SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OSAGE SYSTEMS GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-22808 95-4374983
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(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
1661 East Camelback Road
Suite 245
Phoenix, Arizona 85016
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(Address of principal executive office)
(602) 274-1299
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(Registrant's telephone number, including area code)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes X No _________
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(2) Yes X No _________
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APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's sole class of common stock
as of May 10, 2000 was 12,163,940 shares.
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OSAGE SYSTEMS GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
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Part I Financial Information*
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 1
Unaudited Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 2000 and 1999 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2000 and 1999 3
Notes to Unaudited Condensed Consolidated Financial Statements 4 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10 - 16
Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
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Item 2. Changes in Securities and Use of Proceeds 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Osage Systems Group, Inc.
Condensed Consolidated Balance Sheets
($ In Thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 2000
(Unaudited) December 31, 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,346 $ 2,546
Accounts receivable - net of allowance for doubtful
accounts of $196 at March 31,2000 and $203 at December 31, 1999 20,877 23,198
Inventories 527 534
Prepaid expenses and other current assets 622 700
Deferred income taxes 568 568
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Total current assets 24,940 27,546
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FURNITURE AND EQUIPMENT - net 1,754 1,804
GOODWILL, less accumulated amortization of $1,585 at March 31, 2000 and $1,110
at December 31, 1999 14,752 14,577
DEFERRED INCOME TAXES 2,401 2,140
OTHER ASSETS 461 443
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TOTAL $ 44,308 $ 46,510
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,732 4,356
Accounts payable 10,077 7,507
Accrued expenses 2,095 2,732
Deferred revenue 202 190
Accrued restructuring cost 622 1,287
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Total current liabilities 18,728 16,072
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LONG-TERM DEBT 11,958 14,952
OTHER LONG TERM LIABILITIES 9
CONVERTIBLE SUBORDINATED DEBENTURES 1,912 1,745
SERIES D CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 1000
SHARES IN 1999; TOTAL LIQUIDATION PREFERENCE, $1,000 0 1,200
SERIES E CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 2,000
SHARES IN 1999; TOTAL LIQUIDATION PREFERENCE, $2,000 0 1,713
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized, issued and outstanding, 10 shares
on March 31, 2000 and December 31, 1999; total liquidation preference, $300 1 1
Common stock, $.01 par value - authorized, 50,000,000 shares; issued and outstanding,
11,218,674 shares on March 31, 2000 and 10,334,976 on December 31, 1999 117 103
Additional paid-in-capital 23,586 21,495
Retained earnings (deficit) (12,003) (10,771)
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Total stockholders' equity 11,701 10,828
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TOTAL $ 44,308 $ 46,510
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</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
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unaudited condensed consolidatedd statements of operations
($ In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 2000 March 31, 1999
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<S> <C> <C>
REVENUE:
Hardware and software sales $ 22,024 $ 23,623
Services and consulting revenues 3,946 3,469
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TOTAL REVENUE 25,970 27,092
COST OF SALES 21,899 22,070
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Gross profit 4,071 5,022
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OPERATING EXPENSES:
Selling, general and administrative expenses 3,932 4,829
Depreciation and amortization 490 355
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Total operating expenses 4,422 5,185
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OPERATING LOSS (351) (163)
INTEREST EXPENSE - Net (443) (164)
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LOSS BEFORE BENEFIT FOR INCOME TAXES (794) (326)
BENEFIT FOR INCOME TAXES (261) (60)
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NET LOSS $ (533) $ (266)
SERIES E EMBEDDED DIVIDENDS (687) 0
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NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (1,220) (266)
======== ========
BASIC AND DILUTED LOSS PER SHARE $ (0.11) $ (0.03)
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BASIC AND DILUTED SHARES OUTSTANDING 11,344 9,499
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
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Osage Systems Group, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
($ In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 2000 March 31, 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (533) $ (266)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 490 355
Non-operating interest 332
Deferred income taxes (261) (60)
Changes in operating assets and liabilities:
Accounts receivable 2,321 (5,639)
Inventories 7 7
Prepaid expenses and other assets 60 (291)
Accounts payable 2,569 6,071
Accrued expenses (1,189) 1,357
Deferred revenue 13 (118)
Income taxes payable (70)
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Net cash provided by operating activities 3,809 1,346
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INVESTING ACTIVITIES:
Capital expenditures (80) (290)
Acquisition costs (19)
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Net cash used in investing activities (80) (309)
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FINANCING ACTIVITIES:
Principle payments on long term debt (937) (547)
Borrowings on long term debt 3,000
Net repayments on lines of credit (3,622) (750)
Payments on notes payable officer (46) (533)
Distributions to Osage stockholders (176)
Payments for redemption of Series E preferred stock (2,240)
Proceeds from sale of common stock and preferred shares 92 1,968
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Net cash provided by (used in) financing activities (3,929) 1,421
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NET INCREASE (DECREASE) IN CASH (200) 2,458
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,546 3,152
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,346 $ 4,326
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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OSAGE SYSTEMS GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial position of the
Company and the results of its operations and its cash flows for the periods
reported. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of Osage Systems
Group, Inc. ("Osage") and its wholly-owned subsidiaries, Osage Computer Group,
Inc. ("Osage Computer"), Solsource Computers, Inc. ("Solsource"), H.V. Jones,
Inc. ("HV Jones"), Open System Technologies, Inc. ("OST"), Open Business
Systems, Inc. ("OBS"), Osage Systems Group Minnesota, Inc. and Osage Support
Center, Inc. (collectively, the "Company" or "Osage"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to conform the prior years' financial
statement amounts to the current year classifications.
The information presented within the accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited Financial Statements for the fiscal years ended December 31,
1999 and 1998 and "Management's Discussion and Analysis or Plan of Operation"
from the 1999 Annual Report on Form 10-KSB.
2. 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
quarter after giving effect to stock options and the conversion of preferred
shares considered to be dilutive. Because the Company incurred a loss for the
three months ended March 31, 2000 and 1999, the effects of the potential
dilutive securities are not included in the calculations.
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3. New Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, effective
for fiscal quarters of fiscal years that begin after June 15, 2000. 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.
4. 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.
The deferred income tax asset at March 31, 2000 and 1999 is comprised of
the following:
<TABLE>
<CAPTION>
($ In Thousands)
2000 1999
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<S> <C> <C>
Use of cash basis of accounting for income tax purposes $ 30 30
Allowance for doubtful accounts 68 68
Compensation 470 470
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Net current assets $ 568 568
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Net operating loss carryforwards $ 3,317 3,056
Goodwill (102) (102)
Property 9 9
Discount on subordinated debt (477) (477)
Other (96) (96)
Valuation allowance on net loss carryforwards (250) (250)
------- -------
Net noncurrent assets $ 2,401 2,140
======= =======
</TABLE>
5
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5. Convertible Preferred Stock and Capital Stock
During 1998, the Company completed a private placement offering for 1,000
shares of Series D Preferred shares (the "Series D Shares"). In connection with
the private placement warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $5.97 per share were granted to the
investor. The holder of the Series D Shares had the right at any time following
the 90th day after the issuance date 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 was subject to adjustment if the Company failed to comply with
certain redemption provisions described below. As so adjusted, the conversion
rate was equal to the lesser of $4.975 or 80 percent of the three lowest closing
bid prices of the Common Stock during the five trading days immediately
preceding the conversion date. The Series D Shares could be redeemed at the
option of the 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 was less than the conversion price as of
the issuance date. The redemption price was 120% of the stated value ($1,000 per
share) plus accrued and unpaid dividends. At the date of issuance, the carrying
amount of the redeemable preferred stock was decreased by $154,000, the fair
value of the common stock warrants, with a credit to additional paid-in capital.
As of December 31, 1999 the preferred stock became redeemable at the option of
the holder. Therefore, the preferred stock was accreted to its redemption value
with an increase to the net loss in the consolidated statement of operations to
arrive at the amount of loss attributable to common shareholders. On January 18,
2000, the holder of the Series D Shares converted 500 shares, at a conversion
price of $1.07, into 468,736 shares of Common Stock. On February 10, 2000, the
remaining 500 Series D Shares were converted, at a conversion price of $1.73,
into an additional 288,468 shares of Common Stock.
During 1999, the Company completed a private placement offering for 2,000
shares of Series E Preferred shares (the "Series E Shares"). In connection with
the private placement, warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $7.875 per share were granted to the
investor. The holder of the Series E Shares had the right at any time following
the 90th day after the issuance date to convert the $2,000,000 principal amount
of the shares, plus any and all accrued dividends therein, into shares of Common
Stock at the Series E conversion rate of $6.5625 per share. The Series E
conversion rate was subject to adjustment if the Company failed to comply with
certain redemption provisions described below. As so adjusted, the conversion
rate was equal to the lesser of $6.5625 or 80 percent of the three lowest
closing bid prices of the Common Stock during the five trading days immediately
preceding the conversion date. The Series E Shares could be redeemed at the
option of the 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 was less than the conversion price as of
the issuance date. The redemption price was 120% of the stated value ($1,000 per
share) plus accrued and unpaid dividends. At the date of issuance, the carrying
amount of the
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redeemable preferred stock was decreased by $180,000, the fair value of the
common stock warrants, with a credit to additional paid-in capital. During the
three months ended March 31, 2000, the preferred stock became redeemable at the
option of the holder. Therefore, the preferred stock was accreted to its
redemption value with an increase to the net loss in the consolidated statement
of operations to arrive at the amount of loss attributable to common
shareholders. On February 22, 2000, the holder of the Series E Preferred Stock
converted 133 shares of preferred stock into 20,267 shares of Common Stock of
the Company at a conversion price of $6.5625 per common share. On March 17, 2000
the Company redeemed the remaining shares of Series E Preferred Stock at the
redemption price of $1,200 per preferred share. To redeem the Series E Preferred
Stock, the Company obtained $3,000,000 from the holders of the Long-Term
Warrants (see Note 6) pursuant to an unsecured interest-free demand note. The
advance is included in current portion of long-term debt at March 31, 2000.
6. Convertible Subordinated Debentures
On November 22, 1999, the Company completed a private placement offering
for $3 million principal amount 10% Convertible Subordinated Debentures (the
"Debentures"). In connection with the private placement, common stock purchase
warrants were granted to the investors and to the broker of the transaction. The
principal amount of the Debentures is payable on November 22, 2001 with interest
payable at the rate of ten percent (10%) per annum on a quarterly basis
commencing December 31, 1999. Interest may be paid in cash, or at the option of
the holder, in shares of the Company's Common Stock priced at the "Conversion
Price" of the Debentures. At the option of the holder, the Debentures are
convertible into shares of the Company's Common Stock at the Conversion Price
per share at any time prior to maturity, commencing once stockholder approval of
the conversion feature has been obtained. However, once stockholder approval of
the conversion feature has been obtained and the shares of Common Stock issuable
upon the conversion of the Debentures may be resold under an effective
registration statement filed with the Securities and Exchange Commission, the
Debentures shall automatically convert into shares of the Company's Common Stock
at the Conversion Price. The Conversion Price shall be $.30 per share of Common
Stock (reflective of a twenty percent (20%) discount to the closing bid price of
the Common Stock on October 8, 1999).
The Debentures have a beneficial conversion feature that reflects a
conversion price that was a discount to the price of the Company's Common Stock
on the date the Debentures were priced. The beneficial conversion feature was
valued at $750,000 at the date of issuance. Since the debt is convertible at any
time after the Company's stockholders approve the conversion feature, this
amount will be charged to interest expense at the date stockholder approval is
obtained.
The Debentures were privately offered as a Unit, together with warrants
that, subject to certain vesting provisions, entitled the holders to
contingently purchase twenty million
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(20,000,000) shares of Common Stock of the Company at an exercise price of $.30
per share. The warrants consist of 5-year warrants to purchase ten million
(10,000,000) shares of Common Stock of the Company (the "Long-Term Warrants")
and 90-day warrants to purchase ten million (10,000,000) shares of Common Stock
of the Company (the "Short-Term Warrants"). All of the Short-Term Warrants
expired on February 22, 2000. The Long-Term Warrants shall vest only once
stockholder approval of the exercise feature of these warrants is obtained.
The carrying amount of the Debentures has been decreased by $1,325,840, the
fair value of the common stock warrants issued to the holder. This amount will
be amortized as interest expense over the term of the convertible debt. During
the fourth quarter of 1999 and first quarter of 2000, the Company amortized
$70,711 and $167,411 as interest expense.
At the Company's next annual meeting of stockholders scheduled to be held
on May 31, 2000, the stockholders will vote on the conversion and exercise
feature of the Debentures and the Long-Term Warrants. If the stockholders
approve the conversion and exercise features of the Debentures and the Long-Term
Warrants, the Company may be caused to issue approximately 20,000,000 shares of
its Common Stock to the holders of the Debentures and the Long-Term Warrants,
which would have an extremely dilutive effect on the existing stockholders.
Furthermore, holders of the Debentures and the Long-Term Warrants would
beneficially own approximately 69% of the Company's Common Stock, thereby
securing majority voting control of the Company's stock. In the event that the
stockholders do not approve the conversion and exercise features of the
Debentures and the Long-Term Warrants, the Company will have the obligation to
repay the holders thereof $6,000,000 together with interest at the rate of up to
18% per annum until repayment. The holders will not require the Company to make
payment of the $6,000,000 until the earlier of the Company securing alternative
financing or until January 2, 2001. Since the Company does not presently have
sufficient liquid assets to repay the funds advanced, the failure of the
stockholders to approve the conversion and exercise features of the Debentures
and the Long-Term Warrants may have a material adverse effect on the Company's
financial condition, liquidity and operations.
7. Contingencies
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.
On or about March 7, 2000, Halifax Fund, L.P. commenced an action against
the Company, as well as Michael Lauer and three investment funds managed by him,
Lancer Offshore, Inc., Lancer Partners, L.P. and Orbiter Fund, Ltd.
(collectively "Lancer") in the Supreme Court of the State of New York (the
"Court") captioned Halifax Fund, L.P. v. Osage
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Systems Group, Inc., Michael Lauer, Lancer Offshore, Inc., Lancer Partners, L.P.
and Orbiter Fund, Ltd., Supreme Court of the State of New York, County of New
York (Index No. 600993/00). In its complaint, Halifax alleges that the Company
breached a contractual obligation to offer Halifax a right of first refusal to
participate in a financing transaction the Company completed with Lancer in
November 1999 (see Note 6). Halifax also alleges that the Company breached a
contractual obligation to register securities issuable upon the conversion of
preferred stock Halifax purchased from the Company in February 1999. Halifax
seeks: (i) monetary damages in excess of $23 million for the alleged breaches of
contract; (ii) specific performance of the right of first refusal; (iii)
injunctive relief preventing the Company from issuing shares of its Common Stock
to Lancer upon the conversion of debentures and the exercise of warrants granted
in the Lancer financing; and (iv) injunctive relief preventing the Company from
soliciting stockholder approval for the Lancer financing, which is necessary
condition precedent for the issuance of the Company's Common Stock under the
Debentures and the Long-Term Warrants issued to Lancer.
As to the remainder of the substantive claims, the Company is in the
process of investigating the matter and has tentatively concluded that no breach
of contract occurred. It has arrived at this conclusion in reliance on
information provided by its investment bankers that they provided Halifax with
the requisite written right of first refusal offer in compliance with the
Company's contractual obligation to do so. Accordingly, the Company intends to
vigorously defend the matter.
Since the Company's investigation of the matter has not yet been completed,
and since no assurances can be provided as to the ultimate outcome of
litigation, particularly where fact-based disputes may arise, the Company cannot
assure that it will not be subject to any liability thereunder. In the event
that it is successful in asserting its claims, Halifax may be awarded relief
consisting of, among others, the right to purchase securities of the Company on
the same terms as the Debentures and the Long-Term Warrants offered to Lancer
(in which case the Company may be caused to issue additional securities
convertible into up to 13,333,333 shares of the Company's Common Stock) or
monetary damages which may, if fully awarded, exceed the Company's current asset
value. Due to the Company's belief that the claims are without merit, no
provision has been established for any potential liability arising out of the
litigation.
On October 29, 1999, John E. Udelhofen and E. Michael Durbin filed an
action in the United States District Court for the Northern District of Illinois
against the Company. The Plaintiffs are former shareholders of Open Business
Systems, Inc. ("OBS"). On June 22, 1998 The Company purchased all of the
outstanding shares of OBS and the Plaintiffs entered into employment contracts
with the Company. On August 17, 1999, the Company terminated the Plaintiffs'
employment contracts. In the lawsuit the Plaintiffs claim their employment
contracts were wrongfully terminated and seek damages in excess of $75,000 as
well as declaratory relief. The Plaintiffs also claim that the Company breached
the Registration Rights Agreement entered into by the parties in connection with
the sale of the stock of OBS. The Plaintiffs claim that the
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Company failed to timely file the necessary registration statement with the
Securities and Exchange Commission with respect to the registration for resale
of the Company's Common Stock distributed to plaintiffs in connection with the
transaction. Plaintiffs also claim that they are owed additional sums pursuant
to the "earnout" provisions of the Agreement by which the Company purchased OBS.
The Company has answered Plaintiffs' claims denying that they are entitled to
any relief. Additionally Osage is asserting counterclaims against certain of the
Plaintiffs for violation of provisions of both the Purchase Agreement and their
employment agreements. The Company accordingly believes it has valid defenses to
all of the Plaintiffs' claims and intends to vigorously defend the matter.
8. Segment Reporting
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Report on Form 10-Q, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends which may affect the
Company's future plans of operations, business strategy, operating results and
financial position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties and actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors include, among others: (i) risks related to the
restructuring program being undertaken by the Company; (ii) potential liability
in a lawsuit pending against the Company brought by a former preferred
stockholder; (iii) risks related to the Company's acquisition strategy; (iv) the
Company's ability to secure adequate financing to implement its business
strategies; (v) uncertainty as to whether the Company can achieve integration of
acquired companies in a manner intended to take advantage of overall
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corporate synergies and result in an accretion to consolidated earnings; (vi)
the uncertainty of future trading prices for the Company's Common Stock and the
impact such trading prices may have upon the Company's ability to utilize its
Common Stock to facilitate its acquisition strategy; (vii) the uncertain effect
of the additional dilution associated with the future issuance of outstanding
convertible securities, as well as the dilution associated with the Company's
acquisition strategy; (viii) the Company's dependence on certain large customers
and suppliers; (ix) the Company's dependence on certain key personnel; and (x)
the competitive market for technical personnel. Additional factors are described
in the Company's other public reports and filings with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
Overview
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, Microsoft Corporation, IBM Corporation, 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.
One of the components of the Company's business strategy is to provide
services to customers requiring our systems integration expertise. These
customers include both our traditional base and the emerging market of Internet
related companies. In 1999 Osage had in excess of 70 customers whose principal
business related to the Internet such as internet service providers ("ISPs"),
application service providers ("ASPs"), business to business ("B2B") commerce
sites and business to consumer ("B2C") commerce sites. Most of the services
provided to these customers involve the basic infrastructure of their Internet
installations.
A second component of the Company's business strategy is to take advantage
of the business opportunities afforded by recent e-business trends. The Company
has identified two key
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types of functional roles that have begun to emerge in the e-business space -
that of web content providers (Influencers) and that of infrastructure
providers. Content providers primarily work with clients to develop an Internet
strategy and create the visage that will be seen on the World Wide Web. Each of
these Internet projects additionally involves foundational infrastructure
development for hardware, software, and service support. Osage has developed the
National Influencer Alliances program to establish partnerships with Influencer
organizations. Through the Alliances program, Osage assumes the role of the
infrastructure provider by integrating the technologies upon which the content,
as recommended by the Influencer, will be deployed.
The Company devoted significant resources during the first quarter to the
launch of Osage iXi(TM), a business division formed to design and deliver
high-level business intelligence capability. Additionally, the Company created
the eIntegrator Alliance program, designed to establish national partnership
agreements between Osage and leading Internet strategy consulting companies.
These eBusiness initiatives negatively impacted financial results for the first
quarter of 2000 as the Company diverted resources from revenue production to
product development and market creation to support these initiatives.
In October 1999 the businesses operated by two of the Company's
subsidiaries, Solsource and E-comm, were shut down as part of the Company's
restructuring of its operations. Revenues from those two companies are contained
in the Company's results for the first quarter of 1999.
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 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 the expansion of its service offerings to the marketplace as
one of its business strategies. Management expects its consulting and service
revenue to increase as a percentage of net sales as it expands its internal
service offerings to new and existing customers.
12
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
($ In Thousands, except per share amounts) Three Months Ended
----------------------------------------------
March 31, 2000 March 31, 1999
% of % of
Amount Net Sales Amount Net Sales
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Hardware and software sales $ 22,024 84.8% $23,623 87.2%
Services and consulting revenues 3,946 15.2% 3,469 12.8%
-------- ----- ------- ------
Total revenue 25,970 100.0% 27,092 100.0%
COST OF SALES 21,899 84.3% 22,070 81.5%
-------- ----- ------- ------
Gross Profit 4,071 15.7% 5,022 18.5%
-------- ----- ------- ------
OPERATING EXPENSES:
Selling, general and administrative expenses 3,932 15.1% 4,829 17.8%
Depreciation and amortization 490 1.9% 355 1.3%
-------- ----- ------- ------
Total operating expenses 4,422 17.0% 5,185 19.1%
-------- ----- ------- ------
LOSS FROM OPERATIONS (351) -1.4% (163) -0.6%
INTEREST EXPENSE-NET (443) -1.7% (164) -0.6%
-------- ----- ------- ------
LOSS BEFORE BENEFIT FOR INCOME TAXES (794) -3.1% (326) -1.2%
BENEFIT FOR INCOME TAXES (261) -1.0% (60) -0.2%
-------- ----- ------- ------
NET LOSS $ (533) -2.1% $ (266) -1.0%
SERIES E EMBEDDED DIVIDENDS (687) -2.6% 0 0.0%
-------- -------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (1,220) -4.7% (266) -1.0%
======== =======
BASIC AND DILUTED LOSS PER SHARE $ (0.11) $ (0.03)
======== =======
BASIC AND DILUTED SHARES OUTSTANDING 11,344 9,499
======== =======
</TABLE>
13
<PAGE>
Revenues. Net sales decreased by 4.1%, or $1.1 million, to $26.0 million
for the three months ended March 31, 2000 as compared to $27.1 million for the
same prior year period. This decrease in net sales was partly attributable to
the discontinuance of our Solsource and E-comm subsidiaries, the delay of
shipments from the fourth quarter of 1998 to the first quarter of 1999 as well
as the diversion of resources to develop the Company's iXi and Alliances program
initiatives. Management expects the iXi initiative to be a major component of
its service offerings in the future.
The Company's net sales are expected to slow somewhat during 2000 as the
Company emphasizes improving operating margins.
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
decreased by 18.9% or $.9 million to $4.1 million for the three months ended
March 31, 2000 as compared to $5.0 million for the prior year period. The delay
of fourth quarter 1998 sales, mentioned earlier, had a negative effect on first
quarter 2000 comparison to the same period last year. Gross profit margin
decreased to approximately 15.7% during the three months ended March 31, 2000 as
compared to approximately 18.5% during the prior year. During the first quarter
of 2000, the Company was adversely affected by competitive pressures on hardware
sales, as well as issues relating to the conversion of its enterprise resource
planning ("ERP") financial system. Management believes that the issues
concerning the conversion have subsided and expects to complete the conversion
during the second quarter of 2000. The Company intends to continue growing its
services and consulting business at a rate in excess of the growth of its
hardware and software business. Also, the Company believes that, as one of the
larger systems integrators competing in its markets, it can obtain economies of
scale, which will allow it to compete profitably in spite of any deterioration
of gross profit margins.
Selling, General and Administrative Expenses Selling, general and
administrative expenses consist primarily of salaries, salesperson compensation,
employee benefits, professional fees, travel, marketing and facility costs.
Selling, general and administrative expenses decreased by 18.6% or $.9 million
to $4.0 million for the three months ended March 31, 2000 as compared to $4.8
million for the same period last year. As a percentage of sales, these costs
decreased from 17.8% for the three months ended March 31, 1999 to 15.1% for the
same period this year. The decrease is primarily attributable to the
restructuring program initiated in the third quarter of 1999. The restructuring
activity included the reduction in levels of management, the elimination of
approximately forty-five positions, including several senior executive
personnel, vacating certain leased facilities and canceling certain contracts.
Depreciation and Amortization. Depreciation and amortization of $490,000
for the three months ended March 31, 2000 reflected an increase of 38%, or
$135,000, as compared to the same prior year period. The increase was primarily
due to the effect of amortization of goodwill and depreciation of assets
acquired in connection with acquisitions.
14
<PAGE>
Income Taxes. The Company's effective tax rate benefit for the three months
ended March 31, 2000 was 32.9% which is primarily attributable to the net
operating loss generated during the quarter offset by nondeductible goodwill and
interest expense.
Net Loss. During the three months ended March 31, 2000, the Company
incurred a net loss of $533,814 as compared to a net loss of $266,400 for the
same prior year period.
Variable Operating Results
The Company's historical operating results have varied from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue in any fiscal quarter would generally
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 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. The Company believes, therefore, that past operating results and
period-to-period comparisons should not be relied upon as an indication of
future performance. The Company anticipates that its business will continue to
be subject to such seasonal variations.
Backlog
The Company normally ships systems promptly after receiving an order and
therefore does not customarily have a significant backlog.
Liquidity And Capital Resources
Historically, the Company has funded its operations primarily from cash
generated by operations and, to a lesser extent, with funds from borrowings
under the Company's credit facility. For the three months ended March 31, 2000,
cash flow provided by operations was $3.8 million as compared to cash provided
by operations of $1.3 million during the same period in the prior year. The
Company's cash flow from operations was positively affected by the decrease in
accounts receivable and the increase in accounts payable.
The Company's working capital was $6.2 million at March 31, 2000, as
compared to the working capital of $11.5 million at December 31, 1999. The
decrease in the Company's working capital during such period is principally
attributable to the increase in short-term borrowings and accounts payable.
15
<PAGE>
Capital expenditures, which totaled $80,000 during the first three months
of 2000, were principally for computer hardware and software to support the
Company's expanding operations.
Cash flow from financing activities was unfavorably impacted by the $2.2
million of net redemption of Series E preferred stock and $3.6 million of
repayments under the Company's line of credit, offset by $3 million as an
advance under common stock purchase warrants granted in November 1999.
On January 18, 2000, the holders of Series D Shares converted 500 shares,
at a conversion price of $1.07, into 468,736 shares of Common Stock. On February
10, 2000, the remaining 500 Series D Shares were converted, at a conversion
price of $1.73, into an additional 288,468 shares of Common Stock.
In March 2000, the Company received $3,000,000 as an interest-free advance
under common stock purchase warrants granted November 22, 1999 as part of the
Lancer Financing (as described below). The advance was used to redeem the
Company's outstanding shares of Series E Convertible Preferred Stock.
At the Company's next annual meeting of stockholders scheduled for May 31,
2000, the stockholders will vote on the conversion and exercise feature of the
convertible debentures and common stock purchase warrants (collectively, the
"Debentures and Warrants") sold by the Company to Michael Lauer and three
investment funds managed by him (collectively, "Lancer") in November 1999 (the
"Lancer Financing"). If the stockholders approve the conversion and exercise
features of the Debentures and Warrants, the Company may be caused to issue
approximately 20,000,000 shares of its Common Stock to Lancer or its designees,
which would have an extremely dilutive effect on the existing stockholders.
Furthermore, Lancer and its designees would beneficially own approximately 69%
of the Company's Common Stock, thereby securing majority voting control of the
Company's stock. In the event that the stockholders do not approve the
conversion and exercise features of the Debentures and Warrants, the Company
will have the obligation to repay Lancer or its designees $6,000,000 together
with interest at the rate of up to 18% per annum until repayment. Lancer will
not require the Company to make payment of the $6,000,000 until the earlier of
the Company securing alternative financing or January 2, 2001. Since the Company
does not presently have sufficient liquid assets to repay the funds advanced by
Lancer and its designees under the Debentures and Warrants, the failure of the
stockholders to approve the conversion and exercise features of the Debentures
and Warrants may have a material adverse effect on the Company's financial
condition, liquidity and operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal quarters of fiscal
years that begin after June 15, 2000. 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.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2000, the Company had approximately $12 million
floating-rate debt outstanding. The Company's management believes the interest
rate risk represented by this debt is not material. The Company has not entered
into, and does not plan to enter into, any derivative financial instruments for
hedging or speculative purposes. As of March 31, 2000, the Company had no other
significant material exposure to market risk.
17
<PAGE>
Part II. Other Information
ITEM 2. Changes in Securities and Use of Proceeds.
On January 6, 2000, the Company issued 500,000 shares of Common Stock in
connection with the acquisition of the e-publishing and systems integration
practice groups of Sharon O'Reilly and Michael Lowther. Of these shares, each of
Sharon O'Reilly and Michael Lowther received 250,000 shares. In addition, the
Company may, at its option, issue additional shares of Common Stock in lieu of
cash payments of $220,000 for deferred acquisition consideration. 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.
On March 10, 2000, the Company issued 15,000 shares of Common Stock to
Harbour International, Inc. in consideration of a general release given pursuant
to the terms of a settlement agreement between Harbour International and the
Company. 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.
ITEM 5. Other Information.
On April 15, 2000, Robert T. Peterson became Chief Financial Officer of the
Company.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
--------
Exhibit Number
(referenced
to Item
601 of Reg. S-K) Description Method of Filing
- ---------------- ----------- ----------------
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
The Company did not issue any reports on Form 8-K
during the quarter ended March 31, 2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized
OSAGE SYSTEMS GROUP, INC.
Date: May 15, 2000 By: /s/ Phil Carter
------------ ---------------
Phil Carter
Chairman of the Board
and Chief Executive Officer
Date: May 15, 2000 By: /s/ Robert T. Peterson
------------ ----------------------
Robert T. Peterson
Chief Financial Officer/Principal
Accounting Officer
20
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,346
<SECURITIES> 0
<RECEIVABLES> 21,073
<ALLOWANCES> 196
<INVENTORY> 527
<CURRENT-ASSETS> 29,940
<PP&E> 3,258
<DEPRECIATION> 1,504
<TOTAL-ASSETS> 44,308
<CURRENT-LIABILITIES> 18,728
<BONDS> 0
0
1
<COMMON> 117
<OTHER-SE> 11,583
<TOTAL-LIABILITY-AND-EQUITY> 44,308
<SALES> 25,970
<TOTAL-REVENUES> 25,970
<CGS> 21,899
<TOTAL-COSTS> 21,899
<OTHER-EXPENSES> 4,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (443)
<INCOME-PRETAX> (794)
<INCOME-TAX> (261)
<INCOME-CONTINUING> (533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,220)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
