State of Delaware, without giving effect to any choice of law or conflict of law
rules or provisions (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
10
<PAGE> 11
16. JURISDICTION. The Holder and the Company agree to submit to
personal jurisdiction and to waive any objection as to venue in the federal or
state courts in Phoenix, Arizona. Service of process on the Company or the
Holder in any action arising out of or relating to this Warrant shall be
effective if mailed to such party at the address listed in Section 10 hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officers thereunto duly authorized.
Dated: December 4, 1998
HOLDER:
AMERICAN MAPLE LEAF OSAGE SYSTEMS GROUP, INC.
FINANCIAL CORP.
By: /s/ Andrew Panzo By: /s/ Jack R. Leadbeater
----------------------------- --------------------------------
Andrew Panzo, Jack R. Leadbeater,
Managing Director Chief Executive Officer
11
<PAGE> 12
NOTICE OF EXERCISE
TO: OSAGE SYSTEMS GROUP, INC.
(1) The undersigned hereby elects to purchase _______ shares of Common
Stock of Osage Systems Group, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price for such shares in
full in the following manner (please check one of the following choices):
____ In Cash
____ Bank or certified check; or
____ Cashless exercise through a broker.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and not as
a nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of Common Stock except
under circumstances that will not result in a violation of the Securities Act of
1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-----------------------------------
(Name)
-----------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
-----------------------------------
(Name)
- -------------------- -----------------------------------
(Date) (Signature)
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
OPEN SYSTEM TECHNOLOGIES, INC.
H.V. JONES, INC.
SOLSOURCE COMPUTERS, INC.
OSAGE COMPUTER GROUP, INC.
OPEN BUSINESS SYSTEMS, INC.
OSGE SYSTEMS GROUP MINNESOTA, INC.
OSAGE SUPPORT CENTER, INC.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,151,572
<SECURITIES> 0
<RECEIVABLES> 14,209,862
<ALLOWANCES> 132,000
<INVENTORY> 332,272
<CURRENT-ASSETS> 18,626,678
<PP&E> 2,412,767
<DEPRECIATION> 937,483
<TOTAL-ASSETS> 37,161,265
<CURRENT-LIABILITIES> 21,918,912
<BONDS> 0
765,586
2,250
<COMMON> 95,111
<OTHER-SE> 13,734,302
<TOTAL-LIABILITY-AND-EQUITY> 37,161,265
<SALES> 60,975,674
<TOTAL-REVENUES> 60,975,674
<CGS> 49,430,087
<TOTAL-COSTS> 49,430,087
<OTHER-EXPENSES> 15,880,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (218,044)
<INCOME-PRETAX> (4,553,052)
<INCOME-TAX> (1,529,000)
<INCOME-CONTINUING> (3,024,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,024,052)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
