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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 SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OSAGE SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 0-22808 95-4374983
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
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1661 EAST CAMELBACK ROAD
SUITE 245
PHOENIX, ARIZONA 85016
(Address of principal executive office)
(602) 274-1299
(Registrant's telephone number, including area code)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes X No
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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 November 10, 2000 was 33,151,155 shares.
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OSAGE SYSTEMS GROUP, INC.
INDEX
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Page
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PART I FINANCIAL INFORMATION*
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 (unaudited) and December 31, 1999 1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months ended September 30, 2000
and September 30, 1999 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2000 and
September 30, 1999 3
Notes to Unaudited Condensed Consolidated Financial
Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21 - 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23 - 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
* The accompanying financial information is not covered by an Independent
Certified Public Accountant's Report.
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OSAGE SYSTEMS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
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SEPTEMBER 30, 2000
(UNAUDITED) DECEMBER 31, 1999
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,169 $ 2,546
Accounts receivable - net of allowance for doubtful
accounts of $236 in 2000 and $203 in 1999 23,808 23,198
Inventories 711 534
Prepaid expenses and other current assets 760 700
Deferred income taxes 568 568
-------- --------
Total current assets 28,016 27,546
-------- --------
FURNITURE AND EQUIPMENT - net 1,742 1,804
GOODWILL, less accumulated amortization of $2,254 in 2000 and $1,250
in 1999 15,243 14,577
DEFERRED INCOME TAXES 3,275 2,140
OTHER ASSETS 471 443
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TOTAL $ 48,747 $ 46,510
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,181 4,356
Current portion of convertible subordinated debentures 2,000
Accounts payable 8,423 7,507
Accrued expenses 2,013 2,732
Accrued restructuring 228 1,287
Deferred revenue 127 190
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Total current liabilities 13,972 16,072
LONG-TERM DEBT 15,796 14,952
CONVERTIBLE SUBORDINATED DEBENTURES 1,500 1,745
SERIES D CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 1000
SHARES IN 1999; TOTAL LIQUIDATION PREFERENCE, $1,000 1,200
SERIES E CONVERTIBLE PREFERRED STOCK, ISSUED AND OUTSTANDING, 2,000
SHARES IN 1999; TOTAL LIQUIDATION PREFERENCE, $2,000 1,713
STOCKHOLDERS' EQUITY:
Series A Preferred, $100 stated value - authorized, issued and outstanding,
10 shares in 2000 and 1999; total liquidation preference, $300 1 1
Common stock, $.01 par value - authorized, 100,000,000 shares; issued and
outstanding, 33,151,155 shares on September 30, 2000 and 10,334,976 on
December 31, 1999 332 103
Additional paid-in-capital 31,766 21,495
Retained earnings (deficit) (14,620) (10,771)
-------- --------
Total stockholders' equity 17,479 10,828
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TOTAL $ 48,747 $ 46,510
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</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
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OSAGE SYSTEMS GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands except per share amounts)
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THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
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REVENUE:
Hardware and software sales $ 24,298 $ 25,244 $ 71,041 $ 71,714
Service and consulting revenues 4,507 4,761 13,234 12,002
-------- -------- -------- --------
NET SALES 28,805 30,005 84,275 83,716
COST OF SALES 24,180 25,718 71,615 69,018
-------- -------- -------- --------
Gross profit 4,625 4,287 12,660 14,698
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses 4,283 4,945 12,390 15,237
Depreciation and amortization 565 377 1,586 1,107
Restructuring and impairment charges 0 5,122 0 5,122
-------- -------- -------- --------
Total operating expenses 4,848 10,444 13,976 21,466
-------- -------- -------- --------
OPERATING LOSS (223) (6,157) (1,316) (6,768)
INTEREST - net (1,190) (464) (2,768) (846)
-------- -------- -------- --------
LOSS BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES (1,413) (6,621) (4,084) (7,614)
(BENEFIT) PROVISION FOR INCOME TAXES (368) 82 (981) (183)
-------- -------- -------- --------
NET LOSS (1,045) (6,703) (3,103) (7,431)
SERIES E EMBEDDED DIVIDENDS 0 0 (687) 0
-------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (1,045) $ (6,703) $ (3,790) $ (7,431)
======== ======== ======== ========
LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.05) $ (0.68) $ (0.27) $ (0.77)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 19,462 9,830 14,122 9,611
======== ======== ======== ========
</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)
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NINE MONTHS ENDED
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SEPT. 30, 2000 SEPT. 30, 1999
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OPERATING ACTIVITIES:
Net loss $(3,103) $(7,431)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,586 1,107
Deferred income taxes (1,136) (265)
Noncash interest 2,050 33
Restructuring and impairment charges 0 5,122
Loss on Disposal of Assets 0 1
Changes in operating assets and liabilities:
Accounts receivable (610) (4,803)
Inventories (176) (1,173)
Prepaid expenses and other assets (489) (3)
Accounts payable 915 7,164
Accrued expenses (1,556) (367)
Deferred revenue (62) (979)
Income taxes payable 0 (70)
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Net cash used by operating activities (2,581) (1,664)
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INVESTING ACTIVITIES:
Capital expenditures (358) (690)
Acquisition costs, net of cash received of $185 in 1999 0 (336)
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Net cash used in investing activities (358) (1,026)
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FINANCING ACTIVITIES:
Net borrowings / (payments) under line of credit agreement 898 (417)
Payments on executive officers notes payable (91) (822)
Net proceeds on notes payable 0 188
Principal payments on long-term debt (2,741) 0
Borrowings on long-term debt 3,000 0
Borrowings on convertible debentures 3,500 0
Dividends paid on Series E preferred stock (176) 0
Net proceeds from sale of common stock and preferred shares 412 1,932
Payments for redemption of Series E preferred stock (2,240) 0
Net increase in note receivable 0 2
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Net cash provided by financing activities 2,562 883
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NET DECREASE IN CASH (377) (1,807)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,546 3,152
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,169 $ 1,345
======= =======
</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 accruals) necessary to present fairly the financial position
of the Company and the results of its operations and its cash flows for the
periods reported. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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., Osage Support Center, Inc. and Osage iXi (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain reclassifications have been made to the prior
financial statements to conform to the current classifications.
The information presented within the accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited Financial Statements for the fiscal years ended December
31, 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.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share.
Net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period after
giving effect to stock options and the conversion of preferred shares
considered to be dilutive. Because the Company incurred a loss for the three
and nine months ended September 30, 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.
Subsequent to the issuance of SFAS No. 133, the FASB received many requests
to clarify certain issues causing difficulties in implementation. In June
2000, the FASB issued SFAS No. 138 responding to those requests by amending
certain provisions of SFAS No. 133. The Company will adopt SFAS No. 133 and
the corresponding amendments under SFAS No. 138 no later than the first
quarter of the fiscal year ending December 31, 2001. SFAS No. 133, as amended
by SFAS No. 138, will not have a material impact on the Company's results of
operations or financial position.
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 that can provide for current
recognition of expected tax benefits from temporary differences that will
result in deductible amounts in future years.
The Company believes an ownership change occurred in 2000, the effect
of which will be to limit annual usage of net operating loss carryovers in
the future, pursuant to IRC Section 382. At this time, management believes
this will not result in an inability to use ultimately all of the net
operating losses in the future that are not currently reserved with a
valuation allowance.
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The deferred income tax asset at September 30, 2000 and December 31, 1999 is
comprised of the following: ($ In Thousands)
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2000 1999
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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 $ 3,742 3,056
Goodwill (109) (102)
Property 9 9
Discount on subordinated debt 0 (477)
Other (117) (96)
Valuation allowance (250) (250)
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Net noncurrent assets $ 3,275 2,140
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6
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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 thereon, 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 thereon, 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 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.
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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 note has since converted to equity
pursuant to the automatic conversion that occurred concurrent with the
effectiveness of the Company's Form S-3 which was filed on August 28, 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, as defined, 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. 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. Since the registration became effective on August 28, 2000, the
Debentures have automatically converted into shares of the Company's Common
Stock at the market price of the stock on the closing of the transaction. The
conversion price was $.30 per share of Common Stock (reflective of a twenty
percent (20%) discount to the market price of the Common Stock on October 8,
1999).
The Debentures had a beneficial conversion feature which was valued at
$750,000 at the date of issuance. Since the debt was convertible at any time
after the Company's stockholders approved the conversion feature, this amount
was charged to interest expense in May 2000 when stockholder approval was
obtained.
The Debentures were privately offered as a Unit, together with warrants that,
subject to certain vesting provisions, entitled the holders to contingently
purchase 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
10,000,000 shares of Common Stock of the Company (the "Long-Term Warrants") and
90-day warrants to purchase 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 vested in May 2000 when stockholder approval of
the exercise feature of these warrants was obtained.
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The carrying amount of the Debentures had been decreased by $1,325,840,
the fair value of the common stock warrants issued to the holder. This amount
was to be amortized as interest expense over the term of the convertible debt.
However, since the debt has converted, the remaining interest accretion was
recognized upon the effectiveness of the registration statement. During the
fourth quarter of 1999 and the first nine months of 2000, the Company amortized
$70,711 and $1,255,129 respectively as interest expense.
As is discussed above, at the Company's annual meeting of stockholders,
which was held on May 31, 2000, the stockholders approved the conversion and
exercise feature of the Debentures and the Long-Term Warrants. A registration
statement relating to the Debentures and Long-Term Warrants became effective
during the third quarter of 2000. As a result, the Debentures and Warrants
automatically converted resulting in approximately 20,000,000 shares of Common
Stock being available to the holders of the Debentures and the Long-Term
Warrants. This conversion had a dilutive effect on the existing stockholders.
Furthermore, holders of the Debentures and the Long-Term Warrants now
beneficially own approximately 58% of the Company's Common Stock, thereby
securing majority voting control of the Company's stock.
On July 21, 2000 the Company completed a private placement offering for $4
million principal amount 10% Convertible Subordinated Debentures (the "10%
Debentures"). The principal amount of the Debentures is payable on July 15, 2001
with interest payable at the rate of ten percent (10%) per annum commencing July
25, 2000. Principal and interest may be paid in cash, or at the option of the
Company, in shares of the Company's subsidiary Osage iXi's Common Stock priced
at $1 per share. Such a conversion, assuming the full $4 million is converted,
would convert into 40% of Osage iXi's stock. No interest is due if the Note is
converted. Osage iXi began business on August 1, 2000. At that time, Osage iXi
received certain assets and retained the services of certain individuals now
utilized by other subsidiaries of the Company. For additional information refer
to Part II, Item 5 "Other Information".
On September 22, 2000 the Company completed a private placement of $2.25
million of 8% Convertible Subordinated Debentures (the "8% Debentures"). The
principal amount of the 8% Debentures is payable on October 1, 2001 with
interest payable at the rate of eight percent (8%) per annum. Subject to the
holders right to convert, interest is payable quarterly in arrears commencing
January 1, 2001. The conversion price is a maximum of $.80 per share subject to
downward adjustment depending on the market price of the stock. For additional
information refer to Part II, Item 5 "Other Information".
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
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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 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 was a 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
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with the sale of the stock of OBS. The Plaintiffs claim that the 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 two operating segments, Systems
Integration and Consulting Services. However, the Consulting Services segment
has not materially developed and the Company therefore has not reported separate
activity at this point. 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
United States and the Company's long-lived assets are all located in the United
States.
9. Subsequent Event.
During October 2000, GE Access agreed to convert an existing term loan and
apply obligations due to GE Access from the Company to a new note payable. The
new note is for $2.4 Million and carries an interest rate of 11%. The note is
payable weekly in equal installments of $50,000 beginning January 1, 2001 until
paid in full (December 2001). Until 2001, the weekly payment required is for
interest only. In consideration of extending this Note and in consideration of
its terms, the Company agreed to issue 140,000 three-year warrants at $1 per
share.
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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)
risks related to the Company's acquisition strategy; (iii) the Company's
ability to secure adequate financing to implement its business strategies; (iv)
uncertainty as to whether the Company can achieve integration of acquired
companies in a manner intended to take advantage of overall corporate synergies
and result in an accretion to consolidated earnings; (v) the uncertainty of
future trading prices for the Company's Common Stock and the impact such
trading prices may have upon the Company's ability to utilize its Common Stock
to facilitate its acquisition strategy; (vi) the uncertain effect of the
additional dilution associated with the future issuance of outstanding
convertible securities, as well as the dilution associated with the Company's
acquisition strategy; (vii) the Company's dependence on certain large customers
and suppliers; (viii) the Company's dependence on certain key personnel; and
(ix) 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, Check Point Software Technologies, Ltd. and Veritas
Software Corporation, with Sun Microsystems accounting for approximately 70% of
the Company's hardware sales. 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 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
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<PAGE> 15
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 service offerings to new and
existing customers.
As announced on July 18, 2000, the Company is now organized into two
strategic business units, Osage Consulting Services and Osage Systems
Integration. System Integration 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.
Osage Consulting Services, which originally focused exclusively on business
intelligence and eCommerce solutions for the middle market, will now also
encompass the eIntegrator Alliance Program and the newly launched Professional
Services organization. A core component of the Professional Services
organization has been the development of the Internet Data Center Solution
Stacks, a set of packaged solutions with defined service deliverables in the
areas of Storage, Security, Availability, Assurance, and Operations. These
solutions can be deployed in individual client environments, or customized for
use in specific eIntegrator partnerships. The expansion of the professional
service offerings is in response to expanding market opportunities created by
web-enabled technologies. Osage Consulting Services also provides hardware and
software products to its customers and provides service capability to the system
integration group. This arrangement has allowed each group to maximize sales but
has blurred the clear distinction of offerings to the customer. However, the
groups continue to focus on their predominant service offering to the market
thus enhancing the potential for the growth in the services sector of the
market.
13
<PAGE> 16
RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales: ($ In Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Hardware and software sales $ 24,298 84.4% $ 25,244 84.1%
Services and consulting revenues 4,507 15.6% 4,761 15.9%
--------- --------- --------- ---------
Total revenue 28,805 100.0% 30,005 100.0%
COST OF SALES 24,180 83.9% 25,718 85.7%
--------- --------- --------- ---------
Gross profit 4,625 16.1% 4,287 14.3%
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative expenses 4,283 14.9% 4,945 16.5%
Depreciation and amortization 565 2.0% 377 1.3%
Restructuring and impairment charges 0.0% 5,122 17.1%
--------- --------- --------- ---------
Total operating expenses 4,848 16.9% 10,444 34.9%
--------- --------- --------- ---------
LOSS FROM OPERATIONS (223) -0.8% (6,157) -20.6%
INTEREST - NET (1,190) -4.1% (464) -1.5%
--------- --------- --------- ---------
LOSS BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES (1,413) -4.9% (6,621) -22.1%
(BENEFIT) PROVISION FOR INCOME TAXES (368) -1.3% 82 0.3%
--------- --------- --------- ---------
NET LOSS $ (1,045) -3.6% $ (6,703) -22.4%
========= ========= ========= =========
BASIC AND DILUTED LOSS PER SHARE: $ (0.05) $ (0.68)
========= =========
BASIC AND DILUTED SHARES OUTSTANDING: 19,462 9,830
--------- ---------
</TABLE>
14
<PAGE> 17
Revenues. Net sales decreased by 4.0%, or approximately $1.2 million, to
$28.8 million for the three months ended September 30, 2000 as compared to $30.0
million for the same prior year period. This decrease in net sales was
attributable to an increase in the Company's focus on service sales versus
hardware and software sales. The decrease is also attributable to the
discontinued Solsource and E-comm operations in the fourth quarter of 1999.
Management expects service revenues to increase as new opportunities associated
with the Company's Consulting Services initiative are realized. The Company's
net sales are expected to continue slowing somewhat during 2000 as the Company's
emphasis on improved operating margins is realized.
Gross Profit. The Company's cost of sales consists primarily of the cost
to the Company of products acquired for resale and salaries of certain technical
personnel. The Company's gross profit increased by 7.9% or $0.3 million to $4.6
million for the three months ended September 30, 2000 as compared to $4.3
million for the prior year. Gross profit margin increased to approximately 16.1%
during the three months ended September 30, 2000 as compared to approximately
14.3% during the prior year. The increase in gross profit and margins was
attributable to resource redeployment within Consulting Services and the
Company's focus on hardware sales with improved margins. With respect to the
sale of hardware, management believes that in the long run, gross profit margins
on these sales will decrease. As a consequence, the Company intends to continue
growing its Consulting Services business at a rate in excess of the growth of
its Systems Integration 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, sales person
compensation, employee benefits, professional fees, travel, marketing and
facility costs. Selling, general and administrative expenses decreased by 13.4%
or $0.6 million to $4.3 million for the three months ended September 30, 2000 as
compared to $4.9 million for the same period last year. As a percentage of
sales, these costs decreased from 16.5% for the three months ended September 30,
1999 to 14.9% 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 $565,000
for the three months ended September 30, 2000 reflected an increase of 49.9%, or
$188,000, as compared to the same prior year period. The increase was primarily
due to the effect of amortization of goodwill, the depreciation of assets
acquired in connection with acquisitions and the depreciation associated with
the Company's enterprise software system.
Interest Expense. Interest expense for the three months ended September
30, 2000 of $1.2 million includes interest charges associated with the Company's
line of credit and term loan agreement along with interest accretion related to
the common stock warrants issued to the
15
<PAGE> 18
holder of the Debentures. Interest expense includes $753,000 of additional
interest accretion related to the value of warrants issued in conjunction with
the Debentures. This amount was recognized during the third quarter in
conjunction with the registration of the shares of common stock.
Income Taxes. The Company's effective tax rate benefit for the three months
ended September 30, 2000 was 26% which is primarily attributable to the net
operating loss generated during the year offset by nondeductible goodwill,
interest expense and currently owed state taxes.
The Company believes an ownership change occurred in 2000, the effect of
which will be to limit annual usage of net operating loss carryovers in the
future, pursuant to IRC Section 382. At this time, management believes this will
not result in an inability to use ultimately all of the net operating losses in
the future that are not currently reserved with a valuation allowance.
16
<PAGE> 19
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:
($ In Thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------
NINE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
-------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Hardware and software sales $ 71,041 84.3% $ 71,714 85.7%
Services and consulting revenues 13,234 15.7% 12,002 14.3%
--------- --------- --------- ---------
Total revenue 84,275 100.0% 83,716 100.0%
COST OF SALES 71,615 85.0% 69,018 82.4%
--------- --------- --------- ---------
Gross profit 12,660 15.0% 14,698 17.6%
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative expenses 12,390 14.7% 15,237 18.2%
Depreciation and amortization 1,586 1.9% 1,107 1.3%
Restructuring and impairment charges 0.0% 5,122 6.1%
--------- --------- --------- ---------
Total operating expenses 13,976 16.6% 21,466 25.6%
--------- --------- --------- ---------
LOSS FROM OPERATIONS (1,316) -1.6% (6,768) -8.0%
INTEREST - NET (2,768) -3.3% (846) -1.0%
--------- --------- --------- ---------
LOSS BEFORE BENEFIT FOR INCOME TAXES (4,084) -4.9% (7,614) -9.0%
BENEFIT FOR INCOME TAXES (981) -1.2% (183) -0.2%
--------- --------- --------- ---------
NET LOSS (3,103) -3.7% (7,431) -8.8%
SERIES E EMBEDDED DIVIDENDS (687) -0.8% 0.0%
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,790) -4.5% $ (7,431) -8.8%
========= ========= ========= =========
BASIC AND DILUTED LOSS PER SHARE: $ (0.27) $ (0.77)
========= =========
BASIC AND DILUTED SHARES OUTSTANDING: 14,122 9,611
========= =========
</TABLE>
17
<PAGE> 20
Revenues. Net sales increased by 0.7%, or approximately $0.6 million, to
$84.3 million for the nine months ended September 30, 2000 as compared to $83.7
million for the same prior year period. This increase in net sales was
attributable to an increase in the Company's focus on service sales as well as a
comparable demand for the products the Company offers. The level of change is
larger than the comparative results depict as the Company discontinued the
Solsource and E-comm operations in the fourth quarter of 1999. Management
expects service revenues to continue to increase as new opportunities associated
with the Company's Consulting Services initiative are realized. 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 and salaries of certain technical
personnel. The Company's gross profit decreased by 13.9% or approximately $2
million to $12.7 million for the nine months ended September 30, 2000 as
compared to $14.7 million for the prior year period. Increased competition in
the hardware and software markets was primarily responsible for the decline.
Gross profit margin decreased to approximately 15.0% during the nine months
ended September 30, 2000 as compared to approximately 17.6% during the prior
year period. The decrease in gross profit margins was attributable to increased
competition and the sale of more expensive product, with higher dollar
profitability but lower margins. With respect to the sale of hardware,
management believes that in the long run, gross profit margins on these sales
will decrease. As a consequence, the Company intends to continue growing its
Consulting Services business at a rate in excess of the growth of its Systems
Integration business. 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, sales person
compensation, employee benefits, professional fees, travel, marketing and
facility costs. Selling, general and administrative expenses decreased by 18.7%
or approximately $2.8 million to $12.4 million for the nine months ended
September 30, 2000 as compared to $15.2 million for the same period last year.
As a percentage of sales, these costs decreased from 18.2% for the nine months
ended September 30, 1999 to 14.7% 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 $1.6 million
for the nine months ended September 30, 2000 reflected an increase of 43.3%, or
approximately $0.5 million as compared to the same prior year period. The
increase was primarily due to the effect of amortization of goodwill,
depreciation of assets acquired in connection with acquisitions and the
depreciation associated with the Company's enterprise software system.
18
<PAGE> 21
Interest Expense. Interest expense for the nine months ended September 30,
2000 of $2.8 million includes interest charges associated with the Company's
line of credit and term loan agreement along with interest accretion related to
the common stock warrants issued to the holder of the Debentures. In addition,
interest expense includes $750,000 associated with the beneficial conversion
feature of the Debentures due to the conversion price reflecting a discount to
the price of the Company's Common Stock on the date the Debentures were priced.
This amount was recognized in May 2000 when approval by the Company's
stockholders was obtained for the issuance of shares associated with the
Debenture. The Company also recorded a charge of $753,000 of additional interest
accretion related to the value of warrants issued in conjunction with the
Debentures. This amount was recognized during the third quarter in conjunction
with the registration of the shares of common stock.
Income Taxes. The Company's effective tax rate benefit for the nine months
ended September 30, 2000 was 24% which is primarily attributable to the net
operating loss generated during the year offset by nondeductible goodwill,
interest expense and currently owed state taxes.
The Company believes an ownership change occurred in 2000, the effect of
which will be to limit annual usage of net operating loss carryovers in the
future, pursuant to IRC Section 382. At this time, management believes this will
not result in an inability to use ultimately all of the net operating losses in
the future that are not currently reserved with a valuation allowance.
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 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. Operating
results may also be impacted by the timing of billings and changes in the
Company's billing and utilization rates. The Company believes, therefore, that
past operating results and period-to-period comparisons should not be relied
upon as an indication of future performance. The Company anticipates that its
business will continue to be subject to such seasonal variations.
Backlog
The Company normally ships systems promptly after receiving an order and
therefore does
19
<PAGE> 22
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 nine months ended September 30,
2000, cash flow used by operations was $2.6 million as compared to cash used by
operations of $1.7 million during the same period in the prior year. The
Company's cash flow from operations was negatively affected by an increase in
receivables and a decrease in accrued expenses related to the purchase of vendor
invoices by the Company's credit facility, partially offset by vendor purchases
with credit extending beyond the Company's normal experience.
The Company's working capital was $14.0 million at September 30, 2000, as
compared to the working capital of $11.5 million at December 31, 1999. The
increase in the Company's working capital during such period is principally
attributable to the decrease in short-term debt caused by the conversion of
warrants related to the Debentures, an increase to receivables and payments made
under the Company's restructuring program, partially offset by an increase in
obligations to vendors and additional short-term convertible subordinated
debentures.
Capital expenditures, which totaled $358,000 during the first nine months of
2000 were principally for computer hardware and software to support the
Company's operations and for the upgrade of existing infrastructure.
Cash flow from financing activities was favorably impacted by the $3.0
million interest free advance/warrant conversion (see below) and the $3.5
million of borrowings on convertible debentures, partially offset by the $2.2
million redemption of Series E preferred stock as well as $1.8 million of net
repayments of debt.
In March 2000, the Company received $3.0 million as an interest-free advance.
The advance was used to redeem the Company's outstanding shares of Series E
Convertible Preferred Stock. Upon the effectiveness in August of the
Registration Statement filed with the Securities and Exchange Commission, the $3
million was converted from an interest free advance to payment for the
aforementioned warrants.
At the Company's annual meeting of stockholders held on May 31, 2000, the
stockholders voted on the conversion and exercise feature of the convertible
debentures and Common stock purchase warrants (collectively, the "Debenture")
sold by the Company to Michael Lauer and three investment funds managed by him
(collectively, "Lancer") in November 1999 (the "Lancer Financing"). The
stockholders approved the conversion and exercise features of the Derivative
Securities and as a result, the Company issued approximately 20,000,000 shares
of its Common Stock to Lancer or its designees, which had an extremely dilutive
effect on the existing stockholders. Furthermore, Lancer and its designees
beneficially own approximately 58% of the Company's Common Stock, thereby
securing majority voting control of the Company's stock.
20
<PAGE> 23
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
Subsequent to the issuance of SFAS No. 133, the FASB received many requests to
clarify certain issues causing difficulties in implementation. In June 2000, the
FASB issued SFAS No. 138 responding to those requests by amending certain
provisions of SFAS No. 133. The Company will adopt SFAS No. 133 and the
corresponding amendments under SFAS No. 138 no later than the first quarter of
the fiscal year ending December 31, 2001. SFAS No. 133, as amended by SFAS No.
138, will not have a material impact on the Company's results of operations or
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of September 30, 2000, the Company had approximately $16.2 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, and
does not plan to, enter into any derivative financial instruments for hedging or
speculative purposes. As of September 30, 2000, the Company had no other
significant material exposure to market risk.
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. In October,
the Company satisfied this obligation by issuing 176,000 shares of the Company's
common stock. The Company had previously paid $44,000 in cash related to this
obligation. The issuance of the original 500,000 shares 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.
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 the original 240,000 shares 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 Company's stockholders approved an amendment to the Company's Certificate
of
21
<PAGE> 24
Incorporation to increase the number of shares of Common Stock the Company is
authorized to issue from 50,000,000 to 100,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 31, the Company held its Annual Meeting whereby the holders of the
Company's Common Stock voted to approve each of the following proposals:
(1) The issuance of more than 20% of the Company's outstanding Common Stock
upon the conversion of outstanding debentures and the exercise of outstanding
warrants at below-market prices (the debentures and warrants are collectively
referred to as the "Debentures") related to the November 22, 1999 private
placement offering for $3 million;
(2) Re-elected the current directors and elected Edward Stead, a new director
to serve until the 2003 Annual Meeting of Stockholders or until their successors
are elected and qualified;
(3) An amendment to the Company's Certificate of Incorporation (the
"Certificate") to increase the number of shares of Common Stock the Company is
authorized to issue from 50,000,000 to 100,000,000;
(4) Ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the year ending December 31, 2000; and
At the Annual Meeting, the holders of the Company's Common Stock did not
approve the following proposals:
(1) An amendment to the Certificate to eliminate the classification of the
Board of Directors into three different classes.
(2) An amendment to the Certificate eliminating a super majority voting
requirement for the stockholders to amend the Certificate.
22
<PAGE> 25
ITEM 5. OTHER INFORMATION.
Osage Systems Group, Inc. ("Osage") has obtained $2,000,000 related to a
$4,000,000 convertible debenture as a result of the following transaction. The
proceeds will be used for the operational and capital needs of Osage and its
subsidiaries.
As a requirement for the funding, Osage formed a new wholly-owned subsidiary
called Osage iXi, Inc. ("Osage iXi"), a Delaware corporation. Effective as of
August 1, 2000, pursuant to an Assignment and Assumption Agreement dated July
21, 2000 among Osage, Osage iXi and the other Osage subsidiaries (the "Other
Osage Subsidiaries"), Osage caused the Other Osage Subsidiaries to transfer to
Osage iXi the assets held by them which were primarily associated with their
information technology consulting business (the "Consulting Business"). In
addition, the Other Osage Subsidiaries transferred to Osage iXi their employees
which will be primarily associated with the Consulting Business. In
consideration for such transfers, Osage iXi agreed to assume the liabilities and
obligations of the Other Osage Subsidiaries primarily relating to the Consulting
Business and to employ such employees (with such employees being leased by the
Other Osage Subsidiaries to Osage iXi until December 31, 2000, at which time
they will become employees of Osage iXi).
SPH Investments, Inc. ("SPH") and HMA Associates, Inc. (HMA") (collectively,
the "Lenders") entered into a certain Convertible Promissory Note Purchase
Agreement (the "Note Purchase Agreement") with Osage and Osage iXi dated July
21, 2000 pursuant to which the Lenders committed to purchase a total of
$4,000,000 of Convertible Senior Subordinated Notes (the "Notes") (each Lender
is committed to purchase $2,000,000 of the Notes). On July 25, 2000 the Lenders
purchased a total of $2,000,000 of such Notes. Pursuant to the Note Purchase
Agreement, the Lenders are required to purchase an additional $2,000,000 of such
Notes, with $1,000,000 of such Notes to be purchased on or before September 30,
2000 and $1,000,000 of such Notes to be purchased on or before November 30,
2000. To date, the Company has not received additional funds beyond the original
$2 million funding.
The Notes bear interest at the rate of ten percent (10%) per annum and have a
maturity date of July 15, 2001. In addition to the interest, if the Notes are
neither prepaid prior to July 15, 2001 nor converted into shares of stock (as
described below), Osage is required to pay a redemption fee equal to ten percent
(10%) of the principal amount of the Notes.
Pursuant to two letter Agreements dated July 24, 2000 and July 26, 2000
between Osage and SPH, in consideration of services rendered by SPH to Osage in
connection with this financing, Osage agreed to pay SPH an amount equal to five
percent (5%) of the amount of the original Notes which is repaid (the "Service
Fee"). Osage also agreed that it would advance to SPH the amount of the Service
Fee which will be payable in the event that Osage repays $2,000,000 of the
Notes.
Repayment of the Notes is subordinated to Osage's obligations for repayment
of its obligations to Coast Business Credit and GE Access. The Notes are secured
by a security interest on all of the assets of Osage and its subsidiaries (which
are subordinated to the security interests granted by Osage and its subsidiaries
in favor of Coast Business Credit and GE Access).
In the event that the Notes have not been repaid in full on or before January
15, 2001, Osage agreed under the Note Purchase Agreement to declare a dividend
of 600,000 shares of the Common Stock of Osage iXi to its shareholders and to
pursue a separate listing of Osage iXi on either the American Stock Exchange or
the NASDAQ market.
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<PAGE> 26
In the event that the Notes are not repaid prior to July 15, 2001, unless there
is then an outstanding Event of Default (as defined under the Notes), on such
date the Notes shall automatically be converted into shares of common stock of
Osage iXi at the rate of one (1) share for each one ($1.00) dollar of the
outstanding principal amount of the Notes. Assuming that all $4,000,000 of the
Notes are converted into shares of common stock of Osage iXi, based on the
current number of such shares outstanding, the Lenders will own forty (40%)
percent of the then issued and outstanding stock of Osage iXi.
On September 22, 2000, we completed a private placement transaction intended to
raise gross proceeds of $2,250,000 for general working capital purposes. The
following securities were sold in the private placement:
- $2,250,000 of our 8% convertible notes, convertible into shares of common
stock at a price of $0.80 per share, subject to downward adjustment based
on the trading price of our common stock. The closing market price of our
stock on September 22, 2000 was $0.75, and
- Warrants to purchase 675,000 shares of our common stock.
The securities were sold to six (6) accredited investors. The private
placement requires two separate closings. At the initial closing on September
22, 2000, we realized net proceeds of $1,355,000 after payment of a finder's fee
in the amount of $120,000 and escrow and counsel fees in the amount of $25,000,
and we issued the following:
- $1,500,000 of 8% convertible notes, and
- Warrants to purchase 337,500 shares of common stock immediately
exercisable at $1.25 per share.
The final closing will occur three (3) days after the effective date of
this registration statement. At the final closing, we will receive net proceeds
of $690,000 after payment of a finder's fee in the amount of $60,000, and we
will issue the following:
- $750,000 of 8% convertible notes, and
- Warrants to purchase an additional 337,500 shares of common stock
immediately exercisable at $1.50 per share.
Pursuant to the private placement, we were required to file a registration
statement on Form S-3 with the SEC no later than on or about November 5, 2000
(the filing occurred on October 26, 2000) registering the public resale of (i)
200% of the shares of common stock issuable upon conversion of the notes; and
(ii) 100% of the shares of common stock issuable upon exercise of the warrants.
We are required to cause the registration statement to be declared effective by
the SEC by no later than December 21, 2001. Our failure to comply with these
deadlines will result in a fine
24
<PAGE> 27
payable to the investors equal to 1% of the principal amount of the notes for
the first thirty (30) days period or part thereof of noncompliance and 2% for
each thirty (30) day period or part thereof thereafter. Failure to cause the
registration statement to be declared effective within sixty (60) days after
required effective date, will be deemed an event of default under the notes
resulting in the acceleration of the our obligation to repay the principal
amount of the notes.
In September the Company retained Global Capital Markets, LLC (Global) as a
consultant to advise the Company on corporate finance and business development
matters. The term of the Agreement is one year and the compensation to Global
consists of 520,000 three-year warrants at a price of $1.0625 per share. In
addition, the Company agreed to reimburse Global for reasonable expenses and to
indemnify Global for its actions while acting on behalf of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number
(referenced to
Item 601 of
Reg. S-K) Description Method of Filing
-------------- ----------- ----------------
<S> <C> <C>
27 Financial Data Schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K
The company did not issue any reports on Form 8-K during the quarter ended
September 30, 2000
25
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on by the undersigned,
thereunto duly authorized
OSAGE SYSTEMS GROUP, INC.
Date: November 14, 2000 By: /s/ Phil Carter
--------------------------- --------------------------------
Phil Carter
Chairman of the Board and Chief
Executive Officer
Date: November 14, 2000 By: /s/ Robert T. Peterson
--------------------------- --------------------------------
Robert T. Peterson
Chief Financial Officer/
Principal Accounting Officer
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Method of Filing
-------------- ----------- ----------------
<S> <C> <C>
27 Financial Data Schedule Filed herewith
</TABLE>
